KSB

12-20854 Spencer (Doc. # 277)

In Re Spencer, 12-20854 (Bankr. D. Kan. Jul. 7, 2015) Doc. # 277

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The relief described hereinbelow is SO ORDERED.
SIGNED this 6th day of July, 2015.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

Bobby Joe Spencer and

Diane Wiggins Spencer, Case No. 12-20854
Debtors. Chapter 13

ORDER DENYING MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC’s
MOTION TO QUASH SUBPOENA

Mortgage Electronic Registration Systems, Inc. (MERS), moves this Court to quash
Debtors’ subpoena pursuant to Fed. R. Civ. P. 45(d)(3).1 The Court, having reviewed the
pleadings, counsel’s arguments, and exhibits, denies MERS’s motion. MERS argues that the
subpoena must be quashed because it is unduly burdensome and requires compliance beyond the

1 Doc. 234. Debtors, Bobby Joe Spencer and Diane Wiggins Spencer, appear by their attorney, Constance

L. Shidler, Overland Park, KS; Mortgage Electronic Registration Systems, Inc., appears by its attorney, Michael
Wambolt, St. Louis, MO.
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100-mile limit of Fed. R. Civ. P. 45(c)(2). The Court is unpersuaded by these arguments
because: (a) MERS failed to timely serve an objection in compliance with Fed. R. Civ. P.
45(d)(2)(B); (b) MERS regularly transacts business within 100 miles of the place for compliance;
and (c) MERS does not provide a sufficient factual foundation to establish that the subpoena is
unduly burdensome.

This Court has jurisdiction under 28 U.S.C. §§ 157 and 1334 to decide the matter in
controversy.2 This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A). The parties do
not contest the core nature of this proceeding. Venue is proper pursuant to 28 U.S.C. §§ 1408.

I. FINDING OF FACTS
On March 10, 2015, Debtors issued a subpoena to MERS at its registered agent, CT
Corporation, located at 1200 South Pine Island Road, Plantation, Florida 33324.

MERS’s principal place of business is located at 1818 Library Street, Reston, Virginia
20190.

Debtors assert the subpoena is necessary to investigate whether CitiMortgage3 had the
right to foreclose on Debtors’ principal residence located at 14846 150th Street, Bonner Springs,
Kansas 66012.

Debtors’ subpoena directs MERS to produce:

2 The District Court for the District of Kansas refers all cases and proceedings in, under, or related to Title
11 to the District’s bankruptcy judges pursuant to the Amended Standing Order of Reference, effective June 24,
2013, referenced in D. Kan. Rule 83.8.5.

3 Schedule D of Debtors’ Chapter 13 Petition lists CitiMortgage as having a first mortgage on Debtors’
principal residence. Doc. 1. Whether CitiMortgage fraudulently filed a proof of claim and the secured or unsecured
nature of CitiMortgage’s claim are issues in this case.

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Documents that show the historical and current securitization on the above

identified mortgage; and
Documents that show all mortgagees and any other parties with any interest
historically in the mortgage or mortgage note such as servicers and/or investors
under MIN #: 1000115-0704475396-9 from April 5, 2002, to the current date.4

The place for compliance set forth in the subpoena is Debtors’ attorney’s office located at
750 Commerce Plaza II, 7400 W. 110th St., Overland Park, Kansas 66210-2362 (Commerce
Plaza).5 MERS’s response was requested by March 27, 2015.6

On March 30, 2015, three days after the production deadline had passed, MERS filed a
motion to quash the subpoena.7 MERS filed an amended motion to quash the subpoena on
March 31, 2015.8 MERS asserts that Debtors’ subpoena subjects MERS to an undue burden and
that the subpoena violates Fed. R. Civ. P. 45(c)(2)(A).9

On April 17, 2015, Debtors filed a memorandum in opposition to MERS’s motion to
quash. Debtors argued the subpoena did not subject MERS to an undue burden and that MERS
regularly transacts business within 100 miles of the place for compliance.10

On May 12, 2015, the parties agreed that the matter could be submitted on the briefs and

4 Doc. 218, at 4.
5 Id. at 1.
6 Id.


7 Doc. 230.
8 Doc. 234. MERS amended its motion to quash after the Clerk of the Court issued an order requesting that
MERS correct the defective pleading (Doc. 230) by attaching the appropriate exhibits (originally omitted from Doc.

230).
9 Id. at 2.
10 Doc. 245.

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the Court took the matter under advisement.11

II. LAW
Federal Rule of Bankruptcy Procedure 9016 makes applicable Fed. R. Civ. P. 45 in cases
under the Bankruptcy Code. Rule 45(d)(3) governs quashing or modifying a subpoena as
follows:

(A) When Required. On timely motion, the court for the district where
compliance is required must quash or modify a subpoena that:
(i) fails to allow a reasonable time to comply;
(ii) requires a person to comply beyond the geographical limits
specified in Rule 45(c);
(iii) requires disclosure of privileged or other protected matter, if no
exception or wavier applies; or
(iv) subjects a person to undue burden.12
Federal Rule of Civil Procedure 45(c)(2) provides:
For Other Discovery. A subpoena may command:
(A) production of documents, electronically stored information, or
tangible things at a place within 100 miles of where the person resides,
is employed, or regularly transacts business in person.”13
MERS, as the movant, bears the burden to show that compliance with the subpoena

11 Doc. 254.

12 FED. R. CIV. P. 45(d)(3).

13 FED. R. CIV. P. 45(c)(2)(A). MERS argued that the Rule 45(c)(2)(A) test requires an analysis relating to
locations within 100 miles from its principal place of business. However, Rule 45(c)(2)(A) clearly states the
applicable test requires an analysis relating to locations within 100 miles of where the person “regularly transacts
business in person.”

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presents an undue burden.14 “Typically, a movant asserting an undue burden objection ‘must
present an affidavit or other evidentiary proof of the time or expense involved in responding to
the discovery request.’”15

Rule 45(d)(2)(B) provides:

A person commanded to produce documents . . . may serve on the party or

attorney designated in the subpoena a written objection . . . . The objection must

be served before the earlier of the time specified for compliance or 14 days after

the subpoena is served.16

III.
ANALYSIS
A.
MERS waived its right to object to the subpoena because it failed to timely file an
objection in compliance with Fed. R. Civ. P. 45(d)(2)(B).
A party waives its right to object to a subpoena “[b]y failing to object within the time
permitted by the Federal Rules.”17 Debtors’ subpoena was issued on March 10, 2015, requesting
compliance by March 27, 2015. Rule 45(d)(2)(B)’s 14-day deadline gave MERS until March 24,
2015, to file an objection. The Federal Rules state that an objection must be served by the earlier
of the two dates.18 Thus, MERS had until March 24, 2015, to object. However, MERS did not
file its motion to quash until March 30, 2015, six days outside the time limit. Therefore, MERS
waived its right to object to Debtors’ subpoena.

14 Ficep Corp. v. Haas Metal Eng’g, Inc., 2015 WL 566988, at *3 (D. Kan. Feb. 11, 2015).

15 Id. (quoting Booth v. Davis, 2011 WL 2008284, at *8 (D. Kan. May 23, 2015)).

16 FED. R. CIV. P. 45(d)(2)(B).

17 Creative Gifts, Inc. v. UFO, 183 F.R.D. 568, 570 (D. N.M. 1998) (citing Wang v. Hsu, 919 F.2d 130
(10th Cir. 1990)); see also 2015 WL 566988, at *1.

18 FED. R. CIV. P. 45(d)(2)(B).

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Some courts have considered objections after a party has failed to act in a timely manner
“in unusual circumstances and for good cause.”19

Such unusual circumstances have been found in cases where (1) the subpoena is

overbroad on its face and exceeded the bounds of fair discovery, (2) the

subpoenaed witness is a nonparty acting in good faith, and (3) counsel for the

witness and counsel for the subpoenaing party were in contact concerning the

witness’ compliance prior to the time the witness challenged the legal basis for the

subpoena.20

The Court declines to find that unusual circumstances exist in the instant case. The
subpoena is not overbroad on its face because its inquiry is limited to Debtors’ mortgage.
Further, the Debtors provided the specific MERS “MIN” number for their mortgage. Also,
courts consider late objections to subpoenas when the parties have had regular contact in an
attempt to reach a compromise regarding the subpoenaed items.21 In this case, the parties have
made no showing of regular contact to resolve the issue. Finally, while MERS is a nonparty to
the litigation, which bears consideration, MERS makes no assertions that the subpoena was filed
in bad faith without good cause. Debtors’ subpoena only requests information related to
Debtors’ mortgage. Therefore, the Court finds the subpoena is a fair discovery request to a
nonparty and cannot excuse MERS’s obligation to comply with the applicable rules. However,
even if MERS complied with Rule 45(d)(2)(B)’s time limitation, the motion to quash still fails as
set forth in sections B and C hereinafter.

19 2015 WL 566988, at *1 (quoting Premier Election Solutions, Inc. v. Systest Labs Inc., 2009 WL
3075597, at *4 (D. Colo. Sept. 22, 2009)).

20 Id.
21 See, e.g., id.


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B. MERS regularly conducts business in person within 100 miles of Debtors’ requested
place for compliance.
Debtors assert that the Court may take judicial notice that MERS regularly transacts
business in person within 100 miles of Commerce Plaza. The Federal Rules of Evidence provide
that a court may take judicial notice of a fact that “is not subject to reasonable dispute because it
. . . can be accurately and readily determined from sources whose accuracy cannot reasonably be
questioned.”22 Facts that are part of the public record fall inside the scope of this rule.23 This
Court may take judicial notice of facts at a party’s request or sua sponte during any stage of the
proceeding.24

Here, the Court takes judicial notice that MERS regularly transacts business in person
within 100 miles of Commerce Plaza. Since 2011, the United States Bankruptcy Court for the
District of Kansas has issued five separate judicial orders regarding MERS’s role in Kansas.25 In
those cases, MERS was the mortgagee to a mortgage on real property in Kansas. In each case,
the courts found a mortgage naming MERS as mortgagee was valid and enforceable against

22 FED. R. EVID. 201(b)(2).

23 JP Morgan Trust Co. Nat. Ass’n v. Mid America Pipeline Co., 413 F. Supp. 2d 1244, 1258 (D. Kan.
2006) (citing Van Woudenberg ex rel. Foor v. Gibson, 211 F.3d 560, 568 (10th Cir. 2000), abrogated on other
grounds by McGregor v. Gibson, 248 F.3d 946, 955 (10th Cir. 2001)).

24 FED. R. EVID. 201(c)–(d).

25 Martinez v. MERS and Countrywide Home Loans, Inc. (In re Martinez), 455 B.R. 755 (Bankr. D. Kan.
2011); Williams v. BAC Home Loans Servicing, L.P. (In re Williams), 2012 WL 695832 (Bankr. D. Kan. 2012); Van
Nostrand v. IBM Lender Business Process Svcs., Inc. (In re Van Nostrand), Case No. 09-24265, Adv. No. 10-06146
(Bankr. D. Kan. Apr. 30, 2012); Huerter v. Chase Home Finance, LLC (In re Huerter), Case No. 10-23175, Adv.
No. 10-06147 (Bankr. D. Kan. Apr. 30, 2012); Wilkinson v. BAC Home Loan Servicing, L.P. (In re Wilkinson), Case
No. 09-24357, Adv. No. 10-06251 (Bankr. D. Kan. Apr. 30 2012).

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debtors in bankruptcy proceedings in the District of Kansas.26 Four of the orders involved real

property located in Lawrence, Kansas. Lawrence is 34.4 miles27 from Commerce Plaza. The fifth

order involved real property located in Topeka, Kansas. Topeka is 61.5 miles28 from Commerce

Plaza. Therefore, based on those cases, it is clear MERS transacts business in Kansas and within

100 miles of Commerce Plaza.

Furthermore, MERS holds itself out and makes it publicly known that it transacts

business in Kansas. Following the conclusion of three of the aforementioned cases, MERS, in a

May 3, 2012, press release, heralded the District of Kansas Bankruptcy Courts for affirming

MERS’s model as “valid and effective in Kansas.”29 MERS advertises itself as a member-based

organization which includes members in the Overland Park, Kansas, area.30 A quick search of

MERS’s member database31 reveals that Cornerstone Bank, Valley View State Bank, Bank of

26 “MERS’s business is to hold record legal title to mortgages and deeds of trust on behalf of
the beneficial owners. MERS is structured to allow its members, which include originators,
lenders, servicers and investors, to track transfers of servicing rights and beneficial ownership
interests in notes secured by the mortgages and deeds of trust held by MERS.” Huerter v. Chase Home Finance,
LLC (In re Huerter), Case No. 10-23175, Adv. No. 10-06147 slip op. at 3 (Bankr. D. Kan. Apr. 30, 2012).

27 Distance was calculated using the shortest route of public travel. Generally, courts measure the 100-mile
limit of Rule 45(c) along a straight line or “as the crow flies” rather than along the shortest route of public travel.
Premier Election Solutions, Inc. v. Systest Labs Inc., 2009 WL 3075597, at *4 (D. Colo. Sept. 22, 2009) (citing
Weerheim v. J.R. Simplot Co., 2007 WL 2121925, at *1 (D. Id. July 23, 2007)). However, since the distance along a
straight line will always be shorter than or equal to the shortest route of public travel, the values calculated can be
accepted when within 100 miles.

28 Id.

29 U.S. Bankruptcy Court Judge Affirms MERS’ Role As Mortgagee in Kansas, 2012 press releases (May 3,
2012), http://www.mersinc.org/media-room/press-releases/archives-2012/14-media-room/press-releasesarchives/
press-releases-2012/210-u-s-bankruptcy-court-judge-affirms-mers-role-as-mortgagee-in-kansas1.

30 MERS “is a member-based organization made up of thousands of lenders, servicers, sub-servicers,
investors and government institutions.” Our Business, https://www.mersinc.org/about-us/our-business (last visited
June 16, 2015).

31 Member Search, https://www.mersinc.org/about-us/member-search (last visited June 16, 2015).

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Blue Valley, and Ameri-National all possess Overland Park, Kansas, addresses. All of these
banks are less than five miles from Commerce Plaza and two are less than two miles away.
Therefore, MERS is precluded from arguing that the subpoena violates Fed. R. Civ. P.
45(c)(2)(A).

C. MERS fails to prove why responding to the subpoena is unduly burdensome
because it presented no factual foundation for holding otherwise.
To find undue burden the Court considers “such factors as relevance, the need of the party
for the documents, the breadth of the document request, the time period covered by it, the
particularity with which the documents are described and the burden imposed.”32 A court “will
not excuse compliance with a subpoena for relevant information simply upon the cry of ‘unduly
burdensome.’”33 Inevitably, complying with a subpoena “involves some measure of burden to
the producing party. Nevertheless, the court will not deny a party access to relevant discovery
because compliance inconveniences a nonparty or subjects it to some expense.”34

MERS fails to present information sufficient to form a factual foundation to find that the
subpoena is unduly burdensome. MERS asserts that it would be an “unfair expense on a non-
party” to obtain and ship the documents over 100 miles.35 This argument is insufficient as
MERS offers no information about the number of documents involved, how they are stored, and

32 Goodyear Tire & Rubber Co. v. Kirk’s Tire & Auto Servicenter of Haverstraw, Inc., 211 F.R.D. 658, 662

(D. Kan. 2003) (quoting Concord Boat Corp. v. Brunswick Corp., 169 F.R.D. 44, 53 (S.D.N.Y. 1996)).
33 E.E.O.C. v. Citicorp Diners Club, Inc., 985 F.2d 1036,1040 (10th Cir. 1993) (citing E.E.O.C. v.
Maryland Cup Corp., 785 F.2d 471, 479 (4th Cir. 1986)).
34 Ficep Corp. v. Haas Metal Eng’g Inc., 2015 WL 566988, at *3 (D. Kan. Feb. 11, 2015) (citing Booth v.
Davis, 2011 WL 2008284, at *7 (D. Kan. May 23, 2011)).
35 Doc. 234, at 2.

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what effort is necessary to produce the requested information. Further, Debtors requested only
the specific documents related to Debtors’ mortgage by providing their MERS “MIN” number.
The inclusion of Debtors’ specific MERS “MIN” number should take MERS an electronic
mortgage registration system little time to locate the requested documents. The breadth of the
document request is narrow, even though it calls for a 13-year inquiry, because it relates only to
Debtors’ single mortgage. Without information regarding the number of documents involved or
the effort it would take MERS to produce them, the Court cannot find Debtors’ subpoena unduly
burdensome.

IV.
CONCLUSION
IT IS ORDERED that MERS’s motion to quash is DENIED.
IT IS FURTHER ORDERED that MERS shall produce the requested documents in
compliance with Debtors’ subpoena within 30 days of the entry of this order.

IT IS SO ORDERED.

###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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13-21559 Okrepka (Doc. # 53)

In Re Okrepka, 13-21559 (Bankr. D. Kan. Mar. 4, 2015) Doc. # 53

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The relief described hereinbelow is SO ORDERED.
SIGNED this 4th day of March, 2015.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

OLEKSANDRA M. OKREPKA, Case No. 13-21559
Debtor. Chapter 13

MEMORANDUM OPINION AND ORDER GRANTING CREDITOR’S OBJECTION TO
PLAN CONFIRMATION, DENYING DEBTOR’S CLAIM OBJECTION, AND
GRANTING CREDITOR’S MOTION TO LIFT THE AUTOMATIC STAY


Comes on for hearing Creditor Ivan Kepych’s objection to confirmation of Debtor
Oleksandra Okrepka’s chapter 13 plan, Debtor’s claim objection, and Creditor’s motion to lift
the automatic stay.1 The parties agreed that this matter may be submitted on the pleadings and
exhibits.2 The Court, having reviewed the pleadings and counsel’s arguments, grants Ivan’s

1 Doc. 16, 24, and 28. Debtor, Oleksandra M. Okrepka, appears by her attorney, James W. Lusk, Lenexa,
KS; Creditor, Ivan Kepych, appears by his attorney, Christopher Fletcher, Olathe, KS.

2 Doc. 47, Transcript of Proceedings held March 6, 2014.

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objection to confirmation, denies Oleksandra’s claim objection, and grants Ivan’s motion to lift
the automatic stay.

The Court finds that Oleksandra’s divorce obligation to make an equalization payment to
Ivan is a property settlement obligation under 11 U.S.C. § 523(a)(15) and is not a domestic
support obligation (DSO) because it did not have the purpose and effect of providing support for
Ivan.3 However, because of the divorce court judgment, Ivan holds an in rem interest in the
marital residence for which Oleksandra’s plan does not provide treatment. Ivan’s motion to lift
the automatic stay is granted for cause under § 362(d)(1) because there is not a reasonable
likelihood Oleksandra can propose a confirmable plan.

This Court has jurisdiction under 28 U.S.C. §§ 157 and 1334 to decide the matter in
controversy.4 This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B), (G), and (L).
The pleadings do not contest the core nature of this proceeding. Venue is proper pursuant to 28

U.S.C. §§ 1408.
FACTS

Oleksandra and Ivan married on October 16, 1999, and divorced on October 3, 2007. On
July 12, 2004, they purchased a home at 8400 W. 149th Terrace, Overland Park, Kansas (the
“Marital Residence”). In May 2006, Oleksandra gave birth to their son (the “Minor Child”).
During the marriage, Ivan’s annual income from Embarq was approximately $80,000 while

3 All future statutory references are to the Bankruptcy Code (Code), as amended by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101–1532, unless otherwise specifically noted.

4 The United States District Court for the District of Kansas refers all cases and proceedings in, under, or
related to Title 11 to the District’s bankruptcy judges pursuant to the Amended Standing Order of Reference,
effective June 24, 2013, referenced in D. Kan. Rule 83.8.5.

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Oleksandra was a student with no income.

