Opinion
CIVIL ACTION NO. 3:01CV-621-S
November 6, 2002
ORDER
Appeal having been taken from the judgment of the United States Bankruptcy Court, and for the reasons set forth in the memorandum opinion entered herein this date and the court being otherwise sufficiently advised, IT IS HEREBY ORDERED AND ADJUDGED that the bankruptcy court did not err in its disposition of this matter, and the judgment of the bankruptcy court is AFFIRMED.
There being no just reason for delay in its entry, this is a final order.
MEMORANDUM OPINION
This matter is before the court on appeal from the judgment of United States Bankruptcy Court in this adversary proceeding concerning the dischargeability of a debt owed as a result of the divorce of the parties.
The debtor, Ronald James Miller (hereinafter "Miller"), and the creditor, Linda Ann Miller (now Allen) (hereinafter "Allen"), were divorced in 1995 after twenty-nine years of marriage. The memorandum opinion of the bankruptcy court rendered detailed findings of fact concerning the settlement and subsequent transactions. The debt remaining to Allen at the time of trial was $267,333.64. The amount of the debt was not contested, and is not challenged on appeal. After hearing evidence and making factual findings, the bankruptcy court concluded that 75% of the debt was nondischargeable pursuant to 11 U.S.C. § 523(a)(15) and was to be paid with interest at 8% interest per annum from the date of judgment. The court discharged the remaining 25% of the obligation. Miller moved to alter or amend the judgment or for a new trial. The bankruptcy court considered the matter, and overruled the motion.
Allen contended that Miller should be denied discharge under 11 U.S.C. § 727(a)(5) and (7) on the ground that Miller could not adequately explain the pre-petition dissipation of his assets. The court found that although the transfers of Millers assets were suspicious, the burden was not met to deny Miller discharge under § 727. This conclusion has not been challenged on appeal.
The district court reviews the bankruptcy court's findings of fact for clear error and reviews conclusions of law de novo. In re Caldwell, 851 F.2d 852, 857 (6th Cir. 1988). With regard to findings of fact,
"[a]bsent the `most cogent evidence of mistake or miscarriage of justice' a bankruptcy court's findings will not be disturbed. [citations omitted] . . . and when there are two permissible views of the evidence, the court may not hold that the trial court's findings are clearly erroneous. [ Anderson v. City of Bessemer, 470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)] at 574, 105 S.Ct. at 1511-12 (citations omitted). . . [F]actual findings based on credibility determinations warrant even greater deference, id. at 575, 105 S.Ct. at 1512."H.J. Scheirich Company v. Kitchen Bath Distributors, Inc., 982 F.2d 945 (6th Cir. 1993).
Miller raises several claims of error in this appeal.
Miller challenges the court's inclusion of the income of his live-in girlfriend in considering his income and ability to repay the debt. The court did not err as a matter of law in considering the girlfriend's income. The court found that the availability of her income improved Miller's economic circumstance. It found that Miller's girlfriend, the mother of his 3 1/2 yr. old child, was living with him in an arrangement of long duration in the home he retained from his prior marriage. The combined income of Miller and girlfriend was over $3,000.00 per month. The finding as to the amount of her income has not been contested. Rather Miller challenges only the inclusion of that amount evaluating his ability to pay. Miller has cited no authority for his claim of error.
Consideration of the income of a live-in companion has been held to be proper by bankruptcy courts in a number of jurisdictions. In re Dunn, 225 B.R. 393 (Bankr. S.D.Ohio 1998); In re Crosswhite, 148 F.3d 879 (7th Cir. 1998); In re Cleveland, 198 B.B. 394 (Bankr. N.D. Ga. 1996); In reKoons, 206 B.R. 768 (Bankr. E.D.Pa. 1997); In re Halper, 213 B.R. 279 (Bankr.D.N.J. 1997). The determination regarding the inclusion of such income is fact-driven, and is left to the sound discretion of the trial judge. In re Crosswhite, 148 F.3d at 889. Factors such as the duration and apparent permanence of the live-in relationship are appropriate considerations. In re Dunn, 225 B.R. 393, 401-02 (Bankr. S.D.Ohio 1998), citing, In re Crosswhite, 148 F.3d 879, 889 (7th Cir. 1998). In light of the bankruptcy court's careful consideration of the facts and the ample authority for the disposition, we will not disturb the bankruptcy's ruling on this issue.
Miller appeals the court's factual findings concerning his potential future earnings. He further contends that it was improper for the court to consider potential earnings in addressing his ability to pay.
The court found that there was a "drastic reduction" in Miller's income from $146,000.00 in prior years to $36,000.00. The reduction in income was represented to be due to the "poor sales" by his company, Progress Plastics. "Poor sales" were represented as the reason for the decline, but this assertion was unsubstantiated at trial, and was therefore discounted by the court.
