KEITH L. PHILLIPS, United States Bankruptcy Judge.
This matter is before the Court on 1) the objection to confirmation of the Debtor's chapter 13 Plan filed by Tricia P. Cole ("Ms. Cole"), 2) the objection to confirmation filed by Carl M. Bates, Chapter 13 Trustee (the "Trustee"), and 3) the Debtor's objection to Ms. Cole's proof of claim. An evidentiary hearing was held on November 10, 2015.
Ms. Cole contends that confirmation of the Debtor's plan should be denied because the plan fails to provide for payment in full of all domestic support obligations, was not filed in good faith, fails to satisfy the liquidation test required under § 1325(a)(4) of the Bankruptcy Code, 11 U.S.C. § 1325(a)(4),
The Debtor has objected to the proof of claim filed by Ms. Cole in this case. Ms. Cole claims that $50,000 in attorney's fees awarded to her in connection with state
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(a) and (b)(1) and 1334 and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (L) and (O). This Opinion and Order constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, Fed. R. Bankr.P. 7052.
Gregory A. Cole ("Dr. Cole" or the "Debtor") and Ms. Cole were married on September 8, 2001 and separated on April 21, 2011. Ms. Cole filed a complaint for divorce on July 30, 2010, seeking a divorce a vincula matrimonii on the grounds of adultery or, in the alternative, on the grounds of cruelty and constructive desertion or, in the alternative, on the grounds of a one-year period of separation. Dr. Cole filed an answer and counterclaim in which he asserted his privilege under the Fifth Amendment regarding his alleged adultery and sought a divorce a vincula matrimonii on the grounds of a one-year period of separation. The matter was tried in the Circuit Court for the County of Chesterfield, Virginia, (the "Circuit Court") on the issues of grounds for divorce, equitable distribution, spousal support, child support, custody, visitation, and attorney's fees and costs. In a letter opinion dated September 26, 2014 (the "Letter Opinion"), the Circuit Court ruled on the issues of grounds for divorce, equitable distribution, spousal support, child support, and attorney's fees and costs. A final decree of divorce, incorporating the Letter Opinion, was entered by the Circuit Court on December 19, 2014.
The Circuit Court awarded Ms. Cole a final divorce on the grounds of adultery, provided for the division of property, and ordered Dr. Cole to pay Ms. Cole the sum of $4000 per month in spousal support and $754 per month in child support, as well as the sum of $38,000 in spousal support arrearages. The Circuit Court also ordered Dr. Cole to pay the sum of $70,000 directly to Ms. Cole for attorney's fees and costs. In the Letter Opinion, the court cited a number of factors supporting the fee award:
Ex. 1 at 18. Prior to his bankruptcy filing, Dr. Cole paid Mrs. Cole $20,000 of the attorney's fees award, leaving a balance due of $50,000. He also paid $25,000 toward the spousal support arrearages, leaving an unpaid balance of $13,000.
On February 27, 2015, Dr. Cole filed a voluntary petition under chapter 13 of the Bankruptcy Code, and on March 4, 2015, he filed his chapter 13 plan (the "Plan") (Ex. 4). The Plan is funded by sixty equal monthly payments of $1100 to the Trustee for a total funding of $66,000. The Plan provides for payment of administrative expenses, including a trustee's commission of 10% and $4600 in attorney's fees, and for payment of $13,000 to Ms. Cole for a priority domestic support obligation pursuant to 11 U.S.C. § 507(a)(1). The remaining funds are available for unsecured creditors.
On March 19, 2015, Ms. Cole timely filed her proof of claim (the "Claim") in the total amount of $132,969, comprised of $13,000 in spousal support arrearages, $50,000 in court ordered legal fees, and $69,969 owed in connection with equitable distribution, asserting that the full amount of the Claim is a domestic support obligation entitled to priority pursuant to § 507(a)(1) of the Bankruptcy Code. On April 9, 2015, the Debtor filed an objection to the Claim, asserting that while the total dollar amount of the Claim is correct, only $13,000 of the Claim should be allowed as a domestic support obligation entitled to priority and that the remainder of the Claim should be allowed as a general unsecured claim.
