KSB

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,

14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 1 of 18


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.

- 2


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 2 of 18


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.

- 3


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 3 of 18


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.


- 4


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 4 of 18


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.

- 5


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 5 of 18


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.

- 6


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 6 of 18


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.

- 7


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 7 of 18


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)

- 8


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 8 of 18


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

- 9


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 9 of 18


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.

- 10


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 10 of 18


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.

- 11


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 11 of 18


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).

- 12


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 12 of 18


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.

- 13


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 13 of 18


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.

- 14


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 14 of 18


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.

- 15


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 15 of 18


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).

- 16


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 16 of 18


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.”

- 17


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 17 of 18


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
- 18


14.12.29 Waller Order Granting Priority Status of DSO Claim.wpd
Case 14-06023 Doc# 25 Filed 12/29/14 Page 18 of 18

12-23121 James (Doc. # 50)

In Re James (Bankr. D. Kan. Nov. 5, 2014) Doc. # 50

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 4th day of November, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

MARK ANTHONY JAMES and

CAROLYN MARIE JAMES, Case No. 12-23121
Debtors.

MEMORANDUM OPINION AND ORDER OVERRULING
REC AUTO CREDIT’S OBJECTION TO CONFIRMATION OF PLAN


Comes on for hearing confirmation of Debtors’ chapter 13 plan,1 REC Auto Credit’s
(REC Auto) objection2 to confirmation of Debtors’ chapter 13 plan, and Debtors’ reply3 to REC
Auto’s objection to Debtors’ proposed chapter 13 plan. The parties have agreed this matter may
be submitted on the pleadings and exhibits attached thereto.

This matter constitutes a core proceeding and the Court has jurisdiction to decide the

1 Doc. 2.
2 Doc. 13.
3 Doc. 14.


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 1 of 13


matter in controversy.4 After review of Debtors’ proposed chapter 13 plan (“Plan”), the
objections thereto, attached exhibits, the Court’s file, and consideration of counsel’s arguments,
the Court is ready to rule.

Background

At issue is whether Debtors must cure and assume the Closed End Motor Vehicle Lease
(“Contract”) between REC Auto and Debtors as a lease subject to 11 U.S.C. §§ 365 and
1322(b)(7) or whether Debtors may properly treat the Contract as a security agreement for a
personal use automobile.5 For the reasons set forth below, the Court concludes that the Contract
is a disguised security agreement under Kansas law and that the Plan provides for proper
treatment of REC Auto’s claim. The Debtors’ Plan provides for payment of REC Auto’s 910day
claim6 in full with postpetition interest.

In the United States, the automobile enjoys a particularly vibrant and pervasive position
in and effect on the American economy, only amplified by the relative dearth of public
transportation.7 Ninety-one percent of adults commute to work using their personal vehicles.8

4 This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(L). 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
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.
5 Neither party has asserted the applicability of the Federal Consumer Leasing Act, Regulation M, the
Truth-in-Lending Act and Regulation Z in their arguments. For purposes of this decision, the Court rules under
pertinent Kansas state law and has determined that such resolution is not inconsistent with pertinent federal law. See
generally CAROLYN L. CARTER, ET AL., NATIONAL LAW CONSUMER CENTER, CONSUMER CREDIT REGULATION
§10.24 (2012); DIANE E. THOMPSON, ET AL., NATIONAL CONSUMER LAW CENTER, TRUTH IN LENDING § 13 (8th ed.
2012); CAROLYN L. CARTER, ET AL., NATIONAL CONSUMER LAW CENTER, REPOSSESSIONS § 14.2.3 (8th ed. 2013).

6 A 910-day claim (or 910 claim) is an automotive loan made within 910 days of filing a petition for
bankruptcy as set forth in the hanging paragraph of § 1325.

7

 DEP’T OF THE TREASURY & COUNCIL OF ECON. ADVISORS, A NEW ECONOMIC ANALYSIS OF
INFRASTRUCTURE INVESTMENT 3 (2012) (noting that the average American family spends almost $7,600 a year on
transportation-related expenses due in large part to a lack of alternatives to automobile traffic).

8 NATIONAL CONSUMER LAW CENTER, CONSUMER CREDIT REGULATION §10.3.1.1 at 447 n.53, citing U.S.
Department of Transportation, Bureau of Transportation Statistics, NHTS 2001 Highlights Report, BTS03-05
(Washington, D.C. 2003).

- 2


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 2 of 13


An automobile is virtually essential for a worker to engage in productive and beneficial
employment which, in turn, improves the chances a debtor will complete his or her chapter 13
plan.

The policy goals of achieving a successful chapter 13 plan are strained when a debtor’s
financial condition precludes using or owning a vehicle. A household with an annual income
less than $25,000 is nine times more likely to be without an automobile than those households
with annual incomes in excess of $25,000.9 Low income families have difficulty procuring a
reliable automobile due to their economic situation. In turn, the inability to procure a reliable
automobile materially affects the family’s economic success.10 Breaking this cycle is difficult,
but of the low income families who are able to gain access to a reliable vehicle, it has been
observed that within “[o]ne year after receiving a vehicle, 70% of the families went off public
assistance, 80% were working, and 13% were in job training.”11 The automotive industry and its
many appendages are not only a cornerstone of our economy, but also affect the economic
viability and opportunities of the American worker and the safety of American citizens.12

Discussion

Debtors filed their chapter 13 petition and Plan on November 16, 2012. Debtors’ Plan
lists an automobile and an associated debt owed to REC Auto.13 REC Auto objects to
confirmation of Debtors’ Plan and alleges Debtors wrongfully describe REC Auto as a 910-day

9 Id. § 10.3.1.1 at 447.
10 Id.
11 Id. at n.55.
12 Alan Berube, et al., Socioeconomic Differences in Household Automobile Ownership Rates: Implications


for Evacuation Policy 2-3, UNIV. OF CAL. TRANSP. CTR., WORKING PAPER NO. 804 (June 2006),
http://socrates.berkeley.edu/~raphael/BerubeDeakenRaphael.pdf (noting that citizens of New Orleans who lacked
access to an automobile were less able to escape the ravages of Hurricane Katrina in 2005).

13 Doc. 2 (erroneously listed in the Debtors’ Plan as “RC Auto”).

- 3


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 3 of 13


car loan creditor. REC Auto argues its position by referring to the Contract which it contends
does not involve a lending relationship, but rather a leasing agreement in which REC Auto
leased a 2004 Pontiac Grand Prix (“Vehicle”) to the Debtors as lessees.14

Under the Contract, Debtors are required to make weekly lease payments of $100.
Debtors’ Plan proposes payment of $396 per month for no less than 36 months. Debtors’
proposed Plan payment is insufficient if the Contract were an executory contract under
§§ 1322(b)(7) and 365(a).15 If the Contract were a lease, Debtors could retain the use of the
Vehicle only if all monetary defaults were cured and the Court approves assumption of the
Contract.16 The Debtors have not complied with these requirements.17 REC Auto also contends
that should the Contract be treated as a 910-day car loan, Debtors are not entitled to “cram
down” the secured claim to the collateral’s value under § 1325 because the Contract was entered
into less than 910 days prior to the filing of the bankruptcy petition.18

Debtors assert their characterization of the Contract as a 910 claim is correct because the
Contract is a disguised security interest and purchase-money sale agreement rather than a true
lease under K.S.A. § 84-1-203(a).19 Debtors also support their position by citing various
Contract provisions. For example, Debtors allege the early termination provisions assure that
REC Auto receives the total Contract price which has the effect of precluding early

14 REC Auto’s obj. to Plan confirmation, Doc. 13 ¶ 2 at 1.

15 Id. ¶ 3–4 at 1–2.

16 See generally § 365.

17 Doc. 13 ¶ 5 at 2.

18 Id. ¶ 6 at 2. This objection is without merit because by their very nature, 910-day car loans may not be
crammed down to the value of the collateral, and the Debtors’ Plan does not seek to cram down. REC Auto will also
receive interest on the entire claim. In re Jones, 530 F.3d 1284 (10th Cir. 2008). To pay REC Auto’s claim in full
with interest, Debtors’ Plan will extend beyond 36 months. The Debtors’ Plan complies with the § 1325(a) hanging
paragraph.

