IN RE: RALPH J. ANGELUCCI, JR. CASE NO. 93-50897

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

RALPH J. ANGELUCCI, JR. CASE NO. 93-50897

DEBTOR

 

RALPH J. ANGELUCCI, JR. PLAINTIFF

VS. ADVERSARY NO. 93-5101

CAROLYN FISTER ANGELUCCI DEFENDANT

 

MEMORANDUM OPINION

This matter is pending on the motion of the defendant, Carolyn F. Angelucci, the former spouse of the debtor, for entry of a judgment fixing the amount of the debt which the court has previously determined to be nondischargeable as a debt in the nature of maintenance and support.

The debt originated as a revolving line of credit extended by First Security National Bank & Trust Company of Lexington, now Bank One, to the debtor’s business, Ralph Angelucci Homes, Inc. The debtor and his former spouse individually guaranteed the indebtedness up to $500,000 and, as additional security, granted to the bank a second mortgage on their residence up to the principal amount of $100,000. The second mortgage instrument describes the individual guarantee as a "note" due and payable on demand. The guarantee and second mortgage were executed by the debtor and his former spouse on October 14, 1983.

On April 27, 1987 the debtor commenced a marriage dissolution proceeding against his former spouse in the Fayette Circuit Court, Case No. 87-CI-1418. A decree dissolving the marriage was entered on August 10, 1989. Pursuant to the decree, Carolyn Angelucci, the former spouse, was awarded sole ownership of the marital residence known as 601 Autumn Lane, Lexington, Kentucky. She was assigned responsibility for payment of the first mortgage thereon held by Lexington Federal Savings and Loan Association. The amount of the first mortgage at that time was $42,671.51. It appears the former spouse was expected to make the mortgage payment from child support payments of $1,500 per month and maintenance payments of $1,000 per month which the debtor was ordered to pay to her.

The debtor was ordered to pay the second mortgage indebtedness to First Security/Bank One. The several short term notes, some of which are renewal notes, evidencing the indebtedness secured by the second mortgage on the marital residence, were executed by Ralph Angelucci Homes, Inc., by the debtor as president of the corporation, after the commencement of his divorce action against Carolyn F. Angelucci. One of the notes was executed after entry of the marriage dissolution decree. It seems apparent the debtor was expected to cause the second mortgage indebtedness owed to First Security Bank & Trust Company of Lexington (the predecessor in interest of Bank One) to be paid as an obligation of his business Ralph Angelucci Homes, Inc. There is some confusion in the record of the state court proceedings as to whether the amount of the second mortgage indebtedness at the time of the divorce decree remained at $100,000 or perhaps was only $62,000. This is difficult to determine because some of the notes evidencing the indebtedness are identified as draws on construction loans secured by mortgages on premises on which houses were under construction. In any event, all of the notes came due in 1989 except one which came due in May of 1991. See the bank’s proof of claim filed in Mr. Angelucci’s bankruptcy as claim no. 1.

The debtor, through his business, failed to pay the notes secured by the second mortgage on the marital residence. In 1990 First Security initiated foreclosure proceedings in the Fayette Circuit Court, Case No. 90-CI-2594. The original defendants in the action were Ralph Angelucci Homes, Inc., Ralph J. Angelucci, Jr., Carolyn F. Angelucci, and Lexington Federal Savings and Loan Association.

On April 25, 1991, a hearing was held in the marriage dissolution proceedings before the Domestic Relations Commissioner. The hearing was on the motion of the debtor for a reduction in his child support and maintenance payments. The decree dissolving the marriage of the parties incorporates by reference an order entered simultaneously therewith which permitted modification of these payments. Following the hearing the Domestic Relations Commissioner filed a handwritten report recommending that the child support payments be reduced from $1,500 to $707.28 per month and that the maintenance payments be reduced from $1,000 to $400 per month, upon payment by the debtor of arrearages in child support and maintenance payments. The Domestic Relations Commissioner found there had been a change in the debtor’s circumstances substantial and continuing due to the collapse of the debtor’s business. The Commissioner did find that the debtor’s rent, food, utilities and car payment were paid by another. The apparent purpose of the reductions in the support and maintenance payments was to enable the debtor to pay off the notes secured by the second mortgage on the marital residence. Both the debtor and his former spouse filed exceptions to the recommendations of the Domestic Relations Commissioner.