Miller's proof concerning his assets and income at the time of trial was viewed by the court with some scepticism. There was a lack of documentation of debts allegedly owed, and financial accommodations allegedly reached between Miller and his partner and family. This evidence led the court to conclude that Miller had purposefully divested himself of his assets in an effort to avoid paying his debts. Credibility determinations warrant deference by the reviewing court. See, In re Caldwell, supra.
The bankruptcy court considered that Miller had the potential to earn a substantially greater income from his company in the future. He remains in business with his long-time partner. He has continued ownership in the company, despite the fact that he contends that his stock is pledged to secure a number of alleged loans from the company and his partner. Evidence of his past earnings in a still-viable company supports the findings as to Miller's potential future income.
The court found that these were questionable transactions in light of the fact that these alleged loans were undocumented until many years after they were purportedly made. Documentation came into existence at the time Miller pledged his stock. Further, the value of the stock pledged appeared to exceed the value of the debts by a sizeable amount. As noted herein, the court will not substitute it's own credibility determinations for those of the bankruptcy court where there is some evidence in the record to support such findings.
[A] court may look to a debtor's prior employment, future employment opportunities, and health status to determine future earning potential of the Debtor. [ In re] Florio, 187 B.R. at 657-658. Where, as here, a debtor artificially diminishes his ability to repay obligations addressable under § 523(a)(15), such conduct becomes a factor appropriately considered by the bankruptcy court in a § 523(a)(15) proceeding.In re Molino, 225 B.R. 904, 908 (B.A.P. 6th Cir. 1998).
The bankruptcy court's findings concerning Miller's financial situation are supported by the record. The findings concerning of Miller's financial affairs and potential future income are not clearly erroneous.
Miller claims that the findings concerning his living expenses were erroneous. The court found that his reasonable and necessary living expenses totaled approximately $1500.00. This finding is consistent with "exhibit B" to his affidavit submitted to the bankruptcy court in this adversary proceeding, in which he indicated that his current expenditures were $1,547.00 per month for bare necessities.
Reasonable and necessary living expenses includes only bare necessities of life. See, In re Dunn, supra. Gas and electricity were not included in his itemization of expenses since Progress Plastics paid these charges. Miller had not paid the purported $800.00 per month rent to his business partner/landlord for close to one year, and there was no attempt at collection or eviction. There was testimony that Miller's girlfriend paid for groceries, however Miller listed food at $200 per month. Miller stated in his affidavit that his expenses remained the same as in his bankruptcy petition. The list included $215.00 per month entertainment, $400 per month for food, and $250 per month for electricity, among other things. He also stated in his affidavit, however, that he was managing on $1,547.00 per month for the bare necessities listed. The court was not in error in determining that "exhibit B" presented a more accurate determination of the cost of necessities for Miller.
Miller remained in the marital home after his divorce. In 1994, the home was appraised at $235,000.00. Miller had paid down the mortgage to S80,000.00. He contended that he could no longer afford the home, and sold it to his partner for the mortgage balance of $80,000.00. His partner then began renting the property to Miller for $550.00/month. Miller contends that he sold the home for less than the appraised value because he owed his partner $40,000.00. There is thus sufficient evidence in the record to justify the bankruptcy court's critical view of this alleged rental relationship between the partners.
Some point the "rent" jumped from $550.00/month to $800.00/month. It is unclear why or when this "increase" was implemented.
In light of the finding that the combined income of Miller and his girlfriend totaled over $3,000.00 per month, the conclusion that Miller's monthly expenses were approximately $1,500.00 per month was not clearly erroneous.
The bankruptcy court concluded that Miller had the ability to pay $1,000.00 per month, based upon his potential future income, continued ownership in Progress Plastics, his current monthly income and expenses, and assistance from his girlfriend. The court did conclude, however, that Miller's current income situation did not demonstrate that he had an ability to pay the full debt. This court finds no clear error in these conclusions.
Miller contends that the balancing of the hardships weighed in his favor, and therefore the finding of nondischargeability was in error.
The bankruptcy court may discharge a debt that the debtor has the ability to pay if the debtor proves by a preponderance of the evidence that the discharge of the debt will result in a benefit to him that outweighs the detrimental consequences of the discharge to the former spouse. 11 U.S.C. § 523(a)(15)(B); In re Smither, 194 B.R. 102, 110 (Bankr. W.D.Ky. 1996). The bankruptcy court recited the factors to be considered in making a balancing of the hardships assessment:
In applying this standard, the Court must review both the Debtor and Mrs. Allen's financial status and standard of living and determine which party would suffer more based on the court's decision in this case. See In re Molino, 225 B.R. 904, 907 (B.A.P. 6th Cir. 1998).
