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In re Zentner

United States Bankruptcy Court, N.D. California
Apr 3, 2003
No. 00-52194-ASW, Adv. No. 00-5222 (Bankr. N.D. Cal. Apr. 3, 2003)

Opinion

No. 00-52194-ASW, Adv. No. 00-5222

April 3, 2003


MEMORANDUM DECISION DETERMINING DEBT TO BE DISCHARGEABLE


Before the Court is a complaint by Karen Lent ("Creditor") against Breen Zentner ("Debtor"), who is the debtor in this Chapter 7 case. The complaint seeks a determination that a debt is excepted from Debtor's bankruptcy discharge pursuant to § 523(a) (15).

Unless otherwise noted, all statutory references are to Title 11, United States Code ("Bankruptcy Code"), as applicable to cases commenced on April 21, 2000.

Creditor is represented by Michelle Brenot, Esq. and Debtor is represented by Judson T. Farley, Esq. The matter has been tried and submitted for decision. This Memorandum Decision constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

I. FACTS

The parties were married for three years. The marriage was dissolved in 1997, but issues concerning property and liabilities remained in litigation after termination of the marital status.

Debtor commenced this bankruptcy case by filing a Chapter 7 petition on April 21, 2000. At that time, he had paid none of a $5,000 debt owed to Creditor.

Creditor's claim is based on an order made in the marital dissolution action on March 13, 2000, directing Debtor to pay Creditor $5,000 at the rate of $250 per month, on account of a community debt. However, Debtor contends that the $5,000 debt was incurred by Creditor's use of her own credit card for the benefit of herself and her mother. Debtor testified that the parties had no joint credit card accounts and no credit card debt was incurred for his benefit, with the exception of six restaurant meals for which Debtor had agreed to pay. He said that Creditor would "use credit cards for flyer miles then go to the credit union and pull cash out" — Creditor had a "number of" credit cards before marriage that were solely hers and she would use those "to charge large amounts for her and her mother's well being then go to the credit union with her mother's signature and pull out $10,000 at a time" — Debtor said that he did not make payments on Creditor's cards, but she "paid them in full with large chunks of money."

Debtor testified that he was 45 years old at time of trial and "pre-diabetic", suffering from "extremely high blood sugar" that requires daily testing, and "loss of eyesight, hard to concentrate sometimes" — his late parents were diabetic and he believes that his prognosis is "bad and not going to get better". Debtor said that he had "lost a couple of weeks'' work" due to his illness and his employers are aware of his condition, but it "generally" does not affect his ability to work because he does not deal with customers when he is unable to concentrate.

Debtor testified that he is a high school graduate but did not attend college or receive any vocational training — he had been a machinist for "a little while" and a janitor, but has been "selling cars" for some fifteen years. At time of trial, Debtor had been employed as a salesman at Toyota of Santa Cruz for about one month. He said that he left his previous job at a Nissan-Dodge-Volkswagen dealership after approximately eight months because he was not earning enough and "wanted to increase my lifestyle a little bit" — he had been "doing terrible" at Nissan, averaging $1,800 gross per month and netting $1,200 to $1,300 monthly, but hoped the move would enable him to average $2,500 to $2,800 gross per month and net approximately $1,800 monthly. Prior to working at Nissan, Debtor worked at Toyota of Santa Cruz for five years but moved to Nissan when business declined. Debtor testified that, in his experience as an automobile salesman, "on occasion" he had made up to $4,000 "on a good month" but there is "no real science to it, it can vary"; e.g., fifteen sales could generate earnings of $1,500 or $4,000 because "it's a commission driven business" and the commission on a given sale could be low or high, one "can never tell". He also said that the business is "very seasonal" and sales tend to drop 30% to 50% at the end of the summer; the months of January to March are "really bad", with slow sales and salespeople being terminated, "might as well be picking lettuce".

