Case of the Month Archive

Failure to notify ex-wife about bankruptcy is irrelevant on these
facts . . .

In reversal, Fourth District majority holds that trial court erred by failing to apply balancing test in then-current 11 USC 523(a)(15) to determine whether community debt assigned to husband in disso judgment was discharged in his bankruptcy

When Sydney Harris and Louise Croce were divorced in May 1994, their disso judgment provided that each waived spousal support, and that Sydney would pay a community debt to Mike and Carol Munaretto and hold Louise harmless from that obligation. Sydney filed for a Chapter 7 bankruptcy in October 1999, by which time the debt had grown to over $230,000. Sydney listed the Munarettos as unsecured creditors, but he did not list Louise as a creditor or notify her about the bankruptcy filing. He received a discharge of his debts on February 1, 2000. Louise bought a house in 2002, still unaware of Sydney’s bankruptcy. Louise first learned that Sydney had failed to pay the debt when the Munarettos sent her a copy of the application to renew the judgment that they filed in November 2004.

Louise filed a motion in which she asked the trial court to modify the spousal-support provision and to order Sydney to hold her harmless from the Munarettos’ claims. In opposition, Sydney contended that the discharge of his debts in bankruptcy also discharged his obligation to Louise under the disso judgment. After a hearing, the court denied Louise’s request for spousal support, but found that Sydney had breached, or, alternatively, had anticipated breaching, his disso obligation to hold her harmless from the Munaretto debt because he failed to pay that debt despite his being able to do so. Accordingly, the court permitted Louise to obtain a writ of execution against Sydney for the amount of the debt, but ordered that Louise forward any amount she collected from him to the Munarettos.

Sydney appealed, and a Fourth District majority reversed and remanded.

No support for that . . .
Louise contended that Sydney’s obligation to pay the debt was in the nature of support and should be nondischargeable under 11 USC 523(a)(5) [debt for support is nondischargeable]. The majority justices noted that Louise cited In re Gionis (9 Cir BAP 1994) 170 B.R. 675, 1994 CFLR 6434, 1994 FA 667 to support her contention, but they didn’t believe that that case helped her very much. The Gionis court, they explained, based its conclusion that the debt was in the nature of support on the “substantial disparity” in the income of the parties and the fact that they had a child. Here, the majority continued, Sydney and Louise had no children, Louise had not asserted that she needed support, and there was no income disparity. Given that, the majority concluded, 11 USC 523(a)(5) was not applicable in this case.

It’s the other one . . .
Louise argued that if 11 USC 523(a)(5) didn’t apply, §523(a)(15) surely did. The majority pointed out that when the trial court issued the disso judgment, §523(a)(15) provided that a disso debt was nondischargeable unless the debtor lacked the ability to pay, or the benefit to the debtor-spouse from the discharge was greater than the detriment it inflicted on the other spouse. Relying on In re Montgomery (Bkcy CD Cal 2004) 310 B.R. 169, the majority found that when a court applies former §523(a)(15), the creditor-spouse has the burden of proving that the debt was incurred in connection with a disso, that it was imposed by the trial court, and that it was not in the nature of support. Once those things are established, the burden shifts to the debtor-spouse to show that he or she lacks the ability to pay the debt or that the benefit of discharge outweighs the detriment to the other spouse. The majority thought it was clear that former §523(a)(15) was the applicable statute here.

Lady in the dark . . .
Next, Louise maintained that she’d been prejudiced by Sydney’s failure to notify her about the bankruptcy, terming his actions “dishonest” and claiming that he was trying to avoid the bankruptcy court’s review of their indemnity agreement. She also claimed prejudice from the “ ‘no-asset, no-bar-date’ ” aspect of his Chapter 7 filing. The majority said that Louise “misunderstands the meaning of the concept,” which “merely informs” creditors that there are no assets from which to pay unsecured creditors, and that they needn’t file proofs of claim until the bankruptcy clerk notifies them. More important, the majority justices found that the failure to notify Louise about the bankruptcy did not mean that Sydney’s debt to her was nondischargeable under the no-asset, no-bar-date provision. Although there is no time limit for filing a proof of claim in such a case, they noted, federal courts have consistently found that failing to schedule a debt is “immaterial or irrelevant” because reopening the proceeding to consider an omitted debt is an exercise in futility where there are no assets available. Therefore, the majority concluded, Sydney’s failure to notify Louise about the filing was similarly irrelevant.

What to do, what to do . . .
Having found that former §523(a)(15) applied here, the majority justices noted that the trial court had not made the findings that the statute requires. The court, they said, should have considered Sydney’s “current financial circumstances” and determined whether they were “likely to change in the foreseeable future.” The majority recognized that the court in Montgomery had cited several factors that trial courts should consider in determining whether a debtor has the ability to pay, including “(a) the income and expenses of both parties; (b) whether non-debtor spouse is jointly liable on the debts; (c) number of dependents; (d) the nature of the debts; (e) the reaffirmation of any debts; and, (f) the non-debtor spouse’s ability to pay.” The trial court here, the majority found, had not considered these factors; moreover, it wasn’t clear that the lower court had determined whether Sydney had the ability to pay the debt. It was clear, however, that the court hadn’t weighed the benefit to him of discharging the debt against the detriment to Louise if discharge occurred. Accordingly, the majority justices reversed the order, and remanded for the trial court to make those determinations, as required by former 11 USC 523(a)(15). If the trial court finds that the debt is nondischargeable, they continued, it must order Sydney to pay it directly to the Munarettos; if the court finds that the debt is dischargeable, then Louise’s claim must be denied. In conclusion, the majority said that the trial court may also award attorneys’ fees and costs, as appropriate.

Dissent . . .
In dissent, Presiding Justice Ramirez found that Sydney failed to raise the dischargeability of his debt to Louise as an issue at trial, and he would have precluded him from raising it on appeal. Moreover, the justice believes that Sydney’s argument regarding the lack of damage to Louise is not supported by the facts. Therefore, the dissent would have affirmed the trial court’s order. In addition, the dissenting justice asserted that on remand, the trial court should consider the applicability of both 11 USC 523(a)(5) and (a)(15).