Zeitchik v. Zeitchik

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
FAYETTEVILLE DIVISION
IN RE:
DAVID PAUL ZEITCHIK
DEBTOR
CASE NO.
05-09769-8-RDD
ESTHER P. ZEITCHIK
Plaintiff
v.
DAVID PAUL ZEITCHIK
Defendant
ADVERSARY PROCEEDING NO.
06-00169-8-RDD-AP
MEMORANDUM OPINION
The trial of this adversary proceeding filed by the plaintiff, Esther P. Zeitchik, pursuant to 11 U.S.C.
§ 523(a)(5) and (15) to determine the dischargeability of debts owed to Ms. Zeitchik by the defendant,
SO ORDERED.
SIGNED this 15 day of June, 2007.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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1This bankruptcy case was filed on October 14, 2005, which was prior to the effective date of
the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Therefore, the pre-
BAPCPA version of 11 U.S.C. § 523 is applicable to this case.
2A hearing was held on the plaintiff’s motion for summary judgment on March 15, 2007, at
which time the defendant stipulated that this amount was nondischargeable as alimony pursuant to 11
U.S.C. § 523(a)(5). On March 19, 2007, an order regarding the plaintiff’s motion for summary
judgment was entered granting summary judgment to the plaintiff with regard to the nondischargeability
of the alimony and establishing the sums due with regard to the two remaining obligations. Partial
summary judgment was entered finding that Mr. Zeitchik owed $99,888.64 as of March 15, 2007 on
the $145,000.00 obligation and $42,235.68 as of January 7, 2007 on the mortgage obligation, with
that amount continuing to increase at a rate of $1,884.42 per month.
2
David Paul Zeitchik, was held on June 8, 2007 in Wilson, North Carolina.1 David Paul Zeitchik filed a
petition for relief pursuant to chapter 7 of the Bankruptcy Code on October 14, 2005.
This bankruptcy court has jurisdiction over the parties and the subject matter of this proceeding
pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the United
States District Court for the Eastern District of North Carolina on August 3, 1984. Venue is proper
pursuant to 28 U.S.C. § 1409(a). This is a “core proceeding” within the meaning of 28 U.S.C. §
157(b)(2)(I), which this court may hear and determine.
David Paul Zeitchik and Esther P. Zeitchik were married on February 10, 1973 in Silver Springs,
Maryland. They have two adult children. The parties separated on August 31, 1996 and were divorced
on August 7, 2000. Pursuant to an oral agreement, transcribed and incorporated into the judgment of
absolute divorce, Mr. Zeitchik was to make three separate payments to Ms. Zeitchik. Plaintiff’s Exhibit
1. The first payment was the sum of $2,300.00 per month as indefinite alimony.2 The second payment was
$145,000.00, to be paid with no interest in installments of $805.56 per month for 15 years. The third
payment was for the first mortgage on the marital residence, which was transferred to the wife. Ms.
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Zeitchik seeks a determination that the second and third payments are in the form of alimony, support, or
maintenance and are therefore nondischargeable pursuant to 11 U.S.C. § 523(a)(5). In the alternative, Ms.
Zeitchik seeks a determination that, if the second and third payments are determined to be property
settlement, said obligations are nondischargeable pursuant to 11 U.S.C. § 523(a)(15).
I. CLASSIFICATION
The court must first determine whether the payments at issue are in the form of alimony or support
or are in the form of a property settlement. “The proper test of whether the payments are alimony lies in
proof of whether it was the intention of the parties that the payments be for support rather than as a
property settlement.” Melichar v. Ost (In re Melichar), 661 F.2d 300, 303 (4th Cir. 1981) (citing Shacter
v. Shacter, 467 F.Supp. 64 (D.Md.), aff’d without published opinion, 610 F.2d 813 (4th Cir. 1979);
Nichols v. Hensler, 528 F.2d 304 (7th Cir. 1976); 3 Collier on Bankruptcy P 523.15, at 523-111 (1981
ed.)).
In this case, Ms. Zeitchik testified that, after their separation, Mr. Zeitchik paid her $5,400.00 per
month to cover her expenses of approximately $5,000.00 per month. This continued, voluntarily, from
August 1996 until sometime in 1998, when he decreased the amount to $3,900.00 per month. Mr.
