FAMILY COURT V.

BANKRUPTCY COURT

Sponsor: Bankruptcy Law Section CLE Credit: 1.0

Friday, June 20, 2014 9:40 a.m. - 10:40 a.m.

Ballroom A Northern Kentucky Convention Center

Covington, Kentucky

A NOTE CONCERNING THE PROGRAM MATERIALS

The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority.

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TABLE OF CONTENTS The Presenters ................................................................................................................. i Family Law Issues in Consumer Bankruptcy Cases "Does It Quack Like a Duck?" ......................................................................................... 1 Addendum ..................................................................................................................... 21

THE PRESENTERS

Allen McKee Dodd Dodd & Dodd Attorneys, PLLC

2000 Waterfront Plaza 325 West Main Street

Louisville, Kentucky 40202 allenm@doddattorneys.net

ALLEN MCKEE DODD is a partner at Dodd & Dodd Attorneys, PLLC in Louisville where he concentrates his practice on complex family law cases involving custody, high asset divorce cases, maintenance, prenuptial agreements, child support, and tax issues. Mr. Dodd received his B.A. from the University of Kentucky, his J.D. from the University of Louisville Louis D. Brandeis School of Law and his Masters of Laws in Taxation from Washington University School of Law. He is a member of the Louisville, Kentucky, and American Bar Associations, Kentucky Justice Association, and Association of Trial Lawyers of America. L. Craig Kendrick L. Craig Kendrick, PLLC 7000 Houston Road Building 300, Suite 25 Florence, Kentucky 41042 (859) 371-4321 kylaw@fuse.net L. CRAIG KENDRICK has been practicing bankruptcy law in Northern Kentucky since 1990. He is a graduate of Milligan College with a B.S. in accounting and holds a J.D. from Northern Kentucky University Salmon P. Chase College of Law. He is a member of the Northern Kentucky, Kentucky, and American Bar Associations, and Northern Kentucky Inns of Court and serves as a Chapter 7 Bankruptcy Trustee. Mr. Kendrick is a regular speaker at continuing legal education seminars for the Kentucky Bar Association, Northern Kentucky Bar Association, and Mid-West Regional Bankruptcy Association on bankruptcy issues.

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Dean A. Langdon DelCotto Law Group, PLLC

200 North Upper Street Lexington, Kentucky 40507

(859) 231-5800 dlangdon@dlgfirm.com

DEAN A. LANGDON has been recognized as a "Best Lawyer" and a "Super Lawyer" in the Lexington, Kentucky market. Mr. Langdon speaks on bankruptcy and mediation topics regularly, and is co-author of the Bankruptcy Law chapter of Consumer Law in Kentucky, 2nd Ed. and the Domestic Relations Issues in Bankruptcy chapter of Consumer Bankruptcy Practice in Kentucky: Chapter 7 Practice, both published by the University of Kentucky College of Law. He received his B.A. in English from Centre College and his J.D. from the University of Kentucky College of Law. Mr. Langdon gives back to the community by serving as a judge at the Lexington Concours d'Elegance – a classic car show which benefits the University of Kentucky Children's Hospital, and as a board member (and past president) of the Lexington Art League. Judge Lucinda Masterton Kentucky Court of Justice 120 North Limestone Street Lexington, Kentucky 40507 (859) 246-2212 lucindamasterton@kycourts.net JUDGE LUCINDA MASTERTON completed her undergraduate work at Northwestern University and graduated from West Virginia University College of Law. She moved to Lexington in 1983, and engaged in a general practice of law, focusing on family mediation and bankruptcy. Certified as a mediator by the Mediation Center of Kentucky in 1999, she was an active mediator in family court, both in motion hour at court, and at the Mediation Center. She was an Advanced Practitioner member of the Associate Conflict Resolution as well as a facilitator for the Cooperative Parenting and Divorce Program offered by the Mediation Center. In 2001, she received the Law Day Award from the Mediation Center. Judge Masterton was elected as the Family Court Judge for the Fifth Division in Fayette County, and took the bench in January, 2007. In addition to her duties as a Family Court Judge, Judge Masterton was the judge for family drug court and juvenile drug court, and is the lead judge for the Fayette County Model Court Project. She serves on numerous boards and committess including chairing the Kentucky Child Support Guidelines Commission, and has received many statewide awards for her service as a judge. Those include, a 2008 Kentucky Law Related Education, the 2011 Robert Strauss award for outstanding service in the field of substance abuse community advocacy, and the 2013 Outstanding Judge Award presented by the Kentucky Citizens Foster Care Review Board.

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FAMILY LAW ISSUES IN CONSUMER BANKRUPTCY CASES "DOES IT QUACK LIKE A DUCK?"1

L. Craig Kendrick with assistance from Judge Lucinda Masterton, Fayette County Family Court

I. INTRODUCTION

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA")2 made many significant changes in the arena of domestic relations law. Many domestic and bankruptcy practitioners opined that BAPCPA would decrease the litigation of domestic issues in the bankruptcy courts. However, recent rulings suggest otherwise.3 As Judge Gilman once stated, "There is a saying that if something looks like a duck, walks like a duck, and quacks like a duck, then it is probably a duck."4 Therefore, future litigation of domestic support issues will have to first determine "whether the order from the family court 'quacks' like support."5

II. OVERVIEW OF BAPCPA CHANGES6,7

A. Definition of Domestic Support Obligation

The most significant change in BAPCPA was the addition of 11 U.S.C. §101(14A) which defines a "domestic support obligation." A "domestic support obligation" is defined as follows:

The term 'domestic support obligation' means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankrutpcy law notwithstanding any other provision of this title, that is –

1 See In re Sorah, 163 F.3d 397 (6th Cir. 1998). 2 Hereinafter BAPCPA. 3 In re Jensen, 2006 WL 2589004 (E.D. Tenn. Sep. 7, 2006); In re Westerfield, 403 B.R. 545 (Bkrtcy. E.D. Tenn. 2009); In re Ballard, 2011 WL 2133529 (Bkrtcy. E.D. Ky. May 25, 2011); In re Palmieri, 2011 WL 6812336 (Bkrtcy. E.D. Mich. Nov. 21, 2011); In re Phile, 490 B.R. 250 (Bkrtcy. S.D. Ohio, 2011); In re Fenstermacher, Case No. 11-15482 (Bkrtcy. S.D. OH, December 8, 2011); and Howard v. Howard, 336 S.W.3d 433 (Ky. 2011). 4 Sorah, 163 F. 3d at 401. 5 Id. 6 This is not to be an all-inclusive list of changes BAPCPA made in domestic relation issues but only the ones relevant to this article. 7 This article is limited to Chapter 7 and 13 issues.