19 Debtors’ Reply to REC Auto’s obj. to Plan confirmation, Doc. 14 ¶ 2 at 1.

- 4


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 4 of 13


termination.20 REC Auto may compel compliance with the Contract because it is allowed to
disable the Vehicle through a remotely controlled payment guarantee device if any payment is
not timely made.21 Additionally, Debtors allege the purchase option clause at the end of the term
under the Contract equals or exceeds the economic life of the goods for the purpose of K.S.A.
§ 84-1-203(b)(1).22 Finally, Debtors allege the ancillary obligations in the Contract reinforce
that the Contract as a whole represents a disguised security agreement.23

The Bankruptcy Code generally leaves intact the determination of property rights under
state law.24 Even so, an agreement calling for a series of payments for the transfer and use of
property may either be described as an installment sale or as a lease transaction.25 In Kansas, if
the transfer is a sale, then ownership of the property transfers to the transferee subject to the
transferor’s security interest.26 The transferor’s security interest is defined as an interest in
personal property or fixtures which secures payment or performance of an obligation.27
However, if the transfer is a lease, then the transferor retains legal ownership of the property.28
A lease is defined as a transfer of the right to possession and use of goods for a term in return for

20 Id. ¶ 6–8 at 2–3.

21 Id. ¶ 9 at 3. Of course, doing so postpetition while the automatic stay is in effect would violate § 362(a).

22 Id. ¶ 11 at 3–4.

23 Id. ¶ 13 at 4.

24 Butner v. United States, 440 U.S. 48, 54–55 (1979) (noting that the existence, nature, and extent of a
security interest is governed by state law). An exception exists when the application of state law would contravene
the purposes and objectives of the Bankruptcy Code. See, e.g., In re KAR Dev. Assoc., L.P., 180 B.R. 629, 637 (D.
Kan. 1995) (affirming a Kansas bankruptcy court’s decision to apply an economic realities test to determine whether
a real estate transaction should be characterized as a lease despite Kansas case law to the contrary).

25 Shu-Yi Oei, Context Matters: The Recharacterization of Leases in Bankruptcy and Tax Law, 82 AM.
BANKR. L.J. 635, 639–42 (2008) (noting the similarities in form between sale and lease transactions).

26 K.S.A. § 84-1-201(b)(35) (stating that the retention of title by a seller of goods notwithstanding delivery
to the buyer is limited in effect to a reservation of a security interest). See also K.S.A. § 84-2-401(2) (stating that
title in personal property passes to the buyer when the seller completes delivery of the goods).

27 K.S.A. § 4-1-201(b)(35).

28 K.S.A. § 84-2a-302.

- 5


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 5 of 13


consideration.29

While the definitions and characteristics of the above-described transactions appear
straight-forward, the issue of categorizing a specific transaction as either a lease or a security
agreement is a problem that “has vexed the courts for many years.”30 A document denominated
as a lease may be construed to create a security interest if the terms and contents thereof are
more consistent with a security interest than a lease.31 While the law does not draw an absolute
line between a security interest and a lease, this determination should be made on the factual
basis that the transaction is more similar to one or the other. In making this determination, early
courts focused on the parties’ actual intent and applied a multi-factor test to the transaction.32
This approach, however, proved largely unworkable because often a single factor was just as
applicable to a true lease as it was to a true security interest.33 The multi-factor test was
subsequently abandoned in favor of a two-prong test that examines the underlying economic
realities of the transaction rather than the parties’ subjective intent.34

The two-prong test to establish whether a transaction in the form of a lease creates a lease
or a security interest is codified in K.S.A. § 84-1-203(b). Both prongs must be proven to
establish a security interest. This determination is made by the facts of each case. The first
prong establishes a security interest if the consideration paid by the lessee for the right to

29 K.S.A. § 84-2a-103(1)(j).

30 Charles v. U.S. Bancorp Leasing & Financial (In re Charles), 278 B.R. 216, 221 (Bankr. D. Kan. 2002).

31 Exec. Fin. Servs., Inc. v. Pagel, 238 Kan. 809, 812 (Kan. 1986).

32 See, e.g., Atlas Indus., Inc. v. Nat’l Cash Register Co., 216 Kan. 213 (1975) (applying a 12-factor test to
determine whether a transaction constituted a lease or a security agreement).

33 U.C.C. § 1-201(37) cmt. ¶ 37 (2001) (noting that criteria thought to be consistent with either sales or
loans in fact were applicable to both sales and loans).

34 This test was initially included in the definition of the term “security interest” codified in K.S.A.
§ 84-1-201(37) (2001). Later, consistent with the U.C.C., the test was given its own heading and moved to new

K.S.A. § 84-1-203.
The U.C.C. Comment to § 84-1-203 notes that the substance of the test remains the same.
- 6 14.11.04
James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 6 of 13


possession and use of the goods is an obligation for the term of the lease that is not subject to
termination by the lessee.35 Under the second prong, one of the following four elements must be
present to establish a security interest:

(1)
The original term of the lease is equal to or greater than the remaining economic
life of the goods;
(2)
The lessee is bound to renew the lease for the remaining economic life of the
goods or is bound to become the owner of the goods;
(3)
The lessee has an option to renew the lease for the remaining economic life of the
goods for no additional consideration or for nominal additional consideration
upon compliance with the lease agreement; or
(4)
The lessee has an option to become the owner of the goods for no additional
consideration or for nominal additional consideration upon compliance with the
lease agreement.36
K.S.A. § 84-1-203(c)(1) also states that a transaction in the form of a lease is not a sale merely
because the present value of the consideration paid by a lessee is equal to or greater than the fair
market value of the goods. Also, the transaction is not necessarily a sale if the lessee has an
option to purchase the goods for a fixed price that is equal to or greater than the reasonably
predictable fair market value of the item at the time of the option’s exercise.37 Here, Debtors
carry the ultimate burden of persuasion since they are seeking to recharacterize the Contract as a
35 K.S.A. § 84-1-203(b).

36 Id.

37 K.S.A. § 84-1-203(c)(6).

- 7


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 7 of 13


disguised security interest.38

The Court’s analysis begins by first noting that “a true lease in its purest form has two
distinguishing attributes: the lessor retains an ‘entrepreneurial stake’ in the leased property and
keeps a valuable ‘reversionary’ interest.”39 Specifically, the parties to the lease expect the goods
to retain significant residual value after the lease term is completed and the lessor retains some
possibility of gain or risk of loss in the value of the goods.40 With this framework in mind, the
Court now examines the composition of the lessee’s payments and the termination provisions to
determine whether the Contract satisfies the first prong of K.S.A. § 84-1-203(b).

Under the terms of the Contract, Debtors’ payments total $15,850 and consist of the
amount due at lease signing ($250) plus the sum of the periodic payments ($15,600).41 Each
periodic payment is $100 and is paid weekly for 156 weeks.42 The sum of the periodic payments
reflects the $9,450 agreed upon value of the Vehicle, a $4,805.42 rent charge, and other
miscellaneous expenses (including sales tax) for a total base amount of $14,322.36. The
Vehicle’s estimated end-of-contract residual value of $962.27 and $220.79 of the $250 paid at
the lease signing are excluded from the total base amount.43

For an early termination of the Contract, Debtors are liable to pay REC Auto the total of
any unpaid monthly payments due under the Contract, an early termination fee of $500, and the

38 Hitchin Post Steak Co. v. Gen. Elec. Capital Corp. (In re HP Distribution LLP), 436 B.R. 679, 681–82

(Bankr. D. Kan. 2010).
39 Id. at 684 (citing James White and Robert Summers, 4 UNIFORM COMMERCIAL CODE § 30-3 at 2 (2009)).
40 Id.
41 Ex. A of REC Auto’s obj. to Plan confirm., Doc. 13-1 § 2 at 1.
42 Id. § 3 at 1.43 Id.

- 8


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 8 of 13


amount of the adjusted lease balance that exceeds the Vehicle’s realized value44 at termination.45
However, if the remaining monthly Contract payments are less than the amount calculated under
the early termination formula, then Debtors are only required to pay the weekly payments
remaining under the Contract.46 Debtors’ liability to make the remaining Contract payments is
not terminable.47 Debtors remain liable for the full Contract amount even upon early termination
of the Contract. In reality, the right to terminate by the Debtors is a fiction. Debtors’ inability to
extricate themselves from the financial obligations of this Contract precludes a right to terminate
the obligation for Contract payments, even though the terms of the Contract provide for early
termination.48 The first prong of the test is satisfied because the Debtors’ obligation to pay
consideration under the Contract for the right to possession and use of the Vehicle is an
obligation for the term of the Contract that may not be terminated by the Debtors.