Debtor testified that, at Toyota, his minimum "draw" is the greater of a guaranteed wage or a commission based on sales and he receives $750 on the 15th of each month, which is later deducted from whatever he earns for the full month; he can "count on" the wage minimum of approximately $1,400 to $1,500 per month and has no other source of income. Debtor's federal income tax return for 2000 shows adjusted gross income of $36,707, which he said was "extremely good"; the return for 2001 shows adjusted gross income of $33,009 and he testified that he was unemployed for a month that year due to poor health. Debtor said he was with Toyota during those two years and his income then was the highest it had been in fifteen years, which is way he returned there after earning only $24,000 a year at Nissan. The evidence includes Debtor's paycheck stubs for the months of October 2001 through April 2002 — those show gross monthly earnings ranging from $1,500 to $2,934 and net monthly earnings ranging from $1,345 to $2,400, averaging $2,125 gross and $1,851 net. The evidence also includes copies of Debtor's bank statements for the periods of March 14, 2000 through May 11, 2000; June 14, 2000 through October 13, 2000; November 14, 2000 through January 12, 2001; January 15, 2002 through March 13, 2002; and April 12, 2002 through June 13, 2002 — those show monthly total deposits ranging from $1,340 to $3,719, averaging $2,295. Debtor testified that the last statement reflected unusually high earnings due to a sale at Capitola Auto Mall in which all local dealerships participated, "pretty much just an accelerated pace sale" where he "happened to get real lucky and sell quite a few cars all at once"; he said that "maybe every eight months I can do that if I really try hard and they have a good sale". Debtor stated that he also earned more than usual in his first month at Toyota, due to "some special sales" and working an "extreme amount of hours" in order to "make a strong showing" and keep the new job.

Debtor testified that he has only one bank account and all deposits to it are from his paychecks, except that some proceeds from selling "p.a. equipment" for approximately $600 were deposited between May 14, 2002 and June 13, 2002 — Debtor said that the sale occurred while he "pretty much liquidated all my materials to stay afloat".

Debtor testified that his monthly expenses at time of trial were essentially the same as those set forth on the schedules filed in his bankruptcy case, with two exceptions: rent had increased by $100; and he had incurred a $178 lease payment for a 2001 Toyota Echo. The bankruptcy schedules show monthly expenses totalling $1,865, so the two increases bring the sum to $2,143. Debtor testified that his monthly net income did not always cover his monthly expenses. For example, he was often unable to pay rent in full when due, but the landlord has been willing to accept late payments (and charge a fee); a ledger from the landlord shows twelve such instances between March 9, 1999 and April 22, 2002. Debtor also testified that he made only the minimum monthly payment of $30 on each of his two credit cards, which were "maxed at $500 each" and incurring interest at the rate of 18%.

The expenses are itemized as follows: $895 rent, $40 utilities, $30 telephone, $30 cable television, $400 food, $150 clothing, $20 medical/dental, $150 transportation, $50 recreation, $50 auto insurance, $50 "haircuts, etc.".

Debtor testified that his assets at time of trial remained essentially as set forth on the schedules filed in the bankruptcy case. Those show no real property interests and personal property worth $5,000. The schedules list a 1989 Mazda, which Debtor said he sold in 2001 for $750 to use as a downpayment on the leased car that "my bosses helped me get". He testified that he has acquired no other assets since filing bankruptcy, except a guitar subject to a purchase money lien of approximately $200. He said that he used to nave a savings account with a $5 balance but the credit union closed it due to lack of activity. Debtor does not expect to receive any inheritances other than $12,000 already inherited from his parents (which he said he spent "refurbishing" Creditor's house during the parties' marriage).

Debtor's tax returns for 2000 and 2001, respectively, show charitable donations by cash' or check totalling $2,291 and $3,350. He testified that "I'm Catholic and I give money to my church", "I give it all year long and use some of my tax [refunds] to pay that amount also" to such causes as Catholic charities and victims of September 11, because "I figure that's where my money is going to go if I have any extra".