Three other creditors have filed claims in the case, the largest of which was filed by the Debtor's parents, who filed an unsecured claim in the amount of $69,388.25. The other two claims are a secured claim filed by First Commonwealth FCU in the amount of $1340.55
At the hearing before this Court on November 10, the Debtor offered the testimony of Dean Heinberg, the same valuation expert who testified on his behalf in the divorce proceedings. Mr. Heinberg testified that the "liquidation value of Dr. Cole's practice as a personal-services company" is "zero" because the liabilities of the entity exceed the value of its assets. (Tr. at 31, 11. 4-12). He placed no value on patient records. (Tr. at 30, 11. 5-23).
The Debtor also offered the testimony of an experienced chapter 7 trustee, Bruce Matson. Mr. Matson testified that he had reviewed various documents, including an operating agreement, the shareholders' agreement, a balance sheet, and other financial information relating to the Practice. He stated that if he were appointed to administer Dr. Cole's bankruptcy estate as a chapter 7 trustee, he would abandon the interest in the Practice because he does not believe there is "anyone who would pay anything in the open market, for that twenty-five percent interest." (Tr. at 41, 11. 12-24). He further testified that his opinion was based in part on his assumption that Dr. Cole would be able to continue practicing dentistry, presumably in competition with whoever may acquire his interest, which would discourage another
Ms. Cole offered the testimony of Robert Raymond, the valuation expert who had testified on her behalf in the divorce proceedings. Mr. Raymond testified that he has valued approximately 300 medical practices, including about 75-100 dental practices (Tr. at 78, 11. 16-23), though few in the context of a chapter 7 liquidation. (Tr. at 97, 11. 3-6). Mr. Raymond disagreed with Mr. Heinberg's opinion that the patient records have no value, stating that "far and away the most significant asset of any dental practice is its patient base." (Tr. at 89, 11. 8-9). His testimony regarding the value of Dr. Cole's interest in the Practice was primarily based on a division of proceeds after a sale of the whole practice rather than the isolated sale or liquidation of Dr. Cole's 25% interest. Mr. Raymond's revised valuation (updating that which was submitted in the Circuit Court) places a value of $203,000 as of December 31, 2014, for Dr. Cole's interest in the Practice. (Ex. 15).
Mr. Raymond's testimony included his analysis of the shareholders' agreement existing between Dr. Cole and the other shareholders of the Practice.
The Shareholders' Agreement includes the following provision regarding transfer of shares of the Corporation:
Art. I(A) (emphasis added). The Shareholders' Agreement further provides that:
Art. II(A). The Shareholders' Agreement entitles the Corporation to a first right of refusal but, in the event that all of the shares being offered are not purchased by the Corporation, the other shareholders "
Article IV of the Shareholders' Agreement provides that the purchaser of shares may make payment by cash, by promissory note or by a combination of the two. Schedule A of the Shareholders' Agreement includes the formula for determining the purchase price for the shares, which is the same formula applied by Mr. Raymond in valuing the buyout or "absolute floor" that Dr. Cole would be able to obtain from other shareholders. According to the Shareholders' Agreement, in the event the Corporation were to exercise its first right of refusal, the same formula for determining the purchase price of the shares would be utilized.
In his bankruptcy schedules (Ex. 3), Dr. Cole values his interest in the dental practice at $15,782.
The schedules include Dr. Cole's chapter 13 "Statement of Your Current Monthly Income and Calculation of Commitment Period" (Official Form 22C-1). On Form 22C-1, Dr. Cole lists his average monthly income and his current monthly income at $12,500. Because his current monthly income for the year exceeds the applicable median family income, the required commitment period as calculated under § 1325(b)(4)(A) is 5 years.
On the expense portion of Form 22C-1, Dr. Cole includes transportation expenses and the vehicle ownership expense for one vehicle, a 2012 Ford Focus. By the date of the hearing on November 10, the debt secured by this vehicle had been paid off. Dr. Cole also listed $2779 as the amount of his monthly tax obligation. After deducting all amounts "allowed under 11 U.S.C. § 707(b)(2)(A)," Dr. Cole's monthly disposable income under § 1325(b)(2) came to $108.83 on Form 22C-1.
Pursuant to Bankruptcy Rule 3015(f), an objection to confirmation of a chapter 13 plan is a contested matter and
Ms. Cole contends that the Plan should not be confirmed because it fails to comply with the statutory requirements for confirmation set forth in §§ 1322(a) and 1325. One of the specific deficiencies asserted by Ms. Cole is the Plan's failure to comply with § 1325(a)(4), commonly known as "the best interests of creditors test" or "the liquidation test," which states:
The liquidation test requires that creditors receive payments having a present value at least equal to what they would receive in a chapter 7 case. In re Plascencia, 354 B.R. 774, 782 (Bankr.E.D.Va.2006).
