Court Opinion

ID: 4514576
Source: CourtListenerOpinion
Date Created: 2020-03-11 00:01:43.605583+00
Date Added: 2024-06-11T09:48:08.628610
License: Public Domain

FILED
                                                                           AUG 2 2019
                           NOT FOR PUBLICATION                        SUSAN M. SPRAUL, CLERK
                                                                         U.S. BKCY. APP. PANEL
                                                                         OF THE NINTH CIRCUIT

             UNITED STATES BANKRUPTCY APPELLATE PANEL
                       OF THE NINTH CIRCUIT

In re:                                               BAP No. AZ-18-1311-FLB

DOUGLAS E. PEERY,                                    Bk. No.     4:17-bk-13595-BMW

                    Debtor.                          Adv. Pro. 4:18-ap-00064-BMW

DOUGLAS E. PEERY,

                    Appellant,

v.                                                   MEMORANDUM*

MEGAN ESCOBAR,

                    Appellee.

                     Argued and Submitted on July 18, 2019
                             at Phoenix, Arizona

                                Filed – August 2, 2019

               Appeal from the United States Bankruptcy Court
                         for the District of Arizona

         *
        This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
     Honorable Brenda Moody Whinery, Bankruptcy Judge, Presiding

Appearances:        Andrew A. Harnisch of May Potenza Baran & Gillespie,
                    P.C. argued for appellant Douglas E. Peery; Richard Luff
                    argued for appellee Megan Escobar.

Before: FARIS, LAFFERTY, and BRAND, Bankruptcy Judges.

                                INTRODUCTION

      Chapter 71 debtor Douglas E. Peery agreed to pay his then-wife,

appellee Megan Escobar, approximately $351,000. They entered into a

postnuptial agreement that confirmed how the debt would be treated if

they divorced. Mr. Peery and Ms. Escobar later separated and entered into

a marital settlement agreement, which reaffirmed Mr. Peery’s personal

obligation to Ms. Escobar. When Mr. Peery filed for bankruptcy protection,

the bankruptcy court held that his debt to Ms. Escobar was

nondischargeable under § 523(a)(15). On appeal, Mr. Peery argues that the

bankruptcy court erred because the prepetition debt was not “incurred . . .

in the course of a divorce . . . or in connection with a separation agreement

[or] divorce decree . . . .”

      We hold that the debt was “incurred . . . in connection with” the

      1
        Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal
Rules of Bankruptcy Procedure.

                                           2
parties’ divorce. Accordingly, we AFFIRM.

                            FACTUAL BACKGROUND2

A.     Prepetition events

       Before they married, Mr. Peery and Ms. Escobar formed a commercial

contracting company, Ventura-Pacific Development, Inc. (“VPD”). In 2011,

VPD agreed to purchase Ms. Escobar’s shares in the company for $351,000

pursuant to a stock redemption agreement (“Stock Redemption

Agreement”). Mr. Peery signed the Stock Redemption Agreement and a

promissory note (“Note”) on behalf of VPD as its president and CEO.

       Mr. Peery and Ms. Escobar married in April 2012.

       On December 31, 2012, the parties entered into an addendum

(“Addendum”) to the Stock Redemption Agreement and a postnuptial

agreement (“Postnuptial Agreement”). The Addendum provided that:

Mr. Peery became the maker of the Note; he assumed all responsibility and

liability to fulfill the terms of the Stock Redemption Agreement and Note;

the value of the Note was reset to its original amount; and all previous

payments would be considered a gift to Ms. Escobar.

       The Postnuptial Agreement provided that, in the event of dissolution

of the marriage, VPD would be awarded to Mr. Peery, and Mr. Peery

       2
         We exercise our discretion to review the bankruptcy court’s docket, as
appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2
(9th Cir. BAP 2008).

                                             3
would have to buy out Ms. Escobar’s community interest in VPD by paying

her half of the value of VPD minus the principal sum of the Note. It also

specified that the Note was Ms. Escobar’s sole and separate property. It

provided that, if the parties divorced, the Postnuptial Agreement would

govern the allocation of their assets and debts.

      At some point thereafter, the parties separated. They entered into a

marital settlement agreement (“MSA”) in May 2016.The MSA awarded

“[a]ll right, title, and interest” in VPD to Mr. Peery and the Note to

Ms. Escobar. Mr. Peery reaffirmed his obligation to Ms. Escobar under the

Note and provided additional collateral:

      DOUG affirms his personal obligation to MEGAN pursuant to
      the pre-marital Promissory Note (“Note”). DOUG
      acknowledges the importance of timely payments on the Note,
      however, both parties acknowledge that the Note is not a
      domestic support order. DOUG agrees to secure the Note with
      a life insurance policy, naming MEGAN as the beneficiary of
      any amount equal to the outstanding balance of the Note.

