IN RE:  JOSEPH D. ABNEY  CASE NO. 98-52559

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

 

JOSEPH D. ABNEY

 

DEBTOR

 

SUSAN F. ABNEY

 

VS.

 

JAMES D. LYON, TRUSTEE

 

 

CASE NO. 98-52559

 

 

 

PLAINTIFF

 

ADVERSARY NO. 98-5144

 

DEFENDANTS

 

 

 

MEMORANDUM OPINION

 

            This case was tried by the court on December 11, 2000 on the complaint of Susan F. Abney, the former spouse of the defendant debtor, on the issue of whether certain indebtedness owed by the debtor to his former spouse should be excepted from discharge under title 11 U.S.C. 523(a)(15).

FINDINGS OF FACT:

            The parties were married on July 15, 1978.  They have three minor children ranging in age from 12 to 16.

            In May of 1989 the parties purchased a 32-acre farm located at 4580 Highway 21 at Paint Lick, Madison County, Kentucky, where they resided prior to their divorce.

            Mr. Abney started operation of a machine shop in an old barn on the farm premises at Paint Lick and operated such business there until 1996.  In March of 1995 the parties purchased a 3.54-acre tract of land on Mayde Road in the Berea Industrial Park at Berea, Madison County, Kentucky.  In October of 1995 the parties granted to First Southern National Bank of Garrard County at Paint Lick, Kentucky a mortgage in the amount of $165,000 on this tract of land in the industrial park for the purpose of obtaining funds to erect a building and make other improvements on the tract.

            Prior to October of 1995 the debtor operated his machine and tool shop business as a sole proprietorship, initially under the name Design Unlimited, and subsequently under the name of Berea Machine & Tool.   In October 1995 the debtor caused the business to be incorporated, with himself as the sole shareholder and director.

            In approximately June of 1996 the parties moved the machine shop operation from the old barn on their farm to the new location in the Berea Industrial Park.  On June 27, 1996, the parties purchased an additional lot on Mayde Road in the Berea Industrial Park and executed a purchase money mortgage thereon in the amount of $55,500 to First Southern National Bank.

            The parties jointly owned the three tracts of real estate, the 32-acre tract at Paint Lick, Kentucky, where they had maintained their residence and where the business was originally located, and the tracts on Mayde Road in the Berea Industrial Park, which they had acquired and improved in connection with the relocation of the business to the industrial park.  The properties in the industrial park and the improvements thereon were leased to Berea Machine & Tool, Inc., the debtor’s business.  Presumably, the rental income was used to amortize the mortgage indebtedness owed by the debtors on the industrial park properties.[1]

            The mortgages on each of the commercial tracts secured additional advances up to $25,000 and $20,000 respectively, and thus secured additional notes owed by the parties in the amounts of $10,000 and $1,500.

            In addition the parties owed First Southern approximately $65,000 on a mortgage on their residence, on which they were required to make monthly payments.  According to the proof of claim of First Southern National Bank the Abneys were indebted to the bank in the amount of $240,006.78 when Mr. Abney individually and Berea Machine & Tool, Inc. each filed for relief under chapter 7 of the Bankruptcy Code on October 8, 1998.

            According to the tax returns of the parties, placed in evidence, the family income from the debtor’s machine shop operation declined precipitously after the business was incorporated in October of 1995 and relocated to the Berea Industrial Park in June of 1996.

            The income tax returns indicate the profit or loss from the business and the wages the Abneys received from the business after incorporation were as follows:

                        Year                                  Profit or Loss                       Wages

 

                        1993                                       $23,212

                        1994                                         43,397

                        1995                                       214,853[2]                        $10,500

                        1996                                       -  4,727                            59,900

                        1997                                       -17,190                            81,673

 

            The parties began experiencing marital difficulty and early in 1997 Susan F. Abney filed a proceeding in the Madison Circuit Court seeking dissolution of their marriage, Case No. 97-CI-0156.

            In connection with the marriage dissolution proceedings the parties entered into a Property Settlement and Separation Agreement dated July 30, 1998, which was incorporated by reference in the Decree of Dissolution entered by the state court on August 27, 1998.

            Pursuant to the division of property agreed to by the parties in the Property Settlement Agreement, Susan F. Abney received the residence, its contents, and the farm located at Paint Lick, Kentucky, the air compressor located at the old shop, and all livestock and farm machinery.  She agreed to pay the existing debt on the house and farm in the then approximate amount of $63,000.

