Opinion
No. 7-98-16126 MA, Adversary No. 00-1024 M
July 17, 2001
Kathleen Carter, Attorney for Plaintiff, Albuquerque, NM.
William R. Brummett, Attorney for Defendant, Albuquerque, NM.
MEMORANDUM OPINION
THIS MATTER came before the Court on the Complaint Objecting to the Dischargeability of a Debt filed by Plaintiff Prakongsri Rhoades, by and through her attorney of record, Kathleen D. Carter. The Court conducted a trial on the merits.
This matter stems from a Final Decree and First Amended Qualified Domestic Relations Order (QDRO) entered as part of dissolution of marriage proceedings between Plaintiff and Defendant wherein Plaintiff was awarded her pro-rata share of Defendants military retirement benefits according to a specified formula and in accordance with 10 U.S.C. § 1408.
Subsequent to the entry of the QDRO, Defendant was awarded an increased disability benefit, causing a corresponding reduction in his retirement benefit. The effect of this change was to reduce the amount Plaintiff receives pursuant to the Final Decree and the QDRO. Plaintiff contends that Defendant should be required to pay the difference between the portion of the monthly retirement benefit Plaintiff was initially awarded and the amount she now receives after Defendants disability benefit was increased, and that this amount is non-dischargeable pursuant to 11 U.S.C. § 523(a)(5) and/or (a)(15).
11 U.S.C. § 523(a)(15) was intended to supplement 11 U.S.C. § 523(a)(5) in order to prevent the discharge of debts arising out of dissolution of marriage proceedings that are not in the nature of support but that do not justify discharge. See 4 Collier on Bankruptcy ¶ 523.21 (15th ed., Lawrence P. King, ed., 2000) (discussing legislative history surrounding the enactment of 11 U.S.C. § 523(a)(15)). Plaintiff asserts that the debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(5) on grounds that the obligation is really in the nature of support. But because Plaintiff also bases her claim on 11 U.S.C. § 523(a)(15), the Court need not analyze whether the debt is truly in the nature of support as required by 11 U.S.C. § 523(a)(5). Plaintiff also bases her non-dischargeability action on 11 U.S.C. § 523(a)(2)(A), (a)(4), and/or (a)(17). These sections are inapplicable to this adversary proceeding.
Alternatively, Plaintiff contends that the Final Decree and the QDRO award her a pro-rata share of Defendants military retirement pay as her sole and separate property, and that, therefore, the award is not a debt in Defendants bankruptcy proceeding. Defendant asserts that federal law prohibits court-ordered division of disability benefits, and that Plaintiff continues to receive her pro-rata share of the military retirement benefit in accordance with the Final Decree and the QDRO. The Court agrees that the military retirement benefit awarded to Plaintiff is non-dischargeable pursuant to 11 U.S.C. § 523(a)(15), but cannot find that Defendant is responsible to make up the difference between the amount Plaintiff was to receive when the QDRO was first entered and the amount she now receives after the increase in Defendants disability benefit.
DISCUSSION
The Final Decree, entered April 14, 1994, awarded Plaintiff a pro-rata share of Defendants military retirement benefits in accordance with the following formula:
# years married x gross monthly retirement pay x 1/2; = petitioners share of # years employed Retirement pay
The QDRO, entered in December of 1994, declared the interest in Defendants United States Air Force Retirement Benefits divisible marital property, and awarded Plaintiff a property interest in her share of the retirement benefits as her sole and separate property. See QDRO, ¶ 4. Like the Final Decree, the QDRO awarded Plaintiff a share of the military retirement benefits in accordance with a formula, which, at the time of the entry of the QDRO, was specified as follows:
20 (years married) x $1363 (monthly benefit payment) x 1/2 = $567.92 24 (years in service) (non-member Spouses portion of Monthly benefit payment)
The QDRO also provided for direct payment of Plaintiffs share of the military retirement pay from the U.S. Defense Accounting Service. See QDRO, ¶ 4. Finally, the QDRO included the following language:
In the event there is any period of time during which direct payments cannot be made to each respective party by the U.S. Government because of legal or processing difficulties, or because both parties do not qualify, and all retired pay is being paid only to the Respondent[Defendant], then Respondent[Defendant], upon receiving such pay, shall promptly pay the appropriate share to the Petitioner[Plaintiff]. Nothing herein shall obligate the Respondent[Defendant] to pay retirement benefits to Petitioner[Plaintiff] if in fact he receives none for his service in the United States Air Force. QDRO, ¶ 6.
