Opinion
Case No. 03-10622-SSM.
October 12, 2005
A separate order will be entered consistent with this opinion. Richard G. Hall, Esquire, Annandale, VA, Counsel for the debtor.
Russell B. Adams III, Esquire, Chung Press, P.C., McLean, VA Counsel for the respondents.
H. Jason Gold, Esquire, Wiley Rein Fielding LLP, McLean, VA, Chapter 7 trustee
MEMORANDUM OPINION
This matter is before the court on an order requiring the debtor's former wife, Julia Marie Rudy, and her attorney, Frances Turean, Esquire, to show cause why they should not be held in civil contempt, and appropriate sanctions imposed, for violation of the discharge injunction. The facts are not disputed, and the dispositive issue is whether the debtor's obligation to indemnify Ms. Rudy against certain credit card debts was excluded from the discharge he received because it was a post-petition obligation. For the reasons stated, the court concludes that the debt was discharged, and that the actions of the debtor and her attorney in attempting to enforce the obligation violated the discharge injunction. This opinion constitutes the court's findings of fact and conclusions of law under Fed.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a).
Background
Barry Lee Rudy filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this court on February 7, 2003. At the time the petition was filed, he was married to, but separated from, Ms. Rudy. On his schedules, he listed Ms. Rudy as the holder of an "unliquidated" claim in the amount of "unknown." The address shown for Ms. Rudy on the schedules was 5607 NE Cedar Crest St., Tacoma, WA 98422. That address was the former marital residence, which the debtor had quit-claimed to Ms. Rudy as part of a settlement they had reached in December 2002 of support and community property issues in a pending suit that the debtor had brought for dissolution of the marriage. At the time of the settlement, Ms. Rudy was on a temporary assignment and living in the Washington, D.C., area, but the debtor did not know her local address and used the Tacoma, Washington, address because it was the only one he had and he believed her mail was being forwarded. This apparently was the case, because Ms. Rudy appeared at the meeting of creditors that was held on March 17, 2003. The trustee filed a report of no distribution on March 18, 2003, and the debtor was granted a discharge of his dischargeable debts on May 31, 2003. The case was thereafter closed on June 2, 2003, and remained closed until May 3, 2005, when it was reopened to consider the debtor's motion for a rule to show cause why Ms. Rudy and Ms. Turean should not be held in contempt for violation of the discharge injunction.
The present controversy arises from the decree of dissolution of marriage that was entered by the Superior Court of Pierce County, Washington, on February 14, 2003, one week after the bankruptcy petition was filed. That decree — which was endorsed "approved for entry" by the debtor — required the debtor to pay five specified community debts in the total amount of $56,929.83. There is no dispute that the debtor has not paid them, and that he considers any obligation to pay them to have been discharged in his bankruptcy.
The obligations at issue are as follows:
Creditor Acct. # Amount American Express xxxx-xxxxxx-xx2007 $11,164.83 First USA xxxx xxxx xxxx 9954 $11,077.00 Home Depot xx-xxxx-xxx476-6 $3,183.00 US Bank xxxx-xxxx-xxxx-1821 $15,352.00 US Bank xxxx-xxxx-xxxx-5688 $16,153.00
The evidence shows that Mr. and Ms. Rudy had been negotiating the terms of a property settlement since at least October 17, 2002, and that the terms incorporated into the divorce decree were reached on December 11, 2002, when a settlement conference was held before Judge Vicki L. Hogan of the Pierce County Superior Court. The transcript of the conference reflects that Ms. Rudy's lawyer was physically present and that Ms. Rudy participated by telephone. The judge read the terms of the settlement into the record. These included, among other provisions, a transfer of the marital home to Ms. Rudy, and the debtor's responsibility for the five debts at issue. The judge then asked:
THE COURT: . . . Mr. Pierce, you have got your client on the phone. Mrs. Rudy, you have been able to hear the settlement. Does this represent what your understanding of what the settlement agreement is —
MRS. RUDY: Yes.
Jeffery S. Larson Dep. Ex. K at 7. The debtor's divorce attorney, after confirming that his client likewise agreed to the terms, stated
MR. LARSON: . . . The only other thing that I want to put on the record is that everyone has been put on notice that there is a very good likelihood that Mr. Rudy will be filing bankruptcy, so that there is no — nobody is unaware or that is not a surprise.
THE COURT: All right. Thank you.