            The wife also received a 1996 Cadillac, 1988 blue Chevy van, 1985 brown Chevrolet 4x4 pickup, 1971 Chevrolet pickup, and a pontoon boat, all of which apparently were unencumbered by liens except the 1996 Cadillac on which she agreed to pay the remaining indebtedness of an unspecified amount.

            The wife also was to receive an insurance check for damage caused by fire to the barn on the farm.  According to her testimony she did receive this check in the approximate amount of $23,000.

            The wife testified she sold the farm for approximately $130,000 on a land contract.  She received approximately $80,000 as a down payment and is being paid the balance of the sale price in annual payments of $3,000.

            She used the monies she received from the insurance proceeds and from the sale of the farm to pay off the debt on the farm and on the 1996 Cadillac, to pay credit card debt for which she was liable, and to pay her attorney fees in the divorce case.

            Susan Abney has since remarried.  Her present husband, Doug Floyd, works for the Kentucky State Highway Department.  He pays child support for children from his prior marriage.  She receives child support from the debtor.

            Under the terms of the Property Settlement and Separation Agreement the Abneys were given joint custody of their three children: the wife is primary custodian; the husband has visitation rights.  The debtor husband agreed to carry health and dental insurance on the children and to pay one-half of all medical and dental bills not covered by insurance; he agreed to pay one-half of all college education expenses, including room, board, tuition at a Kentucky state university, and reasonable travel expenses.  He agreed to pay one-half the cost of the children’s extra curricular activities (swimming, sports, etc.), and finally he agreed to pay child support in the sum of $1,044.00 per month.  The latter sum has been reduced by the state court to approximately $893 per month.  He became two months delinquent in child support payments prior to obtaining his present employment and is in the process of catching up in payments.

            In the property settlement the debtor received the entirety of the parties’ interest in the business, Berea Machine & Tool, Inc., including the land, buildings and machines, including some machinery in the barn at the parties’ farm, and a 100-ton punch press located there.  The debtor also received certain plows, hand tools and other items given to him by his grandfather.

            The debtor also received several vehicles not specifically given to the wife.

            The debtor agreed to assume all debts of Berea Machine & Tool, Inc. and all  business and personal back taxes of the parties.

            At the time of execution of the Property Settlement and Separation Agreement on July 30, 1998, the debtor had applied to First State Bank of Barbourville, West Virginia for a loan for working capital for Berea Machine & Tool, Inc.  The amount of the anticipated loan was approximately $400,000.

            Item III E. of the Property Settlement and Separation Agreement provides:

            E.  The Wife shall receive cash in the amount of $170,000, with $85,000 payable on or before August 1, 1998, or whenever the loan proceeds are received from First State Bank, Barbourville, West Virginia, and USDA/BNI, whichever is sooner, with the balance of $85,000 payable by amortized monthly payments for eight (8) years @ 6% per annum from September 1, 1998 until August 1, 2006.  This obligation shall be confirmed by promissory note and secured by a second lien on the equipment and inventory of Berea Machine and Tool.[3]

 

Property Settlement and Separation Agreement, III E.

            A related provision in the agreement is as follows:

            A.  … That Husband will be permitted in the future to work at Berea Machine & Tool, full-time.  The Wife will continue to receive her usual salary, which will be mailed to her at her address of record, until payment to her of the first $85,000 contemplated by Item III-E, hereafter.  Wife will not enter the premises of the business after the execution hereof.  Husband will commence the keeping of the business’ records and financial books himself, but Wife will continue to receive all the same financial information about the business which she currently receives from Long & Fisher (from Joseph Abney) until this divorce is final.

 

Property Settlement and Separation Agreement, Item III A.

            Apparently, prior to the foregoing agreement, the parties had worked at the business under a court-ordered arrangement whereby the wife worked in the office during the morning doing bookkeeping chores and the husband worked during the afternoon and evening supervising work in the shop.

            Insofar as the court can determine the wife’s “usual” salary, which she was receiving at the time of the signing of the Property Settlement and Separation Agreement on July 30, 1998, was $2,950 every two weeks, or $76,700 per year.  This salary arrangement apparently originated after the business was incorporated in October of 1995.  The parties’ tax returns indicate her annual wages were $59,900 in 1996 and $81,673 in 1997, even though the business was unprofitable in both of those years, as well as in 1998 when the business closed.  Mrs. Abney received as salary $59,000 for 1998 prior to the termination of the business in October of 1998, and received a distribution of $4,300.00, less taxes, for back wages owed to her when the business was terminated.

