Opinion ID: 1858246
Heading Depth: 1
Heading Rank: 6

Heading: Effect of Bankruptcy Upon Power of State Court to Modify Alimony Award Based Upon Change in Circumstances

Text: [5,6] Shan's principal argument is that modification of the alimony award violates the U.S. Bankruptcy Code and must therefore be set aside under the Supremacy Clause of the U.S. Constitution. Federal preemption arises from the Supremacy Clause of the U.S. Constitution and is the concept that state law that conflicts with federal law is invalid. Zannini v. Ameritrade Holding Corp., 266 Neb. 492, 667 N.W.2d 222 (2003); Eyl v. Ciba-Geigy Corp., 264 Neb. 582, 650 N.W.2d 744 (2002). Before state law governing domestic relations will be overridden as preempted by federal law, it must do major damage to clear and substantial federal interests. Rose v. Rose, 481 U.S. 619, 107 S. Ct. 2029, 95 L. Ed. 2d 599 (1987); Hisquierdo v. Hisquierdo, 439 U.S. 572, 99 S. Ct. 802, 59 L. Ed. 2d 1 (1979). Shan argues that the modification of his alimony obligation deprives him of the fresh start provided by a discharge of indebtedness under the U.S. Bankruptcy Code, a central purpose of which is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.' Grogan v. Garner, 498 U.S. 279, 286, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991), quoting Local Loan Co. v. Hunt, 292 U.S. 234, 54 S. Ct. 695, 78 L. Ed. 1230 (1934). In order to ensure that the debtor receives the benefit of a fresh start, a discharge under Chapter 7 of the U.S. Bankruptcy Code operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived. 11 U.S.C. § 524(a)(2) (2000). See In re Fluke, 305 B.R. 635 (D. Del. 2004). Generally, a bankruptcy discharge does not discharge the debtor from any debt for a domestic support obligation. At the time of Shan's discharge, 11 U.S.C. § 523(a)(5) (2000) provided in relevant part that a discharge under that title did not discharge an individual debtor from any debt to a former spouse . . . for alimony to, maintenance for, or support of such spouse . . . in connection with a separation agreement, divorce decree or other order of a state court of record. Likewise, other types of debts incurred in the course of a marital dissolution proceeding were not dischargeable in bankruptcy unless: (A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor . . . or (B)discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor. 11 U.S.C. § 523(a)(15). We understand Shan to argue that because Kimberly did not file an adversary proceeding objecting to the dischargeability of Shan's indebtedness to the bank under § 523(a)(15), she cannot now seek a modification of alimony on the basis of the deficiency judgment which is related to the debt. Shan relies upon In re Fluke, supra , which is instructive but distinguishable. In that case, a dissolution decree incorporated a property settlement agreement by which the wife assumed sole responsibility for $9,415.15 in debt incurred jointly by the parties during the marriage, and the husband assumed sole responsibility for other marital debt. The wife subsequently declared bankruptcy. In an adversary proceeding filed by the husband, the bankruptcy court determined that the debt was dischargeable because the conditions specified in § 523(a)(15)(A) and (B) were met. As a result of the wife's discharge, the husband remained obligated to the creditors for the debt. He returned to the state court which had entered the decree of dissolution and sought modification of other provisions of the property settlement based on the wife's 'bad faith in discharging her assumed debts to bankruptcy.' In re Fluke, 305 B.R. at 637. The state court ordered the wife to pay the husband the full amount of the discharged debt in 36 monthly installments in order to give the husband 'the benefits that were bargained for.' Id. In response, the wife sought relief from the bankruptcy court on grounds that by obtaining the state court order, the husband and his attorney violated the discharge injunction of § 524(a). In determining that there had been a violation of the injunction, the bankruptcy judge held that by seeking relief in state court following the wife's bankruptcy discharge, the husband attempted to modify a discharged property settlement without seeking leave to do so from the bankruptcy court. In re Fluke, 305 B.R. at 643. The court further noted that because the dissolution decree did not provide for alimony, support, or maintenance payments, the husband was not seeking a modification of such on-going obligations to address changed circumstances, but, rather, willfully attempted to 'end run' around the discharge. Id. at 643-44. This case is distinguishable from In re Fluke, 305 B.R. 635 (D. Del. 2004), in that the original decree did include an award of alimony and the postbankruptcy modification of that award was sought on the basis of a material change in circumstances. Other courts addressing this scenario have rejected arguments that modification of alimony is merely a repackaging of debts discharged in bankruptcy and thus prohibited by federal law, if the party seeking modification is able to demonstrate an actual change in financial circumstances subsequent to the dissolution and bankruptcy of the former spouse. See, In re Siragusa, 27 F.3d 406, 407 (9th Cir. 1994); Smith v. Smith, 741 So. 2d 420 (Ala. Civ. App. 1999); In re Marriage of Trickey, 589 N.W.2d 753 (Iowa App. 1998). The court in In re Marriage of Trickey articulated what we believe to be the correct analytical approach: If the modification is essentially a reinstatement of the property settlement under the guise of alimony, the modification violates section 524 and is not permitted. . . . Mere attempts to end run around a bankruptcy discharge are not allowed. . . . However, if the alimony modification merely takes into account the fact that one spouse would no longer receive the property settlement payments upon which the original support award was premised and the discharge results in changed financial circumstances, then modification will not violate federal bankruptcy law. (Citations omitted.) 589 N.W.2d at 757. In In re Marriage of Trickey, the court held that because the parties understood at the time of the decree that lump-sum property settlement payments discharged in bankruptcy were contingent upon the success of the former spouse's business, the bankruptcy could not serve as a basis for modification of alimony. However, the court held that the prolonged period of the alimony recipient's unemployment was unanticipated and did constitute a change in circumstances which warranted an upward modification of the original alimony award. In In re Siragusa, supra , the court determined that a postbankruptcy alimony modification did not violate the discharge injunction where there was no showing that the former wife was attempting to reinstate a discharged property settlement obligation. Instead, the modification was based on the changed circumstance that the former wife would not receive the future property settlement payments upon which the original alimony award was premised. The court noted that the former husband's bankruptcy constituted a changed circumstance in that it altered both [the former wife's] need and [the former husband's] ability to pay. In re Siragusa, 27 F.3d at 408. The court therefore concluded that the resulting modification was justified in that it merely takes into account the fact that [the former wife] would no longer receive the property settlement payments upon which the original alimony was premised. Id. Noting that not every modification of periodic alimony is considered a violation of the Bankruptcy Code, the court in Smith v. Smith, supra , determined that the former husband's bankruptcy discharge of his obligation to make future payments of alimony in gross resulted in a change in the former wife's financial circumstances sufficient to warrant an increase in periodic alimony and that such modification was not barred by federal law. 741 So. 2d at 422. Although we have not previously addressed the precise issue presented here, this court has considered a postdissolution bankruptcy discharge in determining whether an alimony award should be modified on the basis of a material change in circumstances. In Anderson v. Anderson, 206 Neb. 655, 294 N.W.2d 372 (1980), a dissolution decree included provisions ordering the husband to pay substantial marital debts and to make alimony payments of $200 a month for 10 years. After changing jobs, the husband filed an application to modify the alimony downward, citing his decreased earnings and the fact that the debts he was ordered to assume were of such magnitude that it was impossible for him to continue making the alimony payments. Id. at 656, 294 N.W.2d at 373. After filing the application for modification, but before the hearing, the husband filed bankruptcy and obtained a discharge of some of his indebtedness. In affirming an order that determined that there had not been a change in circumstances sufficient to justify eliminating or reducing the alimony award, this court referred to the relief afforded the husband by virtue of his bankruptcy discharge, concluding that the husband's change in income and expenses has approximately kept pace with each other. Id. at 658, 294 N.W.2d at 374. In this case, there is evidence that the deficiency judgment resulted in a substantial and material change in Kimberly's financial circumstances. She testified that due to a job change, her annual income had dropped from $52,000 at the time of the decree to approximately $38,000 at the time of the modification hearing. She testified that she has only $200 to $300 remaining each month after payment of her bills. Kimberly testified that she has not made any payments on the deficiency judgment and has no property from which it could be satisfied. She presented evidence establishing that to satisfy the judgment over a 10-year period, it would require that she make debt service payments of $800 per month, and that if she received this amount in alimony, her income tax liability would increase. Shan testified that his expenses had increased and that he could not afford to pay additional alimony. However, he also testified that his monthly income had increased from $1,400 at the time of the original decree to $4,000 at the time of the modification hearing, and that his housing costs, insurance, and some of his utilities are provided or paid for by his employer. The record establishes that Kimberly's liability for the deficiency judgment has resulted in a material and substantial change in the relative economic circumstances of the parties which was not within the reasonable contemplation of the parties at the time of the decree of dissolution. Satisfaction of the deficiency judgment over a 10-year period in her current circumstances would alter Kimberly's monthly cashflow from slightly positive to decidedly negative. Because the modification of the alimony award was specifically attributed to this proven change in circumstances, it is not contrary to or preempted by federal bankruptcy law. See, In re Siragusa, 27 F.3d 406 (9th Cir. 1994); Smith v. Smith, 741 So. 2d 420 (Ala. Civ. App. 1999).