Another Court Holds that Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors

I previously reviewed the case of In re Quezada, ___ B.R. ____, 2007 WL 438258 (Bkrtcy.S.D.Fla.)(Mark, J.) in which the court held that the trustee does not have the ability to administer exempt property for domestic support obligation (“DSO”) creditors pursuant to new section 522(c)(1). The Court in In re Duggan, Case No. 6:06-bk-02512 (Bankr.M.D.Fla. August 15, 2007)(Jennemann, J.) faced the same question and issued its opinion agreeing with In re Quezada . The court noted that to date at least five court have considered this issue and that each court concluded that section 522(c)(1) does not allow a trustee to administer exempt property for the benefit of a DSO creditor.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Ex-Spouse’s Law Firm Not Able to Assert Basis for Non-Dischargeablity

The Court’s decision in In re Brooks, ___B.R. ___, 2007 WL 2083834 (Bkrtcy.N.D.Tex. July 19, 2007)(Lynn, J.) dealt with an adversary proceeding by the law firm of debtor’s ex-spouse to determine a claim against the debtor for attorneys’ fees as non-dischargeable pursuant to 523(a)(5) or (a)(15). The law firm held a judgment against the debtor for their legal services rendered to his ex-spouse, inter alia, in obtaining and enforcing spousal support. Notably, the ex-spouse was not liable for this amount nor was the debtor liable for a certain other amount owed to the law firm by the ex-spouse. The debtor contended that the law firm lacked “standing” to assert a claim under section 523(a)(5) or (15) and moved to dismiss for failure to state a cause of action. The Court granted the debtor’s motion to dismiss as it found that the law firm could not assert a basis for its claim to be excepted from discharge under 523(a)(5) or (a)(15).

Section 523(a)(5) provides that a discharge under section 727 does not discharge an individual debtor for a domestic support obligation (“DSO”). Section 523(a)(15) provides that a debt to a spouse, former spouse, or child not of the kind described in (a)(5) incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of court is not dischargeable. The law firm claimed that the firm’s fee are non-dischargeable on the basis that they were so intertwined with support that they constitute a DSO pursuant to 523(a)(5) or in the alternative that they are a non-dischargeable divorce-related debt under section 523(a)(15). The court looked to the definition of DSO in section 101(14A) and found that the law firm’s fee were not a DSO as they were not owed to a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative or to a governmental unit. Furthermore, the court found that the law firm’s debt was not non-dischargeable under section 523(a)(15) as it was not a debtor to a spouse, former spouse or child of the debtor.

The court rejected the argument to deem the legal fees as a DSO if the amounts were “recoverable” by a former spouse as it found that Congress did not intend to turn a debtor’s family members into debt recovery associates. The court also noted the inapplicability of the cases cited by the law firm under the pre-BAPCPA version of section 523(a)(15). The court noted that it would read the exceptions to discharge narrowly in balancing the two public policies found in sections 523(a)(5) and (a)(15)–that of providing a fresh start to the deserving debtor and the importance of a debtor’s obligations to his family. Marama v. Citizens Bank, ___ U.S. ___ (2007)(“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’) The court noted that Congress did not intend for sections 523(a)(5) or (15) to aid in a law firm’s collection efforts but only for the other party to the divorce or separation.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors

In the recent case of In re Quezada, ___ B.R. ___, 2007 WL 438258 (Bkrtcy.S.D. Fla.)(Mark J.), the Court issued an important decision explicating the new DSO provision in section 522(c)(1). In this case, the Court overruled the chapter 7 trustee’s objection to exemption of the homestead property and denied the trustee’s motion for authority to sell the property to satisfy a domestic support obligation (“DSO”).

The Court explained that section 522(c)(1) was amended by BAPCPA to provide that property deemed exempt in the bankruptcy case will remain liable for DSO debts even if the exempt property would not be reachable to satisfy these claims under applicable state law.

The first issue disposed of by the Court was whether the trustee or DSO creditor can object to the debtor’s exemption to the extent of the DSO claim. The Court explained that although section 522(c)(1) renders exempt property liable for DSO claim, it does not limit a debtor’s right to claim exemptions otherwise available under section 522. The Court therefore overruled the trustee objection to the exemption of the debtor’s homestead.

The second issue dealt with by the Court was whether a trustee may administer exempt property to pay DSO claims. The Court answered this question in the negative and denied the trustee’s motion for authority to sell the homestead property. The Court reasoned that under section 704(a)(1), the trustee only has the authority to “collect and reduce to money the property of the estate” and once the claim of exemption is allowed, exempt property is no longer part of the estate. Furthermore, section 726 only refers to the distribution of the property of the estate.

The Court went on to explain though that the exempt property may be subject to execution by a DSO creditor pursuant to a newly created “federal right” under section 522(c)(2) even though those assets would otherwise be protected from execution under state law. The Court suggested that the bankruptcy court has the jurisdiction to enforce a DSO claim against exempt property in its forum. The Court stated that Section 522(c)(1) grants DSO creditors a “federal right of action” against exempt propeorty. This federal right trumps state law which may otherwise shield the asset from execution. Since this federal right is provided in the Bankruptcy Code, a proceeding to enforce that right would be a proceeding “arising under” title 11, therefore creating non-exclusive jurisdiction in the bankruptcy court under 28 USC 1334 (b).

The Court noted that a state court judge is capable of applying this federal right of action, but in practical terms, it may appear awkward for a DSO creditor to seek relief in state court to pursue assets which are exempt from execution under state law.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983