Shepard v. Shepard

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
MARLA J. SHEPARD,
Debtor. No. 7-07-10497 SA
SEAN E. SHEPARD,
Plaintiff,
v. Adv No. 07-1177 S
MARLA J. SHEPARD,
Defendant.
MEMORANDUM OPINION
This matter comes before the court for trial on the merits
to determine the dischargeability of certain debts of the
defendant/debtor Marla J. Shepard. This Court has jurisdiction
over this action pursuant to 28 U.S.C. § 1334. This memorandum
opinion constitutes the Court’s findings of fact and conclusions
of law pursuant to Bankruptcy Rule 7052. This is a core
proceeding under 28 U.S.C. § 157(b)(2)(I), which gives this Court
authority to enter final judgment. This Court finds that the
debts incurred by defendant/debtor in the Marital Settlement
Agreement are non-dischargeable under § 523(a)(15).
Findings of Fact
The underlying facts in this case were not in dispute, and
were established by the defendant/debtor’s testimony and two
exhibits introduced into evidence by stipulation.
Debtor and Plaintiff are former spouses pursuant to a Final
Decree of Dissolution of Marriage dated April 27, 2006 (“Divorce
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Amended Stipulation Ex. A, Final Decree of Dissolution of	1
Marriage in the New Mexico Eleventh Judicial District Court No.
DM06-145-7.
Amended Stipulation Ex. B, Verified Marital Settlement	2
Agreement ‘Attachment A’. The agreement lists four debts for
which each party has agreed to pay half: Discover card 2177; 1998
Itasca motor home; mortgage to SunTrust Mortgage Company on 1414
South Grandview Drive, Gallup, NM; and a second mortgage on 1414
South Grandview Drive.
7-07-10497 “Main Case”, Doc. 1.	3
Main Case, Doc. 24.	4
Page 2 of 8
Decree”). Just prior to the entry of the Divorce Decree, the	1
parties executed and filed their Verified Marital Settlement
Agreement (“Marital Settlement Agreement”). On March 5, 2007,	2
debtor filed her Chapter 7 bankruptcy. Debtor did not list	3
Plaintiff as a creditor, but did list the individual debts in
question and received a discharge on June 13, 2007.4
Plaintiff alleges that four debts addressed in the Marital
Settlement Agreement are non-dischargeable under 11 U.S.C. §
523(a)(15). Section 523(a)(15) provides that a discharge under §
727 does not discharge a debt:
... to a spouse, former spouse, or child of the debtor and
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, or a determination made in
accordance with State or territorial law by a governmental
unit-
Debtor denies non-dischargeability, arguing that the debt was not
“incurred in the course of a divorce or separation.”
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Grogan v. Garner, 498 U.S. 279, 287 (1991).	5
11 U.S.C. § 727.	6
Cohen v .de la Cruz, 523 U.S. 213, 222 (1998). “The	7
various exceptions to discharge in §523 (a) reflect a conclusion
on the part of Congress that the creditors’ interest in
recovering full payment of debts in these categories outweigh[s]
the debtors’ interest in a completely fresh start.”
Jones v. Jones (In re Jones), 9 F.3d 878, 880 (10th Cir.	8
1993).
See Busch v. Hancock (In re Busch), 369 B.R. 614, 621 (10th	9
Cir. B.A.P. 2007) (citing Sampson v. Sampson (In re Sampson), 997
F.2d 717,721 (10th Cir. 1993)); Shaver v. Shaver (In re Shaver),
736 F.2d 1314, 1316 (9th Cir. 1984); Holliday v. Kline (In re
Kline), 65 F.3d 749, 751 (8th Cir. 2000).
Page 3 of 8
Burden of Proof
The party seeking to except a debt from discharge has the
burden of proving the elements of the exception by a
preponderance of the evidence. All debts owed by a debtor at	5
the time a bankruptcy petition is filed are discharged unless one
of the enumerated exceptions to discharge applies. Section 523	6
(a) lists exceptions to discharge for certain debts which
Congress has determined should be non-dischargeable. Normally	7
exceptions to discharge are to be narrowly construed in favor of
the debtor so as to promote the policy of a “fresh start” after
bankruptcy. However, the underlying public policy of §523 (a)	8
favors the enforcement of familial obligations over the debtor’s
fresh start, and is therefore deserving of more liberal
construction.9
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Davis v. Hosterman (In re Hosterman), 2007 WL 2973592	10
(Bankr. N.D.Okla. 2007).
Davis v. Davis (In re Davis), No 07-1097 at 7	11
(Bankr.M.D.Ala. Dec. 18, 2007); Stegall v. Stegall (In re
Stegall), 188 B.R. 597 (Bankr.W.D.MO. 1995); Belcher v. Owens (In
(continued...)
Page 4 of 8
Conclusions of Law
To be excepted from discharge under § 523(a)(15), a debt
must meet three statutory elements: 1) be to a spouse, former
spouse, or child of the debtor; 2) not be the kind of debt
described in 11 U.S.C. § 523(a)(5); and 3) have been incurred 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.10
I) Debt is to a Former Spouse
Although the parties agree that Plaintiff is the former
spouse of Debtor, there is some dispute as to whether the debts
in question are debts ‘to a former spouse’. The four contested
debts in this case did not originate in the Divorce Decree or
Marriage Settlement Agreement, but nonetheless are debts to a
former spouse as required by § 523(a)(15).
Courts are divided on the issue of whether debts owed to a
third party that are related to a separation or divorce agreement
require an indemnity clause to be within § 523(a)(15). Some
courts require an indemnity, or hold harmless, clause to create
direct liability from the debtor to the former spouse. Other	11
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(...continued)	11
re Owens), 191 B.R. 669 (Bankr.E.D.Ky. 1996).
