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In re Heilman

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


April 26, 2010

IN RE: NICHOLAS P. HEILMAN DEBTOR.
PAM HEILMAN, APPELLANT,
v.
NICHOLAS P. HEILMAN, APPELLEE.

Appeal from the United States Bankruptcy Court for the Eastern District of Washington Honorable Patricia C. Williams, Bankruptcy Judge, Presiding. Bk. No. 05-08319-PCW, Adv. No. 08-80093-PCW.

The opinion of the court was delivered by: Hollowell, Bankruptcy Judge

ORDERED PUBLISHED

OPINION

Submitted Without Oral Argument on November 24, 2009

Before: HOLLOWELL, MONTALI and PAPPAS, Bankruptcy Judges.

The parties to this appeal are former spouses. Approximately six months prior to their divorce, Nicholas Heilman (the Debtor) filed, individually, for chapter 7*fn1 bankruptcy relief and received a discharge. Pam Heilman (Heilman) later sought a declaratory judgment against the Debtor to declare that the Debtor was obligated, by the terms of their dissolution decree, to hold Heilman harmless on a prepetition community debt owed to Heilman's parents. The bankruptcy court held that the loan to Heilman's parents had been discharged and therefore, Heilman could not be held harmless for a nonexistent obligation. For the reasons given below, we AFFIRM.

I. FACTS

The Debtor and Heilman were married in April 2002. During their marriage, from March through December 2004, Heilman's parents, Richard and Laurel Beyer (the Beyers), loaned Heilman approximately $42,000 for the primary purpose of supporting Heilman's daughter (the Beyer Loan).

On October 3, 2005, the Debtor filed an individual chapter 7 bankruptcy petition. A review of the bankruptcy case docket and underlying bankruptcy schedules reveals that the Debtor did not list the Beyer Loan on his schedules or include the Beyers on the creditor mailing matrix.*fn2 The Debtor's case was a no-asset case and he received a discharge on January 11, 2006.

Approximately seven months later, on June 9, 2006, Heilman filed a Petition for Dissolution of Marriage in Washington State Superior Court for Lincoln County. The marriage was dissolved by an agreed Decree of Dissolution on September 19, 2006 (the Dissolution Decree). The Dissolution Decree allocated certain debts to the Debtor. It identified the Beyer Loan as one of four "Community Liabilities to be Paid by the Husband." The Dissolution Decree did not allocate any community liabilities to Heilman. The separate liabilities for each spouse were described only as those obligations that were incurred prior to the marriage or after Heilman and the Debtor separated. The Dissolution Decree also contained a provision that each spouse would hold the other harmless from any collection action relating to the separate or community liabilities that were allocated to the parties in the Dissolution Decree (the Hold Harmless Provision).

On August 15, 2008, Heilman filed an adversary proceeding against the Debtor seeking a declaratory judgment that the Hold Harmless Provision obligated the Debtor to indemnify her for any demands made on her to pay the Beyer Loan.

Heilman filed a motion for summary judgment on February 3, 2009. On March 17, 2009, the Debtor filed a Memorandum of Authorities in Support of Answer to Complaint for Declaratory Judgment Regarding Discharge of Debt. The bankruptcy court heard the matter on March 24, 2009, and denied the motion for summary judgment on March 25, 2009. The parties subsequently agreed to have the bankruptcy court decide the matter on pleadings and a trial was vacated. On April 23, 2009, the bankruptcy court entered an Order Dismissing the Adversary Proceeding and issued its decision finding that the community obligations referenced in the Dissolution Decree had been discharged and the Hold Harmless Provision could not revive a discharged debt. Heilman v. Heilman (In re Heilman), 2009 WL 1139468 (Bankr. E.D. Wash. 2009). Heilman timely appealed.*fn3

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(1). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUE

Does the Dissolution Decree obligate the Debtor to pay the Beyer Loan or to hold Heilman harmless for the Beyer Loan?*fn4

IV. STANDARDS OF REVIEW

We review a bankruptcy court's legal conclusions, including its interpretation of the bankruptcy code and state law, de novo. Hopkins v. Cerchione (In re Cerchione), 414 B.R. 540, 545 (9th Cir. BAP 2009). We may affirm the bankruptcy court on any basis supported by the record. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295 (9th Cir. 1998).

