KSB

Judge Nugent

11-10214 Bright (Doc. # 43) - Document Text

__________________________________________________________________________
SO ORDERED.
SIGNED this 1st day of February, 2012.


DESIGNATED FOR ON-LINE PUBLICATION
BUT NOT PRINT PUBLICATION


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


IN RE:
)
CRAIG EDWARD BRIGHT, ) Case No. 11-10214
) Chapter 13
Debtor. )

____________________________________)
ORDER DENYING CONFIRMATION OF DEBTOR’S CHAPTER 13 PLAN


Debtor Craig Bright’s chapter 13 plan proposes that he will cease paying the second mortgage
on his former wife Kay’s homestead, a debt that was set over to him in their 2007 divorce case. She
objects. Determining whether an order to pay a mortgage on a former spouse’s homestead amounts to
a non-dischargeable domestic support obligation under § 101(14A) of the Bankruptcy Code involves
a determination of the parties intent at the time the divorce settlement was made and whether the
payment obligation has the effect of support. Because Kay Bright received residential custody of the
couple’s four minor children, paying the second mortgage on their residence amounts to a domestic

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support obligation in the circumstances present in this case and confirmation of the debtor’s plan should
be denied.1

I. Findings of Fact
Craig and Kay Bright were married for 17 years when they divorced in late 2007.2 They had four
daughters who, at that time, were 14, 12, 10, and 7 years old. Craig was a school principal with a salary
of $72,476.3 Kay was a school counselor who made about $49,000 a year.4 The couple’s 2006 joint
income tax return reported gross salaries between them of $112,850.5 Craig also ran a sole
proprietorship called Bright Performance Horses in which he trained, showed, and judged at horse show
competitions. In 2007, this business lost nearly <$13,000>.6 Craig lost his principal position in May of
2010 when the school district did not renew his contract and is now a teacher in another school district
that is about 50 miles from his home. His net teaching income dropped to approximately $42,000 in
2010 and his current teaching contract is approximately $48,000 a year.7 He continues in the horse

1 At the trial on confirmation held October 19, 2011 Craig appeared in person and by his attorney
David Lund. Kay appeared in person and by her attorney Eric Lomas. The chapter 13 trustee Laurie B.
Williams also appeared.

2

Ex. 1.

3 Ex. 3. Craig has a teaching degree from Emporia State University, a masters degree in special
education and a masters degree from Wichita State University in administration.

4 Ex. 7. Kay also obtained her teaching degree from Emporia State and has a masters degree in
counseling from Wichita State University. Kay’s teaching career was interrupted for a 9 year period when she
stayed home to raise their children.

5

Ex. 2.

6

 Ex. 3.

7 Ex. 11. Bankruptcy Schedule I reflects a monthly net income of $3,472 from his teaching position,
exclusive of the reported income from Bright Performance Horses. He started his current teaching position
in August of 2010.

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business, however, and incurred a loss of <$6,675> in 2010.8 According to his tax return Schedule C,
he expends $4,430 a year on car and truck expense to travel to horse shows. The Bright children have
lived with Kay since the divorce.

When they divorced, the Brights lived in a home that was encumbered by a first mortgage in
favor of Washington Mutual and a second mortgage to Beneficial Finance. The Beneficial mortgage was
made in 2006 for $46,000 to consolidate credit card debt and to pay for improvements to what is now
Kay’s homestead. Kay contends that Craig insisted on the second mortgage because by paying off the
credit card debts, which were mostly Craig’s, he would improve his credit score and enhance his ability
to buy the 20-acre lot where he now lives.9 The Brights agreed that Kay would pay the first mortgage
and Craig would pay the second mortgage. According to Beneficial’s proof of claim, the payment on
the second mortgage obligation is approximately $490 each month.10 Kay’s first mortgage payment is
$1,454 each month. In his chapter 13 plan, Craig proposes to pay nothing on the second mortgage in
the future.11 He does propose to pay the house payment on his 20-acre homestead which amounts to
$684 per month.12 He also proposes to repay a $3,911 loan on a F-350 pickup truck and a $3,550 loan
on a horse trailer. Craig’s current housemate and he are co-debtors on his 20-acre homestead debt. He
also maintains a minivan that he uses to travel to his teaching job. That vehicle is unencumbered.

Craig and Kay both testified that the allocation of the mortgage debts on the marital home in

8 Ex. 6.

9 The 20-acre lot was indeed acquired before the Brights’ divorce and set over to Craig in the divorce.
Craig’s mother purchased the mobile home that sets on this property and apparently owns the mobile home

as it is not listed in Craig’s bankruptcy Schedule B.

