Opinion
Case No. 98-56807-JRG-CZ Chapter 7, Adversary No. 98-5538
March 21, 2000
GRUBE, Judge.
I. INTRODUCTION
This case involves the dischargeability of a debt arising from the dissolution of the marriage between plaintiff and defendant. Plaintiff contends that the obligation is nondischargeable based on the provision of 11 U.S.C. § 523(a) (15) which deals with the debtor's ability to pay and an evaluation of the parties' relative circumstances. For the reasons set forth below, the Court finds for the plaintiff.
II. FACTUAL BACKGROUND
Defendant James Moore operated a business known as Moore and Sons Mercury Outboard Motors which was started in approximately 1973 in Santa Cruz, California. In addition to owning the business, Moore owned a one-half interest in the building and land on which it was situated.
Moore was married to plaintiff Susan Zenger through 1990. In 1991 Moore and Zenger separated and their marriage was terminated by a Judgment of Dissolution of Marriage entered on October 9, 1991. Moore remarried seven months later in May 1992. His second wife is known as Cynthia Mello Moore (hereinafter referred to as "Cynthia"). Although Moore's first marriage was formally terminated in 1991, a variety of issues remained unresolved. Two years later, in August 1993, these issues were tried in the Santa Cruz County Superior Court. Judge Agliano found that Moore's monthly income before taxes was approximately $7,000. Based on this income he ordered Moore to pay child support of $700 per month and spousal support of $1,500 per month, commencing September 1, 1993. He also found that Moore was then delinquent on past child and spousal support in the amount of $21,663. Judge Agliano further ordered Moore to pay Zenger $13,175 to equalize the division of community property between the parties. Finally, he ordered Moore to pay Zenger $15,000 as and for attorney's fees. Based on these rulings, Moore's financial obligation to Zenger as of August 31, 1993 totaled $49,838.
Moore apparently did not like the approach taken by Judge Agliano. The trial had taken place in August 1993, but Judge Agliano did not file his written ruling until January 1994. In the interim, November 1993, Moore transferred the business real property to Cynthia. His tax returns confirm that at the end of 1996 he transferred his business, Moore and Sons Mercury Outboard Motors, to Cynthia although he has continued to work there until the present time. Following the transfer, his salary was reduced to $902 per month. Moore testified that this amount was set by the new owner of the business, his wife Cynthia. Moore lives in a home that is also owned by Cynthia. In essence he has made himself judgment-proof through the transfers.
The battle over Moore's obligations continued with Zenger attempting to collect and Moore doing his best to avoid payment. By August 1998, five years later, Moore's obligation to Zenger had grown from $49,838 to $145,125. He still owed the equalizing payment which was then $15,750 and attorney's fees which then amounted to $22,500. His child support arrearage had grown to $24,340 and spousal support to $82,535. His determination not to pay Zenger is further evidenced by the Superior Court having found Moore guilty of 13 counts of contempt and sentenced him to serve 65 days in jail which it appears he served. A 1998 hearing added another $2,000 to Moore's obligation, bringing the total to $147,125.
The amount owed by Moore appears to have been reduced by only one payment in the amount of $31,691. However, this was really an involuntary payment. When Moore transferred the business real property to Cynthia, it already had a judgment lien on it in favor of Zenger which had been recorded before the transfer. Five years later, the payment was made to remove this lien.
III. ISSUES PRESENTED
The parties have stipulated that the portion of Moore's obligation which is labeled support is nondischargeable pursuant to 11 U.S.C. § 523(a) (5). This action involves the remainder of the obligation.
The issue presented is whether the equalizing payment and attorney's fees can be discharged pursuant to 11 U.S.C. § 523 (a) (15) when the debtor is alleged to have voluntarily and fraudulently deprived himself of potential income so that he lacks the ability to pay the debt.
Plaintiff also raised a second issue of whether the portion of the obligation labeled attorney's fees is, in fact, an award of support and therefore nondischargeable under § 523(a) (5). Since this Court holds that the subject fee is nondischargeable under § 523(a) (15), this issue is moot and need not be addressed.
IV. DISCUSSION
The dischargeability of marital obligations other than alimony, maintenance or support is governed by 523(a) (15) under which the debt will be discharged if either one of the following conditions is met:
(A) The debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor . . . or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, of child of the debtor.
11. U.S.C. § 523(a) (15) (A) (B) (1994).
A. The Defendant Has The Ability To Pay
Relying on In re Jodoin, 196 B.R. 845 (Bankr.E.D.Cal. 1996) which discussed an allocation of support from a former husband who engaged in sub-rational or self-destructive economic behavior, Zenger argues that Moore has not met the burden of showing his inability to pay due to similar behavior. Based on defendant's continuous failure to modify support, the dismissal of his previous Chapter 13 petition, and the State Court's finding of Moore's earning capacity to be $7,000 per month as of 1993, plaintiff argues that Moore has fraudulently deprived himself of any valuable asset and income so as to render himself unable to pay the debt. In essence, plaintiff argues that the defendant has acted in bad faith.