Creditor testified that, at time of trial, she had been unemployed for two months after being laid off, and her income consisted of $1,220 in monthly unemployment benefits. Her most recent employment lasted for approximately one year, as an administrative assistant at Our Lady of Fatima Villa, earning $400 to $500 net per week. Prior to that, she had received assignments for temporary work through Manpower, which lasted one or two weeks at a time and paid approximately $9 per hour. Creditor testified that she had incurred two loans of $7,000 each for "training", the most recent for web page design; she did not recall whether she completed the design course, but had never been employed in that field. She said that she was looking for work as an administrative assistant but expected to earn less than she had at Our lady of Fatima Villa because "there's a recession" and "people are paying cheaper now, lower wages". Creditor testified that she believed her 2001 federal tax return showed adjusted gross income of $23,000, and that the 2000 return showed "maybe $10,000 at the most". Creditor said that she had not taken tenants into her home since the marriage was dissolved, and lives alone.

No documents concerning Creditor's financial condition were offered in evidence except an "Income and Expense Declaration" that she filed in the marital dissolution action in 1999.

Debtor testified that, during the marriage, he paid $500 monthly "to stay in a room in her house", and that Creditor "was renting out some of the rooms in the house" after she inherited it.

Creditor testified that she inherited her mother's house in September 1996; she valued it at $300,000 in the marital dissolution action during 1999, based on the last time it was appraised. She had no opinion of the house's current fair market value, or knowledge of recent sales for similar properties; she described the house as 1,200 square feet with 3 bedrooms and 1 bath, in Mountain View. She said that she has never borrowed against the house and does not "owe anything on" it, though one of her creditors is "probably trying to get a lien" on it. Creditor testified that the only personal property in her mother's estate was $200,000 cash, all of which was left to her brother. She said that her only personal property assets consist of her household furniture, a Nissan automobile that she bought from Debtor's employer for $18,000 (which is now fully paid for and worth "maybe" $5,000 or $10,000), and "maybe" $1,000 in a retirement account; she used to have $3,000 in a money market account but "spent it on bills".

Debtor testified that, when Creditor inherited the house, she told him it was worth $500,000, but Creditor testified that she did not recall doing so.

Debtor testified that Creditor "inherited real cash to distribute how she felt", but he did not know the amount of any such inheritance.

Creditor testified that she owes approximately $11,600 on credit cards and approximately $10,000 on "credit line", all representing debts incurred during marriage for the joint benefit of the parties; she said that she has not used those accounts since the marriage was dissolved, and the creditors have closed them due to delinquent payments. Creditor's declaration filed in the marital dissolution action during 1999 showed those debts to total $40,000, and she testified that she has paid them down to their current levels since that time — however, the interest rate is "high" and, though she pays as much as she can, she is "getting behind". Creditor testified that she had paid off one credit card by having an attorney settle the balance of over $10,000 for $1,250, but she had not attempted to settle the others because she "didn't think it was necessary".

Creditor seems sincere, but her testimony about her expenses at time of trial was internally inconsistent to some extent: she said that her monthly expenses did not exceed her income of $1,220; but she also said that her earnings at Our lady of Fatima Villa had not been enough to cover "basic living expenses" (which earnings were at least $400 net per wee, or equivalent to approximately $1,600 per month); and she also said that she could pay "basic living expenses" such as property taxes, insurance, food, and utilities, but could not also pay the credit card debts incurred during the parties' marriage; and she also said that, "relatively recently", she was not current with payments on her credit cards for Macy's and Mervyn's (with balances of $500 and $300, respectively). Creditor's declaration filed in the marital dissolution action daring 1999 shows monthly expenses totalling $4,896.24, but she testified that the figure represented what she "was used to living on" before her mother died in 1996, rather than her actual expenses in 1999 — she said that "mom gave me money to spend once in a awhile, [Debtor] liked to help me charge up the bills". Creditor said that her annual real property taxes and homeowner's insurance are approximately $560 and $600, respectively; electricity and gas average $60 per month in the summer and $220 per month in the winter; she also pays for garbage collection and water, and "need[s] a lot of work on the house".