Zeitchik continued to voluntarily pay the $3,900.00 per month until early in 2000, when he stopped making
payments. In August 2000, after entry of the judgment of divorce, Mr. Zeitchik began making the required
alimony payments of $2,300.00 per month and continued to do so through December 2004. Ms. Zeitchik
testified that her monthly expenses remained at approximately $5,000.00 per month until the time of the
divorce and up to the present. Plaintiff’s Exhibit 9. At the time of her divorce, her intent was to receive
approximately $5,100.00 per month from Mr. Zeitchik in order to maintain her current standard of living.
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She testified that the $2,300.00 per month in alimony, the payment of $805.56 per month toward the
$145,000.00 obligation, and the payment of the mortgage in the amount of $1,884.42 per month, equaled
approximately $5,000.00 per month. Therefore, Ms. Zeitchik intended for all three payments to be
considered as support for her. Ms. Zeitchik testified she received more than $100,000.00 in funds from
Mr. Zeitchik shortly after the separation. Mr. Zeitchik stated the amount transferred was $120,000.00.
Mr. Zeitchik testified that it was his intention that the second and third payments be made in
satisfaction of Ms. Zeitchik’s marital property interests in his business. Mr. Zeitchik, at the time of the
divorce, owned a successful manufacturing business. At that time, he testified, the value of the business and
the building in which it was housed had been appraised at $1,600,000.00. Mr. Zeitchik was a 50% owner
of the business and the building, so his interest was valued at $800,000.00. Mr. Zeitchik further testified
that the mortgage on the marital residence at that time was $255,000.00. Mr. Zeitchik agreed to pay the
mortgage and pay Ms. Zeitchik an additional $145,000.00 over time in satisfaction of her one-half marital
interest in the value of his business and building, which was equivalent to $400,000.00.
Because the parties’ intents seem to differ, the court must look to other factors to determine
whether the payments should be classified as alimony or as property settlement. In Sawtelle v. Keech (In
re Keech), Adv. Pro. No. L-03-00109-8-AP, slip op. at 6-7 (Bankr. E.D.N.C. January 7, 2004), Judge
Leonard cites several factors to be considered when determining the classification of an obligation arising
from a divorce:
the nature of the obligation, whether there are dependent children, the relative earning
power of the spouses and an indication that the obligation was an attempt to balance it, the
adequacy of the dependent spouse’s support without the assumption of the obligation,
dependent spouse’s receipt of inadequate assets in settlement, status of the obligation upon
death or remarriage, timing of payments (lump sum or periodic), the payee (direct vs.
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indirect), waivers of maintenance, whether the obligation is modifiable, location of the
paragraph containing the obligationwithin the agreement (whether or not it is located within
the property distribution section), and the tax treatment of the obligation.
Id. (citing Wright v. Wright (In re Wright), 184 B.R. 318, 321 (Bankr. N. D. Ill. 1995)).
In considering these factors, and looking specifically at the transcript of the agreement between the
parties, it appears to the court that these payments should be classified as property settlement. The
agreement specifies that both these payments are “in partial satisfaction of . . . marital property interests.”
Although Ms. Zeitchik testified that she considered the payments to be support and that she had not heard
the term “property interests” used until the recitation of the agreement in the Maryland court, Ms. Zeitchik
testified at the divorce hearing that she had an opportunity to discuss the agreement with her attorney and
considered it to be a fair resolution. Plaintiff’s Exhibit 1. While the alimony payments of $2,300.00 per
month were classified as modifiable in the judgment for divorce, there was no modification language
pertaining to the $145,000.00 obligation or the mortgage payment obligation. In fact, Mr. Zeitchik
remained responsible for paying the principal balance of the mortgage to Ms. Zeitchik, even if Ms. Zeitchik
chose to sell the marital residence. He was also required to maintain life insurance sufficient to cover the
obligation on the mortgage so that Ms. Zeitchik would still receive the funds should he die prior to fulfilling
the obligation. Plaintiff’s Exhibit 1. It is also relevant that these two obligations were treated separately
from the alimony. In Tilley v. Jessee, 789 F.2d 1074 (4th Cir. 1986), the Fourth Circuit Court of Appeals
held the structure of the document, by placing alimony and property settlement in different provisions of the
document, was probative of intent. The Court said, “In this instance, the agreement did more than simply
label payments as alimony or property settlement. It exhibited a structured drafting that purported to deal
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with separate issues in totally distinct segments of the document.” Id. at 1077-1078. That is the case here
where each of the three obligations were dealt with in separate paragraphs.