Ivan filed for divorce on July 7, 2007. Oleksandra did not appear at the divorce
proceedings and was found in default. On October 3, 2007, the Johnson County District Court
for Kansas (the “Divorce Court”) entered its decree of divorce (the “Divorce Decree”).5 Ivan
and Oleksandra were granted joint custody of the Minor Child. Ivan was granted residential
custody while Oleksandra was granted reasonable parenting time. Ivan was ordered to pay
Oleksandra $800 a month commencing October 1, 2007, until the: (a) expiration of 12 months;

(b) the death of either party; or (c) Oleksandra’s remarriage or cohabitation with an adult, non-
relative male in a marriage-like relationship for substantially consecutive periods of time in
excess of 30 days (the “Maintenance”). The following was assigned to Ivan: (a) the real
property located at 220 Jackson Road, Quenemo, Kansas 66528;6 (b) the VISA credit card debt;
(c) a 2005 Dodge Grand Caravan; (d) all checking and savings accounts held jointly or
individually; (e) one half of the parties’ personal property divided by their agreement; and (f)
Ivan’s ownership interest in all his retirement plans, stocks, bonds, IRAs, life insurance policies,
and other intangible assets in his name. The following was assigned to Oleksandra: (a) the
previously unencumbered Marital Residence valued at approximately $165,000; (b) all student
loans; (c) a 2002 Mitsubishi Lancer; (d) one half of the parties’ personal property divided by
their agreement; and (e) Oleksandra’s ownership interest in all her retirement plans, stocks,
5 Doc. 40-1. Ivan and Oleksandra did not agree to a joint marital settlement agreement for the division and
ownership of marital property. Instead, the Divorce Court adopted the Divorce Decree prepared by Ivan’s attorney
because Oleksandra failed to appear at the Divorce Court hearings and was found in default.

6 This property is separate real property and not part of the Marital Residence.

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bonds, IRAs, life insurance policies, and other intangible assets in her name. The Marital
Residence was assigned to Oleksandra, subject to Ivan’s right to remain in the residence for 120
days from the date of the Divorce Decree. Oleksandra was ordered to pay $55,000 to Ivan
within 90 days of Oleksandra’s college graduation or the expiration of 12 months, whichever
was sooner (the “Equalization Payment”).

Additionally, the Divorce Decree included the following clause:

That all property and monies received or retained by the parties pursuant hereto

shall be the separate property of the respective parties, free and clear of any right,

title or interest in the other party, and each party shall have the right to deal with

and dispose of his or her separate property as fully and effectively as if the parties

had never been married. . . .

[T]his Decree itself shall constitute an actual grant, assignment and conveyance of

property and rights and in such manner, and with such force and effect, as shall be

necessary to effectuate the terms hereof.7

Subsequent to the parties’ divorce, the Marital Residence became the subject of litigation
between Ivan and Oleksandra. In October 2008, Oleksandra failed to make the Equalization
Payment. In 2012, Ivan filed a Motion in Contempt and for attorney’s fees. In October 2012,
the Divorce Court appointed a special master to facilitate the sale of the Marital Residence due to
Oleksandra’s failure to either refinance or sell the Marital Residence to satisfy the Equalization
Payment. Oleksandra failed to cooperate with the special master and comply with the related
Divorce Court orders on multiple occasions and was held in contempt. This bankruptcy case
stayed enforcement of all state court orders.

On June 19, 2013, Oleksandra filed a chapter 13 voluntary petition for relief and

7 Doc. 40-1 ¶ 15–16, at 3–4.

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proposed chapter 13 plan.8 Ivan filed an objection to confirmation of Oleksandra’s chapter 13
plan on August 9, 2013.9 Ivan argued Oleksandra’s plan was not feasible and lacked good faith
because she incorrectly reported her income and failed to accurately record her monthly
expenses. On August 24, 2013, Oleksandra responded, arguing that: (a) her income is sufficient
to complete her plan payments; and (b) the Equalization Payment is not in the nature of support
and therefore dischargeable under § 523(a)(15).10

On August 12, 2013, Ivan filed Claim 8-1 in the amount of $73,251, claiming that he is
the joint owner and holds a judgment lien on the Marital Residence.11 On August 27, 2013,
Oleksandra objected to Claim 8-1, asserting that there is not a mortgage or lien on the Marital
Residence and her obligation to Ivan is dischargeable under § 523(a)(15).12 On September 10,
2013, Ivan responded, stating that he is a joint owner and holds an equitable lien in the real
property.13

On September 16, 2013, Ivan filed a motion requesting relief from the automatic stay
under § 362(d) to continue pursing satisfaction of the Equalization Payment in state court.14 Ivan
maintained that the debt owed to him is a DSO and because of his equitable lien, Oleksandra
should satisfy his claim. Ivan also argued that the Divorce Decree controls whether the debt is a

8 Doc. 1 and Doc. 2.
9 Doc. 16.
10 Doc. 21.
11 There was not a mortgage on the Marital Residence at the time of the divorce.
12 Doc. 24. Oleksandra did not object to the amount of Ivan’s claim.
13 Doc. 26.
14 Doc. 28.


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DSO. Oleksandra responded to the motion on September 26, 2013, asserting that: (a) the
Divorce Decree sets the Marital Residence over to her; (b) Ivan is not a joint tenant of the
Marital Residence; (c) she does owe a debt to Ivan, but the debt is in the nature of a property
division, not a DSO; (d) it is for this Court to decide under § 523(a)(5) if the debt is a DSO or
property division; and (e) her penurious circumstances should allow her to continue to reside in
the Marital Residence.

On March 6, 2014, Oleksandra, Ivan, and the Chapter 13 Trustee, William H. Griffin,
appeared before the Court. The parties presented arguments concerning the stay relief motion,
Oleksandra’s claim objection, and plan confirmation.15 Due to Ivan and Oleksandra’s
acrimonious relationship, the parties submitted briefs and the Court took the matter under
advisement.

LAW

Under § 1328(a), a debtor is entitled to a discharge after full compliance with his or her
chapter 13 plan. However, § 1328(a) specifies that certain debts cannot be discharged. The
2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) amendment to
§ 523(a)(15) provides that a property settlement under § 523(a)(15) is nondischargeable.16
However, § 523(a)(15) debts are not excepted from discharge in a full compliance chapter 13
case because the § 523(a)(15) exception was not incorporated into § 1328(a). Section 523(a)(15)

15 Doc. 28, 24, and 16.

16 4 COLLIER ON BANKRUPTCY ¶ 523.23, at 523-126 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed.
2014). This holds true in individual cases under chapters 7 and 11 and cases under chapter 12 where § 523(a)
controls dischargeability. Section 1328(a) controls dischargeability in chapter 13 cases and the § 523(a)(15)
exception was not incorporated into § 1328(a).

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provides for the nondischargeability of debts that do not constitute DSOs17 arising from family
law proceedings.18 Section 523(a)(5) “departs from the general policy of absolution, or ‘fresh
start,’” to “enforce an overriding public policy favoring the enforcement of familial
obligations.”19 In § 523(a)(5), Congress provided the non-filing former spouse the opportunity
to breach certain bankruptcy protections and render nondischargeable the debtor’s obligations to
a former spouse that are in the nature of support. Here, if the Debtor receives a full compliance
discharge under § 1328(a), a property settlement under § 523(a)(15) would be dischargeable,
while a DSO under § 523(a)(5) would not.

ANALYSIS


Debtor asserts the wrong test to determine whether
the Equalization Payment to Creditor is a debt under § 523(a)(15).


Oleksandra seeks a discharge of the Equalization Payment as a property settlement under

§ 523(a)(15). She argues that § 523(a)(15):

. . . excepts from discharge debts incurred through a divorce proceeding other than those
covered by 11 U.S.C. § 523(a)(5), unless the debtor can show an inability to pay the debt
or that discharging the debt will provide benefits to the debtor that outweighs [sic] any
detrimental effects on the former spouse and/or children of the debtor.20

However, this characterization regarding the burden of proof analysis under § 523(a)(15)

17 A domestic support obligation (DSO) is an obligation in the nature of alimony, maintenance, or support
that arises before, on, or after the filing of the bankruptcy petition under a divorce decree, separation agreement, or
other order under state or administrative law. Section 101(14A) fully defines DSOs. The dischargeability of DSOs
is addressed under § 523(a)(5).

18 COLLIER, supra note 16.

19 See In re Trump, 309 B.R. 585, 591 (Bankr. D. Kan. 2004) (citing and quoting In re Sampson, 997 F.2d
717, 721 (10th Cir. 1993)). See also HENRY J. SOMMER & MARGARET DEE MCGARITY, COLLIER FAMILY LAW AND
THE BANKRUPTCY CODE ¶ 6.03[1], at 6-13–6-17 (2014). COLLIER, supra note 16, ¶ 523.05, at 523-1.

20 Doc. 40 at 7, citing In re McFadden, Adv. No. 05-7143 (Bankr. D. Kan. Oct. 20, 2006).

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is outdated. Originally enacted in 1994, § 523(a)(15) excepted from discharge debts arising from
divorce or separation unless either: (a) the debtor lacked the ability to pay the debt; or

(b) discharging the debt would confer a benefit to the debtor that outweighed the detrimental
consequences to the spouse, former spouse, or children of the debtor.21 In 2005, BAPCPA
removed §§ 523(a)(15)(A) and (B), the balancing test controlling dischargeability.22 The burden
of proof regarding dischargeability actions is by preponderance of the evidence and rests with
the objecting nondebtor spouse, former spouse, or child.23 The objecting creditor must prove that
the debt is one that occurred in the course of a divorce or separation.24 Debts arising from a
debtor’s failure to comply with a divorce decree’s property settlement fall within the scope of
§ 523(a)(15).25 The parties’ pleadings and associated exhibits establish that the asserted debt
arose in the course of Ivan and Oleksandra’s divorce. Furthermore, the parties do not contest
that the debt arose from their separation. Thus, the Court declines to follow Oleksandra’s
characterization that the debt should be discharged because: (a) she lacks the ability to pay the
debt; or (b) discharging the debt would confer a benefit to her that outweighs the detrimental
consequences to Ivan and their Minor Child.
21 Former 11 U.S.C. § 523(a)(15)(A), (B), repealed by Pub L. No. 109-8, § 215(3).

22 Pub. L. No. 109-8, § 215(3) (2005). The change became effective in bankruptcy cases commenced on or
after October 17, 2005. Debtor cited In re McFadden, Adv. No. 05-7143 (Bankr. D. Kan. Oct. 20, 2006) (petition
filed October 12, 2005), and In re Hall, 285 B.R. 485 (Bankr. D. Kan. July 11, 2001) (petition filed July 11, 2001),
for her burden of proof analysis. Both decisions applied the pre-BAPCPA analysis in accord with the October 17,
2006, cutoff.

23 Grogan v. Garner, 498 U.S. 279, 286–87 (1991); SOMMER & MCGARITY, supra note 19, ¶ 6.07A[3][c],
at 6-107.

24 SOMMER & MCGARITY, supra note 19, ¶ 6.07A[3][c], at 6-107.

25 SOMMER & MCGARITY, supra note 19, ¶ 6.07A[2][a], at 6-103.

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The Equalization Payment to Ivan is not a DSO under § 523(a)(5)
but is a division of property under § 523(a)(15)

The Court is not bound by the labels applied by the Divorce Court when reviewing the
characterization of the Equalization Payment.26 “[N]either state law nor the parties’
characterization determine[] whether a debt [is] nondischargeable under section 523(a)(5).”27
Whether the Equalization Payment is excepted from discharge under § 523(a)(5) is a matter of
federal law based on an inquiry made on a case-by-case basis.28 Whether the obligation is
excepted from discharge under § 523(a)(5) is “a dual inquiry into both the parties’s [sic] intent
and the substance of the obligation” and the crucial issue is “whether the obligation imposed by
the divorce court has the purpose and effect of providing support for the spouse.”29 The Court
considers the parties’ shared intent at the time of the divorce, the substance of the obligation,
whether the purpose and effect of the obligation is to provide support to a spouse, a spouse’s
need for support, and what function the obligation is intended to serve.30 Here, the intent of the
Divorce Court is considered because Oleksandra and Ivan litigated their divorce—as opposed to

26 In re Rivet, No. 13-11726, 2014 WL 1876285, at *3 (Bankr. D. Kan. May 8, 2014) (This Court is not
bound by labels applied to matrimonial obligations in a state court decree.).

27 In re Sampson, 997 F.2d at 722. The Sampson court rejected the suggestion in Yeates, 807 F.2d 874
(10th Cir. 1986), that an unambiguous agreement normally controls the court’s determination.

28 In re Sampson, 997 F.2d at 721 (“Whether a debt is nondischargeable under § 523(a)(5) is a question of
federal law.”); In re Rivet, 2014 WL 1876285, at *3; In re Trump, 309 B.R. at 592; In re Busch, 369 B.R. 614, 622

(B.A.P. 10th Cir. 2007) (citing In re Sampson, 997 F.2d at 725–26).
29 In re Sampson, 997 F.2d at 723 (quoting 2 HOMER H. CLARK, JR., THE LAW OF DOMESTIC RELATIONS IN
THE UNITED STATES § 17.7, at 305 (2d ed. 1987)) (emphasis provided by the Sampson court).

30 In re Sampson, 997 F.2d at 726; In re Yeates, 807 F.2d at 879; In re Williams, 703 F.2d 1055, 1057 (8th
Cir. 1983); see also In re Taylor, 737 F.3d 670, 676 (10th Cir. 2013) (“When determining whether an obligation is in
the nature of alimony, maintenance, or support, this court conducts a ‘dual inquiry’ looking first to the intent of the
parties at the time they entered into their agreement, and then to the substance of the obligation.”).

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the state court adopting the parties’ mutual marital settlement agreement.31 The inquiry is
whether the Divorce Court believed and found the debt was in fact support, or whether that debt
was established by the state court as a means of fairly dividing the parties’ assets and liabilities.32
The burden of proof to demonstrate nondischargeability is by a preponderance of the evidence
and rests with the objecting creditor.33

The language establishing the Equalization Payment is contained in paragraph 17 of the
Divorce Decree and indicates that “[t]he assets and debts of the parties should be divided as
follows . . . .”34 This language is indicia of a property division settlement, not a DSO. The
Divorce Court’s use of the label “Equalization Payment” in the property division section is
persuasive and shows the Divorce Court’s intent to divide marital property equally between
Oleksandra and Ivan. Although the Court is not bound by the Divorce Decree’s labels, the
characterization assigned to the obligation “is persuasive evidence of intent”35 and the label
attached by the Divorce Court “is entitled to great weight.”36 Paragraph 10 of the Divorce
Decree—a separate section—addresses the Maintenance portion of the parties’ Divorce Decree.
Under the facts of this case, the separation of the Maintenance and property settlement sections
are indicia that the Equalization Payment is a property settlement obligation.

31 SOMMER & MCGARITY, supra note 19, ¶ 6.04[2], at 6-28 to 6-29.
32 In re Good, 187 B.R. 337, 338–40 (Bankr. D. Kan. 1995).
33 SOMMER & MCGARITY, supra note 19.
34 Doc. 40-1 ¶ 17, at 4.
35 In re Sampson, 997 F.2d at 723 (quoting In re Yeates, 807 F.2d at 878).
36 COLLIER, supra note 16, ¶ 523.11[6][a], at 523-85.


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The substance of Oleksandra’s obligation under the second prong of the Sampson
analysis shows the Equalization Payment is a property settlement obligation. Determining
whether Oleksandra’s obligation is in the nature of support turns on “the function served by the
obligation at the time of the divorce.”37 The function the obligation serves is examined by
“considering the relative financial circumstances of the parties at the time of the divorce.”38
Here, the function of the Equalization Payment to Ivan was intended to offset the award of the
Marital Residence to Oleksandra. The Equalization Payment is not in the nature of support
because Ivan’s income was substantially greater than Oleksandra’s. Additionally, in a
subsequent hearing regarding Oleksandra’s failure to make the Equalization Payment, the
Divorce Court stated, “Respondent [Oleksandra] was awarded the [Marital] Residence pursuant
to the [Divorce] Decree, subject to equalization payment due to Petitioner [Ivan] in the amount
of $55,000.”39 Therefore, Oleksandra’s obligation to make the Equalization Payment to Ivan is a
property settlement obligation.

Ivan holds an in rem judgment lien interest
in the Marital Residence under the Divorce Decree


A judicial lien is a “lien obtained by judgment, levy, sequestration, or other legal or
equitable process or proceeding.”40 In 1988, the United States Court of Appeals for the Tenth
Circuit held in Maus that an ex-spouse debtor could avoid her ex-spouse creditor’s judicial lien

37 In re Sampson, 997 F.2d at 725–26 (quoting In re Gianakas, 917 F.2d 759, 763 (3d Cir. 1990)).
38 In re Sampson, 997 F.2d at 726.
39 Doc. 41-5 ¶ 2, at 1.
40 11 U.S.C. § 101(36).


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on her homestead under § 522(f)(1).41 However, in 1991, the Supreme Court of the United
States in Farrey v. Sanderfoot42 abrogated Maus. The Court in Sanderfoot held that the ex-
spouse creditor’s lien could not be avoided under § 522(f)(1) because § 522(f) permits the debtor
to “avoid the fixing of a lien” and in Sanderfoot, the lien did not attach to the debtor’s interest in
the property.43 However, Sanderfoot also explains that the fixing question is a state law concern
and Sanderfoot follows Wisconsin law. In Kansas, the Hilt court held that the divorce decree at
issue granted debtor’s interest in the homestead contemporaneously with the lien given to the ex-
spouse creditor to equalize the distribution of property. Furthermore, Hilt followed Sanderfoot
in explaining that “when a divorce court grants one party the homestead and the other a
compensating lien by decree, state law determines whether the fixing of the lien has occurred.”44

In Kansas, courts have recognized the ability of the Divorce Court to impose a lien on a
homestead and allow the sale of the homestead to enforce the lien,45 ensuring the equitable
division of marital property.46 Furthermore, “[t]he divorce, and the adjustment of property
interests[] are not to be regarded as transpiring at different times, but as contemporaneous.”47 In
Kansas, a divorce decree operates simultaneously with the related judgment liens to affect the

41 In re Maus, 837 F.2d 935 (10th Cir. 1988).
42 Farrey v. Sanderfoot, 500 U.S. 291 (1991).
43 Emphasis added.
44 In re Hilt, 175 B.R. 747, 750 (Bankr. D. Kan. 1994).
45 Blankenship v. Blankenship, 19 Kan. 159 (1877). See also Bohl v. Bohl, 234 Kan. 227 (1983) (holding


that a homestead may be sold to satisfy a judicial lien arising from a debt for alimony or property division).

46 In re Hilt, 175 B.R. at 754.

47 In re Hilt, 175 B.R. at 754 (quoting Brandon v. Brandon, 14 Kan. 342, 345 (1875)).

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parties’ rights.48 Here, Oleksandra’s interest in the Marital Residence arose simultaneously with
the lien securing the Equalization Payment.49 The Divorce Court awarded the Equalization
Payment and accompanying lien to Ivan to equalize the distribution of marital assets in a just and
reasonable manner. Accordingly, Ivan holds what appears to be an unavoidable judgment lien
that created an in rem interest in the Marital Residence to the extent of the award of the
Equalization Payment and related interest, but not attorney’s fees.50 Ivan’s judgment lien
remains enforceable against the Marital Residence because the Marital Residence was awarded
to Oleksandra subject to the Equalization Payment and judgment lien.

There is not a reasonable likelihood that Oleksandra could propose a confirmable plan.
Oleksandra’ petition indicates an average monthly income of $1,004.56 with $895 in average
monthly expenses for a net monthly income of $109.56. Her plan proposes making $100
monthly payments for 48 months. Furthermore, her proposed plan does not provide for
treatment of Ivan’s secured judgment lien. Thus, Ivan’s motion for relief from the automatic
stay is granted for cause under § 362(d)(1) because there is not a reasonable likelihood
Oleksandra could propose a confirmable plan based on her income and projected plan payments.

CONCLUSION

Oleksandra’s obligation to satisfy the Equalization Payment is a dischargeable property

48 In re Hilt, 175 B.R. at 754.

49 See Doc. 40-1, supra note 7.

50 “Congress did not aim § 522(f)(1) at judicial liens created to equalize divorce property divisions.” In re
Hilt, 175 B.R. at 754. Regardless, Oleksandra has not attempted to avoid Ivan’s lien under § 522(f)(1), an action
that may very well be an exercise in futility.

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settlement obligation under § 523(a)(15).51 Ivan holds an in rem interest in the Marital
Residence.
IT IS ORDERED that Creditor Ivan Kepych’s objection to confirmation of Debtor
Oleksandra Okrepka’s chapter 13 plan is GRANTED.
IT IS FURTHER ORDERED that Debtor’s objection to Creditor’s Claim 8-1 is DENIED
as to the secured status of Creditor’s claim.
IT IS FURTHER ORDERED that Creditor’s motion for relief from the automatic stay to
proceed in rem is GRANTED.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
51 Assuming that Oleksandra receives a discharge under § 1328(a).
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09-06172 Yoder v. Long (Doc. # 121)

Yoder v. Long, 09-06172 (Bankr. D. Kan. Dec. 1, 2013) Doc. # 121

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 1st day of December, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


ADAM R. LONG,
Debtor. Case No. 09-23473

JAMES J. YODER,
Plaintiff,

v.
ADAM R. LONG,
Defendant.

