State Ex Rel. Rough v. District Court of Eighth Judicial District

NO. 84-443
IN THE SUPREME COURT OF THE STATE OF MONTANA
1985
STATE OF MONTANA, ex rel., JOSEPH
DUANE ROUGH,
Relator,
THE DISTRICT COUFT OF THE EIGHTH
JUDICIAL DISTRICT, et. al.,
Respondents.
ORIGINAL PROCEEDING:
COUNSEL OF RECORD:
For Relator:
LaRue Smith, Great Falls, Montana
For Respondent:
Clary & Clary, Great Falls, Montana
Submitted on Briefs: July 11, 1985
Decided: December 5, 1985
Filed: DEC-51985
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Clerk
Mr. Justice Fred J. Weber delivered the Opinion of the Court.
Relator, Joseph Duane Rough, petitioned this Court to
review by writ of certiorari an order of the Cascade County
District Court holding him in contempt. We reverse and
remand.
The issues on appeal are:
1. Did the District Court have subject matter
jurisdiction to enforce an obligation allegedly discharged by
the United States Bankruptcy Court?
2. Did the District Court err in concluding that the
credit union debt was excepted from discharge?
In 1977, Joseph Rough married Nancy Rough. In July
1982, they co-signed a promissory note for $2,394.20 to the
Malmstrom Federal Credit Union. Nancy Rough also signed a
separate guarantee agreement.
On December 30, 1982, Nancy and Joseph Rough were
divorced. The District Court incorporated into the
dissolution decree the parties' property division and support
agreement. Under the decree, Joseph Rough contributed
$250.00 per month child support but no maintenance. In
addition, he was to pay the debt owed to Malmstrom Federal
Credit Union.
In July 1983, Joseph Rough filed a petition for
bankruptcy. He listed Malmstrom Federal Credit Union as an
unsecured creditor. Nancy Rough was not listed as a
creditor, even though she was a co-debtor and guarantor on
the debt. On November 16, 1-983, Joseph Rough received a
general discharge of his debts by order of the United States
Bankruptcy Court for the District of Montana. Shortly
thereafter, First Liberty Federal Credit Union, successor in
interest to Malmstrom Federal Credit Union, commenced a
collection suit against Nancy Rough in Justice Court.
Nancy Rough moved the District Court to enforce the
terms of the dissolution decree and require Joseph Rough to
make appropriate arrangements to release her from any
obligation due and owing to the credit union. Following a
hearing on the motion, the District Court conclud.ed:
That the bankruptcy discharged the Respondent of
his own obligation to pay the Credit Union, but did
not discharge his obligation under the Decree of
Dissolution to pay the indebtedness due the Credit
Union for which the Petitioner was held liable.
That by his failure to pay the Malmstrom Federal
Credit Union obligation, the Respondent is in
contempt of the Court's Decree of Dissolution and
the Agreement between the parties.
The court held Joseph Fough in contempt but stayed the
iudgrnent, contingent on satisfactory arrangements being made
to pay the credit union and Nancy Rough's attorney's fees.
Upon Joseph Rough's failure to make satisfactory
arrangements, the District Court ordered him to serve 5 days
in jail and execute an allotment authorizing $250 per pay
period to Nancy Rough in order that she might pay the debt
owed the credit union, attorney's fees, and interest. The
order stated that the jail term was suspended for ten days
and that if Joseph Rough executed the allotment, the sentence
would be suspended.
Joseph Rough filed a. petition for writ of certiorari
asking this Court to review the contempt order and money
judgment. The petition was granted and this Court stayed
further contempt proceedings.
Did the District Court have subject matter jurisdiction
to enforce an obligation allegedly discharged by the United
States Bankruptcy Court?
Nancy Rough contends that the District Court has
jurisdiction to determine whether obligations under a
dissolution decree are enforceable and whether a debt is
excepted from discharge because it was neither listed nor
scheduled.
Joseph Rough argues that a discharge in bankruptcy wipes
clean a.11 previous debts. We disagree. Under Title 11 U.S.C.
5 523, some debts flow through the bankruptcy unaffected even
though the debtor is granted a general discharge. Title 11
U.S.C. 5 523 (a)(3) and (5) specifically except from discharge
unlisted creditors and debts in the nature of alimony,
maintenance or support.
The Bankruptcy Court has concurrent but not exclusive
jurisdiction to determine whether debts are excepted from
discharge under S 523(a) (3) and (5).
[Dlebts that fall within section 523(a) (3) are of
the type which the bankruptcy court has concurrent
but not exclusive jurisdiction. Should a creditor
bring suit in a court other than the bankruptcy
court on a debt which he contends is excepted from
discharge under section 523(a) (3), the local court
would determine the question of dischargeability.