Id. at 8. Judge Hogan then directed Mr. Larson to prepare findings of fact and conclusions of law as well as the final decree. Because the house was then in foreclosure, the debtor had agreed as part of the settlement to execute and deliver the quit claim deed without waiting for entry of the divorce decree. The debtor signed the deed on December 28, 2002, and it was transmitted to Ms. Rudy's attorney on January 9, 2003. Both attorneys then appeared before Judge Hogan on February 14, 2003, and she signed the findings of fact and conclusions of law and the final decree that same day.
Apparently the presentation of the decree was originally noticed for January 17, 2003, but was continued because one of the attorneys had a conflict.
Although the record is not well developed, it appears that at least one of the creditors that the debtor had agreed to pay is now pursuing payment from Ms. Rudy. On March 11, 2005, Ms. Rudy, represented by Ms. Turean, filed a motion in the Pierce County Superior Court for an ex parte restraining order prohibiting the debtor from transferring or disposing of assets, and for entry of a money judgment against the debtor for $56,929.83. The debtor responded by filing the present motion to hold Ms. Rudy and Ms. Turean in contempt. The debtor testified that he had incurred $1,904.85 in attorney's fees responding to the Washington state action and had expended $55.79 in copying costs to provide documents to his divorce attorney and his bankruptcy attorney. He further testified that he had agreed to pay his bankruptcy attorney $250.00 per hour to represent him in this court and had paid him a $1,000.00 retainer plus the $155.00 clerk's fee to reopen the bankruptcy case. No evidence was presented as to the time his bankruptcy attorney had expended in bringing the motion to reopen and motion for order to show cause or in preparing for the evidentiary hearing.
Conclusions of Law and Discussion I.
A chapter 7 discharge discharges an individual debtor from "all debts that arose before the date of the order for relief," except for the debts specified in § 523, Bankruptcy Code. § 727(b), Bankruptcy Code. Among the excluded debts are debts, other than those for support, arising under a divorce decree or marital property settlement, unless the bankruptcy court determines that the debtor cannot afford to pay them or the benefit to the debtor of discharge outweighs the detriment to the other party. § 523(a)(15), Bankruptcy Code. However, such debts will be discharged unless the creditor files an adversary proceeding to determine the dischargeability of the debt within 60 days of the first date set for the meeting of creditors and the court thereafter determines the debt to be nondischargeable. § 523(c), Bankruptcy Code; Fed.R.Bankr.P. 4007(c). The 60-day deadline can be extended only if the motion for the extension is made before the time has expired. Fed.R.Bankr.P. 4007(c) and 9006(b)(3). Once the time period has expired without the filing of a complaint to determine dischargeability, the debt is discharged regardless of the debtor's ability to pay or the detriment to the other party. In the present case, Ms. Rudy did not file a complaint to determine the dischargeability of her indemnity claim under the divorce decree within the required 60-day period. For that reason, the debtor's obligation to indemnify her against the five credit card debts has been discharged unless it did not "arise" until after the date of the bankruptcy petition.
In a voluntary case, the filing of the petition constitutes an order for relief. § 301, Bankruptcy Code.
Debts in the nature of support are not subject to this rule. Such debts are non-dischargeable without regard to the debtor's ability to pay or the benefit of discharge. § 523(a)(5), Bankruptcy Code. Moreover, no action need be taken during the bankruptcy case to preserve the nondischargeability of support claims. If there is a dispute whether a particular claim is in the nature of support, that issue may be brought before the bankruptcy court "at any time," Fed.R.Bankr.P. 4007(b), or may be decided by the court having jurisdiction to enforce the support obligation.
This scheme will change significantly for bankruptcy cases filed on or after October 17, 2005, the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23 (April 20, 2005) ("BAPCPA"). The Act amends § 523(a)(15) to make divorce related debts other than support nondischargeable in all instances and eliminates the requirement in § 523(c) to obtain a determination of nondischargeability from the bankruptcy court of such debts. BAPCPA § 215. Thus, whether such debts are prepetition or postpetition will be of no moment, since they will not be discharged in any event.
II.