In accordance with the QDRO, Plaintiff began receiving direct payment from the U.S. Defense Accounting Service in the amount of $368.79 per month, representing Plaintiffs share awarded in the Final Decree and QDRO, less applicable taxes withheld by the U.S. Defense Accounting Service prior to distribution.
At the time of the dissolution of marriage, Defendant had a thirty percent disability rating. See Exhibit 3.
Thereafter Defendant suffered a heart attack, and, in 1997, after making application, his disability rating increased to seventy percent. He then began receiving an increased disability benefit that resulted in a corresponding reduction in his monthly retirement benefit. Consequently, Plaintiff began receiving only $223.74 per month, representing her share of the monthly military retirement benefit, after taxes, in accordance with the formula set forth in the Final Decree and the QDRO.
Between the date the Final Decree was filed and the date the QDRO was filed, there was a period during which Plaintiff did not receive direct payment of her pro-rata share from the U.S. Defense Accounting Service. The QDRO obligated Defendant to make those payments to Plaintiff. See QDRO, ¶ 6. Plaintiff currently continues to receive $223.74 per month directly from the U.S. Defense Accounting Service pursuant to the Final Decree and the QDRO. Debts incurred by a debtor in the course of a dissolution of marriage proceeding that are not in the nature of support (in other words, property settlements), are nevertheless non-dischargeable unless
See In re Hammond, 236 B.R. 751, 765-766 (Bankr.D.Utah 1998) (noting that 11 U.S.C. § 523(a)(15) was enacted to cover dissolution of marriage-related debts, like property settlement agreements).
(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 and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
11 U.S.C. § 523(a)(15)(A) and (B).
Subsection (A) is inapplicable to this proceeding. The Defendant does not contend that he is unable to pay. The evidence shows that, although he is on seventy-percent disability from the military, he manages to work approximately thirty hours a week as a letter carrier for the postal service, and approximately ten hours a week at Burlington Coat Factory. In addition, his veterans disability benefit is not subject to taxes. See 38 U.S.C. § 5301(a). Thus, even though the total benefit amount from the retirement and disability combined is the same as it was prior to Defendants increased disability rating, his net benefit after taxes is greater because only the retirement portion of his benefit is subject to taxes.
Under subsection (B), the Court must conduct a balancing test to determine whether the benefit of discharging a debt outweighs the consequences to the non-debtor spouse if the debt were discharged. This analysis requires a consideration of the totality of circumstances. See In re Crosswhite, 148 F.3d 879, 888 (7th Cir. 1998) (totality of circumstances test . . . [is] the general method for weighing benefit and detriment under 11 U.S.C. § 523(a)(15)); In re Gamble, 143 F.3d 223, 226 (5th Cir. 1998) (stating that courts should consider all the circumstances, not just the relative net worth of the parties).
The evidence here weighs in favor of Plaintiff. Plaintiff runs her own business as a seamstress, sewing military patches on uniforms, and doing alterations work. She testified that she works twelve hours a day, Monday through Friday, and often works on weekends. Although expenses for her business were comparable for the years 1999 and 2000, Plaintiffs net business income after expenses, but before taxes, dropped from $32,039.49 in 1999 to $23,162.00 in 2000, making her average monthly business income $2,300.00 for the years 1999 and 2000.
This amount is net of New Mexico Gross Receipts Taxes, but not federal taxes. See Exhibit 8a.
Plaintiff continues to drive the 1984 Volvo she received as part of the dissolution of marriage proceedings. The car has suffered mechanical problems in recent years.
Defendant continues to live in the marital home, which he received in the dissolution of marriage proceedings. Although his disability has been increased from thirty percent to seventy percent, he continues to work two jobs:
1) part-time regular letter carrier for the postal service, working approximately thirty hours a week for $18.59 per hour;
2) sales associate at Burlington Coat Factory, working between ten and twenty hours a week for $10.35 per hour. Defendant occasionally picks up additional routes as a letter carrier, working more than thirty hours in those weeks, and he tries to work twenty hours at Burlington Coat Factory as often as he can.
