BAPCPA AND ITS IMPACT

ON OUR FAMILY LAW PRACTICES

NORTH CAROLINA FAMILY LAW SPECIALISTS’ MEETING

JULY 17-18, 2009

RALEIGH, NC

PREPARED AND PRESENTED BY:

Robert A. Ponton, Jr. rponton@wyrick.com Samuel T. Wyrick, III swyrick@wyrick.com WYRICK ROBBINS YATES & PONTON LLP 4101 Lake Boone Trail, Suite 300 P.O. Drawer 17803 Raleigh, North Carolina 27619 919-781-4000

[This article was originally authored by

Robert A. Ponton, Jr., and John T. Logan (Chapter 13 Trustee, EDNC).

It has been updated for this presentation by

Robert A. Ponton, Jr. and Samuel T. Wyrick, III.]

The "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,"

Public Law 109-8, hereinafter “the 2005 Act,” became effective on Oct. 17, 2005. The

legislation, representing the largest overhaul of the Bankruptcy Code since its enactment

in 1978, contains numerous amendments significant to family lawyers. The 2005 Act

makes its primary purpose very clear. In response to increased bankruptcy filings and

substantial creditor losses, the 2005 Act is designed to eliminate perceived loopholes in

the former Bankruptcy Code which allowed "bankruptcy abuse." Many of the provisions

of the 2005 Act, including means testing (which compares the debtor's income to the

state's median income to determine if the debtor may file Chapter 7), are intended to

encourage the repayment of debts by making it more difficult for debtors to discharge

debts through Chapter 7 bankruptcy and encouraging Chapter 13 bankruptcy filings.

However, some of the most positive changes effected by the 2005 Act are those dealing

with Domestic Support Obligations [hereinafter “DSO,” a new term of art in the

Bankruptcy Code, defined in 11 U.S.C. §101(14A)]. This article addresses issues

impacting family lawyers: namely, the automatic stay in bankruptcy; Chapter 7

bankruptcy; Chapter 13 bankruptcy and the impact of a bankruptcy filing on domestic

claims.

I. Domestic Support Obligations

Section 101(14A) of the 2005 Act defines a DSO as a debt owed to a spouse, a

former spouse, or a child of the debtor or such child’s parent, legal guardian, responsible

relative, or governmental unit, which obligations are in the nature of alimony,

maintenance, or support (including assistance provided by a governmental unit) and not

assigned to a nongovernmental entity, unless assigned voluntarily for the purpose of

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collecting a debt. The 2005 Act removed all qualifications on who is owed the spousal

and child support.

II. Notice Required to Holder of DSO and to State Child Support Enforcement

Agency When There is a Bankruptcy Filing

Under §704(a)(10) of the 2005 Act in a Chapter 7 liquidation, when there is a

claim for a DSO against the debtor, the Trustee is under an affirmative obligation to

provide written notice to the holder of the claim, and of the right of the holder to use the

services of the applicable state child support enforcement agency for assistance in

collecting child support during and after the case. The Trustee is also under an

affirmative duty to provide notice of the obligation directly to the appropriate state child

support enforcement agency, along with the name, address and telephone number of the

holder of the claim. 2005 Act, §704(c)(1).

Comparable duties apply to the Trustee under a Chapter 13 filing. 2005 Act §

1302(b)(6) and (d).

Sample DSO notices for Trustees’ use, provided by the U.S. Trustee Program of

the U.S. Department of Justice are included within Attachment 1.

III. The Automatic Stay in Bankruptcy

When Does the Automatic Stay Begin, and When Does it End?

Section 362 is the automatic stay provision of the Bankruptcy Code. The

automatic stay is effective immediately upon the debtor's bankruptcy filing, without any

additional action required by the debtor. When the creditor spouse receives notice of a

bankruptcy filing (irrespective of the chapter), such notice is also notice to the creditor

spouse that the automatic stay is in effect. Generally, the automatic stay is effective until

the debtor achieves his discharge, an order is entered by the bankruptcy court "lifting" the

automatic stay, or the bankruptcy case is dismissed. Upon discharge, the automatic stay is

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replaced by a permanent injunction that prohibits any collection of discharged debts.

(Note: Solely for convenience, this article uses the masculine pronoun. Bankruptcy issues

are gender neutral.)

What Actions of the Creditor Spouse are Prohibited by the Automatic Stay?

With specific exceptions which are discussed below, the automatic stay prohibits

the creditor spouse from either beginning or continuing any judicial action (lawsuit,

hearing, or execution) either against the debtor spouse [§§362(a)(1) and (2)] or against

property of the debtor spouse's bankruptcy estate [§§362(a)(2) and (3)].

Therefore, if your client receives notice that his spouse has filed bankruptcy, your

initial advice to your client is that his domestic case must be discontinued until your

client obtains stay relief from the Bankruptcy Court. Obtaining stay relief to allow your

domestic case to proceed in state court is very possible and is generally not expensive.

Often it may be accomplished by entry of a Consent Order with the debtor, particularly if

you are clear with debtor’s counsel that you want relief from the automatic stay only to

liquidate your client’s claim for purposes of determining the amount and nature of the

claim. The process requires filing a Motion (known as an adversary proceeding, not a

complaint, in bankruptcy) for Relief from the Automatic Stay. In the Eastern and Western

Districts of North Carolina, a motion is not required if a consent order is being tendered;

in the Middle District, the motion must be submitted to the Clerk with the consent order.

There is no filing fee required if a consent order is tendered with the motion, otherwise a

$150.00 filing fee is required. The new Act, in fact, provides for special rights for child

support creditors. Further, as discussed below, some actions can proceed without

bankruptcy court involvement.

The Automatic Stay Prohibits the Prosecution of Equitable Distribution Claims (Absent

Relief from the Automatic Stay)

There is no exemption within Section 362(b) for equitable distribution

proceedings. The 2005 Act explicitly excludes division of property proceedings from its

new exceptions to the automatic stay, at least to the extent that the marital/divisible

property is property of the bankruptcy estate [§362(b)(2)(A)(iv)] (which it will be).

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Therefore, the creditor spouse must seek relief from the automatic stay in the debtor

spouse’s case prior to:

1. Filing any lawsuit for equitable distribution; or

2. Proceeding with a filed suit for equitable distribution; or

3. Attempting to enforce any equitable distribution judgment and/or distributive

award with respect to property of the bankruptcy estate.

The Following Actions by the Creditor Spouse are Allowed in Spite of the Automatic Stay

The "non-stayed" proceedings, as contained within Section 362(b), are:

(1) the commencement or continuation of a criminal action or

proceeding against the debtor [be very careful here -- using a

criminal action, such as "worthless check" charges, as a vehicle to

collect a debt, is a stay violation];

(2) (A) the commencement or continuation of a civil action or

proceeding:

(i) for the establishment of paternity;

(ii) for the establishment or modification of an order for

DSOs [Note: For our purposes, DSOs are

obligations to pay post-separation support, alimony,

and child support (see discussion below on p. 6,

Actions to Establish or Modify Support

Obligations];

(iii) concerning child custody or visitation;

(iv) for the dissolution of a marriage [absolute divorce],

except to the extent that such proceeding seeks to

determine the division of property that is property

of the estate [Note: Equitable distribution

proceedings are stayed]; or

(v) actions regarding domestic violence;

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(B) the collection of a DSO from property that is not property

of the estate (see discussion below in Contempt Motions –

Are They Stayed or Not? p. 7);

(C) with respect to the withholding of income that is property

of the estate or property of the debtor for payment of a

DSO under a judicial or administrative order or a statute;

(D) for withholding, suspension, or restriction of a driver's

license, a professional or occupational license, or a

recreational license, under State law, as specified in Section

466(a)(16) of the Social Security Act;

(E) for reporting of overdue support owed by a parent to any

consumer reporting agency as specified in Section

466(a)(7) of the Social Security Act;

(F) for interception of a tax refund, as specified in Sections 464

and 466(a)(3) of the Social Security Act or under an

analogous State law; or

(G) for enforcement of a medical obligation, as specified under

Title IV of the Social Security Act.

Easily Understood Non-Stayed Domestic Claims

Claims for absolute divorce, paternity, custody, visitation, domestic violence,

license termination and restriction, and tax refund interception can proceed in State

Domestic Court without bankruptcy court involvement.

Actions to Establish or Modify DSO’s – Are They Stayed or Not?

As observed in Norton Bankruptcy Law and Practice 3d, §175:6, under pre-2005

§362(b)(2)(A)(ii), a spouse was required to make a motion for relief from stay and at

least a minimal showing of good cause to secure the right to pursue support relief in a

domestic relations case in a state court. There is no longer the need for formal relief from

the stay for most actions involving DSO’s.

