Opinion
Case No. 97-19185-SSM, Adversary Proceeding No. 98-1067
December 29, 1998
John S. Kelley, Ashburn, VA, for Plaintiff, pro se
Noreen C. Kelley, Bayonne, N.J. for Defendant, pro se
MEMORANDUM OPINION
This is an action by the debtor against his former wife to determine the dischargeability of a $7,000 judgment for attorney's fees entered in their divorce and custody litigation. Both parties are proceeding pro se. A trial was held in open court on December 10, 1998, at the conclusion of which the court took the issues under advisement. For the reasons stated in this opinion, the court concludes that the judgment is nondischargeable, but that the debtor is entitled to a three-year moratorium on enforcement.
Facts
John Steven Kelley ("the debtor") filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on December 11, 1997, and was granted a discharge of his dischargeable debts on March 19, 1998. His former wife, Noreen C. Kelley ("Ms. Kelley") was listed as a creditor with respect to a $7,000 judgment for attorney's fees. On March 6, 1998, the debtor commenced the present adversary proceeding to determine the dischargeability of that debt.
With interest at the judgment rate (9%), the actual amount due on the date of the trial in this court was $7,699.04.
The judgment in question was entered by the Circuit Court of Fairfax County, Virginia, on October 31, 1997, as part of a final decree of divorce which provides in relevant part as follows:
5. ATTORNEY'S FEES. The Court, upon due consideration of the factors contributing to the cost of this litigation and the financial resources of the parties, hereby ORDERS that the Defendant/Cross-Plaintiff, JOHN STEVEN KELLEY, shall forthwith pay to the Plaintiff/Cross-Defendant, NOREEN CLARE KELLEY, the sum of Seven Thousand Dollars ($7,000.00) as and for her counsel fees and costs incurred herein.
(a) The Plaintiff/Cross-Defendant, NOREEN CLARE KELLEY, is hereby awarded a judgment against the Defendant/Cross-Plaintiff, JOHN STEVEN KELLEY, in said amount.
(c) The within judgment shall bear interest as to all amounts unpaid from the date of entry, at the judgment rate set forth in § 6.1-330.54, until the principal sum of $7,000.00 be paid in full.
Significantly, the chancellor struck from the sketch decree, as tendered by Ms. Kelley's attorney, language to the effect that the award of attorney's fees was being made
in lieu of spousal support and is in the nature of support to defer the current financial need of the Plaintiff/Cross-Defendant caused by this litigation, and is reasonably necessary for the maintenance and financial well-being of the Plaintiff/Cross-Defendant and the minor child of the parties.
The decree awarded Ms. Kelley child support in the amount of $900.00 per month, based on findings that the debtor's gross income was $3,694.00 per month and that Ms. Kelley's was $2,625.00 per month. The decree further provided, under the heading, "Spousal Support," that neither spouse was required to pay spousal support to the other "at this time," but reserving the issue of spousal support in the event the debtor "discharges any of the obligations set forth below." Finally, the decree provided for the jointly-owned residence to be conveyed to the debtor if he were able to refinance it with a loan solely in his own name. Otherwise, the debtor was to vacate the property, which would be listed for sale, with the debtor to be solely responsible for the mortgage payments as long as he lived in the house, and the parties to be each responsible for one-half the monthly payment while the house was being marketed. The debtor's schedules in his bankruptcy case stated, "It is debtor's intention to allow this property to go to foreclosure," and it appears that a foreclosure subsequently occurred in February 1998.
In terms of its actual physical position in the decree, the attorney's fee award is above, not below, the reservation of support language. Thus, it is not clear if the chancellor intended the reservation of support to encompass the discharge of the attorney's fee award.
No evidence was presented as to Ms. Kelley's current expenses. The evidence adduced at the hearing shows that the debtor is currently employed by Kelley Multimedia, Inc., a company he founded, at a salary of $40,000.00 per year. The debtor testified that his net pay is $1,100 twice a month. The company also reimburses him for half of the $900.00 per month rent on the apartment he occupies, and from which the company conducts its business. Although he was once the sole shareholder of the company, financial pressures required him to bring in two outside investors, Sharon B. Gamble and Michael K. Gamble, who now hold 51% of the stock in exchange for a $10,000 capital infusion. The debtor testified that the company has never paid a dividend, and that the only money he currently receives from the company is his salary and the rent reimbursement. Under the divorce decree, as noted above, the debtor is required to pay Ms. Kelley $900 per month as child support.
Ms. Kelly made certain representations during opening and closing argument as to her financial circumstances, but presented no evidence as to her expenses. The court explained to both parties at the outset of the trial that argument was not evidence, and that the court could decide the issues based only on the testimony and exhibits.
