By Richard E. Weltman and Michele K. Jaspan

Creditors having significant claims against a bankruptcy debtor often face daunting challenges. Many general practitioners are simply not familiar enough with bankruptcy procedures. Liquidation and reorganization cases have materially different objectives, proceedings move quickly, claims deadlines are strictly observed, and bankruptcy statutes and rules typically favor debtors over creditors. When matrimonial disputes are added to the mix, the bankruptcy court is charged with balancing public policy—protecting the child and custodial parent and deferring to state family court expertise—with the interests of a financially troubled debtor seeking a fresh start. Despite the initial

Father and Mother were married for a short time and had an infant. Their families were soon at odds. Before long, marital ties unraveled and divorce followed. Embittered, Father spent years contesting child support, visitation, and parental rights. Contentious and costly family court actions and appeals roiled Mother and her family. Time after time, the family court found against Father due largely to what it viewed as empty arguments and punishing motion practice. With nowhere else to go, Father turned to chapter 13 to try to cancel his child support obligations through bankruptcy. However, as a debtor he ultimately enjoyed even less success, due in part to dogged and persistent opposition by his former wife and her legal team, assisted by Weltman & Moskowitz, LLP, their bankruptcy lawyers (“W&M”). The gist of the opposition was that debtor’s chapter 13 plan lacked good faith and could not be confirmed as contrary to law and was void against public policy. Ultimately, debtor retreated and withdrew his case after efforts to harass and wear down his largest creditors were rejected by both the bankruptcy and federal district courts.

A substantial driver of debtor’s bankruptcy journey was his persistent failure to pay court-ordered child support arrears and awarded attorney’s fees. His recalcitrance led to risk of imminent incarceration following family court findings of criminal contempt. After two false starts in bankruptcy, debtor’s third attempt to avoid his child support obligations through chapter 13 eventually failed. Debtor was ruled ineligible to use a wage-earner plan to extinguish child support arrears which the state family and appeals courts had previously awarded.

Just prior to debtor’s bankruptcy, the family court had awarded substantial appellate counsel fees to his former wife and her attorneys. Having contemptuously failed to obey family court orders, debtor faced jail time. He walked away from his final opportunity to purge and avoid contempt, instead choosing creditor protection through chapter 13 to circumvent the consequences of his non-compliance.

Debtor did not provide notice of his chapter 13 filing to his former spouse or her attorneys. Instead, he failed to appear, relying instead on the automatic bankruptcy stay. The family court, despite having learned of debtor’s last-minute filing, determined not to condone debtor’s unexcused absence. Exercising its contempt power, the family court ordered debtor’s arrest. Notably, Creditor’s attorneys had sought order compliance from debtor rather than payment.

Despite this, debtor quickly seized upon a claimed “stay violation,” moving for attorney’s fees and actual and punitive damages under section 362(k) of the bankruptcy code. In debtor’s crosshairs were his former wife and her matrimonial attorneys, his most significant creditors by far. Upon learning of the contempt order, W&M immediately reached out to the family court judge, asking that she withdraw the arrest warrant or not enforce it. Notably, Creditors took no steps to enforce the contempt order. At no point was debtor arrested or even detained by law enforcement.

Yet debtor argued that Creditors’ role in family court’s issuance of the arrest warrant, without more, violated the automatic stay triggering statutory damages. He further argued against paying support arrears, claiming the family court awards to his Creditors were dischargeable, and not protected domestic support obligations (DSO) within the meaning of the bankruptcy code. If his position was sustained, and there was no bankruptcy stay exceptions to child support enforcement, then Creditors could have been found to have unwittingly violated the stay.

W&M, on behalf of Creditors, voluntarily sought to preserve the status quo by agreeing to withhold enforcement of the contempt order pending court’s determination of debtor’s motions. Creditors had vigorously opposed debtor’s motion, arguing that (1) the attorney’s fee award was in the nature of child support, thus a DSO under code sections 101 and 362(b)(2)(B) (and excepted from automatic stay violation under prevailing law and public policy), and (2) the contempt order did not violate the stay within the meaning of code sections 362(b)(1) and 362(b)(4). Even had the challenged order had resulted in debtor’s detention for a defined period, he always had the ability to purge. Multiple submissions and several hearings followed, and the bankruptcy court took the parties’ positions under advisement.

To further protect Creditors, W&M recommended they each file a proof of claim for, among other things, the fee award and support arrears as nondischargeable DSOs. Certain types of marital debts can be considered support, and a DSO, even if not expressly labeled as support, maintenance, or alimony. 11 U.S.C. §523(a)(5). Despite well-settled law to the contrary, debtor sought an order deeming child support dischargeable. Debtor’s ability to confirm his chapter 13 plan--at the expense of Creditors and his daughter--hinged on both motions being successful. The stakes were high, and fees and costs continued to mount. Debtor had hoped to run out the clock or recover a windfall from Creditors to rescue his otherwise doomed bankruptcy plan. Though his prospects were nearly nonexistent, debtor managed to keep the motions in play for many months.

Eventually, debtor was defeated, and Creditors triumphed. The bankruptcy court issued two separate rulings: (1) declaring the Creditors’ fee award to be a protected support obligation, and thus a nondischargeable DSO, and (2) determining that Creditors had not violated the stay, meaning debtor would receive no imputed damages, legal fees, or punitive award from Creditors. In the end, the bankruptcy court embraced the findings of the state courts, which had rejected debtor’s legal and factual arguments as disingenuous, lacking good faith, and simply not credible.

Throughout the chapter 13 process, debtor hoped to leverage an imagined stay violation to reverse his significant state court losses. He tried to cloak himself as a deserving debtor, as his wealthy family waged a costly—though unsuccessful--war of attrition. Creditors ultimately won the day, ending debtor’s chapter 13 journey as well as his bankruptcy appeal.

It is often said that hard facts make bad law. In this case study, debtor’s specious arguments and relentless motion practice were not rewarded due in large part to an early and strategic creditor challenge. In short, competing factors must be balanced when insolvency, public policy, divorce, child support, and the claims of a hypothetically “honest but unfortunate debtor” all converge.

If you are scheduled as a creditor in a chapter 7, 11 or 13 filing by a former spouse, business partner, key customer, supplier, tenant, or other financially distressed party, or if you risk trustee avoidance or fraudulent conveyance litigation, think of Weltman & Moskowitz, and bring us your toughest questions. Our team offers peace of mind, helps level the playing field, and might improve your overall outcome and claims experience.

About Weltman & Moskowitz, LLP, a Premier New York and
New Jersey Business, Bankruptcy and Creditor’s Rights Law Firm:

For more than 30 years, Weltman & Moskowitz has protected creditors, debtors, and other interested parties with insolvency-related matters and business litigation. Richard E. Weltman, co-founding partner of the firm, often champions owner, lender and creditor interests, counsels and advises on restructuring, trial strategy, claim priority, distressed asset sales and purchases, commercial foreclosure, high-stakes shareholder and partner disputes, and many types of federal and state court litigation, arbitration, mediation, and alternative dispute resolution. Contact Richard at (646) 532-4622 or email him at rew@weltmosk.com. Reach co-author Michele K. Jaspan, W&M’s senior associate, at mkj@weltmosk.com.