On May 30, 1991, on consideration of the recommendations of the Domestic Relations Commissioner, the judge ordered the debtor to pay $29,980.49 in arrearages in child support and maintenance payments to avoid incarceration and passed to a later time the exceptions to the reduction in the support and maintenance payments permitted by the Domestic Relations Commissioner.

On June 8, 1993 the debtor filed a petition for relief under chapter 7 of the Bankruptcy Code. The Statement of Financial Affairs and Schedule I to the petition indicated that Ralph Angelucci Homes, Inc. had ceased doing business in 1990 and that since 1991 the debtor had been employed as construction superintendent for Lakewood Building Company, Inc. The debtor represented in Schedules I and J to the petition that due to the support and maintenance payments he was required to make, his expenses exceeded his income.

According to the proof of claim of Bank One filed July 1, 1993 in the debtor’s chapter 7 bankruptcy case in support of the bank’s motion for relief from stay, the indebtedness secured by the second mortgage on the marital residence by the date of the debtor’s bankruptcy had, because of the accrual of interest, increased to $93,553.32. On July 21, 1993 an order was entered sustaining the bank’s motion for relief from the stay with respect to the marital residence.

On September 13, 1993, subsequent to the commencement of the debtor’s bankruptcy case, a hearing was held in the Fayette Circuit Court in the marriage dissolution proceedings for the purpose of considering the reduction in the debtor’s child support and maintenance payments that previously had been permitted by the Domestic Relations Commissioner, and the exceptions thereto. At the conclusion of that hearing the judge noted that the commissioner’s decision to reduce the support and maintenance payments was to enable the debtor to make payments to Bank One on the second mortgage indebtedness on the marital residence. Despite the reduction in child support and maintenance payments, the debtor had not paid the notes secured by the second mortgage in the two-year interim between the April 1991 hearing before the Domestic Relations Commissioner and the September 1993 hearing before the presiding Circuit Court judge.

The presiding judge indicated it was his belief the debtor had not made the payments on the second mortgage on the marital residence in order to require the former spouse to sell the residence and pay off the mortgages thereon. See transcript of hearing held September 13, 1993, pg. 47. Accordingly, the judge restored the child support and maintenance payments to their original amounts "immediately," but not retroactively.

On October 6, 1993, in conformity with his findings at the September 13, 1993 hearing, the presiding judge entered an order as follows:

This matter having come before the Court … on September 13, 1993 … and the Court having found that the Petitioner’s Maintenance and Child Support obligation had been reduced to enable the Petitioner to make certain bank payments to First Security (now Bank One), a corporate debt secured by the residence of the Respondent and the parties’ minor children, and that the Petitioner had not made said payments, and that the Petitioner’s intentions in not making said payments were to force the Respondent from her home and the Court being sufficiently advised IT IS HEREBY ORDERED AND ADJUDGED as follows:

The order restored the child support and maintenance payments to the original amounts effective September 13, 1993. The court calculated the arrearage in support and maintenance payment owed by the debtor to be $2,895.41, which the court ordered paid by September 17, 1993.

Prior to the September 13, 1993 hearing in state court, the debtor had on August 12, 1993, filed an adversary proceeding seeking a determination by this court that certain obligations he owed to his former spouse under the terms of the August 10, 1989 marriage dissolution decree resulted from a division of property under a property settlement agreement and were dischargeable in bankruptcy. This court ruled otherwise with respect to the debtor’s obligation to pay the corporate notes secured by the second mortgage on the marital residence. The ruling was affirmed by the U.S. District Court and the U.S. Court of Appeals for the Sixth Circuit.

For reasons that are not apparent from the record before this court, a judgment and order of sale in the state court foreclosure action with respect to the interest of the former spouse in the marital residence was not entered until November 29, 1995. The judgment ordered the property sold by the Master Commissioner at public auction on January 8, 1996.

On March 11, 1996 an order was entered directing the Master Commissioner to deliver a deed to the purchasers of the property, William S. and Ann K. Stone, upon receipt of the balance due from the purchasers and the costs and fee of sale. The order further directed disbursement of the proceeds of the sale.

Also in March of 1996 the debtor appeared in another division of the Fayette Circuit Court in the marriage dissolution proceedings in answer to a motion of his former spouse to hold him in contempt of court for not paying the second mortgage indebtedness to Bank One in accordance with the terms of the marriage dissolution decree. On March 5, 1996, the court ordered the debtor to serve 6 months in jail commencing April 7, 1996, unless the debtor purged himself by paying off the notes to Bank One or making satisfactory arrangements with the bank to avoid the eviction of his former spouse and the children of the parties.