V. DISCUSSION

Heilman contends that the Dissolution Decree ordered the Debtor to pay the Beyer Loan as well as to hold her harmless should the Beyers seek collection from her on the loan. She asserts the Hold Harmless Provision of the Dissolution Decree created a postpetition claim to her that was not discharged in the Debtor's bankruptcy case.*fn5

After analyzing the nature of the Beyer Loan and the effect the bankruptcy discharge had on the parties' liability for the Beyer Loan, we conclude the Dissolution Decree did not create a postpetition claim, but rather attempted to revive a discharged debt.

A. The Beyer Loan Was A Prepetition Community Debt Subject To The Debtor's Discharge

The Debtor and Heilman resided in Washington when the Debtor's bankruptcy petition was filed; therefore, whether the Beyer Loan is a community debt is determined by Washington law. Fed. Deposit Ins. Corp. v. Soderling (In re Soderling), 998 F.2d 730, 733 (9th Cir. 1993).*fn6 Under Washington law, a debt incurred by either spouse during marriage is presumptively a community debt. Seattle First Nat'l Bank v. Marusic (In re Marusic), 139 B.R. 727, 731 (Bankr. W.D. Wash. 1992); Burman v. Homan (In re Homan), 112 B.R. 356, 360 (9th Cir. BAP 1989).

One rather constant theme is the solicitude with which the Washington court has viewed the community property position, manifested in various rules and presumptions: acquisitions by a spouse are presumptively community property; separate property commingled with community property becomes community property by operation of law; obligations incurred by a spouse are presumptively community in character; separate property agreements between spouses must be established by a higher standard of proof than that required to establish community property agreements, and so forth.

Harry M. Cross, The Community Property Law in Washington, 61 Wash. L. Rev. 13, 19 (1986).

Furthermore, debts incurred by either spouse are considered to be community debts if, at the time of the transaction, there was a potential material benefit to the community. Grayson v. Platis, 95 Wash. App. 824, 836, 978 P.2d 1105 (Wash. Ct. App. 1999); In re Marusic, 139 B.R. at 731. The Beyers loaned money to Heilman during the marriage to help care for their grandchild. The Beyer Loan provided a material benefit to the community because it alleviated the community's financial burden of providing support for that child. Neither party has argued otherwise. Thus, in the absence of any evidence to the contrary, the Beyer Loan was a community debt.

The community's liability on expenses "of the family and the education of the children, including step-children," including those items required for sustenance, support and ordinary requirements of a family, is joint and several. RCW 26.16.205 ("[Family expenses] are chargeable upon the property of both [husband and wife], or either of them, and they may be sued jointly or separately."); Sunkidd Venture, Inc. v. Snyder-Entel, 87 Wash. App. 211, 216, 941 P.2d 16 (Wash. Ct. App. 1997).

Divorce courts are "charged with making a just and equitable disposition of the parties' property and liabilities after considering all relevant factors." In re Marriage of Thomas, 63 Wash. App. 658, 660, 821 P.2d 1227 (Wash. Ct. App. 1991); RCW 26.09.050(1) & 26.09.080. Absent the Debtor's bankruptcy, the divorce court could have properly assigned the community's liability for the Beyer Loan to the Debtor and protected Heilman from payment on the Beyer Loan through the Hold Harmless Provision.

However, the entry of the Debtor's discharge bars such a result.

In bankruptcy, community claims are defined as claims that "arose before the commencement of the case concerning the debtor for which property of the kind specified in [§ 541(a)(2)] is liable." 11 U.S.C. § 101(7). Property specified in § 541(a)(2) includes all interests of the debtor and debtor's spouse in community property liable for an allowable claim against the debtor and the debtor's spouse. 11 U.S.C. § 541(a)(2). Because the Debtor and Heilman's marital community was liable for the Beyer Loan, the Beyers held a community claim against the Debtor, which was subject to his bankruptcy discharge.