Ms. Rudy and her attorney contend that the indemnity obligation is a post-petition obligation — and therefore has not been discharged — since the decree of dissolution was entered a week after Mr. Rudy's bankruptcy petition was signed. There is a significant body of case law that would tend to support that argument. See Bugione v. Berlingeri (In re Berlingeri), 246 B.R. 196, 200 (Bankr. D.N.J. 2000) (holding that where divorce suit was filed prepetition, postpetition judgment requiring debtor to hold spouse harmless for certain marital debts did not arise before the order for relief, and the indemnity claims "constituted a non-dischargeable post-petition obligation."); Arleaux v. Arleaux, 210 B.R. 148 (8th Cir. BAP 1997), aff'd 149 F.3d 1186 (8th Cir. 1998) (holding in case where petition for dissolution of marriage was filed before bankruptcy, but dissolution decree was entered 13 months after bankruptcy petition was filed, ex-wife's claim for child support and alimony — which debtor contended was actually in the nature of a property settlement — was a non-discharged postpetition claim); In re Neier, 45 B.R. 740 (Bankr. N.D. Ohio 1985) (holding that debtor's obligation under divorce decree entered one year after bankruptcy petition was filed to pay deficiency on foreclosure sale was post-petition obligation); In re Miller, 268 B.R. 826 (Bankr. N.D. Ind. 2001) (holding that where marriage had been dissolved, but issues concerning division of marital property and apportionment of debts had not been decided when bankruptcy petition was filed, any obligations that might be imposed by state court would not be prepetition debts that could be discharged in the debtor's case); In re Miller, 246 B.R. 559 (Bankr. E.D. Tenn. 2000) (holding that where divorce suit was filed prior to husband's bankruptcy, but marital dissolution agreement was executed six weeks after the bankruptcy petition was filed and was incorporated into a divorce decree signed ten days later, the debtor's obligation under the agreement and decree to hold his former wife harmless against joint debts from the marriage was a postpetition obligation that was not discharged in the debtor's bankruptcy). At least one reported case, however, has reached a contrary conclusion on facts similar to those presented here. In re Anjum, 288 B.R. 72 (Bankr. S.D.N.Y. 2003) (holding that where parties had placed equitable distribution settlement on the record before bankruptcy petition was filed, debtor's obligation under final decree of divorce, docketed two months after bankruptcy was filed, to pay wife a specified sum representing one-half of the value of certain property, was a prepetition claim subject to discharge).
No party has raised the issue of whether the decree was entered in violation of the automatic stay. In this connection, the court simply notes that the debtor was the petitioner in the Washington State dissolution action. The automatic stay applies by its terms to judicial actions "against" the debtor and not to actions in which the debtor is the plaintiff. § 362(a)(1), Bankruptcy Code; Carley Capital Group v. Fireman's Fund Ins. Co., 889 F.2d 1126 (D.C. Cir. 1989); Martin-Trigona v. Champion Fed. S L Assn., 892 F.2d 575 (7th Cir. 1989). But even if the automatic stay were implicated, it has been held in this district that actions taken in violation of the stay are voidable, not void. Khozai v. RTC, 177 B.R. 524 (E.D. Va. 1995). Since it was the debtor's own attorney who presented the dissolution decree, and since there was no injury to the bankruptcy estate, voidance of the decree, even if technically entered in violation of the automatic stay, would not be appropriate.
Berlingeri is readily distinguishable because it relies on the Third Circuit's holding in In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984), cert. denied, 469 U.S. 1160, 105 S.Ct. 911, 83 L.Ed.2d 925 (1985), which adopted what is sometimes termed the "right to payment" test for when a claim "arises" for bankruptcy discharge purposes. The Fourth Circuit, however, has rejected the Frenville test and has held that a claim "arises" when the underlying act giving rise to the liability occurs, not when an action could be brought to enforce it under state law. Grady v. A.H. Robins Co., 839 F.2d 198, 203 (4th Cir. 1988), cert. dismissed sub nom. Joynes v. A.H. Robins Co., 487 U.S. 1260, 109 S.Ct. 201, 101 L.Ed.2d 972 (1988) (holding that automatic stay applied to personal injury claim arising from prepetition use of birth control device manufactured by debtor even though symptoms allegedly did not appear, and thus suit could not have been brought, until after the filing of the petition, and explaining that "Congress intended that . . . all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy."). This result, the Fourth Circuit explained, is a natural consequence of the Bankruptcy Code's expansive definition of "claim:"
"Claim" means —
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured.
§ 101(5), Bankruptcy Code (emphasis added).
Factually, the present case is significantly different from Arleaux, upon which Ms. Rudy principally relies. There is no indication in Arleaux that the parties had agreed on the amount of the disputed alimony and child support payments prior to the bankruptcy filing. Indeed, the lapse of 13 months from the bankruptcy filing to the dissolution decree strongly suggests that no agreement had been reached. In the present case, by contrast, the terms of the agreement had been fully negotiated and had been presented to the state court nearly two months prior to the filing of the bankruptcy petition. The situation here is indistinguishable from that in Anjum, which held under nearly identical facts that the marital settlement obligation (the terms of which had been agreed to prior to the bankruptcy filing) arose prepetition even though the divorce decree was not entered until after the bankruptcy case was filed. In the present case, moreover, the debtor had partially performed his side of the agreement well before the filing of the bankruptcy petition by executing and delivering the quit claim deed to the former marital residence.