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In In Re: Sunny Pamaswamy De Wakar 2007 WL 4353800 (Bkrtcy.E.D. Va.

2007), the question before the court was whether a Chapter 11 debtor in possession – who

was separated from his spouse, but not subject to any court or agency order, or separation

or property settlement agreement, for the payment of spousal or child support – was

required to give his spouse the special notices mandated by the Bankruptcy Code for

holders of “domestic support obligations.” (See Discussion above on p. 2, regarding the

notice required of the bankruptcy Trustee to the holder of a DSO and to the appropriate

State Child Support Enforcement Agency.)

The Court held that under the facts of this case, when no order had yet been

entered in a state court determining an amount of child or spousal support, so as to be a

“DSO,” the motion to require the debtor to give his wife and the state child support

agency the notices required under §1106©(1)(A) and (B) would be denied. The Court,

however, observed that:

The debtor’s wife is of course free, without encumbrance from the automatic stay, to bring a proceeding in state court to establish the appropriate amount of child or spousal support. §362(b)(2)(A)(ii), Bankruptcy Code. Id., (Emphasis added).

We believe that even though there is no North Carolina case on point, the

observation of the Court in the Eastern District of Virginia, quoted above, mirrors the

meaning and intent of the provisions of the 2005 Act, and can be considered reliable

authority (along with the 2005 Act itself) for bringing and maintaining a state court action

for child or spousal support without first having to secure relief from the automatic stay.

Contempt Motions – Are They Stayed or Not?

• Debtor's Earnings.

Section 362(b)(2)(C) provides that income that is "property of the bankruptcy

estate or property of the debtor" may be withheld for payment of a court ordered DSO.

Therefore, as we read the new Act, if the debtor spouse is in arrears (for example, on his

post-separation support obligation) and files bankruptcy, the automatic stay does not

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prohibit a civil contempt proceeding for so long as the civil contempt purge is limited to

“withholding [the debtor's] income for payment of a domestic support obligation under a

judicial or administrative order or a statute.” Notably, in In Re: Taylor, 2007 WL

1234932 (Bkrtcy. E.D. Va. 2007) the debtor filed a motion with the court to extend the

applicable automatic stay so as to block a motion by the debtor’s wife to allow the

continuation of a state court proceeding to monitor the debtor’s compliance of a domestic

support obligation of the debtor to her and to allow the court to take any action deemed

necessary (in “contempt”) to enforce the court’s prior domestic support order. The

reviewing court in the Eastern District of Virginia held that Ms. Taylor (the debtor’s

spouse) would be granted relief from the automatic stay so that the state court could in

fact monitor the debtor’s compliance with that court’s order and take “any action”

deemed necessary by that court to enforce its prior order.

This rationale seems persuasive, in allowing state court oversight of the debtor’s

proper payment of his income towards a DSO, although there is as yet no North Carolina

law on this issue.

• Debtor's Assets.

Section 362(b)(2)(B) provides that DSOs may also be collected from property

"that is not property of the estate," without seeking relief from the stay. Property of the

bankruptcy estate, in a broad sense, includes everything in which the debtor has an

ownership interest when he files bankruptcy. Sections 541 (applicable in Chapters 7, 11,

12, and 13), 1115 (in Chapter 11 cases) (added by the 2005 Act), and 1306 (in Chapter 13

cases) define property of the estate. If in doubt, it is safest to presume that property is

property of the estate. Under Section 522(c)(1) of the Bankruptcy Code, property

exempted [by the debtor] is not liable during or after the case for any debt of the debtor

that arose…before commencement of the case, except…a debt for…a domestic support

obligation.” (See, N.C.G.S. §1(C)-1601, et seq., for North Carolina's statute designating

exempt property) (Attachment 2). In our opinion, if within the debtor's bankruptcy

petition the debtor has claimed an equity interest in an asset as "exempt property," then

the exempt equity interest is not property of the estate and is available to purge the

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debtor's contempt for failure to comply with a court ordered support obligation without

bankruptcy court involvement. For example, if a debtor claims a $1,500 equity exemption

in his automobile, then that exempt equity is available to purge a debtor's contempt for

non-payment of his post-separation support obligation. (Note well: Exempt property is

generally not available to satisfy pre-bankruptcy filing obligations. However, it is

available to satisfy DSOs pursuant to N.C.G.S. Section1C-1601(e)(9)). Although a holder

of a DSO may be entitled to pursue exempt property for satisfaction of DSOs (to reach

the equity portion of such property) the property is still property of the estate. It is risky

to proceed against such property without relief from the automatic stay unless it is crystal

clear that it is not “property of the estate” and that the automatic stay does not apply.1

The consequences of violating the automatic stay can be serious and can include actual

damages (including costs and attorneys’ fees), and, in appropriate circumstances, punitive

damages, under Section 362(k)(1). Until you have case law guidance in your district on

this issue, before proceeding with a contempt motion, we advise that you seek stay relief

or consider filing a motion under Section 362(j) requesting entry of an order under

Section 362(c) confirming that the automatic stay has been terminated. Check your local

court rules. The filing of such a motion requires a filing fee of $150.00 in the U.S.

District Court for the Eastern District of North Carolina in conjunction with a motion to

lift the automatic stay.

IV. Tenancy by the Entirety Property2

1 Case law to date related to state court contempt proceedings has dealt only with pre-filing obligations of the debtor that involve application of the debtor’s income stream towards an obligation that has been determined to be a DSO. Best practice at this time with regard to the pursuit of property of the debtor believed to be available to satisfy a DSO but not being the debtor’s income stream itself would be to first seek relief from the automatic stay. Even if you are seeking state court contempt action related to a debtor’s failure to apply his or her income towards a DSO, the degree of comfort that you feel in bringing that contempt motion in state court without having sought relief from the automated stay should be governed by the extent to which you feel that the obligation underlying the motion would be viewed by a Federal Bankruptcy Court as clearly characterizable as a “support” obligation. As the reasoning of the court shows in In re Travis Benton Johnson (see discussion below in “Protecting the Creditor Spouse in Chapter 13, on p. 22) there can be significant issues surrounding whether an economic obligation undertaken by a spouse during separation is or is not in fact a “support” obligation, and Federal law, not state law, will be applied in seeking the intent of the parties.) 2 See generally the article Asset Protection and Tenancy by the Entirety, by Fred Franke, appearing in the Spring 2009 Issue of the ACTEC (American Council of Trust and Estate Counsel) Journal § 34 ACTECJ 210, which also contains a compendium of states’ treatments of entirety property;

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Under §522(a)(3)(B) of the 2005 Act, there is an exemption for any interest in

entireties property “. . . to the extent that such interest as a tenant by the entirety . . . is

exempt from process under applicable non-bankruptcy law” (i.e. applicable state law). In

what are referred to as “full bar” states (North Carolina is one) there is a complete bar

against a judgment secured by a creditor of only one spouse attaching to the real property

interest, of property owned by the judgment debtor/spouse as a tenant by the entirety. If

only one judgment spouse is a debtor, and that debtor owns entireties property fully

immune from judgment execution, the property is fully exempt. It is also true, that if

both spouses file for bankruptcy, claiming their entireties property as exempt, it will not

be exempt as to claims of judgment creditors that hold pre-petition judgments against the

debtors jointly.)

To the extent that entireties property in a bankruptcy estate is not exempt (e.g. if

there are joint pre-filing judgment debts of the spouses) the Trustee can sell the entireties

property (even if only one spouse is in bankruptcy) if the Trustee can demonstrate that

the criteria of § 363(h) of the 2005 Act are satisfied, e.g. if:.

(1) partition in kind of such property among the estate and such co-owners is

impracticable;

(2) sale of the estate’s undivided interest in such property would realize

significantly less for the estate than sale of such property free of the interests

of such co-owners;

(3) the benefit to the estate of a sale of such property free of the interests of co-

owners outweighs the detriment, if any, to such co-owners; and

(4) such property is not used in the production, transmission, or distribution, for

sale, of electric energy or of natural or synthetic gas for heat, light, or power.

If the value of the entireties property exceeds the joint debt value, the remaining

equity is exempt.

Fraudulent Transfer

By definition an exempt property is removed from the bankruptcy estate. As

noted by Mr. Franke in his article, and discussed in In Re: Swiontek, 376 B.R. 851, 864-

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865 (N.D. Ill., E.D. 2007), however, if a debtor should be found to have engaged in a

fraudulent pre-petition transfer of his or her interest in entirety property, that interest, if

recaptured by the Trustee, does not revert to its character as being a tenancy by the

entirety, and is not exempt from the bankruptcy estate. In In Re: Swiontek, the Court

determined that the Debtor/husband’s pre-petition transfer of his entirety interest in the

family home to his non-debtor wife was fraudulent, and, after the Trustee satisfied the

criteria set out in § 363(h) of the 2005 Act, the Court allowed the Trustee to sell what it

determined to now be joint tenancy property to satisfy the claims of creditors.