Ms. Zeitchik testified that Mr. Zeitchik made 2 mortgage payments during 2005, and Mr. Zeitchik
testified that he made 5 mortgage payments during 2005. Defendant’s Exhibits 1 and 2. Regardless of the
number of payments made, Ms. Zeitchik’s tax returns for 2005 indicate that she did not report these
payments as taxable alimony. Defendant’s Exhibit 3. Mr. Zeitchik further testified that he did not claim
the mortgage payments as a deduction for alimony paid and had never claimed the payments on the
$145,000.00 obligation or the mortgage payments as a deduction for alimony paid. Defendant’s Exhibit
4. The Fourth Circuit Court of Appeals has applied quasi-estoppel to preclude a debtor, who has
deducted payments as alimony on income tax returns, “from avoiding the corresponding obligations or
effects of this classification under the Bankruptcy Code.” Robb-Fulton v. Robb (In re Robb), 23 F.3d
895, 899 (4th Cir. 1994). A party who has failed to report payments pursuant to a divorce decree as
alimony income on income tax returns should likewise be estopped from alleging that the payments are
alimony for purposes of 11 U.S.C. § 523(a)(5).
Finally, the court found Mr. Zeitchik’s explanation of the negotiation for the $145,000.00 obligation
and the mortgage payments more plausible than Ms. Zeitchik’s. Ms. Zeitchik’s interest in Mr. Zeitchik’s
business and building would have been valued at approximately $400,000.00 based upon the appraisal of
$1,600,000.00. The $255,000.00 principal balance on the mortgage plus the $145,000.00 obligation
equal $400,000.00.
Ms. Zeitchik’s explanation that the obligations met the $5,100.00 in support she needed each
month was not as credible. If $5,100.00 was Ms. Zeitchik’s “bottom line,” as she testified, Mr. Zeitchik
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could have simply made a $5,100.00 per month alimony payment. There would have then been no need
for him to agree to take out a life insurance policy for the balance of the mortgage as alimony terminates
on death, and he could have deducted the full amount of alimony on his taxes. For all of the foregoing
reasons, the court finds that the $145,000.00 obligation and the obligation to make the mortgage payments
on the marital residence were settlements of marital property interests and not in the nature of alimony,
support, or maintenance. The court must now determine the dischargeability of those obligations pursuant
to 11 U.S.C. § 523(a)(15).
II. DISCHARGEABILITY
The pre-BAPCPA § 523(a)(15) provides that a property settlement can be dischargeable if:
(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.
If Mr. Zeitchik has the ability to pay the debts after payment of reasonable expenses, then the debt
is not dischargeable. However, if Mr. Zeitchik does not have the ability to pay the debts after payment of
reasonable expenses, then the debts are only discharged if the benefit to Mr. Zeitchik outweighs the
detrimental consequences to Ms. Zeitchik. The burden is placed on Mr. Zeitchik to prove either his
inability to pay or the balancing of the equities in his favor in order for the debt to be dischargeable.
Mr. Zeitchik testified that he is 59 years old and has a Bachelor of Arts degree in interior design
from the International Institute of Interior Design. He began his own business, originally known as Crown
Restaurant and Store Equipment, and was a successful businessman during the 1990s. Mr. Zeitchik’s
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business originally manufactured office furniture, but eventually became a manufacturer of kitchen cabinets
as a result of the economy and a loss of government contracts. His business was originally located in
Maryland, but was relocated to Bladenboro, North Carolina in 2001. During the course of the business,
Mr. Zeitchik took on a partner, Joe Flutka. In 2005, Mr. Zeitchik had to undergo quadruple bypass
surgery and was unable to work for several weeks. He did not receive any payments from the business
during that time, and testified that Mr. Flutka mismanaged the business during his surgery and recovery.
Shortly thereafter, the business was in financial distress, and ultimately filed bankruptcy shortly after Mr.
Zeitchik filed bankruptcy.
Mr. Zeitchik testified that when he and Ms. Zeitchik originally separated, he voluntarily made
payments of $5,400.00 per month to her, which he could afford to pay at that time. In 1998, he decreased
that amount because he was no longer able to afford $5,400.00 per month. In 2005, he stopped making
payments to Ms. Zeitchik and on the mortgage because the money he did have was necessary for him to
survive.