      The parties agreed to “forever release, waive and discharge the other

from any and all claims upon the other for spousal maintenance, alimony

or support of any kind or nature.”

      The state court approved the MSA, which then merged into the

consent decree of dissolution of marriage (“Divorce Decree”).

                                       4
B.    Bankruptcy proceedings

      On November 15, 2017, Mr. Peery filed his chapter 7 petition. He

scheduled an unsecured debt totaling $209,548 due to Ms. Escobar.

      Mr. Peery additionally filed an adversary complaint against

Ms. Escobar, seeking a determination that the debt was dischargeable and

not covered by §§ 523(a)(5) or (a)(15). He argued the Note was a premarital

debt and was not a domestic support obligation under § 523(a)(5) or a debt

incurred in the course of a divorce or in connection with a divorce decree

under § 523(a)(15).

      Ms. Escobar filed a motion for summary judgment (“Escobar MSJ”).

She argued that the debt was a nondischargeable marital debt under

§ 523(a)(15). She contended that the debt arose out of a divorce and was

ordered in the Divorce Decree so was “incurred” in connection with the

Divorce Decree. She also requested attorneys’ fees under a state statute.

      Mr. Peery opposed the Escobar MSJ, arguing that the Note was a

premarital, commercial debt that did not arise out of the parties’ divorce.

He argued that the MSA did not create any independent basis for

repayment and did not modify the obligations between the parties.

      Mr. Peery filed a motion for partial summary judgment (“Peery

MPSJ”) seeking a determination that the debt was not a domestic support

obligation under § 523(a)(5). In response, Ms. Escobar appeared to agree

that the debt was not a domestic support obligation.

                                      5
      Following a hearing on the Escobar MSJ and the Peery MPSJ, the

bankruptcy court issued its decision granting the Escobar MSJ and denying

as moot the Peery MPSJ.

      It stated that § 523(a)(15) requires three elements: (1) that the debt is

owed to the debtor’s former spouse; (2) that the debt is not a support

obligation under § 523(a)(5); and (3) that the debt was incurred in the

course of a divorce or separation or in connection with a separation or

divorce decree. The court held that the first two elements were not

disputed: the alleged debt is owed to Ms. Escobar, and the parties agreed

that the debt is not a domestic support obligation. As such, the only

question was whether the debt was “incurred” by Mr. Peery in the course

of or in connection with the divorce.

      The court noted that the Bankruptcy Code does not define when a

debt is “incurred.” Nevertheless, it stated that the Ninth Circuit has

broadly applied § 523(a)(15) under Short v. Short (In re Short), 232 F.3d 1018

(9th Cir. 2000), to include even prepetition debt that is incorporated into a

divorce decree.

      The bankruptcy court concluded that the debt was initially

commercial in nature but became Mr. Peery’s personal debt by virtue of the

Addendum. It stated that the Note and Mr. Peery’s personal obligation to

satisfy the Note were incorporated into the Postnuptial Agreement as well

as the MSA, which was in turn incorporated into the Divorce Decree. The

                                        6
court noted that the MSA required Mr. Peery to “secure” the Note with a

life insurance policy naming Ms. Escobar as the beneficiary. As such,

because the Divorce Decree explicitly incorporated Mr. Peery’s obligation

under the Note, the bankruptcy court concluded that the debt was incurred

in connection with the Divorce Decree.

     Therefore, the court held that the debt was nondischargeable under

§ 523(a)(15) and granted the Escobar MSJ but denied Ms. Escobar’s request

for fees. It held that the Peery MPSJ was therefore moot.

     Mr. Peery timely appealed.

C.   The motion for sanctions

     After briefing closed in this appeal, Ms. Escobar filed a motion for

sanctions under Rule 8020 (“Sanctions Motion”). The BAP motions panel

deferred ruling on the Sanctions Motion pending the outcome of this

appeal.

                              JURISDICTION

     The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334

and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

                                  ISSUES

     (1) Whether the bankruptcy court erred in holding that the Note is

nondischargeable under § 523(a)(15).

     (2) Whether Ms. Escobar is entitled to an award of attorneys’ fees and

costs under Rule 8020.