Gibson v. Gibson, 219 B.R. 195 (B.A.P. 6th Cir. 1998)(lack	12
of hold harmless clause in separation agreement does not preclude
exception from discharge); Johnson v. Johnson (In re Johnson),
2007 WL 3129951 (Bankr.N.D.Ohio 2007); Anderson, 2001 WL 34652937
at *2; Johnston v. Henson (In re Henson), 197 B.R. 299
(Bankr.E.D.Ark. 1996).
Amended Stipulation Ex. B, Verified Marital Settlement	13
Agreement, at 2. Hosterman, 2007 WL 2973592, at *3 (indemnity in
a divorce decree created a debt from debtor to former spouse and
was non-dischargeable.
Plaintiff asserted with its complaint that these debts	14
were not § 523(a)(5) debts and debtor, understandably, did not
specifically deny that allegation. Doc. 1, ¶ 15; Doc. 4, ¶ 15.
If the Court were to find that the debts were in the nature of
support obligations, the debts would be excepted from discharge
without further inquiry. Therefore, to construe the facts in the
light most favorable to the debtor, the court finds that the
debts are not a domestic support obligation. However, a
prominent treatise on the Bankruptcy Code suggests that post-
(continued...)
Page 5 of 8
courts hold that an obligation to pay debts arising out of a
separation or divorce agreement run from the debtor to the ex-
spouse without an express indemnity or hold harmless clause.12
In the present case, there is no need to resolve this discrepancy
because of the presence of a ‘hold harmless’ clause in the
Marriage Settlement Agreement.13
II) Debt is not Domestic Support
To be excepted from discharge under § 523(a)(15), a debt
must not be in the nature of support described in § 523(a)(5).
While no evidence on this point was presented at trial, neither
party has argued otherwise.14
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(...continued)	14
BAPCPA, “with respect to dischargeability in cases under chapters
7, 11 and 12, all of which base dischargeability on section
523(a), the distinctin between domestic support obligation and
other types of obligations arising out of a marital relationship
is of no practical consequence.” 4 Collier on Bankruptcy, ¶
523.11[1], at 523-81 (Alan N. Resnick and Henry J. Sommer, eds.,
15 ed. Rev.).	th
Hosterman, 2007 WL 2973592 at *3; Schweitzer v. Schweitzer	15
(In re Schweitzer), 370 B.R. 145, 152 (Bankr.S.D.Ohio 2007);
Gibson, 219 B.R. at 204-05.
Hosterman, 2007 WL 2973592 at *3.	16
Gibson, 219 B.R. at 204-05.	17
Page 6 of 8
III) Debt was Incurred in Connection with a Divorce Decree
The most contentious issue of this proceeding is the
determination of whether the debts in question were ‘incurred’ in
the course of the divorce under § 523(a)(15). Debtor claims that
the debts were substantially incurred prior to her marriage, and
as such the obligations were not incurred “in connection with”
the Marital Settlement Agreement. This argument has been widely
rejected. The critical issue under § 523(a)(15) is not the	15
timing but the nature of the debt. Entry into the Marital	16
Settlement Agreement created significant new legal consequences
because it extinguished some pre-existing obligations between the
former spouses and created new ones. Despite any previous	17
obligations or arrangements, the Marital Settlement Agreement
created new rights to payment that were independent of the
debtor’s preexisting liability. The Marital Settlement Agreement
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Hosterman, 2007 WL 2973592 at *3; Schweitzer, 370 B.R. at	18
152.
11 U.S.C. § 101(12).	19
11 U.S.C. § 101(5)(A).	20
Cohen v. de la Cruz, 523 U.S. at 218.	21
Page 7 of 8
created obligations of the debtor to the plaintiff, including an
obligation to hold harmless, and therefore “falls squarely within
the exception to discharge set forth in § 523(a)(15).”18
Debt is defined in the Bankruptcy Code as liability on a
claim. A claim is a right to payment, and the United States	19 20
Supreme Court has defined a right to payment as “nothing more or
less than an enforceable obligation.” Despite the fact that	21
the Marital Settlement Agreement did not alter either parties’
personal liability to third party creditors, it did create, or at
least declare, an enforceable obligation running from Debtor to
Plaintiff. Plaintiff’s right to an enforceable obligation
arising out of the Marital Settlement Agreement created new legal
rights that are clearly within the exception to discharge in §
523(a)(15). This conclusion is not dependent on the presence of
a hold harmless clause, but is bolstered by such language.
Conclusion
Despite the principle that debtors are to receive a ‘fresh
start’ after bankruptcy, Congress has created statutory
exceptions to discharge. The enactment of § 523(a)(15), coupled
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See Hosterman, 2007 WL 2973592 at *4. Prior to BAPCPA,	22
§523 (a) (15) excepted debt from discharge unless the debtor did
not have the ability to pay the 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, or if discharging such debt would result in a benefit to
the debtor that outweighs the detrimental consequences to a
spouse, former spouse, or child. After BAPCPA, there is no need
to balance equities or make elaborate inquiries into
reasonableness; all such debt is non-dischargeable.
Page 8 of 8
with § 523(a)(5), has created a comprehensive statutory framework
for providing similar treatment to all obligations found in
separation and divorce agreements. Plaintiff has shown by a	22
preponderance of the evidence that the debts in question fall
squarely within this comprehensive framework. As such, the debts
described in the Marital Settlement Agreement as debts to be
shared by Debtor and Plaintiff are non-dischargeable under §
523(a)(15). A separate judgment consistent with the Memorandum
Opinion is entered concurrently herewith.
James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: June 30, 2008
COPY TO:
Michael J Caplan
827 E Santa Fe Ave
Grants, NM 87020-2458
David R Jordan
PO Box 840
Gallup, NM 87305-0840
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