Summary
finding that the automatic stay did not preclude a divorce action against the debtor
Summary of this case from In re LinvilleOpinion
Bankruptcy Court Case No. 98-03626 JRH; District Court Case No. 1:01-CV-359
November 14, 2001
OPINION
Debtor John Ujlaky (Appellant), has appealed the United States Bankruptcy Court's April 30, 2001, order denying Appellant's motion to hold Appellant's co-debtor and ex-wife, Annette Ujlaky ("Appellee"), and her attorney in contempt and the bankruptcy court's April 30, 2001, order denying Appellant's motion to discharge Appellant. For the reasons set forth below, the Court affirms the orders.
Facts and Procedural History
On April 23, 1998, Appellant and Appellee, who were then husband and wife, filed a joint Chapter 13 bankruptcy petition. On July 9, 1998, the bankruptcy court confirmed a plan which provided for monthly payments of $1,065, totaling $70,000. In December 1998, Appellee filed for divorce in Eaton County Circuit Court. Appellee did not seek relief from the automatic stay in the bankruptcy case prior to filing her divorce complaint.
On March 6, 2000, a stipulated judgment of divorce was entered by the state court judge. Pursuant to the divorce judgment, Appellant was responsible for child support payments for the minor children and neither party was required to pay spousal support. As part of the division of property, Appellee received the marital home, which was subject to a mortgage. The divorce judgment also provided that Appellant would pay $5,325 to the Chapter 13 Trustee and that Appellee would be responsible for: (i) paying the balance of the plan, which was then $48,690.99; (ii) obtaining a discharge for both parties; and (iii) holding Appellant harmless on his obligations under the plan. It was also contemplated by the parties that Appellee would attempt to refinance the mortgage on the home within six months in order to eliminate Appellant from the mortgage and obtain funds to pay the Chapter 13 plan in full. The judgment also provided that if Appellee was unable to pay off the plan within six months, the parties could seek further relief from the state court.
Appellee was unable to remortgage the home and pay off the plan within six months and therefore sought further relief from the state court. On November 14, 2000, the state court entered an order which, among other things, set Appellant's child support obligation and provided that Appellee could continue to make the plan payments on a monthly basis so long as she remained current. Appellant did not argue during the divorce proceeding, either in the state court or in the bankruptcy court, that Appellee's filing of the divorce proceeding violated the automatic stay.
On March 6, 2001, Appellant filed a motion requesting that the bankruptcy court grant him a discharge from the Chapter 13 proceeding or, in the alternative, convert the case to a Chapter 7 proceeding. Appellant also filed a motion to hold Appellee and her attorney in contempt for violating the automatic stay by filing the divorce action without seeking relief from the stay. In that motion, Appellant requested the bankruptcy court to set aside and undo the divorce proceeding and hold Appellee and her attorney in contempt.
The bankruptcy court held a hearing on both motions on April 19, 2001. At the conclusion of the hearing, the bankruptcy court denied both motions. With regard to the motion to hold Appellee and her counsel in contempt, the bankruptcy court concluded: (1) that the automatic stay did not preclude Appellee from filing for divorce, although the stay could have prevented the state court from making determinations of property that was part of the bankruptcy estate; and (2) that none of the elements of the divorce judgment were subject to the automatic stay either because they all concerned post-petition matters or there were no facts evidencing a violation of the automatic stay. (4/19/01 Hr'g Tr. at 8-11.) With regard to Appellant's motion to discharge, the bankruptcy court noted that Appellee was making the plan payments in a timely manner pursuant to her obligations under the plan and the divorce judgment and, therefore, Appellant was adequately protected. (Id. at 12-13.) The court also observed that Appellant would receive a discharge if Appellee made all of the payments. (Id. at 13.) However, the court stated that even though Appellant currently may not be able to make the payments, he might be able to make them if Appellee, at some point in the future, became unable to make them. The court concluded that because Appellee was still making the payments, a discharge would be premature. (Id. at 14.)
Appellant withdrew his request to convert the case to a Chapter 7 proceeding during the hearing. (4/19/01 Hr'g Tr. at 15.)
