Discharge Injunction Does Not Apply to Domestic Support Obligation

Posted by NCBRC - June 28, 2016

The Missouri Department of Social Services did not violate the discharge injunction by collecting on a debt that the bankruptcy court had deemed fully satisfied through the debtors’ successful completion of their chapter 13 plan. Missouri Dept. of Soc’l Serv. v. Spencer, No. 15-6030 (B.A.P. 8th Cir. June 13, 2016).

Michael and Patricia Spencer filed a chapter 13 bankruptcy petition in which they listed a domestic and child support debt owed by Mr. Spencer to his ex-spouse. The Missouri Division of Child Support Enforcement (Division) filed a proof of claim on behalf of Mr. Spencer’s ex-spouse in the amount of approximately $36,000.00. Upon discovering that it had miscalculated the domestic support debt, the Division amended the proof of claim to over $88,000.00. When the Spencers objected to the amended proof of claim the bankruptcy court held a hearing and found that the original proof of claim was the one that should be allowed. The Division did not appeal this decision or object to confirmation of the plan providing for repayment of the original claim, nor did it object to discharge upon the debtors’ successful completion of their plan. After the discharge order was entered, the Division filed a withholding order with Mr. Spencer’s employer to collect past-due domestic support. Mr. Spencer moved the bankruptcy court for an order of contempt and sanctions. The bankruptcy court the Division willfully violated the discharge order and awarded sanctions and attorney’s fees.

The Division appealed arguing that 1) the discharge injunction does not apply to domestic support obligations, 2) the bankruptcy court violated the principle of comity when it interpreted proof of claim disallowance as a broader determination of Mr. Spencer’s personal liability on his domestic support obligation, and 3) the bankruptcy court lacked “subject matter jurisdiction to reduce the amount of the domestic support obligation under the domestic relations exception to federal jurisdiction.”

The Panel began with the issue of the bankruptcy court’s subject matter jurisdiction. Discussing the holding in Ankenbrandt v. Richards, 504 U.S. 689 (1992), the court found that the “domestic relations exception to federal court jurisdiction applies ‘to divorce and alimony decrees and child custody orders,’ but that ‘the domestic relations exception encompasses only cases involving the issuance of a divorce, alimony, or child custody decree.’” Because this case involved a dispute over the amount owed under a divorce and child support decree rather that the decree itself, the panel found that the domestic relations exception to federal jurisdiction did not apply and the bankruptcy court had jurisdiction over the case.

The panel turned to whether the discharge injunction applies to domestic support obligations under section 523(a)(5) and 1328(a). Section 1328(a) provides that a discharge acts to discharge a debtor of all debts provided for in the plan except those debts specified in section 523(a). Section 523(a)(5) excepts “domestic support obligation[s]” from discharge. Section 101(14A)(A)-(D) defines a domestic support obligation as a debt to a former spouse for maintenance or support established by a divorce decree or court order. The discharge injunction under section 524(a)(2) prohibits a creditor from attempting to collect on a debt that was discharged in bankruptcy. It does not apply to nondischargeable debts.

The panel found that, because the domestic support obligation was not dischargeable, the bankruptcy court abused its discretion when it sanctioned the Division for violation of the discharge injunction. Specifically, the panel reasoned:

“The discharge injunction does not apply to a nondischargeable domestic support obligation, even the disallowed portion. Therefore, any determination that a domestic support obligation was paid in full is not determinative of whether a post-discharge attempt to collect on the domestic support obligation violated the discharge injunction. By operation of § 1328(a)(2), when the debtors received a chapter 13 discharge under § 1328(a), the support arrears debt was excepted from the debtors’ discharge because it was a § 523(a)(5) domestic support obligation. Since the support obligation was not subject to the debtor’s chapter 13 discharge under § 1328(a)(2), it was also not subject to the discharge injunction under § 524(a)(2).”

The panel declined to address the Division’s argument based on comity because the issue was raised for the first time on appeal. For the same reason, the panel declined to address the Spencers’ argument that the bankruptcy court had the power to sanction the Division for abuse of the bankruptcy process. The panel reversed the decision of the bankruptcy court based on its finding with respect to the discharge injunction.

Judge Saladino dissented arguing that the panel could affirm on any basis supported by the record and that the bankruptcy court’s decision went beyond a mere finding of discharge injunction violation. The dissent noted that, after holding a hearing, the bankruptcy court concluded that the “prepetition obligation to the Family Support Division . . . is fully paid; He owes no prepetition or pre-discharge debt (nondischargeable or otherwise) to the Family Support Division and/or Mary Spencer.” Along the way to its decision, the bankruptcy cited Walton v. LaBarge (In re Clark), 223 F.3d 859, 864 (8th Cir. 2000), which held that section 105 “gives bankruptcy courts broad authority to issue sanctions for abuse of the bankruptcy process.” Judge Saladino concluded by this that “the bankruptcy court’s decision was, at its core, much more than a finding that the division violated the discharge injunction.”

Moreover, the Spencers had offered abuse of the bankruptcy process as an alternative basis for sanction. Thus, when the panel found that the abuse of process issue arose for the first time on appeal, it erred. The dissent concluded: “Referencing the discharge injunction may have been incorrect; sanctioning a creditor trying to collect a debt that had been paid in full was not. Accordingly, I do not believe the bankruptcy court’s order was an abuse of discretion. I would affirm.”

Spencer 8th Cir BAP opinion June 2016

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