Debtors need only satisfy one of the four elements under K.S.A. § 84-1-203(b)(1)–(4) to
satisfy the second prong of the test. The first three elements require an examination of the
Vehicle’s economic life in relationship to the lease term, and since neither party provided any
evidence to support their position on this issue, the first three elements are disregarded except as
touched upon in the Court’s analysis below. This leaves only the last element. Under K.S.A.
§ 84-1-203(b)(4), an agreement will satisfy the second prong if the lessee has an option to

44 “The Vehicle’s realized value is: the price we [REC Auto] receive for the Vehicle at disposition; the
highest offer we receive for disposition of the Vehicle; or the fair market value of the Vehicle at the end of the Lease
term. We will add to the amount you owe us what it costs us to pay someone to dispose of the Vehicle (for example,
an auction fee).” Doc. 18-1 ¶ 14 at 1.

45 Debtors’ Reply to REC Auto Credit’s obj. to Plan confirm., Doc. 14 ¶ 6–8 at 2–3.

46 Id.

47

 CAROLYN L. CARTER, ET AL., NATIONAL CONSUMER LAW CENTER, REPOSSESSIONS § 14.1.2.3.2 at
494-95 (8th ed. 2013), collecting cases at n.14.

48 Morris v. Dealers Leasing, Inc. (In re Beckham), 275 B.R. 598, 602 (Bankr. D. Kan. 2002) (conceding
that there is authority to assert that the first prong is satisfied when the financial obligation of the debtor is non-
cancelable, although ultimately deciding the case on other grounds).

- 9


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 9 of 13


become the owner of the goods for no additional consideration or for nominal additional
consideration upon compliance with the lease agreement. Additional consideration is nominal if
it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if
the option is not exercised.49 Stated differently, the lessee must compare the cost not to exercise
a purchase option to the cost to exercise a purchase option. When a lessee does not exercise a
purchase option, the lessee loses the use of the leased asset and must calculate the cost of
acquiring a replacement asset. If it is cheaper for the lessee to exercise the purchase option over
the leased asset rather than to replace the asset, then the option’s consideration may be nominal.
However, if at the time the option is granted, the exercise price is stated as the asset’s fair market
value determined at the time of exercise, then the consideration is not nominal.50 Intuitively,
there would not be a monetary incentive for the lessee to exercise a purchase option when the
cost of exercise is equal to the asset’s fair market value; thus, an option’s consideration would
not be nominal.

The Contract states that Debtors have the option to purchase the Vehicle at the end of the
lease term for the Vehicle’s “FMV.”51 Debtors’ reasonably predictable cost of exercising the
Purchase Option at End of Lease Term is equal to the Vehicle’s fair market value. According to

K.S.A. § 84-1-203(d)(2), the payment of the Vehicle’s fair market value in exercise of this
option is not nominal; thus the second prong of the test is not satisfied under this Contract
provision.
However, Debtors possess a second purchase option under the Contract. In addition to

49 K.S.A. § 84-1-203(d).

50 K.S.A. § 84-1-203(d)(2).

51 Ex. A of REC Auto’s obj. to Plan confirm., Doc. 13-1 § 3 at 1. This Court interprets the term “FMV” as
shorthand for fair market value.

- 10


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 10 of 13


the Purchase Option at End of Lease Term, Debtors may exercise a purchase option upon early
termination by paying the balance of the unpaid Contract payments at the time of early
termination.52 Debtors will also be liable for the early termination penalty, but the penalty’s
formula is capped at the amount remaining under the Contract.53

“Several courts have held that an arrangement which predictably gives the lessee no
rational economic alternative but to purchase the goods at lease end does not constitute the
payment of additional consideration or is nominal consideration and is therefore a security
agreement rather than a lease.”54 The Debtors are faced with three alternatives near the end of the
Contract’s term: surrender the Vehicle and lose the future value of the Vehicle’s use; complete
the Contract’s term and exercise the Purchase Option Upon Completion by paying the Vehicle’s
fair market value; or terminate the Contract early and exercise the Early Termination Purchase
Option by paying an amount equal to the remaining adjusted lease balance plus a nominal early
termination penalty.

The Official Comment to the Uniform Commercial Code emphasizes that the focus of the
analysis should be on the underlying economics of the transaction.55 A rational lessee would
exercise the Early Termination Purchase Option when the sum of the early termination penalty
and the amount due under the adjusted lease balance is less than the Vehicle’s fair market value

52 Ex. A to Debtors’ Amended Reply to REC Auto Credit’s obj. to Plan confirm., Doc. 18-1 §15 at 2
(hereinafter, “Early Termination Purchase Option”). DIANE E. THOMPSON, ET AL., NATIONAL CONSUMER LAW
CENTER, TRUTH IN LENDING § 13.2.3 at 931 (8th ed. 2012).

53 Ex. A to Debtors’ Amended Reply to REC Auto Credit’s obj. to Plan confirm., Doc. 18-1 §14 at 1.

54 Beckham, 275 B.R. at 603 (parenthetical phrase omitted) (citing In re Taylor, 209 B.R. 482, 486 (Bankr.

S.D. Ill. 1997) for its “No Lessee in its Right Mind test,” where a purchase option is considered nominal if “only a
fool would fail to exercise the option”). See also NATIONAL CONSUMER LAW CENTER, TRUTH IN LENDING § 13.2.3
at 931; NATIONAL CONSUMER LAW CENTER, REPOSSESSIONS § 14.1.2.3.2 at 494-95.
55 U.C.C. § 1-201(37) cmt. ¶ 37 (2001) (noting that all four tests under the second prong focus on
economics).

- 11


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 11 of 13


at the end of the Contract’s term. The combined sum of the early termination fee and the amount
owed under the adjusted lease balance could be as little as $200 if Debtors terminate the
Contract immediately prior to making the last scheduled installment payment. At such
termination, the Vehicle’s fair market value will be uncertain, but it will largely be determined
by the Vehicle’s mileage and condition. The Contract specifies that the lessee will be charged
for “excessive wear and use” and sets the normal standard for usage at 15,000 miles annually.56
The Vehicle can be expected to have around 169,688 miles at the early termination date if the
estimated usage is extrapolated over the Contract term.57 There is sufficient evidence in the
record to indicate that the reasonably predictable cost of exercising the Early Termination
Purchase Option is nominal in comparison to the Vehicle’s fair market value on the date of early
termination.58 Thus, with respect to this second purchase option, the second prong set out in

K.S.A. § 84-1-203(b)(4) is satisfied and the Contract is properly characterized as a disguised
secured transaction.
Conclusion

REC Auto possesses substantial bargaining power when it writes the terms of its
adhesion agreements with low income consumers who are trying to secure access to reliable
transportation. Frequently, the financial paradox is that those with the least pay the most for the

56 Ex. A of REC Auto’s Obj. to Plan confirm., Doc. 13-1 § 3 at 1 (titled “Excessive Wear and Use”).

57 The Vehicle’s odometer read 124,688 at the time the Contract was signed which, when added to the
15,000 annual usage over the three-year Contract term, could reasonably be 169,688.

58 See, e.g., Morris v. Dealers Leasing, Inc. (In re Beckham), 275 B.R. 598, 605–06 (Bankr. D. Kan. 2002)
(reaching an opposite conclusion after finding that “[t]here is no evidence that the ‘lease end residual value’ was set
at a price less than the anticipated fair market value of the vehicles”).

- 12


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 12 of 13


least.59 Admittedly, many of REC Auto’s customers may pose a high credit risk60 and may
otherwise be unable to secure credit to purchase a vehicle elsewhere. In drafting these
agreements, REC Auto may intend that the form of its standard Contract provide for some
flexibility in characterizing the transaction as one giving rise to either a security interest or a
lease, but the economic substance of the transaction here remains a sale. REC Auto’s objection
to confirmation is overruled. A separate order confirming the Plan will issue.

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

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
59 See Chico Harlan, Rental America: Why the poor pay $4,150 for a $1,500 sofa, WASHINGTON POST
(Oct. 6, 2014), http://www.washingtonpost.com/news/storyline/wp/2014/10/16/she-bought-a-sofa-on-installment-pa
yments-now-its-straining-her-life/.

60 See AnnaMarie Andriotis, Bank Regulator Warns of Lax Standards on Auto Loans, WALL STREET
JOURNAL (Oct. 28, 2014),
http://blogs.wsj.com/totalreturn/2014/10/28/bank-regulator-warns-of-lax-standards-on-auto-loans/?KEYWORDS=ba
nk+regulator+warns; Sarah Mulholland and Matt Robinson, Subprime Auto Loan Probe Widens as GM Discloses
Subpoenas, BLOOMBERG (Oct.24,2014),http://www.bloomberg.com/news/2014-10-24/subprime-auto-loanprobe-
widens-as-gm-discloses-subpoenas.html. Perhaps these circumstances are exacerbated by inflated prices, high
interest rates and remote starter interrupt devices that allow lenders to disable a car’s starter when a payment is late.
See Michael Corkery and Jessica Silver-Greenberg, Miss a Payment? Good Luck Moving that Car, N.Y. TIMES
(Sept. 24, 2014), http://dealbook.nytimes.com/2014/09/24/miss-a-payment-good-luck-moving-that-car/ (a print
version appears in the Sept. 25, 2014, edition of N.Y. Times at A1).