180 Day Problem – Divorce Within 180 Days of Filing Bankruptcy

One final caution, § 541(a)(5)(B) of the 2005 Act provides that the bankruptcy

estate includes any interest in the property of the debtor “. . . that the debtor acquires or

becomes entitled to acquire within 180 days after such date . . . as a result of a . . .final

divorce decree.” This means, of course, that if a final divorce decree is entered as to a

debtor-spouse within 180 days of filing a bankruptcy petition, any real property interest

of the debtor-spouse in an otherwise-exempt status because it is entireties property will,

upon the effective date of the divorce decree, by law be transformed from tenancy by the

entireties to joint tenancy. The debtor’s interest in the subject property will then no

longer be exempt, and will be subject to the claims of bankruptcy creditors. (See

discussion in In Re: Cordova, 73 F.3d 38, 41 (4th Cir. 1996) in which the Court held that

upon entry of a divorce decree within 180 days of the filing of debtor’s bankruptcy

petition, the entireties exemption became inapplicable.)

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V. The Impact of the 2005 Act on Chapter 7

Discharge (no substantial change)

The reason the debtor has filed Chapter 7 bankruptcy is to obtain a bankruptcy

discharge. A discharge, granted by the Bankruptcy Court’s entry of an order at the

conclusion of a case, relieves the debtor from personal liability to repay his dischargeable

debts (important concept, read on). Under Chapter 7, a debtor will receive a discharge

when his non-exempt property (if any) has been liquidated and the proceeds of that non-

exempt property have been used, to the extent available, to satisfy his debts. Therefore,

following the first meeting of creditors (the 341 meeting), discharge of Chapter 7 debtors

generally occurs within months. Your job, as the family lawyer representing the creditor

spouse, is to protect your client's entitlement to payment from the debtor spouse and to

protect your client’s distributive award.

New Filing Requirements in Chapter 7 (Dramatic Changes)

The debtor must now file additional documents regarding his financial condition

at the same time he files his bankruptcy petition. Revised Section 521 requires a debtor to

file (1) a certificate of an attorney indicating that the debtor has received a notice from

the clerk explaining the sections of the Bankruptcy Code under which he may file, (2)

evidence of any payments he has received from his employer within 60 days before the

filing of the petition (under Local Rule which became effective in the Eastern District of

North Carolina on October 17, 2005, the debtor is not required to file this evidence but

must provide it to the trustee at the Section 341 meeting of creditors), (3) a statement of

his monthly net income, and (4) a statement disclosing any reasonably anticipated

increase in income or expenses over the 12-month period following the filing date.

Additionally, the debtor must provide to the trustee, and any creditor (including your

client) making a timely request, a copy of his most recent tax returns. If the debtor fails to

produce all of the required documents within 45 days of filing his petition, the 2005 Act

requires the automatic dismissal of the case [§521(i)(1)]. There are, however, time frames

within which requests for such information must be made, as set forth in Rule 4002 of the

Federal Rules of Bankruptcy Procedure. For example, in Rule 4002(b)(4), a creditor

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must request a copy of the tax return required to be provided to the trustee at least 15

days before the first date set for the meeting of creditors under § 341 (this may be

different than the actual meeting date if the initial meeting is continued to a later date). In

addition you should always consult the applicable local rules, on our Federal Courts’

websites: www.nceb.uscourts.gov; www.ncmb.uscourts.gov; and

www.ncwb.uscourts.gov. You may also request, under Section521(f), that the debtor file

and provide you with copies of each Federal tax return (and any amendment thereof)

which the debtor must file for each tax year ending during the time the debtor’s case is

pending. It is important to note as well that the debtor’s obligation to provide tax returns

under Interim Local Rule 4002(b)(4) is subject to “procedures for safeguarding the

confidentiality of tax information established by the Director of the Administrative Office

of the United States Courts.”

Why are we, as family lawyers, concerned about these new filing requirements?

Because these additional documents create a "treasure trove" of discoverable information

useful in any future support modification and/or contempt hearings. Also remember,

when using information contained in a debtor’s Petition, Schedules, or Statement of

Financial Affairs in domestic litigation, the debtor's representations in these documents

are made "under penalty of perjury." Likewise, a debtor’s testimony at his Section 341

meeting before the trustee (or at any court hearing) is recorded and given under oath. A

bankruptcy discharge can also be a substantial change in circumstances justifying a

modification of prior orders, of support, etc. entered prior to the debtor’s discharge. See,

Sloan v. Sloan, 151 N.C. App. 399; 566 S.E.2d 97 (2002).

Priority of Claims (some changes) and Exempt Property

Section 507 relating to the priority of distributions (made by the Chapter 7 trustee

from the proceeds of a debtor’s non-exempt, liquidated assets) was amended by the 2005

Act. Amended Section 507 elevates domestic support obligations to first priority among

unsecured claims. The 2005 Act requires that support obligations be paid in full before

other creditors, except administrative expenses incurred by the trustee in administering

assets of the bankruptcy estate. The reprioritization of DSOs in Chapter 7 cases will

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likely be of minimal help to creditor spouses because there will seldom be non-exempt

assets for the Chapter 7 trustee to liquidate and distribute to creditors.

As discussed above, North Carolina has "opted out" of the federal exemptions

otherwise allowed by Section 522(a). Our exempt property statute is contained within

N.C.G.S. Chapter 1C (Section 1C-1601, et seq.). If you have not read this statute

recently, do so. It has been amended, and the amendments took effect January 1, 2006.

(See Attachment 2) The creditor spouse will generally have more knowledge of assets

and their values than any other creditor. His knowledge may result in the discovery of

additional value or assets. In the majority of Chapter 7 bankruptcies, most or all of the

debtor's assets are claimed by the debtor as "exempt" in the debtor’s Petition and

Schedules, which results in few assets for the trustee to liquidate and little or no proceeds

available for distribution to creditors, including spousal creditors, irrespective of the

priority of the claim, after a trustee’s administrative expenses are paid. For this reason, if

you are aware of improperly claimed exemptions, any objection to exemptions claimed

must be filed and served within 30 days of conclusion of the debtor’s Section 341

meeting.

Additionally, if your client is aware that the debtor has materially under-valued

assets (this includes over-statement of lien amounts) in his Schedules, it is important to

bring this to the trustee’s attention as soon as possible, preferably before the debtor’s

Section 341 meeting. Be aware, however, that the time periods for establishing the

debtor’s domicile for purposes of claiming exemptions have changed, so the debtor may

now be able to claim the exemptions available in States other than North Carolina (often

more generous), even if the debtor would have been required to claim North Carolina

exemptions prior to the effective date of the Act. Under Section522(b)(3)(A) of the Code,

if the debtor has not lived in a single State for 730 days pre-petition, exemptions must

now be claimed in the place where the debtor’s domicile for 180 days prior to the 730

day period (or the greater of such 180 days than any other place), rather than just the 180

days pre-petition.

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Claims for Alimony, Child Support, Post-separation Support (DSOs) – Non-

Dischargeable

DSOs are non-dischargeable. The creditor spouse is not required to file a

complaint (adversary proceeding) objecting to the debtor’s discharge to preserve the

validity of his alimony, post-separation, and child support claims. Therefore, even if the

debtor spouse has received his Chapter 7 discharge before you are engaged by the

creditor spouse, as the creditor spouse's attorney may help your client collect child

support, post-separation support, or alimony from the debtor spouse.

Attorneys’ Fees – Non-Dischargeable

Attorneys' fees awarded for representing the debtor spouse in child support,

alimony, and post-separation support cases are non-dischargeable. The Fourth Circuit

Court of Appeals has classified an award of attorneys' fees obtained in prosecuting these

claims as a non-dischargeable debt in the nature of alimony, maintenance, and support

under Section 523(a)(5). In re Silansky, 897 Fed.2d 743, 744 (4th Cir. 1990); and see, In

re Bristow, 2005 Lexus 1117, Middle District of North Carolina (decided April 22,

2005).

Equitable Distribution Claims – Non-Dischargeable

Under pre-amendment law, Section 523(a)(15) allowed the debtor spouse to

discharge equitable distribution obligations including distributive awards, whether by

court judgment or agreement, by demonstrating either that he did not have the ability to

pay the debt or that discharging the debt would result in a benefit to him which

outweighed the detrimental consequences to the creditor spouse. Under pre-amendment

law, the creditor spouse was required to file a timely adversary proceeding in the debtor’s

case objecting to discharge in order to prevent discharge of his equitable distribution

claim.