After the failure of Mr. Zeitchik’s business, he became employed with Hardee’s as a store manager
in Roanoke, Virginia, after unsuccessfully searching for a production manager position in southeastern
North Carolina. His salary with Hardee’s was $23,500.00. He was employed with Hardee’s from
December 2005 until October 2006. In October 2006, he became employed with Sonic Drive-In as
manager, earning approximately $25,000.00 per year. He remained employed with Sonic Drive-In until
April 2007, when his position was terminated. He has since been applying and interviewing for other jobs,
but has been unable to secure another position. In 2006, Mr. Zeitchik earned approximately $25,000.00.
Defendant’s Exhibits 5 and 6.
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Mr. Zeitchik testified that he does have a degree in interior design, but the design field is now
computerized, and he does not have the expertise necessary to become employed in that field. He also
testified that he has applied for production positions, for which he is well-qualified, but has not received any
responses. He feels his age (59 years) is a detriment to being employed.
Mr. Zeitchik testified that he owns a one-half interest in a limited liability company that owns the
building in Bladenboro, North Carolina, which formerly housed his business. However, the debt on the
building is more than what the building is worth. He testified that he does not own a car, has a small
checking account, a timeshare, household goods, and an IRA of approximately $37,000.00 that he has
used to live on since his unemployment. The debtor testified that his current monthly expenses are
approximately $1,676.44 plus an additional $461.00 per month for health insurance under COBRA.
Based on the positions he has been able to obtain since the failure of his business and based on the
positions for which he has interviewed since the loss of his job with Sonic Drive-In, Mr. Zeitchik anticipates
that, when he is able to find employment, he will be able to earn between $25,000.00 and $27,000.00 per
year. After paying his monthly living expenses and the $2,300.00 per month alimony to Ms. Zeitchik, which
is nondischargeable, he will not have the ability to make any additional payments to or on behalf of Ms.
Zeitchik. In fact, it is doubtful that Mr. Zeitchik will have sufficient income to pay the alimony of $2,300.00
per month.
Ms. Zeitchik testified that she is 58 years old. She has asthma and osteoporosis. She also has fluid
accumulating around her heart, which has led her doctors to indicate their preference that she not work.
She has taken some college courses, but stopped taking classes in order to work full-time to support Mr.
Zeitchik while he pursued his degree. She stopped working prior to her daughter’s birth in 1977 and
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remained without a job outside the home until after the separation from her husband. She is currently
employed with Montgomery County Public Schools in a part-time position as a clerk. She works 25 hours
per week and earns approximately $17,000.00 per year or $1,145.86 per month. Plaintiff’s Exhibit 9.
Ms. Zeitchik testified that since her separation and divorce from Mr. Zeitchik, she has had to make
several adjustments to her lifestyle, including giving up bowling with a group of friends with whom she had
bowled for over 30 years, leaving her synagogue, and giving up entertainment such as movies and dining
in restaurants. She testified that she currently makes approximately $1,145.86 per month from her job and
has approximately $5,078.00 in expenses. Ms. Zeitchik indicated that she has had a negative cash flow
since January 2005. Since that time, she has used her savings, which consisted of over $100,000.00 given
to her at the time of separation by Mr. Zeitchik, money from her parents, and sold a small amount of stock
for living expenses. She testified that her cash and savings is now reduced to $35,000.00 and is being
depleted by approximately $4,000.00 per month. Plaintiff’s Exhibit 9.
Ms. Zeitchik testified that she still resides in the marital residence. That home is a 3,400 square foot
home with 4 bedrooms, 3 full baths and 2 half baths. Ms. Zeitchik values the home at $750,000.00, with
an outstanding mortgage of approximately $219,000.00. Although there is considerable equity of over
one-half million dollars in the home, Ms. Zeitchik explained that the home was in need of numerous repairs
and that it would cost her more to sell the home and move somewhere else than it would to stay in the
home. She indicated that to sell her home would place a substantial burden on her.
Mr. Zeitchik’s future income stream is questionable. He is currently unemployed. He has an
interior design degree, but does not have the computer experience necessary to secure a job in that field.