On April 5, 1996 the debtor’s former spouse, Carolyn F. Angelucci, filed a petition for relief under chapter 13 of the Bankruptcy Code. Apparently the marital residence had not yet been deeded to the purchasers of the property at the foreclosure sale and the proceeds of sale had not been disbursed.

On May 9, 1996 Bank One filed a motion for relief from stay in the former spouse’s chapter 13 case, alleging that as of the commencement of the case Carolyn F. Angelucci was indebted to the bank in the amount of $142,421.71 on the second mortgage indebtedness on the marital residence, as evidenced by the bank’s proof of claim submitted in support of the motion.

Following a hearing this court sustained the bank’s motion for relief from stay. Thereafter, the foreclosure action in the state court was concluded. On November 5, 1996 Bank One was paid $127,630.34, the remainder of the proceeds of sale of the marital residence after satisfaction of the first mortgage indebtedness, taxes, and other expenses and costs of the foreclosure action. The bank’s amended proof of claim filed in the Carolyn F. Angelucci chapter 13 case fixes the balance due on the bank’s claim as $26,899.27, after credit of $127,630.34, the bank’s share of the proceeds of sale.

After loss of the marital residence Carolyn F. Angelucci filed an amended chapter 13 plan pursuant to which she proposed to pay to the chapter 13 trustee $250 per month for 36 months, or a total of $9,000 for payment of administrative expenses and creditors holding unsecured claims. There are no secured creditors dealt with by the plan. This amended plan has been confirmed by the court and is in progress. It appears the dividend to creditors that have filed unsecured claims is likely to be minimal. The timely filed unsecured claims total $51,739.50. One of the claims is for an educational loan in the amount of $12,488.99, which may not be dischargeable. 11 U.S.C. 1328(a)(2), 523(a)(8).

The debtor contends he has been denied due process of law in that he has never had an opportunity to contest the amount of his liability for the second mortgage indebtedness to Bank One on the grounds of the failure of his former spouse to mitigate damages. The debtor contends that at the time of the parties’ divorce there was at least $100,000 in equity in the marital residence, which equity could have been realized by his former spouse if she had agreed with his proposal to sell the marital residence and pay off the first and second mortgage indebtedness thereon.

There is a doctrine of avoidable consequence pursuant to which a party who has been wronged by breach of contract is under a duty to mitigate damages, to not sit idly by and allow damages to accumulate. Restatement of Contracts, 336(i). However, we are not here dealing with a contract or agreement between the parties, but rather with terms and conditions imposed on the parties by the decree of the state court in a contested marriage dissolution proceeding. The obligation imposed on the debtor by the court was to convey the marital residence to his former spouse and to pay off the several corporate notes secured by the second mortgage so his former spouse and their three children would have a place to live. The former spouse was under no obligation to sell the house and pay off the second mortgage in order to relieve the debtor of the duty to pay the mortgage. By its order of October 6, 1993 hereinabove quoted, the state court clearly rejected the option of ordering the debtor’s former spouse to sell the marital residence to satisfy the mortgages thereon and preserve any equity therein.

The Findings of Fact and Conclusions of Law entered by the state court on March 1, 1989 in the marriage dissolution proceedings notes that after the parties separated sometime in 1986 or early 1987 the debtor’s business, Ralph Angelucci Homes, Inc., had been successful enough such that the debtor was able to "borrow" $25,000 from the corporation for the purchase of a BMW of a value of $37,000, and to "borrow" $12,000 from the corporation to complete the purchase of an $81,000 houseboat. See pgs. 44, 48 of the Findings of Fact and Conclusions of Law attached to the debtor’s dischargeability complaint in this Adversary Proceeding. This court notes that at the same time Ralph Angelucci Homes, Inc., through its president, the debtor, was borrowing from First Security and that these borrowings were encumbering the marital residence.

The Findings of Fact and Conclusions of Law of the Domestic Relations Commissioner entered on March 1, 1989 awarded the debtor sole ownership of the houseboat which had been purchased by the debtor for $81,000, after the separation of the parties. The houseboat was purchased by the debtor with monies given to him ($50,000) and his children ($20,000) by the debtor’s father, Dr. Ralph Angelucci, a physician. According to Dr. Angelucci, he provided the money to acquire the boat in the hope of bringing about a reconciliation of the parties. Transcript of proceedings Aug. 25, 1988 and Sept. 7, 1988 before the Domestic Relations Commissioner, pgs. 191-194. The debtor deposited the $50,000 gift from his father in a Ralph Angelucci Homes, Inc. account and the corporation issued a note payable to the debtor for that amount. Thereafter monies of the corporation were used to complete the purchase of the boat, and the corporation allegedly retained a lien on the boat. See testimony of Tom Johnston, CPA, before Domestic Relations Commissioner. Tr. 102, 112-116. At the time of the August 25 and September 7, 1988 hearings before the Domestic Relations Commissioner the houseboat was valued at $65,000. Testimony of Joe Harper, Jr., pg. 185-190.