In order to determine whether a proposed chapter 13 plan meets the liquidation test, two separate calculations are necessary. One calculation determines the value, as of the effective date of the plan,
In this case, not including Ms. Cole's Claim, unsecured claims total $69,544.75. Her Claim is in the total amount of $132,969, of which the Debtor contends $119,969 is a general unsecured claim. Assuming for purposes of this analysis that the Debtor's contention is correct, the amount of unsecured claims would total $189,513.75.
The proposed funding of the Plan totals $66,000, to be paid to the Trustee in equal installments of $1100 per month for 60 months. This amount would be further reduced by the trustee's commission of 10% ($6600), attorney's fees ($4600), and the proposed priority claim to Ms. Cole ($13,000). This would leave a total of $41,800 to be paid to unsecured creditors in Dr. Cole's chapter 13 case. Without accounting for present value of future payments,
Ms. Cole contends that the value of Dr. Cole's interest in the Practice is the value that was determined by the Circuit Court in the divorce proceedings. She argues that the principle of collateral estoppel bars the Debtor from relitigating the value of his interest and requires this Court to find that the value is $212,000. Alternatively, Ms. Cole asserts that the "going concern" value of Dr. Cole's interest which according to her evidence, is $212,000 (or Mr. Raymond's more recent estimate of $203,000), is the appropriate measure of value for purposes of applying the liquidation test.
The Debtor maintains that collateral estoppel does not apply because the "intrinsic value" of his business interest, as determined by the Circuit Court, is not the same as the chapter 7 liquidation value contemplated under § 1325(a)(4). He points to various impediments that would adversely affect a chapter 7 trustee's ability to liquidate his interest, many of which are attributable to the difficulties associated with successfully marketing a minority interest in a personal services corporation. The Debtor places substantial weight on the testimony of Mr. Matson, who stated that he would have abandoned the Debtor's interest in the Practice if he were the chapter 7 trustee in this case. The Debtor argues that Mr. Matson's testimony that no one would pay anything in the open market for that 25% interest conclusively establishes that his interest in the Practice would have no value in a chapter 7 liquidation.
The doctrine of collateral estoppel, or "issue preclusion," prohibits the relitigation of an issue of fact in a different cause of action by a party where that party had a full and fair opportunity to litigate the issue in a previous case. Johnson v. Stemple (In re Stemple), 361 B.R. 778, 794-95 (Bankr.E.D.Va.2007). A party seeking to assert collateral estoppel must establish:
Collins v. Pond Creek Mining Co., 468 F.3d 213, 217 (4th Cir.2006). According to Dr. Cole, the necessary elements to establish collateral estoppel are not present. In particular, he claims that the issue determined in the prior proceeding (the "intrinsic value" of the Debtor's interest in the Practice) is not the same as the present
Equitable distribution proceedings in Virginia require the trial court to determine the ownership and value of the parties' property. Va. Code Ann. § 20-107.3(A). The definition of "value" for equitable distribution purposes is "that value which represents the property's intrinsic worth" to the parties. Wright v. Wright, 61 Va.App. 432, 737 S.E.2d 519, 531 (2013) (quoting Bosserman v. Bosserman, 9 Va.App. 1, 384 S.E.2d 104, 107 (1989)). "Intrinsic value is a very subjective concept that looks to the worth of the property
By contrast, in the instant proceeding, the Court must determine the value of Dr. Cole's interest in the Practice in the context of a hypothetical chapter 7 liquidation. Section 704(a)(1) of the Bankruptcy Code requires a chapter 7 trustee to reduce to money the property of the bankruptcy estate, clearly contemplating a sale or other disposition of the property. This is different from determining the intrinsic value, or its worth to the parties, in a divorce proceeding.
In the marital dissolution proceedings, the amount a chapter 7 trustee would receive by liquidating the Debtor's interest in the Practice was not the basis for establishing its value. Accordingly, the issue decided by the Circuit Court is not the same as the issue before this Court. For that reason, collateral estoppel does not apply.
