Opinion
Case No. 02-63793
08-06-2012
In re: Michael P. Peake, Debtor.
Chapter 7
Hon. Walter Shapero
OPINION REGARDING DISCHARGEABILITY OF DEBT
AND DEBTOR'S MOTION FOR SANCTIONS
The matter before the Court is Debtor's Motion for Sanctions for Violation of the Discharge Injunction (Docket No. 38). In order to determine that matter, the Court decided it would be appropriate to first determine whether the underlying divorce judgment debt owed to Debtor's ex-wife, Carol Peake-Finn ("Creditor"), was discharged in this case. If it was not, the discharge injunction was not violated and sanctions would not be awarded.
I. BACKGROUND AND FACTS
The parties stipulated on the record to the facts as set forth in Creditor's Brief in Support of Non-Dischargeability (Docket No. 95). The relevant summarized portion of those facts follows. In 2000, Michael Peake ("Debtor") filed a divorce action in the Oakland County Circuit Court against Creditor. Eventually, the Oakland County Circuit Court entered a Default Judgment of Divorce ("Judgment") on February 20, 2001, which provides, under the section entitled Spousal Support:
In consideration of the property settlement provisions of this judgment, and in lieu thereof, neither party is entitled to alimony or spousal support and the same is forever barred. It is intended that the property settlement provisions of this judgment are intended to enable Counterplaintiff to support herself without the need for direct alimony payment which would otherwise be ordered.The Judgment further provides, under the section entitled Property Settlement:
Counterdefendant, MICHAEL PATRICK PEAKE, shall pay Counterplaintiff, CAROL DENISE PEAKE, cash in the amount of $30,000 which is due upon entry of this judgment. To secure payment of the above obligation,
Counterplaintiff is awarded a lien upon the above referenced business, its receivables and other assets, and upon any and all other property and business interests and assets which Counterdefendant might now hold, or which he may hereafter hold until the above obligation shall be satisfied in full. Judgment interest shall attach. Because this provision is intended to provide Counterplaintiff with support and maintenance in lieu of direct alimony, this obligation is determined to be nondischargeable in bankruptcy.
The state court denied Debtor's Motion to Set Aside the Judgment and the Debtor filed a Claim of Appeal of the Judgment in May 2001.
On October 25, 2002, Debtor filed his Chapter 7 bankruptcy case (No. 02-63793). Debtor failed to list the divorce judgment debt owed to Creditor on his Schedules and failed to list Creditor on his mailing matrix. One listed creditor was Unity Credit Union, with the debt owed being in the amount of $28,423.98 for a deficiency balance on a Ford dump truck. The law firm representing Unity Credit Union at the time (and now also representing Creditor) was listed as a creditor on Schedule F. The attorney who represented Debtor in the divorce proceedings was listed on Schedule F, with the debt owed being in the amount of $2,305 and including a notation that the debt was owed for "2001 Divorce Attorney Fees." In Debtor's Statement of Financial Affairs, in his answer to question 4 relating to suits and proceedings to which the Debtor was a party within the previous year, there is no reference to the divorce proceedings (even though an appeal of the default divorce judgment was then pending), but there is a reference to collection proceedings by Unity Credit Union. There was a similar reference to such in his answer to question 5. On January 16, 2003, the Court entered an Order Discharging Debtor and, on March 20, 2003, that case was closed as a "no asset" case, in which there was no claims filing date.
Between March and November 2003, Debtor's appeals of the Judgment to the Michigan Court of Appeals and the Michigan Supreme Court were denied.
Creditor made no attempt to collect the $30,000 awarded to her in the Judgment of Divorce until after the conclusion of the Debtor's appeals to the Michigan Court of Appeals and the Michigan Supreme Court. In January 2004, she filed and served a wage garnishment against Debtor's wages. On January 29, 2004, Debtor's employer disclosed that the Debtor was laid off. In April 2004, Creditor served another wage garnishment. On May 4, 2004, Debtor's employer disclosed that Debtor had quit. In June 2005, Creditor served a third wage garnishment. On June 27, 2005, Debtor's employer disclosed that it was holding $875.27 following the calculation contained in the Garnishee Calculation Sheet for Earnings. On July 13, 2005, Debtor filed a Motion for Installment Payments and an Objection to Garnishment in the Oakland County Circuit Court. On August 3, 2005, the Court entered Orders granting Debtor's Motion for Installment Payments and denying his Objection to Garnishment.
Eventually this case was reopened at Debtor's request so he could file the extant Motion for Sanctions, which he filed on June 3, 2011.
