Source: https://openjurist.org/715/f2d/1103
Timestamp: 2019-04-24 20:10:49+00:00

Document:
In re Clarence Oral CALHOUN fdba Bimbo's Place, Debtor.
Clarence Oral CALHOUN fdba Bimbo's Place, Defendant-Appellant.
Donald R. Little, Canton, Ohio, for defendant-appellant.
Thomas G. Bedall, Stark County Legal Aid Society, Canton, Ohio, for plaintiff-appellee.
Before KENNEDY, MARTIN and NIES,* Circuit Judges.
Clarence Calhoun appeals the Bankruptcy Court's summary judgment that his assumption of five loan obligations totaling $27,564.14 pursuant to a separation agreement between Calhoun and his former wife were "in the nature of" support or alimony and therefore nondischargeable debts under 11 U.S.C. § 523(a)(5).1 We reverse and remand for further proceedings consistent with this opinion.
Appellant filed for voluntary bankruptcy under Chapter 7, 11 U.S.C. § 701 et seq., on July 1, 1980. His former wife, appellee Jo Ann Long, was listed as the holder of unspecified unsecured claims. Appellee Long brought a complaint before the Bankruptcy Court to determine whether obligations of $21,611.322 assumed by the appellant in the parties' separation agreement constituted alimony excepted from discharge under 11 U.S.C. § 523(a)(5).
Calhoun and Long were married, both for the second time, on October 2, 1976. No children resulted from their marriage. Each had children from their first marriages. On November 14, 1979 the couple entered into a separation agreement in which Calhoun, unrepresented by counsel,3 agreed to assume five debts jointly incurred during the marriage and to hold Long harmless for their payment. The agreement characterizes this assumption as alimony and support although it is found in the section of the document labeled Division of Property. Another section labeled Alimony states that there shall be no alimony other than that provided in the debts and obligation section. An Ohio Common Pleas Court subsequently incorporated this agreement into a divorce decree dissolving the marriage.
(5) A note of $5,998.40 for the purchase of a 1977 Dodge Tradesman Van titled to Calhoun.
At the time of their separation Calhoun had sold his business and had been laid off from his job as a meat cutter. His earnings for the prior three years were approximately $10,000 to $15,000 in 1977, $7,500 in 1978, and a loss in 1979. His current income is approximately $950.00 per month from which he is required to pay approximately $300.00 per month for support of two children from his previous marriage and $707.00 per month on the debts he assumed in the parties' separation agreement. Long has an income of approximately $500.00 per month (including $260.00 in ADC payments and $160.00 in child support from her first husband). She owns her own home (which she received on dissolution of her first marriage) on which she pays $95.00 per month in mortgage payments.
The initial question is whether those obligations not payable directly to the former spouse are nondischargeable under § 523(a)(5). The Senate and House Reports contain conflicting language. At one point they seem to indicate payments must be made directly.
H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 364 (1977) reprinted in  U.S.Code Cong. & Ad.News, 5787, 6320; S.Rep. No. 95-989, 95th Cong., 2d Sess. 79, reprinted in  U.S.Code Cong. & Ad.News 5865. The remaining portion of the report, however, refutes any direct payment requirement in the case of an agreement to hold a spouse harmless on joint debts.
This provision will, however, make nondischargeable any debts resulting from an agreement by the debtor to hold the debtor's spouse harmless on joint debts, to the extent that the agreement is in payment of alimony, maintenance, or support of the spouse, as determined under bankruptcy law considerations that are similar to considerations of whether a particular agreement to pay money to a spouse is actually alimony or a property settlement. See Hearings, pt. 3, at 1287-1290.
24 Cong.Rec. H11,096 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); Id. at S17,412 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini). See 661 F.2d at 10.
Bankruptcy court decisions have uniformly found hold harmless clauses to create nondischargeable obligations. E.g., In re Petoske, 16 B.R. 412 (Bkrtcy.E.D.N.Y.1982); Matter of Gentile, 16 B.R. 381 (Bkrtcy.S.D.Ohio 1982); In re French, 9 B.R. 464, 466-67 (Bkrtcy.S.D.Cal.1981). We agree with these courts and hold that payments in the nature of support need not be made directly to the spouse or dependent to be nondischargeable.