Ms. Cole next argues that notwithstanding the application of the collateral estoppel doctrine, Mr. Raymond's estimate of value
The court in Health Diagnostic Laboratory applied a going concern value in a chapter 11 case to find that a secured creditor was adequately protected under § 364(d)(1)(B) of the Bankruptcy Code where there was no evidence that the debtor intended to liquidate the business. "No evidence was presented to suggest that the Debtors are close to liquidation and, as such, liquidation value (either as orderly liquidation value or forced liquidation value) is not appropriate to value the Debtors' assets. To the contrary, the evidence presented to the Court . . . indicated that the Debtors would remain a going concern as the Debtors pursue the going concern sale of their assets." Id. at 18. The court adopted the Debtors' proposed fair market valuation that was based on a negotiated sale with ongoing operations and, using that valuation, found that an equity cushion existed. Id. at 21-25.
As Judge Huennekens stated in Health Diagnostic Laboratory, "[p]roperty valuations in bankruptcy are `determined in light of the purpose of the valuation and of the proposed disposition or use of such property.'" Id. at 17 (quoting Estate Constr. Co. v. Miller & Smith Holding Co., 14 F.3d 213, 219 (4th Cir.1994)). Neither the purpose of the valuation in this case, nor the proposed disposition, is the same as in the cases cited by Ms. Cole.
In this case, Mr. Raymond's valuation (Ex. 7, Ex. 15) is based on the going concern value of the dental practice as a whole, taking 25% of that total. (Tr. at 79, ll. 17-23). But there is nothing in the Shareholder's Agreement nor any other evidence in the record to suggest that Dr. Cole, or a chapter 7 trustee stepping into his shoes, would have the ability to force a sale of the Practice as a going concern in order to maximize Dr. Cole's 25% interest in the proceeds. Both Baker and Health Diagnostic Laboratory involved circumstances in which a debtor owned and controlled a full interest in an ongoing business. By contrast, a hypothetical chapter 7 trustee would have only the rights held by Dr. Cole as a minority shareholder in the Practice.
Dr. Cole asserts that the valuation espoused by Mr. Heinberg, which places no value on Dr. Cole's interest in the Practice, is the appropriate measure of value.
The Court finds Faison to be inapposite to the current case. The court in Faison was asked to find that a chapter 13 debtor's interest in a partnership, a mortgage brokerage business, was properly valued at one dollar for purposes of applying the § 1325(a)(4) liquidation test. The court found that the debtor's interest was limited to the income he generated for services performed and that, without the debtor, his ownership interest in the partnership would have no value "and certainly no value that a Chapter 7 trustee would be able to realize on behalf of the estate." Id. at 229.
Section 541(a) of the Bankruptcy Code defines property of the bankruptcy estate, but subsection (a)(6) specifically excludes from property of the estate "earnings from services performed by an individual debtor after commencement of the case." Therefore, Dr. Cole's postpetition earnings would not be a part of a chapter 7 bankruptcy estate. See Ackerman v. Schultz (In re Schultz), 250 B.R. 22, 35 (Bankr. E.D.N.Y.2000). Nevertheless, Dr. Cole's interest in the Practice is not limited to the income he may generate for future services. As stated in Ackerman v. Schultz:
Dr. Cole's reliance on Williams v. Swimelar is similarly misplaced. There, the district court, relying heavily on the bankruptcy court's opinion, affirmed the denial of confirmation of a debtor's amended chapter 13 plan due to the debtor's failure to establish compliance with the liquidation test of § 1325(a)(4). The bankruptcy court's opinion, In re Williams, 354 B.R. 604 (Bankr.N.D.N.Y.2006), addressed the value of a debtor's ownership interest in an insurance agency, which the debtor had listed as having no market value. The debtor argued that the business could only be run by someone licensed to sell insurance and that a chapter 7 trustee, who was unlikely to be licensed, could not force the debtor to service the customers' accounts. He also asserted that he could not be compelled to enter into a covenant not to compete and that the insurance companies would likely terminate their agreements with the agency. The bankruptcy court rejected the debtor's contention that the insurance agency had no value, noting that at least some insurance companies may choose not to terminate their relationship with the agency and that a chapter 7 trustee could employ an insurance agent to operate the business while the trustee marketed it. Id. at 610-11. The bankruptcy court found that the debtor had not met his burden to establish that the insurance agency had no value.
Id. at 611.