Adv. No. 09-6172

NUNC PRO TUNC MEMORANDUM OPINION AND ORDER ON PLAINTIFF’S
COMPLAINT AND DEFENDANT’S MOTION FOR SANCTIONS

At issue before the Court is whether the debt in the amount of $912,0001 owed to James

J. Yoder (Plaintiff) by Adam R. Long (Debtor and Defendant) should be classified as
1 $912,000 is the debt balance with accrued interest on October 16, 2009, the date on which Defendant filed
this bankruptcy. The original debt was for loans that totaled $500,000. The Court calculates the debt based on simple
interest of 30 percent per annum on $500,000 prorated through the petition date.

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nondischargeable under 11 U.S.C. § 523(a)(2)(A);2 whether judgment should be entered in this
amount in favor of Plaintiff against Defendant; whether discovery sanctions should be imposed
on Plaintiff for his alleged failure to comply with the Court’s Order of February 15, 2013; and
whether Defendant’s motion for directed verdict should be granted. Having read the briefs and
considered the evidence presented at trial on February 20 and February 25, 2013, the Court finds
that $285,000 of the original debt is not dischargeable as money or an extension of credit
obtained by false pretenses, a false representation, or actual fraud. The Court finds that
$215,000 of the original debt is not dischargeable as an extension, renewal, or refinancing of
debt obtained by false pretenses, false representation, or actual fraud. The Court finds the
balance due on the original debt, with accrued interest, on the bankruptcy petition date in the
amount of $912,000 is excepted from discharge and enters judgment in Plaintiff’s favor against
Defendant in this amount.

The Court considers Defendant’s Motion for Sanctions and oral motion for a directed
verdict.3 The Motion for Sanctions arises out of a discovery dispute that has been ongoing since
the status conference on August 3, 2011. The issue is whether Plaintiff violated Rule 26 of the
Federal Rules of Civil Procedure by refusing to provide copies of certain email conversations
which were later uncovered by searching Plaintiff’s laptop and email accounts. For the reasons

2 All future references to a Code section, without more, are to the United States Bankruptcy Code, 11

U.S.C. §§ 101 et seq.
3 Defendant included a motion for sanctions in his trial brief (Doc. 109). He filed a supplemental motion
for sanctions on March 11, 2013 (Doc. 114), and moved orally for a directed verdict at the trial. The Court treats
Defendant’s motion for directed verdict as one for judgment on partial findings under Fed. R. Civ. P. 52(c).

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set forth below, the Motion for Sanctions is granted in part. The Court took under advisement
Defendant’s oral motion for directed verdict made at trial. Pursuant to Rule 52(c) of the Federal
Rules of Civil Procedure, the Court declines to render judgment on the partial findings and
defers to the statement of facts and conclusions of law below to fully set out the Court’s
judgment.

JURISDICTION

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C.
§ 1334(b). Reference to the Court of this proceeding is appropriate under 28 U.S.C. § 157(a)
and Standing Order No. 13-1 of the United States District Court for the District of Kansas. This
case is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The parties have stipulated to the
jurisdiction of this Court.4

FINDINGS OF FACT

At the time of trial, Defendant was 33 years old. He lived in California and worked as a
broker for Ayre Investments. Defendant grew up in the Kansas City metropolitan area and was
junior high school and high school classmates with Plaintiff’s son, Jay Yoder, though they were
not close friends. Plaintiff helped coach Defendant in eighth grade football. Plaintiff’s son, Jay
Yoder, lived with Defendant briefly in 1997 while the two lived in Florida. In 2000, Defendant
moved back to the Kansas City metropolitan area. In 2003, Defendant, after meandering through
the halls of tertiary education, graduated with a degree in business administration from the

4 Doc. 100.

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University of Kansas with a GPA in the 3.6 to 3.7 range. That same year, Defendant briefly
worked for Waddell and Reed as a financial advisor. Later in 2003, Defendant went to work for
Wells Fargo Financial. Defendant worked for Wells Fargo for nine months where he sold
consumer finance products, including home loans. Defendant did not close the consumer loans,
but he did understand that the home loans were secured by a mortgage, and he understood the
difference between secured and unsecured debts. By the time he was 24 years old, Defendant
was the most successful originator in his Wells Fargo office. After nine months, he was
promoted to a position in the Wells Fargo Home Mortgage Division, which provided subprime
loans to less qualified applicants. These subprime loans were higher risk loans, which also
carried a higher interest rate. Defendant did not handle the preparation of the closing documents
or handle the closing of these loans, because it was the policy of Wells Fargo not to involve sales
people at loan closings. Defendant testified that he worked at Wells Fargo in different capacities
for approximately two years.

Starting in 2004, Defendant engaged in a business relationship with two other people
with whom he purchased and rehabilitated Kansas City area homes and sold those homes at a
gross profit of approximately $150,000 each. This practice is commonly known as flipping or
rehabilitating houses for quick resale. Initially, this was a part-time venture for Defendant. In
2005, Defendant joined First National Mortgage Services (First National) where he brokered
loans. He worked at First National until mid to late 2006. He understood that he was selling
secured loans that required a mortgage or a deed of trust to secure the money loaned. In 2004,
Defendant flipped or turned 30 to 100 properties. Many of these properties were lower in value,

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and some were vacant lots on which a new home was constructed. Defendant soon ventured into
the sale of higher value properties. It was common practice for lenders to finance 100 percent of
the property purchase price and, in some instances, to loan additional funds that were used to
rehabilitate, renovate or build residential properties. In all of these transactions, Defendant was
personally involved and signed the closing documents, including the notes and mortgages.5
Defendant also had considerable experience in originating home loan financing. Despite this
expertise, at trial Defendant maintained that it was a promissory note, and not a mortgage, that is
filed with the appropriate local authorities to perfect a lien for a real estate loan. This testimony
is not credible and is inconsistent with other evidence adduced at trial. Defendant urges this
Court to find a lack of sophistication that is incongruous with his talents, business experience,
and acumen.

During the middle of 2006, Plaintiff, his son Jay, and Defendant all lived in the Kansas
City metropolitan area.6 In April or May of that year, Plaintiff and Jay encountered Defendant at
a bar at which time the acquaintance between the parties was renewed. Although this was a
social meeting, there were discussions regarding their work, and Defendant indicated to Jay that
he was fully engaged in the business of flipping houses in Kansas City. There was discussion

5 As to transactions in Missouri, a deed of trust is used in lieu of a mortgage; however, the function of both
security documents is essentially the same, which is to secure the amount loaned with real property. Since the
Kansas City metropolitan area straddles the Kansas-Missouri state line, these terms are used interchangeably.

6 The Kansas City metropolitan area, including adjacent suburban developments in Kansas and Missouri,
has approximately 2 million people. References to Kansas City include the entire metropolitan area.

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that Plaintiff had recently retired7 and that he might wish to participate in Defendant’s enterprise.
Defendant testified that this meeting and subsequent meetings were his financial “courtship” of
Plaintiff. Various witnesses testified that there were anywhere from five to fifteen subsequent
meetings between Defendant and Plaintiff between April and November of 2006. Although
these meetings were generally considered social, there were discussions of Defendant’s house
flipping business and Plaintiff’s possible involvement in the business. Defendant described the
early meetings between the two as relationship building with an eventual progression to more
specific discussions regarding Defendant’s business. During November and December 2006, a
nascent business relationship formed.

Plaintiff’s prior real estate investments were mostly personal in nature, although he did
purchase a restaurant in Canada for his son to manage, a restaurant and bar in Mexico, and real
estate investment trusts. Plaintiff’s other investments were extensive and primarily focused in
the aircraft industry, equities and financial instruments, not the purchase of real property.8
Plaintiff’s testimony established that he is a relational investor–that is, he develops a relationship
of trust between himself and other parties to the investment or transaction.9 He relies upon the

7 During the middle of December 2006, an aircraft industry company in which Plaintiff held an equity
interest was sold to a Fortune 500 company. From the sale, Plaintiff received net proceeds of approximately $10
million.

8 Plaintiff’s involvement in real estate was as an investor, not as a lender; here, he is a lender.

9 Relational investing is not new. For instance, in 1901, Carnegie and Rockefeller agreed to the sale of the
United States Steel Company during a short meeting in the latter’s parlor. The price was established when
Rockefeller wrote a figure between $250 million and $500 million on a piece of paper and Carnegie accepted. That
sum was the purchase price. The transaction created the largest company in the United States at the time by market
capitalization. Similarly, in 1983, Warren Buffett (“The Oracle of Omaha”) purchased what would become Nebraska
Furniture Mart after a brief glance at an unaudited financial statement. Mr. Buffett commented: “I had no worries.

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integrity and honesty of the other participant in the financial transaction or investment. Plaintiff
is a successful investor, and his approach has served him well.

In November 2006, the parties reached an agreement in principle in which Plaintiff
would loan $500,000 to bolster Defendant’s house rehabilitation business, and the loan would
carry a 30 percent interest rate. Plaintiff testified that he would not have the funds from the sale
of his business venture until December 2006, so the initial agreement was that the entire
investment would be made in January 2007. In December 2006, the parties met again and
discussed the details of the loan. At this meeting, Defendant asked Plaintiff, “You want security
for this [the loan]?” Plaintiff stated that he did. Either at this meeting, or at a separate meeting
sometime in December, Defendant requested an advance of $200,000 on the loan. On December
2, 2006, Plaintiff agreed to loan Defendant $200,000 as an advance. At this time, no promissory
note or mortgage was signed by the parties. The testimony is unclear whether the parties agreed
to collateralize the loan when the $200,000 advancement was made. On January 18, 2007,
Plaintiff loaned Defendant an additional $285,000. At this time, the parties signed a promissory
note for $500,000 (“Note”).10 The Note states, “THIS PROMISSORY NOTE shall be secured
by a Mortgage, filed of record, on the property located at 1000 W. 66th Terrace, Kansas City,

Mrs. B. [the seller] told me what was what, and her word was good enough for me.” Sam Ro, Warren Buffett Once
Bought a Company from an Uneducated Russian Immigrant after Glancing at her Unaudited Financial Statements,
BUSINESS INSIDER (March 1, 2014 9:15 AM)
http://www.businessinsider.com/warren-buffett-on-nebraska-furniture-mart-2014-3.

10 The $500,000 loan includes the $200,000 initial advance, the $15,000 interest for the advance, and the
additional $285,000 loan in January 2007. Thus, the initial advance of $200,000 plus the $15,000 interest payment
were rolled over into the $500,000 Note.

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Missouri 64113.”11 Prior to the Note, Defendant showed Plaintiff the property on 1000 W. 66th
Terrace (Property) and told him that there was $1,000,000 of equity in the Property and that
Plaintiff’s $500,000 loan would be protected by a mortgage in the Property. Plaintiff justifiably
relied upon this material misrepresentation by Defendant. This conversation occurred prior to
the distribution of the second portion ($285,000) of the loan and renewal of the initial loan.
Plaintiff did not ask Defendant if there were any encumbrances against the Property (there were
lien balances totalling $920,180), and Defendant did not volunteer this information to Plaintiff.
Despite the agreement between the parties to secure the loan with a mortgage, such a document
was never prepared, signed, or recorded by Defendant. Plaintiff relied upon Defendant to
accomplish this task.

The Note signed by the parties was drafted by an attorney, Barry McCormick.12
McCormick was Plaintiff’s friend who occasionally provided legal assistance to Plaintiff.
During the discussions between Plaintiff and McCormick during December 2006 and January
2007, the two were in mutual understanding that the Note would be secured by a Deed of Trust.
Plaintiff did not ask McCormick to draft a deed of trust for him because Plaintiff and Defendant
had agreed that Defendant would provide the document and record it because of Defendant’s
vast experience in the real estate area. The evidence demonstrates that Defendant represented
that he would provide a mortgage, and that the mortgage would fully secure the Note. Plaintiff’s
attorney, Barry McCormick, observed that with respect to the Note, Plaintiff was interested in

11 Defendant’s Trial Exhibit C; Plaintiff’s Trial Exhibit 1.
12 Defendant’s Trial Exhibit SS, McCormick Deposition at 8-13.


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some sort of security,13 but Plaintiff did not ask McCormick to draft a mortgage because
Defendant had done so before and was knowledgeable in real estate. McCormick also observed
that Plaintiff was “sophisticated enough to know that he would want some sort of security for a
loan of this size.”14 McCormick was referring to the Note—hence, the reference to a mortgage
in the Note prepared by McCormick and Plaintiff’s reliance on Defendant to prepare and file the
mortgage.

At trial, Bernie Shaner, Defendant’s appraiser (Appraiser), testified that the Property was
appraised in 2006 at $1,500,000 once renovations were complete.15 At the time of the initial loan
to Defendant by Plaintiff, only 50 percent of the renovations were complete. Although
Defendant knew that this value assumed many events which had not yet transpired and did not
disclose the liens on the Property, he represented to Plaintiff that there was sufficient equity to
secure the Note.

Unknown to Plaintiff, at the time the Note was signed, Defendant had already granted
two deeds of trust to commercial lenders against the Property totaling $920,180. During the
months following the signing of the Note, Defendant repeatedly assured Plaintiff that a mortgage

13 Defendant’s Trial Exhibit SS, McCormick Deposition at 12-13.

14 Id. at 13:23-14:2.

15 Even if Appraiser’s testimony were accurate as to value, the ultimate sale price and net proceeds
therefrom are an entirely different matter. Closing costs, even at a five percent real estate commission, on a $1.5
million sale would quickly approach $100,000. At the time Defendant showed the Property to Plaintiff and prior to
the Note, there already existed total principal owed of $920,180 secured by two mortgages against the Property.
This was quickly followed by the further encumbrance of the Property with additional financing liens. The aggregate
principal balance secured by the liens against the Property by June 18, 2007, was $1,345,350. This was five months
after the Note was effected.

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in his favor had been recorded on the Property to secure the Note. Between January and July
2007, Plaintiff and Defendant met on at least ten occasions. Each time Plaintiff asked for a copy
of the mortgage, and each time Defendant assured him that it was recorded and that he would
send a copy. Jaime McNeil, Defendant’s girlfriend at the time, was also well-versed in real
estate transactions. She testified in her deposition, admitted into evidence at trial, that Defendant
acknowledged that he needed and was supposed to file a mortgage in favor of Plaintiff to secure
the Note, but that Defendant wanted to wait until after Defendant had refinanced the original
deed of trust.16 Jaime McNeil’s testimony supports this Court’s finding that Defendant
understood when he borrowed money from Plaintiff, a mortgage needed to be filed to secure the
debt. This also supports the conclusion that Defendant misrepresented to Plaintiff that the
mortgage had been filed and that he had intended to file a mortgage to protect Plaintiff and to
secure the obligation with equity in the Property.

In June 2007, Defendant refinanced the Property and borrowed an additional $355,350
against it, bringing the total amount of liens on the Property at that time to $1,345,350. To the
detriment of Plaintiff, Defendant used the Property as a credit card to generate cash. Although it
is not determinative whether equity actually existed in the Property at the time the Note was
executed, Defendant eviscerated any alleged equity over the following five months. Whether
equity existed or did not exist at the time of the Note, Defendant falsely represented that there
was sufficient equity in the Property to fully secure the Note and that a mortgage would be filed.

16 Defendant’s Trial Exhibit, Deposition of Jaime McNeil at 28-29. McNeil also assisted Defendant with
his accounting books (id. at 8); she moved into the Property with Defendant in spring 2007 at which time the
renovations were 98-99 percent complete (id. at 13).

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Defendant never intended to prepare and record a mortgage to secure the Note.

During the summer of 2007, Defendant approached Plaintiff to borrow an additional
$500,000. Plaintiff refused unless he received proof that the Note was secured. When such
proof was not forthcoming, Plaintiff refused to lend any additional money to Defendant. The
communications from Plaintiff demonstrate that he was surprised and distressed when he learned
the Note was not secured.

By July 2007, Defendant had refinanced the deeds of trust that encumbered the Property
and Plaintiff had discovered that a mortgage to secure the Note neither existed nor was filed.17
Defendant offered alternative security by granting a mortgage in some of Defendant’s other
properties during late 2007 to early 2008. However, Plaintiff’s accountant, Bill O’Connor
(Accountant), researched the alternative properties and found that none had sufficient equity to
secure the Note. Plaintiff called the Note due. As the housing market collapsed, Defendant was
not able to pay the Note. Plaintiff filed suit against Defendant in state court shortly thereafter.
That case is stayed pending the outcome of Defendant’s bankruptcy case.

Defendant is astute, intelligent, and articulate. Unfortunately, much of his testimony is
not believable. At the time of the Note, Defendant was quite experienced in real estate purchases
and finance. His testimony, and portions of the record, are riddled with examples of his lack of
credibility, such as:

(1) That he did not understand that a mortgage is necessary to secure a loan on real estate.
17 In addition, Defendant had added another $355,500 in deed of trust debt to the Property.

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(2)
That neither Plaintiff nor his son Jay contacted him until July 20, 2007, regarding the
recordation of a mortgage to secure the Note. Plaintiff credibly testified that he had at
least five to ten conversations with Defendant beginning in January 2007 through July
2007 regarding whether a mortgage had been recorded and in which Defendant insisted
that a mortgage had been recorded. Some of these conversations were in person, such as
a meeting in Montreal, Canada, as well as two instances in which Plaintiff flew to Kansas
City to meet with Defendant during the spring of 2007. Of course, there was not a
mortgage to record. A number of these conversations were overheard by Kimberly
White, Plaintiff’s girlfriend at the time.18 In her deposition, she testified:
Well, I was there for a lot of the business discussions. There was twice inside the
condo of 1602 that I heard them discuss business and Adam [Defendant] boldfaced
tell Jim [Plaintiff] that he had the properties recorded. There was one time
on the balcony in 1602, outside, and once in his Porsche Cayenne on the way to
Avenues Bistro.19

(3)
That he did not understand the basic aspects of a real estate transaction, a note and a
mortgage. Defendant’s experience in the subprime lending industry and his success in
that industry establish sophistication that belies his assertion.
(4)
That Defendant did not understand a mortgage was necessary to secure a real estate loan
when he granted no less than five mortgages on the Property via initial lending and
additional financing. When the last mortgage on the Property was filed on June 18, 2007,
18 Defendant’s Trial Exhibit VV, Deposition of Kimberly White at 12-13.

19 Id. at 12:19-25.

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the total principal due on the Property debt was $1,345,350.

(5)
That only in hindsight does he realize that on the many properties on which he borrowed
money, he signed mortgages because he did not pay attention to what he was signing.
(6)
That Defendant looked at the Note for five minutes and did not realize that the language
of the Note required that the debt be “secured,” despite language in the second paragraph
of the first page that the “NOTE shall be secured by a Mortgage, filed of record, on the
property located at 1000 W. 66th Terrace, Kansas City, Missouri 64113.”20
(7)
That Defendant was unaware the Note was to be secured when Plaintiff and Defendant
discussed security for the loans more than one month prior to the effectuation of the
Note.
(8)
That Defendant told Plaintiff that the Note’s security interest would be subject to
“permanent financing” on the Property, but then proceeded over the next five months to
add $355,500 in debt secured by the Property. A portion of this additional debt secured
by the Property was associated with the costs of renovation.
In reality, Defendant understood at the time the Note was effected that the Note was to be
secured by an interest in the Property but did not undertake the creation, execution, or filing of a
mortgage in any real property and, in particular, in the Property. Defendant falsely represented
and stated intentions that the Note would be fully secured by real estate. Defendant purportedly
considered Plaintiff a good friend, yet did not undertake any measure to assure Plaintiff was

20 Defendant’s Trial Exhibit C.

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protected on the Note. Defendant referred to himself as a member of Plaintiff’s family.
Kimberly White, Plaintiff’s girlfriend at the time, echoed this sentiment. She further commented
that:

I can just be vague and say that Adam [Defendant] was constantly at our place, is
very friendly. It was like family. You know, they–Jim [Plaintiff] and–I mean Jay
[Plaintiff’s son] and him had been old lost friends. You know, they were
reconnecting. You know, Jim, you know, treated him like a son. So–and I want
that on the record that we were–we were very fooled. It’s like having your own
son, you know, steal money from you.21

On July 20, 2007, Defendant sent an email to his assistant with a request regarding the

filing of Plaintiff’s non-existent mortgage (“Email”) that stated in part:22
Melinda,
Back in February, I gave you the note for Jim Yoder’s loan. You were supposed

to have it filed with Coffelt title after I had Heartland bank paid off. Did you ever

take that note to them?
Please let me know as soon as possible. It looks like Coffelt did not record this
and Jim is very upset about it.