Just previously, on March 28, 2011, the Debtor (and his wife) filed a new Chapter 7 bankruptcy petition, No. 11-48504. In that case, Debtor listed the divorce judgment debt owed to Creditor on his Schedule F and listed it as being disputed. Creditor filed a Motion for Relief from the Automatic Stay in that case, claiming that she wished to pursue collection of a non-dischargeable divorce judgment debt. That motion was heard and was taken under advisement, and it remains under advisement because of the pendency of the Motion for Sanctions and the dischargeability issue of that same debt in this case. The Court held a number of hearings relating to those motions. A distillation of a number of subsequent proceedings on that motion was in part what led the Court to reopen the 2002 case and set an evidentiary hearing primarily and initially directed to determining whether or not the divorce judgment debt owing to Creditor had been discharged.
If it is determined that the divorce judgment debt had been discharged, then the Court will go forward on the sanctions issue. If it is determined that the divorce judgment debt had not been discharged, then the sanctions issues would be irrelevant and the Creditor would be entitled to her sought after lift of stay in the 2011 bankruptcy case.
There are also related issues that were raised by Debtor in his Motion for Sanctions. That Motion was filed not only against Creditor, but also against Unity Credit Union, and Creditor's father and CEO of Unity Credit Union, Dennis Moriarity. Debtor there argues that Dennis Moriarity and Unity Credit Union were using Carol Peake-Finn as an alter ego to collect a debt Debtor had owed to Unity Credit Union and had been discharged in Debtor's 2002 bankruptcy case.
II. DISCUSSION
Creditor argues that the divorce judgment debt owed by Debtor was a non-dischargeable debt under 11 U.S.C. § 523(a)(5), or, in the alternative, under 11 U.S.C. § 523(a)(15). Debtor argues that Creditor should be estopped from arguing that the debt was a non-dischargeable debt pursuant to the doctrine of laches or, alternatively, that the debt was discharged in this bankruptcy case. Since this case was filed in 2002, the law governing the dischargeability of the debt is the Bankruptcy Code as it existed at that time and pre-BAPCPA.
A. Laches
Debtor argues that Creditor has slept on her rights since 2002 and that laches bars her claim now. In order to invoke the defense of laches, a defendant must prove, by a preponderance of the evidence, the following: "(1) [t]hat the plaintiff delayed filing suit for an unreasonable and inexcusable length of time from the time the plaintiff knew or reasonably should have known of its claim against defendant, and (2) [t]hat the delay operated to the prejudice or injury of the defendant." See Costello v. United States, 365 U.S. 265, 282 (1961).
In this case, Debtor did not list Creditor on his Schedules or mailing matrix in his 2002 bankruptcy case and, therefore, Creditor was never given formal notice of his bankruptcy filing. There was conflicting testimony at the evidentiary hearing regarding when Creditor learned of Debtor's bankruptcy filing. Creditor testified that she did not learn of Debtor's bankruptcy filing until 2005, when he objected to the garnishments she initiated against him. She testified that neither her father nor the law firm told her about Debtor's bankruptcy filing, despite the fact that they were both given formal notice of the bankruptcy filing and participated in that case. Creditor's father, Dennis Moriarity, testified that he told Creditor about Debtor's bankruptcy filing shortly after he learned about it in 2002. Although Creditor likely had actual notice of the bankruptcy filing as early as 2002, she was not required to file a non-dischargeability adversary proceeding against Debtor within any set time. Rule 4007(b) provides: "A complaint other than under § 523(c) may be filed at any time." Fed. R. Bankr. P. 4007(b) (emphasis added). As a proceeding "other than under § 523(c)" of the Code, a complaint under § 523(a)(5) falls within the scope of Rule 4007(b). Furthermore, Debtor had the option to file a complaint himself to obtain a determination of the dischargeability of the debt owed to Creditor. See Fed. R. Bankr. P. 4007(a). Debtor could, and should, have initiated an adversary proceeding during his 2002 bankruptcy case or at least when he filed the Motion to Reopen the Case in 2005. Debtor cannot contribute significantly to the delay by failing to list Creditor on his schedules and by failing to initiate an adversary proceeding to determine dischargeabilty and then argue that the delay is prejudicial to him. Although the Court does not condone long delays such as those in this case, the Court concludes that there is no prejudice to Debtor in this case due to the delay.
Another rule precluding application of laches to this situation also comes into play. Assuming that for purposes of computing the applicable ten year statute of limitations in respect to the divorce judgment provision at issue did not commence until the final appeal was denied in November 2003, that statute of limitations would not expire until November 2013, at the earliest. (MCLA 600.5809 provides for a ten year statute of limitations for an action founded on a judgment or decree rendered in a court of record). There is a strong presumption that a delay in bringing an action for monetary relief is not unreasonable, and laches would not bar such, so long as the statute of limitations has not lapsed; See Herman Miller, Inc. v. Palazzetti Imports and Exports, Inc., 270 F.3 d 298 (6th Cir. 2001); City of Wyandotte v. Consolidated Rail Corp., 262 F. 3d 581 (6th Cir. 2001); at least absent extraordinary circumstances or compelling reasons. Paquin v. Van Houtum, 343 Mich. 111, 72 N.W. 2d 169 (1955). No such extraordinary circumstances or compelling reasons exist in this case. For the foregoing reasons, the doctrine of laches is not applicable in this situation.