Standard of Review
In reviewing the decisions of a bankruptcy court, a district court applies a clearly erroneous standard to the bankruptcy court's findings of fact and a de novo standard of review to its conclusions of law. Trident Assoc. Ltd. Partnership v. Metropolitan Life Ins. Co. (In re Trident Assoc. Ltd. Partnership), 52 F.3d 127,130 (6th Cir. 1995); Holly's, Inc. v. City of Kentwood (In re Holly's. Inc.), 178 B.R. 711, 713 (W.D.Mich. 1995).Discussion
I. Motion to Hold Appellee in Contempt
Pursuant to 11 U.S.C. § 362(a), "[a] petition filed for bankruptcy operates as a stay and is applicable to the continuation of a judicial proceeding against the debtor." Parry v. Mohawk Motors of Mich, Inc., 236 F.3d 299, 314 (6th Cir. 2000). Among other things, the automatic stay provision prohibits
the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case . . . or to recover a claim against the debtor that arose before the commencement of the case. . . .11 U.S.C. § 362(a)(1). The bankruptcy court held that the automatic stay does not prohibit a post-confirmation debtor, such as Appellee, from filing a divorce action against a co-debtor. (4/19/01 Hr'g Tr. at 8.) Although the bankruptcy court acknowledged that the automatic stay might affect some aspects of a divorce proceeding, specifically those dealing with assets of the bankruptcy estate, it concluded that there was no such conflict because the assets of the estate vested in the debtors pursuant to 11 U.S.C. § 1327(b) upon confirmation of the plan and, thus, the actions in the divorce proceeding did not affect property of the estate. In addition, the bankruptcy court noted that the divorce proceeding did not trigger certain aspects of the automatic stay because the obligations created pursuant to the divorce judgment arose post-petition. (Id. at 9-11.) Appellant contends that the bankruptcy court's conclusions were erroneous for a number of reasons.
Appellant first contends that the bankruptcy court erred in concluding that the assets of the bankruptcy estate re-vested in Appellant and Appellee as the debtors upon confirmation of the plan. The bankruptcy court cited 11 U.S.C. § 1327(b), which states: "Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor." Appellant contends that the property continued to remain under the control of the Trustee and the bankruptcy court and did not re-vest in the debtors based upon the following language from an order entered by the bankruptcy court on June 30, 1998 ("Definitive Order"):
That, in accordance with the provisions of the Bankruptcy Code, the debtor will continue to remain in possession of the assets and effects of the debtor and to carry on normal business until further order of this Court and the said possession and operation shall, at all times, be under the supervision and control of this Court and the said Trustee.
(6/30/98 Definitive Order ¶ 2, Appellant's Br. Ex. D (italics added).) Appellant's argument is defeated both by the clear language of § 1327(b) as well as the language of the Definitive Order. The exception to § 1327(b) becomes operative only if the provision precluding re-vesting in the debtor is set forth "in the plan or the order confirming the plan." The Definitive Order is neither the order confirming the plan nor the plan, and Appellant cites no language in either of those documents support a conclusion that the provisions of the Definitive Order were somehow incorporated by reference. Moreover, the Definitive Order states that it is effective "until further order," which would include the order confirming the plan. Thus, the assets of the estate vested in the debtors upon confirmation of the plan.
Appellant next argues that even if the assets re-vested in Appellant and Appellee, the bankruptcy court erred in concluding that the automatic stay did not prevent Appellee from filing the divorce action. Appellant contends that the stay still applied because the scope of the stay extends beyond actions affecting property of the estate and it remains in effect even after property leaves the estate. Appellant is correct on this point. With regard to actions against property of the estate, the stay continues in effect until the property is no longer property of the estate. 11 U.S.C. § 362(c)(1). The stay continues in effect with respect to other aspects until the earliest of the closing or dismissal of the case or the granting or denial of a discharge to the debtor. 11 U.S.C. § 362(c)(2).
