In re Sapp

655 B.R. 421

IN RE: James Eric SAPP, Debtor(s).

C/A No. 21-01314-EG

United States Bankruptcy Court, D. South Carolina

Signed November 28, 2023

Vaughan Richard Perry, V.R. Perry Law Firm, LLC, Columbia, SC, Daniel A. Stone, Stone Law Firm, Irmo, SC, for Debtor.

Pamela Simmons-Beasley, Columbia, SC, for Trustee.

ORDER

Elisabetta G. M. Gasparini, United States Bankruptcy Judge

THIS MATTER comes before the Court upon the objection to James Eric Sapp's ("Debtor") Motion to Sell property at 108 Mark I Road, Lexington, SC 29072 (the "Residence")¹ and the Motion to Modify Confirmed Chapter 13 Plan (the "Motion to Modify Plan"),² both filed by Pamela Simmons-Beasley, the Chapter 13 Trustee appointed in Debtor's case (the "Trustee"). Debtor's ex-spouse filed an objection to the Motion to Modify Plan.³

The facts and issues presented revolve around the family court's post-confirmation divorce decree, which incorporated and approved a settlement agreement that Debtor and his ex-spouse entered into over a year after Debtor's chapter 13 plan was confirmed, establishing the division of marital property and Debtor's domestic support obligations. Pursuant to the settlement, Debtor waived his half interest in the marital home's equity—consisting of $152,033.27 in non-exempt proceeds from the sale of the Residence in exchange for his ex-spouse's waiver of alimony. There is no dispute that Debtor's ex-spouse is entitled to half of the sale proceeds from the sale of the Residence or that Debtor's half interest in the non-exempt sale proceeds is property of the estate. There is also no dispute that Debtor's income has increased substantially since he filed for bankruptcy, warranting the post-confirmation modification of Debtor's plan pursuant to 11 U.S.C. § 1329 to increase monthly plan payments to the Trustee.

The issue the parties are asking the Court to decide is not whether the Plan should be modified; rather, how it should be modified. The Trustee contends that the Court should invalidate the provision in the post-confirmation divorce decree approving Debtor's waiver of his interest in the proceeds from the sale of the Residence and that the Plan should be modified to increase the payments to capture both Debtor's increase in salary and the proceeds from the sale of the Residence. To the extent the Court does not invalidate the settlement agreement approved by the family court, the Trustee argues that the ex-spouse's claim to Debtor's proceeds from the sale of the Residence is in the nature of a property settlement, which should be treated as an unsecured claim—not a domestic support obligation entitled to priority.

A hearing on Debtor's Motion to Sell the Residence and the Trustee's Motion to Modify Plan was held on November 9, 2023. A total of 16 exhibits were introduced into the record without objection. Debtor and his ex-spouse, Marina Sapp ("Ex-spouse"), testified. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (L), (M), (N), and (O). Based upon the pleadings filed with the Court, the evidence presented, and a careful review of the entire record before it, the Court concludes that the settlement agreement approved by the family court is not invalid, Debtor's obligation pursuant to the family court order to pay his interest in the proceeds from the sale of the Residence to Ex-spouse is in the nature of alimony, and Debtor shall modify the Plan to increase the payments as a result of his increased salary. The Court makes the following findings of fact and conclusions of law as set forth below.⁴

FINDINGS OF FACT

I. Bankruptcy Filing

Debtor and Ex-spouse were married in 1996 and have two adult children born of their marriage. On May 12, 2021 (the "Petition Date"), Debtor filed for Chapter 13 bankruptcy relief.⁵ Debtor has been represented by bankruptcy counsel throughout the case.⁶ In his original Schedules and Statements of Financial Affairs,⁷ he lists ownership in the Residence, with a value of $580,000.00. Schedule A/B (Property) further indicates that the Residence is co-owned with Ex-spouse and was purchased in November of 2015 for $440,000.00. The Residence was titled in the names of both Debtor and Ex-spouse as joint tenants with rights of survivorship.⁸ As of the Petition Date, the Residence was encumbered by two mortgages to Navy Federal Credit Union ("Navy Federal")—a first mortgage in the amount of $386,115.58 and a home equity line of credit ("HELOC") in the amount of $48,022.81. Both Debtor and Ex-spouse were liable on the mortgages as borrowers and mortgagors.⁹

