Gordon v. Millette (In re Millette)

539 B.R. 396

2015 BNH 008

In re: Mark D. Millette & Linda L. Millette, DebtorsOlga L. Gordon, Chapter 7 Trustee & Woodsville Guaranty Savings Bank, Plaintiffs

v.Mark D. Millette & Linda L. Millette, Defendants

Bk. No. 13–10555–BAH

Adv. No. 14–1001–BAH

United States Bankruptcy Court, D. New Hampshire.

Signed September 28, 2015

Ashley S. Whyman, Murtha Cullina LLP, Boston, Massachusetts, Attorney for Chapter 7 Trustee

Gregory A. Moffett, Preti Flaherty, PLLP, Concord, New Hampshire, Attorney for Woodsville Guaranty Savings Bank

Michael B. Fisher, Fisher Law Offices, PLLC, Hanover, New Hampshire, Attorney for the Debtor

MEMORANDUM OPINION

Bruce A. Harwood, Chief Bankruptcy Judge

I. INTRODUCTION

The Court has before it the Joint Motion for Summary Judgment (Doc. No. 43) (the “Motion”) filed by the plaintiffs, the chapter 7 trustee (the “Trustee”) and Woodsville Guaranty Savings Bank (the “Bank”). In the Motion, the Trustee and Bank request summary judgment on the only count of the complaint, which seeks turnover of certain payments to be made to debtor Linda Millette, pursuant to a final decree of divorce entered in 2008 by the Haverhill Family Division Court. The defendant Debtors oppose the Motion, arguing that the payments in question are alimony or spousal support payments that are not property of the bankruptcy estate and thus not subject to turnover.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and Local Rule 77.4(a) of the United States District Court for the District of New Hampshire. This is a core proceeding in accordance with 28 U.S.C. § 157(b) in which all parties have consented to this Court entering final judgment.

II. FACTS

The Debtors filed their bankruptcy petition on March 6, 2013 (the “Petition Date”). The Trustee filed her complaint for turnover pursuant to 11 U.S.C. § 542 on January 8, 2014.¹ Soon after the Debtors filed their answer to the complaint, in December 2014, the Bank intervened as co-plaintiff to the Trustee.

The payments the Trustee and the Bank seek to have the Debtors relinquish stem from a 2008 divorce decree. In that year, debtor Linda Millette—then Linda Elliott—divorced her erstwhile husband, Jeffrey Elliott (“Mr. Elliott”). See Motion, Ex. A (the “Divorce Decree”). In the divorce, Mr. Elliott agreed to make certain payments to the Debtor. Paragraph 5 of the Divorce Decree provides:

Wife shall be awarded $50,000 per year for eight years, beginning February 1, 2010 and ending February 1, 2018. Spousal support payments shall not terminate upon payee's remarriage or cohabitation with an unrelated person. Spousal support payments shall be paid directly to Linda Elliott on an annual basis. See attached Uniform Support Order .

Id. ¶ 5 (italics in original).² Going forward, the Court shall refer to these payments as the “Support Payments.”

In 2012, the Debtor collaterally assigned her right to receive the future Support Payments to the Bank as security for certain loans. See Motion, Ex. D, “Assignment.” This assignment encompassed the Support Payments to be made in 2013 and onward, and was to be effective even if the Support Payments were modified. Id. As of the Petition Date, Mr. Elliot had paid the Debtor $200,000 in Support Payments, leaving $200,000 yet to be paid. This remaining $200,000 in Support Payments is the amount that the Trustee and Bank are seeking turnover of in their complaint. The post-petition Support Payments for 2014 and 2015 were made pursuant to the Divorce Decree and are being held in escrow by Debtors' counsel, pending the resolution of this dispute.

The Support Payments are neither listed on the Debtors' Schedule B nor claimed as exempt on their Schedule C. The Support Payments are identified in the Statement of Financial Affairs as a “Divorce Property Settlement.” Statement of Stipulated Facts, ¶ 23. Finally, the Debtors did not identify the Support Payments received as alimony in their federal tax returns, pre-petition. Post-petition, and after this adversary proceeding commenced, they amended these tax returns to refer to the Support Payments as alimony.