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(A) Owed to or recoverable by –

(i) A spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or representative; or (ii) A governmental unit;

(B) In the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child's parent, without regard to whether such debt is expressly so designated; (C) Established or subject to establishment before, on or after the date of the order for relief in a case under this title, by reason of applicable provisions of –

(i) a separation agreement, divorce decree, or property settlement agreement; (ii) an order of the court of record; or (iii) a determination made in accordance with applicable nonbankruptcy law by government unit; and

(D) Not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child's parent, legal guardian, or responsible relative for the purposes of collecting the debt.8

The definition of a "domestic support obligation" does not require that a support claim be established prior to the filing of the bankruptcy petition. Instead, a "domestic support obligation" can 1) be established prior to the bankruptcy filing; 2) be in the process of being established at the time of the bankruptcy filing; or 3) be established after the bankruptcy petition is filed.9 Initially, many practitioners believed that the inclusion of this definition would limit future litigation regarding support claims; however, the opposite appears to be true, especially when considering BAPCPA's modifications to the automatic stay,10 Chapter 13 Plan Confirmation11 and most importantly, the discharge of debts.12

8 11 U.S.C. §101(14A). 9 Id. 10 11 U.S.C. §362(b)(2).

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B. Automatic Stay

Once a bankruptcy petition is filed, 11 U.S.C. §362 generally prevents the commencement, continuation or collection of most debts. However BAPCPA added an exception to the stay regarding domestic support issues, providing:

(2) under subsection (a) –

(A) Of the commencement or continuation of a civil action or proceeding –

(i) For the establishment of paternity; (ii) For the establishment or modification of an order for domestic support obligations; (iii) Concerning child custody or visitation; (iv) For the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or (v) Regarding domestic violence;

(B) Of the collection of a domestic child support obligation from property that is not property of the estate;

11 U.S.C. §362(b)(2). In short, this addition allows for the establishment or modification of domestic support claims without seeking relief from the automatic stay.13 This is a substantial change. The establishment or modification of a domestic support claim, after the bankruptcy filing, may have a devastating impact on a debtor's plan of reorganization. This would especially be true if the domestic support obligation is established or increased post plan confirmation.

11 11 U.S.C. §1325(a)(8). 12 11 U.S.C. §§727 and 1328. 13 Before proceeding, counsel must make sure the action in family court is a "duck." If not, any action may be void and subject to sanctions. The best practice is that if the claim is other than child support, seek relief from the automatic stay.

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C. Chapter 13 Plan Confirmation

BAPCPA also made significant changes for the protection of holders of domestic support obligations in Chapter 13 filings. First, the debtor's Chapter 13 Plan must provide for the full payment of all claims entitled to priority under 11 U.S.C. §507, unless the holder of the claim agrees to a different treatment of such claim.14 11 U.S.C. §507(a)(1)(A) provides that claims for domestic support obligations are of first priority.15 Second, a bankruptcy court will not confirm a plan unless all domestic support obligations due after the bankruptcy plan have been paid as of the date of confirmation.16 Finally, 11 U.S.C. §1307 provides that the bankruptcy court may dismiss or convert a Chapter 13 to a Chapter 7, if the debtor fails to pay any domestic support obligation after the filing of the bankruptcy petition.17

D. Discharge of Debts: A Little History

The inclusion of a domestic support obligation also altered the dischargeability of certain debts under 11 U.S.C. §523. In order to fully understand the impact of BAPCPA, a limited history regarding the issue of dischargeability of domestic debts is necessary. Prior to the enactment of BAPCPA, 11 U.S.C. §523 provided that any debt to a spouse, former spouse or child of the debtor for child support or maintenance under a separation agreement or divorce decree was not dischargeable.18 Prior law also excepted from discharge any other debt 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 the court of record, unless the debtor was not reasonably able to pay the debt and the benefits of discharge to the debtor outweighed the detriment to the spouse, ex-spouse or child.19 However, unless the debt was for child support or maintenance, the creditor to whom the debt was owed (usually the ex-spouse) was required to file an adversary proceeding for the court to determine whether the debt was dischargeable.20 The issue

14 11 U.S.C. §1322(a)(2). 15 The limitation of 11 U.S.C. §507(a)(1)(A) is that the unsecured claim for domestic support obligations is that the claim must be established as of the date of filing the petition. Thus the question – is it a "duck" or not? 16 11 U.S.C. §1325(a)(8). 17 11 U.S.C. §1307(c)(11). 18 11 U.S.C. §523(a)(5) 2004. 19 11 U.S.C. §523(a)(15) 2004. 20 11 U.S.C. §523(c)(1) 2004.