Additionally, because the obligation was joint and several, at the time the Debtor and Heilman incurred the debt, Heilman was entitled to a contribution claim from the Debtor. Sunkidd Venture, 87 Wash. App. at 217. Thus, on the petition date, Heilman held a contingent claim against the Debtor for contribution on the Beyer Loan.*fn7 11 U.S.C. § 101(5).

1. The Discharge Extinguished The Debtor's Personal Liability on Prepetition Claims

Section 727(b) provides that (except for non-dischargeable debts listed in § 523(a))*fn8 a discharge under § 727(a) discharges a debtor from all debts that arose before bankruptcy (regardless of whether, in the instance of a no-asset chapter 7 case, the debt was listed in a debtor's schedules). 11 U.S.C. § 727(b); Beezley v. Cal. Land Title Co. (In re Beezley), 994 F.2d 1433, 1434 (9th Cir. 1993). The bankruptcy discharge releases the debtor from liability on debts and enjoins any creditor's effort to collect a discharged debt as a personal liability of the debtor. 11 U.S.C. § 727(b) and § 524(a)(1), (a)(2); see also Lone Star Sec. & Video, Inc. v. Gurrola (In re Gurrola), 328 B.R. 158, 163-64 (9th Cir. BAP 2005). As a result, the Debtor's liability for community debts, including the Beyer Loan, and his contingent liability to Heilman for contribution for payments she may have to make on the Beyer Loan, were extinguished when he received his discharge. 11 U.S.C. § 524(a)(1), (a)(2).

2. The Discharge Enjoined Collection Efforts Against The Community

Additionally, under § 524(a)(3), the discharge protected postpetition community property from collection efforts by any creditor holding a prepetition community claim because a discharge permanently enjoins enforcement of prepetition community claims against all future-acquired community property:

[A] nondebtor spouse in a community property state typically benefits from the discharge of the debtor spouse. According to Section 524(a)(3), after-acquired community property is protected by injunctions against collection efforts by those creditors who held allowable community claims at the time of filing. This is so even if the creditor claim is against only the nonbankruptcy spouse; the after-acquired community property is immune.

Rooz v. Kimmel (In re Kimmel), 378 B.R. 630, 636 (9th Cir. BAP 2007) quoting In re Homan, 112 B.R. at 360.

However, the discharge injunction of § 524(a)(3) only applies as long as there is community property. In re Kimmel, 378 B.R. at 636. Dissolution of the marriage terminates the community, at which point after-acquired community property loses its protection. Id. citing, 4 COLLIER ON BANKRUPTCY, ¶ 524.02[3][c] (Alan N. Resnick & Henry J. Sommer, eds., 15th ed. rev. 2007).

3. The Debtor's Discharge Did Not Discharge Heilman From Her Separate Liability On Community Claims

After the Debtor's bankruptcy discharge, Heilman continued to remain separately liable for community debts, including the Beyer Loan. Her separate property (and any community property ultimately distributed to her when the community finally dissolved) was, therefore, subject to collection by a creditor holding a community claim. Von Burg v. Egstad (In re Von Burg), 16 B.R. 747, 749 (Bankr. E.D. Cal. 1982); Gonzales v. Costanza (In re Costanza), 151 B.R. 588, 589 (Bankr. D.N.M. 1993). Heilman's separate liability on the Beyer Loan was not allocated to the Debtor by the Dissolution Decree or subject to its Hold Harmless Provision.

B. The Dissolution Decree's Hold Harmless Provision Did Not Create A New Postpetition Obligation

The bankruptcy court found that by listing the Beyer Loan as a liability to be paid by the Debtor, the Dissolution Decree impermissibly attempted to revive the Debtor's personal liability for a discharged debt. We agree.

