Marriage of Vaughn ( 2018 )

Filed 11/27/18
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
In re Marriage of PHILIP and 2d Civil No. B286871
CHARLENE YU STEELE (Super. Ct. No. 16FL-00726)
VAUGHN. (Santa Barbara County)
PHILIP VAUGHN,
Appellant,
v.
CHARLENE YU STEELE
VAUGHN,
Respondent.
Philip Vaughn appeals from the trial court’s
postjudgment order concluding that his outstanding debt on a
loan from a family partnership—in which his ex-wife, Charlene
Yu Steele Vaughn, is a limited partner—was nondischargeable in
bankruptcy. (Code Civ. Proc., § 904.1, subd. (a)(2).) Philip1
contends the court incorrectly determined that his debt was
1 We use the parties’ first names for clarity.
exempt from discharge pursuant to section 523(a)(15) of title 11
of the United States Code.2 We hold that when the nature of a
debt is such that its discharge will directly and adversely impact
the finances of the debtor’s spouse or former spouse, it is
nondischargeable in bankruptcy, even if it is not directly payable
to the spouse. We therefore affirm.
FACTUAL AND PROCEDURAL HISTORY
In May 1995, Charlene’s parents created CJPM
Family Partnership, Ltd. Charlene’s parents are the general
partners of CJPM. They have “full, exclusive, and complete
authority and discretion in the management and control of the
business of the [p]artnership.” Charlene, her parents, and her
three siblings are limited partners of CJPM. No limited partner
is liable for the “debts, liabilities, contracts, or any other
obligations of the [p]artnership.”
Each partner has a capital account in the
partnership. Charlene’s account contains 20 percent of the
partnership’s total capital. The amount of money distributed to a
partner, the partner’s share of partnership losses, and the
amount of the partner’s liabilities that are assumed by the
partnership all decrease a partner’s capital account.
Philip and Charlene married in June 1995. Ten
years later, CJPM made three loans to Philip totaling $150,000.
The promissory notes name Philip as the borrower and CJPM as
the note holder. The loans were credited against Charlene’s
partnership interest. Her capital account was reduced by
$150,000.
2 All
undesignated statutory references are to title 11 of the
United States Code.
2
In 2009, Philip executed a new promissory note for
$150,000, restating the total amount he had borrowed from
CJPM. The note provided for 8 percent annual interest. Interest
began to accrue from the date of the notes that were executed in
2005.
Philip did not repay his debt to CJPM. He and
Charlene divorced in 2011. Section 9.3 of their stipulated
dissolution judgment awarded Charlene “[a]ll rights, title[,] and
interest to any community interest that may exist in [CJPM].”
Section 10.1 assigned to Philip, as his separate obligation, his
debt to CJPM. It also required Philip to “indemnify and hold
[Charlene] harmless from” that debt.
Section 11.0 of the judgment is a separate warranty
clause:
[E]ach party has released the other from any and all
liabilities, debts[,] or obligations that have been or
will be incurred[,] and each party shall indemnify
and hold the other harmless therefrom. If any claim,
action[,] or proceeding hereafter shall be brought
seeking to hold the other party liable on account of
any such debt, liability[,] or obligation, the party who
incurred such debt, liability[,] or obligation will[,] at
his or her sole expense, defend the other party
against any such claim or demand or threat thereof
....
Later that year, Philip filed for Chapter 7
bankruptcy. All of his debts, including his loan from CJPM, were
discharged.
3
In 2015, Charlene moved to reopen bankruptcy
proceedings to obtain a ruling that Philip’s debt to CJPM was
nondischargeable. The bankruptcy court declined to reopen the
case. It did not decide whether the debt was dischargeable.
Charlene moved to recover Philip’s CJPM debt in the
trial court. Charlene testified that the money loaned to Philip
came from her share of CJPM. She said Philip acknowledged
that he knew the loan came from her share. She also said she is
responsible for the loan to Philip, as implied by the CJPM
partnership agreement. Her father confirmed this. Charlene’s
capital account in the partnership was reduced by the amount of
the unpaid loan.
