WHEN CAN DEBTS BE DISCHARGED IN A MARITAL DISSOLUTION?
WHEN CAN DEBTS BE DISCHARGED IN A MARITAL DISSOLUTION?
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WHEN CAN DEBTS BE DISCHARGED IN A MARITAL DISSOLUTION?

| Nov 29, 2018 | Firm News

In May 1995, Charlene’s parents created CJPM Family Partnership, Ltd. Charlene’s parents are the general partners. Charlene, her parents, and her siblings are limited partners of CJPM. Philip and Charlene married in June 1995. CJPM made three loans to Philip totaling $150,000, which were credited against Charlene’s partnership interest. Philip did not repay the debt.

The two divorced in 2011. Their stipulated dissolution judgment awarded Charlene all interest to any community interest in CJPM, assigned to Philip, as his separate obligation, his debt to CJPM, and required Philip to indemnify Charlene from that debt. Philip filed for Chapter 7 bankruptcy. All of his debts, including his CJPM loan, were discharged. Years later, Charlene unsuccessfully moved to reopen bankruptcy proceedings to obtain a ruling that Philip’s debt to CJPM was nondischargeable. Charlene then moved to recover Philip’s CJPM debt in state court.

The trial court determined that Philip’s CJPM debt was nondischargeable under the 11 U.S.C. 523(a)(15) exemption and calculated that Philip owes Charlene $345,963. The court of appeal affirmed. When the nature of a debt is such that its discharge will directly and adversely impact the finances of the debtor’s spouse or former spouse, it is nondischargeable in bankruptcy, even if it is not directly payable to the spouse.

The stipulated judgment separate warranty clause required Philip to “indemnify and hold [Charlene] harmless from” that debt.

This is the federal bankrutcy law the appeal court relied on: A Chapter 7 bankruptcy generally discharges all of an individual’s debts, but there are exceptions. (In re Hicks (Bankr. D.Mass. 2005) 331 B.R. 18, 22; see § 727(a), (b).) Debts excepted from discharge are limited to those “plainly expressed” in federal bankruptcy statutes. (Bullock v. BankChampaign, N.A. (2013) 569 U.S. 267, 275-276.) They include debts for “domestic support obligation[s]” (§ 523(a)(5)) and those “to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that [are] 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” (§ 523(a)(15)). State courts have concurrent jurisdiction to decide whether a debt is dischargeable under these provisions. (In re Doll (Bankr. N.D.Ohio 2018) 585 B.R. 446, 461, fn. 7; see 28 U.S.C. § 1334(b).)

The appeal court also reasoned that most courts have determined that section 523(a)(15)’s language is ambiguous, and should be interpreted “broadly and liberally . . . to encourage payment of familial obligations rather than to give a debtor a fresh financial start.” (In re Reynolds (Bankr. M.D.Fla. 2016) 546 B.R. 232, 237; see also id. at p. 236, fn. 19 [compiling cases].) The court agreed with the latter line of cases opposed to Philip’s contentions that section 523(a)(15)’s meaning is “clear and unambiguous,” and requires that his debt be payable directly to Charlene to be nondischargeable. (In re Reinhardt (Bankr. M.D.Fla. 2012) 478 B.R. 455, 457 (Reinhardt); see also In re Gunness (Bankr. 9th Cir. 2014) 505 B.R. 1, 7-8 (Gunness) [section 523(a)(15) should be interpreted narrowly to afford debtors a “fresh start”].).

The appeal court further reasoned that the referenced bankruptcy enactment section 523(a)(15) evidenced Congress’s “intent that ‘a debtor should not use the protection of a bankruptcy filing in order to avoid legitimate marital and child support obligations.’ [Citation.]” (In re Proyect (Bankr. N.D.Ga. 2013) 503 B.R. 765, 773.); and worked in conjunction with section 523(a)(5). (In re Cordia (Bankr. N.D.Ohio 2001) 280 B.R. 138, 146.)

The appeal court also mentioned the enactment of the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA). (In re Wodark (Bankr. 10th Cir. 2010) 425 B.R. 834, 837 (Wodark).) “One of Congress’s overarching themes in enacting BAPCPA was to redefine and reinforce the ability of [nondebtor] former spouses to recover both support and property settlement obligations from debtors in bankruptcy.” (Id. at p. 838.) It sought to accomplish this goal by eliminating the provisions of section 523(a)(15) that allowed a debtor to discharge a debt if the debtor was unable to repay it or the benefit to the debtor outweighed that to the nondebtor spouse or child. (Gunness, supra, 505 B.R. at p. 5.)

On appeal, Philip contended only his promise to indemnify and hold Charlene harmless for his debt to CJPM—and not his promise to repay that debt—was incorporated into the dissolution judgment and is thus nondischargeable. (In re Brown (Bankr. S.D.Ga. 2013) 488 B.R. 810, 813.)  The court disagreed reasoning, to “indemnify” a person is to “save [them] from a legal consequence of the conduct of one of the parties, or of some other person.” (Civ. Code, § 2772, italics added.) It is “the obligation resting on one party to make good a loss or damage another party has incurred.” (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628 (Roosmoor).)

Philip next argued that the promise was barred on a 4-year statute of limitations, but was pointed out by the appeal court that he statute of limitations for the enforcement of a dissolution judgment is 10 years. (Code Civ. Proc., § 337.5, subd. (b); see In re Marriage of Hanley (1988) 199 Cal.App.3d 1109, 1121.)

The appeal court affirmed and also the trial court’s calculation of the amount owing.

See  Marriage of Vaughn

Robert Rodriguez has litigated well over 100 family law cases and civil litigation matters including personal injury motor vehicle cases, dog bite and slip & fall cases, breach of contract, defamation & invasion of privacy, fraud, unfair business practice, malicious prosecution, workplace and employment matters including sexual harassment, wrongful termination, wage & hour violations, discrimination pursuant to the FEHA, Gov’t Code §§ 12940 et seq., violations of the FMLA & Pregnancy Leave, Civil Rights  discrimination pursuant to 42 U.S.C. § 1983 and Title VII of the 1964 Civil Rights Act in the State of California and California federal district courts.

Robert Rodriguez has represented both debtors and creditors in dozens of bankruptcy proceedings under chapters 7, 13, and 11.

* Disclaimer – Robert Rodriguez is licensed to practice only in the State of California & this analysis is applied only under State of California law.  Robert D. Rodriguez is also admitted to practice in the U.S. District Courts, Central, Northern & Eastern Districts of California.  Robert Rodriguez has practiced in the State of California Court of Appeal.

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