S.Rep. No. 95-989, 95th Cong., 2d Sess., 79, reprinted in  U.S.Code Cong. & Ad.News 5787, 5865. See also H.R. No. 95-595, 95th Cong., 1st Sess., 364 (1977), reprinted in  U.S.Code Cong. & Ad.News 5963, 6320.
Yet, while it is clear that Congress intended that federal not state law should control the determination of when an assumption of joint debts is "in the nature of" alimony or support, it does not necessarily follow that state law must be ignored completely. It is unlikely that Congress could have intended such a result. The underlying obligation to provide support in the first place is necessarily determined by state law. The federal bankruptcy courts are obviously not empowered to create an obligation to support where it did not previously exist. Moreover, there is "no federal law of domestic relations." De Slyva v. Ballentine, 351 U.S. 570, 580, 76 S.Ct. 974, 980, 100 L.Ed. 1415 (1956). Divorce, alimony, support and maintenance are issues within the exclusive domain of the state courts. Boddie v. Connecticut, 401 U.S. 371, 389, 91 S.Ct. 780, 792, 28 L.Ed.2d 113 (1971) (Black, J., dissenting). We agree, therefore, with the Second Circuit's reasoning in In re Spong, 661 F.2d at 9, that Congress could not have intended the bankruptcy courts to ignore well developed state law principles of domestic relations in determining whether a particular loan assumption is "in the nature of" alimony or support for purposes of the bankruptcy act.
Neither the case law nor legislative history, however, resolve the extent to which resort to state law would be appropriate. The rationale that has prevailed in varying degrees before most bankruptcy courts as well as the Second Circuit in In re Spong is that while state law is not binding, it nonetheless may provide a useful source of "guidance." E.g., Id.; In re King, 15 B.R. 127, 129 (Bkrtcy.Kans.1981); In re Allen, 4 B.R. 617 (Bkrtcy.E.D.Tenn.1980); In re Pelikant, 5 B.R. 404 (Bkrtcy.N.D.Ill.1980); In re Dirks, 15 B.R. 775, 779 (Bkrtcy.N.M.1981). Yet, there is little agreement as to what the vague term "guidance" actually means. Some bankruptcy courts have utilized state law to determine whether there is an underlying "obligation" to pay alimony or support in the first instance. See In re French, 9 B.R. 464, 468 (Bkrtcy.S.D.Cal.1981); In re Miller, 8 B.R. 174, 3 Collier Bankr. Cas.2d 595, 598 (Bkrtcy.N.D.Ohio 1981); In re Warner, 5 B.R. 434, 440-41 (Bkrtcy.Utah 1980); In re Pelikant, 5 B.R. 404 (Bkrtcy.N.D.Ill.1980); In re Lowell, 3 B.R. 401, 404 (Bkrtcy.N.D.Ga.1980). Similarly, some courts have considered the amount of support a state court would have reasonably granted as a relevant factor in determining whether the loan assumption was actually in the nature of support. See, e.g., In re Jeffrey Lowell Williams, 3 B.R. 401, 404 (Bkrtcy.N.D.Ga.1980); In re French, 9 B.R. 464, 468 (Bkrtcy.S.D.Cal.1981).6 A few bankruptcy courts have also considered whether some provision is made for termination of the debtor's sole responsibility for the assumed obligation upon remarriage of the former spouse or age of majority in the children. See, e.g., Matter of Martin, 19 B.R. 367 (Bkrtcy.M.D.Fla.1982); In re Dirks, 15 B.R. 775 (Bkrtcy.N.M.1981); Matter of Taft, 10 B.R. 101, 4 Collier Bankr.Cas.2d 65 (Bkrtcy.Conn.1981).
