State of Missouri v. Michael E. Spencer ( 2016 )

United States Bankruptcy Appellate Panel
For the Eighth Circuit
___________________________
No. 15-6030
___________________________
In re: Michael Eugene Spencer; Patricia Anne Spencer
lllllllllllllllllllllDebtors
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State of Missouri, Department of Social Services, Family Support Division
lllllllllllllllllllllClaimant - Appellant
v.
Michael Eugene Spencer; Patricia Anne Spencer
lllllllllllllllllllllMovants - Appellees
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Appeal from United States Bankruptcy Court
for the Western District of Missouri - Kansas City
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Submitted: May 19, 2016
Filed: June 13, 2016
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Before KRESSEL, SALADINO and NAIL, Bankruptcy Judges.
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KRESSEL, Bankruptcy Judge.
The State of Missouri, Department of Social Services, Family Support
Division appeals from the bankruptcy court’s July 28, 2015 contempt order and
August 11, 2015 sanction order. The bankruptcy court found the division in
contempt and imposed sanctions against the division for willful violation of the
discharge injunction in attempting to collect on a support debt after the debtors
obtained a discharge. The bankruptcy court imposed sanctions against the division
for such contempt. We have jurisdiction over this appeal under 28 U.S.C.
§ 158(b). We reverse.
BACKGROUND
Michael Spencer and Patricia Spencer jointly filed a chapter 13 petition on
October 12, 2010, listing Michael’s former spouse as the holder of an unsecured
priority claim categorized as a domestic support obligation. Subsequently, the
Missouri Division of Child Support Enforcement, acting on behalf of Michael’s
former spouse, filed a proof of claim for an unsecured priority claim in the amount
of $36,026.27 as of the petition date for support arrears that Michael owed to his
former spouse. The underlying support obligation was created by a June 1, 2001
marital dissolution judgment and decree from the Circuit Court of Jackson County,
Missouri, which ordered Michael to pay maintenance support in the amount of
$1,200.00 per month, minus any amounts Michael paid for child support for ten
years beginning May 1, 2001; the judgment also ordered Michael to pay child
support in the amount of $800.00 per month, beginning March 1, 2001. The record
does not reflect that the 2001 judgment was ever modified.
After discovering that it had incorrectly calculated Michael’s monthly
support obligation as $400.00 per month instead of the 2001 judgment amount of
$1,200.00 per month from 2005 to 2011, the division amended its proof of claim to
claim $88,026.27 as the updated total amount of arrears owed to Michael’s former
spouse as of the petition date.
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The debtors objected to the amended proof of claim. The bankruptcy court
held a hearing to determine the amount of the claim. On August 9, 2011, the court
sustained the debtors’ objection to the amended claim, disallowing the amended
amount of $88,026.27, and allowing the claim as originally filed in the amount of
$36,026.27. Citing Missouri case law, the bankruptcy court found that the division
had waived a portion of the support arrears by acquiescing in lower payments after
the children were emancipated. The division did not seek reconsideration of the
order sustaining the objection, did not appeal the order, and did not object to
confirmation of the debtor’s proposed plan, which proposed to pay the division the
allowed claim amount of $36,026.27. The division also did nothing to alert the
debtors or the court to the fact that it did not feel bound by the court’s determination
of its claim. The court confirmed the debtors’ plan.
In accordance with their confirmed plan, the debtors paid the division’s
allowed claim for support arrears in the amount of $36,026.27. The debtors
completed all of their plan payments early, so they filed a motion for discharge,
asserting that pursuant to § 1328(a), “all amounts payable under any judicial or
administrative order or by statute for domestic support obligations that were due on
or before the date upon which this certification was signed, including all payments
due under the plan for amounts due before the petition was filed, have been paid.”
No objections were filed to the debtors’ motion for discharge. On March 26, 2015,
the court entered an order granting the debtors a discharge under 11 U.S.C.