10 Claim 5-1, Part 2, p. 1.

11 Ex. 12, p 6, ¶ 9.c.

12 Ex. 12, p. 5, ¶ 9.b. ($49,000 mortgage).

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their divorce decree was by mutual agreement and done to equalize their property and debts. They
“verbally agreed” that if Kay made no claim to Craig’s KPERS account or sought alimony, he would
agree to pay the Beneficial debt. The decree does not memorialize that agreement. Instead, it states that
“the parties shall each retain their respective retirement, and pension plans free and clear” of the claims
of the other party.13 Craig’s KPERS account was worth more than Kay’s because he had worked longer
and held higher-paying positions than she for the bulk of their married life. The first mortgage debt was
set over to Kay and the second mortgage debt was set over to Craig with a mutual hold harmless clause
if the “responsible party fail[ed] to meet his or her obligation . . . .”14 But there were no provisions in
the decree providing for termination or modification of the second mortgage obligation upon
remarriage, death, loss of employment or other change in circumstance. In another part of the decree,
both Craig and Kay waived spousal maintenance.15 Kay could not have afforded to make both mortgage
payments at the time of the divorce because of the financial obligations inherent in raising four young
girls. She claims that she is unable to pay the second mortgage payment at this time. Craig’s initial child
support obligation under the decree was $1,487 but is now $900 each month according to Kay.

Craig filed his chapter 13 petition and plan on February 3, 2011. His plan proposes to pay $415
for sixty months, or a total of $24,900. Craig would pay less than a 2% dividend to unsecured creditors
whose claims total approximately $183,500.16

II. Analysis and Conclusions of Law
A. The Beneficial Second Mortgage Obligation is in the Nature of Support
13 Ex. 1, p. 9.

14 Ex. 1, p. 6-7.

15 Ex. 1, p. 6.

16 Ex. A.

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and is a Domestic Support Obligation (DSO) under § 101(14A).

11 U.S.C. § 101(14A) defines a domestic support obligation (DSO), as pertinent here:

 . . . a debt that accrues before . . . the date of the order for relief in a case under this title
. . . that is -


(A) owed to or recoverable by – (I) a spouse, former spouse, or child of the debtor . .
.
(B) in the nature of alimony, maintenance, or support . . . of such spouse, former
spouse, or child of the debtor . . . , without regard to whether such debt is expressly so
designated;
(C) established . . . before . . . 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; . . .
(D) not assigned to a nongovernmental entity . . .
In a chapter 13 case, the existence of a DSO is significant for several reasons. One, a debt that is a DSO
is not dischargeable.17 Two, the Court cannot confirm a chapter 13 plan if the debtor has failed to make
all post-petition DSO payments.18 Three, and as relevant here, a DSO is a first priority claim under §
507 and the plan must provide for payment in full, in deferred cash payments, unless the holder of the
claim agrees to different treatment.19 Because Kay objects to confirmation of Craig’s plan, if the
Beneficial mortgage obligation is a DSO, the plan must comply with § 1322(a)(2) and pay this first
priority claim in full. The only DSO definitional element at issue here is subparagraph (B) – whether
the Beneficial second mortgage debt is in the nature of support. There is no dispute that the Beneficial
debt was set over to Craig in the divorce decree entered before he filed his bankruptcy petition
[subparagraph (C)] and is not assigned to a nongovernmental entity [subparagraph (D)]. Nor does the
fact that Craig is to pay the second mortgage directly to Beneficial, rather than Kay, disqualify the debt
17 See 11 U.S.C. § 1328(a)(2) and § 523(a)(5).
18 See 11 U.S.C. § 1325(a)(8).
19 See 11 U.S.C. § 1322(a)(2) and § 507(a)(1)(A).