The combined effect of § 727(b) and § 524(a)(3) was to discharge both the Debtor and the community from liability for prepetition debt. The discharge also extinguished the Debtor's liability to Heilman for contribution claims she might have as a result of her surviving sole liability for prepetition community debt. The dissent strongly disagrees with this result, citing a number of decisions holding that debts established in postpetition divorce decrees are new debts not discharged in a debtor's bankruptcy case.*fn9

None of the cases cited by the dissent, however, are from community property jurisdictions where members of the community are jointly and severally liable for community debt. Although one of the cases does address joint and several liability, it relied on state law to determine that the non-debtor spouse's contribution right arose post-bankruptcy. Miller v. Miller (In re Miller), 246 B.R. 559, 563 (Bankr. E.D. Tenn. 2000). It is well-settled in the Ninth Circuit that federal law determines when a claim arises under the Bankruptcy Code. SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 839 (9th Cir. 2009). For purposes of discharge, a claim arises "at the time of the events giving rise to the claim, not at the time plaintiff is first able to file suit on the claim." O'Loghlin v. County of Orange, 229 F.3d 871, 874 (9th Cir. 2000). "[A] claim arises when a claimant can fairly or reasonably contemplate the claim's existence even if a cause of action has not yet accrued under nonbankruptcy law." In re SNTL Corp., 571 F.3d at 839. Under that test, Heilman could have fairly contemplated that she had a reimbursement claim when the Beyers made the loan (and certainly by the date the Debtor filed his petition).

While the Hold Harmless Provision of the Dissolution Decree is broader than the Debtor's contribution liability, it nevertheless encompasses Heilman's contribution claim.*fn10 Therefore, the Hold Harmless Provision is based "in whole or in part . . . on a debt that is dischargeable" and can only be revived if the reaffirmation requirements are met. 11 U.S.C. § 524(c); see also, Edwards v. Edwards (In re Edwards), 91 B.R. 95, 96 (Bankr. C.D. Cal. 1988) ("In a marriage dissolution proceeding, one spouse cannot be required to pay obligations which have been discharged in bankruptcy.").

The Code sets forth requirements that an agreement must meet in order to revive a discharged debt. 11 U.S.C. § 524(c). "Post-bankruptcy attempts to enforce pre-bankruptcy obligations in nonbankruptcy courts using nonbankruptcy law" is dealt with under § 524(c). Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1066 (9th Cir. 2002). An agreement to reaffirm a debt must strictly comply with the statutory requirements. Republic Bank of Cal., N.A. v. Getzoff (In re Getzoff), 180 B.R. 572, 574 (9th Cir. BAP 1995).

Section 524(c) provides that agreements to reaffirm a dischargeable debt, when the consideration is no more than the promise to repay the debt, must be made before the granting of a bankruptcy discharge. 11 U.S.C. § 524(c). Furthermore, the agreement must be approved by the bankruptcy court, which determines that the debtor (1) knowingly and voluntarily entered into the agreement, (2) understood all of its legal consequences, and (3) that the agreement did not impose an undue hardship on the debtor. Id. The Dissolution Decree does not conform to any of these requirements. Instead, the Dissolution Decree circumvents the bankruptcy laws by reviving a discharged debt. See In re Edwards, 91 B.R. at 96. Therefore, the Debtor's obligation to pay the Beyer Loan or hold Heilman harmless on the Beyer Loan is void and unenforceable. In re Gurrola, 328 B.R. at 171 (Section 524 voids any judgment at the time it is obtained to the extent it is a determination of the personal liability of a debtor with respect to any debt discharged.); In re Bennett, 298 F.3d at 1067 ("Absent a valid reaffirmation agreement under [§] 524(c), [an] agreement to repay a discharged debt is unenforceable under [§] 524(a).").

Accordingly, we affirm the bankruptcy court's dismissal of the adversary proceeding.*fn11

VI. CONCLUSION

For the foregoing reasons, we affirm the bankruptcy court's dismissal of Heilman's adversary proceeding seeking to enforce the terms of the Dissolution Decree with respect to the Beyer Loan.