§ 1328(a).
After the debtors received a discharge, the division issued a May 7, 2015
income withholding order to Michael’s employer to collect past-due child support
and past-due spousal support. After receiving a copy of the withholding order,
counsel for the debtors sent a letter to the division, requesting that the division
release the order. In the letter, counsel stated that Michael received a discharge, that
the support arrears debt was paid and discharged under the debtors’ plan, that any
remaining balance of arrears was invalid, and that the continued collection of the
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debt violated the discharge order and was subject to sanction. After receiving no
reply from the division, the debtors filed a motion for contempt and for sanctions
against the division for violating the discharge injunction. In its response, the
division argued that support arrears were nondischargeable domestic support
obligations, excepted from discharge under §§ 1328(a)(2) and 523(a)(5). The
division further argued that the bankruptcy court lacked subject matter jurisdiction
to decide issues relating to the modification of a child support order and child support
obligations.
On July 28, 2015, the court granted the debtors’ motion for contempt,
concluding that the division’s post-discharge attempt to collect support arrears
willfully violated the discharge injunction, and determining that the debtors would
be awarded attorney’s fees as a sanction against the division for contempt. The court
stated that Michael’s prepetition support obligation was satisfied in full and that
Michael owed “no prepetition or pre-discharge debt” to the division or his former
spouse. The court then ordered the division to cease all further collection activity
against Michael. The court also directed the debtors to submit a statement of
attorney’s fees to assess the amount of the sanction. Later, the debtors filed the
attorney’s fees statement. In accordance with its July 28, 2015 order, on August 11,
2015, the court awarded attorney’s fees in the amount of $1,335.00 as a sanction
against the division. The division appealed.
In this appeal, the division challenges the July 28, 2015 contempt order on
three grounds. First, the division argues that the discharge injunction does not apply
to domestic support obligations under §§ 523(a)(5) and 1328(a). Second, the
division argues that the bankruptcy court violated the principle of comity when
interpreting proof of claim disallowance as a broader determination of Michael’s
personal liability on his domestic support obligation. Third, the division argues that
the bankruptcy court lacks subject matter jurisdiction to reduce the amount of the
domestic support obligation under the domestic relations exception to federal
jurisdiction. The division does not challenge the amount of the sanction.
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On the other hand, the debtors urge affirmance of the bankruptcy court’s
decision. First, the debtors argue that issues not raised below are not considered on
appeal. Second, the debtors argue that the bankruptcy court had jurisdiction to
determine the amount of the claim. Further, the debtors argue that the doctrines of
res judicata and collateral estoppel bar the division from relitigating the claim
amount. The debtors also argue that § 105 of the Bankruptcy Code grants a
bankruptcy court the power to prevent abuse of the bankruptcy process, and that the
court may impose sanctions upon a creditor under § 105 for abuse of the bankruptcy
process even if that creditor has not violated the discharge injunction.
STANDARD OF REVIEW
Whether to grant or deny a motion for contempt falls within the discretion of
the bankruptcy court. As such, we review such motions for abuse of discretion.
Wright v. Nichols, 80 F.3d 1248, 1250 (8th Cir. 1996). Similarly, we review an
award of sanctions for abuse of discretion. Everly v. 4745 Second Ave., Ltd. (In re
Everly), 346 B.R. 791, 794 (B.A.P. 8th Cir. 2006) (citation omitted). We review
legal conclusions de novo and factual findings for clear error. Fischer v. Great W.
Bank (In re Fischer), 501 B.R. 346, 349 (B.A.P. 8th Cir. 2013). A bankruptcy court
abuses its discretion if the court bases its decision on erroneous legal conclusions or
clearly erroneous factual findings. Carlson v. U.S. Bank, N.A., (In re Carlson), 519
B.R. 756, 757 (B.A.P. 8th Cir. 2014).
