Thad J. Collins, Chief Bankruptcy Judge.
This matter came before the Court at a telephonic hearing. Derek Hong appeared for the Debtor, Joshua J. Cochran ("Debtor"). Carol F. Dunbar appeared as the
Debtor failed to pay Ms. Marvel on or before July 1, 2015 as he had promised in resolving a state court divorce proceeding. In June 2016, Debtor filed for bankruptcy in the Northern District of Iowa. Along with his petition Debtor attached a proposed Chapter 13 repayment plan. He acknowledged that Ms. Marvel had a secured claim worth $153,000 secured by four vacant lots he co-owned with her. His Plan proposed disposing of her claim by surrendering four parcels of land securing her claim as payment in full. In his bankruptcy schedule, Debtor listed the value of the four parcels at $153,000. Debtor and Ms. Marvel each owned one-half interest of the four lots.
On August 18, 2016, Ms. Marvel (pro se) filed her proof of claim. In her claim, Ms. Marvel asserted that the Debtor owed her $159,097.07 (the $153,000 State judgment plus interest). On the same day, Ms. Marvel commenced an adversary proceeding (Case No. 16-09032) to challenge the dischargeability of the $159.070.97 Debtor owed her. Ms. Marvel, however, did not file a separate objection to Debtor's Chapter 13 Plan. She believed the adversary case served as an objection. On October 17, 2016, the Court confirmed Debtor's Plan without objection, and without discussion of the pending adversary case.
The adversary proceeding continued on and eventually went to trial. The case was tried over two separate time periods. Ms. Marvel had to travel in from Arizona for both trial segments. The trial was interrupted so the parties could attempt to settle. After completion of the trial, the Court agreed to delay ruling so more settlement discussions could occur. The parties got very, very close to settlement. Settlement, however, ultimately was not reached.
After settlement discussions broke down, but before a decision on the merits, the Debtor withdrew his Answer to Ms. Marvel's Complaint. This Court thus entered a judgment of non-dischargeability in favor of Ms. Marvel in the amount of $120,984.07 (subtracting the value of the properties already sold under the Plan) plus interest at the rate of 2.56% until paid in full. Debtor then completed all the remaining payments under his Plan.
On July 22, 2019, Debtor filed a Motion for Entry of Discharge and Notice of Deadline to Object. Debtor requested the Court to enter discharge because he had completed all payments under the confirmed Chapter 13 Plan. On August 9, 2019, Ms. Marvel filed an Objection to Debtor's Request for Certified Entry of Discharge. She objected because Debtor had yet to pay her on the judgment of $120,984.07 plus interest from the Court's ruling in her favor in the dischargeability proceeding. On August 26, 2019, Debtor replied by asserting that when he executed a quit claim deed to Ms. Marvel transferring his one-half interest in the four vacant lots to her under the Plan it constituted full payment to Ms. Marvel. The Court took the matter under advisement without further briefing.
The question presented here is whether a confirmed plan or a Court order on dischargeability of debt entered later controls. Ms. Marvel asserts that her claim is
Debtor claims that the Plan reduced Ms. Marvel's entire claim to value of the four parcels of land. He asserts that once he transferred those lots to her under the Plan, her claim was fully satisfied. Ms. Marvel responds that the Plan is not binding on her claim because the Court found the claims were for domestic support obligations that were nondischargeable under section 523(a)(5) and 523(a)(15).
The parties are essentially arguing the two legal proceedings adjudicated by this Court may be at odds with each other. The first was an uncontested Chapter 13 Plan confirmation proceeding that resulted in an order confirming the Plan. The second was the trial of an adversary claim—filed before confirmation of the Plan but adjudicated later.
Debtor now claims that the adversary, tried later, never should have proceeded. Debtor claims that his attorney made this argument to the Court before trial in the adversary. The Court has a slightly different recollection. The Court recalls noting at trial that the question raised was not about whether the case should be tried, but instead whether Debtor's Plan fully or partially resolved her claim. Rightly or wrongly, the adversary proceeded to trial. While the parties tried many times during trial to resolve the case—and thought they had at several points—ultimately an agreement could not be finalized.
It is important to reiterate here, that instead of proceeding to a final decision on the case tried to the Court—Debtor decided to simply withdraw his Answer after settlement attempts failed. On February 14, 2019, the Court entered a judgment finding $120,984 of the $153,000 original debt, and nearly $5,984 of interest, nondischargeable. The Court reached that number by taking $39,000 off the $159,984 of debt. The $39,000 represented the value Ms. Marvel netted on the sale of the four lots.
In requesting entry of discharge here, Debtor now argues the discharge should be entered because he fulfilled all Plan terms—including surrendering the four lots to Ms. Marvel. He points out that the Plan stated that surrendering property to Ms. Marvel was payment of her claim in full. He now argues (or re-argues) the adversary proceeding should have never proceeded and the Court's judgment in the adversary cannot be treated as having controlling legal effect.
To better understand the issues here the Court will discuss the legal effect of a plan confirmation and an adversary proceeding. Then the Court will discuss the interaction of these proceedings and what it means to this case.
Section 1327 of the Bankruptcy Code outlines when a confirmed plan is binding. 11 U.S.C. § 1327. Under section 1327, a confirmation order has res judicata effect on "any issue
To determine the dischargeability of any debt, an adversary complaint and proceeding is required. Section 523(a) of the Bankruptcy Code enumerates the different types of debts that should be excluded from a debtor's discharge.
11 U.S.C. § 523(a)(15) (emphasis added).
The general bankruptcy policy of protecting the debtor is thus not as robust when the debt arises out of a divorce or a separation agreement. In enacting subsections 523(a)(5) and (15), Congress had to "balance two public policies ... the Bankruptcy Code's purpose of providing a fresh start to a deserving debtor; and the importance of a debtor's obligations to his family."