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for the court to determine was whether the debt was actually in the nature of alimony, maintenance or support.21 As the Bankruptcy Code did not provide any guidance to answer this issue, the Sixth Circuit Court of Appeals decided a string of cases setting forth "tests" to aid in determining whether (a)(5) and (a)(15) debts were dischargeable.22 First, the Sixth Circuit decided In re Calhoun. In Calhoun, the court was presented with the issue of whether the husband's (debtor's) assumption of five separate loan obligations, under the terms of a separation agreement, were dischargeable under 11 U.S.C. §523(a)(5).23 The court determined that this issue must be decided under federal bankruptcy law and not state law;24 yet, state law should not be totally ignored.25 In reversing the bankruptcy court, the Sixth Circuit set forth the following tests: 1) whether the parties or the state court intended the obligation to provide support; 2) whether the obligation will provide necessary support to the former spouse; 3) whether the amount is so excessive that it is manifestly unreasonable under traditional concepts of support; and 4) if unreasonable, the obligation is dischargeable to the extent necessary to serve the purposes of federal bankruptcy law.26,27 However, after the court provided this "analytical framework," many courts applied them "more broadly than intended."28

In Fitzgerald, the court stated that Calhoun was not:

... intended to intrude into the states' traditional authority over domestic relations and the risk of injustice to the non-debtor spouse or children. Rather, we were applying to loan assumptions a minimum standard ordinarily applied by state courts, holding that, to the extent loan

21 11 U.S.C. §523(a)(15) 2004 and In re Calhoun, 715 F.2d 1103 (6th Cir. 1983). 22 See In re Calhoun, 715 F.2d 1103 (6th Cir. 1983); In re Fitzgerald, 9 F.3d 517 (6th Cir. 1993) and In re Sorah, 163 F.3d 397 (6th Cir. 1998). 23 The Bankruptcy Court had ruled that the debts were in the nature of alimony, maintenance or support. 24 Calhoun, 715 F.2d at 1107. 25 Id. 26 Id. 27 The third and fourth tests were later combined to create a three part test. 28 Fitzgerald, 9 F.3d at 519, 520.

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assumptions exceed what a court would have awarded for alimony, maintenance or support they are discharged.29

In 1994, 11 U.S.C. §523(a)(15) was amended to state that a debt was dischargeable (1) if the debtor cannot afford to pay it, or (2) if the discharge benefits the debtor more than it harms the debtor's spouse and children. This amendment led the Sixth Circuit to issue the opinion in Sorah.30 In Sorah, the domestic court awarded the non-debtor spouse $750 per month designated as maintenance, to cease upon the non-debtor spouse's death, remarriage, or 62nd birthday, whichever first occurred. After filing bankruptcy, the debtor sought a ruling that his obligation to pay the $750 per month was discharged on the grounds that the payments were not actually in the nature of alimony, maintenance or support. The bankruptcy court ruled that the payments were not in the nature of alimony, maintenance or support but were intended to punish the debtor for his infidelity. The district court affirmed the bankruptcy court and the non-debtor spouse appealed to the Sixth Circuit, which reversed and remanded with specific instructions.

In doing so, Judge Gilman stated:

There is a saying that if something looks like a duck, walks like a duck, and quacks like a duck, then it is probably 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 at 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 events as death, remarriage, or eligibility for Social Security benefits. 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. The burden then shifts to the debtor spouse to demonstrate that although the obligation is of the type that may not be discharged in

29 Id. at 521. 30 In re Sorah, 163 F.3d 397 (6th Cir. 1998).

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bankruptcy; its amount is unreasonable in light of the debtor spouse's financial circumstances.

Once the non-debtor spouse has established that the obligation in question has all of the indicia of support the debtor spouse may not introduce evidence to contrary. In particular, a debtor spouse may not ask the bankruptcy court to assume the role of a psychological examiner, probing the state court's decision for linguistic evidence of ulterior motives. Nor may the debtor spouse introduce evidence regarding the resources, earning potential and daily needs of the non-debtor spouse, either at the time the obligation arose or at the time of the bankruptcy proceeding…. When the obligation is so structured, the only response available to the debtor spouse is to demonstrate that the obligation is unreasonable in light of the debtor's financial circumstance…31

It appears from this ruling that the court placed the burden on the non-debtor spouse to prove the indicia of support and limits the debtor's rebuttal once the indicia have been established.

E. Enter: BAPCPA

Then BAPCPA again amended 11 U.S.C. §523(a)(5) and (15), presumably in an attempt to resolve these difficult issues. 11 U.S.C. §523(a) now provides, in part:

(a) A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt –

(5) for a domestic support obligation… (15) 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.

But, there is a large exception: it is important to note that a discharge under §1328(a) is not included in §523(a). 11 U.S.C. §1328(a) provides, In relevant part:

31 Sorah at 401.

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Subject to subsection (d), as soon as practicable after completion by the debtor of all payments under the plan, and in the case of a debtor who is required by a judicial or administrative order, or by statute, to pay a domestic support obligation, after such debtor certifies that all amounts payable under such order or such statute that are due on or before the date of the certifications (including amounts due before the petition was filed, but only to the extent provided for by the plan) have been paid, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt- (2) of the kind specified in section 507(a)(8)(C) or in paragraphs (1)(B), (1)(C), (2), (3 ), (4), (5), (8), or (9) of section 523(a)

It is clear from reading §1328(a)(2) that not all §523(a) debts are excepted from a Chapter 13 discharge. In other words, a domestic order might be discharged in a Chapter 13. The question remains: Does it "quack" like support?

III. CURRENT POST BAPCPA LITIGATION ISSUES

A. Chapter 7 Litigation

There is no dispute that the BAPCPA amendments regarding §523(a)(5) and (15) should end future litigation regarding domestic issues in Chapter 7 cases. Simply stated any domestic support obligation or debt arising from dissolution of marriage is not dischargeable.32

B. Chapter 13 Litigation

However, the same is not true in Chapter 13 cases. 11 U.S.C. §1325(a) provides for a discharge of §523(a)(15) debts (debts which are not domestic support obligations). Prior to BAPCPA the issue was whether the debt was in the nature of alimony, maintenance or support.33 Now the issue is whether the debt is a "domestic support obligation." With the development of case law since BAPCPA, the answer appears to be that a court's analysis of a purported "domestic support obligation" is very similar to the historical analysis of whether the obligation is "in the nature of alimony, maintenance or support."

32 See 11 U.S.C §523(a)(5) and (15); 11 U.S.C. §727; Howard v. Howard, 336 S.W.3d 433 (Ky. 2011). 33 The only difference is that test 3 and 4 of Calhoun may not be relevant.

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In an attempt to declare debts dischargeable in a Chapter 13, many bankruptcy practitioners have included "language in a proposed Chapter 13 plan for the purpose of setting the status of the creditor's [non-debtor spouse's] claim."34 And, on the other side, many divorce practitioners have attempted to have debts be presumptively non-dischargeable by including language in settlement agreements. A random sampling is attached.