As of the Petition Date, Debtor had been unemployed since February of 2021. Original Schedule I (Income) reflected that Ex-spouse was earning a gross monthly salary of $4,583.00—$3,414.00 net after payroll deductions.¹⁰ Debtor was earning $500.00 a month working part time, and he listed future expected net income of $1,650.00; accordingly, their combined net income as of the Petition Date was $5,564.00. Original Schedule J (Expenses) reflected no dependents, monthly expenses of $5,170.67, including mortgage payments of $2,214.11, leaving monthly net income after expenses of $393.33.¹¹ At the hearing, Debtor testified that on June 18, 2021 he accepted a position with Hitachi Rail STS USA Inc., earning an annual base salary of $95,000.00 with the possibility of annual bonuses.¹² Aside from the four months that he was unemployed in 2021, both Debtor and Ex-spouse testified that during their 26-year marriage, Debtor earned more than Ex-spouse and provided the main financial support for the family.

On September 28, 2023, Debtor filed amended Schedules B, C, I, and J. Debtor raised his claimed homestead exemption from $57,000.00 to $65,500.00 pursuant to S.C. Code Ann. § 15-41-30(A)(1)(a).¹³ Amended Schedule I (Income) reflects Debtor's monthly gross salary of $8,241.24 plus non-guaranteed bonuses—net income of $5,651.55—from his employment at Hitachi Rail STS USA Inc. Amended Schedule J reflects Debtor's monthly expenses of $3,241.16, leaving a monthly net income after expenses of $2,409.39. At the hearing, Debtor testified that in November of 2022, when he entered into a settlement agreement concerning his divorce, he was making approximately what is reflected in the amended schedules. He further testified that while he had been earning that amount since the summer of 2021, he had no disposable income available once his Spouse filed for divorce and the family court ordered him to make alimony payments and pay approximately $1,900.00 in mortgage payments on the Residence for the benefit of Spouse until June of 2023.

Debtor's Chapter 13 Plan¹⁴ was confirmed on September 21, 2021 (the "Plan").¹⁵ The Plan contemplates payments of $352.00 for 60 months, with non-priority unsecured creditors estimated to receive payment of less than 100% of their claims. It further provides that Debtor will make regular payments on both the first and second mortgages directly to the mortgage creditor. Section 7.1 of the Plan included the following standard language:

Property of the estate will vest in the debtor as stated below:

Upon confirmation of the plan, property of the estate will remain property of the estate, but possession of property of the estate shall remain with the debtor. The chapter 13 trustee shall have no responsibility regarding the use or maintenance of property of the estate. The debtor is responsible for protecting the estate from any liability resulting from operation of a business by the debtor. Nothing in the plan is intended to waive or affect adversely any rights of the debtor, the trustee, or party with respect to any causes of action owned by the debtor.

The Confirmation Order included the following language that was standard at the time:¹⁶

The debtor shall not sell, encumber, or otherwise transfer any interest in estate property outside the ordinary course of business without approval of the court, and shall not incur indebtedness except as provided in SC LBR 3015-8.¹⁷

II. Relief from Stay to Seek Divorce and Divorce Proceedings

On December 1, 2021—approximately two months after the Plan was confirmed—Debtor and Spouse submitted a Consent Order Lifting Stay to proceed with a divorce action in family court, which the Court approved.¹⁸ The order granted relief from the automatic stay to permit Debtor and Spouse to adjudicate the following actions in the Family Court for the Eleventh Judicial Circuit in Lexington County, South Carolina (the "Family Court"): "equitable division, college expenses, alimony, health insurance, and attorney fees and costs." The Consent Order Lifting Stay expressly provided:

It is Therefore, ORDERED, ADJUDICATED, AND DECREED that the automatic stay is lifted pursuant to 11 U.S.C. § 362 and is hereby modified to allow the Family Court to hear, approve, and order the above. However, additional relief from stay is necessary for the enforcement of marital obligation against property of the estate or to hold the Debtor in civil contempt. The parties and the Chapter 13 Trustee further agree that upon motion by an interested party, this Court shall have the ability to review the determination by the Family Court as it may relate to the Debtor's Bankruptcy Case.

Spouse filed for divorce on or about December 7, 2021. The parties were formally separated on March 18, 2022. On April 7, 2022, the Family Court entered a Temporary Order,¹⁹ which found that Spouse had made a prima facie case of adultery and was entitled to sole possession of the Residence on a temporary basis. The Temporary Order further required both parties to split the costs of the first mortgage on the Residence ($1,384.86 each) and required Debtor to pay (a) the full HELOC monthly payment of $512.12; (b) spousal support in the amount of $1,300.00 per month on a temporary basis, and (c) Spouse's attorney's fees in the amount of $8,873.73. Accordingly, between the alimony and mortgage...