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as a DSO under subparagraph (A).20

We turn now to the crux of this case – determining whether Craig’s second mortgage obligation

was in the nature of support and therefore, a DSO. The bankruptcy courts apply the same tests for

determining whether a DSO is excepted from discharge under § 523(a)(5) as determining whether it is

a first priority claim under § 507(a)(1).21 Whether a matrimonial obligation is support or property

division for bankruptcy purposes is a matter of federal bankruptcy law.22 Bankruptcy judges look within

the four corners of the decree and consider the respective financial circumstances of the parties at the

time of the divorce.23 The purpose of that inquiry is to determine the intent of the parties [or the state

court] at the time of the decree and to examine whether the payments have the effect of support or

property division.24 We do not consider the present wherewithal of the parties, nor are we bound by

20 See Lewis v. Trump (In re Trump), 309 B.R. 585 (Bankr. D. Kan. 2004) (Debtor’s obligation to make
second mortgage note payments to the second mortgagee, a third party, did not prohibit court from finding
the debt nondischargeable under § 523(a)(5), citing In re Miller, 55 F.3d 1487 (10th Cir. 1995).); Jones v. Jones (In
re Jones), 9 F.3d 878 (10th Cir. 1993)(Emphasis should be placed on the determination of whether a debt is in
the nature of support, rather than on the identity of the payee.); In re Miller, 284 B.R. 734 (10th Cir. BAP 2002)
(nature of debt owed and not identity of payee that governs whether debt is support within the meaning of
priority provision, § 507(a)); In re Palmieri, __ B.R. __, 2011 WL 6812336 at *5 (Bankr. E.D. Mich. Nov. 21,
2011) (chapter 13 case). The Court also observes that the divorce decree included an indemnification and
hold-harmless clause with respect to the debts set over to each responsible party. See Wodark v. Wodark (In re
Wodark), 425 B.R. 834 (10th Cir. BAP 2010); Ex. 1, p. 7.

21 In re Krueger, 457 B.R. 465, 474 (Bankr. D. S.C. 2011); In re Boller, 393 B.R. 569, 574 (Bankr. E.D.
Tenn. 2008); In re Miller, 284 B.R. 734, 738 (10th Cir. BAP 2002).

22 See Sampson v. Sampson (In re Sampson), 997 F.2d 717, 721 (10th Cir.1993); Busch v. Hancock (In re
Busch), 369 B.R. 614, 622 (10th Cir. BAP 2007).see also Lowther v. Lowther (In re Lowther), 266 B.R. 753, 756 (10th
Cir. BAP 2001).

23 Sampson, supra at 726; Busch, supra at 622.

24 See In re Loper, 329 B.R. 704, 708 (10th Cir. BAP 2005) (Where debtor and ex-spouse’s divorce is by
agreement, whether an obligation under that agreement is in the nature of support is resolved by determining
the parties shared intent at the time it arose and whether obligation had actual effect of providing support.).
Because the divorce decree here was entered by the state court pursuant to the agreement or settlement
between Kay and Craig, this Court focuses upon the intent of the parties as approved and memorialized by
the divorce decree. See Ex. 1, p. 1: “The parties announce their case is settled and request the court approve
the same. . . .[T]he Court . . . finds that . . . the parties have reached an agreement.”

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any labels applied to matrimonial obligations in a state court decree.25 The term “support” as used in
the statutes are entitled to broad application.26

Here Craig relies on the alimony “waiver” contained in the decree and the fact that the second
mortgage obligation was paid direct to Beneficial, citing two of the four support “factors” enumerated
by the Tenth Circuit Court of Appeals in In re Goin.27 That court held that bankruptcy judges need to
consider whether the spouse needed the payments as support at the time of the divorce. It then
enumerated four factors that strongly militate toward an obligation being support: (a) whether there
were minor children in the home and an imbalance of incomes between the spouses at the time of the
divorce; (b) whether the agreement fails to provide explicitly for spousal support and under the
circumstances the spouse needs support; (c) whether the obligation was payable to the spouse direct and
in installments over time; and (d) whether the obligation terminated upon the spouse’s death or
remarriage.28 As two the four Goin factors are present in this case [(c) and (d)] and two are absent [(a)
and (b)], the Court must look further for the answer.29

25 In re Busch, supra at 622 (Bankruptcy court should determine for itself the character of an obligation
based upon the facts, not the denomination of the obligation in the divorce decree).; In re Trump, supra at 592;
Sampson, supra at 725-26 (The critical inquiry is the ‘function served by the obligation at the time of the
divorce.’); Young v. Young (In re Young), 35 F.3d 499, 501 (10th Cir.1994).

26 Jones v. Jones (In re Jones), 9 F.3d 878, 881 (10th Cir. 1993).

27 808 F.2d 1391 (10th Cir. 1987) (determining whether debt owed under agreement incorporated in
divorce decree was excepted from discharge under § 523(a)(5)) .