B. 11 U.S.C. § 523(a)(5)
11 U.S.C. § 523(a)(5) (pre-BAPCPA) provides:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt -
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of both 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 government 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[.]
In the case of In re Calhoun, 715 F.2d 1103 (6th Cir. 1983), the Sixth Circuit articulated a four part analysis for determining whether a debt is "actually in the nature of alimony, maintenance or support." That analysis was articulated as follows:
First, the obligation constitutes support only if the state court or parties intended to create a support obligation. Second, the obligation must have the actual effect of providing necessary support. Third, if the first two conditions are satisfied, the court must determine if the obligation is so excessive as to be unreasonable under traditional concepts of support. Fourth, if the amount is unreasonable, theIn re Fitzgerald, 9 F.3d 517, 521 (6th Cir. 1993). The Sixth Circuit, in the case of In re Fitzgerald, modified the second step of that analysis and held that that, in a case where it is clear that the obligations are alimony, the "present needs" of the recipient should not be considered if the obligation was intended as support. The Sixth Circuit further clarified that analysis when it stated:
obligation is dischargeable to the extent necessary to serve the purposes of federal bankruptcy law. The burden of demonstrating that an obligation is in the nature of support is on the non-debtor.
There is a saying that if something looks like a duck, walks like a duck, and quacks like a duck, then it probably is a duck. In determining whether an award is actually support, the bankruptcy court should first consider whether it "quacks" like support. Specifically, the court should look to the traditional state law indicia that are consistent with a support obligation. These include, but are not necessarily limited to, (1) a label such as alimony, support, or maintenance in the decree or agreement, (2) a direct payment to the former spouse, as opposed to the assumption of a third-party debt, and (3) payments that are contingent upon such event as death, remarriage, or eligibility for Social Security benefits.In re Sorah, 163 F.3d 397, 401 (6th Cir. 1998).
An award that is designated as support by the state court and that has the above indicia of a support obligation (along with any others that the state support statute considers) should be conclusively presumed to be a support obligation by the bankruptcy court. A non-debtor spouse who demonstrates that these indicia are present has satisfied his or her burden of proving that the obligation constitutes support within the meaning of § 523, and is thus nondischargeable. See Calhoun, 715 F.2d at 1111 (holding that the non-debtor spouse has the burden of proving nondischargeability). The burden then shifts to the debtor spouse to demonstrate that although the obligation is the type that may not be discharged in bankruptcy, its amount is unreasonable in light of the debtor spouse's financial circumstances.
Applying the above analysis here, it is clear that the debt owed by Debtor to Creditor is "in the nature of support." As noted, the Court must first consider whether the state court or parties intended to create a support obligation. As noted, the Judgment of Divorce states, in the section entitled "Spousal Support:"
In consideration of the property settlement provisions of this judgment, and in lieu thereof, neither party is entitled to alimony or spousal support and the same is forever barred. It is intended that the property settlement provisions of this judgment are intended to enable Counterplaintiff to support herself without the need for direct alimony payment which would otherwise be ordered.The section entitled "Property Settlement" states, in relevant part:
Counterdefendant, MICHAEL PATRICK PEAKE, shall pay Counterplaintiff, CAROL DENISE PEAKE, cash in the amount of $30,000.00 which is due upon entry of this judgment. To secure payment of the above obligation, Counterplaintiff is awarded a lien upon the above referenced business, its receivables and other assets, and upon any and all other property and business interests and assets which Counterdefendant might now hold, or which he may hereafter hold, until the above obligation shall be satisfied in full. Judgment interest shall attach. Because this provision is intended to provide Counterplaintiff with support and maintenance in lieu of direct alimony, this obligation is determined to be nondischargeable in bankruptcy.There are some inconsistencies in the language of these two provisions. The "Spousal Support" section basically states that except for the property settlement provisions, no alimony and spousal support will be granted and such is forever barred. Then, the "Property Settlement" provision grants Creditor support and maintenance in lieu of direct alimony in the amount of $30,000. Those two sections also use strong language both for and against the argument that the $30,000 was intended as spousal support - the "Spousal Support" section providing that "neither party is entitled to alimony or spousal support and the same is forever barred" and the "Property Settlement" section providing that "this provision is intended to provide [Creditor] with support and maintenance . . . [and] this obligation is determined to be nondischargeable in bankruptcy." However, the "Spousal Support" section provided that that section was "[i]n consideration of the property settlement provisions of this judgment, and in lieu thereof." Reading those two sections together, it is clear that the state court intended to provide Creditor with support in the provisions in the "Property Settlement" section and that any other alimony or spousal support would not be granted.