The trial court determined that Philip’s CJPM debt
was nondischargeable. It concluded that the debt did not have to
be directly payable to Charlene to fall under the exemption set
forth in section 523(a)(15). The court calculated that Philip owes
Charlene $345,963, representing $150,000 principal plus accrued
interest.
DISCUSSION
A Chapter 7 bankruptcy generally discharges all of
an individual’s debts, but there are exceptions. (In re Hicks
(Bankr. D.Mass. 2005) 331 B.R. 18, 22; see § 727(a), (b).) Debts
excepted from discharge are limited to those “plainly expressed”
in federal bankruptcy statutes. (Bullock v. BankChampaign,
N.A. (2013) 569 U.S. 267, 275-276.) They include debts for
“domestic support obligation[s]” (§ 523(a)(5)) and those “to a
spouse, former spouse, or child of the debtor and not of the kind
described in paragraph (5) that [are] incurred by the debtor in
the course of a divorce or separation or in connection with a
separation agreement, divorce decree, or other order of a court of
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record” (§ 523(a)(15)). State courts have concurrent jurisdiction
to decide whether a debt is dischargeable under these provisions.
(In re Doll (Bankr. N.D.Ohio 2018) 585 B.R. 446, 461, fn. 7; see 28
U.S.C. § 1334(b).)
Whether Philip’s debt to CJPM is nondischargeable
presents a mixed question of law and fact. (Miller v. United
States (9th Cir. 2004) 363 F.3d 999, 1003-1004.) The
interpretation of section 523(a)(15) is a question of law for our
independent review. (Western States Petroleum Assn. v. Board of
Equalization (2013) 57 Cal.4th 401, 415.) Our goal is to give
effect to Congress’s intent. (Harris v. City of Santa Monica (2013)
56 Cal.4th 203, 215.) We first examine the words of the statute,
giving them their plain, commonsense meaning. (Bruns v. E-
Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724.) We follow
the statute’s plain meaning unless doing so would lead to absurd
results Congress did not intend. (Ibid.)
If section 523(a)(15)’s meaning is unclear, we
examine its legislative history to determine Congress’s intent.
(Pacific Palisades Bowl Mobile Estates, LLC v. City of Los Angeles
(2012) 55 Cal.4th 783, 803.) We strive to harmonize provisions
relating to the same subject matter (Lakin v. Watkins Associated
Industries (1993) 6 Cal.4th 644, 659), bearing in mind that
“[w]here a statute is framed in language of an earlier enactment
on the same or an analogous subject, and that enactment has
been judicially construed, [Congress] is presumed to have
adopted that” interpretation in the more recently enacted statute
(People v. Harrison (1989) 48 Cal.3d 321, 329 (Harrison)). We
also “consider the impact of an interpretation on public policy, for
‘[w]here uncertainty exists consideration should be given to the
5
consequences that will flow from a particular interpretation.’
[Citation.]” (Mejia v. Reed (2003) 31 Cal.4th 657, 663.)
We review the trial court’s resolution of disputed
facts and inferences for substantial evidence. (HLC Properties,
Ltd. v. Superior Court (2005) 35 Cal.4th 54, 60.)
Philip’s debt to CJPM is a debt to a former spouse
Philip first contends section 523(a)(15)’s meaning is
“clear and unambiguous,” and requires that his debt be payable
directly to Charlene to be nondischargeable. (In re Reinhardt
(Bankr. M.D.Fla. 2012) 478 B.R. 455, 457 (Reinhardt); see also In
re Gunness (Bankr. 9th Cir. 2014) 505 B.R. 1, 7-8 (Gunness)
[section 523(a)(15) should be interpreted narrowly to afford
debtors a “fresh start”].) But most courts have determined that
section 523(a)(15)’s language is ambiguous, and should be
interpreted “broadly and liberally . . . to encourage payment of
familial obligations rather than to give a debtor a fresh financial
start.” (In re Reynolds (Bankr. M.D.Fla. 2016) 546 B.R. 232, 237;
see also id. at p. 236, fn. 19 [compiling cases].) We agree with the
latter line of cases.