- 13


14.11.04 James Confirmation Objection Order.wpd
Case 12-23121 Doc# 50 Filed 11/04/14 Page 13 of 13

 

13-06115 Bernritter v. Bernritter (Doc. # 12)

Bernritter v. Bernritter, 13-06115 (Bankr. D. Kan. Jun. 11, 2014) Doc. # 12

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 10th day of June, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

JOHN VON BERNRITTER and Case No. 13-22505-7
SUZANNE ELIZABETH BERNRITTER,
Debtors.

BARBARA J. BERNRITTER,
Plaintiff,

v. Adv. No. 13-6115
JOHN VON BERNRITTER,
Defendant.

ORDER DENYING DEFENDANT’S MOTION TO DISMISS

This matter is before the Court on Debtor/Defendant John Von Bernritter’s motion to
dismiss1 the adversary complaint filed against him by Plaintiff Barbara J. Bernritter. The
adversary complaint seeks the denial of discharge of a $140,547.64 debt to Plaintiff under

1 Doc. 9.
2014.06.10 Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 1 of 9


11 U.S.C. § 523(a)(15),2 which excepts from an individual’s chapter 7 discharge any debt to a
former spouse that is not a “domestic support obligation”3 and “that is incurred by the debtor in
the course of a divorce or separation or in connection with a separation agreement, divorce
decree or other order of a court of record.” Defendant has moved to dismiss the complaint under
Federal Rule of Civil Procedure 12(b)(6), arguing that the allegations made fail to support a §
523(a)(15) claim because they do not connect the debt owed to the parties’ separation agreement.

 Plaintiff Barbara J. Bernritter appears by her attorney, Alan B. Gallas of Gallas & Schultz,
Kansas City, Missouri; Debtor/Defendant John Von Bernritter appears by his attorney, Neil S.
Sader of The Sader Law Firm, LLC, Kansas City, Missouri.

The Court finds that Plaintiff’s complaint states a legally cognizable claim under
§ 523(a)(15), and the Court therefore denies Defendant’s motion to dismiss.

I. Background and Findings of Fact
The following allegations are made in Plaintiff’s complaint or in the attachments
incorporated thereto. Plaintiff and Defendant were previously married, but dissolved their
marriage on August 1, 1994, in the Circuit Court of Jackson County, Missouri. As part of the
proceeding to dissolve their marriage, Plaintiff and Defendant entered into a separation
agreement and a “general real estate partnership” agreement. Through these documents, the
assets of Plaintiff and Defendant were divided, and part of the real estate owned by the parties
was placed into a partnership. The partnership was to be managed by Defendant and was to
continue until all partnership assets were liquidated. Upon sale of the partnership assets, the net
proceeds were to be distributed equally between Plaintiff and Defendant.

Years later, on October 27, 2000, Defendant executed and delivered a promissory note to
Plaintiff in the amount of $90,555. This amount represented Plaintiff’s equitable interest in the

2 All future statutory references are to title 11 of the United States Code, unlessotherwise specified.

3 See § 101(14A) for the definition of a “domestic support obligation.”

- 2 2014.06.10
Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 2 of 9


real estate transferred to the partnership at the time the parties’ marriage was dissolved. Debtor
made sporadic payments on the promissory note over the years, and on June 18, 2009, Plaintiff
filed suit in Platte County, Missouri, against Defendant, seeking to collect the money owed on
the note. Shortly thereafter, on November 6, 2009, judgment was entered against Defendant in
favor of Plaintiff for $140,547.64 plus interest, costs, and attorneys’ fees.

John Bernritter filed a chapter 7 bankruptcy petition on September 24, 2013. Plaintiff
then filed her adversary complaint, claiming the obligation owed to her by Defendant should be
excepted from discharge under § 523(a)(15). Plaintiff’s complaint then alleges: “The obligation
owed to [Plaintiff] was incurred by [Defendant] in the course of or in connection with a ‘divorce
or separation agreement.’” Plaintiff also seeks attorneys’ fees incurred by her in relation to this
proceeding.

II. Analysis
A. Legal Standard for Assessing Motion to Dismiss
An adversary proceeding to determine the dischargeability of particular debts is a core
proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter
jurisdiction.4

Defendant’s motion to dismiss is filed under Federal Rule of Civil Procedure 12(b)(6),
which permits a motion for “failure to state a claim upon which relief can be granted.”5 The
requirements for a legally sufficient claim stem from Rule 8(a), which requires “a short and plain
statement of the claim showing that the pleader is entitled to relief.”6 To survive a motion to
dismiss, a complaint must present factual allegations that, when assumed to be true, “raise a right

4 28 U.S.C. § 157(b)(1) and § 1334(b).

5 Rule 12 is made applicable to adversary proceedings via Federal Rule of BankruptcyProcedure 7012(b).

6 Rule 8 is made applicable to adversary proceedings via Federal Rule of BankruptcyProcedure 7008(a).

- 3 2014.06.10
Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 3 of 9


to relief above the speculative level.”7 The complaint must contain “enough facts to state a claim
to relief that is plausible on its face.”8 “[T]he complaint must give the court reason to believe that
this plaintiff has a reasonable likelihood of mustering factual support for these claims.”9

The plausibility standard does not require a showing of probability that a defendant has
acted unlawfully, but requires more than “a sheer possibility.”10 “[M]ere ‘labels and
conclusions,’ and ‘a formulaic recitation of the elements of a cause of action’ will not suffice; a
plaintiff must offer specific factual allegations to support each claim.”11 Finally, the Court must
accept the nonmoving party’s factual allegations as true and may not dismiss on the ground that
it appears unlikely the allegations can be proven.12

B. Legal Sufficiency of Plaintiff’s § 523(a)(15) Claim
“One of Congress’s overarching themes in enacting BAPCPA was to redefine and
reinforce the ability of non-debtor former spouses to recover both support and property
settlement obligations from debtors in bankruptcy.”13 To that end, under § 523(a), an individual
debtor filing a Chapter 7 bankruptcy is not discharged from any debt:

(5) for a domestic support obligation; [or]
. . .
(15) to a spouse, former spouse, or child of the debtor and not of thekind described in paragraph (5) that is incurred by the debtor in the
7 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

8 Id. at 570.

9 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (italics

in original).

10 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

11 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting

Twombly, 550 U.S. at 555).

12 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

13 Wodark v. Wodark (In re Wodark), 425 B.R. 834, 838 (B.A.P. 10th Cir. 2010).

- 4 2014.06.10
Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 4 of 9


course of a divorce or separation or in connection with a separationagreement, divorce decree or other order of a court of record, or adetermination made in accordance with State or territorial law by agovernmental unit[.]

Plaintiff’s claim under § 523(a)(15) alleges a debt to a former spouse that was incurred by
Defendant “in connection with a separation agreement.” Creditors, like Plaintiff, bear the burden
of proof by a preponderance of evidence with respect to dischargeability actions.14 Although
most § 523(a) exceptions to discharge are strictly construed in favor of the debtor,15 “exceptions
to discharge under § 523(a)(15) are construed more liberally than other provisions of § 523.”16

To state a claim under § 523(a)(15), a plaintiff must allege sufficient facts that could
show that the debt in question is: (1) to a “former spouse;” (2) is not (a)(5) support; and (3) is
incurred “in connection with a separation agreement, divorce decree or other order of a court of
record.”17 Defendant does not dispute that the facts alleged support the first and second prongs of
a § 523(a)(15) claim;18 he only argues that the allegations made in Plaintiff’s complaint are
insufficient to tie the debt owed to Plaintiff on the promissory note to the parties’ separation
agreement.

In response to Defendant’s motion to dismiss, Plaintiff cites Kush v. Kush (In re Kush)19
in support of her claim. In the Kush bankruptcy case, the husband and wife divorced and the

14 Grogan v. Garner, 498 U.S. 279, 283, 291 (1991).

15 Mantooth v. Jones (In re Jones), 9 F.3d 878, 880 (10th Cir. 1993).

16 Taylor v. Taylor (In re Taylor), 478 B.R. 419, 427 (B.A.P. 10th Cir. 2012). The TaylorBAP decision was appealed to the Tenth Circuit where the Tenth Circuit also affirmed thebankruptcy court’s determination that the debt at issue was a § 523(a)(15) obligation. See Taylor

v. Taylor (In re Taylor), 737 F.3d 670 (10th Cir. 2013).
17 See Taylor, 478 B.R. at 427-28 (listing elements) (internal quotation marks omitted).
18 As a result, this Court will likewise not address the “former spouse” and “not (a)(5)
support” portions of the claim.
19 Adversary Case No. 06-225, Bankruptcy Case No. 05-24972, 2006 WL 3096681(Bankr. D. Ariz. Oct. 30, 2006).
- 5 2014.06.10
Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 5 of 9


parties’ divorce decree awarded the marital home to the ex-wife and all property related to the
ex-husband’s landscaping business to the ex-husband.20 The decree also required each party to be
responsible for the taxes on all property awarded to that party in the divorce decree.21 The
ex-husband/debtor owed old taxes stemming from his landscaping business, and when he failed
to pay the taxes, the IRS issued notices of intent to levy on the ex-wife’s home.22 The parties
then co-signed a second lien on the home in order for the ex-husband to pay the tax debt, and the
ex-husband agreed to solely make the second mortgage payments.23 Eventually, because the ex-
wife sought to refinance her home, the parties executed a promissory note for the ex-husband to
pay the ex-wife for the payment of the second lien.24 After the ex-husband filed bankruptcy, the
ex-wife sought to have the debt on the promissory note determined nondischargeable under
§ 523(a)(15).25 The bankruptcy court determined that the debt on the promissory note was
incurred in connection with the parties’ divorce and was nondischargeable.26 The court reasoned
that although the original obligation arose from the indemnification for the payment of income
taxes and was transformed into an obligation to make payments on the promissory note, the ex-
wife was “clearly able to trace the obligation.”27 The bankruptcy court found that the “essential
nature of the obligation” remained the same and that it arose out of the divorce decree.28 Thus,

20 Id. at *1.

21 Id.

22 Id.

23 Id.

24 Id. at *2.

25 Id. at *1.

26 Id. at *3.

27 Id. at *4.

28 Id.

- 6


2014.06.10 Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 6 of 9


because the original obligation would be nondischargeable, so would the obligation on the
promissory note.29

Here, the facts are similar. The parties set up the general real estate partnership as a
method of distributing their jointly-held property at the time of the divorce. The general real
estate partnership agreement is incorporated into the parties’ separation agreement. Essentially,
the complaint alleges that the partnership agreement was executed to effectuate the divorce
property settlement. The parties’ subsequent promissory note was connected to Defendant John
Bernritter’s partnership obligations; Defendant was the managing partner and was to divide the
net sale proceeds of the partnership assets with Plaintiff. The parties’ promissory note indicates a
subsequent, different arrangement was made, but the arrangement is still one that grew out of the
partnership agreement, which itself grew out of the settlement agreement. The character of the
underlying debt remains.

The Tenth Circuit has indicated its willingness to hold a former spouse liable for marital
debt that has changed in form. In Robinson v. Robinson (In re Robinson), 30 the parties’ divorce
proceeding required the ex-husband to pay the second mortgage on the house awarded to the exwife.
31 The ex-wife later refinanced her home, but asserted in the ex-husband’s bankruptcy
proceeding that the ex-husband’s debt on the second mortgage was nondischargeable.32 The
Tenth Circuit concluded that the ex-wife’s act of refinancing the debt did not extinguish the ex


29 Id. See also Archer v. Warner, 538 U.S. 314, 320 (2003) (concluding that reducing afraud claim to a settlement does not change the nature of the debt for dischargeability purposes);
Burrell-Richardson v. Mass. Bd. of Higher Educ. (In re Burrell-Richardson), 356 B.R. 797, 804

(B.A.P. 1st Cir. 2006) (concluding that a debt did not lose its characteristic as a student loanobligation when the debt was reduced to a judgment); Moraes v. Adams (In re Adams), 761 F.2d
1422, 1427 (9th Cir. 1985) (addressing dischargeability of punitive damages under § 523(a)(6)
and concluding that “the exception to discharge turns upon the nature of the act which gave riseto the liability rather than upon the nature of the liability”).
30 921 F.2d 252 (10th Cir. 1990).

31 Id. at 253.

32 Id.

- 7 2014.06.10
Bernritter 523a15 MTD.wpd

Case 13-06115 Doc# 12 Filed 06/10/14 Page 7 of 9


husband’s obligation to pay the debt and affirmed the district court’s decision that the debt was
nondischargeable.33 The facts of Robinson are similar to the facts at hand—the allegations here
show that the parties’ actions transformed the debt from the form originally envisioned in the
marital settlement agreement and the partnership agreement, but did not extinguish Defendant’s
obligation to pay and did not alter the nature of the debt.

Although the determination of whether a particular debt is dischargeable is a question of
federal law,34 the federal courts are reluctant to interfere in family law matters.35 Ultimately,
Plaintiff’s complaint alleges sufficient facts to state a claim under the § 523(a)(15) exception to
discharge, a statutory directive that is construed more liberally than other provisions of § 523.36
Although the facts of this complaint will ultimately be resolved via an evidentiary hearing where
the specific dynamics will be ascertained, Plaintiff’s complaint states a sufficiently viable claim
to survive dismissal. Defendant’s motion to dismiss Plaintiff’s complaint is denied.

III. Conclusion
For the reasons set forth above, the Court finds that Plaintiff’s complaint states a legally
cognizable claim under § 523(a)(15), and Defendant’s motion to dismiss is denied.

It is, therefore, by the Court ordered that Defendant’s motion to dismiss is DENIED,
as stated more fully herein.

IT IS SO ORDERED.

33 Id.

34 See Sampson v. Sampson (In re Sampson), 997 F.2d 717, 721 (10th Cir. 1993) (statingthat nondischargeability under § 523(a)(5) “is a question of federal law”).

35 See Wise v. Bravo, 666 F.2d 1328, 1332 (10th Cir. 1981) (noting that the substantivelaw of domestic relations “is one uniquely within the province of the respective states”).

36 Taylor v. Taylor (In re Taylor), 478 B.R. 419, 427 (B.A.P. 10th Cir. 2012). Also, the
§ 523(a)(5) exception to discharge for domestic support obligations is not construed strictly infavor of the debtor. See 4 COLLIER ON BANKRUPTCY ¶ 523.05, at 523-1 (Alan N. Resnick &
Henry J. Sommer, eds., 16th ed. 2013); Mantooth v. Jones (In re Jones), 9 F.3d 878, 880 (10thCir. 1993).

- 8 2014.06.10
Bernritter 523a15 MTD.wpd
Case 13-06115 Doc# 12 Filed 06/10/14 Page 8 of 9


###


ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
- 9 2014.06.10
Bernritter 523a15 MTD.wpd
Case 13-06115 Doc# 12 Filed 06/10/14 Page 9 of 9

 

12-21994 Feagan (Doc. # 118)

In Re Feagan, 12-21994 (Bankr. D. Kan. Sep. 19, 2014) Doc. # 118

PDFClick here for the pdf document.


The relief described hereinbelow is SO ORDERED.
SIGNED this 17th day of September, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

JERRY HARRISON FEAGAN and Case No. 12-21994
CYNTHIA A. FEAGAN,
Debtors.

ORDER OVERRULING IN PART DEBTOR’S OBJECTION TO MOTION TO SELL

On July 16, 2013, the Trustee filed a Motion for Approval of Sale of real estate.1 In the
Motion, the Trustee proposed to pay $220,000 of the sale proceeds to Kaw Valley Bank to obtain
a release of a mortgage. Debtors assert that KVB is only entitled to $146,263.84 because the
future advances clause in the mortgage is unenforceable or, alternatively, because KVB is bound
by its statements in the Motion for Relief from Automatic Stay wherein KVB asserted a total
secured claim of only $146,263.84. The Trustee contests the Debtors’ standing to challenge the

1 Doc. 72.

14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 1 of 12


security agreement. The Court holds that the Debtors have standing to challenge the agreement,
but more evidence is needed to determine whether the future advances clause in the mortgage is
enforceable. The Court also finds that statements made by KVB in the Motion for Relief from
Automatic Stay do not bar KVB from claiming the full amount of security they may be entitled
to under the contract.

Jurisdiction

The Court has jurisdiction over this contested matter 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)(K), (N), and (O). The parties have stipulated to the
jurisdiction of this Court.

Background

Debtors filed for Chapter 7 bankruptcy relief on July 23, 2012. Among their assets the
Debtors listed a 50 percent interest in 138.7 acres of farmland in Cherokee County, Kansas
(“Property”).2 Debtors listed the value of the Property as unknown. The Property is encumbered
by a mortgage with Kaw Valley Bank (“KVB”) with a maximum principal amount of $180,000
(“Mortgage”).3 The exact amount of debt secured by the Mortgage is disputed. Both Debtors
and Minnie Feagan4 signed the Mortgage. On September 28, 2012, KVB filed its Motion for

2 Doc. 1 at 19.

3 Doc. 34, Ex. 4.

4 Minnie Feagan is Debtor Jerry Feagan’s mother and owner of the other 50 percent interest. Doc. 72.

- 2


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 2 of 12


Relief from Stay.5 In the Motion for Relief from Stay, KVB asserts that the Debtors held no
equity in the Property.6 In Claim #15-1, KVB asserts a secured claim of $266,000 with the value
of the collateral unknown. No evidence of the Property’s value was provided. The Trustee’s
Motion for Approval of Sale was granted on September 12, 2013, and the Property sold for
$246,900.00, with $220,000 to be paid to KVB conditioned upon a further determination by this
Court.

The issue arises in part from the statements made by KVB in the Motion for Relief from
Automatic Stay. In this motion, KVB listed the total secured debt as $146,263.84. Specifically,
KVB stated that the Debtors borrowed $33,073.76, as evidenced by a promissory note dated
March 14, 2012 (“Note 1”), and $100,000, as evidenced by a promissory note dated January 5,
2012 (“Note 2”). KVB asserts that the Mortgage secures not only Notes 1 and 2, but also that
the future advances clause in the Mortgage includes all other loans made by KVB to Debtors
after March 14, 2008. These other loans include a promissory note for $86,000 signed on May
10, 2010 (“Note 3”); a promissory note for $200,000 signed on June 9, 2011 (“Note 4”); a
promissory note for $400,000 signed on October 15, 2011 (“Note 5”); and a promissory note for
$74,897.89 signed on February 4, 2012 (“Note 6”). Each of these promissory notes referenced
specific collateral, but only Notes 1 and 2 referenced the Mortgage. Note 3 listed a Deed of
Trust in property located in Missouri as the collateral, and Notes 4, 5, and 6 each listed various
personal and business property of the Debtors. According to the Trustee, KVB asserts that by

5 Doc. 34.

6 Doc. 34 at 6 ¶ 32.

- 3


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 3 of 12


virtue of a future advances clause in the Mortgage, the other Notes are secured under the
Mortgage and the total lien on the property is therefore $232,113.40. This amount includes the
$180,000 maximum principal balance, $45,113.40 in accrued interest, and attorney’s fees of
$7,000.7 Prior to filing the Motion for Approval of Sale, the Trustee and KVB agreed that KVB
would receive $220,000 of the proceeds in full satisfaction of the Mortgage. The Debtors
objected to this settlement agreement (“Agreement”) because they assert that KVB is only
entitled to the $146,900 under the terms of the Mortgage and the statements made in the Motion
for Relief from Automatic Stay. If the Mortgage only secures Notes 1 and 2, then KVB is
entitled to $146,900 of the proceeds as secured, but if some or all of the other promissory notes
are secured by the Mortgage, then KVB’s lien may be $232,113.40.

Debtors claim to have standing to challenge the Trustee’s administration of the case and
the estate assets based on the existence of certain non-dischargeable priority tax debt which may
receive a greater distribution from the proceeds of the sale if KVB’s secured claim is reduced,
thereby lowering Debtors’ post-discharge liability. The Trustee challenges this position because
the Debtors will not receive any proceeds from the sale of the Property, regardless of the
outcome of this dispute.

Discussion

There are two separate issues before the Court: First, whether the Debtors have standing
to challenge the extent of KVB’s secured claim when the Debtors’ only pecuniary interest arises
from a potential reduction in their post-discharge liability. Second, what rights does KVB

7 Doc. 72 at 2 ¶ 9.
- 4


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 4 of 12


maintain under the Mortgage in light of the claims made in the Motion for Relief from Stay?
There is a split of authority on the first issue,8 and this Court was not able to find controlling
Tenth Circuit precedent. Determining KVB’s rights under the Mortgage involves two issues.
First, whether the future advances clause is enforceable, and second, whether the doctrines of
judicial admissions or judicial estoppel limit KVB to the statements of value and security stated
in the Motion for Relief from Automatic Stay.

A. Debtors have standing to challenge the settlement agreement.
The Trustee contests the Debtors’ standing to challenge his administration of the estate
because the Debtors cannot receive any funds from the sale of the Property, regardless of the
outcome of this issue. The Trustee bases his position on the general rule that chapter 7 debtors
lack standing to challenge the administration of their case unless the debtor would receive a
distribution under 11 U.S.C. § 726(a)(6).9 The Trustee asserts that unless the distribution of the
assets of the estate would produce a surplus to the Debtors, the Debtors are not parties-in-interest
and therefore lack standing.

This Court has previously held that a chapter 7 debtor has standing to challenge a
proposed settlement agreement if the debtor will be adversely affected by that agreement.10

8 Compare In re Adams, 424 B.R. 434, 436-37 (N.D. Ill. 2010) (holding that chapter 7 debtor lacked
standing because the effect on the non-dischargeable debt liability was indirect and that granting debtor standing in
these cases would “interfere with the administration of chapter 7 cases”) with McGuirl v. White, 86 F.3d 1232, 1235

(D.C. Cir. 1996) (holding that the possible reduction of post-discharge liability is direct benefit to the debtor,
sufficient to confer standing).
9 4 COLLIER ON BANKRUPTCY ¶ 502.02[2][c], at 502-13 (Alan N. Resnick & Henry J. Sommer, eds., 16th
ed. 2014). All future statutory references are to title 11 of the United States Code, unless otherwise specified.
10 In re Middendorf, 381 B.R. 774, 776 (Bankr. D. Kan. 2008).
- 5


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 5 of 12


Other courts have approached the issue by looking to see whether the debtor has any pecuniary
interest in the outcome of the dispute.11 In McGuirl v. White, the Court of Appeals for the D.C.
Circuit held that a debtor had standing to challenge the Trustee’s administration of the estate
because the impact on the debtor’s non-dischargeable debt affected the debtor’s pecuniary
interest in the outcome of the bankruptcy. The court held that a reduction in the debtor’s post-
discharge liability was sufficient for the debtor to have standing to challenge the trustee’s
application for administrative expenses. In In re Adams, the Bankruptcy Court for the Northern
District of Illinois disagreed and held that a chapter 7 debtor in a non-surplus case lacked
standing to challenge the trustee despite the existence of non-dischargeable debt. The courts
reached opposite conclusions because they disagreed on whether the reduction in post-discharge
liability directly affected the debtor’s pecuniary interests. This Court concludes that a reduction
in a debtor’s post-discharge priority tax liability benefits the debtor nearly as directly as an
increase in a surplus distribution. Because a possible outcome in favor of the Debtors here will
mean that they owe less debt after their discharge, the Court will not prevent the Debtors from
challenging the Agreement. Further, this conclusion supports the manifest preference under the
Code to favor the payment of tax liabilities. See, e.g., § 523(a)(1) and 507(a)(8).

This outcome fairly reconciles the interest of the Trustee in administering the estate and
the Debtors’ pecuniary interest. Allowing standing in this case also follows the reasoning in In
re Middendorf because the Debtors may be adversely affected by the Agreement.

B. Whether the future advances clause in the Mortgage is enforceable up to the
11 See In re Cult Awareness Network, Inc., 151 F.3d 605, 607 (7th Cir. 1998); In re Kieffer-Mickes, Inc.,
226 B.R. 204, 208-09 (B.A.P. 8th Cir. 1998); In re Adams, 424 B.R. 434 (N.D. Ill. 2010).

- 6


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 6 of 12


stated maximum obligation of $180,000, plus interest and fees, is a factual
question.

Promissory notes and mortgages are contracts between the parties, and therefore subject
to the same rules of construction as other contracts. The “primary rule in interpreting promissory
notes and mortgages is to determine the intention of the parties.”12 Courts determine the intent of
the parties by examining the mortgage and note together, not each one individually.13 Future
advances clauses in real estate mortgages are enforceable in Kansas, provided that the
subsequent promissory note either specifically refers to the prior mortgage, or if the subsequent
debt is “of the same kind or character as, or part of the same transaction or series of transactions
with, that originally secured by the mortgage.”14 Whether the subsequent debt is of the same
kind or character, or part of the same transaction or series of transactions, is a factual question.
A lien on future advances cannot exceed the maximum obligation stated in the mortgage.15
Pursuant to § 363(p)(2), “the entity asserting an interest in property has the burden of proof on
the issue of the validity, priority, or extent of such interest.”