Queries: (1) Must the non-debtor spouse file a proof of claim? (2) Does the non-debtor spouse file an objection to the plan? (3) Does the trustee file an objection to confirmation of the plan? or (4) Does the non-debtor spouse do nothing? Consider the following cases: In In re Westerfield,35 the parties' dissolution agreement provided that the debtor continue to pay the mortgage debt on the former marital residence until the death or remarriage of the non-debtor spouse. The debtor made the mortgage payments for a period of eleven years prior to filing his Chapter 13 bankruptcy. The debtor did not list his ex-spouse as a creditor but only as a co-debtor on the mortgage debt which included the notation "523(a)(15) claim." The debtor's bankruptcy plan provided for the surrender of the home. After confirmation of the plan, the non-debtor spouse filed a proof of claim in the amount she paid to the mortgage holder to prevent foreclosure. The bankruptcy court found that debtor's plan was clear in that the debtor (1) would not make plan payments to cure any arrearage on the mortgage debt; (2) he would not continue making the regular monthly payments; (3) he consented to foreclosure by the mortgage holder if justified by other facts and law; and (4) the mortgage holder would have only a non-priority unsecured claim in the debtor's Chapter 13 case.36 Apparently, debtor's counsel believed that the confirmation of the plan ended the dispute as to whether the ex-spouse's claim was a domestic support obligation. However, the bankruptcy court disagreed. The court stated,

The plan provisions could have been intended to raise the issue of whether the debtor's obligation is a domestic support obligation and to require the [non filing spouse] to litigate the issue during the confirmation process or lose by default. The proposed plan failed to give the [non filing spouse] sufficient notice to that intent. Even if the plan had given [the non filing spouse] sufficient notice, the court

34 In re Westerfield, 403 B.R. 545 (Bkrtcy. E.D. TN 2009). 35 Id. 36 Westerfield, 403 B.R. at 550.

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doubts that confirmation would have been a binding decision against [the non filing spouse].37

The court concluded that the "confirmation of the plan did not decide that the debtor's duty to pay the mortgage debt is not a domestic support obligation."38 Then, consistent with Calhoun, Fitzgerald, and Sorah, the bankruptcy court found that the mortgage payments were a domestic support obligation and the plan could not be confirmed because the debtor had not made his post-petition domestic support obligations prior to confirmation.39 Query: Would the result have been different had the non-filing spouse failed to file a proof of claim or objection to the plan? In In re Phile,40 the bankruptcy court for the southern district of Ohio also concluded that "plan confirmation is not the mechanism contemplated by the bankruptcy code and the bankruptcy rules to determine the dischargeability of debts of this nature (domestic support obligations)." The debtor's plan stated that the debtor did not owe a domestic support obligation. The ex-spouse did not file a proof of claim or object to confirmation of the plan.41 The court, sua sponte, set the matter for a confirmation hearing. The court determined that the proposed plan raised two questions.

The first query is substantive – can this court determine that no domestic support obligation is owed by the debtor to the debtor's former spouse as the debtor states in the proposed plan based on the information provided in the proposed plan and the record before this court? The second is procedural – does making such determination through the plan confirmation process comport with the letter and spirit of the applicable provisions of the bankruptcy code and the bankruptcy rules relating to dischargeability determinations for obligations arising out

37 Id. 38 Id. 39 11 U.S.C. §1328(a)(8). 40 In re Phile, 490 B.R. 250 (Bkrtcy. S.D. Ohio, 2011). 41 The trustee also did not object to confirmation of the plan. As stated by the court "the debtor and the Chapter 13 Trustee both support including a provision such as Paragraph 30(e) of the proposed plan or similar language in a Chapter 13 plan where potential domestic support obligations may be at issue. They contend that the plan provisions of this nature facilitate the chapter 13 process by encouraging a former spouse or domestic support oblige to 'come to the table' during the plan confirmation stage to resolve potential disputes relating to priority and dischargeability of debts arising from a dissolution or divorce proceeding." Id.

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of a marital relationship or in the course of a divorce or separation?42

In answering the first question, the court again used the four-step test of Calhoun to find "that the court is unable to make the findings required to determine that no domestic support obligation is owed by the debtor to the debtor's former spouse as the debtor states in the proposed plan based upon the information provided in the proposed plan and the record before this court."43 In answering the second question, the court concluded that the bankruptcy rules contemplated that dischargeability of debts will only be made in the context of an adversary proceeding to provide procedural safeguards for non-debtors.44 After answering these two questions, the bankruptcy court denied confirmation of the debtor's plan and concluded that the issue of dischargeability of any debt owed to the former spouse must be made in the context of an adversary proceeding.45,46 The requirement of filing an adversary to determine whether a debt owed to an ex-spouse is discharged in a Chapter 13 has been recently adopted by Judge Humphrey as well.47 Thus it would appear that the best practice, at least in the southern district of Ohio, is for the debtor to bring an adversary to determine if a debt is a domestic support obligation.

Previously, the bankruptcy court for the eastern district of Kentucky had ruled that an objection to claim of a domestic support obligation by a bankruptcy court must be by adversary proceeding.48 However, it now appears the court has limited this ruling to a specific set of facts or to determine dischargeability of debts. For example, in In re Fitch,49 the debtor filed a Chapter 13 bankruptcy and listed his ex-wife as an unsecured creditor. The ex-wife filed a priority proof of claim alleging the monies owed by the debtor were a domestic support obligation. The debtor objected to the proof of claim. The wife filed a response to the objection and alleged, among other things, that the

42 Id. 43 Id. 44 Id. Citing Fed. R. Bankr. P. 4007 and 7001(6) and Cf., Janc v. Coordinating Bd. For Higher Educ. (In re Janc), 251 B.R. 525 (Bkrtcy. W.D. Mo. 2000). 45 Id. 46 This decision was also upheld in the case of In re Fenstermacher, Case No. 11-15482 (Bkrtcy. S.D. Ohio, 2011). where the Chapter 13 Trustee objected to similar plan language. 47 See In re Corbin, 2013 Bankr. LEXIS 1574, (Bkrtcy. S.D. Ohio, 13-30309). 48 In re Micek, 473 B.R. 185 (Bkrtcy. E.D. Ky. 2012). 49 In re Fitch, 2013 WL 305217 (Bkrtcy. E.D. Ky. Jan. 25, 2013).