When the debtor — who is now 40 years of age — was 24, he fell and suffered extensive injuries to his teeth and facial bones. As a result, he has a number of missing teeth and a number of teeth that are fractured and chipped. Several of the teeth had been the subject of root canal procedures many years back. Three of those teeth are now severely decayed and abscessed, and an endodontist has recommended immediate treatment of those three teeth in the form of a new root canal and temporary filling at a minimum projected cost of $1,840.00. The debtor's treating dentist has recommended an extensive 1 1/2 year treatment program, which includes orthodontia to correct severe malocclusion and oral surgery to reposition existing teeth and to fill in missing teeth. The total estimated cost of the treatment program exceeds $20,000.
Conclusions of Law and Discussion I.
This court has subject matter jurisdiction of this action under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Venue is proper in this district under 28 U.S.C. § 1409 (a). Under 28 U.S.C. § 157(b)(2)(I), this is a core proceeding in which final judgments and orders may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158. The defendant was properly served and has appeared generally.
II.
Under § 727(b), Bankruptcy Code, a chapter 7 discharge releases an individual debtor from personal liability for "all" prepetition debts except those specified in § 523(a), Bankruptcy Code. Two of those exceptions are relevant to the present controversy. First, under § 523(a)(5), a chapter 7 discharge does not affect the debtor's liability for a debt
to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement, but not to the extent that —
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support[.]
Second, a chapter 7 discharge also does not discharge a debt
(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless —
(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.
§ 523(a)(15), Bankruptcy Code. Thus, the first inquiry is whether the $7,000.00 debt is one for "support." If so, it is nondischargeable, and no further analysis is required. On the other hand, if the debt, although arising in the course of a divorce, is not one for "support," then the two questions to be resolved are (a) whether the debtor is unable to pay the debt and still support himself and (b) whether the benefit to the debtor from discharging the debt outweighs the resulting detriment to Ms. Kelley. If either question is answered in the affirmative, the debt is discharged; otherwise it is not discharged.
A.
As noted, the threshold inquiry is whether the $7,000 judgment is a debt "to a . . . former spouse . . . for alimony to, maintenance for, or support of such spouse." Initially, the court notes that the obligation is not described in the divorce decree as alimony or support, and, in fact, proposed language that would have labeled it as support was struck by the chancellor. An obligation may, however, be in the nature of support, so as to be nondischargeable under § 523(a)(5), even if not specifically denominated as support in a property settlement agreement or divorce decree. Melichar v. Ost (In re Melichar), 661 F.2d 300, 303 (4th Cir. 1981) ("The proper test of whether the payments are alimony lies in proof of whether it was the intention of the parties that the payments be for support rather than as a property settlement.") (decided under Bankruptcy Act of 1898); Tilley v. Jessee, 789 F.2d 1074, 1077 (4th Cir. 1986) (" [T]he true intent of the parties rather than the labels attached to an agreement or the application of state law [controls]"); Long v. West (In re Long), 794 F.2d 928, 930 (4th Cir. 1986) (intent of divorce court governs where obligation arises from that court's decree). At the same time, the classification of an obligation under state law "is an important factor" in determining whether it constitutes a debt for support. Melichar, 661 F.2d at 303; Tilley, 789 F.2d at 1077-78 (although labels attached to separation agreement were not controlling, they were "persuasive evidence of intent" that former spouse was required to overcome). The burden of showing that a particular obligation is in the nature of alimony, maintenance, or support, so as to be nondischargeable under § 523(a)(5), Bankruptcy Code, is on Ms. Kelley, as the party opposing the debt's dischargeability in bankruptcy. Long, 794 F.2d at 930. The standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 290, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991); Beaton v. Zerbe (In re Zerbe), 161 B.R. 939, 940 (E.D. Va. 1994).
The attorney's fees for which the state court granted judgment to Ms. Kelley were incurred in a divorce suit in which both the proper amount of child support and custody of the child were adjudicated. Some courts have held broadly that " [o]rdinarily, any debt for attorney's fees incurred during a spousal or child support proceeding is nondischargeable pursuant to Section 523(a)(5)." Lanting v. Lanting, 198 B.R. 817, 822 (Bankr. N.D. Ala. 1996); see also Taylor v. Foiles, 176 B.R. 420, 423-24 (Bankr. E.D. Va. 1994) (award of attorneys' fees made in conjunction with an award of spousal or child support are, "in the absence of other evidence of intent," in the nature of support and therefore nondischargeable.). It seems clear, however, that the Fourth Circuit has not adopted a per se rule with respect to awards of attorney's fees, and that the proper focus remains on the intent of the parties (where there is a property settlement agreement) or of the court making the award (where there is no agreement). Zerbst, 161 B.R. at 941. The factors traditionally considered in determining that intent are " (1) the relative financial condition of the parties and (2) the function served by the obligation." Foiles, 176 B.R. at 423.