Two of the promissory notes signed by the Debtors specifically state that the notes are
secured by the Mortgage. There is no question that the Mortgage secures these notes and the
parties do not contest the issue. The other four notes list other security, however, and therefore
the Court must determine whether the parties intended for the Mortgage to secure Notes 3-6.

12 Mark Twain Kansas City Bank v. Cates, 248 Kan. 700, 709 (Kan. 1991) (citing Carpenter v. Riley, 234
Kan. 758, 763 (Kan. 1984)).
13 See Mark Twain Kansas City Bank v. Cates, 248 Kan. at 710.
14 Id. at 700 (1991).
15 K.S.A. 9-1101; K.S.A. 58-2336.
- 7


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 7 of 12


Absent a specific reference to the Mortgage in the promissory note, Notes 3-6 will only be
secured if they were “of the same kind or character as, or part of the same transaction or series of
transactions with, that originally secured by the mortgage.”16 Since there has been no evidence
submitted on the record to indicate to the Court that Notes 3-6 were executed in the same
transaction or a series of the same transactions as Notes 1 and 2, this Court cannot presently rule
on the issue.

C.
The doctrines of judicial estoppel and judicial admissions do not limit KVB’s
security to the amount stated in the Motion for Relief from Automatic Stay.
Debtors argue that the representations KVB made in its Motion for Relief from
Automatic Stay regarding the secured portion of the claim should be binding on KVB throughout
this bankruptcy case. In the Motion for Relief from Automatic Stay, KVB stated that the
Property served as collateral for Notes 1 and 2 totaling $146,900. The Motion for relief from
stay stated only that Notes 1 and 2 were secured by the Property, that the Property was
completely encumbered, and therefore that relief from the stay was appropriate. The motion was
unopposed and it was granted. The issue now is whether the statements made by KVB in the
Motion for Relief from Automatic Stay bind KVB on the extent of its lien.

1.
The statements made in the Motion for Relief from Automatic Stay do
not constitute judicial admissions.
Debtors assert that KVB is bound by its statements in the Motion for Relief from
Automatic Stay because KVB “admitted that the value of its claim against the [Property] is
limited to the two Notes.” Debtors’ position is that because KVB claimed that only the two

16 Mark Twain Kansas City Bank v. Cates, 248 Kan. at 709.
- 8


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 8 of 12


Notes referenced in the Motion for Relief from Automatic Stay were secured, KVB is prohibited
from asserting the validity of the future advances clause with regards to Notes 3-6.

“‘Judicial admissions are formal admissions . . . which have the effect of withdrawing a
fact from issue and dispensing wholly with the need for proof of the fact.’”17 Judicial admissions
in pleadings are formal concessions or stipulations that are binding on the party making them.18
A statement will not be held as a judicial admission if the circumstances do not justify such a
finding.19 Whether a statement made in a pleading is binding on the party is up to the court’s
discretion.20

The representations made by KVB in the Motion for Relief from Automatic Stay must be
understood in context. Under the Code, a party-in-interest may obtain relief from the automatic
stay upon a showing that the debtor does not have an equity in the property and the property is
not necessary to an effective reorganization.21 In other words, “[a] creditor can meet its burden
of proof that a debtor has no equity by showing that the liens exceed the value stated. When the
motion is uncontested . . . [t]he court need not determine the exact value.”22 The Motion for
Relief from Automatic Stay filed by KVB met these requirements, and since it was unopposed,

17 Koch v. Koch Indus., Inc., 996 F. Supp. 1273, 1277 (D. Kan. 1998) (quoting Guidry v. Sheet Metal
Workers Intern. Ass’n, Local 9, 10 F.3d 700, 716 (10th Cir. 1993)).
18 See Koch, 996 F. Supp. at 1277 (quoting Michael H. Graham, Federal Practice and Procedure: Evidence
§ 6726).
19 See Koch, 996 F. Supp. at 1277 (quoting Schott Motorcycle Supply v. American Honda Motor Co., 976
F.2d 58, 61 (1st Cir. 1992)).
20 See Koch, 996 F. Supp. at 1278 (quoting Guidry, 10 F.3d at 716).
21 See 11 U.S.C. 362(d)(2).
22 Thomas v. Countrywide Home Loans, Inc. (In re Thomas), 344 B.R. 386, 393 (Bankr. W.D. Penn. 2006).
- 9


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 9 of 12


the Motion for Relief from Automatic Stay was granted by default. The Court dismisses the
argument because KVB asserted a lien balance that was apparently sufficient to satisfy Debtors
that there was no equity in the Property. The Debtors have also changed their position now that
the value of the Property turns out to be higher than the Debtors might have thought. Because
the issue of valuation and the extent and validity of KVB’s liens were never actually litigated,
the Court will not bind KVB to the statements made in the Motion for Relief from Automatic
Stay. In further support of the Court’s conclusion, neither the Debtors nor the Trustee objected
to KVB’s proof of claim in which KVB asserted a secured claim of $266,000.

The Court determines that the statements made in the Motion for Relief from Stay by
KVB must be considered in the context of the specific purposes of that motion. Because KVB
only needed to demonstrate that Debtors lacked equity in the Property, KVB is not barred from
attempting to collecting the full value of the lien from the proceeds of the sale of the Property.

2.
The doctrine of judicial estoppel does not prohibit KVB from
asserting the full value of the lien on the Property.
Debtors aver that KVB is judicially estopped from asserting a greater lien on the Property
than what was stated in the Motion for Relief from Stay. “Judicial estoppel is an equitable
doctrine, ‘which protects the integrity of the judicial process by prohibiting parties from
deliberately changing positions according to the exigencies of the moment.’”23 In the Tenth
Circuit, three factors are used to determine whether the doctrine of judicial estoppel should be

23 Barker v. Asset Acceptance, LLC, 874 F. Supp. 2d 1062, 1065 (D. Kan. 2012) (quoting Eastman v. Union
Pac. R.R., 493 F.3d 1151, 1156 (10th Cir. 2007)).

- 10


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 10 of 12


applied.24 Judicial estoppel may be applied if: (1) the party’s later position is clearly
inconsistent with his earlier position; (2) the party has succeeded in persuading a court to accept
the earlier position, so as to create the perception that either the first or second court was misled;
and (3) whether the party seeking to assert an inconsistent position would derive an unfair
advantage or impose an unfair detriment on the opposing party if he were not estopped.25
“Application of the doctrine of judicial estoppel as applied to estimates of value in a bankruptcy
is considered with a different, more relaxed view.”26

Here, the alleged amount of the secured claim of KVB increased from when the Motion
for Relief from Automatic Stay27 and the Motion for Approval of Sale28 were filed. However,
this position is not “clearly inconsistent” with the prior position, because the statements made in
the Motion for Relief from Automatic Stay were for the limited purpose of obtaining relief from
the automatic stay under § 362(d). Moreover, as noted above, KVB needed only to show that it
was entitled to the limited relief from the automatic stay; the Motion for Relief from Automatic
Stay was not in this case a final adjudication of KVB’s rights under the Mortgage. There is no
indication that the Court was misled by the statements made in the Motion for Relief from
Automatic Stay. KVB demonstrated that it was entitled to relief, and because there was no
opposition, the motion was granted. Finally, Debtors assert that they might have opposed the

24 In re Riazuddin, 363 B.R. 177, 185 (B.A.P. 10th Cir. 2007).

25 Id.

26 Kasbee v. Huntington Nat’l Bank (In re Kasbee), 466 B.R. 719, 726 (Bankr. W.D. Penn. 2010).

27 Doc. 34 filed on September 28, 2012.

28 Doc. 72 filed on July 16, 2013.

- 11


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 11 of 12


Motion for Relief from Automatic Stay had KVB listed the value of the lien at the higher
amount. This argument is not persuasive. The Debtors are now asking this Court to intercede
and find that KVB has misled the Court because the Property was actually worth more than the
Debtors thought. The Court declines this invitation and therefore determines that the doctrine of
judicial estoppel is not applicable to this case.

Conclusion

Debtors have standing to challenge the Agreement because their post-discharge liability
may be decreased upon a favorable finding on the issue of KVB’s lien. If KVB’s lien amount is
reduced, then there will be more estate assets available to pay on priority unsecured tax claims.
This is of sufficient benefit to Debtors to impart standing. The extent of KVB’s lien cannot be
ascertained at this time, as the Court lacks the necessary evidence to make a final determination
as to the extent that KVB’s claim is secured by the Mortgage. Further proceedings are necessary
to fully resolve Debtors’ Objection and an evidentiary hearing consistent with this opinion will
be set forthwith. This Court rejects Debtors’ arguments under the doctrines of judicial
admissions or judicial estoppel.