Section 523 (a)(5) does not fa]-1 within the terms of
section 523 (c) which discharges debts specified in
section 523 (a)(2), (4) or (6) unless the creditor
requests the court for a hearing to determine
dischargeability of such debts. In effect, the
determination of whether debts within subsection
(a)(2), (4) or (6) are dischargeable under section
523 (a) falls within the exclusive jurisdiction of
the bankruptcy court, and only as a matter of
concurrent jurisdiction with respect to other types
of debts. ..
Thus, debts falling within other clauses of section
523 (a) may have the issue of dischargeability tried
in courts other than those of bankruptcy unless a
complaint is filed by either the creditor or the
debtor in the bankruptcy court.
3 Collier - Bankruptcy
on ¶4[ 523.13[9] & 523.15[6] (15th ed.
1985). See also In re Mattern (Rankr. S.D. Ala. 1983), 33
B.R. 566 and Loyko v. Loyko (N.J. Super. Ct. App. Div. 1985),
We hold the District Court had jurisdiction to determine
whether the debt was excepted from discharge.
Did the District Court err in concluding that the credit
union debt was excepted from discharge?
In substance, the court ruled that the obligation under
the dissolution decree was not dischargeable. Under Title I1
U.S.C. S 523 ( a ) (5), only debts constituting alimony,
maintenance or support are excepted from discharge.
An indebtedness for a former spouse for alimony,
maintenance, or support of the spouse or the
couple's children which is memorialized in the
divorce decree is not discha.rgeable in bankruptcy.
11 U.S.C. S 523 (a)( 5 ) . An indebtedness in the
divorce decree that merely divides the marital
property, however, is dischargeable.
Matter of Coil (7th Cir. 1982), 680 F.2d 1170, 1171.
"The issue of when an assumption of joint debts is in
'the nature of alimony, maintenance or support' as opposed to
a division of communal property is to be determined by
federal bankruptcy law [and not state law] .'I In re Calhoun
(6th Cir. 1983), 715 F.2d 1103, 1107. The District Court
made no findings of fact or conclusions of law with respect
to the nature of the debt, and for that reason we remand this
issue for further proceedings.
The mere fact a debt is labeled a property division or
support payment is not controlling. A "well-established
principle of bankruptcy law [is] that dischargeability must
be determined by the substance of the liability rather than
its form." In re Spong (2d Cir. 1981), 661 F.2d 6, 9.
Although various tests are used by different circuits,
we adopt the view of the Ninth Circuit:
Because of the federal interests
reflected in the Bankruptcy Act, the
courts look to federal law to determine
whether an obligation is "actually in the
nature of ... support" and is therefore
nondischargeable . . . "[Rlegardless of
how a state may choose to define
'alimony', a ...
court, for purposes of
applying the federal bankruptcy laws, is
not bound to a label that a state affixes
to an award, and that, consistent with
the objectives of federal bankruptcy
policy, the substance of the award must
govern. "
In determining whether an obligation is
intended for support of a former spouse,
the court must look beyond the language
of the decree to the intent of the
parties and to the substance of the
obligation ...
The courts that have
considered this issue have used several
factors to aid in the characterization of
the debt. If an agreement fails to
provide explicitly for spousal support, a
court may presume that a so-called
"property settlement" is intended for
support when the circumstances of the
case indicate that the recipient spouse
needs support ...Factors indicating
that support is necessary include the
presence of minor children and an
imbalance in the relative income of the
parties ... Similarly, if an obligation
terminates on the death or remarriage of
the recipient spouse, a court may be
inclined to classify the agreement as one
for support ... A property settlement
would not be affected by the personal
circumstances of the recipient spouse;
thus, a change in those circumstances
would not affect a true property
settlement, although it would affect the
need for support. The court will look
also to nature and duration of the
obligation to determine whether it is
intended as support. Support payments
tend to mirror the recipient spouse's
need for support. Thus, such payments
are generally made directly to the
recipient spouse and are paid in
installments over a substantial period of
time .
Shaver v. Shaver (9th Cir. 1984), 736 F.2d 1314, 1316-17
(citations omitted) .
Section 523 (a) (3) provides that debts neither listed nor
scheduled are excepted from discharge unless the creditor had
notice or actual knowledge of the case to permit timeI-y
filing of a proof of claim. We note that co-debtors and
guarantors are classified as creditors and entitled to
notice. - In re Warner (Bankr. D. Utah 1 9 8 0 ) ~5 B.R. 434;
See
In re Gilbert (Bankr. N.D. Ohio 1984), 38 B.R. 948; In re
Barnett (Bankr. S.D. N.Y. 1984), 42 B.R. 254. We conclude
there is an unresolved fact issue as to whether Nancy Rough
ha.d notice or actual knowledge of the bankruptcy. -3
See
Collier - Bankruptcy 9 523.13 [5][c] (15th ed.
on 1985). We
remand this issue to the District Court.
We reverse the order of contempt and remand for the
District Court to determine whether the debt was in the
nature of alimony, maintenance or support and, if not,
whether Nancy Rough had notice or actual knowledge of the
case to permit timely filing of a proof of claim.
We Concur: