In re: Case No. F00-00771-DMD

CARL E. RUSSELL, Jr.,

Debtors.

DEBORAH RUSSELL,

Plaintiff,

CARL E. RUSSELL, Jr.,

Defendant.

Bancap No. 01-4019

Adv. No. F00-00771-001-DMD

Chapter 13

This is an action for exception to discharge under 11 U.S.C. § 523(a)(5) and (a)(15). It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). This court has jurisdiction in accordance with 28 U.S.C. § 1334(b) and the district court’s order of reference. I find that some of the obligations described in the complaint and divorce decree are nondischargeable support obligations pursuant to 11 U.S.C. § 523(a)(5). I further find that it is premature to make any dischargeability determination under 11 U.S.C. § 523(a)(15) as to the remaining obligations. The dischargeability of such obligations is more appropriately determined at the time the debtor seeks a chapter 13 discharge or, in the event this case is converted to chapter 7, prior to the time a chapter 7 discharge is entered. Should the debtor seek a hardship discharge under 11 U.S.C. § 1326(b) or if the case is converted to chapter 7, a deadline for filing dischargeability complaints will be set in accordance with Fed. R. Bankr. P. 4007. If 7 ABR 190

a deadline is set in accordance with Rule 4007, the plaintiff may reassert her § 523(a)(15) counts at that time. Until then, her § 523(a)(15) counts will be dismissed, without prejudice.

Carl and Deborah Russell were married on July 15, 1997, and separated on May 23, 1999. Their divorce decree was entered April 24, 2000. Carl filed his chapter 13 petition on August 4, 2000. He has been making payments of $157.00 a week to the chapter 13 trustee. No confirmation hearing has been scheduled for his plan. This adversary proceeding was initiated March 16, 2001, and tried on October 10, 2001. Deborah seeks a determination that obligations arising from the divorce decree are nondischargeable pursuant to 11 U.S.C. § 523(a)(5) and (a)(15).

Both parties worked during the marriage. Carl worked as a Teamster earning $50,000.00 to $60,000.00 per year. Deborah worked at NorthRim Bank until July, 1998, making about $10.52 an hour. She was self-employed in a magazine business in December 1998. The business lasted roughly one month and she did not make a profit. Starting in September, 1998, Deborah also received child support of $400.00 per month for her two children from a prior marriage. She had previously received $200.00 per month in child support. At the time of her divorce, she worked as a paralegal for an attorney earning $12.00 an hour. She has been unemployed recently because of poor health.

The parties incurred a large amount of debt during their marriage. The divorce decree allocated 27% of the parties’ marital debt to Deborah and 73% to Carl. 7 ABR 191

Deborah assumed $37,490 of the marital debt. Carl was to assume $50,916.00 of the marital debt. The obligations allocated to Carl which are the subject of this adversary proceeding include a note payable to William Stewart (Deborah’s step-father), a debt to NorthRim Bank for $20,000.00, and Deborah’s attorney’s fees incurred in the divorce ($3,500.00). Under the divorce decree, Carl was also to continue making mortgage payments on the family home until it could be sold. Half of the net proceeds from sale of the home were to be paid to Deborah. Carl defaulted on the mortgage debt, and the home was lost in foreclosure. Deborah claims she is entitled to recover $10,541.00 from Carl for her share of the lost equity in the home. Deborah contends these obligations are nondischargeable pursuant to § 523(a)(5) or (a)(15).

Carl argues that Deborah’s adversary action is premature because he intends to obtain a discharge under 11 U.S.C. § 1328(a). He is correct, but solely as to Deborah’s nondischargeability claims under § 523(a)(15). A “superdischarge” under § 1328(a) would encompass any debts that were otherwise nondischargeable under 11 U.S.C. § 523(a)(15). ^1.

