Valdivia v. Hauk (In re Valdivia)

IN RE DAVID L. VALDIVIA, Debtor.

DAVID L. VALDIVIA, Appellant, v. MARY A. HAUK, Appellee.

Case Number 20-12076

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

May 13, 2021

Honorable David M. Lawson

OPINION

David L. Valdivia filed a Chapter 13 bankruptcy petition seeking to discharge a $300,000 debt to his ex-wife that arose from a divorce case. In an adversary proceeding brought by Valdivia's ex-wife, Mary Hauk, the bankruptcy court determined on summary judgment that the debt was a nondischargeable spousal support obligation under 11 U.S.C. § 523(a)(5), and at trial that the amount reasonably may be regarded as being within Valdivia's present and future capacity to repay. Valdivia appeals both rulings. This Court affirms.

I.

Debtor David L. Valdivia divorced Mary Hauk in 2010. The divorce judgment obligated Valdivia to pay Hauk for certain property he converted and for support. The dissolution of that marriage and the judgment that was entered sparked nearly a decade of bitter litigation, which culminated with the parties' entry into a consent judgment in 2019 requiring Valdivia to pay Hauk $300,000. That sum "was labeled as support," and, as stated in the consent judgment, "was 'intended by the parties and determined by the Court not to be discharged in bankruptcy'; and that 'any debt or debt obligation incurred by' [Valdivia] 'as a consequence of this Judgment . . . will not be discharged in bankruptcy.'" In re Valdivia, 615 B.R. 231, 237 (Bankr. E.D. Mich. 2020) (quoting Judgment of Divorce).

Despite that clear language, almost immediately upon concluding that "resolution" of the marital dispute, Valdivia made a beeline for the bankruptcy court and filed a Chapter 13 petition, seeking to avoid his only significant debt, which was the obligation that he assumed under the consent judgment to pay approximately $300,000 to his ex-wife. Id. at 235. Hauk promptly filed an adversary proceeding in the bankruptcy court seeking a ruling that the $300,000 judgment debt was nondischargeable under several theories, including that the debt was for a domestic support obligation. See 11 U.S.C. § 523(a)(5).

The parties filed cross-motions for summary judgment. The bankruptcy court ruled that the debt did not arise from "any fraud, conversion, breach of fiduciary duty, bad faith, intentional harm, or other misconduct by" Valdivia, since the state court had determined that he repaid funds he converted or misappropriated back in 2012. In re Valdivia, 615 B.R. at 236. However, the court held as a matter of law that the debt qualified as a support obligation under section 523(a)(5). Ibid. The parties then proceeded to trial on the remaining unresolved factual question of whether "'although the obligation is of the type that may not be discharged in bankruptcy, its amount is unreasonable in light of the debtor spouse's financial circumstances.'" In re Valdivia, 617 B.R. 278, 281 (Bankr. E.D. Mich. 2020) (quoting In re Schubiner, 590 B.R. 362, 394-95 (Bankr. E.D. Mich. 2018)).

The bankruptcy court held that the $300,000 debt was not unreasonable in light of Valdivia's financial circumstances and did not exceed what he could reasonably be expected to pay. The trial opinion included a comprehensive recitation of the evidence taken, and the courtsummarized its factual findings on the debtor-appellant's ability to repay the spousal support debt as follows:

Given the Defendant's burden of proof, and the evidence presented, the Court must assume that Defendant has the ability to pay his Debt to Plaintiff, from the following resources:

» Defendant's $451.68 per month in disposable income disclosed by his Schedule I and J (= $5,420.16 per year = $54,201.60 over ten years = $81,302.24 over fifteen years);

» Defendant's ability to earn additional income, in an unknown amount, now and in the future, by obtaining additional employment, in addition to his current part-time job working for his father, including possible cement construction jobs;

» Defendant's proceeds from a sale of Defendant's Deering property (unknown amount, but under Plaintiff's valuation this could yield up to $80,000.00, less sale costs, for Defendant's one-half share);

» Defendant's proceeds from a sale of the 2008 Ford Taurus ($2,000.00);

» Defendant's future realization of the value of the Rental Acosta business, in an unknown amount, from either (1) realizing the profit (unknown amount) from operating the business for an unknown number of years; (2) selling the business on a going-concern basis (value unknown); or (3) liquidating the 8-9 pieces of real property owned by the business (value unknown).

For example, if we assume that Rental Acosta owns 9 pieces of unencumbered real estate, and that each is worth only $50,000.00, the equity in those properties that could be tapped by selling or borrowing against the properties would total $450,000.00 — an amount far greater than the amount of Defendant's Debt to Plaintiff.

Because Defendant has the burden of proof, the fact that some of the items listed above are "unknown" works against Defendant; the unknown things highlight that Defendant has not proven his future inability to pay the Debt to Plaintiff.