            According to the testimony of the debtor, First State Bank of Barbourville, West Virginia would not conclude the loan for the business until the Property Settlement and Separation Agreement with his wife was concluded.  Then, based on the financial information provided by the debtor, including the Property Settlement and Separation Agreement, the bank declined to make the proposed loan to the business.

            Consequently, the debtor was unable to pay Mrs. Abney the initial $85,000 provided for by the Property Settlement and Separation Agreement, or the additional $85,000 that was to be paid in installments.  Instead, the business was forced to close due to lack of operating capital.

            Since the business closed and the business entity, Berea Machine & Tool, Inc., and the debtor, individually, filed petitions for relief under chapter 7 of the Bankruptcy Code on October 8, 1998, the debtor has held a series of jobs earning between $14 and $18 per hour.  He apparently had drinking and womanizing problems.  Apparently, he was fired from one job for a pattern of tardiness in reporting to work and from another job for sexual harassment of a female employee.  He fell behind on the child support payments of $1,044 per month provided for by the Separation Agreement and was incarcerated for a time for that reason.

            On October 30, 2000 the debtor began work as a tool and die maker at CMS Hurtsell, Berea, Kentucky where he earns $18.18 per hour plus an additional .25 to .30 cents per hour when he works the late shift.  He now earns $540 to $560 per week take home pay for a 40-hour week.  He has subscribed to medical insurance for himself and for his three minor children as required by the Separation Agreement.  Deduction of the insurance premiums may reduce his take home pay somewhat.

            The debtor’s monthly income and fixed expenses are as follows:

            Income                                                                                         $2,235.00

 

            Expenses

                        Child support @ $207 per week          $893.00

                        Rent                                                         $325.00

                        Utilities                                                    $150.00

                        Repayment of money

                          borrowed to pay arrearages

                          in child support                                     $150.00

                        Repayment of money

                          borrowed to attempt to

                          start  another tool & die shop

                          in nearby Estill County                         $100.00

                        Reaffirmed debt to Sears,

                          Roebuck & Co.                                       $56.00

                        Repayment of reaffirmed debt

                          to Bank of Mt. Vernon on

                          repossessed pickup truck             Unknown

                                                                                      $1,674.00          $1,674.00

                                                                                                                     $561.00

 

            The debtor is left with perhaps $500 per month for food, gasoline, and other miscellaneous expenses such as one-half the costs of the children’s extracurricular activities, and will ultimately have to pay his share of the children’s college expenses.  He commutes to work from his apartment in Richmond, Kentucky to his place of employment in Berea, Kentucky, a distance of  30 miles round trip.

            According to the debtor he has talked to officers at three different banks about a loan to restart a tool and die business, and has talked to others about forming a partnership to start such business but has been unsuccessful in these efforts.

            The assets of Berea Machine & Tool, Inc. have been liquidated and the proceeds thereof distributed to creditors.  The assets of the debtor in his individual case likewise have been liquidated and distributed to creditors.

            The debtor reaffirmed a debt to Sears, Roebuck and Co. for the amount of $2,332.38 secured by a security interest in a lawn tractor, trimmer, mower, pressure washer, freezer, washer, and electric dryer which apparently are in the possession of his ex-wife, the plaintiff herein.  The payments on this debt are $56.00 per month (Document #35).

            The debtor testified he reaffirmed a debt to Bank of Mt. Vernon secured by a security interest in a 1991 Chevrolet pickup truck but defaulted on the payments, and as a result, the bank repossessed the truck.  He stated he owes the balance due on this debt.  This is consistent with the debtor’s Statement of Intention accompanying the debtor’s chapter 7 petition (Document #11).  However, the reaffirmation agreement is not filed of record as required by title 11 U.S.C. 524(c)(3) for which reason the reaffirmation agreement may not be enforceable.  The amount of the monthly payments on this debt as provided for by the reaffirmation agreement are not discernable from the record.

            According to the testimony of the debtor his take home pay is $2,235 per month and his expenses are $2,400 per month, when food, gasoline and miscellaneous expenses are included.

            After she ceased working for the business Susan Abney worked for a time at Kenwood Nursing Home earning $6.25 per hour.  She now works for a florist shop where she earns $7.00 per hour.  She also attends nursing school and has two semesters of study to complete to obtain a degree.  As previously noted by the court she has remarried.  Her present husband contributes to the household expenses of the family.