The 2005 Act amends Section 523(a)(15) so that all debts incurred by the debtor

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

which are not domestic support obligations are also non-dischargeable under Section

523(a)(5). A debtor may no longer obtain a discharge of an equitable distribution

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judgment/award by showing that he is unable to pay the debt. Nor may discharge be

obtained upon a showing that benefits of discharge to the debtor outweigh the detrimental

effects to the debtor’s spouse or former spouse. By eliminating these affirmative

defenses, the 2005 Act effectively renders all equitable distribution awards pursuant to

court judgments and/or separation and property settlement agreements non-dischargeable

in Chapter 7. [Note well: The creditor spouse is no longer required to file a complaint

(adversary proceeding) objecting to the dischargeability of equitable distribution awards.]

Strategies for Protecting the Creditor Spouse

If you are confronted with a Chapter 7 bankruptcy representing the creditor

spouse:

Step 1 – Obtain the debtor spouse’s Bankruptcy Petition, Schedules and

Statement of Financial Affairs.

All petitions and most pleadings are available electronically through the

appropriate bankruptcy Court Clerk's office (Eastern, Middle, Western Districts). Each

Clerk's office has an easily accessible website, though access requires registration

through the Web site and payment for certain information provided. Most petitions and

pleadings may be retrieved by accessing them through a docket search of the appropriate

bankruptcy court. Access is through the PACER service of the Administrative Office of

the U.S. Courts. Go to http://pacer.psc.uscourts.gov. Then go to the Frequently Asked

Questions for guidance on registration, access, and payment for PACER service.

Step 2 – File and Serve a Notice of Appearance.

Unless you, as counsel for the creditor spouse are already properly listed in the

debtors schedules as a party to whom notices should be sent, you should file and serve

upon the debtor, debtor’s counsel, the trustee, and the Bankruptcy Administrator a notice

of appearance giving notice that you are entering an appearance in the case on behalf of

your named client and providing the address where all notices should be sent. This will

ensure that you receive a copy of all notices in the case (such as a notice that the case has

been dismissed or a discharge has been granted or denied).

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Step 3 – Review the Petition, Schedules and Statement of Financial Affairs.

Upon obtaining the Petition, Schedules, and Statement of Financial Affairs,

review them to be certain your client is listed as a creditor and that his claims are

appropriately denominated either as DSOs or property distribution claims. Also review

the assets listed; values and exempt property. If you are aware of any false statements or

omissions, these should be brought to the trustee’s attention in writing as soon as possible

and preferably prior to the 341 meeting. Any documentation supporting your allegations

should also be provided. This will assist the trustee in determining whether any omissions

or false oaths are material and actionable (enabling the Trustee to move the court to

dismiss the bankruptcy).

Step 4 – Determine the status of the debtor's case.

Has the case been completed (discharge order entered) or is the case pending? If

the creditor spouse reaches your office before a discharge is entered, you should first

obtain the domestic court orders/agreements establishing the debtor spouse's obligation to

your client and determine the type of obligation (i.e., child support, equitable distribution,

alimony). Determine if the first meeting of creditors (the Section 341 meeting) has been

held. If the meeting has not been held, you should communicate with the Chapter 7

trustee (in writing) advising him of your client's domestic support and/or equitable

distribution claims. Generally, proofs of claim are not filed in Chapter 7 bankruptcies

absent a notice from the court or the trustee that the case has been classified as an asset

case, meaning there will be assets available to pay creditors’ claims (as opposed to a no-

asset case).

Step 5 – The Section 341 Meeting.

This meeting is presided over by the Chapter 7 trustee. Questioning is generally

brief; however, it is an opportunity for you to advise the Chapter 7 trustee of the

existence of your claims and the fact that they are, in fact, non-dischargeable DSOs, as

well as to inquire concerning "exempt property" claims made by the debtor spouse.

Obviously, attendance at the 341 meeting will depend on whether or not you are engaged

before the 341 meeting; the amount involved, and the location of the 341 meeting. If you

17

wish to question the debtor at greater length than is permitted at the 341 meeting, you

may file a motion for entry of an order allowing an examination of the debtor under

Bankruptcy Rule 2004.

The Lis Pendens Question

Pursuant to N.C.G.S. Section 50-20(h), if either party claims that any real

property is marital or divisible property, that party may cause a Notice of Lis Pendens to

be recorded, pursuant to Article 11 of Chapter 1 of the General Statutes. N.C.G.S. Section

50-20(k) provides that "the rights of the parties to an equitable distribution of marital and

divisible property are species of common ownership…vesting at the time of the parties'

separation."

It is important to advise your client that his equitable distribution claim is just that

– a claim. Your client's claim to equitable distribution is not a property right, nor does the

equitable distribution statute (as interpreted by both state and federal courts) provide your

client with a right to receive any particular item of marital/divisible property. See, In Re

Halverson, 151 BR 358 (M.D.N.C. 1993); see also, Justice v. Justice, 123 N.C.App.

733, 475 S.E.2d 225 (1996), affirmed, 346 N.C. 176, 484 S.E.2d 551 (1997).

In the Eastern District of North Carolina, the filing of a Notice of Lis Pendens will

not create a security interest in specific property for the creditor spouse. In the case of

Watts v. Slough (In Re Slough), E.D.N.C., March 2005, Chief Judge Leonard

concluded that "the filing of Notices of Lis Pendens did not create security interests in the

underlying properties but served as constructive notice of pending litigation. (Citations

omitted)." Not published. [See, Eastern Bankruptcy Institute manuscript, June 3 and 4,

2005, page 66, for a complete case summary of this case.]

VI. The Impact of the 2005 Act on Chapter 13

Introduction

Chapter 13 is commonly referred to as a “wage-earner bankruptcy.” Historically,

in North Carolina, more Chapter 13 bankruptcies are filed than Chapter 7 bankruptcies.

As with Chapter 7, when the debtor files a Chapter 13 bankruptcy, he must file a petition,

18

schedules listing all of his assets, debts, income, and expenses, claiming certain assets as

exempt and listing all creditors, and a Statement of Financial Affairs, answering

questions concerning the debtor’s financial affairs prior to the petition filing.

In addition to his schedules and petition, the Chapter 13 debtor must file a

proposed repayment plan. To be confirmed, the plan must pay priority claims (which

include pre-petition alimony, post-separation support, and child support claims) in full.

The debtor must pay all post filing DSOs in full and, if the trustee or an unsecured

creditor (such as your client) objects to confirmation the debtor must use 100% of his

"disposable income" to be received during the plan period to pay unsecured claims

(including equitable distribution judgments) (§1322 and §1325). If the debtor’s plan

provides for all disposable income to be committed to the plan, such an objection would

not be needed to ensure that disposable income is paid for the applicable commitment

period. The debtor makes monthly payments to the Chapter 13 trustee, and the trustee

distributes payments on allowed claims to creditors over a period of 36 to 60 months.

After all payments are made under the debtor’s confirmed plan, the debtor receives his

discharge. The 2005 Act requires payment plans to be made over the “applicable

commitment period” [as defined in § 1325(b)(4)], either 36 or 60 months, unless all

unsecured claims are paid in full over a shorter period.

What is Disposable Income and Why is it Important?

"Disposable income" is all of the debtor's income not reasonably necessary for the

maintenance or support of the debtor or a dependent of the debtor or for a DSO that first

becomes payable after the date the bankruptcy is filed. [§1325(b)(2)]. Therefore, income

necessary for prospective DSOs is deducted by the debtor from his income prior to a

determination of "disposable income."

Our primary interest in disposable income relates to equitable distribution.

Equitable distribution claims and judgments are unsecured claims and the debtor's

obligation to pay these claims will be discharged upon completion of the plan. Therefore,

if the debtor's confirmed plan pays unsecured creditors only twenty percent (20%) of

their claims, your creditor spouses' equitable distribution judgment will only be paid

19

twenty percent (20%). Making sure that all of the debtor's disposable income is

discovered and paid into the plan is your client's best protection for these claims.

Protecting the Creditor Spouse in Chapter 13

In order to protect the creditor spouse's claims in Chapter 13, the following steps

should be taken:

File and Serve a Notice of Appearance. As in a chapter 7 case, and for

the same reasons, you should file and serve a notice of appearance giving

notice that you are entering an appearance on behalf of your client.

Review the Petition, Schedules and Statement of Financial Affairs. As

in a Chapter 7 case, obtain and review copies of the Petition, Schedules,

and Statement of Financial Affairs for completeness and accuracy. If your

client is not listed as a creditor, or his claims are not appropriately

denominated either as DSOs or property distribution claims, immediately

file a claim making this clear (see below), or if the claims' bar date has

passed, write to the trustee making him aware of the amount, nature, and

payment status (both pre-petition and post-petition) of any DSO within the

meaning of Section 101(14A). Additionally, you should make the trustee

aware, if not accurately stated in the schedules, what State has jurisdiction

over enforcement of the debtor’s DSOs. If you are aware of any material

false oaths or omissions, bring these to the trustee’s attention in writing

with any available supporting documentation.