Through his work for the postal office he participates in a Thrift Savings Plan and the Federal Employees Retirement System. He is also enrolled in the 401(k) plan offered by Burlington Coat Factory.
Given these facts, discharging the debt would be more detrimental to Plaintiff than beneficial to Defendant. The Court, therefore, concludes that the debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(15).
Having determined that the benefit awarded by the Final Decree and the QDRO is non-dischargeable, the Court must next determine the amount of the non-dischargeable debt. This question is much more problematic. After Defendant received an increase in his disability benefit, his retirement benefit was reduced by the same amount as required by federal law. See 38 U.S.C. § 5305.
Consequently, although Plaintiff continues to receive her pro-rata share of the retirement benefit, she receives less than she used to because the amount of Defendants retirement benefit has been reduced.
Whether this difference should be included as part of the non-dischargeable debt requires an examination of the law concerning the division of military retirement and disability benefits upon dissolution of marriage.
Disability benefits are not divisible marital property. Under the Uniformed Services Former Spouses Protection Act (USFPA), disposable retired pay that the USFPA authorizes courts to divide in connection with marital dissolution proceedings, does not include any amounts deducted from the retired pay . . . as a result of a waiver of retired pay required by law in order to receive compensation under title 5 or title 38." 10 U.S.C. § 1408(a)(4)(B). Disability benefits are deducted from retired pay, and are, therefore, not considered part of disposable retired pay as defined by 10 U.S.C. § 1408(a)(4)(B). See 38 U.S.C. § 5305. In interpreting the USFPA, the United States Supreme Court in Mansell v. Mansell, 490 U.S. 581, 594-595 (1989), determined that military retirement benefits that have been waived in order to receive disability benefits cannot be considered property divisible through dissolution of marriage proceedings.
The Mansell decision prohibits state courts from ordering a portion of a disability benefit awarded to a military retiree be paid to a former spouse to compensate for a reduced share of retirement benefit due to an increase in disability benefit. See, Scheidel v. Scheidel, 129 N.M. 223, 4 P.3d 670 (Ct.App. 2000) (discussing Mansell). Thus, when a retirement benefit has been waived, the former non-military spouse cannot recover the difference from the converted portion of disability benefit. See, e.g., Ashley v. Ashley, 990 S.W.2d 507 (Ark. 1999); In re Marriage of Pierce, 982 P.2d 995 (Kan.Ct.App. 1999).
In an attempt to circumscribe this harsh result, some courts have determined that because Mansell only prohibits courts from ordering direct payments from disability benefits, a court can enforce an indemnification provision in a marital settlement agreement against the former military spouse provided that the source of payment is not the disability benefit. See Scheidel v. Scheidel, 129 N.M. 223, 4 P.3d 670 (Ct.App. 2000) (New Mexico Court of Appeals enforced an indemnification provision requiring husband to make up any difference in benefit caused by his voluntary modification of his military retirement benefit); Abernathy v. Fishkin, 699 So.2d 235 (Fla. 1997); In re Marriage of Strassner, 895 S.W.2d 614 (Mo.Ct.App. 1995); McHugh v. McHugh, 861 P.2d 113, 114 (Idaho Ct.App. 1993) (court enforced agreement that specified that the monthly amount would not be decreased for any reason); Owen v. Owen, 419 S.E.2d 267 (Va.Ct.App. 1992) (court enforced husbands guaranty that he would take no action to defeat wifes rights to receive one-half of husbands retirement pay, plus cost-of-living increases, where order did not specify source of funds to be paid over to former spouse).