PAPPAS, Bankruptcy Judge, dissenting in part:

Regrettably, I believe the majority incorrectly applies 11 U.S.C. § 727(b) in this appeal, and that its decision inappropriately impairs the ability of state courts to equitably resolve debt issues in a marital dissolution proceeding. I therefore respectfully dissent from that portion of the decision which holds that the Debtor's obligation to hold Heilman harmless for any payments she is required to make to the Beyers was a prebankruptcy, discharged debt.*fn12

In a Washington dissolution proceeding, the state court is commanded by statute to assign responsibility for the parties' liabilities in a manner "as shall appear just and equitable after considering all relevant factors . . . ." RCW 26.09.080. In particular, the court is directed to consider the economic circumstances of each spouse at the time of the dissolution in designing an equitable resolution of the parties finances. See RCW 26.09.080(4).

These statutes would seem to require the state court to consider that one party to a dissolution action has received a discharge in bankruptcy when the court crafts its equitable dissolution of the parties' property and debts. Consistent with the agreement of the parties, I think we must presume that the Washington court in this case decided, in the exercise of its equitable discretion in dissolving the parties' marriage, that if Heilman were required to pay the community debt owed by the parties to the Beyers, the Debtor must hold her harmless.*fn13 I think we must also assume, to be true to the state law, that the dissolution court imposed the equitable, hold-harmless obligation upon the Debtor based upon the economic circumstances of the parties existing at the time of the dissolution in September 2006, some nine months after the Debtor received his bankruptcy discharge.

Despite the statutory requirement that an equitable dissolution be crafted based upon the facts as they exist at the time of the dissolution, the majority characterizes the Debtor's newly-imposed obligation under the state court's order as a prebankruptcy claim. Then, though holding that the hold-harmless obligation is a pre-petition claim, the majority inexplicably concludes that it is not excepted from discharge in the Debtor's bankruptcy case under § 523(a)(15) since it was not incurred in the course of a divorce, apparently because the dissolution decree was not entered by the state court until after the Debtor's bankruptcy case was filed.*fn14 These conclusions simply can not be correct.

In general, except for debts described in § 523(a), a chapter 7 discharge impacts "all debts that arose before the date of the order for relief . . . ." 11 U.S.C. § 727(b). Simply put, under Washington law, the state court could not impose a hold-harmless obligation upon the Debtor until it entered the dissolution decree. As a result, the Debtor's duty to indemnify Heilman for payments made to the Beyers was clearly a post-bankruptcy debt not covered by the discharge in the bankruptcy case filed in October 2005.

The majority's attempt to treat the Debtor's obligation as a pre-existing "contingent" claim for contribution held by Heilman is out of step with state law. Heilman held no contribution claim against her spouse for payment of a community obligation - that claim could only arise as a result of the dissolution, and then only based upon a state judge's assessment of the equities of the parties' current economic circumstances.*fn15

There are an abundance of decisions from bankruptcy courts across the Nation holding that debts established in post-petition divorce decrees in favor of a nondebtor spouse are not discharged in the debtor's prior bankruptcy case.*fn16 As one court recently summarized these holdings:

"Courts have consistently held that a debtor's obligation to a former spouse under a postpetition divorce decree or settlement constitutes a postpetition debt and is not dischargeable under § 727(b)." In re Miller, 246 B.R. 559, 562 (Bankr. E.D. Tenn. 2000) (citing Arleaux v. Arleaux, 210 B.R. 148, 150 (8th Cir. BAP 1997); Compagnone v. Compagnone (In re Compagnone), 239 B.R. 841, 844-45 (Bankr. D. Mass. 1999); Scholl v. Scholl (In re Scholl), 234 B.R. 636, 645 (Bankr. E.D. Pa. 1999); In re Degner, 227 B.R. 822, 824 (Bankr. S.D. Ind. 1997); Bryer v. Hetrick (In re Bryer), 216 B.R. 755, 760-61 (Bankr. E.D. Pa. 1998); Neier v. Neier (In re Neier), 45 B.R. 740, 743 (Bankr. N.D. Ohio 1985)). Furthermore, where a divorce decree "obligates the debtor to indemnify the spouse and hold the spouse harmless from debts incurred during the marriage, courts recognize that the obligation to the spouse is separate from the original debt." Id. Consequently, a post-petition divorce obligation to hold a spouse harmless from prepetition debt will not be subject to discharge. Id.