The chancellor departed downward slightly from the presumptive amount of child support payable under Virginia's statutory guidelines based on the costs that the debtor would incur in exercising visitation.
In the present case, the state court's findings reflect that the debtor was earning approximately 40% more than Ms. Kelley. The decree further recited that the attorney's fee award was made based on "the factors giving rise to the cost of this litigation and the financial resources of the parties." Thus, it is clear that the "relative financial condition" of the parties was a factor in the state court's award. At the same time, it also seems clear that the award was made, not solely, or necessarily even primarily, because Ms. Kelley was without resources to pay for an attorney, but because the debtor, in the chancellor's view, was responsible for unnecessarily increasing the costs of the proceedings. In short, it seems more likely that the chancellor's intent in fashioning the award was not to provide for Ms. Kelley's support, as such, but rather to ensure, as a matter of equity, that she was not made to bear the financial burden of litigation for which the debtor was primarily responsible.
As noted above, the burden is on Ms. Kelley to demonstrate that the award was intended as support. Although the issue is a close one, the chancellor's act in striking from the final decree the language which would have characterized the attorney's fee award as support, coupled with the recitation that the award was made in part because "of the factors contributing to the cost of this litigation," weighs in favor of a finding that the state court did not intend its award to be in the nature of support. Accordingly, the court concludes that the $7,000 is not excepted from discharge under § 523(a)(5), Bankruptcy Code, as being in the nature of support.
B.
Even though the judgment for attorney's fees is not support, it is nevertheless nondischargeable under § 523(a) (15), Bankruptcy Code, as an obligation arising under a divorce decree unless the debtor can show that one of the two statutory exceptions applies. See King v. Speaks (In re Speaks), 193 B.R. 436, 440-41 (Bankr. E.D. Va. 1995) (inability to pay and benefit to debtor are affirmative defenses to be raised and proved by the debtor); Craig v. Craig, 196 B.R. 305, 308-09 (Bankr. E.D. Va. 1996) (burden is on the debtor to prove by preponderance of the evidence either inability to pay or that benefit of discharge outweighs detriment to former spouse).
At the outset, the court observes that neither party offered any evidence — as opposed to various representations made in oral argument, which the court advised the parties were not evidence — as to Ms. Kelley's overall expenses. The exhibits offered by Ms. Kelley do, however, reflect that as of November 1, 1998, she still owed her divorce attorneys $3,662.18, and that the attorneys advised her they could not further represent her because of the unpaid fees. Additionally, the findings made by the chancellor in the divorce decree reflected that the debtor made $1,069 (or approximately 41%) more per month than Ms. Kelley. While it is clear that discharge would be a benefit to the debtor, there is no evidence which would allow the court to determine that such benefit outweighs the resulting detriment to Ms. Kelley. Accordingly, the debtor has not carried his burden of proof with respect to the balance-of-benefit exception in § 523(a)(15)(B), Bankruptcy Code.
Ms. Kelley offered in evidence bills from her attorneys totaling $19,876.48 for services in connection with the divorce case, most of which appeared to relate to the custody dispute.
The factors that have been considered by the courts in determining whether the benefit to the debtor from discharging a divorce debt outweighs the resulting detriment to the former spouse include the income and expenses of both parties, whether the nondebtor spouse is jointly liable on the debts, the number of dependents, the nature of the debts, the reaffirmation of any debts, the nondebtor spouse's ability to pay, and whether the debt can be collected from the nondebtor spouse. Craig, 196 B.R. at 310.
The more difficult question is whether the debtor has shown that he does not have the ability to pay the $7,000.00 attorney's fee award "from income or property . . . not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor." § 523(a)(15)(A), Bankruptcy Code. As noted above, the chancellor found that the debtor's income at the time of the final decree (October 31, 1997) was $3,694 per month (or $44,328 per year). The debtor testified at the trial that he receives a salary of $40,000 a year from Kelley Multimedia, Inc., the company he founded, and that in addition he is reimbursed by the company $450 per month ($5,400 per year) for rent, for a total of $45,400 per year. He testified that his take home pay is $1,150 twice a month, or $2,300 per month. This does not include the $450 per month rent reimbursement, which would bring the monthly total to $2,750. No breakdown was offered as to the deductions from gross pay to arrive at net. The debtor filed two different schedules of monthly expenses during his chapter 7 case and also testified at trial concerning various of the claimed expenses. Given the shifting and vague figures to which the debtor testified, determining the amount of his "necessary" expenses is not an easy task, but the court finds the following amounts — which do not include the claimed extraordinary medical expenses — to be consistent with the evidence and reasonable:
The debtor's bankruptcy schedules showed net ("take home") pay of $3,151 per month. Although the debtor filed an amended schedule of expenses, he did not amend his schedule of income The court can only conclude that greater amounts are now being deducted from the debtor's paycheck than previously.