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

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
- 12


14.09.17.A Feagan Order Denying Debtors' Objection.wpd
Case 12-21994 Doc# 118 Filed 09/17/14 Page 12 of 12

12-20854 Spencer (Doc. # 157)

In Re Spencer, 12-20854 (Bankr. D. Kan. Jun. 12, 2014) Doc. # 157

PDFClick here for the pdf document.


 

The relief described hereinbelow is SO ORDERED.
SIGNED this 11th day of June, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

BOBBY JOE SPENCER and Case No. 12-20854
DIANE WIGGINS SPENCER,
Debtors.

MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN PART
CREDITOR’S MOTION FOR A MORE DEFINITE STATEMENT


Debtors Bobby Joe Spencer and Diane Wiggins Spencer (“Debtors”) filed their chapter
13 bankruptcy petition on March 31, 2012, listing CitiMortgage, Inc. (“Creditor”) as a creditor
with a lien secured by Debtors’ principal residence. Debtors amended their plan, and this Court
confirmed the amended plan on July 26, 2012. The confirmed Chapter 13 Plan calls for payment
of both pre-petition arrearages and post-petition monthly payments to CitiMortgage. On
October 1, 2012, Creditor filed its secured proof of claim, Claim 12-1. After the Court denied
Debtors’ initial objection to the proof of claim, Debtors filed a pro se Amended Objection to
Claim 12.1 This Court elected to treat Debtor’s [sic] Amended Objection to CitiMortgage, Inc.

1 Doc. 103.

14.06.11 Spencer Definite Statement Order.wpd
Case 12-20854 Doc# 157 Filed 06/11/14 Page 1 of 5


Proof of Claim as an adversary complaint, and pursuant to Fed. R. Bankr. P. 7012 and Fed. R.
Civ. P. 12(e),2 Creditor has filed the Motion for More Definite Statement3 presently before the
Court. Federal Rule of Civil Procedure 12(e) allows a party to seek “a more definite statement
of a pleading to which a responsive pleading is allowed but which is so vague or ambiguous that
the party cannot reasonably prepare a response.”4 Because the Court agrees that the fraud
portion of Debtor’s [sic] Amended Objection is so vague or ambiguous that Creditor cannot
reasonably prepare a response, the Court grants Creditor’s motion for a more definite statement
with respect to that portion of the objection and requires Debtors to file a second amended claim
objection within 30 days.

Where, as here, a plaintiff is proceeding pro se, the Court will construe the plaintiff’s
pleadings liberally.5 Thus, if a plaintiff’s complaint can reasonably be read “to state a valid
claim on which the plaintiff could prevail, [the court will] do so despite the plaintiff’s failure to
cite proper legal authority, his confusion of various legal theories, his poor syntax and sentence
construction, or his unfamiliarity with pleading requirements.”6 However, it is not “the proper
function of the . . . court to assume the role of advocate for the pro se litigant.”7 For that reason,
the court will not “construct arguments or theories for the plaintiff in the absence of any
discussion of those issues,”8 nor will it “supply additional factual allegations to round out a

2 Fed. R. Bankr. P. 7012 incorporates Fed. R. Civ. P. 12(b)-(i) and makes it applicable toadversary proceedings in bankruptcy court.

3 Doc. 108.

4 Fed. R. Civ. P. 12(e).

5 Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).

6 Id.

7 Id.

8 Drake v. City of Fort Collins, 927 F.2d 1156, 1159 (10th Cir. 1991).

- 2


14.06.11 Spencer Definite Statement Order.wpd
Case 12-20854 Doc# 157 Filed 06/11/14 Page 2 of 5


plaintiff’s complaint or construct a legal theory on plaintiff’s behalf.”9

“A motion for a more definite statement should not be granted merely because the
pleading lacks detail; rather, the standard to be applied is whether the claims alleged are
sufficiently specific to enable a responsive pleading in the form of a denial or admission.”10
Generally, Rule 12(e) motions are disfavored by the courts because of the minimal pleading
requirements of the Federal Rules.11 The parties should obtain additional details with respect to
claims through the discovery process.12 “Rule 12(e) is designed to strike at unintelligible
pleadings rather than pleadings that lack detail,”13 and the decision whether to grant or deny such
a motion is within the sound discretion of the court. The Court considers only the objection in
assessing definitiveness, not Debtors’ additional pleadings.

Debtors’ Amended Objection appears to state three bases for the objection: “The Court
is moved that Debtors objects [sic] to CMI’s Proof of Claim . . . for being Late; Improper Party
of Interest and Fraudulent.” Based on the additional information provided in the objection, the
first basis for the objection, lateness, is clear and does not require additional clarification.
Likewise, the second basis for the objection, that Creditor is not the true party-in-interest, is also
clear and requires no additional detail. But the third basis for the objection, that the proof of
claim is fraudulent, requires additional details.

When a party alleges fraud, Federal Rule of Civil Procedure 9(b)14 requires the party to
“state with particularity the circumstances constituting fraud,” with general allegations only

9 Whitney v. New Mexico, 113 F.3d 1170, 1173-74 (10th Cir. 1997).

10 Creamer v. Ellis Cnty. Sheriff Dep’t, 2009 WL 484491, at *1 (D. Kan. Feb. 26, 2009).

11 Id.

12 Id.

13 Id.

14 Rule 9(b) is applicable in bankruptcy pursuant to Fed. R. of Bankr. P. 7009.
- 3


14.06.11 Spencer Definite Statement Order.wpd
Case 12-20854 Doc# 157 Filed 06/11/14 Page 3 of 5


allowed for “[m]alice, intent, knowledge, and other conditions of a person’s mind.” The party
alleging fraud must “set forth the time, place and contents of the false representation, the identity
of the party making the false statements and the consequences thereof.”15 In other words, the
alleging party must specify the “‘who, what, where, and when of the alleged fraud.’”16

The Court is aware that the “‘who, what, where, and when” standard is generally applied
in a motion to dismiss or a motion to strike context,17 but the Court finds that these same details
are necessary to enable a responsive pleading in the form of a denial or admission. Absent these
details, an opposing party cannot know the nature of the fraud it is meant to admit or deny. From
the standpoint of a party seeking to formulate a response, or from a court attempting to evaluate
a fraud claim, this lack of details renders the fraud claim unintelligible.

Here, the fraud claim lacks all necessary detail. For the fraud claim, Debtors’ Amended
Objection states only the following, taken verbatim from the objection:

The Court is moved the Debt/Claim from CMI is fraudulent and fabricated, which

must address by CMI.

The Court is moved CMI is NOT the Party of interest at the time of its CLAIM

filing.

The Court is moved CMI was NOT the Party of Interest in state court action.

The Court is moved CMI claim prepared by Bankruptcy Specialist, Mr. Derrick

Brown, dated 10/01/2012 is fabricated and fraudulence.

The Court is moved pursuant 18 U.S.C 152 and 3571 and under Federal Fraud

Guidelines requires the Debtors to prove those elements of Who, What, When,

Where and How to substantiate fraud.18
These statements fail to set forth the time, place, and contents of the false representation, the
identity of the party making the false statements and the consequences of the allegedly false

15 Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) (quotingLawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1992)) (internalquotation marks omitted).

16 Jamieson v. Vatterott Educ. Ctr., Inc., 473 F. Supp. 2d 1153, 1156 (D. Kan. 2007)
(quoting Plastic Packaging Corp. v. Sun Chem. Corp., 136 F. Supp. 2d 1201, 1203 (D. Kan.
2001)).

17 Id.

18 Doc. 103, at 2.
- 4


14.06.11 Spencer Definite Statement Order.wpd
Case 12-20854 Doc# 157 Filed 06/11/14 Page 4 of 5


statement. This pleading is insufficiently specific to enable a responsive pleading and is the kind
of pleading Rule 12(e) is designed to address. Even reading the objection in conjunction with
Debtors’ two responses to the motion seeking a more definite statement fails to supply the
necessary detail; the responses are difficult to understand and never clearly explain the nature of
the alleged fraud.

Therefore, with respect to the portion of Debtors’ Amended Objection addressing fraud,
Creditor’s motion for a more definite statement is granted, and Debtors have 30 days to file a
second Amended Objection to Claim 12. If Debtors fail to file an adequate second Amended
Objection, the portion of the objection alleging fraud will be dismissed. With respect to the
remaining two bases of the Amended Objection, the motion is denied. For administrative
purposes, the deadline for Creditor’s responsive pleading will be established by the Court after
the fraud pleading issue is resolved.

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

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
- 5


14.06.11 Spencer Definite Statement Order.wpd
Case 12-20854 Doc# 157 Filed 06/11/14 Page 5 of 5



You are here: Home