By consent, a chapter 11 plan can discharge an individual’s nondischargeable debt, even a matrimonial debt that is excepted from discharge under Section 523(a)(15).
The October 29 opinion by Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., demonstrates that matrimonial disputes never go away, even when the contending spouses engraft a “global settlement” onto a confirmed chapter 11 plan.
A couple emigrated from Romania and evidently amassed considerable properties and businesses in both the U.S. and Romania. However, they divorced after 35 years of marriage.
After warring in matrimonial courts in both California and Romania, they entered into a marital settlement agreement, or MSA, which became part of their California divorce judgment. The MSA parceled out their considerable assets and obliged the wife to make a $150,000 equalization payment to her husband.
Years later, the wife filed an individual chapter 11 petition because health care properties she owned outright under the MSA were having financial trouble. In the chapter 11 case, the couple squabbled over the equalization payment, because the bankrupt wife believed she had offsets.
Naturally, the husband-creditor asserted that the $150,000 equalization payment was nondischargeable under Section 523(a)(15). That provision excepts a debt from discharge that was incurred “in connection with a . . . divorce decree . . . .” The debtor-wife principally challenged the amount of the debt, based on her offsets.
The couple reached a “global settlement” engrafted into a chapter 11 plan that the court ultimately confirmed. The plan put the husband into a class of his own. On account of his $150,000 claim, the plan provided that the husband would receive a “one-time lump sum payment of $45,000 . . . . This claim satisfies the [husband’s] claim in full.”
The wife immediately paid the $45,000 after confirmation, as the plan required.
While the debtor was making payments under her five-year plan, the husband petitioned the state court to compel her to pay the remaining $105,000. After the wife completed her plan payments, she filed a motion for entry of discharge. The husband initiated an adversary proceeding to declare that the $105,000 debt was not discharged under Section 523(a)(15).
Judge Klein ruled in favor of the debtor-wife, holding that the settlement contained in the plan “operated as an accord and satisfaction that extinguished the [MSA] obligation as a matter of state law, thereby leaving zero to eliminate by virtue of the bankruptcy discharge.”
Judge Klein said that the MSA was a contract controlled by California law. “Like any other contract,” he said, an MSA “may be amended by agreement.” He proceeded to analyze law on accord, novation and satisfaction under state law and, more broadly, under the Restatement (Second) of Contracts. He concluded that the plan operated as an accord and satisfaction.
The husband contended that parties may not override Section 523(a)(15). Judge Klein responded by saying that chapter 11 can be used “as a vehicle contractually to modify otherwise nondischageable debt.” He said, “Nothing is remarkable about an agreement compromising nondischargeable debt.” Likewise, he said, there is nothing “untoward about including a settlement in a chapter 11 plan.”
The husband also relied on a provision in the plan saying that nondischargeable debts were not discharged. Judge Klein dispatched the argument by saying that the specific provisions in the plan overrode the general provision.
So, the questions remains: Would the $105,000 debt have been discharged if the wife had not completed her plan payments or did not receive a discharge?
Judge Klein answered the question by saying that the $45,000 payment by the wife had “extinguished the debt as a matter of nonbankruptcy law, leaving nothing to be discharged by the bankruptcy discharge.”
By consent, a chapter 11 plan can discharge an individual’s nondischargeable debt, even a matrimonial debt that is excepted from discharge under Section 523(a)(15).
The October 29 opinion by Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., demonstrates that matrimonial disputes never go away, even when the contending spouses engraft a “global settlement” onto a confirmed chapter 11 plan.
A couple emigrated from Romania and evidently amassed considerable properties and businesses in both the U.S. and Romania. However, they divorced after 35 years of marriage.
After warring in matrimonial courts in both California and Romania, they entered into a marital settlement agreement, or MSA, which became part of their California divorce judgment. The MSA parceled out their considerable assets and obliged the wife to make a $150,000 equalization payment to her husband.
Years later, the wife filed an individual chapter 11 petition because health care properties she owned outright under the MSA were having financial trouble. In the chapter 11 case, the couple squabbled over the equalization payment, because the bankrupt wife believed she had offsets.