Adam


The Email was sent after Defendant had encumbered the Property in the principal sum of
$1,345,350. This Court does not believe the substance of the Email. The Email was constructed
to establish the false impression that Defendant believed that a mortgage had been filed. The
Email refers to the filing of the Note, continuing the ruse that Defendant believed that a note and

21 Defendant’s Trial Exhibit VV, Deposition of Kimberly White at 19:2-10.

22 Plaintiff’s Trial Exhibit 8.

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not a mortgage should be filed. Defendant had been asked many times by Plaintiff for a copy of
the mortgage, which Defendant assured Plaintiff he possessed, and Defendant assured Plaintiff
that he would send a copy of the mortgage to Plaintiff. Defendant maintained that he had
possession of the mortgage and that “his girl” had filed it. All that Plaintiff had in his possession
was a copy of and not the original Note. This Court does not believe the content of the Email,
and the Email actually reinforces this Court’s conclusion that Defendant’s testimony is
contrived. Defendant is attempting to blame a secretary for his failure to secure the Note.

Before the Note was effectuated, Defendant showed Plaintiff approximately 15 real
properties and alleged that equity in these properties was also a component of the lending.
Defendant asserted that equity in the real properties, in particular the equity in the Property,
would be sufficient to collateralize and fully secure the Note. At the time the Note was signed,
Defendant had already granted two deeds of trust in the Property in the amount of $920,180. In
order for Plaintiff to have been fully secured, the Property needed to be worth more than the
asserted value of $1,490,000. When the Property was eventually sold in July 2008, the purchase
price was only $673,000 and there was no indication that it was ever worth much more than that.

The Accountant testified that through June 2007, Defendant told him Plaintiff was
secured.23 The Accountant understood that the Note was fully secured by equity in the Property
and that there was back up collateral available.24 Also, the Accountant’s knowledge five months

23 Defendant’s Trial Exhibit TT, Deposition of William O’Connor at 101:13-19.
24 Id. at 107:19-25 and 108:7-12.


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after the Note was executed does not reflect Plaintiff’s knowledge at the time the Note was
executed. The Accountant did not review the transaction until after the Note, and he did not
participate in the original transaction because Plaintiff believed there was sufficient equity in the
Property.25 The Accountant’s testimony is consistent that it was Plaintiff’s impression that the
Note was fully secured. During the summer of 2007, the Accountant discussed with Defendant
the latter’s request that Plaintiff loan another $500,000 to Defendant; however, the Accountant
sought assurances that there was sufficient equity in the Property to collateralize the Note and
any additional contributions. Once Plaintiff realized that the Note was not collateralized, which
rendered the existence of equity irrelevant, he refused to loan additional funds to Defendant
absent full collateralization and because his faith in Defendant’s representations had evaporated.
Defendant makes much of the Accountant’s email to Plaintiff dated July 20, 2007,26 to argue that
the relationship between Plaintiff and Defendant was not that of lender/borrower, but that of
partners. This email states in part:

In essence, you [Plaintiff] are Adam’s [Defendant’s] partner in the deal and the

30% is a partner-like return, but Adam needs to drastically improve partner

communication style and communicate what collateral really backs up your note

(and how the liquidity/cash flow will work from prop sales of all types) to re


build any confidence.
This email was sent by the Accountant to Plaintiff and is dated July 20, 2007, well after the
relationship between the parties had deteriorated during the summer of 2007. The Court gives

25 Id. at 77:13 to 78:6.

26 Defendant’s Trial Exhibit K.

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no weight to the Accountant’s offhand remark27 that Plaintiff and Defendant were in essence in a
partnership. This is a legal conclusion to be decided by this Court. The facts of the case have
established that Plaintiff and Defendant were in a lender/borrower relationship when Plaintiff
loaned $500,000 to Defendant as evidenced by the Note. To the extent that it is relevant at all,
the Accountant’s comment in the email is incorrect. The Accountant also testified that he did
not consider Plaintiff’s loan to Defendant to create equity in the Property or an unsecured
position; to the contrary, the loan was to be made as a secured position with equity in the
Property. The other real property was to serve as backup collateral for liquidity.28 This
understanding was conveyed to the Accountant by Defendant on January 22, 2007, four days
after the Note was executed. The Accountant considered Defendant an expert or a professional
in the mortgage industry, and Defendant indicated to the Accountant that Plaintiff had a secured
collateral position in the Property.29 The Accountant’s email also reflects that over one-half of
Plaintiff’s initial $500,000 investment was paid as a deposit for 30 inner-city duplexes.
Defendant’s investment in this larger multi-family development further reflects a high level of
real estate investment sophistication. Regarding these post-transaction communications with
Defendant, the Accountant stated:

I think, you know, my interpretation of what Adam [Defendant] had told me was

27 Defendant’s Trial Exhibit TT, O’Connor deposition at 93:19-25. This observation by the Accountant
reflected his assessment that Plaintiff held a note without “clear collateral value” and that Plaintiff would have to
recover on the Note through alternative means or by becoming an equity partner.

28 Id. at 106:3-24.

29 Id. at 108:7-12.

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that there was sufficient equity in 1000 West 66th to collateralize Mr. Yoder’s

[Plaintiff’s] loan, and if there was not there was additional collateral, standby

sources, that would back that up that would provide a secondary and tertiary

provision of collateral to secure that note.30

The Accountant learned that the Property may have been encumbered by a lien that
predated the Note, although this knowledge was obtained after effection of the Note, and his
understanding from Defendant was that the Note was fully collateralized. This evidence does
not establish that Defendant did not represent to Plaintiff that the Note would be fully secured or
that Defendant revealed to Plaintiff that the Property was already encumbered. The
Accountant’s conversations with Plaintiff and Defendant during the January 2007-summer 2007
period were consistent with the Note being collateralized.31 Regardless, there is no credible
evidence that the existence of encumbrances on the Property was communicated to Plaintiff;
what was communicated was that there was significant equity in the Property that was sufficient
to collateralize the Note.

Email communications between the Accountant and Plaintiff also reflect Defendant’s
desperate attempts during the summer of 2007 to borrow another $500,000 from Plaintiff as the
business scheme unraveled. Plaintiff, having discovered that the initial $500,000 loan was not
secured, was distressed with the situation and unwilling to loan additional funds absent full
collateralization. An email from Defendant to the Accountant32 reflects the contours of the

30 Id. at 107:19 to 108:1.

31 Id. at 115-118, 120.

32 Defendant’s Trial Exhibit P.

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relationship on July 23, 2007:

Just to follow up with our conversation, you are coordinating with Jim [Plaintiff]
and his attorney, correct? I need to know by mid day tomorrow at the latest if he
intends to go forward with the next 500k. If not, I am flying another money guy
in and putting him up for a few days to take his place. Don’t want to do it but he
leaves me no choice here. Hopefully he cools down today.

An email dated August 1, 2007,33 from Plaintiff to Defendant reflects in part Plaintiff’s

understanding of the relationship with Defendant:

All I am saying is what I have said all along. I will give you money, but I have to
be completely collateralized in a first position. I cannot take any chances on
losing my money. I am better off in a Raymond James fund paying 15% than
with you paying 30% if I am not protected.

Following these business practices, Defendant’s business enterprise unravelled. When

the housing bubble collapsed in 2008 and the “Great Recession” ensued, Defendant’s scheme

imploded.

ANALYSIS

I.
Defendant’s debt to Plaintiff in the amount of $912,000 is not dischargeable under
§ 523(a)(2)(A).
Plaintiff’s dischargeability claim against Defendant arises from 11 U.S.C. § 523(a)(2)(A).
Section 523(a)(2)(A) provides:

(a) A discharge under section 727 . . . of this title does not discharge an individual debtor
from any debt–
. . .


(2) for money, property, services, or an extension, renewal, or refinancing of
credit, to the extent obtained, by–
(A) false pretenses, a false representation, or actual fraud, other than a
33 Defendant’s Trial Exhibit Q.

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statement respecting the debtor’s . . . financial condition . . . .

The analysis under this section “begins ‘with the recognition that exceptions to discharge
are narrowly construed, and because of the fresh start objectives of bankruptcy, doubt as to the
meaning and breadth of a statutory exception is to be resolved in the debtor’s favor.’”34
However, the Code “has long prohibited debtors from discharging liabilities incurred on account
of their fraud, embodying a basic policy animating the Code of affording relief only to an ‘honest
but unfortunate debtor.’”35

Section 523(a)(2)(A) requires a creditor to meet the following factors to except a debt
from discharge: (1) the debtor made a false representation; (2) the debtor made the representation
with the intent to deceive the creditor; (3) the creditor relied on the representation; (4) the
creditor’s reliance was justifiable; and (5) the debtor’s representation caused the creditor to
sustain a loss.36 Under this section, the debtor’s intent to deceive must be subjective and “may
be inferred from the totality of circumstances, or ‘from a knowingly made false statement.’”37
Whether a creditor justifiably relied on a debtor’s statement is also subjective.38 To discern
whether a creditor’s reliance is justifiable, courts should “examine ‘the qualities and

34 Bartley v. Jacobson (In re Jacobson), 485 B.R. 255, 261 (Bankr. D. Kan. 2013) (quoting DSC Nat’l
Properties, LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (B.A.P. 10th Cir. 2012)).

35 Cohen v. De La Cruz, 523 U.S. 213, 217 (1998) (citation omitted); see also Grogan v. Garner, 498 U.S.
279, 286 (1991) (“[A] debtor has no constitutional or ‘fundamental’ right to a discharge in bankruptcy.”).

36 In re Jacobson, 485 B.R. at 261.

37 Id. (quoting Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10th Cir. 1996)).

38 See Field v. Mans, 516 U.S. 59, 76 (1995).

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characteristics of the particular plaintiff, and the circumstances of the particular case, rather than
[applying] a community standard of conduct to all cases.’”39

The exception to discharge under § 523(a)(2)(A) does not include oral statements
respecting the debtor’s financial condition,40 which are subject to § 523(a)(2)(B) for false
statements “that purport to present a picture of the debtor’s overall financial health.”41
Statements that meet this definition include: “those analogous to balance sheets, income
statements, statements of changes in overall financial position, or income and debt statements
that present the debtor or insider’s net worth, overall financial health, or equation of assets and
liabilities.”42 These statements do not necessarily need to be as formal as a balance sheet,
income statement, or statement of net worth, but the statements must refer generally to the
financial position of Defendant. Oral statements regarding specific assets are not included in this
exception and therefore do not prevent a debt from being nondischargeable under
§ 523(a)(2)(A).

Here, Plaintiff seeks relief under § 523(a)(2)(A) and alleges Defendant made false
representations to Plaintiff with intent to deceive, upon which Plaintiff justifiably relied and
which caused Plaintiff loss. Defendant told Plaintiff that the Note would be secured and that the

39 Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 792 (10th Cir. 2009), quoting Field v. Mans, 516

U.S. at 71.
40 See § 523(a)(2)(B). Cadwell v. Joelson (In re Joelson), 427 F.3d 700, 714 (10th Cir. 2011).

41

Id. at 707.

42

Id. at 714.

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security for the Note would be not only the Property, but also other real property Defendant
owned would be backup collateral. Defendant represented to Plaintiff that the collateral for the
Note was sufficient to fully secure the Note. The statement by Defendant that the Note would be
secured by any of the property he owned specifically refers to the ability to secure the Note, not
to Defendant’s general wealth. This is similar to the facts in In re Joelson where the Tenth
Circuit held that a defendant’s statement that he would be able to obtain financing from his
brother was not a statement about his overall financial condition because it was a statement
about “one part of Joelson’s income flow.”43 Here, the statement that Defendant would provide
all of his property as security referred to a collateral position to fully secure the Note and was not
a statement referring to Defendant’s overall financial health. At the time Defendant made these
representations to Plaintiff, Defendant knew the statements were false because he never intended
to secure the Note with a mortgage in the Property or in any other property owned by Defendant;
in addition, there was not sufficient equity in the Property to fully secure the Note even if the
mortgage were filed. What Defendant did do was to load up the Property with encumbrances
that eventually consumed any possible equity.

Defendant argues that the parol evidence rule prevents Plaintiff from claiming additional
terms to the agreement that were not expressly provided for in the contract. However, this
argument is unavailing. First, parol evidence is admissible for claims of fraud in the

43 Joelson, 427 F.3d 715.

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inducement.44 Second, the Note does not contain an integration clause. Third, the Note, which is
the contract at issue here, expressly states that the loan would be secured by a mortgage.
Because the Note is silent as to whose responsibility it was to file the deed of trust, parol
evidence is admissible to fill in the gap. Since it is necessary to consider evidence outside the
Note to determine what the parties intended when they included the condition that the Note be
secured by a mortgage, the Court may consider parol evidence.

The evidence establishes that Defendant made false representations with the intent to
deceive Plaintiff and to induce Plaintiff to loan money to Defendant. Plaintiff’s justifiable
reliance on these misrepresentations proximately caused the debt evidenced by the Note.
Defendant testified that he did not realize that a separate document was required to grant a
mortgage against a property. This testimony is inconsistent with Defendant’s education,
experience and knowledge, as well as his representations to Plaintiff. Defendant studied
business in college and then worked for several years in mortgage financing. Defendant stopped
selling secured real estate loans when his house rehabilitation business started to take off.
Defendant was involved extensively in the buying and selling of houses and other real estate,
which of necessity involved the collateralization of debt with mortgages. His claim that he did
not realize that a mortgage was necessary in addition to a promissory note to collateralize a real
estate loan is not believable. Instead, the testimony shows that Defendant made the
representations with the intent to deceive Plaintiff and to induce Plaintiff into lending money and

44 Pinken v. Frank, 704 F.2d 1019, 1022 (8th Cir. 1983); Ramada Franchise Sys., Inc. v. Tresprop, Ltd.,
188 F.R.D. 610, 614 (D. Kan. 1999).

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renewing credit. Defendant engaged in a scheme to dupe Plaintiff into loaning Defendant money

on an unsecured basis and with little real prospect for repayment. In Joelson, the Tenth Circuit

Court of Appeals affirmed the bankruptcy court’s finding that debtor’s debt to plaintiff was not

dischargeable under § 523(a)(2)(A). The facts in Joelson are similar to Defendant’s “courtship”

of Plaintiff and ultimate defrauding of Plaintiff:

[Plaintiff] is a single, retired man who lives in Casper, Wyoming. [Plaintiff] met
[debtor] at a café in Casper where she was working as a waitress. Around March
1996, [debtor] told [plaintiff] that she needed to travel to Scottsdale, Arizona to
check on a house that she owned and pick up her mother.

[Plaintiff] agreed to drive [debtor] from Casper to Scottsdale. While [plaintiff]
and [debtor] were in Scottsdale, someone gave [debtor] money. [Debtor]
represented to [plaintiff] that the money was rent for the house that she owned in
Scottsdale.

After [plaintiff] and [debtor] returned to Casper, [debtor] informed [plaintiff] that
she needed a loan of over $50,000 to save her Scottsdale home from foreclosure.
[Debtor] stated that her brother, Larry Oltman, would later loan her these funds,
and that as soon as Oltman did so, she would repay [plaintiff]. [Debtor] promised
that she would provide [plaintiff] with collateral to secure the loan and
represented that she owned residences in both Casper and Glendo, Wyoming; a
motel in Glendo; and a number of antique vehicles stored in Glendo. When
[plaintiff] asked to see the properties, [debtor] took [plaintiff] to Glendo and
showed [plaintiff] the inside of a house, the outside of another house and a motel,
and a storage facility in which the antique cars were allegedly housed. [Debtor]
also provided [plaintiff] with a list of the antique cars that she allegedly owned.

After he viewed the properties, [plaintiff] mortgaged his home and borrowed over
$50,000. [Debtor] gave [plaintiff] a promissory note, [FN1] and the two traveled to
Arizona, where they met with a lender’s representatives regarding the foreclosure.
In the course of these dealings, [plaintiff] learned that the Arizona property was
titled in the name of “Joelene M. Joelson.” However, [plaintiff] knew Debtor as
“Jeanne Joelson,” not “Joelene M. Joelson.” After Debtor told [plaintiff] that she
and “Joelene M. Joelson” were the same person, [plaintiff] advanced
approximately $54,000 to [debtor] to pay off the Deed of Trust.

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[Plaintiff]’s attempts to collect the loan have proved fruitless, as [debtor] has not
repaid the loan or forfeited collateral. [Debtor] has rebuffed [plaintiff]’s claims by
asserting that she never had an interest in the Scottsdale property and that the
funds that [plaintiff] gave to her in connection with that property were a gift.45

[FN1]. The promissory note is not part of the record, and there is no indication
in the opinions of the bankruptcy court or the BAP as to the note’s contents.
Thus, it is not clear whether all of the properties and the antique cars that
[debtor] said she owned were intended as collateral. However, we need not
determine what [debtor] listed as collateral in the note in order to resolve this
appeal. This is because we only need consider the fact that [debtor] made
representations as to her ownership of various properties and vehicles in order to
obtain a loan from [plaintiff].]

Here, the Court finds that Plaintiff relied on Defendant’s representations and that his
reliance was justifiable. The standard of justifiable reliance does not look to whether a creditor
reasonably relied on a debtor’s misrepresentations based on a community standard of reasonable
behavior. Instead, a creditor’s reliance is justifiable unless he could have ascertained the falsity
of the statements if he had “utilized his opportunity to make a cursory examination or
investigation.”46 However, this requirement does not go so far as to require a creditor to check
the courthouse for unsatisfied mortgages when a debtor claims that the property is free from
encumbrances.47 When a court is determining whether a creditor’s reliance was justifiable, the
court must also take into consideration the sophistication of the individual creditor. The less
reasonable a creditor’s reliance, the more difficult it is to prove reliance in fact.48 Furthermore,

45 Joelson, 427 F.3d 703.

46 Field v. Mans, 516 U.S. 59, 71 (1995) (citing RESTATEMENT (SECOND) OF TORTS § 545A, cmt. b
(1976)).

47 Field, 516 U.S. at 70 (citing RESTATEMENT (SECOND) OF TORTS § 540, Illustration 1).

48 See Field, 516 U.S. at 76.

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courts have held that a creditor’s reliance can become unjustifiable if he continues to lend money
after learning of facts that should have alerted him to the defendant’s fraud.49

Here, Plaintiff routinely made business deals based on his ability to ascertain the
character of those with whom he dealt.50 That strategy had served Plaintiff well. Plaintiff did
not lend money to Defendant until the two had met on several occasions to establish a
relationship. Although Plaintiff had significant financial resources, he lacked the technical savvy
that financial institutions and other real estate lenders have. Because Plaintiff acted pursuant to
his proven business strategy, and because he lacked the accounting savvy to perform the due
diligence that most banks would have done before lending such a large sum of money, the Court
finds that Plaintiff in fact relied on the false representations of Defendant and that his reliance
was justified. Moreover, after Plaintiff learned that Defendant never created or recorded a deed
of trust to secure the Note, Plaintiff refused to lend Defendant more money. This supports the
Court’s conclusion that Plaintiff justifiably relied on Defendant’s promise to secure the Note at
the time the parties signed it. Interestingly, Defendant testified that he could have procured a
$500,000 loan from any number of commercial banks with whom he had a relationship. If this
were the case, why would he borrow money at 30 percent interest from Plaintiff? This Court’s
conclusion is that Defendant was becoming desperate for funds and that he could not have duped

49 In re Riebesell, 586 F.3d 782, 792 (upholding bankruptcy court’s findings that after a certain point,
creditor’s reliance became unjustifiable, and therefore the additional loans were dischargeable.).

50 Riebesell is also instructive here. In that case, the court held that the level of trust between the parties,
demonstrated by their relationship, constituted additional support for the court’s conclusion that the plaintiff
justifiably relied on the defendant. Id. at 792. In Riebesell, the debtor was an attorney and the creditor an individual
for whom debtor had provided legal services.

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a commercial lender into lending $500,000 on an unsecured basis.