Creditor testified that Debtor had agreed during the parties' marriage to reimburse her for half of many joint expenses but did not, such as: costs to "help him get the CD off the ground"; clothing; and the $18,000 automobile purchase. Debtor disagreed with those contentions. He testified that he has had a "hobby of creating music for my listening pleasure" since he was 13 years old, has "a home system", and has "produced total of three musical recordings" — during the "last few months" of the parties' marriage, he "was working on a small project" with his brother, but did not believe that Creditor contributed any funds toward it. Debtor also testified that the parties moved to Santa Cruz a year after Creditor inherited her mother's house, and Debtor paid all of the rent and "the bills" — he said that Creditor did not buy mm clothes; she did give him a leather coat as a gift, but she took it when the marriage ended and gave it to her brother.

II. ANALYSIS A. Standards

The Bankruptcy Code is "designed to afford debtors a fresh start, and we interpret liberally its provisions favoring debtors", see In re Bugna, 33 F.3d 1054, 1059 (9th Cir. 1994). Bankruptcy Code § 523(a) provides limited exceptions to the general policy of discharge, but those are to be construed narrowly, see In re Riso, 978 F.2d 1151 (9th Cir. 1992). The standard of proof for claims asserted under § 523(a) is preponderance of the evidence, Grogan v. Garner, 498 U.S. 279 (1991).

B. Provisions and Application of § 523(a) (15)

Creditor relies upon the exception from discharge provided by § 523(a) (15) for any debt that is:

. . . not of the kind described in paragraph (5) [i.e., not in the nature of support] 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, [or] 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.

The parties' respective burdens are allocated as explained by In re Jodoin, 209 B.R. 132 (9th Cir. BAP 1997) ("Jodoin") and applied by In re Myrvang, 232 F.3d 1116 (9th Cir. 2000) ("Myrvang"). First, the creditor has the burden of proving that the debt is within the scope of § 523(a) (15), i.e., that it is not in the nature of support, and that it was incurred in the manner required by the Code (e.g., through marital dissolution). Then the burden shifts to the debtor to prove either lack of ability to pay (what Jodoin refers to as the "ability test"), or that discharge of the debt would benefit the debtor more than it would harm the debtor's spouse, former spouse, or child (what Jodoin refers to as the "detriment test") — since the two tests are stated in the disjunctive, it is not necessary to reach the second one concerning detriment if the debtor meets the first one by showing inability to pay.Jodoin holds that both tests are to be applied to the parties' respective financial conditions at the time of trial rather than on the date of bankruptcy, and Myrvang proceeded on that basis without discussing the issue.

The statute considers harm only to the debtor's spouse, former spouse, or child, not harm to any other kind of creditor. For example, In re Dollaga, 260 B.R. 493 (9th Cir. BAP 2001) holds that a debtor's marital dissolution attorney lacks standing to seek exception from discharge under § 523(a) (15) for the attorney's claim against the debtor when the debtor's former wife and child are not liable for the debt (taking no position on whether standing would exist if the former wife and child were liable for the debt). In this matter, the creditor seeking a determination of non-dischargeability is the former wife of the debtor, so no issue of standing arises.

C. Type of Debt

Counsel stated at trial that the parties agree that the subject debt is not in the nature of support, and was created by an order made in their marital dissolution action. Accordingly, the debt is within the scope of § 523(a) (15).