Section 523(a)(15)’s legislative history supports a
broad interpretation. For over a century, Congress has sought to
protect a debtor’s spouse and children in bankruptcy proceedings.
(Beale v. Kurtz (Bankr. S.D.Ind. 2008) 381 B.R. 727, 731; see
Wetmore v. Markoe (1904) 196 U.S. 68, 77 [bankruptcy law
should not be “an instrument to deprive [a] dependent [spouse]
and children of the support and maintenance due [to] them”].) It
enacted section 523(a)(15) in 1994 because it recognized “that the
economic protection of dependent spouses and children under
state law [could] no longer [be] accomplished solely through the
traditional mechanism of support and alimony payments.” (In re
6
Golio (Bankr. E.D.N.Y. 2008) 393 B.R. 56, 61.) The enactment of
this section evidenced Congress’s “intent that ‘a debtor should not
use the protection of a bankruptcy filing in order to avoid
legitimate marital and child support obligations.’ [Citation.]” (In
re Proyect (Bankr. N.D.Ga. 2013) 503 B.R. 765, 773.)
As enacted, section 523(a)(15) worked in conjunction
with section 523(a)(5). (In re Cordia (Bankr. N.D.Ohio 2001) 280
B.R. 138, 146.) Former section 523(a)(5) exempted from
discharge any debt “to a spouse, former spouse, or child of the
debtor, for alimony to, maintenance for, or support of such spouse
or child, in connection with a separation agreement [or] divorce
decree.” Former section 523(a)(15) exempted from discharge any
debt, other than one described in section 523(a)(5), “that [was]
incurred by the debtor in the course of a divorce or separation.”
Section 523(a)(15) thus enlarged the scope of nondischargeable
debts to any debt incurred in the course of a divorce or
separation, unless the debtor was unable to repay the debt or the
benefit of discharging the debt outweighed the benefit to the
spouse or child. Together, sections 523(a)(5) and 523(a)(15)
“demonstrate[d] a policy against discharging . . . essentially any
debt arising out of the demise of a marital relationship.” (In re
Nugent (Bankr. S.D.Tex. 2012) 484 B.R. 671, 684.)
In 2005, Congress enacted the Bankruptcy Abuse
Protection and Consumer Protection Act (BAPCPA). (In re
Wodark (Bankr. 10th Cir. 2010) 425 B.R. 834, 837 (Wodark).)
“One of Congress’s overarching themes in enacting BAPCPA was
to redefine and reinforce the ability of [nondebtor] former spouses
to recover both support and property settlement obligations from
debtors in bankruptcy.” (Id. at p. 838.) It sought to accomplish
this goal by eliminating the provisions of section 523(a)(15) that
7
allowed a debtor to discharge a debt if the debtor was unable to
repay it or the benefit to the debtor outweighed that to the
nondebtor spouse or child. (Gunness, supra, 505 B.R. at p. 5.)
The elimination of these provisions shows Congress’s intent to
“broaden the scope of nondischargeable marital debt by
abandoning a need-driven analysis of the dischargeability of non-
support marital debt.” (In re Taylor (Bankr. 10th Cir. 2012) 478
B.R. 419, 428.)
BAPCPA also amended sections 523(a)(5) and
523(a)(15). Section 523(a)(5) now exempts from discharge any
debt “for a domestic support obligation.” Section 523(a)(15) now
exempts from discharge any debt “to a spouse, former spouse, or
child of the debtor and not of the kind described in [section
523(a)(5)] that is incurred by the debtor in the course of a divorce
or separation.”
The elimination of the words “to a spouse, former
spouse, or child” from section 523(a)(5) necessitated their
addition to section 523(a)(15), given the latter’s reference to the
former. (Wodark, supra, 425 B.R. at p. 838.) Thus, rather than
narrowing the scope of debts exempt from discharge pursuant to
section 523(a)(15), as Philip maintains, BAPCPA restated them.