Appellant's argument fails, however, because courts have consistently held that the automatic stay does not preclude the filing of a divorce action against a debtor. In Schock v. Schock (In re Schock), 37 B.R. 399 (Bankr.D.N.D. 1984), the court stated, "[a] divorce petition is clearly not within the meaning of section 362(a)(1)." Id. at 400. The court continued, "[s]ince divorce proceedings are not stayed by section 362 of the Bankruptcy Code, it would be nonsensical for this Court to modify the stay to permit a divorce proceeding to continue." Id. In Elrod v. Elrod (In re Elrod), 91 B.R. 187 (Bankr.M.D.Ga. 1988), the court observed, "[T]he Bankruptcy Code protects property of the bankruptcy estate and of the debtor; it does not protect the marital status of the debtor." Id. at 189. See also In re Ziets, 79 B.R. 222, 225 (Bankr.E.D.Pa. 1987) ("We do acknowledge an exemption of domestic issues which do not bear on a debtor's economic status from the scope of the stay, such as the marital status itself or child custody matters, as both logic and clear Congressional intent implies such an exemption."); In re Becker, 136 B.R. 113, 116 (Bankr.D.N.J. 1992) (stating that "[a] complaint for divorce is also not subject to the automatic stay"). Appellant has cited no authority to the contrary.
The bankruptcy court acknowledged that while the automatic stay does not bar the filing of a divorce action against the debtor, the stay may preclude a state court from deciding certain aspects of the divorce proceeding. See Anderson v. Briglevich (In re Briglevich), 147 B.R. 1015, 1019 (Bankr.N.D.Ga. 1992) (stating that because the defendant did not seek relief from the automatic stay, "[t]hose portions of the divorce decree . . . which affect and direct any transfer of property of the bankruptcy estate clearly violate the automatic stay and are void"). In determining whether any aspects of the divorce judgment ran afoul of the automatic stay, the bankruptcy court focused on the child support obligation imposed upon Appellant and the division of property between Appellant and Appellee. With respect to the support obligations, the bankruptcy court found that §§ 362(a)(1), (2), (5), (6), and (7) did not apply because the support obligations arose post-petition. In addition, the bankruptcy court noted that any effort by Appellee to collect support from Appellant's future earnings, which are considered part of the estate, see 11 U.S.C. § 1306(a)(2), could be subject to the automatic stay, although Appellant did not allege that Appellee was seeking to collect support. However, the court also noted that such activity is excepted from the automatic stay under 11 U.S.C. § 362(b)(2)(B). Appellant does not attack these conclusions on appeal, and this Court agrees with the bankruptcy court's analysis on this issue.
With respect to the division of property and the assignment and assumption of responsibility for debts, the bankruptcy court concluded first, that §§ 362(a)(1), (2), (5), (6), and (7) were not violated because those claims arose post-petition, and second, that §§ 362(a)(3) and (4), which concern acts against property of the estate, were not violated because at the time the divorce judgment was entered the property was no longer property of the estate by virtue of 11 U.S.C. § 1327(b). Appellant does not challenge the former conclusion but asserts that the second conclusion is contrary to Annese v. Kolenda (In re Kolenda), 212 B.R. 851 (W.D.Mich. 1997). In In re Kolenda, the debtors filed a Chapter 13 petition. After their plan was confirmed, the debtors acquired a car and later used the car as collateral for a loan. When the debtors fell behind in the loan, the creditor repossessed and sold the debtors' car. The debtors filed a motion to show cause why the creditor should not be held in contempt for violating the automatic stay. The bankruptcy court concluded that the creditor violated the stay and imposed sanctions. On appeal, Judge Hillman affirmed the order. In doing so, he adopted the "estate preservation" approach to reconciling the language of 11 U.S.C. § 1306(a), which suggests that property acquired by the debtor after commencement but before closing of the case is property of the estate, with § 1327(b), which provides that property of the estate vests in the debtor upon confirmation of the plan. The "estate preservation" approach considers the property of the debtor and property of the estate as one to the extent that the debtor's property or post-confirmation income is required for implementation of the plan. Id. at 853. Under the reasoning of Kolenda, the bankruptcy court's determination that the property was no longer property of the estate after confirmation may have been incorrect. However, this Court need not make that determination because even if the property was property of the estate at the time the divorce judgment was entered, the automatic stay was not violated. The automatic stay is concerned with the acts of creditors or others attempting to obtain or in some way affect property of the estate. Here, there was simply a division of property between co-debtors. If the property was part of the estate before it was divided, it remained part of the estate after it was divided because the estate continues with respect to both Appellant and Appellee. A different result would likely occur if Appellee was a non-debtor spouse seeking division of joint marital property that was part of the bankruptcy estate, in which case a lift of stay would be necessary in order for the state court to proceed. See In re Bamman, 239 B.R. 560, 562 (Bankr.W.D.Mo. 1999); Hohenberg v. Hohenberg (In re Hohenberg), 143 B.R. 4805 484-85 (Bankr.W.D.Tenn. 1992); Moore v. Moore (In re Moore), 22 B.R. 200, 201-02 (Bankr.M.D.Fla. 1982). However, this case is different because the divorce judgment had no effect on any property of the estate other than allocating it between Appellant and Appellee.