Creditor contends that the subject debt was incurred for Debtor's benefit while Debtor denies that it was, and both parties testified at some length about the spouses' respective contributions to the marital community (or lack thereof). However, the issue of whether Debtor should be liable for the subject debt is not before this Court; he already is liable, though his bankruptcy discharge may relieve him of having to pay the liability. It is undisputed that the debt was created by an order made in the marital dissolution action on March 13, 2000 and Debtor does not claim to have appealed from that order before filing bankruptcy on April 21, 2000. Under such circumstances, the pre-petition State Court order must be given collateral estoppel and/or res judicata effect as to the fact of Debtor's liability and the amount of such liability, leaving the Bankruptcy Court to determine only whether the debt representing the liability is dischargeable in bankruptcy, see In re Comer, 27 B.R. 1018 (9th Cir. BAP 1983), affirmed, 723 F.2d 737 (9th Cir. 1984). Accordingly, Debtor is liable to Creditor for payment of a $5,000 debt, which was found in the parties' marital dissolution action to be a community debt, and which the parties agree is not in the nature of support — the sole issue before this Court is determination of whether that debt is excepted from Debtor's Chapter 7 discharge by virtue of § 523(a) (15).

D. Ability Test

As discussed above, it is Debtor's burden to show that he is unable to pay $5,000 "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". Jodoin holds that the "primary" test by which to determine ability to pay is that of § 1325(b)(2), which measures the "disposable income" required to be devoted to a Chapter 13 repayment plan:

We also agree with the bankruptcy court that the "disposable income" test that is delineated in Code § 1325(b) provides an excellent starting point for measuring a debtor's ability to pay under § 523(a) (15) (B)" [sic; should be subsection (A)]. [citation and footnote omitted] Some courts nave been reluctant to use this test in the divorce situation where parties have been known to sacrifice their own financial well-being to spite their ex-spouse. However, a proper application of the test should take into account the prospective income that the debtor should earn and the debtor s reasonable expenses. [citation omitted] These types of adjustments are appropriate and should not cause courts to reject the disposable income test as an excellent reference point. [footnote omitted].

Jodoin, at 142. The Ninth Circuit has not ruled on the issue:

The parties have not briefed, and we do not decide, whether the disposable income test of 11 U.S.C. § 1325 (b)(2) is the exclusive method that a bankruptcy court must employ in determining ability to pay under § 523(a) (15) (A). We note, however, that courts have employed a variety of approaches in determining a debtor's ability to pay a divorce-related debt. See [Jodoin] (the disposable income test provides an "excellent reference point" for determining ability to pay); Greenwalt v. Greenwalt (In re Greenwalt), 200 B.R. 909, 913 (Bankr.W.D.Wash. 1996) (stating that the majority of courts adopt the disposable income test); Humiston v. Huddelston (In re Huddelston), 194 B.R. 681, 688-89 (Bankr.N.D.Ga. 1996) (employing a totality of the circumstances test); Comisky v. Comisky (In re Comisky), 183 B.R. 883, 884 (Bankr.N.D.Cal. 1995) ["Comisky"] (employing the undue hardship test from 11 U.S.C. § 523 (a)(8)); Florio v. Florio (In re Florio), 187 B.R. 654, 657 (Bankr.W.D.Mo.1995) (test for ability to pay should be determined on a case-by-case basis).

Myrvang, at 1120, n. 3.

Of the several oases cited by Myrvang, only Comisky considered a Code section other than § 1325(b)(2) concerning disposable income (the rest proceeded on a case by case basis and addressed the totality of the circumstances). The Bankruptcy Court in Comisky looked to § 523(a)(8) pertaining to student loans, but did so in the context of deciding whether a debt might be partially excepted from discharge and partially discharged:

When the court examines James' income and expenses, it is clear that he does not have the ability to pay all of his debt to Susan, which is now about $25,000.00 with accrued interest. However, it is equally clear that over a reasonable period of time he could afford to pay part of the debt. The issue before the court is therefore whether section 523(a) (15) (A) mandates judgment for the debtor if he cannot pay the whole debt, or whether the court can fashion an equitable remedy whereby part of the debt is discharged and part is not. [¶] There are no appellate cases dealing with section 523(a) (15), as the section has only been in effect some nine months. No other bankruptcy courts have published decisions dealing with the issue. However, the court finds analogous cases regarding student loan issues to be helpful in deciding this case. [¶] Section 523(a)(8) of the Code is similar to section 523(a) (15) in that it provides for a non-dischargeable debt with two exceptions. It provides that a student loan is not dischargeable unless it is either more than seven years old or making the debt non-dischargeable would impose an undue hardship on the debtor. In In re Yousef, 174 B.R. 707 (Bkrtcy.N.D.Ohio 1994), Bankruptcy Judge Speer held that where the debtor would suffer undue hardship if forced to pay all of the student loan, but could pay part of it, the court has discretion to declare only part of the debt nondischargeable. This approach seems fair and sound, and is directly applicable to the issue now before this court.