File the proof of claim. The first important action item for the creditor

spouse is to complete and file a "Proof of Claim" form. Supporting

documentation, such as a judgment or order, should be attached. Only

claims filed with Chapter 13 trustee (in the Eastern District) or the Clerk

of the Bankruptcy Court (in the Middle and Western Districts) are

recognized as “allowed” or valid claims to be paid through the Chapter 13

plan.

A proof of claim form will be provided with the notice of the

bankruptcy filing. The notice of bankruptcy filing will identify the Chapter

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13 trustee in the notice and will provide both the address where claims

should be filed and the bar date by which any claim must be filed. The bar

date for filing claims is 90 days from the first date set for the meeting of

creditors (note that the first date set for the meeting may be different than

the date the meeting is actually held). All claims must be received by the

trustee or Clerk, as appropriate, by the bar date. Any claims filed after the

bar date will not be allowed and, therefore, will not be paid any

distribution. Be sure to note on the face of the proof of claim form if the

claim is for alimony, post-separation support, or child support (a domestic

support obligation), and note on the proof of claim that the claim is a

priority claim. If the claim is an equitable distribution claim, a general

unsecured proof of claim must be filed. You will always want to receive a

filed copy of your proof of claim. Send an extra copy of the claim with a

self-addressed, postage-paid, return envelope.

Section 341 Meeting. Review the debtor's Petition, Schedules, Statement

of Affairs, and proposed plan, and attend the Section 341 meeting. The

Section 341 meeting in Chapter 13 is presided over by the Chapter 13

trustee; the debtor is placed under oath. No judge is present. The trustee

will ask questions, and creditors are allowed to ask questions of the debtor

concerning his proposed plan, obligations, and repayment of debts. You

will also be able to ask questions of the trustee. As in a Chapter 7 case, the

time available for questioning may be limited during the meeting. If

extensive questioning is necessary, a Rule 2004 examination (deposition)

(requiring a motion and order) may be required.

The creditor spouse (or his attorney) should attend the Section 341

meeting to confirm that all established support claims will be paid directly

to the creditor spouse as priority claims, and to confirm whether the debtor

is current in the payment of all post-petition DSOs. If such payments are

not current, the debtor’s plan may not be confirmed, and the case may be

dismissed. Further, the creditor spouse should advise the trustee if there

are support issues which are pending and not yet finalized and whether,

21

and to what extent, determination of such issues may impact a

determination of the debtor's disposable income.

Plan Confirmation, the Debtors Certification Concerning DSOs, and Discharge.

The Chapter 13 debtor receives a discharge (of dischargeable debts) when he

completes all payments required to be made under his confirmed Chapter 13 plan. One of

the advantages of a debtor seeking relief under Chapter 13 in the past was that the debtor

could obtain what was commonly referred to as a “super-discharge.” After the 2005 Act,

a debtor’s discharge, while broader than that available in Chapter 7, is no longer as

“super” as it once was. There is a limited hardship discharge exception, and alimony,

post-separation support, and child support debts are non-dischargeable in Chapter 13.

[§1328(a)(2)]. Additionally, a claim for willful and malicious injury, under § 1328(a)(4),

based on claims of alienation of affection or criminal conversation – arising from a state

court judgment - is possible. Therefore, when the debtor completes his plan and receives

his discharge, these support and/or payment obligations remain. [Note well: Equitable

distribution judgments/obligations pursuant to court order or property

settlement/separation agreements are general unsecured claims that can be discharged and

"crammed down" in Chapter 13. Equitable distribution claims will be paid along with

other unsecured claims only to the extent of the debtor's disposable income.]

Although § 1328 requires a debtor seeking final discharge to certify that DSOs

have been satisfied, the conservative and prudent practice is to continue to monitor the

completion of those payment obligations through the powers of the state court that

originally established the obligation. If the obligations were set only by contract, and

they remain unmet after a discharge has occurred, there may be a need to apply to the

Bankruptcy Court for an examination of the debtor and a review of the discharge of the

debtor has falsely represented to the Bankruptcy Court that all DSOs, pre-petition and

post petition, have been satisfied.

Should you become aware within 180 days post plan confirmation that the debtor

made a false statement that all post-petition, pre-confirmation domestic support

22

obligations were paid, and if such false statement constitutes fraud, you may seek

revocation of confirmation under Section 1330(a) in addition to dismissal (or conversion

to a case under Chapter 7, with the debtor’s consent) under Section1307(c)(11) (failure to

pay a DSO which first becomes due after the petition date). The addition of Sections

362(c)(3) and (4) by the 2005 Act, limiting the availability or extent of protection of the

automatic stay in second and subsequent serially filed cases, makes dismissal of a case

filed (under any chapter of the Bankruptcy Code) after Oct. 17, 2005, a much more

consequential event than in the past. Accordingly, if you become aware that the debtor is

two months’ or more delinquent in the payment of a DSO during the pendency of a case,

you will have significant bargaining leverage with debtor’s counsel to ensure that

arrearages are promptly cured and maintained as current. Also consider providing the

trustee with an affidavit concerning the delinquency with a request that a motion to

dismiss be filed. Most Chapter 13 trustees will be willing to file such a motion,

particularly since payment of all domestic support obligations is now a pre-condition of

discharge.

A Word to the Wise Regarding Characterization of Obligations in Separation and

Property Settlement Agreements, to Maximize Protection in Chapter 13.

The ways in which obligations regarding marital assets are described by the

parties in their Separation Agreements and Property Settlements become crucial indicia

for reviewing Bankruptcy Courts in later determinations as to whether a given obligation

fits under the category of a “DSO.” In In re Travis Benton Johnson, 397 B.R. 289

Bkrtcy. (M.D.N.C. 2008) the Court grappled with the issue in the context of a Chapter 13

bankruptcy. The principal issue was whether the debtor-husband’s obligation to his ex-

wife to pay the indebtedness secured by a second deed of trust on the parties’ former

marital residence was in the nature of “support” and therefore constituted a domestic

support obligation (DSO) that had to be paid in full under the debtor’s Chapter 13 plan.

The court noted that “Federal bankruptcy law, not state law” determined whether a debt

is in the nature of support. Id., at 296. The court went on to examine all the

circumstances that would illuminate the intent of the parties at the time the obligation was

undertaken by the debtor, and noted that the “Separation Agreement” did not designate

23

the obligation to pay off the second deed of trust on the marital home as support. The

court in this case found that the debt was indeed a DSO, but the message of the case is

clear. To maximize the probability of a paying spouse’s economic obligation being

characterized as a DSO, so as to insure it is paid in full out of a Chapter 13 plan, make

sure the obligation is discussed and labeled as “support” in the documents memorializing

the obligation.

VII. Alienation of Affection and Criminal Conversation – Are State Law

Judgments Awarding Damages for These Torts Exempt from Discharge

Under the 2005 Act?

The short answers follow; then there is a more detailed discussion concerning

both Chapter 7 (Liquidation) and Chapter 13 (The Wage Earner Plan).

1. Chapter 7 Answer. In a Chapter 7 Bankruptcy, you have a good chance at

having a state law judgment award for alienation of affections or criminal conversation

declared non-dischargeable by the Debtor under Section 523(a)(6) of the 2005 Act

(provided that you establish a careful evidentiary record – as will be discussed).

2. Chapter 13 Answer. In a Chapter 13 Bankruptcy, you have a much more

remote chance at having a state law judgment award for alienation of affections or

criminal conversation declared non-dischargeable by the Debtor under the applicable

Code section, Section 1328(a)(4) of the 2005 Act (there is no case law extant at the time

of writing of this article recognizing an adversary claim for non-dischargeability on this

basis). Still there are arguments to be made that might be persuasive – see below.

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1a. Chapter 7 Discussion

The beginning point for an analysis of a claim in a Chapter 7 case is Section

523(a)(6) of the 2005 Act, (a debt is not dischargeable if it arises from a “willful and

malicious injury by the debtor to another entity or to the property of another”). (An

“entity” under the 2005 Act includes a “person.” See § 101(15) – Definition of “entity.”

The U.S. Supreme Court has further complicated the burden of proof for a plaintiff

seeking non-dischargeability by holding that § 523(a)(6) applies only to “acts done with

the actual intent to cause injury.” Kawaauhou v. Geiger, 523 U.S. 57, 61 (1998). This

means that to qualify for the exception, the Plaintiff must show more than negligent,

grossly negligent or reckless conduct or a deliberate act resulting in serious injury – it

takes a deliberate or intentional injury. There is a very thoughtful and educative

discussion of these issues in the recent case of In Re Gallagher, 388 B.R. 694 (W.D.N.C.