In considering the Defendant's ability to pay the Debt to Plaintiff in the future, the Court is not limited to any particular, proven time limit. Nor is the Defendant limited to a time limit for paying the entire Debt within the 5-year maximum length that applies to Chapter 13 plans under 11 U.S.C. § 1322(d)(2). If necessary, Defendant could pay the Debt over a longer period of time, without the need for a bankruptcy case. This is especially true in this case, because Defendant really has no need for any bankruptcy relief from his other creditors. As further discussed below, Defendant filed his bankruptcy case only to try to address Plaintiff's claim against him.

The Court concludes that Defendant failed to meet his burden of proving, by a preponderance of the evidence, that his Debt to Plaintiff is, to any extent, "unreasonable in light of the [Defendant D]ebtor's financial circumstances," within the meaning of [In re Sorah, 163 F.3d 397, 41 (6th Cir. 1998)], and that the Debt, to any extent, "exceeds what the [Defendant D]ebtor can reasonably be expected to pay [according to the Sorah analysis]."

Id. at 287-88. Valdivia filed this appeal, in which he challenges the bankruptcy court's determination of nondischargeability and its assessment of his ability to repay the debt.

II.

District courts have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy courts. 28 U.S.C. § 158(a)(1); Central States, Se. & Sw. Areas Pension Fund v. U.S. Truck Co. Holdings, Inc. (In re U.S. Truck Co. Holdings), 341 B.R. 596, 599 (E.D. Mich. 2006). The Sixth Circuit has held that "finality 'is considered in a more pragmatic and less technical way in bankruptcy cases than in other situations.'" Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 578 (6th Cir. 2008) (quoting Lindsey v. O'Brien, Tanksi, Tanzer & Young Health Care Providers of Conn. (In re Dow Corning), 86 F.3d 482, 488 (6th Cir. 1996)). A final judgment in an adversary proceeding terminates a "discrete dispute[]" in the larger bankruptcy case, and therefore "it may be appealed immediately." Ibid.; see also Morton v. Morton (In re Morton), 298 B.R. 301, 303 (B.A.P. 6th Cir. 2003) (noting that an order overruling a Chapter 13 debtor's objection to claims was a final order because it ended litigation on the merits and left nothing for the court but the execution of judgment).

This Court reviews the bankruptcy court's factual findings for clear error and gives fresh review to its conclusions of law. Fed. R. Bankr. P. 8013; B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931, 935-36 (6th Cir. 2010) (citing Behlke v. Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004)). A clear-error review standard simply asks "'whether a reasonable person could agree with the bankruptcy court's decision.'" Waldman v. Stone, 698 F.3d 910, 922 (6thCir. 2012) (quoting Volvo Comm. Fin. LLC the Americas v. Gasel Transp. Lines, Inc. (In re Gasel Transp. Lines, Inc.), 326 B.R. 683, 685-86 (6th Cir. BAP 2005)). This Court will "not disturb the bankruptcy court's findings of fact unless there is the 'most cogent evidence of mistake of justice.'" WesBanco Bank of Barnesville, Ohio v. Rafoth (In re Baker & Getty Fin. Servs. Inc.), 106 F.3d 1255, 1259 (6th Cir. 1997) (quoting Newton v. Johnson (In re Edward M. Johnson & Assocs., Inc.), 845 F.2d 1395, 1401 (6th Cir. 1988)).

Valdivia argues that the bankruptcy court erred by holding as a matter of law that the $300,000 debt established by the consent judgment was for spousal support, and by finding at trial that he could afford to pay it.

Section 523 of the Bankruptcy Code plainly states that "[a] discharge under [Chapter 13 of the Code] does not discharge an individual debtor from any debt . . . for a domestic support obligation." 11 U.S.C § 523(a)(5). A "domestic support obligation" includes those debts that are (1) owed to a former spouse; (2) are "in the nature of" alimony or support to the former spouse; (3) established by "an order of a court of record"; and (4) "not assigned to a nongovernmental entity." 11 U.S.C. § 101(14A). Congress intended "to make most divorce-related obligations nondischargeable" in bankruptcy. In re Sorah, 163 F.3d 397, 401 (6th Cir. 1998). However, even if the bankruptcy court finds that a debt is a domestic support obligation because it has the "indicia of support" of a child or ex-spouse, it still may be discharged if the debtor can prove "that the obligation is unreasonable in light of the debtor's financial circumstances." Id. at 402 (citing In re Calhoun, 715 F.2d 1103, 1110 (6th Cir.1983)).

A.

Valdivia first argues that the bankruptcy court's ruling that the debt was a spousal support obligation was flawed because (1) there was "no evidence" presented at trial to...