Moore counters with an argument based on present income and expense figures. He argues that based on his net income of $902 per month and his current wife's income of $3,800 per month and monthly expenses of $5,571, he does not have the ability to pay the equalizing payment and attorney's fees under the widely used "disposable income" test set forth in 11 U.S.C. § 1325(b). Most courts have used the "disposable income" standard to assess the ability to pay. Disposable income means "income which is received by the debtor and which is not reasonably necessary to be expended (A) for the maintenance or support of the debtor or a dependent of the debtor . . ." 11 U.S.C. § 1325(b) (2) (1994). Under this test and based on the figures submitted by defendant, defendant suffers a shortfall of $869 per month and therefore arguably has no ability to pay.
Defendant concedes that the ability to pay is determined at the time of trial. S ee In re Haines, 210 B.R. 586, 591 (Bankr.S.D.Cal. 1997) and In re Jodoin, 209 B.R. 132, 142 (9th Cir. B.A.P. 1997).
Plaintiff argues that "factors relating to `ability to pay' under § 523(a) (15) (A) [should be construed] more flexibly than the same factors under § 1325(b) . . ." In re Jodoin, 196 B.R. at 854. This is because "the chapter 13 requirement that the plan has been ` proposed in good faith' does not have an explicit chapter 7 analogue that is designed to police abuse." Id. at 855. (quoting Johnson, 501 U.S. at 87-88) (emphasis added).
The Bankruptcy Appellate Panel of the Ninth Circuit, in hearing the appeal of In re Jodoin, agreed that the disposable income test is the appropriate test even though some courts have been unwilling to use this "in the divorce situation where parties have been known to sacrifice their own financial well-being to spite their ex-spouse." In re Jodoin, 209 B.R. at 142. The disposable income test continues to be appropriate because "a proper application of the test should take into account the prospective income that the debtor should earn and the debtor's reasonable expenses." Id. (emphasis added). In this regard, there is no reason to believe the defendant could not have continued his $7,000 per month income through the present time. His testimony to the contrary is simply not credible.
Although "good faith" is not explicitly stated in the statute, a consideration of the true intent of the statute supports the proposition that "good faith" be implied. As the Supreme Court put it, "a central purpose of the Code . . . is to [let] insolvent debtors reorder their affairs, make peace with their creditors, and enjoy `a new opportunity in life . . .'" but courts should limit "the opportunity for a completely unencumbered new beginning to the ` honest but unfortunate debtor.'" Grogan v. Garner, 498 U.S. 279, 286-87 (1991) (emphasis added). Indeed, to disregard the element of "good faith" may thwart the true intent of the Code. "The plain meaning of legislation should be conclusive, except in the `rare case [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" In re Huddelston, 194 B.R. 681, n. 13 (Bankr.N.D.Ga. 1996) (quoting Griffin v. Oceanic Contractors Inc., 458 U.S. 564, 571 (1982)).
Courts in other circuits have concluded that § 523(a) (15) (A) calls for an expanded scope of inquiry and, as such, courts must give attention to a panoply of relevant considerations, including but not limited to:
(1) debtor's "disposable income" as measured at the time of trial;
(2) the presence of more lucrative employment opportunities which might enable the debtor fully to satisfy his divorce-related obligations;
(3) the extent to which the debtor's burden of debt will be lessened in the near term; and
(4) the extent to which the debtor previously has made a good faith effort to fully employ towards satisfying the debt in question.
Matter of Cleveland, 198 B.R. 394, 398 (Bankr.N.D.Ga. 1996) (quoting In re Huddelston, 194 B.R. 681, 688 (Bankr.N.D.Ga. 1996). "[I]f surveying these broader considerations reveals an actual ability to perform, the debtor cannot avail himself of section 523(a) (15) (A) 's safe harbor." Id.
One Court distinguished the concept of "ability to pay" from "earning capacity" by stating that the question of "earning capacity" must be answered before the question of the "ability to pay". See In re Florio, 187 B.R. 654, 657 (Bankr.W.D.Mo. 1995). If the debtor "voluntarily reduced her income postpetition and now asks the Court to find that she does not have the ability to pay a debt, [t]he Court cannot sanction such behavior." Id.
If such voluntary conduct were allowed to become successful, the purpose of the statute could be frustrated on the mere whim of a debtor. Considering all of these factors, the Court finds that the defendant has failed to meet his burden of proof in demonstrating he does not have the ability to pay plaintiff the subject obligations.
B. The Benefit To Plaintiff Outweighs The Detriment To Defendant
Even if the Court finds that the debtor has the ability to pay under § 523(a) (15) (A), the debt can still be discharged if the debtor meets the test set forth in § 523(a) (15) (B) by demonstrating that the discharge will be more beneficial to the debtor than detrimental to plaintiff.