2008). In Gallagher, the debtor had filed a Chapter 7 petition. At that time, Gallagher

had been a defendant in a state court action in which Susan Keever had alleged alienation

of affections and criminal conversation by Gallagher with Keever’s husband. Keever

filed an adversary proceeding in the Bankruptcy Court, asserting the same tort claims as

those raised in state court. Keever requested that the Bankruptcy Court declare the

resulting liability non-dischargeable as a “willful and malicious injury” under 11 U.S.C. §

523(a)(6). The jury in state court had awarded Keever a verdict finding Gallagher liable

for both alienation of affections and criminal conversation. The judgment included

punitive damages. In Bankruptcy Court, Keever moved for summary judgment, arguing

that in the state court action she had established that Gallagher had injured her in a

“willful and malicious” manner so as to make the debt established by the state court

judgment non-dischargeable under 11 U.S.C. § 523(a).

The Bankruptcy Court found that the doctrine of collateral estoppel barred

relitigation of the issue of whether Gallagher’s actions caused a “willful and malicious”

injury, and granted Summary Judgment (meaning that the jury award was non-

dischargeable in bankruptcy). Gallagher appealed to the U.S. District Court for the

Western District of North Carolina, and argued that the doctrine of collateral estoppel did

25

not apply because the state court jury never specifically found that Gallagher willfully

and maliciously intended injury to Keever or to Keever’s protected marital relationship.

The District Court, relying on Geiger (supra) and on In Re: Duncan, 448 F.3d 725

(4th Cir. 2006) reversed, and found that the doctrine of collateral estoppel did not apply,

since neither the alienation of affections claim nor the punitive damages award

specifically decided the issue of whether Gallagher maliciously intended to injure the

Keevers or their marital relationship. The District Court remanded the case for further

hearing on this issue and Gallagher and Keever provided testimony. On remand, the

Bankruptcy Court found the judgment resulting from the state court judgment to be non-

dischargeable. Keever appealed this finding back to the U.S. District Court.

Upon review of the testimony, the District court determined that there was no

evidence that Gallagher participated in the adulterous acts alleged with the “substantial

certainty that harm could result” to Susan Keever. Additionally, the Court found nothing

to support a subjective motive on behalf of Gallagher to injure Susan Keever. There was

insufficient evidence, according to the Court, to support a finding that Gallagher

committed criminal conversation with the intent to willfully and maliciously injure

Keever and her marital relationship. The court found that the portion of the state court

judgment attributable to criminal conversation was not a non-dischargeable debt under §

523(a)(6) – i.e. it could be discharged through the Chapter 7 proceeding..

The District Court did find, however, that Gallagher continued her relationship in

a non-sexual manner long after being confronted by Keever and asked her to break off

the relationship. On this basis, the District Court found that the Bankruptcy Court “did

not err” in its determination that Gallagher committed a “willful and malicious injury” to

the marital relationship itself, and that the portion of the state court judgment which could

be apportioned to Keever’s claim for alienation of affections constituted a non-

dischargeable debt under 11 U.S.C. § 523(a)(6). The case was remanded for damage

apportionment.

26

Importantly, the District Court made the following observation as part of the

hearing on the initial appeal: “at the outset, the court notes the difficulty raised by the

issue of whether an injury to a marital relationship constitutes an injury “to another entity

or to the property of another” within the meaning of § 526(a)(6). Neither party, however,

raised this issue in the Bankruptcy Court or on appeal to this Court, and thus the issue has

been waived.” Id. at 701. This issue, still undecided, is a crucial one that will certainly

be raised in the future. Were the Court in this case to have considered the issue and

decided that a marital relationship is not “another entity” or “property of another” within

the meaning and intent of the exemption from discharge described in § 523(a)(6), the

Plaintiff/Appellant in this case would have gone home empty handed – neither of the

judgment grounds, criminal conversation or alienation of affections, would have been

found to be non-dischargeable.

From this case, it is clear just how stringent and detailed the proof standards are

with regard to establishing a specific, subjective motive to injure another person (or

“another entity” or “property of another”) if there is to be any hope of characterizing the

wrong alleged as non-dischargeable under § 523(a)(6). It appears that in order to meet

the requirement of specific intent to do personal harm established by Geiger (supra) the

plaintiff will have to either provide a state court judgment record that documents finding

of specific intent to harm the plaintiff (so as to be able to argue collateral estoppel on the

issue in Bankruptcy Court) or there will have to be convincing proof on this point

provided to the Bankruptcy Court itself. Either way, the element of specific intent must

be established for the claim of alienation of affections or criminal conversation to be non-

dischargeable. One way to augment the state court record (in the event of a later Chapter

7 filing by the defendant spouse) would be to seek from the finder of fact a special

finding that the requisite specific intent was present as part of the tort claim. Copies of

the pattern jury instructions for the torts themselves, as well as for damages for alienation

of affections and criminal conversation are attached in Attachment 3. One could request

from the Court additional instructions to be given with the tort instructions as follows:

27

a. In tandem with NCPJI Civil 800.20 (Alienation of Affections):

“If your answer was ‘yes’ to the foregoing issue, did the Defendant, in the

course of causing alienation of affections, willfully and maliciously intend to

harm the marital relationship?” _______________.

b. In tandem with NCPJI Civil 800.25 (Criminal Conversation):

“If your answer was ‘yes’ to the foregoing issue, did the Defendant, in the

course of engaging in criminal conversation, willfully and maliciously intend to

harm the plaintiff?” _______________.

[If the trial is a bench trial specific comparable findings could be requested of the

Presiding Judge.]

At this point, we should refer to the old adage: “Be careful what you ask for . . .”

Should the trier/finder of fact provide a “no” answer to the questions on specific intent,

that finding would certainly foreclose the possibility of later establishing that the

plaintiff’s claim was non-dischargeable under Section 523(a)(6) in an adversary claim

against the Debtor (the former Defendant) in a Chapter 7 bankruptcy proceeding. It is a

matter of strategy. If you think your chances are not good for getting the desired finding

before the trier of fact, you can always argue (at least with regard to alienation of

affections) that a finding against the Defendant necessarily included the requisite element

of personal malice because the jury question itself requires that the jury consider whether

the Defendant “maliciously” caused the alienation of the marital relationship. (Whether

this argument was made and/or rejected in Gallagher is not addressed in the opinion.)

2a. Chapter 13 Discussion

With regard to a Chapter 13 proceeding one can only speculate at this point, in the

absence of relevant case law, whether one can establish non-dischargeability based on

damages awarded in a civil action against the debtor as a result of a “willful or malicious

injury by the debtor that caused personal injury to an individual . . .” [Section

1328(a)(4)].

28

The first difficulty is that there is no case recognizing the non-dischargeability of

a state court judgment for alienation of affections or criminal conversation under Section

1328 in a Chapter 13 Bankruptcy. Gallagher, supra, at least recognizes the plaintiff’s

claims for these torts as viable claims for “personal injury” under Section 523(a)(6) in a

Chapter 7 proceeding, if the requisite proof of specific willful, malicious intent is present.

The only case remotely supporting the concept that alienation of affections and/or

criminal conversation could be argued to constitute a “personal injury” that would be

non-dischargeable in a Chapter 13 proceeding is In Re: Longhenry, 246 B.R. 234

(Bkrtcy.D. Maryland 2000). That case was a Chapter 7 case dealing with § 529 (a)(9),

which exempts from discharge any debt “for death or personal injury caused by the

debtor’s operation of a motor vehicle . . . if such operation was unlawful because the

debtor was intoxicated from using alcohol, a drug, or another substance.” This exception

from discharge was imported into Chapter 13 by § 1328(a)(2).

In Longhenry, the court dealt with a Chapter 7 debtor’s liability for a state court

judgment for loss of consortium caused by the debtor’s unlawful operation of a motor

vehicle while under the influence of drugs or alcohol; the court found that the judgment

fell within the discharge exception of §523(a)(9) for “personal injury” caused by driving

while intoxicated. Procedurally, the debtor had filed an adversary proceeding to

determine the dischargeability of a state court judgment that was entered against him, in

favor of a husband and wife jointly, on a claim of loss of consortium. The Court found

that under Maryland law the leading case on loss of consortium characterized the damage

to the marital relationship arising from loss of consortium as a “physical injury” and

concluded that “[A] loss of consortium claim under Maryland law is properly

characterized a “personal injury” and that this “comports with this court’s reading of

federal law and Congressional intent concerning 11 U.S.C. § 523(a)(9).” Id. at 241.

Note that the personal injury exception here is grounded specifically on an injury based

on alcohol-drug impaired driving by the debtor.