While it is true that the Bankruptcy Code exceptions to discharge are usually "strictly construed against the objecting creditor," in domestic relations situations the "exceptions are liberally construed in favor of a former spouse."
Some courts have ruled that section 523(a)(15) debt is nondischargeable under Chapter 7, but dischargeable under Chapter 13 because of section 1328. 11 U.S.C. § 1328(a);
11 U.S.C. § 1328(a)(2) (emphasis added). The exclusion of § 523(a)(15) from the list provided in 1328(a)(2) has led some courts to believe that 523(a)(15) debts continue to be dischargeable under Chapter 13.
The real question becomes which result governs here—the one suggested by the confirmed Plan or the one required by the Court's order in the adversary. As a general rule, if a creditor had notice and hearing of the plan confirmation, the creditor cannot contest the discharge of the debt as the plan treatment is binding on all its creditors. In
559 U.S. 260, 130 S.Ct. 1367, 1374, 176 L.Ed.2d 158 (2010).
Under
Under the Federal Rules of Bankruptcy Procedure, the confirmation process cannot invalidate a creditor's rights in property. Under Rule 7001(6), the dischargeability of a debt can only occur "through litigation in an adversary proceeding — and not through a provision in a plan."
The dischargeability of a debt held by a specific creditor is "a matter of particularly great consequence, in terms of the applicable legal principles and the practical result," as such creditor must be afforded the right to defend her rights in an adversary proceeding.
The meaning and spirit of this rule is particularly applicable to this case. The prevailing practice in this judicial district is to get Chapter 13 plans confirmed, if at all possible, and to deal with issues that might later effect the Plan at the time they arise. This is true for issues that may arise with claim disputes (or potential disputes), issues relating to possible or likely changes in debtor's disposable income, and other matters that can be handled after confirmation. This practice of getting a Plan confirmed and moving forward was certainly intended to apply here—in the context of a confirmation proceeding where a dischargeability adversary had already been filed. The Court's assumption was that the normal process would apply—and in fact was applied here. The less formal confirmation proceeding resulted in a confirmed plan, which treated the claim, subject to the adversary proceeding to follow. Debtor's counsel never suggested the pending adversary was resolved at the time of confirmation. The Court would not have approved the Plan if Debtor's counsel had brought up the issue.
The Third Circuit in
In addition to this reasoning, there are several additional problems with Debtor's arguments that the adversary proceeding and resulting order was barred by res judicata. First, and probably foremost, the problem for Debtor is that he eventually withdrew his Answer. The Answer is
Third, even if the Court accepted some of Debtor's arguments here, and looked to the Plan as potentially binding, the Plan itself contains a pretty significant error in math. Debtor either did not catch the error or improperly attempted to mislead the creditors and the Court. Debtor now argues that when he deeded the four parcels of property to Ms. Marvel under the Plan, it was in full satisfaction of the $153,000 debt. It is undisputed, however, that Ms. Marvel held a 50 percent interest in those four lots. Debtor—at most—thus transferred only his 50% interest to Ms. Marvel. That interest—even using Debtor's own numbers—was worth $76,500 (1/2 of the $153,000). Even if the Plan and those numbers in it were binding, he would still owe Ms. Marvel half of $153,000. In short, the Plan provision attempting to offer the real estate collateral in full satisfaction of the debt, when at most its value would be for one-half of the debt—is in fact nowhere near a fair, full-value transfer. The order in the adversary gave credit to Debtor for the transfer of his one-half interest in the parcels. The Court used $39,000 for the value of the lots. That was the amount Ms. Marvel showed at trial.
In the Ruling and judgment in adversary, the Court, in fact, accounted for property transferred under the Plan. Debtor requested entry of discharge in an amount of $159,999—plus—representing the original $153,000 debt and interest. The Court instead ordered only $120,000 as the non-dischargeable judgment. The $39,000 reduction represents the value of the Debtor's half interest in the real estate conveyed to Ms. Marvel under the Plan. The Court chose that amount based on the proof offered at trial by Ms. Marvel on what the real estate actually sold for.
Additionally, Ms. Marvel also arguably had an unsecured priority claim after confirmation.
Here, Debtor argues that nothing else matters because the Plan was confirmed without any objection from Ms. Marvel, and that she effectively consented to, or impliedly assented to the Plan. Debtor argues Ms. Marvel is bound by the provisions of the Plan under any scenario. Ms. Marvel concedes that she did not object to the Plan at confirmation, but she did file a proof of claim within the statutory allocated period, in addition to have already filed an adversary proceeding specifically noting what treatment she sought.
The Court concludes that, notwithstanding the fact that the Debtor's Plan was confirmed by the Court in the normal process, Ms. Marvel's rights were not cut off by confirmation. The issue of dischargeability is an issue that needs to be determined by an adversary proceeding, which is exactly what Ms. Marvel did. Therefore, the Debtor's Plan did not affect or discharge Ms. Marvel's claim.
Moreover, even if Debtor had some legitimate argument that confirmation was binding and had a preclusive effect in and against the adversary—he has waived and
This Court denies the Debtor's Motion for Entry of Discharge to the extent a discharge effects the debt remaining to Ms. Marvel. Debtor is to pay Ms. Marvel the total amount of $120,984.07 plus all the accrued interest at the rate of 2.56% until paid in full or arrange for an out-of-court agreement. Debtor's Motion is hereby DENIED.
Judgment shall enter in favor of Melissa Marvel and against Joshua J. Cochran in the amount of $120,984.07 plus all the accrued interest at the rate of 2.56%.