                                       7
                          STANDARD OF REVIEW

      When reviewing a bankruptcy court’s determination of an exception

to discharge claim, we review its findings of fact for clear error and its

conclusions of law de novo, see Oney v. Weinberg (In re Weinberg), 410 B.R.

19, 28 (9th Cir. BAP 2009), including its interpretation of the Bankruptcy

Code, see Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP

2014). “De novo review requires that we consider a matter anew, as if no

decision had been made previously.” Id. (citations omitted).

                                DISCUSSION

A.    The bankruptcy court did not err in holding that the debt was
      nondischargeable under § 523(a)(15).

      The narrow question of law on appeal concerns whether Mr. Peery’s

debt to Ms. Escobar – first created by the Addendum, but immediately

incorporated into the Postnuptial Agreement and subsequently

incorporated into the MSA and Divorce Decree – constitutes a debt that

Mr. Peery “incurred . . . in the course of a divorce or separation or in

connection with a separation agreement [or] divorce decree . . . .” Based on

the Ninth Circuit’s decision in Short and the facts of this case, we hold that

this debt falls under § 523(a)(15).

      Section 523(a)(15) excepts from discharge any debt:

      to a spouse, former spouse, or child of the debtor and not of the
      kind described in paragraph (5) that is incurred by the debtor
      in the course of a divorce or separation or in connection with

                                        8
      a separation agreement, divorce decree or other order of a
      court of record, or a determination made in accordance with
      State or territorial law by a governmental unit[.]

§ 523(a)(15) (emphasis added). Thus, a creditor must establish three

elements:

      (1) that the debt in question is owed to a former spouse of the
      debtor; (2) that the debt is not a support obligation within the
      meaning of § 523(a)(5); and (3) that the debt was incurred in the
      course of a divorce or separation or in connection with a
      separation agreement, divorce decree, or other order of a court
      of record.

Adam v. Dobin (In re Adam), BAP No. CC-14-1416-PaKiTa, 2015 WL 1530086,

at *6 (9th Cir. BAP Apr. 6, 2015), aff’d, 677 F. App’x 353 (9th Cir. 2017)

(citing Taylor v. Taylor (In re Taylor), 478 B.R. 419, 428 (10th Cir. BAP 2012)).

      The Ninth Circuit construed § 523(a)(15) in Short. The debtor,

Mr. Short, borrowed money from Ms. Short before and after they married

to finance the purchase of a truck and pay off a debt to a prior spouse. Two

months after they wed, they entered into a postnuptial agreement to

memorialize the debt. 232 F.3d at 1020. The postnuptial agreement

provided that Mr. Short’s obligation to repay the $50,000 debt was incurred

prior to marriage and that the debt was Ms. Short’s separate property. Id. at

1021. However, if the marriage lasted more than three years, the debt

would be canceled. Id.

      A few weeks later, the parties separated, and Mr. Short filed for

                                        9
divorce. The parties agreed to divide the assets largely pursuant to the

postnuptial agreement; Ms. Short also received a boat. Regarding the

$50,000 loan, the parties agreed to deduct half of the value of the boat and

the amount previously paid toward the loan. The stipulated judgment

recognized that “[Mr. Short] owed to [Ms. Short] the principal sum of

$41,450. . . . [Mr. Short] shall pay the sum of $600 per month to [Ms. Short]

until such time as the loan is paid.” Id.

      Mr. Short later filed a chapter 7 bankruptcy petition. Ms. Short filed

an adversary complaint to determine that the debt was nondischargeable

under § 523(a)(15). The bankruptcy court concluded that the debt was

“incurred in connection with the parties’ divorce” and that the debt was

nondischargeable. Id. This Panel affirmed. Id. at 1022.

      On appeal to the Ninth Circuit, Mr. Short argued that the debt was

not “incurred . . . in the course of a divorce or separation” under

§ 523(a)(15). He contended that the loan was made before the divorce and

that at least a portion of it was transferred to him before marriage. He

concluded that the loan was separate property debt incurred prior to

marriage. Id.

      The Ninth Circuit disagreed. It held that “Mr. Short’s contention that

his $50,000 loan from Ms. Short is not divorce-related, even though the

terms of its repayment were expressly incorporated into the decree of

dissolution, lacks merit.” Id. at 1022-23 (citing In re Crosswhite, 148 F.3d 879,

                                       10
881-82 (7th Cir. 1998)). The court concluded that, “[b]ecause Mr. Short’s

debt to Ms. Short was incurred by him as part of a division of property

under the terms of a judgment of dissolution, we conclude that the debt

was incurred in connection with a divorce decree and therefore subject to

§ 523(a)(15).” Id. at 1024.