When the burden is on the debtor to establish that an asset has no value in order to demonstrate compliance with § 1325(a)(4), he must do more than list the impediments a chapter 7 trustee would encounter while attempting to liquidate the asset, even if the impediments would lead to the belief that some trustees would forego the effort, particularly where there is evidence to suggest that the asset has more than a nominal value. In this case, there is evidence suggesting that Dr. Cole's interest in the Practice would have significant value in a chapter 7 liquidation. The Shareholders' Agreement corroborates Mr. Raymond's testimony that Dr. Cole is entitled to compel the other shareholders of the Practice to buy out his interest for a set price. The Shareholders' Agreement provides that "if a Shareholder desires to sell or in any manner to dispose of or otherwise transfer all or any portion of his Shares during his lifetime" he must first offer the shares to the Corporation and then, if the Corporation does not purchase the shares, to the other shareholders, who "shall be obligated to purchase" the shares. The price to be paid by either the Corporation or the other shareholders
A chapter 7 trustee, who would inure to the rights of Dr. Cole as a shareholder of the Practice, would be entitled to demand that the other shareholders (if not the Corporation) purchase Dr. Cole's shares in exchange for the sum of $161,268. Dr. Cole has offered no evidence to rebut the availability of the buyout to a chapter 7 trustee
The general rule is that the liquidation value of the assets available in a chapter 7 case less the associated costs, including the trustee's fees, costs of sale, exemptions and capital gains taxes, should be used when determining whether a chapter 13 plan satisfies the calculation required under § 1325(a)(4). In re Delbrugge, 347 B.R. 536, 539 (Bankr. N.D.W.Va.2006). In the instant case, the record enables the Court to determine the amount of the Debtor's exemptions, and § 326(a) sets forth the means by which the Court may calculate the maximum commission available to a chapter 7 trustee. However, there is nothing to guide the Court in determining other potential liquidation costs, such as sales expenses,
The Debtor listed no interest in real estate and listed the value of his personal property at $159,231. Other than his interest in the Practice, the value of the Debtor's assets is not in dispute. The Court has valued the Debtor's interest in the Practice at $161,268, which exceeds his scheduled valuation of $15,782 by $145,486. Therefore, the total value of the Debtor's assets is $304,717. The Debtor has claimed and is entitled to exemptions in the amount of $99,732, which would leave $204,985 in assets available to be administered in a chapter 7 case.
Under § 326(a), a chapter 7 trustee would be entitled to a maximum commission of $13,499.25 upon disbursing $204,985 to parties in interest.
When determining the amount to be paid to unsecured creditors under the Debtor's chapter 13 Plan, the Court has accepted, for that limited purpose only, the Debtor's assertion that Ms. Cole's priority claim is limited to $13,000. Subtracting that sum from the $191,485.75 available to pay all creditors in a hypothetical chapter 7 liquidation leaves $178,485.75 to pay the remaining creditors.
When evaluating the Plan, the Court has calculated that general, unsecured claims total $189,513.75. In a chapter 7 case, payment of $178,485.75 to those creditors would constitute a distribution of 94% of their claims. However, in this chapter 13 case, the Plan proposed by the Debtor would distribute a total of only $41,800 to general, unsecured creditors, which amounts to a distribution of 22% of their claims. Therefore, the Debtor has failed to establish that the Plan complies with § 1325(a)(4). The Court will deny confirmation and grant the Debtor leave to file an amended Plan.
At confirmation, the Debtor has the burden of proving that both the case and the Plan were filed in good faith. In re Colston, 539 B.R. 738, 746 (Bankr. W.D.Va.2015) (citing Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 918 (9th Cir. BAP 2011)). Ms. Cole contends that Dr. Cole has not proceeded in good faith, both in the filing of his petition and in the filing of his Plan.
The Fourth Circuit applies a totality of the circumstances test to determine whether a chapter 13 plan has been proposed in good faith pursuant to § 1325(a)(3). In re Colston, 539 B.R. at 747; Solomon v. Cosby (In re Solomon), 67 F.3d 1128, 1134 (4th Cir.1995); Deans v. O'Donnell, 692 F.2d 968 (4th Cir.1982). The court must consider various factors including, but not limited to, the following: the proposed distribution to unsecured creditors, the nature and amount of unsecured claims, the debtor's prepetition and postpetition conduct, and whether the debts would be dischargeable in a chapter 7 bankruptcy. In re Colston, 539 B.R. at 747.