The final element remaining under § 523(a)(2)(A) is whether the creditor sustained a loss
as a result of his reliance on a defendant’s false representations. Here, Plaintiff sustained a loss
when Defendant failed to create and file a mortgage against either the Property or any of
Defendant’s other properties as he represented. Although it is questionable whether Plaintiff
would have been fully secured if Defendant had filed a deed of trust against the Property,
Defendant made statements that he had plenty of equity in his other properties to protect
Plaintiff. These statements were made to Plaintiff to induce him to lend as much money as
possible. The evidence was unclear whether the promise to secure Plaintiff’s loan came before
or after the initial disbursement of $200,000. However, Plaintiff carried the burden of proof to
demonstrate that this promise was made and justifiably relied upon when Plaintiff made the
decision to renew the first loan for $200,000, plus the accrued interest of $15,000.51 The record
demonstrates that Defendant promised to file a mortgage in favor of Plaintiff and to protect
Plaintiff, when in fact he never intended to do so.52 Because the entire balance due on the note
meets the requirements of § 523(a)(2)(A), it is nondischargeable. On the petition date, the total

51 Signing the Note constituted a “renewal” to the extent that the advancement is considered a separate
loan. See Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 790 n.4 (10th Cir. 2009).

52 It is Defendant’s assertion that he intended to file a mortgage after final financing on the Property. Even
if one were to believe Defendant’s and his ex-girlfriend’s testimonies to this effect, Plaintiff would still prevail.
When the financing was complete on the Property in June 2007, the total principal debt was $1,345,350, and even
based upon a doubtful valuation of $1.5 million for the Property, there was little, if any, equity to secure the Note.
Regardless, it was Plaintiff’s logical inference that the Note would be immediately secured by the Property or other
real estate. Defendant never prepared a mortgage or attempted to file a mortgage to secure the Note. It is this
Court’s conclusion that under these facts, Defendant never intended to secure the Note.

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amount of the claim was $912,000.53 This amount is excepted from discharge in Defendant’s
bankruptcy case. The Court enters judgment for Plaintiff for $912,000.54 The Court, in its
discretion, declines to award prejudgment interest accruing after the petition date.55 Plaintiff is
entitled to post-judgment interest at the statutory rate.56

II.
Sanctions are appropriate under Rule 37 because Plaintiff withheld evidence in
discovery which required Defendant to conduct expensive and unnecessary
electronic discovery.
Defendant filed a motion for sanctions57 based on Plaintiff’s failure to comply with the
Court’s discovery Order.58 According to Defendant, Plaintiff wrongfully withheld emails during
discovery and failed to provide a privilege log explaining the omission. This caused Defendant
to spend additional time and resources recovering the documents. Defendant also asserts that
although Plaintiff claimed to have lost access to the emails, Plaintiff had actually recovered them
prior to the state court trial via the Accountant. Defendant argues that Plaintiff’s obligation to
produce the documents continued throughout the trial. Because Plaintiff did not produce the

53 11 U.S.C. § 502.

54 This Court has jurisdiction to declare the debt nondischargeable, to liquidate the debt, and to enter a
monetary judgment against the Debtor. Riebesell, 586 F.3d at 793-94; see also Deitz v. Ford (In re Deitz), 760 F.3d
1038 (9th Cir. 2014) (adopting the lower court’s decision in Deitz v. Ford, 469 B.R. 11 (B.A.P. 9th Cir. 2012),
reaching the same conclusion in the wake of the decision in Stern v. Marshall, 131 S. Ct. 2594 (2011)).

55 Diamond v. Bakay (In re Bakay), 454 Fed. App’x 652, 654 (10th Cir. 2011) (citing Turner v. Davis (In
re Inv. Bankers, Inc.), 4 F.3d 1556, 1566 (10th Cir. 1993)).

56 28 U.S.C. § 1961.

57

 Doc. 114.

58

 Doc. 92.

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documents, Defendant was required to obtain leave of this Court to conduct an expensive search
of the Accountant’s computer.

At issue are five email conversations which Defendant provided at trial over Plaintiff’s
continued evidentiary objection. Plaintiff did not initially disclose the requested emails because,
according to Plaintiff, the email accounts had become inaccessible. After a pretrial hearing, this
Court directed the parties to proceed with discovery and provided for Defendant to recover the
emails from the Accountant’s laptop. Defendant successfully recovered the emails and presented
them at trial. Once the emails were obtained by Defendant, Plaintiff asserted that the contested
emails were all protected as settlement discussions and that Defendant’s Trial Exhibits M and N
were protected under the Attorney-Client privilege. This was the first time any issue of privilege
was raised. The emails at issue were introduced at trial as Defendant’s Trial Exhibits K, M, N,
O, and II. Defendant contests the sufficiency of Plaintiff’s justifications for not providing either
the documents or a privilege log, and after considering the evidence, the Court agrees with
Defendant.

The Federal Rules of Civil Procedure allow for the discovery of evidence that may not be
admissible at trial. Under Fed. R. Civ. P. 26(b)(1), absent an order of the court limiting
discovery, “[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to
any party’s claim or defense–including the existence, description, nature, custody, condition, and
location of any documents or other tangible things and the identity and location of persons who
know of any discoverable matter.” “Relevant information need not be admissible at the trial if

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the discovery appears reasonably calculated to lead to the discovery of admissible evidence.”59
Fed. R. Civ. P. 26(b)(1) provides that “[f]or good cause, the court may order discovery of any
matter relevant to the subject matter involved in the action.”

Essentially, evidence is discoverable if it is either admissible or “reasonably calculated to
lead to the discovery of admissible evidence,” and it is not privileged. If the documents sought
to be discovered are privileged, the party asserting the privilege must “expressly make the claim,
and describe the nature of the documents, communications, or tangible things not produced or
disclosed—and do so in a manner that, without revealing information itself privileged or
protected, will enable other parties to assess the claim.”60

Plaintiff’s responses to the Motion for Sanctions focus on the assertion that the
documents were either privileged or inadmissible. However, Plaintiff never produced a privilege
log, which would have allowed Defendant to determine whether to challenge the claimed
privilege. At a status conference on November 15, 2011, Defendant objected to Plaintiff’s
failure to provide the requested documents or produce a privilege log. Shortly after the hearing,
the parties submitted an agreed Order directing Plaintiff to turn over the Accountant’s laptop so
Defendant could search the hard-drive for the emails. Defendant found the emails on the laptop
but, in doing so, was forced to hire an e-discovery company. The reason Defendant filed the
instant motion for sanctions is that after uncovering the emails, Defendant found an email

59

 FED.R.CIV. P. 26.
60 FED.R.CIV. P. 26(b)(5)(A).


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conversation between Plaintiff and the Accountant from August 20 and 21 of 2009 in which the
Accountant forwarded to Plaintiff all the allegedly lost emails.61 Defendant argues the emails are
not protected under either Fed. R. Evid. 408 or attorney-client privilege, and the failure to
provide the emails should result in sanctions to Plaintiff. After considering the arguments and
evidence presented by the parties, the Court agrees with Defendant. However, the Court also
finds the emails were of little or no value to Defendant’s defense of this case.

As noted supra, if the disputed emails were privileged, then Plaintiff was under no
obligation to produce them in discovery and was only obligated to produce a privilege log. If
however, the emails were not privileged, then Plaintiff’s failure to produce them was a violation
of Rule 26. Plaintiff’s first argument states that each of the emails arose after Plaintiff realized
that a mortgage had never been filed against the property, and therefore each email constituted
settlement negotiations. Rule 408(a) of the Federal Rules of Evidence states:

Evidence of the following is not admissible–on behalf of any party–either
to prove or disprove the validity or amount of a disputed claim or to impeach by a
prior inconsistent statement or contradiction:

(1) furnishing, promising, or offering–or accepting, promising to accept,
or offering to accept–a valuable consideration in compromising or attempting to
compromise the claim; and
(2) conduct or a statement made during compromise negotiations about
the claim . . . .
Rule 408 limits the admissibility of evidence; it does not prevent the evidence from being
discoverable. However, even if the settlement negotiations were privileged, none of the disputed

61

 Defendant’s Trial Exhibit II.

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exhibits involved email conversations between Defendant and Plaintiff and cannot be said to be
statements made during compromise negotiations.62

Defendant’s Trial Exhibit K is an email conversation between Plaintiff and the
Accountant regarding a conversation between the Accountant and Defendant. The emails in the
exhibit show Accountant’s thoughts about the promissory note and the business relationship
between Defendant and Plaintiff. There is no mention of settlement or any other attempt to
resolve the dispute in the Exhibit K emails.

Exhibits M and N were contested as attorney-client privilege, so the Court will discuss
those emails below. Exhibit O contained emails from Defendant to Accountant from July 2007
regarding the cash-flow of Defendant’s business at the time. This conversation was not related
to solving any dispute and cannot be considered settlement negotiations.

Exhibit II was an email correspondence between Plaintiff and the Accountant regarding
the missing emails. This conversation was not related to any settlement discussions, but
certainly would have led to the discovery of admissible evidence. Once the Accountant turned
over the emails, Plaintiff was required under Rule 26 to provide the documents to Defendant and
to provide an updated privilege log. Plaintiff undertook neither of these actions.

Returning to Exhibits M and N, the evidentiary issue is whether these qualify for the
attorney-client privilege protection, but the discovery issue remains the same as the other
exhibits. Generally, communications between the attorney and the client are protected from

62 An argument could be made that these emails are protected as trial preparation materials, but that
argument is not before the Court.

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disclosure.63 This protection is necessary to allow open and honest discussions between the
attorney and his client.64 However, this protection is strictly construed, and generally does not
extend to communications involving a third party. The emails in Exhibits M and N were initially
conversations between Plaintiff and his counsel, John Campbell. However, the emails were all
forwarded to the Accountant. By including the Accountant in the conversation, Plaintiff waived
his privilege. Plaintiff argues that the inclusion of the Accountant in the conversation should not
waive the privilege because his knowledge was necessary to make an informed legal decision.
To support this position, Plaintiff cites United States v. Kovel, 65 a decision by the Second Circuit
Court of Appeals. In that decision, the well-respected Judge Henry Friendly stated “[a]ccounting
concepts are a foreign language to some lawyers in almost all cases, and to almost all lawyers in
some cases.”66 Accordingly, Judge Friendly went on to hold that “the presence of an accountant,
whether hired by the lawyer or by the client, while the client is relating a complicated tax story
to the lawyer, ought not destroy the privilege[.]”67

In a later Second Circuit decision, United States v. Ackert, 68 the court limited the Kovel
analysis and held that the attorney-client privilege does not apply to all communications shared

63 United States v. Ackert, 169 F.3d 136, 139 (2d Cir. 1999).
64 See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
65 296 F.2d 918 (2d Cir. 1961).


66

Id. at 922.

67

Id.

68

 169 F.3d 136.

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with accountants. In Ackert, a non-practicing attorney working as a financial advisor was
brought in on discussions relating to the taxes of a proposed investment. The accountant argued
that the Kovel decision required a finding that the conversation was privileged, but the court held
that the accountant’s role was not necessary to provide legal advice and that communications
that merely aide the attorney do not necessarily fall under the protection.

Here, Accountant’s role was not that of an interpreter because the legal relationship
between Plaintiff and Defendant was straightforward and easily discernable. Moreover, the
Accountant was not included in the conversation at the behest of Plaintiff’s attorney in order to
help decipher the relationship; instead he was voluntarily included by Plaintiff. Because the
email conversations from Exhibits M and N were voluntarily forwarded to Accountant, Plaintiff
waived his right to assert protection under the attorney-client privilege.

The Court finds the exhibits were improperly withheld during discovery and that Plaintiff
not only failed to disclose the documents, but withheld them after recovering them from
Accountant. This resulted in Defendant spending a large amount of time and money to recover
the emails from Accountant’s laptop. This is a violation of the language and purpose of Rule 26.

The next issue is whether this violation of Rule 26 is sufficient to justify sanctions as
requested by Defendant. Rule 37 of the Federal Rules of Civil Procedure provide for sanctions if
a party fails to cooperate in discovery. Rule 37 also provides a guide for parties who disagree
over discovery issues. The first step is to contact the other party and try to resolve the issue.69 If

69 FED.R.CIV. P. 37(a)(1).

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the allegedly recalcitrant party is still not forthcoming, then the other party may move for an
order to compel.70 At the pretrial conference on November 15, 2011, the issue was discussed and
the parties submitted their agreed order. At the time, it was unknown that Plaintiff had already
recovered the disputed emails from the Accountant. Had Plaintiff provided a privilege log and
not misled the Court regarding the existence of the emails, Defendant would not have been
required to expend time and money recovering the emails. Because the Court granted
Defendant’s Motion to Compel and required that Accountant turn over the laptop, Rule 37(a)(5)
states that, after providing an opportunity to be heard, the party whose conduct necessitated the
motion must pay the movant’s reasonable expenses incurred in making the motion, including
attorney’s fees. The Court need not award these fees, however, if “(i) the movant filed the
motion before attempting in good faith to obtain the disclosure or discovery without court action;

(ii) the opposing party’s nondisclosure, response, or objection was substantially justified; or (iii)
other circumstances make an award of expenses unjust.”71
Here, Defendant attempted to resolve the issue without court action. The next issue is
whether the omission of the documents was substantially justified, or if there were other
circumstances that would make an award of expenses unjust. If Plaintiff did not have access to
the emails as claimed, and therefore was not exactly certain of the content of the conversations,
then the claim of privilege would seem substantially justified. That would also help explain the

70 FED.R.CIV. P. 37(a)(3).
71 FED.R.CIV. P. 37(a)(5)(A)(i)-(iii).


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lack of a privilege log. However, the evidence shows Plaintiff was in possession of the emails
and still refused to provide a privilege log or comply with the discovery request. The Court finds
the position taken by Plaintiff was not substantially justified. However, the Court does find
other circumstances that would make award of Defendant’s expenses unjust.

In Defendant’s Supplemental Motion for Sanctions,72 Defendant claims the total amount
of costs and expenses required to recover the emails was $14,716.00. The Court has reviewed
Defendant’s statement of fees and costs in support of Defendant’s motion. The computer
forensic fees of $2,999 are reasonable. Attorney’s fees in the amount of $2,45073 are reasonable.
Therefore, the amount of $5,449 is awarded to Defendant against Plaintiff for failure to comply
with Fed. R. Civ. P. 26. This amount is offset against the $912,000 judgment in Plaintiff’s favor
set out above.

III. Motion for Judgment on Partial Findings
After the close of Plaintiff’s case-in-chief, Defendant orally moved for a directed
verdict.74 Motions for Judgment on Partial Findings are governed by Rule 52 of the Federal
Rules of Civil Procedure and incorporated into bankruptcy proceedings under Rule 7052 of the
Federal Rules of Bankruptcy Procedure. Rule 52(c) provides the court discretion to enter
judgment on partial findings, and a court need not make any determination until the close of

72

 Doc. 114.

73 Attorney’s fees are calculated at counsel’s hourly rate of $175 multiplied by the 14 hours of attorney time
that are reasonable and sufficiently limited to the discovery dispute.

74 The Court treats this motion as a Motion for Judgment on Partial Findings under Fed. R. Civ. P. 52(c).
A motion for directed verdict no longer exists under the Federal Rules of Civil Procedure.

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evidence. The Court determines that the Motion for Judgment on Partial Findings is moot based
upon the Findings of Fact and Conclusions of Law stated supra.

CONCLUSION

After reviewing the evidence adduced at trial, deposition transcripts and video
depositions, and considering the briefs filed by the parties, the Court determines that the
$912,00075 debt owed to Plaintiff James Yoder by Defendant Adam Long on the bankruptcy
petition date is nondischargeable because it was for money, property or the refinancing or
renewal of credit obtained by false pretenses, false representations, or actual fraud by Defendant,
and the Court enters judgment in the amount of $912,000. The Court also grants Defendant’s
Motion for Sanctions, which sanction is the amount of $5,449, which sum shall be applied to and
reduce Plaintiff’s money judgment. After this setoff, the judgment is reduced to a net judgment
of $906,551 in Plaintiff’s favor. The Motion for Directed Verdict is denied as moot. A separate
entry of judgment will be entered in accordance with this decision.

IT IS ORDERED that except as otherwise provided herein, Plaintiff’s costs in this action
are assessed against Defendant pursuant to Fed. R. Bankr. P. 7054(b).

IT IS FURTHER ORDERED THAT the foregoing constitute Findings of Fact and
Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule
52(a) of the Federal Rules of Civil Procedure. The judgment based on this ruling will be entered

75 This amount is reduced by the sanction of $5,499 in Defendant’s favor against Plaintiff; the net judgment
is $906,501. The setoff of the discovery sanction against Plaintiff’s judgment is appropriate. See Weisberg v.
Weisberg (In re Weisberg), 218 B.R. 740 (Bankr. E.D. Pa. 1998), in which the bankruptcy court set off a possible
nondischargeable attorney fee claim against a postpetition claim against the same attorney for violation of the
automatic stay.

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on a separate document as required by Fed. R. Bankr. P. 7058 and Fed. R. Civ. P. 58.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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11-06250 Johnson et al v. Educational Credit Management Corporation (Doc. # 63)

Johnson et al v. Educational Credit Management Corporation, 11-06250 (Bankr. D. Kan. Feb. 20, 2015) Doc. # 63

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 19th day of February, 2015.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

GEORGE A. JOHNSON and

MELANIE RANEY-JOHNSON, Case No. 11-23108
Debtors.

GEORGE A. JOHNSON and
MELANIE RANEY-JOHNSON,

Plaintiffs,

v. Adv. No. 11-6250
SALLIE MAE, INC., and
EDUCATIONAL CREDIT
MANAGEMENT CORPORATION,

Defendants.

MEMORANDUM OPINION AND ORDER
DISCHARGING DEBTORS’ STUDENT LOAN


The Court considers Debtors’ Complaint to Determine Dischargeability of Student Loan

(Doc. 1) owed to Educational Credit Management Corporation (ECMC).1 The Court has

1 Debtors George A. Johnson and Melanie Raney-Johnson appear pro se. Defendant Educational Credit
Management Corporation appears by its attorney, N. Larry Bork of Goodell, Stratton, Edmonds & Palmer, L.L.P.,
Topeka, KS. By the Court’s order of April 24, 2012, Sallie Mae, Inc., was dismissed as a defendant in this adversary
proceeding.

15.02.19.A Johnson v ECMC Judgment Order.wpd
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reviewed the pleadings and court file and heard arguments of the parties. For the reasons set out
below, the Court finds that repayment of Debtors’ student loan to Educational Credit
Management Corporation would constitute an undue hardship and Debtors are entitled to
discharge the loan as provided in 11 U.S.C. § 523(a)(8).2

Findings of Fact

Debtors George A. Johnson and Melanie Joy Raney-Johnson filed this chapter 7
bankruptcy case on November 10, 2011. The Debtors filed this case hopefully to resolve issues
with one of their home mortgagees, Bank of America. This case has been discharged and the
Trustee has abandoned the estate’s interest in Debtors’ administered property and interests.

In this proceeding, the Debtors seek to discharge under § 523(a)(8) their consolidated
student loan. The balance due on this joint spousal consolidation student loan is approximately
$83,000 (“Loan”). This Loan was created by a consolidation of Debtors’ individual student
loans in 2005. The Debtors do not contest the balance on the Loan or that it falls within the
ambit of § 523(a)(8). The original amount borrowed by George was $25,000 and by Melanie
was $20,000; these loans were incurred during the 1990s.

George Johnson is approximately 38 years old and his wife, Melanie Johnson, is
approximately 36 years old. They were married in 1999 and have three minor children: Maya (11
years old), Xavier (8 years old) and Trey (5 years old). Neither George nor Melanie has any
mental or physical disabilities that keep them from working; their children also have no mental
or physical disabilities. However, George regularly needs allergy shots. One of their children
has asthma. Their daughter recently received orthodontia. All of their parents are alive.

Amended Schedule A reflects a home value of $125,000 and secured debt on the home of
$162,728. The home is encumbered by two mortgages. Debtors’ current monthly first mortgage

2 This matter is a core proceeding under 28 U.S.C. §157(b)(2)(I). This Court has jurisdiction under 28

U.S.C. §157 and 1334. Venue is proper pursuant to 28 U.S.C. §1408 and 1409. All future statutory references areto the Bankruptcy Code (“Code”), as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of2005, 11 U.S.C. §§ 101 - 1532, unless otherwise specifically noted.
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payment is $1,320, and the balance due on Schedule D is $130,470. The second mortgage note
was discharged in this bankruptcy case. The Debtors’ expenses only reflect payment on the first
mortgage; although the debt on the second mortgage was discharged, this Court’s file indicates
that the lien remains. The Court is uncertain why a budget expense is not listed for the second
mortgage payment. The balance on the second mortgage note is $32,258.