29

Longhenry does, however, offer food for thought. It at least offers an analogy by

which a plaintiff’s counsel can try to invoke the “personal injury” exception of

§1328(a)(4) by arguing that a judgment for criminal conversation and/or alienation of

affections inherently recognizes an even more aggravated form of damage to the marriage

relationship than simple loss of consortium. Since loss of consortium was sufficient to

constitute “personal injury” under the discharge exception of § 523(a)(9) in Longhenry,

the argument continues, it should therefore be sufficient to constitute a “personal injury”

within the meaning of § 1328(a)(4). In this way, one could at least mount a credible

argument for having a criminal conversation or alienation of affections judgment being

non-dischargeable by the debtor in a Chapter 13 proceeding based on the exception in §

1328(a)(4) for damages “as a result of willful or malicious injury.”

[In the State court proceeding leading to the judgment in favor of your client on

the claim of criminal conversation or alienation of affections you will want to have done

the same analysis as described in the preceding section dealing with Chapter 7, and to

have decided whether you want to press the trier of fact for a specific finding of willful,

malicious intent. The surest path to non-dischargeability in Chapter 13 will require your

establishing willful, malicious intent either on the State court record or by proving it as

part of your adversary claim in Bankruptcy Court.]

Robert A. Ponton Jr. is a partner with the Raleigh law firm of Wyrick Robbins Yates & Ponton LLP. He is a Board Certified Specialist in the area of family law and he is a fellow in the North Carolina Chapter of the American Academy of Matrimonial Lawyers. Samuel T. Wyrick, III is General Counsel to the firm of Wyrick Robbins Yates & Ponton LLP, and practices bankruptcy law as part of his civil commercial practice.

30

ATTACHMENT 2

Chapter 1C. Enforcement of Judgments.

Articles 1 through 15 Reserved for Future Codification Purposes.

§§ 1C-1 through 1C-1599. Reserved for future codification purposes.

Article 16. Exempt Property.

§ 1C-1601. What property exempt; waiver; exceptions. (a) Exempt property. – Each individual, resident of this State, who is a debtor is

entitled to retain free of the enforcement of the claims of creditors: (1) The debtor's aggregate interest, not to exceed eighteen thousand five

hundred dollars ($18,500) in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor; however, an unmarried debtor who is 65 years of age or older is entitled to retain an aggregate interest in the property not to exceed thirty-seven thousand dollars ($37,000) in value so long as the property was previously owned by the debtor as a tenant by the entireties or as a joint tenant with rights of survivorship and the former co-owner of the property is deceased.

(2) The debtor's aggregate interest in any property, not to exceed five thousand dollars ($5,000) in value of any unused exemption amount to which the debtor is entitled under subdivision (1) of this subsection.

(3) The debtor's interest, not to exceed three thousand five hundred dollars ($3,500) in value, in one motor vehicle.

(4) The debtor's aggregate interest, not to exceed five thousand dollars ($5,000) in value for the debtor plus one thousand dollars ($1,000) for each dependent of the debtor, not to exceed four thousand dollars ($4,000) total for dependents, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

(5) The debtor's aggregate interest, not to exceed two thousand dollars ($2,000) in value, in any implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.

(6) Life insurance as provided in Article X, Section 5 of the Constitution of North Carolina.

(7) Professionally prescribed health aids for the debtor or a dependent of the debtor.

NC General Statutes - Chapter 1C 1

(8) Compensation for personal injury, including compensation from private disability policies or annuities, or compensation for the death of a person upon whom the debtor was dependent for support, but such compensation is not exempt from claims for funeral, legal, medical, dental, hospital, and health care charges related to the accident or injury giving rise to the compensation.

(9) Individual retirement plans as defined in the Internal Revenue Code and any plan treated in the same manner as an individual retirement plan under the Internal Revenue Code, including individual retirement accounts and Roth retirement accounts as described in section 408(a) and section 408A of the Internal Revenue Code, individual retirement annuities as described in section 408(b) of the Internal Revenue Code, and accounts established as part of a trust described in section 408(c) of the Internal Revenue Code.

(10) Funds in a college savings plan qualified under section 529 of the Internal Revenue Code, not to exceed a cumulative limit of twenty-five thousand dollars ($25,000), but excluding any funds placed in a college savings plan account within the preceding 12 months (except to the extent any of the contributions were made in the ordinary course of the debtor's financial affairs and were consistent with the debtor's past pattern of contributions) and only to the extent that the funds are for a child of the debtor and will actually be used for the child's college or university expenses.

(11) Retirement benefits under the retirement plans of other states and governmental units of other states, to the extent that these benefits are exempt under the laws of the state or governmental unit under which the benefit plan is established.

(12) Alimony, support, separate maintenance, and child support payments or funds that have been received or to which the debtor is entitled, to the extent the payments or funds are reasonably necessary for the support of the debtor or any dependent of the debtor.

(b) Definitions. – As used in this section, the following definitions apply: (1) "Internal Revenue Code" means Code as defined in G.S. 105-228.90. (2) "Value" means fair market value of an individual's interest in property,

less valid liens superior to the judgment lien sought to be enforced. (c) Waiver. – The exemptions provided in this Article cannot be waived except by:

(1) Transfer of property allocated as exempt (and in that event only as to the specific property transferred);

(2) Written waiver, after judgment, approved by the clerk or district court judge. The clerk or district court judge must find that the waiver is made freely, voluntarily, and with full knowledge of the debtor's rights to exemptions and that he is not required to waive them; or

(3) Failure to assert the exemption after notice to do so pursuant to G.S. 1C-1603. The clerk or district court judge may relieve such a waiver

NC General Statutes - Chapter 1C 2

made by reason of mistake, surprise or excusable neglect, to the extent that the rights of innocent third parties are not affected.

(d) Recent purchases. – The exemptions provided in subdivisions (2), (3), (4), and (5) of subsection (a) of this section are inapplicable with respect to tangible personal property purchased by the debtor less than 90 days preceding the initiation of judgment collection proceedings or the filing of a petition for bankruptcy, unless the purchase of the property is directly traceable to the liquidation or conversion of property that may be exempt and no additional property was transferred into or used to acquire the replacement property.

(e) Exceptions. – The exemptions provided in this Article are inapplicable to claims:

(1) Of the United States or its agencies as provided by federal law; (2) Of the State or its subdivisions for taxes, appearance bonds or fiduciary

bonds; (3) Of lien by a laborer for work done and performed for the person

claiming the exemption, but only as to the specific property affected; (4) Of lien by a mechanic for work done on the premises, but only as to the

specific property affected; (5) For payment of obligations contracted for the purchase of the specific

real property affected; (6) Repealed by Session Laws 1981 (Regular Session, 1982), c. 1224, s. 6,

effective September 1, 1982; (7) For contractual security interests in the specific property affected;

provided, that the exemptions shall apply to the debtor's household goods notwithstanding any contract for a nonpossessory, nonpurchase money security interest in any such goods;

(8) For statutory liens, on the specific property affected, other than judicial liens;

(9) For child support, alimony or distributive award order pursuant to Chapter 50 of the General Statutes;

(10) For criminal restitution orders docketed as civil judgments pursuant to G.S. 15A-1340.38.

(f) Federal Bankruptcy Code. – The exemptions provided in The Bankruptcy Code, 11 U.S.C. § 522(d), are not applicable to residents of this State. The exemptions provided by this Article and by other statutory or common law of this State shall apply for purposes of The Bankruptcy Code, 11 U.S.C. § 522(b).

(g) Effect of exemptions. – Notwithstanding any other provision of law, a creditor shall not obtain possession of a debtor's household goods and furnishings in which the creditor holds a nonpossessory, nonpurchase money security interest until the creditor has fully complied with the procedures required by G.S. 1C-1603. (1981, c. 490, s. 1; 1981 (Reg. Sess., 1982), c. 1224, ss. 1-7, 20; 1991, c. 506, s. 1; 1995, c. 250, s. 1; 1998-212, s. 19.4(j); 1999-337, s. 2; 2005-401, s. 1.)

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§ 1C-1602. Alternative exemptions. The debtor may elect to take the personal property and homestead exemptions

provided in Article X of the Constitution of North Carolina instead of the exemptions provided by G.S. 1C-1601. If the debtor elects to take his constitutional exemptions, the exemptions provided in G.S. 1C-1601 shall not apply and in that event the exemptions provided in this Article shall not be construed so as to affect the personal property and homestead exemptions granted by Article X of the Constitution of North Carolina. If the debtor elects to take his constitutional exemptions, the clerk or district court judge must designate the property to be exempt under the procedure set out in G.S. 1C-1603. The debtor is entitled to have one thousand dollars ($1,000) in value in real property owned and occupied by him and five hundred dollars ($500.00) in value in his personal property exempted from sale under execution. If the value of the property in which the debtor claims his constitutional exemption is in excess of his exemptions, the clerk, in an execution, may order the sale of the property with the proceeds of the sale being distributed first to the debtor to satisfy his exemption and the excess to be distributed as ordered. (1981, c. 490, s. 1; 1981 (Reg. Sess., 1982), c. 1224, s. 8.) § 1C-1603. Procedure for setting aside exempt property.