Approximately two and one-half years later, at the hearing before the Domestic Relations Commissioner in April of 1991, on the debtor’s motion to reduce his child support and maintenance payments, the debtor was still in possession of the houseboat. The testimony indicated that he and Janis Taylor, who later became his wife, were continuing to use the houseboat on weekend visits to the lake where the houseboat was kept. See tape of the April 1991 hearing before the Domestic Relations Commissioner. The point to be made here is that while the debtor believed his former spouse should sell the marital residence to pay off corporate debts, he apparently was unwilling to sell the houseboat to accomplish the same purpose.

The foregoing facts with respect to the houseboat lend credence to the findings of the circuit court judge by his order of October 6, 1993, that the debtor’s intention in not paying the debt to First Security/Bank One was to force his former spouse to sell the marital residence.

The court notes that the schedules and Statement of Financial Affairs to the debtor’s chapter 7 bankruptcy petition filed on June 8, 1993 makes no reference to ownership or disposition of the houseboat.

Obviously, the debtor had an opportunity to raise the issue of selling the marital residence at the hearing on his motion to reduce the child support and maintenance payments. The Domestic Relations Commissioner opted for a reduction in child support and maintenance payments to enable the debtor to pay the second mortgage indebtedness on the marital residence. The handwritten notes of the Domestic Relations Commissioner of the hearing on April 25, 1991 indicate the debtor had additional imputed income in that his rent, food, utilities, and car payment are paid by another. The transcript of the hearing held on September 13, 1993 on the exceptions to the recommendations of the Domestic Relations Commissioner indicate the debtor was then living with the owner of Lakewood Building Company, Inc. for whom he was then working. Tr. 33. The owner, Janis Taylor, is the debtor’s present wife.

The schedules to the debtor’s petition for relief under chapter 7 of the Bankruptcy Code indicate the debtor was married at the time the petition was filed. See, Schedule I to the petition. The testimony before this court on May 3, 1994 at the hearing on the debtor’s dischargeability complaint indicated the debtor was then employed by Lakewood Building Company, Inc., an S corporation, the stock of which was wholly owned by his current wife, Janis. According to Schedule I accompanying his bankruptcy petition he had been employed in this manner for approximately 2-1/2 years. He testified that his "salary" as construction superintendent for Lakewood Building Company, Inc. was approximately $20,000 per year. This testimony is not entirely consistent with the exhibits submitted in support thereof. Schedule C (Profit or Loss from Business) accompanying the joint federal income tax return filed by the debtor and his wife Janis for 1992 lists the debtor’s business as Ralph Angelucci Homes and the debtor as proprietor. Schedule SE to the return shows the debtor as owing $3,245 in self-employment tax on net earnings of $22,963 from self-employment. This is the amount of gross income of Ralph Angelucci Homes shown on Schedule C. If the debtor draws a salary from Lakewood it is not clear why he would owe self-employment taxes on the salary. The debtor’s income as a construction superintendent appears to have been treated as self-employment income by him as proprietor of Ralph Angelucci Homes. Apparently, Lakewood Building Company pays the debtor as if he is an independent contractor, although he incurred no expenses. Construction materials apparently are purchased by Lakewood Homes, Inc. This arrangement probably serves two purposes. It circumvents the inability of the debtor to obtain credit directly, and shields as income any profit the debtor might otherwise be entitled to as a supervising subcontractor. The adjusted gross income of the debtor and his wife for 1992 from his earnings from self-employment, her salary as an accountant for Cox Hardware Company, from oil and gas royalties and from Lakewood Building Company, Inc., was $55,080.

While the home building and remodeling business may have been in decline in the early 1990’s, the court takes judicial notice of the fact that is not presently so.

Counsel for the defendant Carolyn F. Angelucci suggests that the amount of the nondischargeable judgment to be entered in the defendant’s favor should be fixed as $127,630.34, the amount of the payment received by Bank One as its share of the proceeds of sale of the marital residence. This would result in the defendant being made responsible for expenses and costs of the foreclosure sale resulting from the debtor’s failure to pay the second mortgage indebtedness on the marital residence.