Melanie Johnson obtained loans while attending the University of California-Davis from
1994 through 1999. These loans were the subject of an individual consolidation that initially
occurred on March 28, 2003, and then again on April 26, 2004. Those loans were zeroed out as
a result of the spousal consolidation loan that occurred on August 26, 2005 (the Loan).

George Johnson obtained loans to attend the University of St. Mary from 1995 through
1997. He then consolidated those loans individually on July 23, 2004, and then again into the
spousal consolidation loan on August 26, 2005 (the Loan). The Loan had an initial disbursement
of approximately $63,000.00.

Melanie attended the University of California at Davis from August 1994 to June 1999
with a major in biology. She claims to have almost obtained her degree, but did not complete it.
Melanie is one class short of a biology degree. She states that her positions with the federal
government were obtained in part because of her education.

George attended Labette Community College in Parsons, Kansas, from August 1992
through 1994 and obtained an associate’s degree. He then continued his education at the
University of St. Mary in Leavenworth, Kansas, from August 1994 through December 1996. He
received a bachelor’s degree in sociology.

Melanie has health care through her employment which covers George as well. Their
children have coverage through the State of Kansas. The following are the expenses detailed in
their responses to interrogatories and on their Schedule J:

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Expense Category

MortgageMaintenance
ElectricityHeat
Heating/ElectricityWater
TelephoneBundle (Internet/TV)
TransportationInsurance
Auto Insurance
Groceries
Eating outLaundryRecreation
Medicine
Medical/DentalClothingChildcare
Personal Loan to Uncle

TOTAL $ 4,021.84

2012
Interrogatories

$1,319.00

100.00

149.00

48.00
-085.00


200.00
-0400.00


146.00
-0600.00


125.00

100.00

200.00

25.00

75.00

200.00

150.00

100.00
Oct. 2011
Schedule J

$1,402.00

100.00
-0-
0257.00


89.00

140.00

110.00

400.00
-0165.00


600.00
-0100.00


100.00
-0200.00


200.00
-0150.00
$ 4,013.00

The Schedule I filed in October 2011 states that George had gross monthly income of
approximately $2,450 and net monthly income of approximately $2,010. Melanie had gross
monthly income of approximately $2,900 and net monthly income of approximately
$2,222. Thus, pursuant to the October 2011 Schedule I, the Debtors had total net monthly
income of approximately $4,232. The 2012 interrogatory responses reflect take-home pay for
George of $2,010.00 and Melanie of $2,222.00 for a total of $4,232.00. However, at the time of
trial, George had been laid off.

George enjoyed steady employment for approximately two-and-one-half years working at
The Guidance Center making about $27,000 a year. As of November 2012, George no longer
worked at The Guidance Center because he was laid off and is currently employed as a substitute
teacher, coach, and referee. His total income for 2013 was approximately $1,100. Prior to
November 2012, George was paid every two weeks. A pay stub was provided for the period

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ending August 4, 2012. At that pay period, he had year-to-date income of $19,559 and
year-to-date deductions and withholdings totaling $2,019 and $1,266, leaving net income of
$16,274. That pay date was the 17th of 26 total paydays, which extrapolated to an annual net
income of $24,900 and monthly net income of $2,075. As noted, in November 2012, George
was discharged from his employment.

Melanie has had employment for the last two-plus years. She is currently working at the
Department of Veteran Affairs as a billing supervisor making approximately $39,000 a year.
Before that, she had another job in government. She has had the same employer for a little over
two years and has received promotions.

In 2010, the Debtors received a tax refund of approximately $8,500; this refund occurred
because of a one-time federal tax credit associated with the purchase of their residence. In 2011,
they had a net tax refund of approximately $100.

George has a KPERS retirement plan with a balance of approximately $3,000 and
Melanie has a federal government retirement plan with a balance of approximately $2,500. The
Debtors own a 2000 GMC Sierra and a 1998 Volvo, valued on Schedule B at $2,500 and $1,500,
respectively.

Melanie provided a pay stub for a period ending July 28, 2012, with a pay date of August
3, 2012. This was prior to her promotion from a GS-6 to GS-7. Her year-to-date gross pay was
$25,862 and her year-to-date net pay was $18,666. This was her sixteenth paycheck.
Extrapolated, that would result in annual net pay of $30,330 or $2,525 a month. Melanie is at
the leader level, GS-7, Step 2. Her time frame for promotion to a supervisor, which ranges from
GS-9 to GS-11, may be as long as 20 years (this is how long it took her current supervisor to
reach that grade).

For 2011, George had taxable income of $27,220 and total wages of $29,038. For their
2011 tax return, the Debtors showed total wages of $55,402, so of that amount approximately
$28,000 would have been attributable to the income of Melanie.

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Because of federal budgetary issues, the overtime prospect for Melanie is reduced

considerably. Melanie’s gross basic pay with a locality adjustment is $40,000. Melanie is paid

bi-weekly and her gross monthly pay adjusted for 26 paychecks annually is $3,340. Her non-

mandatory pay deductions are as follows:

Optional life insurance: $ 12.00
FSA medical reimbursement account: 38.00
TSP retirement savings: 100.00
Vision insurance 26.00
Charitable contribution: 6.00
Health insurance: 300.00
Union dues 35.00
Dental insurance 64.00


Subtotal $581.00

The balance of the deductions from Melanie’s paycheck are:

TSP loan repayment $215.00
Medicare: 61.00
Federal income tax withholding 114.00
State income tax withholding 91.00
Non-Medicare Social Security Tax: 260.00
Mandatory FERS contribution 27.00
Non-optional FEGLI life insurance 14.00


Subtotal $ 782.00
Total expenses $ 1,363.00
Net monthly income after payroll deductions: $ 1,977.00


This calculation excludes overtime pay for Melanie. Further, the non-monthly expenses
of life insurance ($12), TSP retirement ($100), charitable contribution ($6), and union dues ($35)
could be added back to Melanie’s net income, resulting in an adjusted net income of $2,124.
Melanie’s income tax withholdings are reasonable, although deletion of the TSP contribution
will increase her income taxes. Health-related costs are allowable. The Court’s calculation is
based upon Melanie’s pay stub dated August 24, 2013. At trial, George indicated that after
being terminated by The Guidance Center, his income for the first eight months of 2013 was
approximately $1,100. (Work-related expenses more than eradicated this income). He submits

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five to ten applications per month for new employment. Although he was fully employed in the
five years prior to his layoff, he now works on a part-time basis. George’s wages during 2011
when he worked at The Guidance Center, Inc., were $27,219.

Even though Melanie has worked overtime in the past, the prospect for future overtime is
less tenable because of the federal government’s sequestration and budget constraints for the

V.A. She did not receive a cost of living increase for the fiscal year 2013. The Court is reticent
to allocate additional income from overtime to Melanie. Melanie is attempting to maximize her
income by contributing tax-free dollars to a flexible spending account (“FSA”) that will then
reimburse Debtors, without penalty, for any actual medical expenses incurred. Although
voluntary, Melanie’s monthly contribution to the FSA is a prudent means for maximizing
disposable income. Melanie’s monthly net income would actually decrease were she to cease
making contributions to the FSA because Debtors’ ongoing medical expenses would then be paid
from post-tax income.
The calculation of Melanie’s pay is predicated on ECMC’s Trial Exhibit L, Melanie
Johnson’s Dept. of Veterans Affairs pay stubs. George’s income for prior years is extrapolated
from Trial Exhibit O (George Johnson’s 2011 W-2 from The Guidance Center Inc.). George’s
gross income for 2010 was $19,226. (See Trial Exhibit M, George Johnson 2010 W-2 Firstline
Transportation Security, Inc.) The Commerce Bank account statements (Exhibit J) reflect net
paycheck deposits for both George and Melanie. The average monthly deposits for their
combined pay is approximately $5,000 through October 2012. Melanie’s net pay deposits reflect
overtime pay. For the reasons indicated, the Court will not consider Melanie’s overtime pay.

At the time of trial, Melanie’s adjusted net income was $2,124 and despite his best
efforts, George’s income was $0. When subtracted from this Court’s estimated reasonable
expenses of $3,921.84, the Debtors’ available net monthly is negative $1,797.84. This
calculation does not include a deduction for payment of the second mortgage.

Debtors were married in 1999 and lived in California until 2007. When both Debtors

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were in California and were working, they made payments on their student loans for nine months
for a total of $2,440. In 2008, Debtors moved to Kansas to help George’s father, who had
experienced a brain aneurysm. Debtors’ total payments of $2,440 are approximately five percent
of the total original student loan debts. Melanie was able to reduce the balance on her Perkins
loan when she worked at a group home for three years. Debtors acknowledge that they have
only made small payments on their student loan obligation. They explained that when they were
both working and were financially capable of making payments, they did so. Otherwise, the
student loan was either in a forbearance or in deferment, during which periods the Johnsons
testified that they were unable to cash flow payments on their student loan. When the Debtors
moved back to Kansas, they borrowed $10,000 from George’s uncle to pay moving costs.
Melanie also borrowed $2,500.00 from her TSP account to attempt to make ends meet during
George’s recent unemployment. Over the years of their marriage, the Debtors have experienced
significant fluctuations in household income and have been able to minimally pay their nonstudent
loan debts. The Debtors qualified for food stamps and the Debtors’ children still qualify
for free school lunches.

Both Debtors benefitted from their post-secondary educations, which were funded in part
by student loans. Melanie’s education, although she was one class short of a biology degree,
assisted with her procurement of her current employment with the V.A.

Predicated on a hypothetical annual salary of $60,000 and their household size, it is
Defendant’s assertion that under income based repayment (IBR), the Debtors’ payment on the
student loan would be $234 per month paid over a 25-year period, with a potential for tax
consequences associated with the cancellation of indebtedness, but with continuing certain rights
such as deferment and forbearance. The Debtors were not aware of the IBR until two days prior
to trial and had not applied to the program. The reality is that even if the Debtors’ gross income
were $60,000 per annum, providing for a family of five would be a Herculean task.

Analysis

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A. Nondischarge of 523 Loan would impose an undue hardship under Title 11
U.S.C. § 523(a)(8).
The Tenth Circuit, in In re Polleys, adopted a version of what is commonly referred to as
the “Brunner test,” holding that in order to establish an undue hardship, a debtor must prove:

(1)
that the debtor cannot maintain, based on current income and expenses, a“minimal” standard of living for herself and her dependents if forced to repay theloans;
(2)
that additional circumstances exist indicating that this state of affairs is likely topersist for a significant portion of the repayment period of the student loans; and
(3) that the debtor has made good faith efforts to repay the loans.3
The court observed that “to better advance the Bankruptcy Code’s ‘fresh start’ policy and to
provide judges with the discretion to weigh all the relevant considerations, the terms of the test
must be applied such that debtors who truly cannot afford to repay their loans may have their
loans discharged.”4 In addition, the court directed that in applying the “good faith” portion of
the test, bankruptcy courts “should consider whether the debtor is acting in good faith in seeking
the discharge, or whether he is intentionally creating his hardship.”5
When it enacted the student loan exception to discharge in the 1978 Act, “Congress was
primarily concerned about abusive student debtors and protecting the solvency of student loan
programs.”6 The exception to discharge was constructed because of a “rising incidence of
consumer bankruptcies of former students motivated primarily to avoid payment of educational
student loans.”7 Section 523(a)(8) was designed “[t]o remove the temptation of recent graduates

3 Educ. Credit Mgmt. Corp. v. Polleys (In re Polleys), 356 F.3d 1302, 1309 (10th Cir. 2004).

4

 Id.

5

 Id.

6 Id. at 1306. Until 2005, the exception to discharge did not apply to private student loans.

7 Id. at 1306 (quoting REPORT OF THE COMM’N ON THE BANKR. LAWS OF THE UNITED STATES, H.R. DOC.
NO. 93-137, pt. II § 4-506 (1973), reprinted in COLLIER ON BANKRUPTCY, App. Pt. 4(c) at 4-710 (15th ed. rev.
2003)). This concern seems misplaced since from 1969 to 1975 only three-tenths of one percent of the then-
outstanding $7 billion of student loans had been discharged in bankruptcy. Janet Kosol, Running the Gauntlet of“Undue Hardship”–The Discharge of Student Loans in Bankruptcy, 11 GOLDEN GATE U.L. REV. 457, 462 (1981).

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to use the bankruptcy system as a low-cost method of unencumbering future earnings.”8 The
Polleys court adopted a less restrictive application of the Brunner test that does not require a
debtor to demonstrate dire circumstance to discharge a student loan and commented, “[A]n
overly restrictive interpretation of the Brunner test fails to further the Bankruptcy Code’s goal of
providing a ‘fresh start’ for the honest but unfortunate debtor.”9 The Polleys court refrained
from adopting wholesale the “totality of the circumstances test” employed by the Eighth
Circuit.10 As noted above, the good faith portion of the Brunner framework requires the
bankruptcy court to consider whether a debtor is acting in good faith if she seeks to discharge a
student loan or whether she is intentionally creating her hardship.11 Courts should not impose
their own values on a debtor’s life choices when considering good faith. Courts should also
consider undue hardship within the context of economic realities faced by debtors.

The Polleys court’s reticence to apply a strict interpretation to the Brunner test is well
placed, and the Brunner framework has met with considerable criticism. Brunner was decided in
1987 when most private student loans were not excepted from discharge and government loans
were subject to the undue hardship test only if a debtor filed her bankruptcy petition within five
years of the start of the repayment period on a student loan. In Brunner, the debtor sought to
discharge a student loan that was only one month into repayment status.

Exceptions to discharge are the products of public policy. The Polleys test applying
§ 523(a)(8) should not be applied in a vacuum and that court’s more flexible application of the
Brunner test reflects this public policy. The student loan exception to discharge in part was
enacted in 1978 in response to highly publicized circumstances in which professionals, who

8 Polleys, 356 F.3d at 1306.

9 Id. at 1308.

10 Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).

11 Polleys, 356 F.3d at 1309.

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enjoyed a prospect for future increases in income, filed bankruptcy to discharge student loans
soon after conclusion of their educations.12 The result was § 523(a)(8) that provided if a debtor
sought to discharge her government-affiliated student loan prior to the expiration of the five-year
waiting period, then the loan could only be discharged under the undue hardship test.13 Upon
expiration of the five-year (and later the seven-year) waiting period, student loans were
automatically dischargeable. The waiting periods were to prevent the abusive filing of graduates
with high income potential who sought to discharge student loan debt soon after graduation; in
order to discharge a student loan during the waiting period, these graduates would have to
establish undue hardship under § 523(a)(8). In 1998, the seven-year waiting period for
automatic discharge of a student loan was eliminated and in order to discharge a student loan in
bankruptcy, a debtor had to establish undue hardship. In 2005, BAPCPA extended the exception
to discharge of student loans to include all private student loans, not just those with some
government connection.

The typical repayment term for student loans is ten years, which under the seven-year
rule only extended for three years past the now-eliminated seven-year waiting period. Within an
historical context, the Brunner framework is an unfortunate relic. The Polleys court shifted
away from the strict reading and allowed a more realistic and considered application of the
undue hardship standard with a partial embrace of the totality of the circumstances standard:
hence, the Circuit’s rejection of a test predicated on the certainty of hopelessness and the
directive that this Court weigh all relevant considerations. The Tenth Circuit has further
recognized that if only a portion of a student loan qualifies for discharge under the undue

12 HENRY J. SOMMER, ET AL., NATIONAL CONSUMER LAW CENTER, CONSUMER BANKRUPTCY LAW AND
PRACTICE § 15.4.3.8.1, at 495 (10th ed. 2012). A limited class of private student loans were also subject to
§ 523(a)(8).

13 The five-year period was extended to seven years in 1990 and then eliminated entirely in 1999. Periods
during which the loan repayment was suspended did not apply to the dischargeability waiting periods.

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hardship standard, the bankruptcy court may enter a partial discharge accordingly.14

The student loan programs were indeed of noble birth--to provide citizens an opportunity

to pursue post-secondary education and to better their economic circumstances. Since the

inception of this virtuous experiment, our student loan debt has grown to unimaginable levels

because of burgeoning education costs. Total student loan debt in the United States now exceeds

$1.2 trillion - government loans account for 92 percent of this figure, private loans for the

remaining 8 percent.15 The burden of student loans delays marriage for graduates,16 persists long

after graduation,17 widens the wealth gap in the United States,18 is a drag on and harms the

national economy, and stifles the housing market.19 The burden of student loan debt is not

restricted to recent graduates, but touches the lives of many older citizens,20 and it is estimated

that 17 percent of all adults owe student loans.21 The student loan debt affects not only the

14 See Alderete v. ECMC, et al. (In re Alderete), 412 F.3d 1200 (10th Cir. 2005).

15 AnnaMaria Andriotis and Alan Zibel, Lenders Wince at CFPB’s Voice, WALL ST. J., Dec. 4, 2014, at
C1.

16 Rebecca Ungarino, Burdened with Record Amount of Debt, Graduates Delay Marriage, NBC NEWS,
(Oct. 7, 2014), http://www.nbcnews.com/business/personal-finance/burdened-record-amount-debt-graduates-delaymarriage-
n219371.

17 Douglas Belkin, College Loans Are a Burden Long After Graduation, Poll Finds, WALL STREET
JOURNAL ON-LINE (Aug. 7, 2014),
https://www.lexis.com/research/retrieve?cc=&pushme=1&tmpFBSel=sel&totaldocs=&taggedDocs=8Z1%3A&toggleValue=&numDocsChked=1&prefFBSel=0&delformat=XCITE&fpDocs=&fpNodeId=&fpCiteReq=&expNewLead=id%3D%22expandedNewLead%22&brand=&dedupeOption=0&T1=1&_m=a097f07a3f841e875e3217968718fac3&docnum=1&_fmtstr=FULL&_startdoc=1&wchp=dGLzVzB-zSkAb&_md5=f692797662fc269c56164096ae7b21c6&focBudTerms=Douglas+Belkin&focBudSel=sel.

18 Carolyn Thompson, $1 trillion student loan debt widens US gap, ASSOCIATED PRESS/CNBC NEWS
(Mar. 27, 2014) http://www.cnbc.com/id/101531304#.

19 Scott Stucky, Burden of Student Loans Stifles the Housing Market, AMERICAN BANKER (Mar. 24, 2014),
https://www.lexis.com/research/retrieve?cc=&pushme=1&tmpFBSel=all&totaldocs=&taggedDocs=&toggleValue=
&numDocsChked=0&prefFBSel=0&delformat=XCITE&fpDocs=&fpNodeId=&fpCiteReq=&expNewLead=id%3D%22expandedNewLead%22&brand=&dedupeOption=0&_m=3829bc224fce05b24150f0ef78ee6e53&docnum=1&_fmtstr=FULL&_startdoc=1&wchp=dGLbVzB-zSkAz&_md5=375b907cdd857124981a05d40c5a4cc0&focBudTerms=&focBudSel=all.

20 Elizabeth Olsen, Student Loan Debt Burdens More Than Just Young People, CNBC.COM (Sept. 12,2014) http://www.cnbc.com/id/101995544.

21 17 Percent of Adults Owe Student Loans, CONSUMER BANKRUPTCY NEWS, Oct. 28, 2013, at 4.

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students, but also their parents.22 Indeed, student loan debt adversely affects the psychological
health of students and graduates.23

Considering a significant shift of the skyrocketing costs of college education to the
middle class over the last three decades,24 it is disconsonant with public policy and bankruptcy’s
fresh start to leave debtors in virtual lifetime servitude to student loans. It is doubtful that
Congress intended to leave the courts so constrained or the student borrowers so burdened, and
neither the purpose nor the text of § 523(a)(8) demand such an outcome.

In a recent and well-considered article, the authors observe that because of the crush of
student loan debts:

. . .a substantial percentage of Americans may not be able to buy homes and

automobiles, start businesses, invest in capital ventures, educate their children, or

save for a secure and dignified retirement because they are overly burdened with

debt incurred in completing their postsecondary educations.25
The authors review the history of the federal government involvement in student loan programs
and current status of the student loan debt, including its treatment in bankruptcy proceedings. Of
particular concern is that “for-profit institutions represented only eleven percent of all higher
education students, but they accounted for twenty-six percent of all student loans and forty-three
percent of student-loan defaulters.”26 Also of note are that two-thirds of all college or university
students borrow money to pay for tuition and costs, the current student loan debt trails only

22 Jeanie Ahn, Parents pay the price for children’s student debt, YAHOO FINANCE (Oct. 17, 2014),
http://finance.yahoo.com/news/student-loans-drowning-parents-125503328.html;_ylt=AwrTWfxgONpUkUgAfEmTmYlQ.