(a) Motion or Petition; Notice. – (1) A judgment debtor may have his exempt property designated by motion

after judgment has been entered against him. (2) Repealed by Session Laws 1981 (Regular Session, 1982), c. 1224, s. 10. (3) The clerk or district court judge may determine that particular property

is not exempt even though there has been no proceeding to designate the exemption.

(4) After judgment, except as provided in G.S. 1C-1603(a)(3) or when exemptions have already been designated, the clerk may not issue an execution or writ of possession unless notice from the court has been served upon the judgment debtor advising the debtor of the debtor's rights. The judgment creditor shall cause the notice, which shall be accompanied by the form for the statement by the debtor under subsection (c) of this section, to be served on the debtor as provided in G.S. 1A-1, Rule 4(j)(1). If the judgment debtor cannot be served as provided above, the judgment creditor may serve the judgment debtor by mailing a copy of the notice to the judgment debtor at the debtor's last known address. Proof of service by certified or registered mail or personal service is as provided in G.S. 1A-1, Rule 4. The judgment creditor may prove service by mailing to last known address by filing a certificate that the notice was served indicating the circumstances warranting the use of such service and the date and address of service. The notice shall be substantially in the following form:

[FORM REMOVED FROM ATTACHMENT FOR SPACE CONSIDERATIONS]

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(b) Contents of Motion or Petition. – The motion or petition must: (1) Name the judgment debtor; (2) Name the judgment creditors of the debtor insofar as they are known to

the movant; (3) If it is a motion to modify a previously allocated exemption, describe

the change of condition (if the movant received notice of the exemption hearing) and the modification desired.

(c) Statement by the Debtor. – When proceedings are instituted, the debtor shall file with the court a schedule of:

(1) The debtor's assets, including their location; (2) The debtor's debts and the names and addresses of the debtor's creditors; (3) The property that the debtor desires designated as exempt.

The form for the statement shall be substantially as follows:

[FORM REMOVED FROM ATTACHMENT FOR SPACE CONSIDERATIONS]

(d) Notice to Persons Affected. – If the judgment debtor moves to designate his

exemptions, a copy of the motion and schedule must be served on the judgment creditor as provided in G.S. 1A-1, Rule 5.

(e) Procedure for Setting Aside Exempt Property. – (1) When served with the notice provided in G.S. 1C-1603(a)(4), the

judgment debtor may either file a motion to designate his exemptions with a schedule of assets or may request, in writing, a hearing before the clerk to claim exemptions.

(2) If the judgment debtor does not file a motion to designate exemptions with a schedule of assets within 20 days after notice of his rights was served in accordance with G.S. 1C-1603(a)(4) or if he does not request a hearing before the clerk within 20 days after service of the notice of rights and appear at the requested hearing, the judgment debtor has waived the exemptions provided in this Article and in Sections 1 and 2 of Article X of the North Carolina Constitution. Upon request of the judgment creditor, the clerk shall issue a writ of execution or writ of possession.

(3) If the judgment debtor moves to designate his exemptions by filing a motion and schedule of assets, the judgment creditor is served as provided in G.S. 1C-1603(d).

(4) If the judgment debtor requests a hearing before the clerk to claim exemptions, the clerk sets a hearing date and gives notice of the hearing to the judgment debtor and judgment creditor. At the hearing, the judgment debtor may claim his exemptions.

(5) The judgment creditor has 10 days from the date served with a motion and schedule of assets or from the date of a hearing to claim exemptions to file an objection to the judgment debtor's schedule of exemptions.

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(6) If the judgment creditor files no objection to the schedule filed by the judgment debtor or claimed at the requested hearing, the clerk shall enter an order designating the property allowed by law and scheduled by the judgment debtor as exempt property. Upon request of the judgment creditor, the clerk shall issue an execution or writ of possession except for exempt property.

(7) If the judgment creditor objects to the schedule filed or claimed by the judgment debtor, the clerk must place the motion for hearing by the district court judge, without a jury, at the next civil session.

(8) The district court judge must determine the value of the property. The district court judge or the clerk, upon order of the judge, may appoint a qualified person to examine the property and report its value to the judge. Compensation of that person must be advanced by the person requesting the valuation and is a court cost having priority over the claims.

(9) The district court judge must enter an order designating exempt property. Supplemental reports and orders may be filed and entered as necessary to implement the order.

(10) Where the order designating exemptions indicates excess value in exempt property, the clerk, in an execution, may order the sale of property having excess value and appropriate distribution of the proceeds.

(11) The clerk or district court judge may permit a particular item of property having value in excess of the allowable exemption to be retained by the judgment debtor upon his making available to judgment creditors money or property not otherwise available to them in an amount equivalent to the excess value. Priorities of judgment creditors are the same in the substituted property as they were in the original property.

(12) Appeal from a designation of exempt property by the clerk is to the district court judge. A party has 10 days from the date of entry of an order to appeal. Appeal from a designation of exempt property by a district court judge is to the Court of Appeals. Decisions of the Court of Appeals with regard to questions of valuation of property are final as provided in G.S. 7A-28. Other questions may be appealed as provided in G.S. 7A-30 and 7A-31.

(f) Notation of Order on Judgment Docket. – A notation of the order setting aside exempt property must be entered by the clerk of court on the judgment docket opposite the judgment that was the subject of the enforcement proceeding. If real property located in a county other than the county in which the judgment was rendered is designated as exempt and the judgment has already been docketed in that county, the clerk must send a notice of the designation of exempt property to the county where the property is located. The clerk of the county where the land is located shall enter a notation of the designation of exempt property on the judgment docket. If a judgment is docketed in a county where real property is located after that real property has been designated as exempt, the

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transcript of judgment must indicate that the exemptions have been designated. The clerk in the county receiving the transcript must enter the notation of designation of exempt property as well as docket the judgment.

(g) Modification. – The debtor's exemption may be modified by motion in the original exemption proceeding by anyone who did not receive notice of the exemption hearing. Also, the debtor's exemption may be modified upon a change of circumstances, by motion in the original exemption proceeding, made by the debtor or anyone interested. A substantial change in value may constitute changed circumstances. Modification may include the substitution of different property for the exempt property.

(h) Repealed by Session Laws 1981 (Regular Session, 1982), c. 1224, s. 14. (1981, c. 490, s. 1; 1981 (Reg. Sess., 1982), c. 1224, ss. 9-14, 18, 19; 1991, c. 607, s. 1; 1999-456, s. 59; 2005-401, ss. 2, 3.) § 1C-1604. Effect of exemption.

(a) Property allocated to the debtor as exempt is free of the enforcement of the claims of creditors for indebtedness incurred before or after the exempt property is set aside, other than claims exempted by G.S. 1C-1601(e), for so long as the debtor owns it. When the property is conveyed to another, the exemption ceases as to liens attaching prior to the conveyance. Creation of a security interest in the property does not constitute a conveyance within the meaning of this section, but a transfer in satisfaction of, or for the enforcement of, a security interest is a conveyance. When exempt property is conveyed, the debtor may have other exemptions allotted.

(a1) The statute of limitations on judgments is suspended for the period of exemption as to the property which is exempt. However, the statute of limitations is not suspended as to the exempt property unless the judgment creditor shall have, prior to the expiration of the statute of limitations, recorded a copy of the order designating exempt property in the office of the register of deeds in the county where the exempt real property is located.

(b) Exempt property which passes by bequest, devise, intestate succession or gift to a dependent spouse, child or person to whom the debtor stands in loco parentis, continues to be exempt while held by that person. The exemption is terminated if the spouse remarries, or, with regard to a dependent, when the court determinates that dependency no longer exists. (1981, c. 490, s. 1; 1991, c. 607, s. 2.) §§ 1C-1605 through 1C-1700. Reserved for future codification purposes.

http://www.ncleg.net/gascripts/statutes/Statutes.asp The Statutes on the North Carolina General Assembly web site are updated through the 2008 session.

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ATTACHMENT 3

The full text of each North Carolina Pattern Jury Instruction is available to practitioners at the website of the North Carolina Bar Association via the NC Casemaker database. NCBA membership is required for access. www.ncbar.org

NC Pattern Jury Instructions for Civil Cases Part 4: Miscellaneous Torts 800.20 Alienation of Affections 800.22 Alienation of Affections – Damages 800.25 Criminal Conversation 800.26 Criminal Conversation – Damages