DISCUSSION
Jurisdiction
The division argues that the bankruptcy court lacked subject matter
jurisdiction to reduce the amount of the domestic support obligation under the
domestic relations exception to federal jurisdiction. The division relies on
Ankenbrandt v. Richards, 504 U.S. 689 (1992), which clarified the domestic
relations exception to federal court subject matter jurisdiction.
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In that case, the plaintiff filed suit in federal district court against her ex-
spouse and his partner for damages arising from alleged torts committed by the
defendants upon the children. Id. at 691. The district court dismissed the complaint
for lack of jurisdiction, concluding that the case fell within the domestic relations
exception to federal court diversity jurisdiction. Id. at 692. As an alternative, the
district court abstained from exercising jurisdiction. Id. The Fifth Circuit affirmed.
Id. On appeal, the Supreme Court of the United States concluded that the domestic
relations exception to federal court jurisdiction applies “to divorce and alimony
decrees and child custody orders,” id. at 703, but that “the domestic relations
exception encompasses only cases involving the issuance of a divorce, alimony, or
child custody decree.” Id. at 704 (emphasis added). The Court reversed and
remanded, concluding that federal subject matter jurisdiction was proper because the
suit did not seek such a decree, and concluding that abstention was inappropriate.
Id. at 705–07.
Like Ankenbrandt, the case at bar does not involve the issuance of a divorce,
alimony, or child custody decree. On the contrary, the division’s contention with
the bankruptcy court’s determination regarding the effect of the disallowance order
sounds towards a dispute over the amount owed pursuant to the divorce decree, not
toward the validity or the issuance or the modification of the divorce decree itself.
We conclude that this case does not fall within the domestic relations exception to
federal jurisdiction. Therefore, we conclude that the bankruptcy court had
jurisdiction to determine the division’s claim.
Comity
The division next challenges the bankruptcy court’s contempt order on the
basis of comity, arguing that the bankruptcy court violated the rule of comity when
interpreting proof of claim disallowance as a broader determination of Michael’s
personal liability on his domestic support obligation. The division raises the issue
of comity for the first time on appeal. Ordinarily, and with exceptions not applicable
here, an issue not raised in the trial court and raised for the first time on appeal cannot
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be considered as a basis for reversal. Pennington-Thurman v. Bank of Am. N.A. (In
re Pennington-Thurman), 499 B.R. 329, 332–33 (B.A.P. 8th Cir. 2013) (citations
omitted). Therefore, we decline to consider the comity issue. See Trailer Train Co.
v. State Tax Comm’n, 929 F.2d 1300, 1303 (8th Cir. 1991) (declining to consider a
comity challenge because the issue was raised for the first time on appeal).
Exception to Discharge
The division’s prominent challenge on appeal is that bankruptcy court erred
in holding the division in contempt for willful violation of the discharge injunction
because the discharge injunction does not apply to domestic support obligations
under §§ 523(a)(5) and 1328(a). We agree.
A discharge granted under § 1328(a) discharges a debtor “of all debts provided
for by the plan or disallowed under section 502 of this title, except any debt . . . . of
the kind specified . . . in paragraph . . . (5) . . . of section 523(a)[.]” 11 U.S.C. §
1328(a)(2) (emphasis added). Section 523(a)(5) specifically excepts a “domestic
support obligation” from discharge. 11 U.S.C. § 523(a)(5). A “domestic support
obligation,” as defined in the Code, includes a debt owed to a former spouse of the
debtor for maintenance or support established by a divorce decree or court order. 11
U.S.C. § 101(14A)(A)–(D).
The chapter 13 discharge “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 . . . [.]”
11 U.S.C. § 524(a)(2). “[T]he discharge injunction ‘prohibits collection only with
respect to dischargeable debts and does not apply to nondischargeable debts.’ As a
result, once a discharge has been granted, holders of nondischargeable debts
generally may attempt to collect from the debtor personally for such debts.” Fla.