      The material facts of this case are indistinguishable from Short.

Similar to the debtor in Short, Mr. Peery owed a debt to Ms. Escobar.3 In

both cases, the debt was incorporated into a postnuptial agreement and

reaffirmed in a divorce settlement and decree. The Ninth Circuit held that

Mr. Short’s debt to Ms. Short was nondischargeable under § 523(a)(15); for

the same reasons, Mr. Peery’s debt to Ms. Escobar is also nondischargeable.

      Indeed, Mr. Peery’s debt to Ms. Escobar is exactly the kind of debt

that § 523(a)(15) usually covers. That section most commonly applies to

“equalization payments,” or debts owed by one spouse to the other in

order to equalize the allocation of assets and debts between them. See

generally Berse v. Langman (In re Langman), 465 B.R. 395, 405 (Bankr. D.N.J.

2012) (“This provision has been read to encompass a range of matrimonial

debts, including obligations arising out of property settlement agreements

      3
       Mr. Short incurred his debt to Ms. Short partly before and partly after they were
married. In contrast, Mr. Peery first became personally liable to Ms. Escobar after they
married. Short provides no reason to think that this factual difference should change the
outcome. If anything, it arguably makes Ms. Escobar’s case stronger than Ms. Short’s
because Ms. Escobar’s claim is more tightly connected to the marriage.

                                           11
and equitable distribution judgments.” (citation omitted)); Bodily v. Morris

(In re Morris), 193 B.R. 949, 950 (Bankr. S.D. Cal. 1996) (concerning a

nondischargeability action under § 523(a)(15) where “[t]he equalization

payment was intended by that court to equalize the responsibilities for

payment of debts as well as the division of property between the parties”).

The Postnuptial Agreement provides that, if they divorced, Mr. Peery

would be entitled to own VPD, but he would have to buy Ms. Escobar’s

community interest in the company by paying her half of the value of the

company less the principal amount of the Note. In other words, the parties

agreed that, if they divorced, the Note would serve as part of an

equalization payment. As such, the Note was nondischargeable under

§ 523(a)(15).

      It is of no moment that the debt predated the divorce. Section

523(a)(15) applies to debts that are incurred “in the course of” a divorce or

“in connection with” a separation agreement or divorce decree. The debts

of one spouse to another under a prenuptial or postnuptial agreement are

connected with a subsequent divorce; spouses (or prospective spouses)

enter into such agreements precisely in order to predetermine what will

happen in a subsequent divorce. See Ruhlen v. Montgomery (In re

Montgomery), 310 B.R. 169, 178 (Bankr. C.D. Cal. 2004) (rejecting the

debtor’s argument that a property division provision in a marital

settlement agreement “only reaffirmed” the debtor’s duty to pay the debt

                                       12
and was thus outside the scope of § 523(a)(15)).

       None of Mr. Peery’s attempts to distinguish Short is persuasive.

       First, he argues that § 523(a)(15) applies to “familial” obligations, not

commercial obligations. The statutory language does not support this

argument.4 Neither does Short: Mr. Short owned a trucking company, and

he used most of the money he borrowed from Ms. Short to buy a Peterbilt

truck. In re Short, 232 F.3d at 1020. So, most of Mr. Short’s debt was

arguably commercial, yet the Ninth Circuit held it was not dischargeable.

       Second, he says that Short only applies if the divorce decree changed

the debt in some way. He argues that, in the present case, the Divorce

       4
        Nor does the legislative history. In enacting § 523(a)(15), Congress appeared
concerned with ensuring that the debtor spouse’s bankruptcy did not deprive the non-
debtor spouse of property that she needed to rely on for her livelihood:

       If such “hold harmless” and property settlement obligations are not found
       to be in the nature of alimony, maintenance, or support, they are
       dischargeable under current law. The nondebtor spouse may be saddled
       with substantial debt and little or no alimony or support . . . .

In re Francis, 505 B.R. at 919 (quoting 140 Cong. Rec. H 10770 (Oct. 4, 1994)). Thus, where
the parties bargain for a certain distribution of assets, § 523(a)(15) is meant to protect the
non-debtor spouse’s right to certain property. See In re Montgomery, 310 B.R. at 178
(“Under the MSA, [spouse] relinquished valuable rights in [debtor’s] pension plan and
deferred compensation plan in exchange for the parties’ equity in the . . . Property and
his promise to pay one-half of the . . . Note secured by the property. [Debtor] reneged
under the Judgment and sought to discharge his obligation in this case. In the court’s
view, [debtor’s] action is precisely the tactic § 523(a)(15) was designed to prevent and
[debtor’s] obligation to [spouse] is exactly the type of debt § 523(a)(15) was intended to
except from discharge.”).

                                             13
Decree did not.

      He cites non-binding decisions so holding. See, e.g., Sherman v. Proyect

(In re Proyect), 503 B.R. 765, 775 (Bankr. N.D. Ga. 2013) (rejecting the notion

that restating a debt in a divorce decree means that the debt was “incurred”

in the course of a divorce, because “rendering every obligation to be

nondischargeable simply because it is mentioned in a divorce settlement

agreement seems to go far beyond what Congress intended”). But we are

bound by Short. It is true that the divorce decree in Short modified

Mr. Short’s obligations in some respects. But the Short opinion does not

even hint that this fact was relevant to the court of appeals’ decision. To the

contrary, it was enough that “the terms of [the debt’s] repayment were

expressly incorporated into the decree of dissolution . . . .” 232 F.3d at 1022-

23. In the present case, there is no question that Mr. Peery’s obligations

under the Note were incorporated into the MSA and Divorce Decree. The

Divorce Decree did not recite those obligations, but that is a formality that

should not affect the substantive outcome.

      Further, the MSA and Divorce Decree in this case did change

Mr. Peery’s obligation to Ms. Escobar. The MSA imposed the new

obligation that Mr. Peery “secure” the Note with a life insurance policy

naming Ms. Escobar as the beneficiary.5 Mr. Peery argues that Ms. Escobar

      5
          Mr. Peery initially argued that he did not take out a life insurance policy. (This
                                                                                (continued...)

                                              14
did not raise the issue before the bankruptcy court, so it was not fully

developed in the bankruptcy court. We reject this argument. The MSA was

part of the record; the bankruptcy court was free to read it and make

appropriate rulings.

      Therefore, the bankruptcy court did not err in holding that the debt

was “incurred . . . in connection with a separation agreement [or] divorce

decree” and that the debt was nondischargeable under § 523(a)(15).

B.    Ms. Escobar is not entitled to her fees and costs on appeal.

      Ms. Escobar argues that this appeal is frivolous and that she is

entitled to her attorneys’ fees and costs on appeal. We disagree.

      Rule 8020, which conforms to the language of Federal Rule of

Appellate Procedure (“FRAP”) 38, provides that: “If the district court or

BAP determines that an appeal is frivolous, it may, after a separately filed

motion or notice from the court and reasonable opportunity to respond,

award just damages and single or double costs to the appellee.” Rule

8020(a). Under FRAP 38, “a frivolous appeal is one where the result is

obvious or the appellant’s arguments are wholly without merit.” First Fed.

Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284, 297 (9th Cir. BAP

      5
        (...continued)
argument implies that, if he had done what he agreed to do in the MSA, his debt would
not be dischargeable, but it is dischargeable because he never carried out his promise.
To state this argument is to refute it.) At oral argument, Mr. Peery’s counsel clarified
that Mr. Peery had taken out a life insurance policy and listed it in his schedules.

                                           15
1998) (citations omitted). We may impose sanctions to penalize an

appellant or attorney who pursues a frivolous appeal and to compensate

the appellee for the delay and expense of defending the appeal. 10 Collier

on Bankruptcy ¶ 8020.03 (Richard Levin & Henry J. Sommer eds., 16th ed.);

see Burlington N. R.R. Co. v. Woods, 480 U.S. 1, 7 (1987).

      Ms. Escobar argues that Mr. Peery’s factual and legal positions on

appeal are disingenuous, so the appeal is frivolous. However, her Sanctions

Motion reads like an unauthorized surreply to Mr. Peery’s reply brief.

Although she couches her arguments in terms of frivolity (allegedly

because the result is obvious), she uses the Sanctions Motion primarily to

refute the arguments raised in the reply brief. This is a thinly-veiled

attempt to get in the last word in this appeal.

      In any event, we reject Ms. Escobar’s argument. We cannot say that

this appeal is frivolous or that Mr. Peery has otherwise abused the

appellate process. See In re Weinstein, 227 B.R. at 297 (“Considered in their

[entirety], the [appellant’s] arguments, while not well taken, are not so

wholly without merit as to warrant sanctions.”).

                                CONCLUSION

      The bankruptcy court did not err in holding that the debt owed to

Ms. Escobar was nondischargeable under § 523(a)(15). We AFFIRM. We

DENY Ms. Escobar’s Sanctions Motion.

                                       16