He has extensive production experience, but has been unable to find work in that area. His last two jobs
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have been management positions in the fast food service industry, for which he has earned between
$23,000.00 and $25,000.00 per year.
Mr. Zeitchik reviewed his expenses during his testimony, and they all appeared to be reasonable.
These expenses, taken together with the alimony of $2,300.00 per month for which Mr. Zeitchik has
acknowledged responsibility, will more than likely exceed the income from any position that Mr. Zeitchik
may find in the future.
After reviewing the testimony of Mr. Zeitchik and Ms. Zeitchik, the court finds that Mr. Zeitchik
does not have the ability to pay the $145,000.00 obligation to Ms. Zeitchik and the mortgage payment
obligation required by the divorce decree. Mr. Zeitchik made substantial alimony and property settlement
payments to Ms. Zeitchik for a period of approximately eight years, until health and business problems left
him no ability to do so.
Inability to pay, in itself, is sufficient to regard these property settlement obligations as
dischargeable. However, the court has also considered the balancing of the equities between the parties.
The balancing test, like the ability to pay test, requires that the court consider the
relative circumstances of the parties at the time of the adversary proceeding. The courts
have developed a number of factors that may be considered in evaluating the relative
impact of the dischargeability determination on the parties:
-- the payment terms and amount of debt;
-- the current income of the debtor, the creditor and their respective spouses;
-- the current assets of the debtor (whether exempt or not), the creditor and their
respective spouses;
-- the current liabilities (other than those discharged) of the debtor, the creditor and
their respective spouses;
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-- the health, job skills, training, age and education of the debtor, the creditor and their
respective spouses;
-- the age, number and any special needs of the dependents of the debtor, the creditor
and their respective spouses;
-- any changes in the financial condition of the debtor and the creditor which may have
occurred since the entry of the divorce decree;
-- the amount of debt which has been or will be discharged in the debtor's bankruptcy case;
-- whether the creditor is eligible for bankruptcy relief; and
-- whether the parties have acted in good faith in the filing of the bankruptcy case and in
the litigation of the subsection 523(a)(15) issues.
4 Collier on Bankruptcy, ¶ 523.21[4] (15th ed. rev. 2005) (footnote omitted).
At the current time, Mr. Zeitchik is unemployed, having been terminated from his position on
April 16, 2007. Mr. Zeitchik’s financial condition has deteriorated dramatically since the entry of the
divorce judgment and agreement. Mr. Zeitchik has very few assets, the most substantial being his
$37,000.00 IRA.
Ms. Zeitchik is currently employed in a part-time position, and has a home with equity of more
than $500,000.00. Her financial statement, which she prepared and submitted as evidence, indicates
that, as of May 2, 2007, she had assets of $30,000.00 in cash on hand and in banks; $5,000.00 in
savings accounts; $135,000.00 in an IRA or other retirement account; $750,000.00 in real estate; and
$6,400.00 in the present value of an automobile. She also had liabilities of $9,000.00 to Star of David
to be paid in monthly payments of $190.00 and a mortgage liability of $219,000.00. Ms. Zeitchik’s net
worth according to this financial statement is $698,400.00. Plaintiff’s Exhibit 8.
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Although the court does understand Ms. Zeitchik’s desire to keep her home and the burden she
is under to maintain her current standard of living on the salary received from her part-time position, the
court feels that the totality of the circumstances weigh in favor of Mr. Zeitchik. Ms. Zeitchik could sell
her home, pay the mortgage, and use some portion of the $500,000.00 equity to buy a smaller home,
townhouse, or condominium and have no mortgage payment. Plus, depending on the price of the new
home, she could have additional proceeds not used in purchasing a new home for her use.
Because Mr. Zeitchik has met his burden of proving his inability to pay the $145,000.00
obligation and the mortgage payment obligation and of proving that the benefit of the discharge to him
outweighs the detriment to Ms. Zeitchik, the mortgage payment debt of $1,884.82 per month, with an
outstanding balance as of January 7, 2007 in the amount of $42,235.68 plus $1,884.82 per month, and
the $804.15 per month payment with a balance of $99,888.64 as of March 19, 2007, arising out of the
agreement incorporated into the judgment of absolute divorce entered on August 7, 2000, is
DISCHARGEABLE.
A separate judgment will be entered.
SO ORDERED.
END OF DOCUMENT
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