Dep’t of Revenue v. Diaz, (In re Diaz), 647 F.3d 1073, 1088 (11th Cir. 2011)
(citations omitted) (quoting United States v. White, 466 F.3d 1241, 1246 (11th Cir.
2006)).
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The support arrears debt at issue is a “domestic support obligation” under 11
U.S.C. § 101(14A) because it is a debt owed to the former spouse of the debtor for
spousal maintenance and child support pursuant to a June 1, 2001 marital dissolution
judgment and decree. No party disputes the nature of the debt. Indeed, the debtors
listed and categorized the claim as a domestic support obligation in their schedules.
The bankruptcy court concluded that the prepetition support obligation was
fully paid and fully satisfied, remarking that it entered orders disallowing the
division’s amended amount, confirming the debtors’ plan paying the claim’s lesser
amount in full, and granting the debtors a chapter 13 discharge. On the basis of its
conclusion that the division paid the support arrears obligation in full, the bankruptcy
court determined that the division willfully violated the discharge injunction when
the division attempted to collect on that debt after the debtors received their chapter
13 discharge.
The discharge injunction does not apply to a nondischargeable domestic
support obligation, even the disallowed portion. Therefore, any determination that
a domestic support obligation was paid in full is not determinative of whether a post-
discharge attempt to collect on the domestic support obligation violated the
discharge injunction. By operation of § 1328(a)(2), when the debtors received a
chapter 13 discharge under § 1328(a), the support arrears debt was excepted from
the debtors’ discharge because it was a § 523(a)(5) domestic support obligation.
Since the support obligation was not subject to the debtor’s chapter 13 discharge
under § 1328(a)(2), it was also not subject to the discharge injunction under
§ 524(a)(2). Therefore, the bankruptcy court erred in finding that the division’s post-
discharge attempt to collect on a prepetition domestic support obligation willfully
violated the discharge injunction. Accordingly, the bankruptcy court abused its
discretion in holding the division in contempt and in awarding attorney’s fees for
such contempt.
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The debtors urge affirmance of the contempt order and sanction order,
arguing that the doctrines of res judicata and collateral estoppel bar the division from
relitigating the claim amount because the proof of claim disallowance order was a
final adjudication of the support arrears obligation. While that may be true, we need
not address the debtors’ res judicata and collateral estoppel arguments based on our
conclusion that the division did not violate the discharge injunction.
Relying on In re Hann, 711 F.3d 235 (1st Cir. 2013), the debtors also argue
that the court may sanction a creditor for another reason—for abuse of the
bankruptcy process—even if the creditor’s conduct did not violate the discharge
injunction. We decline to address this argument because the debtors raise it for the
first time on appeal. In re Pennington-Thurman, 499 B.R. at 332.
The dissent seems to concede that the bankruptcy court erred in finding that
the division willfully violated the discharge injunction. Nonetheless, the dissent
would adopt the debtors’ argument on appeal and affirm the sanction for “abuse of
the bankruptcy process,” stating that the bankruptcy court sanctioned the division
because the division was attempting to collect a debt that was fully paid. The court
did not sanction the division for attempting to collect a fully paid debt. The
bankruptcy court held the division in contempt and sanctioned it as punishment for
that contempt for willful violation of the discharge injunction: “The Debtors’
Motion for Contempt is GRANTED and the Debtors will be awarded reasonable
attorney’s fees as a sanction for such contempt.” The contempt was for willful
violation of the discharge injunction: “As a result, the Family Support Division’s
attempt to collect the asserted prepetition obligation willfully violated the discharge
injunction and the Debtors’ Motion for Contempt will, therefore, be granted.” While
the dissent correctly states that we may affirm on any basis supported by the record,
we decline to do so here because doing so would require us to change the debtors’
cause of action and change the remedy from contempt to a sanction on an implied
cause of action.
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CONCLUSION
For the foregoing reasons, the award of sanctions based on contempt for
violation of the discharge injunction is reversed.