Neither the Final Decree nor the QDRO contain an indemnification provision. Nothing in the Final Decree or the QDRO expressly requires Defendant to pay Plaintiff any sums in the event he claims an increased disability benefit and receives a reduced military retirement benefit. To the contrary, the language in the QDRO provides that Nothing herein shall obligate the Respondent[Defendant] to pay retirement benefits to Petitioner[Plaintiff] if in fact he receives none for his service in the United States Air Force. QDRO, ¶ 6. Defendant now receives a reduced retirement benefit from which Plaintiff continues to receive her pro-rata share. That Plaintiff should suffer a reduction in her property settlement amount due to the failure of her attorney to include an indemnification provision is inequitable. In recognizing this problem, at least one court has found that the absence of an indemnity agreement is not necessarily fatal. In re Marriage of Krempin, 70 Cal.App.4th 1008, 1019, 83 Cal.Rptr.2d 134, 142 (Ct.App. 1999).
Absent an indemnity provision, the non-military spouse can be protected where the language of the parties agreement evidences an intent that the non-military spouse was not meant to bear the cost of any reduction in such retirement benefits. Id.
The QDRO sets Plaintiffs monthly share of the retirement payment at $567.92. It also provides that Plaintiffs share shall include one-half of any increase from cost of living adjustment which may be awarded from time to time. Although the QDRO addresses anticipated increases, it is silent with regard to any decrease. It is, therefore, possible to interpret this to mean that the parties did not intend for Plaintiff to bear the cost of any reduction in military retirement benefit. On the other hand, paragraph six of the QDRO releases Defendant from any obligation to pay retirement benefits to Petitioner[Plaintiff] if in fact he receives none . . . QDRO ¶ 6.
The Court must therefore conclude that neither the language of the Final Decree nor the language of the QDRO clearly evidences an intent to protect Plaintiff against any reduction in her share of the military retirement benefit. The testimony offered by the parties at trial likewise did not indicate that, at the time of the entry of the Final Decree and the QDRO, the parties intended to ensure that Plaintiff received a specified sum or that Defendant was obligated to pay any shortfall in the event his retirement benefits were reduced.
See Harris v. Harris, 991 P.2d 262, 266 (Ariz.Ct.App. 1999) (stating that court must consider all the surrounding circumstances when the decree is not explicit, and that lack of a specified sum in the decree does not necessarily require the conclusion that wife did not reasonably expect to receive a sum certain.).
Plaintiff contends that the QDRO awards her a sum certain as her sole and separate property, and that, because Defendants military retirement has been reduced, Defendant is obligated to pay the difference from sources other than his disability benefit. This reasoning seems to parallel the reasoning of a few courts that view the award of a share in military retirement benefits as a vested property interest. See, e.g., Johnson v. Johnson, 37 S.W.3d 892, 897 (Tenn. 2001) (holding that wifes interest in husbands military retirement benefits vested as of the date entry of the courts decree and could not be unilaterally altered by husbands post-dissolution waiver of retirement benefits in favor of disability benefits); In re Marriage of Gaddis, 957 P.2d 1010, 1012-1013 (Ariz.Ct.App. 1997), cert. denied, 525 U.S. 826 (1998) (holding that wifes quantified interest in husbands military retirement benefit as of a specified date as set forth in the dissolution decree could not be reduced by husbands post-dissolution waiver of retirement benefit upon obtaining civil service employment); In re Marriage of Strassner, 895 S.W.2d 614, 618 (Mo.Ct.App. 1995) (finding that wifes share in husbands retirement benefit was finally determined on the date of the decree . . .).
As appealing as it may be to take this position to prevent the inequity that will result in this case, the Court finds the evidence before it insufficient to conclude that the parties intended for Plaintiff to receive a sum certain from Defendants military retirement benefit which would obligate Defendant to pay any difference in the event of Defendants waiver of retirement benefit in favor of an increased disability benefit. At the time of the dissolution of marriage, Defendant was receiving a thirty percent disability benefit. It was foreseeable that his disability could increase, and the parties could have included language in the marital dissolution documents addressing that foreseeable situation. It is not the function of this Court to re-write the agreement between the parties. The Court therefore concludes that Defendant is not obligated to pay Plaintiff the difference between the monthly share of military retirement benefit Plaintiff initially received and the amount she has been receiving since Defendants disability benefit increased. The non-dischargeable debt is limited to the variable property settlement amount as determined by the formula contained in the Final Decree and the QDRO.
This opinion constitutes the Courts findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. An appropriate judgment will be entered.