A number of factors, including the timing of Dr. Cole's bankruptcy filing, his
Ms. Cole has also objected to confirmation under § 1325(a)(7), which provides that a plan may not be confirmed unless a debtor proves, by a preponderance of the evidence, good faith in the filing of his chapter 13 petition. In re Colston, 539 B.R. at 750. The factors considered by courts when determining whether a petition was filed in good faith have usually focused on whether, under the circumstances of the case, there has been an abuse of the bankruptcy process. See, e.g., In re Uzaldin, 418 B.R. 166, 173 (Bankr.E.D.Va.2009); In re Colston, 539 B.R. at 750-51.
Both Ms. Cole and the Trustee objected to confirmation on the basis of the disposable income requirements of § 1325(b). The issues in contention involve an expense of $330 per month for a car payment, the Debtor's alleged overestimation of his monthly income tax obligation, and the Debtor's alleged "voluntary underemployment."
Under § 1325(b)(4)(A)(ii), Dr. Cole is required to pay his projected disposable income
Ms. Cole contends that Dr. Cole's calculation of monthly disposable income is incorrect, arguing that the amount listed for his monthly tax expense fails to account for allowed deductions attributable to spousal support payments.
Dr. Cole testified that his 2014 individual federal tax return included a deduction of $50,000 attributable to his payment of spousal support. (Tr. at 46, 11. 18-22). His 2014 federal and state tax returns corroborate this testimony. (Ex. F). Dr. Cole's further testimony concerning the amounts listed for federal and state income taxes and FICA, based on his adjusted gross income after deducting "alimony paid," is also corroborated by his 2014 tax returns. Therefore, the reduction in Dr. Cole's monthly tax obligation resulting from his ability to exclude spousal support from his gross income is properly reflected in Form 22C-1, and the amount listed under Line 16 for Taxes is substantially correct.
Ms. Cole's assertion that Dr. Cole is able to increase his payments by an additional $330 per month as a result of his having fully paid a debt secured by his automobile, notwithstanding that the expense appears to have been properly taken on Lines 13-13c of Form 22C-1, is also of no consequence. See In re Walker, No. 07-70358, 2010 WL 4259274, at *9 (Bankr.C.D.Ill. Oct. 21, 2010) (the disposable income analysis adds nothing when its outcome would require payments totaling less than the amount necessary to satisfy the liquidation analysis). The Court's ruling in connection with the liquidation analysis will require an increase in plan funding significantly in excess of the amount that would be provided by an additional monthly payment of $330 for the remainder of the required 60 months. Since the Debtor is required to pay only the higher of the two amounts, the Court need not consider an increase in projected disposable income of only $330 per month. Id. at *8.
Ms. Cole couches her contention that the Debtor is "voluntarily underemployed" as the further failure of the Debtor to submit all of his disposable income toward funding the Plan. This allegation, that Dr. Cole has intentionally foregone the opportunity to earn a higher salary, would be more appropriate to consider when deciding whether he has complied with his good faith requirements under § 1325(a)(3) and (7). See In re Uzaldin, 418 B.R. at 175-76. As the Court has already stated, it is not necessary to rule on the issue of Dr. Cole's good faith at this time. Proof, if it exists, that Dr. Cole could, but chooses not to, earn a higher income by working more hours, in the absence of any evidence that he has manipulated or structured his income in order to lower the amount of his current monthly income has little, if any, bearing on the amount of his disposable income under § 1325(b)(2).
Ms. Cole has filed a proof of claim in the amount of $132,969, claiming that the entire amount is entitled to priority under § 507(a) of the Bankruptcy Code. The parties now agree that $13,000 of the Claim represents unpaid spousal support and should be allowed as a priority claim under § 507(a)(1). The parties also agree that $69,969 of the Claim represents an equitable distribution award and should be allowed as a general unsecured claim. The parties do not agree on how the remaining portion of the Claim should be classified.
The remaining component of the Claim is in the amount of $50,000 and represents the balance of attorney's fees awarded to Ms. Cole in connection with state court divorce proceedings. Although they disagree as to the classification of this portion of the Claim, the parties agree that the amount asserted is correct. Dr. Cole contends that the attorney's fees award is not a domestic support obligation as defined by § 101(14A)
Dr. Cole has submitted invoices and time entries from Ms. Cole's attorneys (Ex. N) upon which the Circuit Court's award of attorney's fees is based. He contends that only those fees that Ms. Cole can prove were incurred in connection with support issues, as opposed to those relating to equitable distribution, are nondischargeable. Dr. Cole claims that none of the attorney's fees are entitled to priority because Ms. Cole has failed to meet her burden of proving which fees are attributable to support issues.