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domestic support obligation is non-dischargeable and should only be determined by adversary proceeding and not in the context of plan confirmation. However the court disagreed with the ex-wife and stated, "This matter is before the court on an objection to claim, and not confirmation or a request to determine dischargeability, an adversary proceeding is not necessary, particularly where the wife has notice of the issue and has chosen to actively participate."50 The court further stated, "These issues of dischargeability and priority of a DSO overlap. Both depend on a determination in which this court shall proceed to determine whether the claim is a DSO. The relief sought is a finding that the wife's claim is a DSO and thus is eligible for priority status under §507(a)(1)(A)." The court opined that §502 is applicable and under the bankruptcy rules an adversary is not necessary.51 The court then set the matter for a contested hearing on the objection to claim. In the end, the court applying the analysis of Calhoun, Fitzgerald and Sorah determined that the wife's claim was indeed a domestic support obligation and entitled to priority.

Queries: What if the wife did not file a proof of claim or participate in the bankruptcy? Would the outcome be different?52 What if the husband had filed a proof of claim on behalf of the wife and she did not file any response to the proof of claim? Is an adversary necessary?

C. Stay Violations

As previously indicated, BAPCPA makes an exception to the automatic stay for the continuation, modification or establishment of a domestic support obligation.53 In some instances this creates additional litigation expense for debtors. Consider the case of In re Palmieri.54 In that case, the debtor (husband) was ordered to be responsible for one-half of the first and second mortgage until a sale of the home or the mortgages were paid in full. Prior to the bankruptcy filing, the ex-wife had filed a motion in state court for contempt for the debtor's failure to make the payments and a show cause hearing had been set. Once the debtor filed his bankruptcy petition, the state court dismissed the show cause. Thereafter, and without seeking relief of the automatic stay, the ex-wife filed a motion for spousal support and attorney fees in the state court. The debtor then filed a motion in the bankruptcy court alleging that the actions of the ex-

50 Id. 51 Id. (Doc. 41). 52 See In re Cody, 246 B.R. 597, 600 (Bkrtcy. E.D. Ark. 1999); In re Hall-Walker, 445 B.R. 873 (Bkrtcy. N.D. Ill. 2011). 53 11 U.S.C. §362. 54 In re Palmieri, 2011 Bankr. LEXIS 5108 (Bkrtcy. E.D.S.D. MI, 2011).

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wife violated 11 U.S.C. §362. In deciding whether the motion in state court violated the automatic stay, the bankruptcy court began with a detailed analysis of whether the ex-wife's motion was seeking a domestic support obligation and concluded "that the relief sought by [the ex-wife] in her support motion 'quacks' like support";55 thus, the bankruptcy court found that the ex-wife's motion for support and attorney fees was not a violation of the automatic stay as she was seeking a domestic support obligation. The court went on to state,

This opinion does not make a dischargeability determination on any award that the state court may grant [the ex-spouse]. The court only concludes here that the support motion seeks a domestic support obligation as defined in §101(14A) and therefore is excepted from the automatic stay pursuant to §362(b)(2)(A)(ii). If the state court does award [the ex-spouse] the relief she requests, at that point either party is not precluded from seeking a non-dischargeability determination from an appropriate court, and the debtor may need to modify his plan accordingly, 11 U.S.C. §1322(a)(2) and §507(a)(1)(A).56

This case presents several litigation concerns. First, after the filing of the bankruptcy, an ex-spouse may be permitted to file an action in state court for the creation of a domestic support obligation, which can include attorney fees. Second, once the state court rules, it may be on the debtor to file an adversary proceeding in bankruptcy court to determine whether the state court's ruling is actually a domestic support obligation for bankruptcy purposes.

D. Motions for Contempt

Motions for contempt filed in family court continue to create issues for bankruptcy and domestic attorneys alike. The issue is whether a motion for contempt violates the automatic stay. It does not appear that the issue has been directly addressed in the Eastern District of Kentucky or in the Sixth Circuit Court of Appeals. In determining whether or not a contempt proceeding is a violation of the automatic stay, two factors seem to be important: the date the order is entered and enforced, and what specifically the motion is requesting. Numerous bankruptcy courts have held that contempt orders entered after the bankruptcy has been filed are void and violate the automatic stay.57 It is also generally accepted that if the contempt order has been

55 Id. 56 In re Palmieri, 2011 WL 6812336 (Bkrtcy. E.D. Mich. Nov. 21, 2011). 57 See In re Caffey, 384 B.R 297 (Bkrtcy. S.D. Ala. 2008); In re Johnston, 321 B.R. 262 (D. Ariz. 2005); In re Moore, 2009 WL 1616019 (Bkrtcy. D. Ohio, Mar. 20, 2009);

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entered and enforced, the automatic stay does not prevent the continued enforcement of the order; this includes a debtor's incarceration due to a state court contempt order.58 Yet any further collection efforts post-petition would be a violation of the stay. For example, if the contempt order has been entered but not enforced, any attempt to enforce the contempt order post-petition would be a violation of the automatic stay. In In re Hall-Walker,59 a rule to show cause was filed prior to the debtor's (wife's) bankruptcy filing. The family court entered an order finding the debtor in contempt for failing to pay a certain debt assigned to her, and directed her to remove the ex-husband's name from the debt, threatening to incarcerate her for ninety days if she did not follow the court order; and the court set the matter for a status conference. After the debtor filed her bankruptcy petition, counsel for the ex-husband appeared at the family court's status conference. The matter was continued several times. At some point, the family court entered an order that no action on collection shall be taken while the stay of bankruptcy is in effect and again continued the status conference. The debtor then filed a motion against ex-husband's counsel for violating the automatic stay. The bankruptcy court held that the order continuing the matter for status conference was a violation of the automatic stay. As a result, the bankruptcy court determined that the family court's order was void and instructed the debtor that she did not need to appear at any further status conferences. Debtor was also awarded actual damages for the violation of stay.