28 Id. at 1392-93. The evidence in Goin established three of the four support factors; only the
termination of the obligation upon remarriage or death was lacking and the absence of that factor did not
prevent the Goin court from finding that the debtor’s obligation was support.

29 As noted previously, the courts do not view the fact that the obligation is paid to a third party
rather than to the spouse fatal to determining the obligation is support. The key inquiry is the nature of the
debt, not the identity of the payee. See note 20, supra. The parties’ waiver of alimony is more suggestive that
the second mortgage debt was support in lieu of a specific alimony award and satisfies factor (b) - the parties’
agreement fails to explicitly provide for spousal support. Even if the alimony waiver is unambiguous, the
language of the decree is not controlling. See Goin, 808 F.2d at 1392; Sampson, 997 F.2d at 722-23.

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More recent Tenth Circuit and BAP authority suggests that an examination of the shared
intentions of the parties and the actual effect of the contested obligation is necessary.30 One BAP case
goes so far as to hold that, in general, an allocation of a debt secured by a lien on the home of the non-
debtor and the children is likely to be support.31 Kay did not have the wherewithal to service the second
mortgage. If she could not pay it, her and the children’s principal residence was subject to foreclosure.
Even though the language of the decree “waives” alimony or maintenance, its effect is to provide further
support to Kay and the Brights’ children in the form of paying the second mortgage, thereby ensuring
that Kay could maintain the home and they would have shelter.32 Craig’s 2007 salary income was
considerably greater than Kay’s, by almost one-third. Even considering that his business lost $12,000,
his adjusted gross income is still nearly $60,000 for that year, twenty percent more than hers of $49,900.
And although there was no evidence of the amount of Craig’s and Kay’s respective KPERS accounts,
it was undisputed that Craig’s retirement fund was larger than Kay’s because Kay was not in the
workforce for 9 years while she stayed home with their young children and Craig held a higher paying
school administrator position. The fact that Craig lost his administrative position three years after the
divorce and had to return to teaching at a lower salary is not relevant.33

30 Sampson, 997 F.2d at 721; In re Busch, 369 B.R. 614, 622-23 (10th Cir. BAP 2007) (Debtor’s second
mortgage obligation on former marital home was in the nature of support).

31 Busch, 369 B.R. at 622 (Spouse’s need for support at time of divorce is sufficient to presume the
parties intended the second mortgage obligation to be support, citing Sampson, 997 F.2d at 726, n. 7). See also,
In re Robinson, 921 F.2d 252 (10th Cir. 1990) (debtor’s second mortgage obligation on former marital home
assigned to ex-spouse and order to hold ex-spouse harmless was support);Trump, 309 B.R. at 594 (Providing
shelter for one’s family is ordinarily in the nature of support and represents strong indicia that debtor’s second
mortgage obligation is in the nature of support; function of second mortgage obligation was to allow his ex-
spouse and children to remain in the martial residence as their shelter).

32 See Trump, 309 B.R. at 593 (second mortgage obligation on marital home was support, regardless of
waiver of maintenance in marital settlement and separation agreement).

33 See Trump, 309 B.R. at 594 (fact that debtor experienced significant downturn in his income after
the divorce was not relevant to the determination of dischargeability).

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The function, purpose, and effect of this division of debt is to provide support for Kay and her
children.34 Craig’s obligation to pay the Beneficial second mortgage debt is therefore a DSO that is non-
dischargeable and required to be paid under the debtor’s plan. Because § 1322(a)(2)requires that all
priority claims by paid under the plan and because § 1325(a)(8) requires that Craig pay and continue to
pay any DSO that becomes due post-petition, this plan cannot be confirmed. Kay’s objection to
confirmation is SUSTAINED and confirmation of Craig’s plan is DENIED.

B.
Even if the Beneficial Mortgage Debt were not a DSO, Craig can Provide
for its Payment.
Before and after the divorce, Craig has pursued his passion for horses, horse training and
judging. He cares for horses that his mother owns. The problem is that horses are an expensive hobby
and by Craig’s own admission, horses are more of a hobby to him than a vocation. Craig’s income tax
returns from 2006 to 2010 all show that the horse pursuit loses him money, sometimes as much as
<$20,000> in a year as in 2008.35 In his best year, 2010, he lost <$6,675>.36 He expensed $4,460 of
trucking expense in 2010. That amount alone would have paid almost ten mortgage payments to
Beneficial. Indeed, the payments on his truck and trailer would go a long way toward servicing the
Beneficial debt. According to Credit Union of America’s proof of claim, the truck payment is $366. The

34 Numerous courts across the country have determined in circumstances similar to those existing
here, that a mortgage debt on a former marital home ordered to be paid by debtor is support. These cases
reason that the purpose or function of such an obligation is to provide a home for debtor’s children and ex-
spouse that they otherwise would not have been able to afford. See e.g., In re Krueger, 457 B.R. 465 (Bankr. D.