Comisky did not apply § 523(a)(8) as a means of measuring the debtor's ability to pay, but for the quite different purpose of finding discretion to except only part of the debt from discharge. With respect to the issue of ability, § 523(a)(8) is more dissimilar from § 523(a) (15) than is § 1325(b)(2). Under § 523(a)(8), a debt for a student loan is excepted from discharge unless doing so "will impose an undue hardship on the debtor and the debtor's dependents" — under § 523(a) (15), a debtor who is not engaged in business must show inability to pay the subject 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" — under § 1325(b)(2), "disposable income" for a debtor who is not engaged in business is defined as "income which is received by the debtor and which is not reasonably necessary to be expended — (A) for the maintenance or support of the debtor or a dependent of the debtor, including charitable contributions [as defined]". Both § 523(a) (15) and § 1325(b)(2) expressly require debtors to pay only such income (if any) as is "not reasonably necessary" for the support of the debtor or a dependent, whereas § 523(a)(8) requires debtors to pay unless "undue hardship" results. On its face, "undue hardship" may well be a higher standard than "not reasonably necessary" for support, and the identical language of both § 523(a) (15) and § 1325(b)(2) referring to income that is "not reasonably necessary" for support suggests that those two sections mean the same thing, which arguably is something different from, and less than, the "undue hardship" standard of § 523(a)(8). As both Jodoin and Myrvang note, courts have been flexible in measuring ability to pay under § 523(a) (15), and this Court agrees with Jodoin that such an approach is necessary to account for all of the variable factors present in a marital dissolution case, e.g.,:

. . . in the divorce situation where parties have been known to sacrifice their own financial well-being to spite their ex-spouse. However, a proper application of the test should take into account the prospective income that the debtor should earn and the debtor's reasonable expenses.

Jodoin, at 142. In this case, there is no evidence that Debtor has been depressing his earning ability, inasmuch as he has been an automobile salesman for fifteen years and is not qualified by education or experience to enter some other field that is far more lucrative. Further, the evidence shows that he works fulltime and has been making an effort to increase his earnings by moving to a new job and working overtime. Under the circumstances of this case, the disposable income test of § 1325(b)(2) is the appropriate means for measuring Debtor's ability to pay. With respect to that test in the context of Chapter 13,In re Smith, 207 B.R. 888 (9th Cir. BAP 1996) holds that the totality of the circumstances must be considered on a case by case basis.