Since alimony and child support are nondischargeable in any event, see § 523(a)(5), Bankruptcy Code, the issue of when the obligation arises would normally not be significant. However, alimony and child support are nondischargeble only if they are "actually in the nature of support." Id. The debtor's contention in Arleaux was that the obligation, although labeled "support," was not "actually" support. Thus, it was necessary to determine whether the obligation was prepetition or postpetition.
On the present facts, the court need not and does not reach the question of whether the mere pendency of a divorce suit on the filing date is sufficient to render obligations under a subsequent marital property settlement or divorce decree a prepetition claim. The facts here go well beyond the mere pendency of a divorce suit. The debtor and Ms. Rudy had reached an agreement which had been read into the record. There is no suggestion that under Washington law the debtor would have been free to repudiate the agreement simply because it had not yet been embodied into decree of dissolution. Thus, regardless of whether Ms. Rudy could have brought an action prior to the filing of the bankruptcy petition to enforce the indemnity obligation, the debtor had sufficiently bound himself to the terms of the agreement that his liability is properly treated as having arisen before the date of the petition. For that reason, the court concludes that the obligation was discharged when the debtor was granted his discharge more than three months after the entry of the dissolution decree.
Ms. Rudy cites to Munroe v. Munroe, 178 P.2d 983, 986 (Wash. 1947) for the proposition that under Washington law, a property settlement stipulation entered into during the trial of a dissolution action is not binding on the trial court but may be approved, modified, or entirely disregarded by the court. However, regardless of whether a stipulation reached on the record is binding on the court, it is binding on the parties, and, if approved by the court, will be set aside only if there is a showing of fraud, mistake, misunderstanding, or lack of jurisdiction. Baird v. Baird, 494 P.2d 1387, 1389 (Wash.App. 1972).
III.
A discharge "voids any judgment at any time obtained . . . with respect to a debt discharged under section 727 . . . whether or not discharge of such debt is waived." § 524(a)(1), Bankruptcy Code. It also
operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such [discharged] debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
§ 524(a)(2), Bankruptcy Code (emphasis added). Although there is no private right of action for violation of the discharge injunction, violations may be redressed under the court's contempt powers. Cherry v. Arendall (In re Cherry), 247 B.R. 176, 186-87 (Bankr. E.D. Va. 2000); see also Burd v. Walters (In re Walters), 868 F.2d 665 (4th Cir. 1989) (bankruptcy court has civil contempt powers to enforce its own orders). Sanctions for civil contempt may be remedial or coercive or both. Keene Corp. v. Acstar Ins. Co. (In re Keene Corp.), 168 B.R. 285, 288 (Bankr. S.D.N.Y. 1994) ("Civil contempt proceedings can be coercive or compensatory. Coercive civil contempt imposes sanctions, such as fines or imprisonment, to compel compliance with the court's orders; compensatory civil contempt attempts to indemnify the injured party for the damage caused by the contempt."). Compensatory sanctions for civil contempt do not, however, extend to emotional distress. Burd, 868 F.2d at 670 (upholding civil contempt sanction against debtor's attorney for violation of court order to refund improper fees, but vacating award of $1,000 for the debtors' emotional distress and stating, "[N]o authority is offered to support the proposition that emotional distress is an appropriate item of damages for civil contempt, and we know of none."); see also Cherry v. Arendall (In re Cherry), 247 B.R. 176, 189 n. 21 (Bankr. E.D. Va. 2000) (acknowledging unavailability of emotional distress damages for violation of discharge injunction). Although in Cherry Judge St. John suggested that punitive damages could be awarded for violation of the discharge injunction, the subsequent decision of the Fourth Circuit in Cromer v. Kraft Foods N. Am., Inc., 390 F.3d 812 (4th Cir. 2004), clearly seems to preclude an award of punitive damages in a contempt proceeding unless the proceeding is pursued as criminal under Rule 42, Fed.R.Crim.P.
Based on the foregoing principles, this court finds that Ms. Rudy and Ms. Turean should be held in civil contempt for violating the discharge injunction by bringing the show cause proceeding against the debtor in the Pierce County Superior Court. This court will require that Ms. Rudy and Ms. Turean seek dismissal of the state court show cause proceeding and will award the debtor compensatory sanctions, for which Ms. Rudy and Ms. Turean shall be jointly and severally liable, in the amount of $1,960.64 plus the reasonable fees incurred by the debtor in prosecuting the show cause proceeding in this court.
A separate order will be entered consistent with this opinion.