Also, in Lawida v. Seyffer60 the debtor (husband) had filed an adversary complaint against his ex-wife alleging that she had violated the automatic stay by pursuing a motion for contempt with the state court for his failure to pay various obligations under the terms of the decree. The bankruptcy court had dismissed the complaint, finding that the filing of the motion was not a violation of the automatic stay pursuant to 11 USC §362(b)(2)(B), as the motion was simply a seeking to collect a domestic support obligation. In reversing, the BAP noted that the motion sought more than the collection of a domestic support obligation because it "sought sanctions, a judgment for the child support arrears, including interest, attorney fees and costs connected with the filing" of the motion. The BAP remanded the case to the bankruptcy court with instructions to determine if the stay violation was willful and, if so, to assess damages. Further, if counsel for the debtor believes that a motion for contempt or order of the court has been entered in violation of the automatic stay or discharge, timely relief must be sought from the bankruptcy court. For

58 See In re Montana, 185 B.R. 650 (Bkrtcy. S.D. Fla. 1995); Rucker v. Johnson (In re Rucker), 458 B.R. 287 (Bkrtcy. D. S.C. 2011). 59 In re Hall-Walker, 445 B.R. 873 (Bkrtcy. N.D. Ill. 2011). 60 2011 Bankr. LEXIS 4299; 2011 WL 4502060 (9th Cir. BAP, Aug. 1, 2011).

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example, in In re Lee,61 after the debtor filed bankruptcy and before the bankruptcy case was closed, the family court entered an order directing the debtor to pay the ex-spouse's attorney fees and $1,506 per month toward the marital debts. Prior to this order being entered, the ex-spouse did not seek relief of stay nor did the debtor immediately return to seek relief from the bankruptcy court. Instead the debtor waited almost two years prior to reopening his bankruptcy case and filing for sanctions with the bankruptcy court. Denying the debtor's motion for sanctions, the bankruptcy court opined, "The debtor should have raised any concerns about the family court order back in 2010, while the bankruptcy case was still open. The debtor offers no justification for not raising these arguments after the entry of the family court order on January 26, 2010 and before closing of the bankruptcy case on March 2, 2010. . . . Under the doctrines of laches, this motion for sanctions must be denied as untimely." Even though the motion was dismissed for laches, the bankruptcy court determined that "all the debts established by the family court order clearly and unequivocally qualify as domestic support obligations." In so finding, the bankruptcy court gave a stern warning to counsel: "The court will conclude with a cautionary warning to debtor's counsel. While the court certainly appreciates zeal by attorneys, those attorneys must act within the confines of Rule 11 . . . Future lapses of judgment in this nature may result in sanctions." Warning to zealous counsel: Before seeking relief with the bankruptcy court, carefully consider if the family court ruling "quacks" like support!

E. Guardian Ad Litem Fees

During many custody issues pending in the family courts, the judge has the discretion to appoint a guardian ad litem (GAL) to represent the interest of the minor children.62 Further, the family court has the discretion to award the GAL a reasonable fee for their services and to divide the fee between the litigants. Query: Once the family court awards the GAL fees, are they dischargeable or are the fees a domestic support obligation? This issue was recently presented to Judge Wise in the case of In re Keeton.63 Judge Wise first found that the four-part test of Calhoun still controls whether the GAL fees are a domestic support obligation. After a detailed analysis of the first three requirements of Calhoun, Judge Wise held that the GAL fees were in fact a domestic support obligation and therefore non-dischargeable.

61 465 B.R. 469 (Bkrtcy. W.D. KY 2012). 62 See KY. R. Civ. P. 4.04 and 17.03. 63 2013 WL 6536735 (Bkrtcy. E.D. Ky. Dec. 13, 2013).

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F. Concurrent Jurisdiction

There is no dispute that state courts have concurrent jurisdiction with the federal courts to determine whether a domestic support obligation is dischargeable.64 Query: Where to litigate? Consider the case of Howard v. Howard.65 In the divorce case, the state court ordered Mr. Howard to pay toward a deficiency judgment arising from the repossession of a Dodge Durango. Subsequent to the decree being entered, Mr. Howard filed a Chapter 7 bankruptcy and sought a discharge of his obligation to pay for the Dodge Durango. After receiving his discharge, his ex-wife asked the state court to hold him in contempt for his failure to make the Durango payments. Mr. Howard claimed that the debt was discharged, but the state court held him in contempt anyway. On appeal, Mr. Howard again claimed that the debt was discharged and therefore he could not be held in contempt of court and forced to pay the debt. The ex-wife claimed:

The practical affect [sic] of these new provisions (BAPCPA Amendments) is that all marital and domestic relations obligations, whether support, property division, or division of debts, are non-dischargeable, either through a Chapter 13 proceeding or a Chapter 7. 11 USC §1328(a) (2), 11 USC §523(a)(5), (15).

In affirming, the Kentucky Court of Appeals simply stated, "we have carefully examined 11 USC §523(a)(15) and conclude that it applies here." In reaching its decision, the Court of Appeals limited its determination of dischargeability to 11 USC §523(a)(15), taking the position that if the type of debt is listed in §523, it is discharged under all circumstances. The Kentucky Supreme Court affirmed the Court of Appeals with a detailed analysis of BAPCPA modifications to sections 523(a)(5) and (15). However, (perhaps because it was a Chapter 7 case) neither the Court of Appeals nor the Supreme Court distinguished between discharge of §523(a)(15) debts in a Chapter 7 vs. a Chapter 13 case. So now, many Kentucky state courts have interpreted Howard to hold that any debt arising from a domestic matter is nondischargeable in bankruptcy, period. Consider the case of Chilton v. Chilton,66 where the husband and wife entered into a separation agreement assigning the wife several debts, including a credit card debt in the amount of $9,000. The decree

64 See 11 U.S.C. §523(c)(1) and In re Hamilton, 540 F.3d 367 (6th Cir. 2008). 65 336 S.W.3d 433 (Ky. 2011). 66 Chilton v. Chilton, 2013 WL 2475588 (Ky. App. Jun. 7, 2013).

