In the Matter of Johnnie Williams, Whose Wife is Mytris Genewilliams, Bankrupt-appellee, v. Department of Social and Health Services, State Ofwashington, Creditor-appellant, 529 F.2d 1264 (9th Cir. 1976)

Kenneth MacIntosh, Asst. Atty. Gen. (argued), Seattle, Wash., for creditor-appellant.

John Sennhauser (argued), Legal Services Center, Seattle, Wash., for bankrupt-appellee.

OPINION

Before MERRILL and TRASK, Circuit Judges, and LUCAS,^*  District Judge.

LUCAS, District Judge:

The Department of Social and Health Services, State of Washington, appeals from an October 26, 1973 order entered in the District Court for the Western District of Washington affirming the Referee in Bankruptcy's decision that the bankrupt-appellee's obligation to the Department for unpaid child support pursuant to RCW 74.20 A. 010 et seq.¹  was discharged in bankruptcy. Both parties have stipulated to the pertinent facts.

In a divorce decree dated June 14, 1967, the bankrupt Johnnie Williams, was ordered to pay $33.33 per month per child for the support of his two minor children, who were awarded to the custody of their mother. The bankrupt has subsequently remarried and become responsible for the support of a stepdaughter and son living with him and his second wife.

From September 1969 through February 1972, the bankrupt paid only $135.00 in child support for the offspring by his first marriage, the Department meanwhile paying to their mother for their support $1,864.80 in public-assistance benefits of the category Aid to Families with Dependent Children (AFDC). On April 19, 1972, the Department filed a lien for that amount on the bankrupt's wages pursuant to RCW 74.20 A. 060 et seq. Notice of the lien was served on the bankrupt's employer, Bethlehem Steel Corporation, on April 27, 1972. Under RCW 74.20 A. 090, 50% of the debtor's disposable earnings are exempt from such a child-support lien. During the time the lien was placed upon the bankrupt's wages, his earnings averaged approximately $600.00 gross and $440.00 net income per month. Prior to the filing on June 9, 1972, of the petition in bankruptcy which duly scheduled the support lien, $420.39 was withheld from the bankrupt's check and paid to the Department. Subsequent to the filing of the petition and prior to the suspension of the lien, $397.81 was similarly withheld and paid to appellant. Effective August 1, 1972, pending final determination of this matter including all appeals, enforcement of the lien was suspended and the bankrupt effected a wage assignment to the Department for the full amount of current support owed his two minor children, $66.66 per month. The order affirmed by the district court required the Department to repay the $397.81 withheld after the filing of the petition in bankruptcy, and enjoined further attempts to enforce the debt to the Department for unpaid child support.

It is uncontroverted that the discharge in bankruptcy did not affect the right of the bankrupt's ex-wife to enforce the divorce court's award for the support of their minor children. Whether the bankrupt's obligation to the Department under RCW 74.20 A. 010 et seq. is also exempt from discharge is the single issue on appeal and is resolved by construction of Section 17(a) (7) of the Bankruptcy Act, 11 U.S.C. § 35(a) (7).²  That section provides, in pertinent part:

'A discharge in bankruptcy shall release a bankrupt from all his provable debts, whether allowable in full or in part, except such as . . . (7) are for alimony due or to become due, or for maintenance or support of wife or child . . ..'See generally, 1A Collier on Bankruptcy P17.19 (14 ed. 1975).

RCW 74.20 A. 030, the principal statute upon which the Department's claim rests, read as follows at the time this action was instituted:

'Any payment of public assistance money made to or for the benefit of any dependent child or children creates a debt due and owing to the department by the natural or adoptive parent or parents who are responsible for support of such children in an amount equal to the amount of public assistance money so paid: Provided, that where there has been a superior court order or final decree of divorce, the debt shall be limited to the amount of said court order or decree. The department shall have the right to petition the appropriate superior court for modification of a superior court order on the same grounds as either party to said cause.