The court believes the amount of the judgment should be computed as follows. The marital residence was sold at the foreclosure sale for $173,000. This was $22,000 less than the $195,000 value placed on the residence by the court in the marriage dissolution proceedings. Nevertheless, the sale price fixes an indisputable value. The amount of the first mortgage indebtedness, which was an obligation of the defendant Carolyn F. Angelucci and which was paid from the sale proceeds, was $32,554. The latter amount subtracted from the sale price of $173,000 equals $140,466 [$173,000 – $32,554 = $140,466]. This is the amount of loss suffered by the defendant by reason of the failure of the debtor to pay the second mortgage indebtedness on the marital residence in conformity with the orders of the Fayette Circuit Court. See the Amended and Agreed Order of April 21, 1989.

This court also found to be nondischargeable the amount of $1,500 owed by the debtor in payment of an expert witness fee as ordered by the state court.

Accordingly, the amount of the judgment to be entered in this adversary proceeding is fixed as $141,966, plus interest at the federal judgment rate until paid.

CONCLUSIONS OF LAW:

The court does not believe that In re Calhoun, 715 F.2d 1103 (6th Cir. 1983), relied on by counsel for the debtor, is particularly apposite to the facts of this case.

In Calhoun the parties had entered into a separation agreement under the terms of which the debtor had assumed five debts and agreed to hold his former spouse harmless with respect thereto. The bankruptcy court granted summary judgment in favor of the former spouse based on the hold harmless agreement. The court of appeals reversed and directed the bankruptcy court to make a separate determination as to whether each of the debts qualified as a debt in the nature of alimony, support or maintenance. The court suggested a methodology for making this determination.

In this case it has already been determined that the indebtedness in question is a debt in the nature of maintenance and support, and the debtor has exhausted his right of appeal on that issue.

The court in Calhoun did instruct by way of dicta that if any of the indebtedness involved in that case were determined to be nondischargeable the court must determine whether the amount of support represented by the assumption is so excessive as to be manifestly unreasonable under traditional concepts of support.

The present case does not involve a separation agreement. In this case the division of property and the assignment of debt obligations was made by the state court following extensive hearings and based on detailed findings of fact and conclusions of law concerning the relative circumstances of the parties as determined by the court. The state court reserved to itself the right to adjust the support and maintenance payments in its discretion. This court believes the proper place for the debtor to seek adjustment of the payment of the debt in question is the state court.

Moreover, the debt in this case is in effect a debt for back support and maintenance. It is a debt which the debtor was directed to pay in 1989 to prevent loss of the marital residence. The state court seemed persuaded the debtor could have paid this debt at that time but had not done so as a means of forcing his former spouse to sell the marital residence to pay off the mortgages thereon which would have resulted in payment of the several notes owed by Ralph Angelucci Homes, Inc., the business managed by the debtor and in which he had an interest. Perhaps the debtor viewed the sale of the marital residence as a means of preserving the business. The state court viewed the matter otherwise and denied the debtor that option.

This court believes it should limit its participation in this matter to fixing the amount of the judgment. The court does not desire to get into the matter of jailing the debtor for nonpayment of a judgment for support and maintenance or regulating the manner of payment. That is appropriately a matter for the state court handling the domestic relations case.

Dated:

By the court –

_______________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

John C. Ryan, Esq.

Steven F. Vicroy, Esq.

James D. Lyon, Esq., Trustee

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

RALPH J. ANGELUCCI, JR. CASE NO. 93-50897

DEBTOR

 

RALPH J. ANGELUCCI, JR. PLAINTIFF

VS. ADVERSARY NO. 93-5101

CAROLYN FISTER ANGELUCCI DEFENDANT

 

ORDER

 

In conformity with the memorandum opinion of the court this day entered, the defendant, Carolyn F. Angelucci, is awarded judgment against the plaintiff debtor, Ralph J. Angelucci, Jr., in the amount of $141,966.00, plus interest at the rate of 5.34% until paid. In accordance with the previous rulings of the court the debt evidenced by this judgment is nondischargeable in bankruptcy and is excepted from the discharge granted to the debtor, Ralph J. Angelucci, Jr., in his chapter 7 bankruptcy case.

Dated:

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

John C. Ryan, Esq.

Steven F. Vicroy, Esq.

James D. Lyon, Esq., Trustee