______________________________
SALADINO, Bankruptcy Judge, dissenting.
Although I agree with most of what is stated in the majority opinion, I
respectfully disagree with the majority’s conclusion. I believe the majority has
characterized the underlying motion and the bankruptcy court’s order too narrowly.
The majority states that the motion sought contempt and sanctions for “violating the
discharge injunction” and that the bankruptcy court found the division “had violated
the discharge injunction.” While those are accurate statements in isolation, the
underlying motion and the bankruptcy court order reveal much more – enough, I
believe, to hold that the bankruptcy court’s award of attorney fees was not an abuse
of discretion and should be affirmed.
Specifically, the underlying motion by the debtors asks that the division be
held in contempt for trying to collect debts “that have been paid through the chapter
13 plan.” After a hearing, the bankruptcy court issued its order which found that the
debtor’s “prepetition obligation to the Family Support Division . . . is fully paid; He
owes no prepetition or pre-discharge debt (nondischargeable or otherwise) to the
Family Support Division and/or Mary Spencer.” The bankruptcy court then held the
division in contempt and awarded attorney fees as a sanction.
Granted, the bankruptcy court did specifically find that the division willfully
violated the discharge injunction, which the majority noted does not apply to debts
that are excepted from discharge by operation of § 1328(a)(2). However, the
majority refused to consider the debtors’ argument that the division could be
sanctioned for abuse of the bankruptcy process–asserting that it was raised for the
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first time on appeal. I believe that is incorrect. The bankruptcy court clearly
expressed its position that it was sanctioning the division because the debt it was
trying to collect – dischargeable or not – was fully paid. The bankruptcy court even
included a citation to Walton v. LaBarge (In re Clark), 223 F.3d 859, 864 (8th Cir.
2000), an Eighth Circuit case holding that § 105 of the Code gives bankruptcy courts
broad authority to issue sanctions for abuse of the bankruptcy process. So, the
bankruptcy court’s decision was, at its core, much more than a finding that the
division violated the discharge injunction.
We recently said:
Bankruptcy Code § 105(a) provides a bankruptcy court
with authority to “issue any order, process, or judgment
that is necessary or appropriate to carry out the provisions
of” the Bankruptcy Code, and allows the court to “tak[e]
action or mak[e] any determination necessary or
appropriate to . . . prevent an abuse of process.” 11 U.S.C.
§ 105(a). And, a bankruptcy court “may also possess
‘inherent power . . . to sanction “abusive litigation
practices.” ’ ” Law v. Siegel, ___ U.S. ___, 134 S. Ct.
1188, [1191,] 188 L. Ed. 2d 146, 2014 WL 813702, at *5
(2014) (citing Marrama v. Citizens Bank of Mass., 549
U.S. 365, 375-76, 127 S. Ct. 1105, 166 L. Ed. 2d 956
(2007)) (quotation marks omitted).”
Needler v. Casamatta (In re Miller Automotive Group, Inc.), 536 B.R. 828, 835
(B.A.P. 8th Cir. 2015) (quoting Young v. Young (In re Young), 507 B.R. 286, 291-
92 (B.A.P. 8th Cir. 2014)).
Semantics aside, the bankruptcy court ordered the division to reimburse the
debtors for attorney fees spent defending the division’s attempts to collect a debt that
had been determined in a contested matter and paid under the Chapter 13 plan.
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Clearly, the bankruptcy court had the authority under § 105 and the inherent power
to issue such a sanction. Referencing the discharge injunction may have been
incorrect; sanctioning a creditor trying to collect a debt that had been paid in full was
not. Accordingly, I do not believe the bankruptcy court’s order was an abuse of
discretion. I would affirm. 1
1
The Panel may affirm on any basis supported by the record. Kaler v. Charles (In
re Charles), 474 B.R. 680, 687 (B.A.P. 8th Cir. 2012).
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