'The department shall be subrogated to the right of said child or children or person having the care, custody, and control of said child or children to prosecute or maintain any support action or execute any administrative remedy existing under the laws of the state of Washington to obtain reimbursement of moneys thus expended. If a superior court order or final decree of divorce enters judgment for an amount of support to be paid by an obligor parent, the department shall be subrogated to the debt created by such order, and said money judgment shall be deemed to be in favor of the department.'

This and companion statutes³  were enacted in response to new requirements placed upon states participating in the AFDC program, 42 U.S.C. § 601 et seq., by the Social Security Amendments of 1967, Pub. L. No. 90--248, 81 Stat. 821 (Jan. 2, 1968). The modus operandi of that program, designed to meet the needs of minor children in families without a breadwinner, was outlined by the Supreme Court in King v. Smith, 392 U.S. 309, 316--18, 88 S. Ct. 2128, 2133--34, 20 L. Ed. 2d 1118 (1968) (Warren, C.J.) (citations omitted):

'The AFDC program is based on a scheme of cooperative federalism. . . . It is financed largely by the Federal Government, on a matching fund basis, and is administered by the States. States are not required to participate in the program, but those which desire to take advantage of the substantial federal funds available for distribution to needy children are required to submit an AFDC plan for the approval of the Secretary of Health, Education, and Welfare (HEW). . . .

The plan must conform with several requirements of the Social Security Act and with rules and regulations promulgated by HEW. . . .

'One of the statutory requirements is that 'aid to families with dependent children * * * shall be furnished * * *.' . . . (T)he Act clearly require(s) participating States to furnish aid to families with children who have a parent absent from the home, if such families are in other respects eligible. . . .'

'. . . There is no question that States have considerable latitude in allocating their AFDC resources, since each State is free to set its own standard of need and to determine the level of benefits by the amount of funds it devotes to the program. Further, there is no question that regular and actual contributions to a needy child . . . can be taken into account in determining whether the child is needy. . . .'A major purpose of the Social Security Amendments of 1967, supra, was to reduce the rapidly increasing cost of this program to taxpayers and increase the benefit of the AFDC moneys expended by spurring states' enforcement of laws requiring legally responsible parents of sufficient means to make their appropriate contribution to the support of their children. See King v. Smith, supra, at 332, 88 S. Ct. at 2141; S.Rep.No.744, 90th Cong., 1st Sess. (1967), reprinted in 1967 U.S.Code Cong. & Admin.News 2834 at 2981--82, 2997--3000.⁴  Among other provisions directed towards that goal,⁵  § 201(a) (1) (C) mandated that participating states set up a separate agency to execute programs to establish the paternity and secure support for children born out of wedlock and

'(ii) in the case of any child receiving such (AFDC) aid who has been deserted or abandoned by his parent, to secure support for such child from such parent . . . utilizing any reciprocal arrangements adopted with other States to obtain or enforce court orders for support . . ..'

81 Stat. 878--79, 42 U.S.C. § 602(a) (17).

The Washington legislature had previously authorized the Department in RCW 74.20.040 (1963), as amended, RCW 74.20.040 (Supp.1974), to enforce child-support obligations on behalf of applicants for public assistance, but redoubled its enforcement efforts in response to the 1968 federal amendments by enacting the recoupment statutes at issue, RCW Chapter 74.20A.⁶  While the Congressional Conference Committee had deleted Senate provisions which would have required state plans to include sections under which a deserting parent could have become liable to the United States for the federal share of AFDC payments for his children, Conference Rep.No.1030, Amendment No. 223, 90th Cong., 1st Sess. (1967), 1967 U.S.Code Cong. & Admin.News at 3208, the 1967 amendments did not preclude states from creating a similar liability for AFDC moneys expended.⁷  In fact, subsequent to appellee's filing in bankruptcy, Congress enacted the Social Services Amendments of 1974, Pub. L. No. 63--647, 88 Stat. 2337 (93rd Cong., 2d Sess. 1974), § 460(c) (5) of which sets forth that state plans must provide that each applicant or recipient of AFDC aid, as a condition of eligibility therefor,

'. . . assign to the State any rights to support from any other person such applicant may have (i) in his own behalf or in behalf of any other family member for whom the applicant is applying for or receiving aid, and (ii) which have accrued at the time such assignment is executed . . ..'