The evidence did not suggest that Debtor has any assets of value, or that he receives any income other than that from his employment. His paycheck stubs show that, for the six month period ending two months prior to trial, his average monthly income was $2,125 gross and $1,851 net. His monthly expenses totalled $2,143, with none of the listed items appearing extravagant (or, in the language of § 1325(b)(2), "not reasonably necessary" for support) In fact, the list may be understated because it includes only $20 for medical and dental expense — Debtor's paycheck stubs show that health insurance premiums are deducted from his gross earnings, but some part of his daily testing or other medical expense is probably not covered and might well exceed $20 per month (e.g., over time, dental work can be very expensive). And the list is incomplete because it fails to reflect the $60 minimum credit card payments (which will not soon retire balances totalling $1,000 and accruing interest at the rate of 18%). Further, there is no provision for contributions to a retirement plan or savings account, which would be reasonably necessary expenses for a 45 year old man with health problems. Debtor's paycheck stubs show that his monthly net income exceeded the understated monthly expense total of $2,143 only once in the six month period represented, in April 2002 when it was $2,400. It is true that Debtor was earning more by time of trial, having just returned to work at Toyota, where the two best years of his career had been spent in 2000 and 2001 — but his tax returns show that his adjusted gross income in those years was $36,707 and $33,009, respectively, which is only approximately $3,000 per month gross. Moreover, Debtor testified without contradiction that the business is both "commission driven" and highly seasonal, with some months much slower than others (during which the salesforce might be reduced) and no certainty beyond the $1,400 to $1,500 monthly guaranteed wage — his paycheck stubs bear this out, dropping as low as $1,838 gross ($1,681 net) in November 2001 and $1,500 gross ($1,345 net) in March 2002. The evidence also showed that Debtor is not always able to pay his expenses in full from income, such that he is frequently late with rent and is paying only the minimum possible on his credit cards. Finally, although Debtor testified that his health does not "generally" affect his ability to work, he also said that there are times when he cannot concentrate well enough to deal with customers and he has had to miss work for "a couple of weeks" due to his illness — he testified without contradiction that his prognosis is "bad and not going to get better", so it could well be that his ability to earn will decline rather than remain constant or improve.

With respect to Debtor's charitable donations of $2,291 in 2000 and $3,350 in 2001, he testified that "that's where my money is going to go if I have any extra", such as tax refunds or available cash during the year. The Court notes that Debtor may not really have "any extra" to give to charity, because he is incurring 18% interest on credit card balances that are being reduced only by minimum monthly payments, and he is not saving for retirement. Moreover, as Debtor's attorney pointed out in argument at trial, Debtor's income tax liability (which was approximately 7% to 8% of gross income for 2000 and 2001) would increase and offset the charitable contributions to some unknown extent if he did not have the benefit of deductions for the donations. Further, the disposable income test of § 1325(b)(2) expressly permits charitable contributions up to 15% of gross earnings within the year of the donation, and the amounts donated by Debtor in 2000 and 2001 are well within that limit.

An argument could be made that charitable donations should not be permitted to absorb assets that could otherwise be devoted to payment of a debt within the scope of § 523(a) (15). For example, the fact that Congress included the charitable contribution provision in § 1325(b)(2) concerning post-petition expenses and other sections of the Code concerning pre-petition transfers (§ 544, § 546, § 548 and § 707(b)) while omitting it from § 523(a) (15) might mean that Congress did not intend to permit charitable donations to be made at the expense of a debtor's family or former spouse. But it is not clear that any surplus funds are actually available in this case.

If Debtor had some assurance of net earnings at a level exceeding the amount "reasonably necessary" for his support every month (i.e., including realistic expenses for retirement savings and reduction of credit card debt, but possibly excluding charitable donations), then he might be considered able to pay the debt that he owes to Creditor. But the evidence at trial did not suggest that either of those conditions exists now or is likely to exist in the near future.

E. Detriment Test

As set forth above, the detriment test is not reached unless Debtor is found able to pay, and that finding has not been made. However, even assuming for the sake of argument that Debtor were able to pay, he would prevail under the detriment test.

The detriment test requires a showing that discharge of the subject debt "would result in a benefit to [Debtor] that outweighs the detrimental consequences to" Creditor. Myrvang points out that this test calls upon the Court to balance equities. The Bankruptcy Appellate Panel in Jodoin upheld the Bankruptcy Court's result without analysis of the test — the Bankruptcy Court noted that:

Since the balancing occurs only when the debtor does not lack the ability to pay, it follows that the debtor's ability to pay is no more than one factor to consider in what amounts to a "totality of the circumstances" standard for the balancing under § 523(a) (15) (B). [In re Morris, 193 B.R. 949, 952 (Bankr.S.D.Cal. 1996)] (debt discharged despite ability to pay). [¶] The § 523(a) (15) (B) balancing test gives the court the flexibility to do justice, and even discharge the debt if appropriate under the circumstances, when the debtor has the ability to pay under § 523(a) (15) (A)