If Carl fully performs a confirmable plan, then Deborah’s § 523(a)(15) arguments would become moot. However, if Carl seeks a hardship discharge under § 1328(b) or if this case is converted to chapter 7, Deborah could still raise the issue of dischargeability. Accordingly, her § 523(a)(15) counts will be dismissed, without prejudice. She may reassert these claims in the event a 7 ABR 192

deadline for filing dischargeability complaints is set in accordance with Fed. R. Bankr. P. 4007(c) or (d).

On the other hand, debts for support under 11 U.S.C. § 523(a)(5) are not discharged under § 1328(a). Additionally, 11 U.S.C. § 1322(a)(2) requires a debtor to pay in full all claims entitled to priority under 11 U.S.C. § 507. Claims for support or maintenance are priority claims under 11 U.S.C. § 507(a)(7). The priority language of § 507(a)(7) is identical to, and should be applied coincidentally with, § 523(a)(5). ^2.

In order to be feasible, Carl’s plan must provide for full payment of any support obligations he owes Deborah. Deborah’s support claim must therefore be liquidated before a plan can be confirmed.

Nondischargeable support obligations are defined as debts “to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a . . . divorce decree.” ^3.

Federal bankruptcy law, rather than state law, is applied to determine whether a debt is a nondischargeable support obligation under § 523(a)(5). ^4.

“In determining whether an obligation is intended for support of a former spouse, the court must look beyond the language of the decree to the intent of the parties and to the substance of the obligation.” ^5.

Joint marital debts assumed by a debtor under a divorce decree may be found to 7 ABR 193

constitute nondischargeable support obligations. ^6.

In the Ninth Circuit, eight factors have been applied to determine whether obligations imposed by a divorce decree are in the nature of support and nondischargeable. ^7.

Those factors are:

Applying these factors to the four obligations at issue in this proceeding, I find that three of them are nondischargeable support under § 523(a)(5), and that one constitutes property settlement.

Several of the Combs factors do not shed much light on the character of Carl’s obligations under the decree. The divorce decree and two master’s reports 7 ABR 194

entered in the state court did not label the obligations at issue here as “support” or “property settlement.” However, debt classification and property division were the primary contested issues in the divorce. ^9.

Because these were contested issues resolved by the state court, there was no evidence of negotiation between the parties or their prior understanding regarding these obligations. With the exception of Deborah’s attorney fees, none of the obligations required periodic payments. The obligations do not terminate on death or remarriage. Interest accrues on the full amount of each obligation, rather than on monthly payments past due.

The remaining Combs factors indicate that Carl’s obligations to Deborah, with one exception, are in the nature of support. First, in Alaska, alimony is not generally awarded unless the financial needs of the parties cannot be met through property division and the alimony award is otherwise just and necessary. ^10.

Here, the relative earning capacities of the parties were clearly considered when the marital debt was allocated. The findings in the master’s report on divorce establish that the financial needs of the parties were met through the allocation of the higher debt load to Carl. The master found that both parties had contributed equally to create the substantial marital debt and that neither party was guilty of economic wrongdoing. However, the debt was allocated 73% to Carl and 23% to Deborah, based upon the fact that Carl’s earning potential was three times that of Deborah’s. The master also noted that Carl had only himself to care for, while Deborah was a single mother with 7 ABR 195

two young children. In discussing whether Deborah should be awarded alimony, the master stated:

Deborah requests reorientation alimony and temporary health insurance coverage. The court finds given the short length of the marriage, the ten month period prior to the entry of the final decree when Deborah had medical coverage through Carl, the six month period that Deborah lived in the marital residence while Carl paid the mortgage, and the high debt load distributed to Carl, that awarding temporary health insurance or reorientation alimony to Deborah would not be fair or equitable to Carl. ^11.

Based on these findings, I conclude that the state court’s allocation of higher debt to Carl was in the nature of support. The debts apportioned to Carl which constitute support include his obligation to pay one half of the William Stewart note ($3,290.00) and his obligation to repay $20,000.00 of the NorthRim Bank marital debt. These two debts constitute nondischargeable support under § 523(a)(5). They are also priority debts under § 507(a)(7). Carl’s plan must provide for full payment of these debts.