88 Stat. 2359, 42 U.S.C. § 602(a) (26).

Section 456(b) specifies that

'(a) debt which is a child support obligation assigned to a State under (42 U.S.C. § 602(a) (26)) is not released by a discharge in bankruptcy under the Bankruptcy Act.'

88 Stat. 2356. Although this amendment, effective July 1, 1975, should control future actions under state statutes seeking to collect accrued unpaid child support, it is not dispositive of this appeal. However, the decision we reach is in accord with and may properly take cognizance of this recent declaration of Congressional intent. Cf. Wetmore v. Markoe, 196 U.S. 68, 76--77, 25 S. Ct. 172, 175, 49 L. Ed. 390 (1904). For we hold that the recoupment debt created by RCW 74.20 A. 010 et seq. is a debt for maintenance or support exempt from discharge in bankruptcy under 11 U.S.C. § 35(a) (7).⁸ 

While the oft-stated purpose of the Bankruptcy Act is to give debtors a chance for a fresh start, e.g., Perez v. Campbell, 402 U.S. 637, 649, 91 S. Ct. 1704, 1710--11, 29 L. Ed. 2d 233 (1971), even prior to codification of the support exemption into the Act in 32 Stat. 798, ch. 487 § 5 (Feb. 5, 1903), courts interpreted obligations to dependents as beyond its remedial purposes. In Wetmore v. Markoe, supra, 196 U.S. at 77, 25 S. Ct. at 176, the Supreme Court declared that

'(u)nless positively required by direct enactment the courts should not presume a design upon the part of Congress, in relieving the unfortunate debtor, to make the law a means of avoiding enforcement of the obligation, moral and legal, devolved upon the husband to support his wife and to maintain and educate his children.'

E.g., Dunbar v. Dunbar, 190 U.S. 340, 23 S. Ct. 757, 47 L. Ed. 1084 (1902); Poolman v. Poolman, 289 F.2d 332, 335 (8th Cir. 1961); In re Hubbard, 98 F. 710 (N.D. Ill. 1899).

The bankrupt and the opinion of the Referee in Bankruptcy adopted by the district court argue essentially that the State of Washington has attempted to invest itself with the character and quality of the children's relationship to the bankrupt 'statutory fiat,' and that the true origin of the recoupment debt is the independent obligation of the Department to provide AFDC payments to all eligible individuals rather than the bankrupt's obligation to provide support. E.g., Hilliard v. De Ciuceis, 202 Misc. 197, 115 N.Y.S.2d 5, 6 (Sup.Ct.1952):

'The funds provided . . . by the welfare authorities were not provided in lieu of the bankrupt's obligation to support them. They were provided because these people, quite independent of their relationship to the debtor, were in need. The same funds would have been supplied to the same people from the same source if the judgment debtor were dead or under no obligation to support them. The funds are recoverable from the debtor because the Social Welfare Law so provides, doubtless due to the fact that had he been able to support them, he rather than the state would have been required to support them. The debt was not created to relieve the debtor of his obligation but only because the authorities deemed that it is impossible for him to meet it.'

We disagree. A debt's underlying nature, rather than its form, is the central concern in determining whether it is discharged. Cf. Pepper v. Litton, 308 U.S. 295, 305--06, 60 S. Ct. 238, 244--45, 84 L. Ed. 281 (1939); Martin v. Rosenbaum, 329 F.2d 817, 820 (9th Cir. 1964); Poolman v. Poolman, supra. The Department's duty to provide $1,864.80 in AFDC funds for the support of the bankrupt's minor children did not arise in a vacuum. 42 U.S.C. § 602(a) (7) requires state agencies determining need and eligibility for AFDC support to

'. . . take into consideration any other income and resources of any child or relative claiming aid to families with dependent children . . .'