Fairly divergent dispositions have resulted from utilization of the above factors. The initial difficulty is that every assumption of a joint loan obligation in a divorce settlement at least indirectly contributes to support. The former spouse is relieved of payments on that debt and thus has funds for other purposes including necessary support. Support in this broad sense results even if the assumption of joint marital debts is actually a division of property. It is clear from the statute and legislative history that Congress could not have intended that all assumptions of joint debts would be nondischargeable. Such assumptions of debt are discharged "to the extent that payment ... is not actually in the nature of alimony, maintenance or support ...." 124 Cong.Rec. 4, 11,096 (daily ed. Sept. 28, 1978) (Rep. Edwards) 517, 412 (daily ed. Oct. 6, 1978) (Sen. DeConcini). To interpret § 523 in this broad sense envisages results at odds with the "fresh start" concept which underlies the Bankruptcy Act. See In re Dirks, 15 B.R. 775, 779 (Bkrtcy.D.N.M.1981); In re King, 15 B.R. 127, 130 (Bkrtcy.D.Kan.1981). The federal bankruptcy common law of domestic relations which Congress has apparently charged the bankruptcy courts to fashion must give considerable weight to this important factor. This, and Congress' mandate that federal bankruptcy law considerations must be determinative in dischargeability issues, convinces us that a more searching inquiry is required than merely applying traditional factors borrowed from state law.
Having found that the loan assumption has the effect of providing necessary support, the Bankruptcy Court must finally determine that the amount of support represented by the assumption is not so excessive that it is manifestly unreasonable under traditional concepts of support. Such an excessive allowance is at odds with the fresh start concept underlying federal bankruptcy law. For this reason, the loan assumption should be treated, to the extent possible, the same as ordinary direct child support or alimony payments. A universal consideration of state courts in setting such direct support payments is the supporting spouse's general ability to pay the support ordered. Under the mandate of Congress that the bankruptcy court fashion a common law of bankruptcy and the principle that one cannot contract away bankruptcy rights, the bankruptcy courts in the case of an obligation to hold the former spouse harmless on joint debts must, therefore, examine the ability to pay. If, at the time the debts were assumed,11 the assumption substantially exceeded a spouse's present and foreseeable ability to pay, the amount of the assumption which exceeded that ability should be not characterized as in the nature of support. We recognize the difficulty of making such a factual inquiry. However, the alternative would be to permit the debtor to contract away the right to discharge in bankruptcy and the opportunity for a fresh start. The inquiry will be limited to whether the amount agreed to is manifestly unreasonable in view of the earning power and financial status of the debtor spouse.
The bankruptcy court's determination of whether a loan assumption constitutes a nondischargeable support obligation is a factual finding only reviewable in the court of appeals under the clearly erroneous standard of Fed.R.Civ.P. 52.13 See Matter of Coil, 680 F.2d 1170, 1172 (7th Cir.1982). See also Melichar v. Ost, 661 F.2d 300, 303 (4th Cir.1981); In re Nelson, II, 20 B.R. 1008 (D.C.M.D.Tenn.1982) (The district court may overturn a factual finding by a bankruptcy court only if clearly erroneous. Bankr.R. 810). In this case, however, the Bankruptcy Court made two errors of law which require that the judgment be reversed and the case remanded for reconsideration without our review of the court's factual findings.
The Bankruptcy Court first erred by applying an incorrect legal standard. The Court held, that the clear language of the parties' separation agreement controlled the issue of dischargeability "unless the compelling weight of the evidence suggests that enforcement of the agreement would work a manifest injustice."14 The language of the parties' (or state courts') characterization of the loan assumption does not control. Moreover, the Bankruptcy Court, in effect, shifted the burden of proof from the plaintiff spouse15 to the debtor to show that the agreement does not mean what it says or works a manifest injustice. Placing this degree of reliance upon the language of the parties' agreement and placing the burden of persuasion on the debtor are legal errors which may not be separated from the court's factual findings in this case. The contents of those findings were inextricably dependent upon the focus of the court's inquiry.
The Bankruptcy Court also erred by not considering each loan obligation assumed individually. Many of the factors considered in determining dischargeability could vary depending upon the type of loan involved, its purposes and the circumstances of the parties. See, e.g., In re Nelson, 20 B.R. 1008 (D.C.M.D.Tenn.1982); Inskeep v. Draper, 25 B.R. 518 (Bkrtcy.S.D.Ohio 1982); Hixson v. Hixson, 23 B.R. 492 (Bkrtcy.S.D.Ohio 1982). On remand, therefore, the Bankruptcy Court should consider each of the appellant's five assumed debts in light of the standards enunciated in this opinion.
Accordingly the judgment of the Bankruptcy Court is reversed and the case remanded for further proceedings consistent with this opinion.

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