(Ibid.) It did not add a “direct pay” requirement. (In re Francis
(Bankr. 9th Cir. 2014) 505 B.R. 914, 919-920 (Francis); see also
In re Prensky (Bankr. D.N.J. 2009) 416 B.R. 406, 410 [BAPCPA
was “intended to increase the scope of the discharge exception,”
not limit its protection to spouses, former spouses, and children].)
Prior judicial interpretations of section 523(a)(5)
reinforce our conclusion. Before BAPCPA’s enactment in 2005,
the phrase “to a spouse, former spouse, or child” was part of
section 523(a)(5). Most courts broadly interpreted that phrase “to
8
provide an exception from discharge for certain debts to third
parties . . . when the debts were incurred . . . in furtherance of
domestic support obligations.” (In re Langman (Bankr. D.N.J.
2012) 465 B.R. 395, 406; see also In re Chang (9th Cir. 1998) 163
F.3d 1138, 1140-1142 [collecting cases].) What mattered, the
courts said, was “the nature of the debt rather than the identity
of the payee” (In re Miller (10th Cir. 1995) 55 F.3d 1487, 1490)—
i.e., whether “discharge of the debt would have adversely
impacted the finances” of the debtor’s spouse, former spouse, or
child (Gunness, supra, 505 B.R. at p. 6).
We presume Congress was aware of and adopted this
interpretation when it enacted BAPCPA. (Harrison, supra, 48
Cal.3d at p. 329.) It would be “strange indeed” if Congress
intended a different statutory interpretation when it moved the
phrase “to a spouse, former spouse, or child” to section 523(a)(15).
(In re Notary (Bankr. D.Colo. 2016) 547 B.R. 411, 421-422.) We
accordingly hold that a debt is nondischargeable pursuant to
section 523(a)(15) if the nature of the debt is such that its
discharge would directly and adversely impact the finances of the
debtor’s spouse or former spouse. The identity of the payee is not
determinative.
Here, the trial court correctly determined that
Philip’s debt to CJPM is a debt to a former spouse. Philip’s loan
came from Charlene’s share of CJPM. The debt was credited
against her partnership interest, and her capital account was
reduced accordingly. Philip’s failure to repay the debt adversely
affects Charlene’s finances. The debt is therefore “to a former
spouse” pursuant to section 523(a)(15).
Philip’s concern that our interpretation of section
523(a)(15) will lead to inequitable results is misplaced. In
9
Reinhardt, supra, 478 B.R. 455, 457, on which Philip relies, the
bankruptcy court refused to deem a debtor husband’s mortgage
and credit card debts nondischargeable because doing so could be
inequitable: The nondebtor wife could discharge her obligations
on those debts in a future bankruptcy case, but the husband
would remain liable based on the court’s nondischargeability
finding. Here, in contrast, there is no potential financial burden
Charlene can stave off in a future proceeding; she was already
damaged by the reduction in her CJPM capital account.
Reinhardt is inapposite.
Philip’s promise to repay his debt was incurred in connection with
a divorce decree
Philip next contends only his promise to indemnify
and hold Charlene harmless for his debt to CJPM—and not his
promise to repay that debt—was incorporated into the dissolution
judgment and is thus nondischargeable. (In re Brown (Bankr.
S.D.Ga. 2013) 488 B.R. 810, 813.) We disagree.
Section 10.1 of the dissolution judgment awarded to
Philip, as his separate debt, the CJPM loan. The promissory note
on that loan requires Philip to repay the $150,000 he borrowed.
Philip’s promise to repay his debt to CJPM was incorporated, by
reference, into the dissolution judgment. (Flynn v. Flynn (1954)
42 Cal.2d 55, 59.) It was therefore incurred in connection with a
divorce decree, and is nondischargeable. (Francis, supra, 505
B.R. at pp. 916, 921-922 [debtor husband’s promise to pay debts
assigned to him in divorce was nondischargeable]; see also
Wodark, supra, 425 B.R. at pp. 838-839 [same]; In re Burckhalter
(Bankr. D.Colo. 2008) 389 B.R. 185, 190 [same].)