Had the bankrupt met his common law and statutory support obligation⁹  reflected in the divorce court's support order, the need of his offspring and the level of AFDC payments which the Department was obligated to make to those dependents would have been correspondingly reduced. See King v. Smith, supra, 392 U.S. at 319--20, 88 S. Ct. at 2134--35. Therefore, the Department's payments, while mandated by statute and regulations, were substantially in lieu of the bankrupt's support obligations.

The fact that the funds recovered flow to state and federal treasuries¹⁰  rather than directly to the bankrupt's children does not alter their character as obligations for maintenance or support. Under RCW 74.20 A. 030 the Department is 'subrogated' to the welfare recipients' right to support. That doctrine of subrogation results in a '. . . shift of the original debt from the creditor to the (subrogee) who steps into the creditor's shoes.' Putnam v. Commissioner of Internal Revenue, 352 U.S. 82, 85, 77 S. Ct. 175, 176, 1 L. Ed. 2d 144 (1956). E.g., Compania Anonima Venezolana de Nav. v. A. J. Perez Exp. Co., 303 F.2d 692, 696 (5th Cir. 1962); Allen v. See, 196 F.2d 608, 610 (10th Cir. 1952). As such, the debt to the Department is not a debt different than the bankrupt's obligation to his dependents although it is payable to a different party.

Even if the Department is not viewed as standing squarely in the shoes of its welfare-recipient subrogors, third parties have been permitted to collect what were characterized as support obligations in other contexts. E.g., Jones v. Tyson, 518 F.2d 678 (9th Cir. 1975); In re Meyers, 12 F.2d 938 (W.D.N.Y. 1926); Leib v. Auerbach, 10 N.J.Super. 391, 76 A.2d 726 (1950); Krupp v. Felter, 191 Misc. 726, 77 N.Y.S.2d 665 (Sup.Ct.1948). The rationales of these and other decisions interpreting 11 U.S.C. § 35(a) (7) vary widely.

Those cases allowing third parties who provide essential support to abandoned dependents to maintain their claims after bankruptcy make a reasonable accommodation between the divergent policies behind the exemption for maintenance or support, foreshadowed in Wetmore v. Markoe, supra, and the principle that all provable debts are generally discharged.

In the absence of controlling case authority or conclusive legislative history, policy considerations are of substantial import to our determination. The bankrupt contends that a common pragmatic thread runs through all the cases which have refused to discharge support-related obligations owing to third parties--that the dependents were threatened with actual deprivation of support if discharge were granted, because the third party claimant either was custodian of the dependents or had supplied them with goods in which he retained a security interest. Certainly, the prospect of an immediate impact upon the dependents is an important factor to be weighed in construing the scope of the statutory exemption for support obligations. However, actual deprivation was not a risk in the circumstances of In re Meyers, supra, where the third party claimant by the time of the filing in bankruptcy had ceased to provide nursing care to the bankrupt's abandoned wife. Moreover, the purposes of the maintenance or support exemption would be ill-served by the result sought by the bankrupt, which would jeopardize the continuing viability of the AFDC program¹¹  and at the same time give tacit encouragement to parents who seek to avoid their duty to support their dependents.¹²  See 53 Colum. L. Rev. 570 (1953), criticizing the result reached in Hilliard v. De Ciuceis, supra. In light of state and federal lawmakers' serious concern over the current and projected costs of the AFDC program traceable in part to family breakup, and the states' power to determine the level of benefits to provide and standards of need, King v. Smith,supra, there is a direct and substantial link between the collection of child support arrearages and the continuing provision of meaningful aid to a large class of particularly needy children.¹³ 

We hold, therefore, that RCW 74.20 A. 010 et seq.'s recoupment debt is essentially an obligation for maintenance or support exempt from discharge in bankruptcy under 11 U.S.C. § 35(a) (7). The judgment of the district court requiring repayment of $397.81 to the bankrupt and enjoining further attempts to enforce the debt for the balance of the child support arrearages outstanding is reversed, and the trial court is directed to enter judgment in accordance with this opinion.