In re Jodoin, 196 B.R. 845, 855 (Bankr.E.D.Cal. 1996)

With respect to Debtor's benefit from discharge, his income is subject to seasonal and other fluctuations beyond his control, unlikely to improve significantly, and not always sufficient to cover reasonably necessary expenses as they come due. Debtor is already failing to provide for his retirement and pay off his credit card balances that accrue interest at 18%, so adding the expense of paying Creditor $5,000 (whether in $250 monthly installments as fixed by the State Court or at some other rate) would merely make Debtor's current bad situation worse.Myrvang holds that § 523(a) (15) gives bankruptcy courts discretion to except only part of a debt from discharge, but there does not appear to be room in Debtor's budget for any extra expense. Assuming that Debtor's current expenses were calculated at a realistic level, and assuming that Debtor's income were to return to what it was in 2000 and 2001 when he worked for Toyota as he now is, the income would still continue to fluctuate due to the nature of the business and be likely to fall short of expenses in some months.

The record does not indicate whether the State Court's order provided for the $5,000 to accrue interest while being paid in monthly installments.

As for the detrimental consequences of discharge to Creditor, she is not a wealthy or young person, her earnings have been limited by some periods of unemployment and temporary employment during the past two years, and she could certainly use the $5,000 at issue here. Nevertheless, it does not appear that her circumstances would be significantly affected by $5,000 one way or the other. According to Creditor, she is able to live on her income but cannot retire credit card debt consisting of some $800 for department store accounts plus approximately $21,600 on other accounts that was incurred during the parties' marriage. But if Creditor were to receive $5,000 from Debtor immediately and apply it to the accumulated credit card debts, she would still owe over $17,000 on those liabilities and the evidence shows that she could not pay that amount from her income either. Further, Creditor owns an unencumbered house that she valued at $300,000 in 1999 — the property is likely to have appreciated but, even if it has not, its equity vastly exceeds Creditor's total indebtedness. Moreover, Creditor testified that she was able to have an attorney negotiate a reduction of one credit card debt from over $10,000 to $1,250, but has not attempted to do the same with the other accounts.

Even if Debtor had the ability to pay, discharge of the subject debt would harm Creditor less than it would benefit Debtor. Creditor was unemployed at time of trial but has a history of doing clerical work that pays enough for her to live on, and was receiving unemployment benefits that covered what she referred to as her "basic living expenses". By contrast, Debtor's fluctuating monthly income has not always exceeded his unrealistically low expense budget, and the business is subject to seasonal reductions. But even if the parties' income circumstances were equal, the fact remains that Creditor has far greater resources than Debtor does — Debtor owns no real property or other assets of value, whereas Creditor owns an unencumbered house that was worth $300,000 three years prior to the time of trial. Finally, the subject debt is less than 25% of what Creditor needs to retire all of her liabilities, so receiving it would confer only a minor benefit upon Her and being deprived of it would not significantly increase her existing burdens. Under all of these circumstances, discharging the subject debt will have relatively little impact on Creditor, while relieving Debtor of that additional expense will avoid stretching his already strained income even further.

CONCLUSION

For the reasons set forth above, the $5,000 debt arising from the March 13, 2000 order in the parties' marital dissolution action is not excepted from discharge under § 523(a) (15)

Counsel for Debtor shall submit a form of judgment so providing, after review as to form by counsel for Creditor.


Summaries of

In re Zentner

United States Bankruptcy Court, N.D. California
Apr 3, 2003
No. 00-52194-ASW, Adv. No. 00-5222 (Bankr. N.D. Cal. Apr. 3, 2003)
Case details for

In re Zentner

Case Details

Full title:In re Breen Zentner, Chapter 7, Debtor(s). Karen Lent, Plaintiff, v. Breen…

Court:United States Bankruptcy Court, N.D. California

Date published: Apr 3, 2003

Citations

No. 00-52194-ASW, Adv. No. 00-5222 (Bankr. N.D. Cal. Apr. 3, 2003)