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specified that the debts assigned to the ex-wife would be bankrupted and could not be considered as support to her. Thereafter, the ex-wife filed for bankruptcy. The ex-husband then filed a motion for contempt on the grounds that the ex-wife did not pay the debt assigned to her and she was responsible for the payments he made on the debt. The family court determined that the ex-wife was responsible for the debt and held her in contempt. Relying on Howard, the Court of Appeals affirmed the family court. In doing so the Court stated,

An obligation under a divorce decree to pay a debt to a creditor establishes two distinct obligations, one to a creditor which may be discharged in bankruptcy, and another to the former spouse that the debt be paid as a part of the division of marital property. Accordingly the family court can properly enforce [the wife's] obligation to [the husband] under the divorce decree even if the wife's obligation to Capital One is discharged. Therefore while the language in the divorce decree specifying that the debt was not to be construed as a support obligation may have been intended to allow wife to be discharged from this debt as against both Capital One and husband, the BAPCPA amendments meant that the language would not have this effect.67

Once again the court of appeals does not clarify the different treatment of a Chapter 7 vs. a Chapter 13. Query: Should domestic courts be determining these issues? Consider the recent case of Jeffreys v. Jeffreys.68 Prior to the final dissolution hearing, the wife filed for Chapter 7 bankruptcy and listed among her debts a second mortgage on the marital residence which was owed to her mother. Following a hearing, the family court entered a decree of dissolution which held that the debt owed to the wife's mother was not discharged pursuant to 11 U.S.C. §523(a)(15) and awarded this debt to the wife. The wife then appealed the family court's decision. The Court of Appeals held, "Federal courts maintain exclusive jurisdiction in determining whether a debt is discharged in bankruptcy.69 Thus, the trial court committed error in making a conclusion of law that the debt to Diana was not discharged." Query: How does this square with concurrent jurisdiction? What if the state court gets it wrong?

67 Id. 68 2014 WL 35442 (Ky. App. Jan. 31, 2014). 69 Relying on In re Smither, 194 B.R. 102, 106 (Bkrtcy. W.D. Ky. 1996) and Holbrook v. Holbrook, 151 S.W.3d 825, 828 (Ky. App. 2004).

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If the state court does decide the dischargeability issue and gets it wrong, the bankruptcy court can fix it. For example, in Hamilton v. Herr, 540 F.3d 367 (6th Cir. 2008), the Sixth Circuit addressed the issue of "whether 11 USC §524(a) makes a state court judgment void ab initio when entered against a debtor whose dischargeable debts had been discharged, or whether the Rooker-Feldman doctrine compels federal courts to respect the state court judgment."70 In Hamilton, the debtor filed a complaint in the bankruptcy court seeking to enjoin the collection of debt which arose from a dissolution proceeding and was discharged in his bankruptcy proceeding. The ex-wife responded that the Rooker-Feldman doctrine prohibited the federal court from collaterally attacking a state court judgment. The bankruptcy court agreed and dismissed the debtor's complaint. The district court reversed the bankruptcy court and ruled that the state court judgment was a modification of the discharge order and state courts were barred pursuant to 11 USC §524(a). After a thorough discussion of the Rooker-Feldman doctrine and bankruptcy court jurisdiction, the Court of Appeals remanded the case to allow the bankruptcy court to determine whether the debt was in fact discharged. In doing so, the court stated, "State courts are allowed to construe the discharge in bankruptcy, but what they are not allowed to do is construe the discharge incorrectly, because an incorrect application of the discharge order would be equivalent to a modification of the discharge order."71 The Court continued, "If the debt was discharged, then the state court judgment was a modification of the discharge order and is void ab initio. If the debt was not discharged pursuant to the bankruptcy court's discharge order, then the state court judgment was not a modification of the discharge order and the Rooker-Feldman doctrine would bar federal court jurisdiction."72

Recently the Sixth Circuit again addressed a similar issue in Rugiero v. DiNardo.73 During a custody dispute and after the state court entered an order requiring the debtor to pay $100,000 in attorney fees, the debtor filed for bankruptcy and filed a notice of stay with the state court. However, the state court refused to impose a stay on the grounds of a domestic support obligation and held that the debts were non-dischargeable. The debtor then filed a motion with the bankruptcy court to enforce the stay and to void the state court order. The bankruptcy court and the district court denied the debtor's motion on the grounds that the family court had ruled that the debt was a domestic support obligation, and the Rooker-Feldman doctrine divested the federal courts of jurisdiction to decide whether the debts were dischargeable. The Sixth Circuit disagreed and stated:

70 In re Hamilton, 540 F.3d at 369. 71 Id. at 375. 72 Id. at 376. 73 502 Fed. Appx. 436 (6th Cir. 2012).

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[T]he debtor's bankruptcy was filed before the state court issued its order regarding stay. The Rooker-Feldman doctrine applies, if it applies at all, only when the state court loser files a new lawsuit in federal court after the state court adversely rules. Neither Rooker nor Feldman supports the notion that properly invoked concurrent jurisdiction vanishes if a state court reaches judgment on the same or related question while the case remains sub judice in a federal court.

Thus, the Sixth Circuit determined that jurisdiction was maintained in the federal courts to correct the state court's mistakes, if required. However this ruling did not assist the debtor as the Sixth Circuit ultimately determined that the debts awarded in the state court were domestic support obligations and thus non-dischargeable.

IV. CONCLUSION

The intersection of bankruptcy and family law continues to present challenges to practitioners in both areas. The most carefully crafted agreements or orders in domestic cases, often the result of complex facts, are still ultimately viewed through the bankruptcy court's question, "Does it quack like a duck?"