Cooper v. Cooper (In re Cooper), 2009 WL 3747210 *3 (Bankr. M.D. Ala. 2009); see also, Buglione v. Berlingeri (In re Berlingeri), 246 B.R. 196, 200-201 (Bankr. D.N.J. 2000). The common theme expressed by all of these decisions is that an obligation imposed by a divorce-court in a post-bankruptcy decree is a new debt owed by the debtor to his soon-to-be former spouse, not an obligation to pay any prebankruptcy debt.*fn17 Without good reason, the majority departs from that simple theme today.

I also believe that the majority's conclusion runs afoul of the general case law concerning when a claim arises for purposes of discharge. As the majority acknowledges, in the Ninth Circuit, a claim is deemed to arise only when the claimant can fairly or reasonably contemplate the claim's existence. See, e.g., SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 839 (9th Cir. 2009). Here, the dissolution action was not even commenced until several months after the Debtor filed the bankruptcy case and received a discharge. Contrary to the majority's conclusion, there is nothing in our terse record to show that Heilman should have fairly or reasonably contemplated at the time of the Debtor's bankruptcy that a state court would, in an as-of-yet unfiled dissolution action, employ a hold-harmless obligation in her favor in dissolving her marital affairs with the Debtor. The majority does not identify what circumstances should have alerted Heilman that her marriage to the Debtor would one day end, and that she would, as a result of the dissolution decree, be granted a claim against her spouse? Absent such facts, we should hold that the Debtor's hold-harmless obligation to Heilman was not discharged in his bankruptcy.

In addition to misapplying § 727(b), I fear that the majority's holding will also unnecessarily interfere with the ability of state courts to equitably dissolve marriages. By restricting the dissolution court's ability to impose a hold-harmless obligation in favor of Heilman against the Debtor, the majority effectively instructs the court that, in spite of controlling state law, it can not impose new financial obligations in favor of one spouse against a former bankruptcy debtor in its effort to equitably adjust their marital affairs.

The resolution of divorce issues is the exclusive province of the state courts, not the federal bankruptcy courts.*fn18 We should be extremely reluctant to create barriers to the otherwise just, fair resolutions of dissolution actions in state courts. Unfortunately, that is exactly what the majority's holding does.*fn19

Finally, if it is indeed a prebankruptcy debt, I can not fathom how the hold-harmless obligation created in the state court dissolution decree does not represent a debt to a spouse "that is incurred by the debtor . . . in connection with a . . . divorce decree or other order of a court . . ." for purposes of excepting that debt from discharge under § 523(a)(15). In enacting §§ 523(a)(5) and (15), Congress dictated that virtually all obligations and debts created in state court divorce proceedings be excepted from discharge in a former spouse's bankruptcy case. But while the majority declares the hold-harmless obligation to be a pre-petition debt, it concludes that because the dissolution decree was not entered by the state court until after the Debtor filed for bankruptcy, the hold-harmless obligation is not covered by the exception from discharge. Section 523(a)(15) contains no such condition, nor does the majority cite case law or other authority for restricting the application of the discharge exception in this fashion. Moreover, the inconsistency in the majority's logic is indefensible: either the debt owed by the Debtor to Heilman is a prebankruptcy claim to which the exception applies, or it is an undischarged post-bankruptcy debt.*fn20

In sum, I would conclude that the hold-harmless obligation imposed upon the Debtor by the state court is a post-bankruptcy debt and was not discharged in the Debtor's bankruptcy case. Even assuming it was a prebankruptcy debt, I would hold that it was excepted from discharge. Instead, the majority renders a most unfair decision that, in my opinion, conflicts with the Code and cases interpreting it, impairs the ability of state courts to equitably resolve married parties' financial affairs upon divorce, and misapplies the exception to discharge for debts created in divorce decrees. I do not agree.


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