A requirement to pay attorney’s fees may also be a nondischargeable support obligation. ^12.

I conclude Carl’s obligation to pay $3,500.00 to Deborah’s divorce attorney, for her attorney’s fees, is in the nature of support. As with the two preceding obligations, the master focused on the disparity in the earning potential of the parties, and the fact that Deborah had two dependents to support, while Carl had only himself. Based on the difference in circumstances between the two, and their 7 ABR 196

disparate earning power, the master concluded it would be reasonable to award $3,500.00 of attorney’s fees to Deborah. ^13.

Carl was to pay the attorney’s fees at the rate of $300.00 per month, directly to Deborah’s attorney. He has failed to do this and the entire sum, $3,500.00, is now due. This sum, plus interest thereon, is nondischargeable support under § 523(a)(5). It is also a priority debt under § 507(a)(7), which must be paid in full under Carl’s chapter 13 plan.

The last obligation at issue here is the requirement that Carl sell the family home and pay Deborah half of the net equity. Deborah contends her portion of the equity in the home was $10,541.00. The home was lost in foreclosure and neither party realized any equity from it. I find that the division of equity was property settlement rather than a support obligation. First, the disposition of the home is discussed in the “property distribution” portion of the master’s report, specifically under “valuation of assets.” ^14.

Further, and more importantly, it is one of the few items that was divided equally between the parties. Their relative earning power was not considered in allocating the home equity. Finally, Carl was denied a credit for mortgage payments he made on the home after the parties separated, because the mortgage payments themselves were considered to be a method of interim spousal support. ^15.

Considering these findings, I conclude Deborah’s share of the equity was property division. In the context of Carl’s chapter 13 plan, Deborah’s claim for the home equity is a general unsecured claim, not entitled to priority. The dischargeabil-
7 ABR 197

ity of this claim under § 523(a)(15) will not be considered until the time Carl seeks a discharge under § 1328 or this case is converted to chapter 7.

Carl’s obligations to pay one-half of the William Stewart note, to pay $20,000.00 of the NorthRim Bank debt, and to pay $3,500.00 in Deborah’s attorney’s fees are nondischargeable support obligations under 11 U.S.C. § 523(a)(5). These obligations are also priority claims under § 507(a)(7) and must be paid in full in any chapter 13 plan proposed by Carl.

Deborah’s claim for one-half of the net equity from the family home is a general unsecured claim in this chapter 13 case, not entitled to priority. Deborah may reassert her § 523(a)(15) claims with regard to this obligation in the event Carl seeks a hardship discharge under 11 U.S.C. § 1328(b) or this case is converted to chapter 7.

1. See Superior Court for the State of Calif. v. Heincy (In re Heincy), 858 F.2d 548, 550 (9th Cir. 1988) [it is premature to determine the dischargeability of debts which may by discharged under “superdischarge” provision of 11 U.S.C. § 1328(a) until the court reaches the issue whether a chapter 13 debtor’s discharge will be entered under § 1328(a) or (b)].

4. Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir. 1984); Stout v. Prussel, 691 F.2d 859, 861 (9th Cir. 1982); HR Rep No. 95-595, 95th Cong., 2nd Sess 364 (1977).

12. Palmatier v. Palmatier (In re Palmatier), 1 ABR 155, 162 (Bankr. D. Alaska 1990).

13. Def’s Ex. C, Master’s Report on Mot. for Attorney’s Fees, pp. 3-4.

1.	The label given to the payments;
2.	The context or location of the disputed provision in the decree;
3.	The parties’ negotiations and understanding of the provision;
4.	Whether a lump sum or periodic monthly payments were provided for;
5.	The relative earning power of the parties;
6.	Whether the recipient spouse would be entitled to alimony under state law;
7.	Whether interest accrues on the entire debt or only on the monthly payments past due; and
8.	Whether the debtor’s obligation of payment terminates on the death or remarriage of the recipient, or on the death of the debtor. ^8.