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ADDENDUM

1. Bankruptcy: The assumption of any indebtedness by each party herein shall be

considered an obligation directly related to the support and maintenance of the party benefitted through said assumption and is intended to be in lieu of maintenance. Said allocation of debt is a substitute for maintenance in that the respective assumptions of debt have the effect of providing necessary support by allowing each party to ensure that sufficient funds are available for each to satisfy his/her ordinary necessary daily needs and living expenses. Payment of said debts shall not be considered deductible or taxable as alimony or maintenance for income tax purposes. The parties further stipulate that the respective assumptions are reasonable based upon the respective incomes and liabilities of the parties and the parties intend that these debts and liabilities listed shall be non-dischargeable under Section 523(a)(5) of the Bankruptcy Code.

In the event either party shall file a bankruptcy petition after the execution of this agreement, the parties agree to notify the other party of such filing within five (5) days of said filing, regardless of whether or not the other party is listed as a creditor on the bankruptcy petition.

2. Bankruptcy: The parties acknowledge, understand and agree that the

assumption of any indebtedness by one party as part of the agreement herein (whether referenced specifically or not) shall be considered an obligation directly related to the support and maintenance to the other party, although payment of said debt shall not be considered deductible or taxable as alimony or maintenance for income tax purposes. Both parties acknowledge, understand and agree that the respective assumptions have the effect of providing necessary support by allowing each party to ensure that sufficient funds are available for each to satisfy their ordinary and necessary daily needs and living expenses and that this issue may be reviewed should a party discharge an assumption in bankruptcy. Additionally both parties acknowledge, understand and agree that the amount of the respective assumptions are reasonable based upon the respective incomes and liabilities of the parties. The parties further stipulate that they intend that these debts and liabilities be non-dischargeable under the Bankruptcy Code.

3. Bankruptcy: In the event either party hereto files a Petition under Chapters 7, 11

or 13 of the Bankruptcy Act, or in the event either party enters into bankruptcy, then and in such event, the amount of any debt assumed hereunder by one party that the other party is forced to pay, including all loss, costs and expenses (e.g. attorney's fees and Court costs) associated with such debt, shall not be dischargeable in bankruptcy as a pre-Petition debt, and the aforementioned amount shall be deemed a domestic support obligation due from the bankrupt party to the other party and shall not be dischargeable in bankruptcy pursuant to 11 USC §523(a)(5) or (15). Both parties acknowledge and agree that the respective indebtedness assumed herein by the other is intended to be in lieu of, and to substitute for, awards of providing necessary support by allowing each party to ensure that sufficient funds are available for each to satisfy their ordinary and necessary daily needs and living expenses. Additionally, both parties agree

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that the amounts of the respective assumptions are reasonable based upon the respective incomes and liabilities of the parties. Further, the parties agree that their acquiescence to accept sole responsibility for said debt as stated above shall not be non-dischargeable under §523(a)(5) or (15), as it exists now or as hereafter amended, of the federal Bankruptcy Code.

4. Bankruptcy: The assumption of indebtedness by each party shall be considered

an obligation directly related to the support and maintenance of the other party, although payments of said debts shall not be considered deductible or taxable as alimony or maintenance for income tax purposes. The parties further stipulate that they intend that these debts and liabilities listed shall be non-dischargeable under any Section of the Bankruptcy Code, unless otherwise mutually agreed in writing between parties.

In the event that either Husband or Wife should file a Petition under Chapter 7 or 13 of the U.S. Bankruptcy Code, and, despite the language of non-dischargeability in this agreement, receive a discharge, then the non-bankrupt party shall automatically be entitled, under this provision, to maintenance from the bankrupt party in an amount equal to that portion of any debt for which he or she is responsible hereunder and which the bankrupt party is relieved of paying due to the aforementioned filing and discharge.

5. Bankruptcy: The assumption of indebtedness set forth throughout this Agreement

shall be considered an obligation directly related to the support and maintenance of the respective parties although payment of said debts shall not be considered deductible or taxable as alimony or maintenance for income tax purposes. The parties further stipulate that in the event either party hereto files a petition under Chapters 7, 11 or 13 of the Bankruptcy Act, or in the event either party hereto is forced into bankruptcy involuntarily, then in such event the amount of any debt assumed hereunder by one party that the other party is forced to pay, including all loss, cost and expensed (e.g. attorney' fees and court costs), associated with such debt, shall not be dischargeable as a pre-petition debt or under any provision of the Bankruptcy Code, including but not limited to §523(a)(5), and the aforementioned amounts shall be deemed maintenance due from the bankrupt party to the party not discharged in said bankruptcy. Both parties agree and acknowledge that the respective indebtedness assumed herein by the other is intended to be in lieu of, and to substitute for awards of maintenance and/or support in that the respective assumptions have the effect of providing necessary support by allowing each party to ensure that sufficient funds are available for each to satisfy their ordinary and necessary daily needs and living expenses. Additionally, both parties agree that the amount of the respective debt assumption hereinabove set forth are reasonable based upon the respective incomes and liabilities of the parties and said debts shall be deemed Domestic Support Obligations pursuant to 11 U.S.C. §101(14A), as these debts accrued during the marriage and it is ordered and agreed that said debts are not assignable to nongovernmental entity by either party.

6. Bankruptcy: In the event either party hereto files a Petition under Chapters 7, 11

or 13 of the Bankruptcy Act, or in the event either party is forced into bankruptcy involuntarily, then and in such event, the amount of any debt assumed hereunder by one party that the other party is forced to pay, including all loss, costs and

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expenses (e.g., attorney's fees and Court costs) associated with such debt, shall not be dischargeable in bankruptcy as a pre-Petition debt, and the aforementioned amounts shall be deemed maintenance due from the bankrupt party to the other party and shall not be dischargeable in bankruptcy. Both parties acknowledge and agree that the respective indebtedness assumed herein by the other is intended to be in lieu of, and to substitute for, awards of maintenance, in that the respective assumptions have the effect of providing necessary support by allowing each party to ensure that sufficient funds are available for each to satisfy their ordinary and necessary daily needs and living expenses. Additionally, both parties agree that the amount of the respective assumptions are reasonable based upon the respective incomes and liabilities of the parties. Further, the parties agree that their acquiescence to accept sole responsibility for said debt as stated above shall not be non-dischargeable under §523(a)(5), as it exists now or as hereafter amended, of the federal Bankruptcy Code.

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