23 Katrina M. Walsemann, Gilbert C. Gee, and Danielle Gentile, Sick of our loans: Student borrowing andthe mental health of young adults in the United States, 124 SOCIAL SCIENCE & MEDICINE 85 (January 2015)
http://www.sciencedirect.com/science/article/pii/S0277953614007503.

24 Adjusted for inflation, the cost to attend a four-year public university has increased by 331 percent since1983. (Source: College Board (2013). Trends in College Pricing 2013.)

25 Robert C. Cloud and Richard Fossey, Facing the Student-Debt Crisis: Restoring the Integrity of theFederal Student Loan Program, 40 J.C. & U.L. 467, 495 (2014), citing to Jayne O’Donnell, Consumer Protection
Chief Talks About Student Loans, USA TODAY, Aug. 15, 2013, at 3B.

26 Robert C. Cloud and Richard Fossey, supra note 25, 40 J.C. & U.L. at 487.

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home mortgage debt in amount, and student loan debt has tripled between 2004 and 2012.27
Tuition has risen “27 percent at public colleges and 14 percent at private schools in the past five
years . . . .”28 Many college students find themselves in such dire financial straits that food
pantries have become a common sight on campus.29

1.
Debtors cannot maintain, based on their current income and
expenses, a “minimal” standard of living for themselves if forced torepay their § 523(a)(8) Loan obligation.
Under the first element of the Brunner test, a debtor must show that she cannot maintain,
based on her current income and expenses, a “minimal” standard of living if forced to repay her
student loan debt.30 The record establishes that Debtors barely maintain a minimal standard of
living, even without paying the Loan.

Taking the budget as a whole, none of Debtors’ projected expenses are unreasonably
high. In fact, they are too low. For instance, monthly maintenance costs for a home well exceed
the $100 that the Debtors budgeted. The Debtors drive two automobiles that in the aggregate are
40 years old. Debtors’ projected monthly car payment and monthly auto repair expense are
unrealistically low for automobiles that are driven daily. The Debtors’ projected expense for
gasoline consumption is inadequate.

Noticeably absent from the record is how Debtors pay for the day-to-day costs to
maintain a household, as well as unexpected expenses that occur over time, e.g., disruption of
income, illness, costs of replacing an automobile, and unforeseen medical expenses. It is likely
that instead of anticipating and paying such miscellaneous expenses as they arise, the Debtors

27 Robert C. Cloud and Richard Fossey, supra note 25, 40 J.C. & U.L. at 493.

28 Frank Eltman, Food Pantries on the Rise at U.S. College Campuses, ASSOCIATED PRESS (March 19,2014,
http://diverseeducation.com/article/61283/?utm_campaign=Diverse%20Newsletter%203&utm_medium=email&utm_source=Eloqua&elq=97ed4a9be13746568b0af0a80cb7ba2b&elqCampaignId=173.

29 Frank Eltman, supra note 28.

30 Polleys, 356 F.2d at 1307.

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will be forced to incur debt or to borrow from their retirement accounts.

Defense counsel argues that Debtors have a few voluntary expenses that appear
unnecessary for them to maintain a “minimal” standard of living. Namely, Melanie currently
contributes monthly towards an FSA, as discussed supra. In addition, Melanie pays $35
monthly for union dues, $100 monthly toward saving for retirement, and $215 monthly toward
two loans against her retirement savings. Defense counsel argues that because the
aforementioned expenses are both voluntary and unnecessary, Debtors should instead be forced
to contribute these payments toward their student loans. This Court disagrees.

As discussed supra, even if Melanie discontinues her contributions toward the FSA,
Debtors’ ongoing health expenses are not likely to diminish and, accordingly, their monthly
disposable income, if any, will decrease because of the associated tax consequences. The
Debtors prudently have health and dental insurance. The union dues, retirement contributions,
and loan repayment pose a more intriguing question: Can voluntary expenses that do not
immediately affect a debtor’s standard of living nevertheless be necessary to maintain a
“minimal” standard of living if the payments thereon were instead applied to repay a student
loan? Under the appropriate circumstances, the answer is yes. This Court’s experience suggests
that many debtors actually understate expenses and that in reality it is impossible to forecast
unavoidable but significant expenses. The Debtors are no different as their budget provides
meager allowances for essentials and is devoid of a monetary contingency for unexpected events,
such as might involve the Debtors’ home or their three minor children, the latter of whom will
have higher costs as they grow older. If Melanie stops repaying the TSP loan, there are negative
tax consequences and penalties.

The Court takes judicial notice of the Great Recession and the lumbering recovery of the
United States’ economy and slow growth since 2008. Debtors’ projected expenses make no
provision for the unexpected yet inevitable occurrences, in particular those associated with
raising three young children. While such unexpected events impose additional hardship on any

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debtor, the resulting hardship on these Debtors would be undue because they would be incapable
of affording essential expenses and deprived of the ability to maintain a minimal lifestyle if
forced to repay the Loan.

Although it is a debtor’s obligation to accurately complete his or her schedules, it is
within the province of this Court to account for over- and understatements of scheduled expenses
within the totality of the circumstances. In this case, the reality is that Debtors will either have
to redirect their seemingly “unnecessary” expenditures toward inevitable life expenses as they
occur, e.g., the higher than projected costs of auto repairs/replacement, unexpected healthcare
costs, home maintenance costs, food and sundry costs, and miscellaneous needs of everyday life,
or they will have to incur debt by using credit cards or by borrowing against the minimal
retirement savings Melanie has accumulated, which will, in turn, increase monthly expenses.
However, the loan payment of $100 per month to George’s uncle should be deleted, which does
reduce Debtors’ listed expenses to $3,921.84.

Although the Court finds Debtors’ expenditures toward retirement will inevitably be
redirected to maintain their minimal standard of living,31 to otherwise inhibit their ability to
contribute reasonable funds to a retirement plan contradicts the public policy reflected in the
Congressional encouragement of self-sustained retirement and, further, would improperly
penalize an individual who must either self-fund her own retirement or place her future in the
hands of a social welfare system regularly criticized for its inadequacy. This Court must follow
the Tenth Circuit’s directive “that debtors who truly cannot afford to repay their loans may have
their loans discharged.”32 These Debtors truly cannot afford to repay the Loan.

2.
Additional circumstances exist indicating that Debtors’ state of affairsis likely to persist for a significant portion of the repayment period ofthe student loans.
31

 Melanie was forced to borrow from her TSP federal retirement account to “make ends meet.”

32 Polleys, 356 F.3d at 1309.

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When applying the second Brunner element, the Tenth Circuit observed:

[C]ourts need not require a “certainty of hopelessness.” Instead, a realistic look

must be made into debtor’s circumstances and the debtor’s ability to provide for

adequate shelter, nutrition, health care, and the like. Importantly, “courts should

base their estimation of a debtor’s prospects on specific articulable facts, not

unfounded optimism,” and the inquiry into future circumstances should be limited

to the foreseeable future, at most over the term of the loan.33

Debtors’ expenses seem unreasonably low, and any significant reduction in their living
expenses would most likely be offset by future expenses. This Court agrees with Judge Karlin
who, in In re Quarles, 34 observed that even where a car might soon be paid off, “to completely
deduct that payment from the Debtor’s monthly expenses ignores the fact that the nine year old
car will almost certainly need to be replaced at some point in the near future.”35 In addition, as
cars grow older, “there will likely be an increase in maintenance costs for the aging car until it is
replaced.”36 As noted supra, because Debtors’ projected monthly expenses for car payments, for
maintenance, and for gasoline are unrealistically low, an increase in Debtors’ monthly
expenditures is appropriate. Based on their income history and increasing costs of their family,
this state of affairs is likely to persist for a significant portion of the Loan’s repayment period.

Absent refinancing or, in the alternative, a program for repayment, the standard student
loan repayment term is ten years. It might be argued that since the ten years has expired with
respect to repayment of the Loan, this repayment period factor does not apply and any proposed
total repayment plan should not exceed ten years. This observation is sound because at the time
Brunner was decided, student loans that had been in a repayment period for a more than five
years were dischargeable and, by extension, all student loans for which debtors sought discharge

33 Polleys, 356 F.3d 1310 (citation omitted).

34 Quarles v. Education Credit Management Corporation (In re Quarles), No. 02-7089, 2004 WL
2191608, at * 7 (Bankr. D. Kan. April 22, 2004) (agreeing with Judge Pusateri’s decision in Innes v. State of Kansas,
et al. (In re Innes), Adv. No. 95-7104 at 12 (Bankr. D. Kan. Dec. 22, 2000)).

35 Quarles, 2004 WL 2191608, at * 7.

36

 Id.

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under undue hardship had to be in the ten-year repayment period. Of equal or greater force is
that Brunner was decided at the time that all student loans were eventually dischargeable, subject
to the five-year test. The Brunner test was developed when there were means other than undue
hardship to discharge student loans under the Code.

3. Debtors have made good faith efforts to repay their student loans.
The Tenth Circuit directed that a court’s inquiry into the third Brunner element, a
debtor’s good faith, “should focus on questions surrounding the legitimacy of the basis for
seeking a discharge.”37 “[T]he failure to make a payment, standing alone, does not establish a
lack of good faith.”38 However, “a debtor who willfully contrives a hardship in order to
discharge student loans should be deemed to be acting in bad faith.”39 While participation in a
repayment program is not required to establish good faith, weight should be given to the steps a
debtor takes prior to filing for bankruptcy in determining whether the debtor is acting in good
faith.40 In Polleys, the Tenth Circuit held that “the debtor’s efforts to cooperate with her lenders
show that she was acting in good faith in working out a repayment plan.”41

Debtors’ efforts to cooperate with the lenders is indicia of their good faith. Evidence
admitted at trial by stipulation, although unnecessary to this Court’s conclusion, shows that the
Debtors cooperated with the student loan creditors.

Finally, there is no indication that Debtors are “attempting to abuse the student loan
system by having [their] loans forgiven before embarking on lucrative careers in the private

37 Polleys, 356 F.3d at 1310.
38 Id. at 1311 (citing In re Coats, 214 B.R. 397, 405 (Bankr. N.D. Okla. 1997)).
39 In re Alderete, 412 F.3d 1200, 1206 (10th Cir. 2005).


40

 Id.
41 Id. (citing Polleys, 356 F.3d at 1312).
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sector.”42 There is also no evidence that Debtors could have otherwise increased their earning
potential. The evidence before the Court, including Debtors’ credible testimony, is that Debtors
have maximized their earning potential.

Given the facts of this case, the Court finds that Debtors’ small voluntary payments
toward their loans, the consolidation of those loans, and the Debtors’ efforts to stay in contact
with the student loan creditor establishes that they were acting in good faith. Because Debtors
have shown that they have made good faith efforts to maximize earning potential and minimize
expenses, the Court finds that Debtors have made a good faith effort to repay their student loans.
Both Debtors testified at trial that they wish they could pay the Loan, and they impressed this
Court as honest and hardworking individuals doing their best to provide for their family and to
contribute to society. The Debtors seek discharge of the Loan in good faith.

Conclusion

The Court finds that repayment of Debtors’ Loan would constitute an undue hardship
under § 523(a)(8) on the Debtors and the Debtors’ dependents. Debtors cannot afford to repay
any of the Loan while maintaining a minimal standard of living. Debtors’ current financial
inability to repay their student loans is likely to continue throughout any repayment period.
Debtors have demonstrated good faith by making voluntary payments toward the Loan. Having
satisfied each part of the Brunner test, Debtors are entitled to discharge the Loan. A separate
judgment consistent with this Memorandum Opinion will be entered this day.

IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
42 Polleys, 356 F.3d at 1312 (citing In re Cheesman, 25 F.3d 356 (6th Cir. 1994)).
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14-06023 Waller v. Waller et al (Doc. # 25)

Waller v. Waller et al, 14-06023 (Bankr. D. Kan. Dec. 29, 2014) Doc. # 25

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 29th day of December, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

JAMES DOMINIC WALLER, Case No. 14-20200-13
Debtor. Chapter 13

JAMES DOMINIC WALLER,
Plaintiff,

v. Adv. Pro. No. 14-06023
ERICKA CORRADO WALLER, et al.,
Defendants.
MEMORANDUM OPINION AND ORDER ON PLAINTIFF’S COMPLAINT

Comes on for hearing Plaintiff’s complaint to determine the dischargeability of certain
debts.1 This is an adversary proceeding in which Debtor-Plaintiff James D. Waller (James) seeks

1 Debtor-Plaintiff James D. Waller appears by his attorney, Jonathan C. Becker,
Lawrence, KS; Defendant Ericka C. Waller appears by her attorney, John R. Hooge, Lawrence,

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a determination of whether maintenance and attorney’s fees and costs2 awarded to his former
spouse, Defendant Ericka C. Waller (Ericka), are a domestic support obligation (DSO) under 11
U.S.C.§ 101(14A) that are excepted from discharge under 11 U.S.C. §§ 523(a)(5) and
1328(a)(2); or whether that award is a property or debt division under 11 U.S.C. § 523(a)(15)
and dischargeable under 11 U.S.C. §1328(a)(2) in James’s chapter 13 bankruptcy case.3

The parties stipulated to orders, memorandum orders, decisions and journal entries issued
by the Douglas County, Kansas, District Court (Divorce Court) in the case captioned, In the
Matter of the Marriage of Ericka C. Waller and James D. Waller, Case No. 2010-DM-870, and
the Memorandum Opinion issued by the Kansas Court of Appeals in the case captioned, Erika
(a/k/a Ericka) C. Waller v. James D. Waller, No. 108,151 (Kan. Ct. App. June 14, 2013).4
James, Ericka, and the Douglas County District Court Trustee submitted briefs and the Court
took the matter under advisement on September 2, 2014.5

This Court has jurisdiction under 28 U.S.C. §§ 157 and 1334 to decide the matter in

KS; Douglas County Court Trustee appears by John C. Giele, Assistant Douglas County District
Court Trustee, Lawrence, KS.

2 Although the dischargeability of the attorney’s fees and costs were not pled in
Plaintiff’s complaint, the parties have proceeded to brief the issue. This evidences consent to the
Court’s adjudication of the issue and the Court proceeds accordingly.

3 All future statutory references are to the Bankruptcy Code (Code), as amended by the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101–1532,
unless otherwise specifically noted.

4 Doc. 19.

5 Doc. 21, 22, and 23.

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controversy.6 This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The pleadings do
not contest the core nature of this proceeding. Venue is proper pursuant to 28 U.S.C. §§ 1408
and 1409.

FACTS

James and Ericka were married on September 25, 1999, and divorced on October 17,
2011. James and Ericka have one minor child who resides with Ericka. James also has two
children from a previous marriage, who are now adults, whom Ericka adopted. Ericka ran the
household and stayed home with the children during most of the marriage while James traveled
on business. During the marriage, James received income from StagePro, Inc., StagePro Mobile,
LLC, and Apex, Inc. In January 2010, James owned 100 percent of StagePro, Inc., 100 percent
of StagePro Mobile, and 33 percent of Apex, Inc. As of October 17, 2011, total gross receipts
for James’s businesses were approximately $1,500,000 to $2,000,000 annually. However, the
Divorce Court experienced difficulty pinning down James’s exact income. During the pendency
of James and Ericka’s divorce, James was uncooperative and flaunted the Divorce Court’s rules
in an apparent attempt to conceal his true income.7

6 The United States District Court for the District of Kansas refers all cases and
proceedings in, under, or related to Title 11 to the District’s bankruptcy judges pursuant to the
Amended Standing Order of Reference, effective June 24, 2013, referenced in D. Kan. Rule

83.8.5.
7 The Divorce Court noted that James “never provided copies of many financial records
to [Ericka] or to the Court. Moreover, he refused to provide some of the partial records that he
ultimately provided without a court order. [James] appeared at each court hearing . . . with more
records than previously produced, even though he still fell short of reasonable requests and
pleaded shoddy bookkeeping.” Doc. 19-3, at 9.

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Ericka works two jobs, earning a combined current annual salary of $27,300. During the
marriage, Ericka earned $24,000 annually through James’s companies for undisclosed work.

The Divorce Court granted the parties’ divorce under its written memorandum and
decision (Divorce Decree).8 The Divorce Decree ordered child support, maintenance, property
and debt distribution, and attorney’s fees. The Divorce Decree ordered James to pay $597 per
month in child support, and beginning December 8, 2010, maintenance of $1,000 per month for
60 months (Maintenance).9 The Divorce Court later adjusted the Maintenance from 60 months
to 55 months, allowing for a temporary maintenance credit.10 Maintenance payments terminate
upon the death of either party, Ericka’s remarriage, or her cohabitation in a marriage-like
relationship with an adult. The Divorce Court allocated to James a majority of the marital assets
and all of the marital debts. The following was assigned to James: (a) the marital home
($265,000); (b) James’s business interests ($2,409,126); (c) two time shares ($24,333); (d) a
recreational vehicle ($100,000); (e) a Volkswagen Jetta ($2,325); (f) the marital home mortgage
($186,000); (g) credit card debt ($37,861); (h) a mortgage on business real estate ($435,887); (i)
the People’s Bank business loan ($654,682); (j) the Daimler business loan ($105,256); (k) the
Bank of America business loan ($486,479); (l) tax debt ($163,986); and (m) business credit card

8 Doc. 19-3.
9 Doc. 19-3, ¶ 12–13, at 8.
10 Doc. 19-4.


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debt ($109,185).11 James ended up with a net value of the marital estate worth $621,448.53.12
The following was assigned to Ericka: (a) one time share ($12,167); (b) a Volkswagen Beetle
($4,150); and (c) a boat and trailer ($7,000). This left Ericka with a net value of the marital
estate worth $23,317, a difference of $598,132 compared to James. The Divorce Court ordered
James to pay attorney’s fees of $3,300.00 and bank fees of $950.00 to Ericka because James
failed to cooperate in discovery.13

James filed a chapter 13 petition on January 30, 2014.14 On February 24, 2014, James
filed a complaint seeking a determination as to whether the Maintenance and attorney’s fees and
costs are a DSO under § 101(14A) and excepted from discharge pursuant to §§ 523(a)(5) and
1328(a)(2); or whether the Maintenance and attorney’s fees and costs are a property or debt
division under § 523(a)(15) and dischargeable under § 1328(a).15 On March 25, 2014, the
Douglas County District Court Trustee filed an answer asserting that the Maintenance is a DSO

11 Erika (a/k/a Ericka) C. Waller v. James D. Waller, No. 108,151 (Kan. Ct. App.
June 14, 2013) (Doc. 19-8 at 5–6 showing the breakdown of the Divorce Court’s property
award).

12 Doc. 19-8, at 5–6. The Divorce Court assigned assets with a gross value of
$2,800,784.33 to James. Those assets were encumbered by business debt of $1,955,475.05. The
Divorce Court also assigned nonbusiness debt of $223,860.75 to James—bringing James’s total
debt balance to $2,179,335.80. Thus, the net value of the assets assigned to James after
considering the assigned debt was $621,448.53.

13 Doc. 19-3, at 9.

14 Doc. 1, James Waller’s Main Bankr. Case No. 14-20200-13.

15 Doc. 6. As noted (supra note 2), the dischargeability of the attorney’s fees and costs
was not raised in the complaint, but was briefed by the parties.

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under § 101(14A) and nondischargeable pursuant to § 523(a)(5).16 On March 25, 2014, Ericka
filed an answer requesting the Maintenance be determined a DSO and James be denied any and
all relief.17 On June 16, 2014, James, Ericka, and the Douglas County District Court Trustee
filed stipulated exhibits in this adversary proceeding.18 On August 1, 2014, Ericka filed a
memorandum requesting the Court review the Divorce Court’s memorandum that ordered the
Maintenance.19 On August 4, 2014, the Douglas County District Court Trustee filed a brief in
opposition to James’s request to discharge the Maintenance.20 On August 29, 2014, James filed
a reply brief in response to the Douglas County District Court Trustee and Ericka that requested
a determination that the Maintenance is not a DSO.21

LAW

Under § 1328(a), a debtor is generally entitled to discharge after completion of his

16 Doc. 15. The Douglas County District Court Trustee has the statutory duty to enforce
and administer collection activities. K.S.A. § 20-378 (giving the court trustee the responsibility
for collection of support); K.S.A. § 20-379 (delineating the court trustee’s powers).