S.C. 2011) (mortgage payments on former marital home was a DSO and payable on a priority basis in debtor’s
chapter 13 plan); In re Hayden, 456 B.R. 378 (Bankr. S.D. Ind. 2011) (payment of both mortgages on marital
home awarded to ex-wife); In re Westerfield, 403 B.R. 545 (Bankr. E.D. Tenn. 2009) (debtor’s hold harmless
obligation to ex-wife for making mortgage payments on former marital home was DSO and had to be paid in
chapter 13 plan as a priority claim); In re Leslie, 181 B.R. 317 (Bankr. N.D.Ohio 1995) (credit line secured by
open-end mortgage on marital home); In re Tatge, 212 B.R. 604 (8th Cir. BAP 1997) (payment of mortgage
obligation served “the most basic of support functions . . .”).
35 Ex. 4.
36 Ex. 6.


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amount of the trailer payment cannot be discerned from Great Southern’s proof of claim. In any event,
the $366 truck payment is just $130 short of the Beneficial payment.

The Code requires that the Court find that Craig is acting in good faith both in proposing the
plan and filing the petition.37 Good faith entails a variety of factors and several of those come into play
here.38 The amount of proposed payments and the amount of the debtor's surplus matters because were
the debtor to eliminate the truck and trailer payments or his business loss, he could pay the Beneficial
payment. The type of debt sought to be discharged and whether any such debt is non-dischargeable in
Chapter 7 is also important here – even if I were to find the Beneficial obligation to be a § 523(a)(15)
property obligation, it would be dischargeable in chapter 13 were Craig to complete his plan, but not
in chapter 7.39 Finally, the cardinal factor is the motivation and sincerity of the debtor in seeking
Chapter 13 relief. That Craig would elevate staying in the horse venture above paying the second
mortgage on his children’s home calls his motivation into question.

Craig can and should find a way to pay the Beneficial debt. His plan provides for him to retain
a business that absorbs disposable income at the expense of not only Kay but all of his creditors. This
is not his best effort. Passions should not trump priorities, at least not in bankruptcy. Whether the
Beneficial obligation is or is not a DSO, confirmation must still be DENIED for lack of good faith.

C. Plan Amendment
Craig is granted 21 days from the entry of this Order to file an amended chapter 13 plan that
provides for a cure of any arrearage on the Beneficial mortgage and proposes current payment of the
same. If no amended plan is timely filed, the case will be dismissed without further notice.

37 § 1325(a)(3) and (7).

38 See Flygare v. Boulden, 709 F.2d 1344, 1347-48 (10th Cir.1983).

39 § 1328(a)(2).

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D. Kay’s Motion for Relief from the Stay
On February 22, 2011, Kay filed a motion for relief from the automatic stay to “seek
enforcement of the Divorce Decree in domestic court” so that she might enforce Craig’s mortgage
obligation under the divorce decree.40 This motion was carried with confirmation of Craig’s chapter 13
plan. The Court received no evidence at trial concerning Craig’s default on the Beneficial mortgage or
the extent of that alleged default, but Craig’s plan provides that he will make no further payments to
Beneficial and his plan payment falls far short of funding that payment through the trustee. Though the
specific relief Kay seeks is unclear, she is not stayed from enforcing the DSO obligation against property
that is not property of the estate.41 Nor is she stayed from seeking to establish or modify a DSO42 or
from “withholding of income that is property of the estate . . . for payment of a domestic support
obligation.”43 Having concluded that Craig’s obligation to pay the Beneficial mortgage is in the nature
of domestic support, this Court concludes that Kay’s efforts to pursue a contempt citation or otherwise
enforce the domestic court’s order in state court are not stayed.44 For these reasons, Kay’s stay relief
motion is DENIED as moot.

# # #

40 Dkt. 13.
41 § 362(b)(2)(B).
42 § 362(b)(2)(A)(ii).
43 § 362(b)(2)(C).
44 See In re Penaran, 424 B.R. 868, 880 (Bankr. D. Kan. 2010) (garnishment of chapter 13 debtor’s


wages for past-due DSO not stayed)

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