Dr. Cole's argument that only those fees for legal services that Ms. Cole can connect to the litigation of nondischargeable support are themselves nondischargeable ignores longstanding case law in this District. This Court's opinion in In re Taylor, which is cited by Dr. Cole to support his position, states "that it is well within the province of the bankruptcy court to find a fee award to be in the nature of alimony, maintenance, or support even though the fee at issue was for services in the divorce litigation where both property and support were at issue." In re Taylor, 252 B.R. at 355 (citing In re Grady, 180 B.R. 461, 465 (Bankr.E.D.Va. 1995) ("(I]t is insignificant that the litigation addressed property awards as well as support.")). In Taylor, the Court held that determining those attorney's fees that are "inextricably intertwined with the litigation of nondischargeable support" is but one analysis the Court may implement; the Court should also balance the function of the award and relative finances of the litigants. 252 B.R. at 353. The Court further remarked that:
Id.
The determinative factor here is the intent of the Circuit Court. Beaton v. Zerbe (In re Zerbe), 161 B.R. 939, 941 (E.D.Va.1994) ("In this circuit, the question of whether or not a debt is in the nature of alimony, support, or maintenance is largely a question of intent. . . . In a case where a . . . judge . . . makes the decision that one party must pay the other's attorney's fees, it is the intention of the [judge], not of the parties, that controls."); In re Grady, 180 B.R. at 465 ("Since the issue at bar arises out of a clause in the divorce decree entered by a state court, we must look to the intent of the trier or [sic] fact with respect to those obligations.").
The Circuit Court's intent in awarding attorney's fees can best be ascertained from the Letter Opinion (Ex.1).
The Court is unable to discern the extent to which the attorney's fees in question were related to property settlement or to support; nevertheless, there is a sufficient connection between the award of attorney's fees and the ascertainment of maintenance and support to find that the Circuit Court's fee award is in the nature of alimony, maintenance and support. See In re Taylor, 252 B.R. at 355. Furthermore, this Court is of the opinion that the Circuit Court intended that Dr. Cole pay the attorney's fees of Ms. Cole after due consideration of their respective assets and financial ability. See In re Grady, 180 B.R. at 465. Therefore, the Court finds that the $50,000 portion of Ms. Cole's Claim is a domestic support obligation under the language of § 523(a)(5) and is entitled to priority status under § 507(a)(1)(A).
The Objections to Confirmation of the Debtor's chapter 13 Plan filed by Ms. Cole
The Debtor's Objection to Ms. Cole's Proof of Claim is sustained in part and overruled in part. Ms. Cole shall have an allowed proof of claim in the total amount of $132,969, of which $63,000 shall be entitled to priority pursuant to 11 U.S.C. § 507(a)(1)(A) and $69,969 shall be a general unsecured claim.
A separate order shall issue.
Subsequent references to the Bankruptcy Rules are to the Federal Rules of Bankruptcy Procedure, Fed. R. Bankr. P. 1001-9037.
All references to the transcript are to the transcript of the evidentiary hearing held in this Court on November 10, 2015.
Courts look to state law when determining a debtor's interest in property. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The Shareholders' Agreement defines the Practice as a Virginia Professional Corporation, as do all related exhibits; therefore, Virginia corporate law applies. While Section 13.1-747 of the Code of Virginia, Va. Code Ann. § 13.1-747, allows for judicial dissolution as a result of oppressive and fraudulent conduct by the majority shareholders, see, e.g., Colgate v. The Disthene Group, Inc., No. CL-11-117, 85 Va. Cir. 286, 2012 WL 9391675, at *4 (Va.Cir.Ct. August 30, 2012), there is nothing in the record to suggest that such circumstances are present in this case. Moreover, a chapter 7 trustee attempting to compel a sale of the Practice pursuant to § 363(h) of the Bankruptcy Code would likely encounter opposition from the other shareholders. See, e.g., Horizons A Far, LLC, v. Webber (In re Soderstrom), 484 B.R. 874 (M.D.Fla.2013); Schwab v. Stroup (In re Stroup), 521 B.R. 84 (Bankr.M.D.Pa.2014).