Creditor testified that she left the marital home after being subject to alleged physical and verbal abuse and that the locks had been changed when she returned to the home a few days later. She testified that Debtor continued to live in the home throughout most of the divorce proceedings and that Debtor took most of the furniture, appliances, and household items with him when he moved out. She also testified that there had been some damage done to the house between the time she left and that time she returned to the home and that she would need to repair the damage prior to listing the home for sale. She testified that the $30,000 award in the Divorce Judgment was granted to help her support herself, to buy new furnishings and housewares, and to repair the damage to the home.
During the divorce proceedings, Debtor and Creditor met with their attorneys in an attempt to come to a consent agreement. They apparently came to some agreement, which was put into writing. At the next scheduled hearing in the divorce court, however, Debtor indicated that he no longer agreed to the terms of that consent agreement. The divorce court then set the matter for trial. Debtor failed to attend that trial, although his attorney did, and the state court entered the Default Judgment of Divorce currently at issue. Debtor testified that the provision at issue in the "Property Settlement" section was not originally in the consent agreement the parties had discussed and that it was apparently added some time after the parties had met to discuss the consent agreement and the entry of the Default Judgment of Divorce. Creditor testified that the provision in the "Property Settlement" section was added after she returned to the marital home and learned that Debtor had taken most of the furniture, appliances, and household items and that there had been damage to the home. Debtor's counsel, who appeared at the hearing in which the Default Judgment of Divorce was entered, signed off on that Default Judgment. Those facts support a finding that the state court intended to create a support obligation.
The Court must next consider whether the obligation has the actual effect of providing necessary support. Creditor testified that she paid the mortgage on the marital home and most of the utility expenses while Debtor was living in the home throughout the divorce. In addition to those expenses, she also had to pay her own living expenses and attorney fees. Once she returned to the home, other necessary expenses arose. She had to purchase furniture, appliances, and housewares for her new living situation and had to pay to repair the damage to the marital home prior to listing it for sale. Creditor and her father testified that she had to take out loans from her father to pay for some of those expenses. The $30,000 granted to Creditor by the state court had the actual effect of providing necessary support to help Creditor cover those and other future expenses.
Since those first two conditions have been satisfied, the Court must next determine if the obligation is so excessive as to be unreasonable under traditional concepts of support. In this case, given the above facts, the Court does not find the $30,000 to be unreasonable. As noted, Debtor was forced to take loans in order to pay her living expenses and attorney fees and she had to replace all of the items Debtor took when he left the marital home.
Accordingly, the Court concludes that the divorce judgment debt owed by Debtor to Creditor is a non-dischargeable under 11 U.S.C. § 523(a)(5). Because the Court has determined the debt to be a non-dischargeable debt under 11 U.S.C. § 523(a)(5), it need not consider Creditor's alternative argument that the debt is non-dischargeable under 11 U.S.C. § 523(a)(15).
C. Sanctions
As discussed above, the Court has concluded that the divorce judgment debt is non-dischargeable under 11 U.S.C. § 523(a)(5). Since the debt is a non-dischargeable debt, granting sanctions for violation of the discharge injunction against Creditor for attempting to collect a non-dischargeable debt would be inappropriate. For those reasons, Debtor's Motion for Sanctions against Creditor is denied.
As noted, Debtor also included Unity Credit Union, and Creditor's father and CEO of Unity Credit Union, Dennis Moriarity, as defendants in his Motion for Sanctions. Debtor argues that Dennis Moriarity and Unity Credit Union were using Carol Peake-Finn as an alter ego to collect a debt Debtor had owed to Unity Credit Union and had been discharged in Debtor's 2002 bankruptcy case. The evidentiary hearing the Court held was limited to the issue of dischargeability of the divorce judgment debt Debtor owed to Creditor. The Court has determined that the $30,000 debt Debtor owed to Creditor is a non-dischargeable debt and that it would be inappropriate to grant sanctions against Creditor. If the Debtor intends to continue with his Motion for Sanctions against Unity Credit Union and Dennis Moriarity (which may now be moot considering the fact that the Court has determined that the debt Creditor was attempting to collect, with the help of her father and the Butler firm, over the past ten years originated from the Default Judgment of Divorce), the Court may need additional briefs and may possibly need to set another evidentiary hearing. Accordingly, the Court will hold a status conference on September 12, 2012 at 2:30 p.m., unless Debtor withdraws his Motion for Sanctions against Unity Credit Union and Dennis Moriarity prior to that date.
III. CONCLUSION
Creditor shall prepare and present an order consistent with this Opinion.
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Walter Shapero
United States Bankruptcy Judge