The warranty clause in section 11.0 of the dissolution
judgment also includes Philip’s promise to repay the CJPM debt.
10
To “indemnify” a person is to “save [them] from a legal
consequence of the conduct of one of the parties, or of some other
person.” (Civ. Code, § 2772, italics added.) It is “the obligation
resting on one party to make good a loss or damage another party
has incurred.” (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13
Cal.3d 622, 628 (Roosmoor).)
While indemnity usually relates to third party
claims, it may also refer to direct liability. (Zalkind v. Ceradyne,
Inc. (2011) 194 Cal.App.4th 1010, 1024 (Zalkind).) Whether an
indemnity agreement covers direct liability, third-party liability,
or both, is a question of contract interpretation (Rossmoor, supra,
13 Cal.3d at p. 633) for our independent review (Argonaut Ins.
Co. v. Transport Indem. Co. (1972) 6 Cal.3d 496, 502). Our goal
is to determine the intent of the parties when they included the
indemnification provision in the dissolution judgment. (Zalkind,
at p. 1025.)
In section 11.0 of the dissolution judgment, Philip
released Charlene “from any and all liabilities, debts[,] or
obligations” that he had incurred, and “indemnif[ied] and [held
her] harmless therefrom.” (Italics added.) He also agreed to
defend her against “any claim, action[,] or proceeding . . . seeking
to hold [her] liable on account of any such debt, liability[,] or
obligation.” (Italics added.) The use of such broad language
demonstrates the parties’ intent that the warranty clause refer to
both direct and third-party liability. (Hot Rods, LLC v. Northrop
Grumman Systems Corp. (2015) 242 Cal.App.4th 1166, 1181.)
Had they instead intended to narrow the clause to only cover
third-party claims, they could have done so expressly. (Zalkind,
supra, 194 Cal.App.4th at p. 1026.) Because they did not, the
warranty clause requires Philip to indemnify Charlene for the
11
losses she suffered when he failed to pay his CJPM debt. That
promise is nondischargeable.
The statute of limitations does not bar Charlene’s action
Philip next contends that, even if his CJPM debt was
nondischargeable, he cannot be forced to pay it because the
statute of limitations has run. (See Code Civ. Proc., § 337 [four-
year statute of limitations to enforce obligations in a promissory
note].) He bases his contention on the assumption that CJPM
would have to bring a claim against Charlene to recover Philip’s
unpaid debt, and Charlene would then have to bring a claim
against him to recover her damages. But Charlene’s right of
recovery is based on the dissolution judgment, not an action to
enforce the promissory note. The statute of limitations for the
enforcement of a dissolution judgment is 10 years. (Code Civ.
Proc., § 337.5, subd. (b); see In re Marriage of Hanley (1988) 199
Cal.App.3d 1109, 1121.)
The trial court properly calculated the amount owed
Finally, Philip contends Charlene is entitled to
recover, at most, $150,000 because her capital account has not
been charged interest. He cites no evidence in support of this
contention. (People v. Garza (2005) 35 Cal.4th 866, 881 [party
attacking judgment must affirmatively demonstrate error on
appeal].) It is forfeited. (Fernandes v. Singh (2017) 16
Cal.App.5th 932, 942-943.)
Even if it were not, Charlene seeks to enforce the
dissolution judgment. The judgment incorporates Philip’s
promissory note. The note requires Philip to repay his CJPM
loan at 8 percent annual interest. The trial court’s calculation
was correct.
12
DISPOSITION
The judgment is affirmed. Charlene Yu Steele
Vaughn shall recover costs on appeal.
CERTIFIED FOR PUBLICATION.
TANGEMAN, J.
We concur:
YEGAN, Acting P. J.
PERREN, J.
13
Pauline Maxwell, Judge
Superior Court County of Santa Barbara
______________________________
Law Office of Charles M. Oxton, Charles M. Oxton;
Ferguson Case Orr Paterson, Wendy C. Lascher and John A.
Hribar, for Appellant.
Jarrette & Walmsley, Robert R. Walmsley and
Marlea F. Jarrette, for Respondent.