Positions of the Parties

In their initial memoranda supporting and opposing the Motion, the parties confined their arguments to a discussion of the legal characterization of the Support Payments. The Trustee and Bank argued that the Support Payments were in reality a property settlement under New Hampshire law and thus subject to turnover. In making this argument, the plaintiffs urged the Court to disregard the labeling of the Divorce Decree and look at the substance of the arrangement and the different ways the Debtors characterized the payments in their petition and tax returns. The plaintiffs also referred to bankruptcy law in their original memorandum, although arguing that it was not controlling. They cited cases discussing 11 U.S.C. § 522(d)(10) —the federal exemption for spousal support payments—and § 523(a)(5), which renders domestic support obligations of a debtor nondischargeable. These cases discuss the parameters that federal law uses to distinguish property settlements from alimony or spousal support.

The Debtors opposed this view, arguing that federal bankruptcy law controlled the characterization of the Support Payments, and that the Court ought to conclude that the payments were alimony, not a property settlement, and thus not subject to turnover. The Debtors did not discuss New Hampshire law in their opening brief. The Debtors also argued that issues of material fact prevented the Court from characterizing the Support Payments at the summary judgment phase—that the Court could not resolve the conflicting facts in the record regarding how the Debtors and Mr. Elliott treated the Support Payments.

At the hearing on the Motion, the Court questioned why the legal characterization of the Support Payments as either a property settlement or as alimony made any difference to whether they were subject to turnover, since the Debtors had not claimed them as exempt and neither side claimed the Support Payments were outside the realm of bankruptcy estate property. After raising this issue, the Court required both sides to file further memoranda.

In their supplemental memorandum, the Debtors took the position that, categorically, alimony or spousal support payments cannot be property of a bankruptcy estate because such payments are not a “property interest” within the meaning of § 541, but rather are a “personal interest” of the recipient debtor. To support this line of argument, the Debtors cite a relatively small number of cases. The Debtors do not cite any New Hampshire state law directly supporting the proposition that spousal support payments are not a property interest.

The Trustee and Bank respond to this new line of argument by distinguishing the cases the Debtors cite. They argue that the substance of the Divorce Decree is completely distinguishable from those discussed in the case law the Debtors cite. Further, the Trustee and Bank argue that if alimony were not a property interest that is included as part of the bankruptcy estate, there would be no need for the alimony exemption in § 522(d)(10).

After the parties submitted their supplemental memoranda, the Court took the matter under advisement.

III. DISCUSSION

A. Summary Judgment Standard

Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “Genuine issues of fact are those that a factfinder could resolve in favor of the nonmovant, while material facts are those whose ‘existence or nonexistence has the potential to change the outcome of the suit.’ ” Green Mountain Realty Corp. v. Leonard, 750 F.3d 30, 38 (1st Cir.2014) (quoting Tropigas de Puerto Rico, Inc. v. Certain Underwriters at Lloyd's of London, 637 F.3d 53, 56 (1st Cir.2011) ). In assessing the summary judgment record, a court must draw all reasonable inferences in favor of the non-moving party but is “not obliged to accept as true or to deem as a disputed material fact, each and every unsupported, subjective, conclusory, or imaginative statement made to the [c]ourt by a party.” Adamson v. Walgreens Co., 750 F.3d 73, 78 (1st Cir.2014) (citation omitted); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249–50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (“If the evidence is merely colorable or is not significantly probative, summary judgment may be granted.”) (internal citations omitted).

The Trustee and Bank seek turnover of the Support Payments that were unpaid as of the petition date. Section 542 governs such turnover actions. It provides, in pertinent part:

(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

11 U.S.C. § 542(a). “[T]he inquiry involved in a ruling on a motion for summary judgment ... necessarily implicates the substantive evidentiary standard of proof that would apply at the trial on the merits.” Anderson, 477 U.S. at 252, 106 S.Ct. 2505. To prevail, the Trustee and Bank bear the burden of proof by a preponderance of the evidence to demonstrate that the elements of § 542 are satisfied. See Bailey v. Suhar (In re Bailey), 380 B.R. 486, 490 (6th Cir. BAP 2008) ; In re Belenkova, No. 12–17475–FJB, 2014 WL 1203131, at *16 (Bankr.D.Mass. March 24, 2014) ; Collier on Bankruptcy ¶ 542.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).³ The only element in dispute in this adversary proceeding is whether the post-petition Support Payments constitute “property that the trustee may...