Kolenda is also distinguishable on its facts. In that case, a creditor interfered with property of the estate acquired post-confirmation. Here, the property was all acquired prior to confirmation and was simply divided between two co-debtors under a single Chapter 13 plan.
Having concluded that Appellee did not violate the automatic stay, the Court need not address Appellee's argument that an equitable exception to the automatic stay should be applied in this case.
Appellant also argues that even if the automatic stay was not violated, the Court should require Appellee to pay off the entire Chapter 13 plan as provided in the divorce judgment. The Court rejects this argument for two reasons. First, Appellant has cited no legal basis for either this Court or the bankruptcy court to require Appellee to pay of the entire plan when Appellee is continuing to make timely payments as provided by the plan. Appellant's obligation in the divorce judgment is a matter between Appellant and Appellee that can be enforced by the state court. On the other hand, the plan governs how payments are to be made and the amount of those payments. Second, the November 14, 2000, order entered by the state court supersedes the divorce judgment with respect to the issues covered in the order. The order provides that Appellee may continue to make monthly payments under the plan so long as Appellee continues to make timely payments. Appellant contends that the November 14 order did not amend the divorce judgment. While that may be so, the order was issued in accordance with the provisions of the divorce judgment, and it is irrelevant that the order did not technically amend the divorce judgment.
II. Motion for Discharge
Appellant also contends that the bankruptcy court erred in denying the motion for discharge. Appellant argues that the bankruptcy court erred in stating that there were two separate proceedings administered as a single case and in glossing over the hardships that are imposed upon Appellant by virtue of his continuing status as a debtor under the plan. With regard to Appellant's first point, it appears that the bankruptcy court erroneously stated that there were two separate cases when in fact only one case was filed. However, Appellant does not explain how that mistaken observation attributed to error in the bankruptcy court's decision. As for Appellant's second argument, the Court concludes that the bankruptcy court did not improperly gloss over the hardships imposed on Appellant in denying the motion. The bankruptcy court noted that Appellant sought the discharge under 11 U.S.C. § 1328(b), known as the hardship provision. In order for that section to apply, a debtor must show that there has been "a failure to complete [the plan] payments." 11 U.S.C. § 1328(b)(1). The bankruptcy court concluded that a discharge was not warranted because Appellee was making the payments and, if Appellee failed to make the payments at some time in the future, Appellant might be in a position to make the payments. Moreover, this Court concludes that the circumstances offered by Appellant as "hardship", relating mostly to Appellant's status as a debtor in Chapter 13, are typical incidents of debtor status that do not meet the requirement of "circumstances for which the debtor should not justly be held accountable." Id. In this regard, this Court notes that courts have generally required debtors to show the occurrence of some unforseen event that prevents the debtor from making payments under the plan. Loss of employment or temporary disability are examples of events that have been held to be insufficient to meet this requirement. See In re Easley, 240 B.R. 563, 565 (Bankr.W.D.Mo. 1999) (holding that the debtor's loss of employment was insufficient to show hardship especially where the debtor was healthy and actively seeking employment); In re Marrero, 7 B.R. 589, 590 (Bankr.D.P.R. 1980) (finding the debtor's temporary incapacity as a result of an accident was insufficient to support a discharge). Here, Appellant has not alleged an event that has actually occurred which would support a claim for a discharge under § 1328(b). Therefore, the Court concludes that the bankruptcy court did not err in denying the motion.
Conclusion
For the foregoing reasons, the Court will affirm the bankruptcy court's orders entered on April 30, 2001.
An Order consistent with this Opinion will be entered.