CONCLUSIONS OF LAW:

            Title 11 U.S.C. 523(a)(15) excepts from discharge a debt incurred by the debtor in connection with a separation as follows –

            523.  Exceptions to discharge.

 

               (a)  A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt –

 

                          (15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless –

 

                              (A)  the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or

 

                              (B)  discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.

 

            On the facts of this case, the court finds the debtor does not have the ability to pay the debt of $170,000, plus accrued interest, representing compensation for the former spouse’s interest in the debtor’s now defunct business.  Counsel for the former spouse argues the debtor is a skilled tool and die maker who has the ability to restart a profitable tool and die business and ultimately earn enough to satisfy the indebtedness in question.  This is speculation, especially in view of the failure of the debtor’s former business due to over expansion and mismanagement.

            Moreover, the court finds that discharging the debt in question would not result in a benefit to the debtor that outweighs the detrimental consequences to the debtor’s former spouse or the children of the debtor.  The debtor remains obligated to pay child support for the children, to maintain health insurance on the children, and to pay his share of their miscellaneous expenses and college education expenses.  Holding that the debt for the former spouse’s interest in the parties’ business is nondischargeable in bankruptcy would compromise the debtor’s ability to meet his other obligations under the Separation Agreement and would be counterproductive.  Moreover, it appears to the court that the former spouse’s interest in the business was greatly overvalued by the parties as evidenced by the debtor’s inability to obtain the financing necessary to continuation of the business.[4]


            Accordingly, the court finds the complaint of the former spouse in this adversary proceeding should be dismissed.

            Dated this _____ day of February 2001

                                                                                    By the court –

 

                                                                                    ________________________________

                                                                                    JOE LEE, U.S. BANKRUPTCY JUDGE

 

 

Copies to:

 

John F. Lackey, Esq.

C. Wayne Shepherd, Esq.

James D. Lyon, Trustee

J. James Rogan, Trustee, Berea Machine & Tool, Inc.

U.S. Trustee

 


UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

 

JOSEPH D. ABNEY

 

DEBTOR

 

SUSAN F. ABNEY

 

VS.

 

JAMES D. LYON, TRUSTEE

 

 

CASE NO. 98-52559

 

 

 

PLAINTIFF

 

ADVERSARY NO. 98-5144

 

DEFENDANTS

 

 

 

ORDER

 

            In conformity with the memorandum opinion of the court this day entered, IT IS NOW THEREFORE ORDERED that this adversary proceeding be and the same is hereby DISMISSED.

            Dated this _____ day of February 2001

                                                                                    By the court –

 

                                                                                    ________________________________

                                                                                    JOE LEE. U.S. BANKRUPTCY JUDGE

 

Copies to:

 

John F. Lackey, Esq.

C. Wayne Shepherd, Esq.

James D. Lyon, Trustee

J. James Rogan, Trustee, Berea Machine & Tool, Inc.

U.S. Trustee



[1]  The income tax returns of the parties indicate they received $22,000 annual rental income from Berea Machine & Tool, Inc.  The mortgage payments on the properties totaled $26,269.48 annually.  The rental income was insufficient to amortize the mortgage indebtedness on the property.

[2]  The earnings for this productive year may have been the source of the funds to purchase the 3.54-acre tract in the Berea Industrial Park.

[3]  In a separate opinion in the Berea Machine & Tool, Inc. case this court ruled this obligation to be an unsecured debt because it was never confirmed by a note and security agreement.  No security agreement or judgment incorporating the agreement was ever recorded.  The equipment of the business was subject to a prior, perfected security interest held by Orix Credit Alliance, Inc.

[4]  There was no formal professional valuation of the business.  The $170,000 figure is based on the parties’ pre-bankruptcy guess as to the value of the wife’s claimed one-half interest in the business.  The trustee in Mr. Abney’s case realized a net of $48,348.96 from the sale of the debtor’s interest in the real estate leased to the business.  The real estate was not an asset of the business.  The trustee of the estate of the business, Berea Machine & Tool, Inc., realized a net of only $61,352.34 from liquidation of the assets of the corporate debtor.  Of this amount $36,667.12 was paid in satisfaction of the secured claim of Orix Credit Alliance, Inc.  The liabilities of the corporation were scheduled as $274,930.87.