The original schedules showed monthly gross income of $3,667, monthly net income of $3,151, and monthly expenses of $3,721, for a net monthly shortfall of $570. That sum, however, included a hypothetical $800 per month payment on account of the $7,000 attorney's fee award. The amended schedule shows monthly expenses of $3,730 before any payment of the attorney's fees.
Rent $900 Child Support 900 Car Lease Payment 360 Food 170 Utilities 120 Telephone 60 Newspapers and magazines 10 Personal property tax on car 29 Unreimbursed medical costs 35 Insurance 57 Total $2,641
Amounts claimed by the debtor for visitation with his son (who lives with Ms. Kelley in New Jersey) are not included because, while visitation is clearly beneficial both for father and son, the court is unable to conclude that the expenses of visitation are in a strict sense "necessary" for the support of the debtor and his son. The debtor, as noted above, has available net income (including the rent reimbursement) of $2,750 per month. Accordingly, in the absence of extraordinary medical expenses, the debtor would have a surplus of approximately $109 per month that could be used to pay the $7,000 attorney's fee award.
The debtor, however, argues that he is in desperate need of approximately $20,000 in dental work to repair extensive trauma damage to his teeth. That damage, as noted above, occurred 16 years ago, and Ms. Kelley urges that the debtor, having lived with the problem for 16 years, can certainly live with it a few years longer. The evidence of the dentists whose testimony was presented by way of deposition, however, presents a compelling case for immediate treatment for the three teeth that have abscessed. As noted above, the cost of that treatment would be a minimum of $1,840. The other recommended procedures have varying degrees of urgency, and will plainly have to be performed at some point, but the court is unable to find that postponement of the treatment will have an immediate adverse impact on the debtor's health.
Having carefully weighed the evidence, the court concludes that the debtor is unable to pay the $7,000 attorney's fee award at this time and still provide for his basic support (which includes the immediate treatment of the three abscessed teeth). At the same time, the debtor earns a reasonable income, and, once the most urgent portion of the dental treatment is concluded, there is no apparent reason why he would not be able to begin paying the $7,000 attorney's fee award. See Craig, 196 B.R. at 310 (test is not whether debtor has the ability to pay the debt at a certain time but whether the debtor can pay the debt over time); Johnson v. Henson (In re Henson), 197 B.R. 299, 303-05 (Bankr. E.D. Ark. 1996) (ability to pay is not limited to moment of trial but includes view of debtor's future financial situation, including ability to make minimum monthly payments on debt). The court concludes, therefore, that the attorney's fee award should not be excepted from discharge, but that a three-year moratorium should be imposed on payment and collection in order to give the debtor an opportunity first to take care of his immediate medical needs. See McGinnis v. McGinnis (In re McGinnis), 194 B.R. 917, 921 (Bankr. N.D. Ala. 1996) (if debtor is able to pay only a portion of divorce-related debt, the court may discharge or modify the remainder of the obligation).
The debtor in argument cited to Johnson v. Johnson (In re Johnson), 212 B.R. 662 (Bankr. D. Ran. 1997), and suggested that his situation was essentially indistinguishable. The debtor in Johnson lived in a 30-year old mobile home, had monthly net wages of $1,310 per month, had monthly living expenses of $1,065 per month, was paying an additional $110 per month for medical expenses, and was making $114 per month payments on one of the debts he was ordered to pay by the final decree of divorce (and which he was not seeking to discharge). His former wife, prior to remarrying and going to work for her new husband's company, earned more than he did. Even a brief recitation of the facts is sufficient to demonstrate that the debtor's economic situation in this case is not at all comparable with that of the debtor in Johnson, To the extent that the Johnson court, in applying the ability-to-pay test, looked solely to the debtor's economic situation at the time of trial, and to the extent that it also held that dischargeability under § 523(a)(15) was an "all or nothing" determination, this court finds the opinion in Johnson unpersuasive and declines to follow it.
III.
A separate judgment will be entered determining that the attorney's fee award is nondischargeable but imposing a three-year moratorium on payment and collection. This opinion constitutes the court's findings of fact and conclusions of law as required by F.R.Bankr.P. 7052.