In determining whether the benefit outweighs the detriment, courts have normally examined the totality of the circumstances and considered factors including:
(1) the income and expenses of both parties;
(2) whether the nondebtor spouse is jointly liable on the debts;
(3) the number of dependents;
(4) the nature of the debts;
(5) the reaffirmation of any debts; and
(6) the nondebtor spouse's ability to pay.
See e.g. In re Morris, 193 B.R. 949, 954, n. 8 (Bankr.S.D.Cal. 1996), In re Haines, 210 B.R. 586, 594 (Bankr.S.D.Cal. 1997), In re Florio, 187 B.R. 654, 658 (Bankr W.D. Mo. 1995), In re Hill, 184 B.R. 750, 756 (Bankr.N.D.Ill. 1995), and In re Carroll, 187 B.R. 197, 201 (Bankr.S.D.Ohio 1995).
Defendant testified that he is currently working for Moore and Son Outboard Motors, the business that he voluntarily transferred to his current wife, and has a monthly income of $902. His current spouse's income is $3,800 and their joint expenses are $5,571, leaving them with a monthly shortfall of $869. Conversely, plaintiff is presently a mortgage loan processor. She has a monthly income of $2,600 and monthly expenses of $1,470, leaving her with a monthly disposable income of $1,130. Undoubtedly, a literal application of the above figures would be favorable to the defendant.
Some courts, however, have used a more detailed analysis such as that set forth in In re Smither where the cases involved debtors artificially diminishing their ability to repay obligations. These courts have included an inquiry of "[w]hether the parties have acted in good faith in the filing of the bankruptcy and the litigation of the 11 U.S.C. § 523(a) (15) issues." See e.g. In re Smither, 194 B.R. 102, 111, (Bankr.W.D.Ky. 1996), In re Molino, 225 B.R. 904, 909 (6th Cir. B.A.P. 1998), and In re Asbill, 236 B.R. 192, 197 (Bankr.D.S.C. 1999).
Since the dissolution between plaintiff and defendant in 1991, defendant has been delinquent on spousal and child support which now approximates $106,875. He also owes plaintiff an equalizing payment of $15,750 and attorney's fees which are now $24,500. The large accumulation of debt is the result of defendant's determination not to pay and is due to his voluntary transfer of assets to his current wife and the monthly salary of $902 which was set by her.
Given that the defendant is underemployed for the sole purpose of avoiding his obligations to plaintiff, the Court will take the debtor's underemployment into consideration for the purpose of 523(a) (15) (B). Where the debtor has voluntarily chosen to be underemployed, or transferred his valuable property, the court must look at what the debtor could have earned instead of his artificially created income. See In re Florio, 187 B.R. at 658 (using debtor's income as surgical technician rather than the zero income that she gets from the grooming business that she voluntarily enters into); In re Asbill, 236 B.R. at 198 (adopting family Court's finding of earning capacity of $3,600 per month when debtor voluntarily lowers his income from $43,000 per year to $25,500 per year and transfers his business to his current wife); In re Huddelston, 194 B.R. at 690 (holding debtor's actual income of $65 per month while having a capacity to earn more from other lucrative opportunities makes him fail the 523(a) (15) (B) test); In re Smither, 194 B.R. at 111 (holding that voluntary reduction should still be considered by the Court in making the 523 (a) (15) (B) balancing test); and In re Greenwalt, 200 B.R. 909, 913 (using the income from the job that debtor left voluntarily days before the trial on 523(a) (15)).
This approach is mandated because "[d]ischarging this obligation would simply provide Debtor with additional disposable income to `use at his discretion' [and] [t]his is not the type of benefit that § 523(a) (15) (B) ought to protect." In re Carroll, 197 B.R. at 201. Therefore, utilizing the monthly income of $7,000 found by the State Court, the Court concludes that Moore has a monthly disposable income of $5,229, an amount considerably larger than Zenger's.
$7,000 (debtor's income) plus $3,800 (income of debtor's spouse) minus $5,571 (monthly expenses) equals $5,229 (disposable income).
In light of the totality of the circumstances, including the State Court's finding of a monthly salary of $7,000, bad faith in defendant's underemployment, the transfer of assets and refusal to pay support for over ten years, the Court finds that the defendant has failed to meet his burden under 523(a) (15) (B) of proving that the benefit to him of discharging the obligations outweigh the detriment to plaintiff.
IV. CONCLUSION
For the above reasons, the equalizing payment and attorney's fees owed to Zenger by Moore cannot be discharged pursuant to 11 U.S.C. § 523 (a) (15). The foregoing shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Federal Rule 52. Counsel for plaintiff shall lodge a proposed form of judgment with the Court within 15 days. It need not contain the findings of fact and conclusions of law which the Court has made in this Memorandum Decision.