In making this determination, the Court considers the following: the amount of the debt and the payment terms; the current income and expenses of the debtor, creditor and respective spouses; the current assets (including exempt assets of the debtor) and liabilities of the debtor, creditor and spouses; the amount of debt which will be discharged in bankruptcy; the health, job experience, age and education of the debtor, creditor and spouses; any changes in financial conditions of the debtor and creditor since the entry of the decree; whether the creditor is eligible for bankruptcy; and whether the parties have acted in good faith in the filing of the bankruptcy and the litigation of the § 523(a)(15) issue. See, Smither, 194 B.R. at 111.
Memorandum Opinion of June 6, 2001 ("Mem. Op."), pg. 10.
Miller has challenged the evaluation of Allen's financial situation, emphasizing that she and her husband own a condominium in Florida, a country club membership, a Jaguar automobile and have had the ability to travel. He also takes exception to the finding that his conduct raised a question as to his good faith in this matter.
With respect to Allen's lifestyle, the court noted that Allen had remarried and that she and her husband had an annual income of $41,000.00. Their comfortable lifestyle was afforded from the husband's 401K fund and investments, both of which the court noted were finite sums. He was retired and had dissipated a portion of his retirement funds. Allen did not work during her first marriage, but she and her current husband had invested a large sum of money in attempting to start up a business together.
The court found that there was no evidence that Allen had acted in any matter other than in good faith in the proceedings. By contrast, the court found that
The Debtor, however, voluntarily divested himself of several valuable assets that could have provided him with additional funds to pay Mrs. Allen. Although the Court did not find that these transactions were sufficient to deny Debtor a discharge in this case due to the remoteness of the transfers, they do provide sufficient grounds to question the Debtor's good faith with respect to his obligation to Mrs. Allen. This is particularly true with respect to the mortgage taken on the K M Properties real estate and the pledge of the Debtor's Progress Plastics stock to secure his debt to the company. The Court finds after weighing both parties' financial situations that the Debtor failed to meet his burden of proving that the benefit of the discharge of this debt outweighs the detrimental consequences to Mrs. Allen. See, In re Florio, 87 B.R. 654, 657 (Bankr. W.D.Ky. 1995) (equity weighs against discharge where the debtor has the ability to pay a debt under § 523(a)(15)).
Mem.Op., pg. 11.
The burden with respect to the balancing of hardships was on Miller. This court agrees with the conclusion of the bankruptcy court that the factors to be considered, as set out in Smither, supra., disfavor Miller in a balancing of hardships. The court begins from the premise that sufficient grounds exist to question Miller's good faith in this matter. As we have already stated, there is ample evidence in the record to support this finding by the bankruptcy court. Since there was doubt as to the legitimacy of his financial strife, any dollar-for-dollar comparison between the financial pictures of Miller and Allen would have been meaningless. Such a comparison is not mandated, in any event. The bankruptcy court properly considered the financial circumstances of Allen and reasonably concluded that "[i]t does not appear that Mrs. Allen will need to file for bankruptcy protection with or without the discharge of this obligation, but any additional funds received from the Debtor will provide stability for Mrs. Allen's future financial circumstances." Mem. Op., pg. 11.
0n reconsideration of its judgment, the court acknowledged the possibility of error in its factual finding that Miller had made no payments on Note No. 3 owed to Allen under the property settlement. The court noted that the proof on the point was somewhat contradictory, but that it was not material to the case. It did not alter the amount of the debt owed at the time of trial, and the court did not use the finding in its consideration of good faith. To the extent that the finding is inconsistent with the proof at trial, it is vacated, but does not otherwise impact the decision below or here.
Additionally, the court found that Miller's financial future was promising in light of his business history, his continued partnership in a viable business, and the gainful employment of his girlfriend. The court noted by contrast that Allen did not work during their 29 year marriage, but has recently embarked upon a business venture with her current husband; a business which was as yet unproven and involved a substantial investment of savings.
This court agrees with the bankruptcy court that Miller failed to establish by a preponderance of the evidence that he would suffer greater hardship from the denial discharge than Allen would suffer were discharge afforded him.
The court ordered Miller to pay 75% of the debt at 8% interest from the date of judgment. It discharged the remaining 25% of the obligation. Miller contends on appeal that the judgment should have made "his payments reasonable over a reasonable period of time." Appellant's Brief, pg. 13. As correctly stated by the court on reconsideration, however, "[t]he Judgment does not direct Debtor to make monthly payments of $ 1,000.00. The court did find that Debtor could afford to pay Mrs. Allen at least $1,000.00 per month, but he must determine how to pay off the debt. The interest component of the Judgment is the cost to Debtor for any delay in payment. This does not provide a basis to alter or amend the Judgment." Mem. Op. of September 27, 2001, pg. 3.
The court concludes that the bankruptcy court did not err in its disposition of this matter, and the judgment will be affirmed by separate order.