17 Doc. 16.

18 Doc. 19–19-8. The exhibits included: (a) Temporary Order of Custody, Parenting
Time, Child Support, Maintenance, Reinstatement of Health Insurance; (b) Order on Petitioner’s
Motion to Compel Discovery; (c) Memorandum Decision; (d) Order Denying Motion to
Reconsider in Part and Amending Journal Entry; (e) Memorandum Decision; (f) Agreed Journal
Entry of Judgment in Contempt and Purge Review Order; (g) Order Modifying Purge Review
Order; (h) Memorandum Opinion of the Kansas Court of Appeals, Erika (a/k/a Ericka) C.
Waller v. James D. Waller, No. 108, 151 (Kan. Ct. App. June 14, 2013).

19 Doc. 21.

20 Doc. 22.

21 Doc. 23.

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chapter 13 plan. However, § 1328(a) specifies that certain debts cannot be discharged. A DSO
is such a debt; in bankruptcy parlance a DSO is also referred to as a debt that is in the nature of
support. A DSO is treated as a first priority claim under § 507(a)(1) and, with limited exception,
must be paid in full during a chapter 13 plan’s duration under § 1322(a)(2).

Sections 523(a)(5) and 101(14A) control the Court’s determination with regard to
dischargeability of the Maintenance. Section 523(a)(5) “departs from the general policy of
absolution, or ‘fresh start’” to “enforce an overriding public policy favoring the enforcement of
familial obligations.”22 In § 523(a)(5), Congress provided the non-filing former spouse the
opportunity to breach certain bankruptcy protections and render some or all of the debtor’s
obligations to a former spouse nondischargeable.23 Section 523(a)(5) creates tension between
the interests of the debtor under the Code and the obligations to former spouses arising in family
law proceedings. Something must give when state family law and federal bankruptcy law
collide. Frequently, at least one party is unsatisfied with the outcome of the bankruptcy
proceedings.

Analysis

This Court is not bound by the labels applied by the Divorce Court when reviewing the

22 See In re Trump, 309 B.R. 585, 591 (Bankr. D. Kan. 2004); In re Sampson, 997 F.2d
717, 721 (10th Cir. 1993), citing and quoting Shaver v. Shaver, 736 F.2d 1314, 1315–16 (9th Cir.
1984); HENRY J. SOMMER & MARGARET DEE MCGARITY, COLLIER FAMILY LAW AND THE
BANKRUPTCY CODE ¶ 6.03[1], at 6-13 to 6-17 (2014); 4 COLLIER ON BANKRUPTCY ¶ 523.05, at
523-1 (ALAN N. RESNICK AND HENRY J. SOMMER, eds. 16th ed. 2014).

23 This case is procedurally somewhat unusual in that the debtor, not the former spouse
creditor, filed the adversary action.

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dischargeability of James’s obligations to Ericka.24 The treatment of James’s obligations to
Ericka under Kansas law does not bind the Court’s inquiry. “[N]either state law nor the parties’
characterization determine[] whether a debt [is] nondischargeable under section 523(a)(5).”25
Whether James’s obligations to Ericka are excepted from discharge under § 523(a)(5) is a matter
of federal law based on an inquiry made on a case-by-case basis.26

This Court’s inquiry into the “actual nature of the obligation promotes nationwide
uniformity of treatment between similarly situated debtors and furthers § 523(a)(5)’s underlying
policy favoring enforcement of familial support obligations over a debtor’s ‘fresh start.’”27 The
court in Sampson concluded that whether an obligation is excepted from discharge under §
523(a)(5) is “a dual inquiry into both the parties’ intent and the substance of the obligation,” and
the crucial issue is “whether the obligation imposed by the divorce court has the purpose and
effect of providing support for the spouse.”28 The term “support” receives broad interpretation

24 In re Rivet, No. 13-11726, 2014 WL 1876285, at *3 (Bankr. D. Kan. May 8, 2014)
(Bankruptcy court is not bound by labels applied to matrimonial obligations in a state court
decree).

25 In re Sampson, 997 F.2d at 722. The Sampson court rejected the suggestion in Yeates
(807 F.2d 874 (10th Cir. 1986)) that an unambiguous agreement normally controls the court’s
determination.

26 In re Sampson, 997 F.2d at 721 (“Whether a debt is nondischargeable under §
523(a)(5) is a question of federal law.”); In re Rivet, 2014 WL 1876285, at *3; In re Trump, 309

B.R. at 592; In re Busch, 369 B.R. 614, 622 (B.A.P. 10th Cir. 2007) (citing In re Sampson, 997
F.2d at 725–26).
27 In re Sampson, 997 F.2d at 722 (citation omitted).

28 In re Sampson, 997 F.2d at 723, quoting in the second statement 2 HOMER H. CLARK,
JR., THE LAW OF DOMESTIC RELATIONS IN THE UNITED STATES § 17.7, at 305 (2d ed. 1987)

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under the Code.29 “A ‘spouse’s need for support is a very important factor,’ and ‘the crucial
issue is the function the award was intended to serve.’”30

To determine whether a debt is a DSO this Court considers the parties’ shared intent at
the time of the marital settlement agreement, the substance of the divorce obligation, whether the
purpose and effect of the obligation is to provide support to a spouse, a spouse’s need for
support, and what function the obligation is intended to serve.31 If the divorce were litigated, as
in the present case (as opposed to the state court adopting the parties’ mutual marital settlement
agreement), then it is the intent of the state court judge that is considered.32 The inquiry is
whether the state court judge believed and found the debt was in fact support, or whether that
debt was established by the state court as a means of fairly dividing the parties’ assets and
liabilities.33

(emphasis provided by the Sampson court).

29 In re Rivet, 2014 WL 1876285, at *3.

30 In re Trump, 309 B.R. at 593 (quoting In re Yeates, 807 F.2d at 879, and In re
Williams, 703 F.2d 1055, 1057 (8th Cir. 1983)).

31 In re Sampson, 997 F.2d at 726; In re Yeates, 807 F.2d at 879; In re Williams, 703 F.2d
at 1057; see also Taylor v. Taylor (In re Taylor), 737 F.3d 670, 676 (10th Cir. 2013) (“When
determining whether an obligation is in the nature of alimony, maintenance, or support, this
court conducts a ‘dual inquiry’ looking first to the intent of the parties at the time they entered
into their agreement, and then to the substance of the obligation.”).

32 SOMMER & MCGARITY, supra note 22, ¶ 6.04[2], at 6-28 to 6-29.

33 Good v. Good (In re Good), 187 B.R. 337, 338–40 (Bankr. D. Kan. 1995). As an aside,
the analysis is difficult when the ex-spouse’s obligation to pay joint debt not associated with the
parties’ former joint residence—such as joint credit card debt. Whether the requirement that a
debtor pay these debts and hold his ex-spouse harmless therefrom and indemnify her qualifies as

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If a debt is not discharged, then the associated interest, both pre and post-bankruptcy, is
likewise, not discharged.34 Section 523(a) exceptions to discharge usually are strictly construed
in favor of the debtor; however, that rule does not apply to DSOs.35 The burden of proof to
demonstrate nondischargeability is by a preponderance of the evidence and rests with the
objecting creditor.36 The burden for the objecting creditor is both to establish the existence of
the underlying debt and to demonstrate that the debt is of a kind contemplated under an
exception to discharge.37

James’s Obligation to Pay Maintenance to Ericka is a DSO

The first inquiry to determine whether James’s obligation to Ericka is actually in the
nature of alimony, maintenance, or support is the parties’ intent.38 Here, the Court examines the
Divorce Decree for the intent of the Divorce Court because an agreement was not reached

a domestic support obligation or a division of debts is problematic. “No type of obligation is
more difficult for the bankruptcy courts to analyze in determining dischargeability under section
523(a)(5) than a spouse’s undertaking to pay joint marital debts or to hold the other spouse
harmless from such debts.” SOMMER & MCGARITY, supra note 22, ¶ 6.05[5], at 6-66. However,
James’s obligation under the Divorce Decree to pay joint debts assigned to him is not currently
before the Court.

34 See Tuttle v. United States (In re Tuttle), 291 F.3d 1238, 1241 (10th Cir. 2002) (finding
that the post-bankruptcy interest associated with a nondischargeable tax debt is not discharged).

35 4 COLLIER ON BANKRUPTCY, supra note 22, ¶ 523.05, at 523-1; Jones v. Jones (In re
Jones), 9 F.3d 878, 880 (10th Cir. 1993).

36 Grogan v. Garner, 498 U.S. 279, 286–87 (1991).

37 See SOMMER & MCGARITY, supra note 22, ¶¶ 6.07[4] and 6.07A[3][b], at 6-97 and
6-106, respectively.

38 In re Sampson, 997 F. 2d 717.

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between James and Ericka in their state court divorce action.39 The Divorce Decree labels the
obligation as “maintenance” and consistently refers to the obligation as maintenance throughout
the decree. Although the Court is not bound by the Divorce Decree’s labels, the characterization
assigned to the obligation “is persuasive evidence of intent.”40 The label attached by the Divorce
Court “is entitled to great weight.”41 Furthermore, the Divorce Court did not reclassify the
Maintenance when James filed a motion to reconsider and amend.42 The Divorce Court
reiterated that Ericka stayed at home and raised the children and although James “said he was
broke and cash poor, his lifestyle showed little diminution.”43 Here, the Court finds the Divorce
Court’s use of the word maintenance and its refusal to reclassify the Maintenance persuasive that
the Maintenance is a DSO. The Divorce Court would have most likely avoided use of the word
maintenance if in fact its sole purpose was to provide for a property division with monthly
payments. A separate section of the Divorce Decree addresses the property settlement between
James and Ericka. It is significant the Maintenance is paid in installments, the termination of
which is triggered by events ordinarily associated with maintenance. Under the facts of this

39 SOMMER & MCGARITY, supra note 22, ¶ 6.04[2], at 6-29.

40 In re Sampson, 997 F.2d at 723 (quoting In re Yeates, 807 F.2d at 878). Here, the
Divorce Decree’s language is persuasive of intent because the parties were unable to reach their
own agreement (SOMMER & MCGARITY, supra note 32, ¶ 6.04[2], at 6-28 to 6-29).

41 4 COLLIER ON BANKRUPTCY, supra note 22, ¶ 523.11[6][a], at 523-85.

42 Doc 19-4. James’s motion to reconsider filed with the Divorce Court was not included
in the parties’s stipulated documents. However, the Divorce Court’s order denying the motion to
reconsider in part and amending the journal entry was included.

43 Doc. 19-4.

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case, the use of the word maintenance and the separation of the Maintenance and property
settlement sections are indicia of a DSO.

It could be argued that the Divorce Court’s intent is somewhat unclear due to the
statements that “[b]ased upon the division of financial accounts and assets outlined below,
maintenance is ordered in the amount of $1,000 a month for 60 months”44 and “in lieu of any
value assigned to the businesses and their assets.”45 However, the Court does not consider these
statements in a vacuum, but instead examines the Divorce Court’s intent based on the entirety of
the Divorce Decree. Here, the question is how the substance and function of the Maintenance
operates under federal law. The Court “must attempt to infer an intent by examining the
underlying facts of the case.”46

Here, to determine whether the Maintenance is a DSO, the Court addresses the second
prong of the Sampson47 analysis—the substance of the obligation. Determining whether James’s
obligation is in the nature of support turns on “the function served by the obligation at the time
of the divorce.”48 The function the obligation serves is examined by “considering the relative

44 Doc. 19-3 ¶ 4, at 7.
45 Doc. 19-3 ¶ 13, at 8.
46 SOMMER & MCGARITY, supra note 22, ¶ 6.04[2], at 6-29 (2014).
47 In re Sampson, 997 F.2d 717.
48 In re Sampson, 997 F.2d at 725–26 (quoting In re Gianakas, 917 F.2d 759, 763 (3d Cir.


1990).

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financial circumstances of the parties at the time of the divorce.”49 Courts examine the following
factors: (a) the income and needs of the parties at the time the obligation becomes fixed; (b) the
amount and outcome of property division; (c) whether the obligation terminates upon the
obligee’s death, remarriage, or emancipation of children; (d) the number and frequency of
payments; (e) the waiver of alimony or support rights; (f) the availability of state court
procedures to modify the obligation or enforce through contempt of court order; (g) the tax
treatment of the obligation; and (h) the current circumstances of the parties at the time of the
dischargeability proceeding when analyzing whether the substance of the obligation is in the
nature of support.50 Here, the Sampson factors indicate that the Maintenance is in the nature of
support because that was the intent of the Divorce Court and the substance of the payments are
based on Ericka’s need and provide post-divorce support for Ericka.

James and Ericka’s child support worksheet lists James’s proportionate share of the
combined marital income as 75.8 percent and Ericka’s as 24.2 percent.51 James admitted that
Ericka relied on his income for basic needs when he said Ericka “use[d] me as a meal ticket for
over 8 years.”52 Ericka relied on James’s access to his business’s petty cash fund to pay for
“personal items such as clothing and family meals at restaurants.”53 While married, Ericka also

49 In re Sampson, 997 F.2d at 726.

50 SOMMER & MCGARITY, supra note 22, ¶ 6.04[4]–6.04[11], at 6-33 to 6-55.

51 Doc. 19-1 ¶ D.2, at 6.

52 Doc. 19-3, at 2.

53 Doc. 19-3 ¶ 8, at 4.

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received “$24,000 annually [from James’s] company for undisclosed work.”54 Both James and
Ericka “benefited from a number of personal expenses paid for by [James’s] company, including
property and vehicle insurance, personal property taxes, cell phones, satellite TV, internet, health
insurance, and travel.”55 Ericka was the beneficiary of this arrangement because “[d]uring most
of the marriage, [Ericka] ran the household and reared the children, while [James] traveled the
country on business.”56 Ericka currently works two jobs bringing in $27,300 annually.57
Furthermore, James received all the business-related assets that generated most of the income
received by Ericka during the marriage. In arriving at its conclusion, the Divorce Court
considered “the length of this marriage, the age of the parties, the property they own, their
present and future earning capacities, and the time, source and manner of acquisition of their
property.”58 These findings indicate Ericka relied on family support from James’s income from
the business assets assigned to James. At the time of the divorce, Ericka was in need of support
in the form of maintenance.

The Divorce Court separately ordered James to pay monthly child support. However, the
Goin court recognized that a separate child support award was insufficient “to provide the spouse

54 Doc. 19-3 ¶ 6, at 3.
55 Doc. 19-3 ¶ 7, at 3.
56 Doc. 19-3 ¶ 1, at 2.
57 Doc. 19-1, at 6. Ericka’s $24,000 annual salary from James’s companies terminated


when James and Ericka divorced.
58 Doc. 19-3, at 9.

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and children with the standard of living to which they had grown accustomed,” and relied on that
fact in finding that the [maintenance] obligation was in the nature of support.59 Furthermore,
following the issuance of its Divorce Decree, the Divorce Court was asked to modify its child
support order due to James’s failure to pay the Maintenance. The Divorce Court’s initial
October 17, 2011, child support order required James to pay $597 a month and was based on
James paying $1,000 a month in maintenance to Ericka.60 On May 3, 2013, the Divorce Court
found James in arrears on the Maintenance and increased his child support obligation to $692 a
month.61 This indicates Maintenance was intended as a DSO, because the Divorce Court had to
increase child support payments to provide necessary support for Ericka—offsetting James’s
failure to pay the Maintenance. If the Maintenance were actually a property settlement and not a
DSO, then James’s failure to pay Maintenance would not change the child support calculus.

Ericka is scheduled to receive the Maintenance in monthly increments over the course of
60 months.62 It is notable that the Divorce Court awarded monthly maintenance, and not a
distributive award payable over a term period. The Maintenance also “terminate[s] upon the
death of either party, [Ericka’s] remarriage or her cohabitation in a marriage-like relationship

59 In re Goin, 808 F.2d 1391, 1393 (10th Cir. 1987).

60 Doc. 19-5 ¶¶ 1 and 5, at 1–2.

61 Doc. 19-5 ¶ 10, at 4.

62 4 COLLIER ON BANKRUPTCY, supra note 22, ¶ 523.11[6][e], at 523-87. An obligation
paid as a lump sum is more likely a property settlement while an obligation to make regular
monthly payments is more characteristic of support.

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with an adult.”63 James also received $2,800,784.33 in assets encumbered by $2,179,335.80 in
debt.64 Despite the encumbrance: (a) these assets are income-generating; and (b) James received
$621,448.53 in income-generating assets in excess of debt. Comparatively, Ericka received
$23,316.67 in debt-free marital assets. Thus, James received $598,131.86 more than Ericka in
marital estate property. It is this Court’s conclusion that the Maintenance is a DSO and is not
dischargeable under §§ 523(a)(5) and 1328(a)(2) .

Attorney’s Fees

Ericka seeks a determination that attorney’s fees and costs of $4,250.00 awarded to her in
the Divorce Decree are a DSO. As discussed, Sampson65 states the general rule with regard to
dischargeability of obligations arising from divorce actions under § 523(a)(5). The Tenth Circuit
Court of Appeals narrowed the creditor’s burden when the obligations are directly linked to
custody proceedings.66 However, “not all fees awarded in a divorce arise in conjunction with or
are directly related to custody or the best interest of the child.”67 As discussed in Turner,

63 Doc. 19-3, ¶ 13, at 8; 4 COLLIER ON BANKRUPTCY, supra note 22, ¶ 523.11, at 523-87.
An obligation terminating on death, remarriage, or emancipation of the parties’ children is likely
support.

64 Doc. 19-8, at 5–6, supra note 12.

65 In re Sampson, 997 F.2d 717.

66 In re Jones, 9 F.3d 878 (holding that attorneys’ fees incurred and awarded in custody
matters are by their nature related to the best interests of the child and are therefore in the
“nature of support” under 11 U.S.C. § 523(a)(5)).

67 In re Turner, 266 B.R. 491, 497 (B.A.P. 10th Cir. 2001).

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attorney’s fees may be “awarded without reference to any particular issue or controversy.”68 In
the instant case, where the child custody factors in Jones69 are not present, the Sampson test
applies.

The Divorce Court indicated that the attorney’s fee award covered discovery costs.70
Based on this language, the Court finds that the Divorce Court’s attorney’s fees and costs award
was not intended for Ericka’s support, but to punish James for his lack of candor and
recalcitrance. Because the award was intended as punishment and is not in the nature of support,
Ericka’s claim for $4,205 in attorney’s fees and costs is not a DSO.

Conclusion

James’s obligation to pay the Maintenance is a DSO under § 101(14A) and is
nondischargeable under §§ 523(a)(5) and 1328(a)(2). Ericka failed to prove that the award of
attorney’s fees and costs award is in the nature of support. James’s obligation to pay $4,205 in
attorney’s fees and costs is not a DSO and is a debt under § 523(a)(15); accordingly, the

68 In re Turner, 266 B.R. at 497.

69 In re Jones, 9 F.3d 878. Awards directly linked to child custody or to matters
involving the best interest of the child are ordinarily in the nature of support.

70 Doc. 19-3 ¶ 14, at 9. “[James] never provided copies of many financial records to
[Ericka] or to the Court. Moreover, he refused to provide some of the partial records that he
ultimately provided without a court order. [James] appeared at each court hearing . . . with more
records than previously produced, even though he still fell short of reasonable requests and
pleaded shoddy bookkeeping. Hence, it is reasonable to assess some cost of discovery in the
case to him. . . . The Court awards attorney fees of $3,300.00 (12 x $275/hr.), and bank fees of
$950. The accounting fees were necessary at some point for case preparation. . . . Some of the
claimed costs were part of the normal give and take of discovery, and some review of produced
documents was necessary to the case. However, [James] flouted the rules repeatedly and must
bear some of the costs of making him comply.”

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attorney’s fees and costs award is not excepted from a full compliance chapter 13 discharge
under § 1328(a).

IT IS ORDERED that each party shall bear his or her costs in this action pursuant to Fed.

R. Bankr. P. 7054(b).
IT IS FURTHER ORDERED that the foregoing constitute Findings of Fact and
Conclusions of Law under Fed. R. Bankr. P. 7052 and Fed. R. Civ. P. 52(a). A judgment on this
ruling will be entered on a separate document as required by Fed. R. Bankr. P. 7058 and Fed. R.
Civ. P. 58.

IT IS SO ORDERED

###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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