AE - Novak v. Novak (3/18/1994)

[Riser Adkisson LLP]

Linda Novak v. Gerald H. Novak,
513 N.W.2d 303 (Neb. 03/18/1994)

SUPREME COURT OF NEBRASKA

No. S-91-1142

1994.NE.143, 513 N.W.2d 303, 245 Neb. 366

March 18, 1994

LINDA NOVAK, APPELLEE AND CROSS-APPELLANT,
v.
GERALD H. NOVAK, APPELLANT AND CROSS-APPELLEE.

SYLLABUS BY THE COURT

1. Partnerships: Attachments: Claims. The interest of a partner is not subject to attachment or
execution, except on a claim against the partnership.

2. Garnishment. The provisions of Neb. Rev. Stat. § 25-1030 (Reissue 1989) are mandatory.

3. Debtors and Creditors: Attachments: Garnishment. Individual retirement accounts are generally
protected from attachment and garnishment under Neb. Rev. Stat. § 25-1563.01 (Reissue 1989) to the
extent the funds contained therein are reasonably necessary for the support of the debtor or any
dependent of the debtor.

4. Contempt. When a party to an action fails to comply with an order of the court made for the
benefit of the opposing party, such act is ordinarily a civil contempt, which requires willful
disobedience as an essential element.

5. Contempt: Proof. A defendant's contempt must be established by proof beyond a reasonable doubt.

6. Contempt: Final Orders: Appeal and Error. An appellate court, reviewing a final judgment or
order in a contempt proceeding, reviews for errors appearing on the record.

7. Contempt: Appeal and Error. A trial court's factual finding in a contempt proceeding will be
upheld on appeal unless the finding is clearly erroneous.

8. Corporations: Debtors and Creditors. Corporate officers may not pay their personal debts by
transfer or encumbrance of corporate property.

9. Divorce: Contempt. In order for a failure to comply with the terms of a divorce decree to be
contemptuous, the failure to comply must be willful.

10. Contempt. If it is impossible to comply with the order of the court, the failure to comply is
not willful.

Petition for further review from the Nebraska Court of Appeals, Sievers, Chief Judge, and Irwin
and Wright, Judges, on appeal thereto from the District Court for Douglas County, Donald J.
Hamilton, Judge.

Timothy K. Kelso and Albert L. Feldman, of Harris, Feldman, Stumpf Law Offices, for appellant.

Timothy J. Pugh, of McGrath, North, Mullin & Kratz, P.C., and, on brief, Patricia A. Lamberty, of
Zweiback, Hotz & Lamberty, P.C., for appellee.

Hastings, C.j., Boslaugh, White, Caporale, Fahrnbruch, and Lanphier, JJ., and Grant, J., Retired.

The opinion of the court was delivered by: Boslaugh

BOSLAUGH, J.

On August 21, 1990, the district court for Douglas County entered a decree of dissolution of the
marriage of Linda Novak and Gerald H. Novak. Gerald was ordered to pay child support of $455 per
month for each of two children, together with alimony for 6 months at $1,200 per month and then
$1,000 per month for 54 months. Additionally, Gerald was ordered to pay Linda a total property
settlement of $228,400, of which $165,000 was to be paid in 15 semiannual installments of $11,000
on March 1 and September 1 of each year beginning in March 1991, the balance being paid by
property transfers which have been made.

Four months after the entry of the decree, Gerald filed an application to modify the decree with
respect to alimony, child support, the property award, attorney fees, and court costs. Following
Linda's motion to make more definite and certain, Gerald filed on May 22, 1991, an amended
application to modify the decree, to which Linda demurred. The district court sustained Linda's
demurrer and dismissed Gerald's application to modify without giving Gerald an opportunity to
amend.

At the time of the hearing on these proceedings, Gerald was current as to alimony and child
support payments, but he had not made any of the cash property settlement payments.

Linda attempted to collect the unpaid property settlement amounts by contempt proceedings and
garnishments, including garnishment of Gerald's individual retirement account (IRA). At the same
time that it ruled on the demurrer, the district court found that Gerald was not in contempt,
denied Linda's attempt to establish garnishee liability against Property Investment Co., and found
that Gerald's IRA was exempt from garnishment.

Gerald appealed the district court's judgment concerning the demurrer to the Nebraska Court of
Appeals, and Linda cross-appealed the district court's judgment pertaining to the contempt
proceedings, garnishment of Property Investment, and garnishment of Gerald's IRA. The Court of
Appeals reversed in part and affirmed in part the district court's judgment, finding that the
district court improperly sustained the demurrer to Gerald's application to modify, that Gerald
was in contempt of court for failure to make the two property division payments due to Linda, that
the district court correctly dismissed Linda's application to establish garnishee liability
against Property Investment, and that the district court erred in its decision that Gerald's IRA
was unconditionally exempt from garnishment. The case was remanded to the district court for
further proceedings on Gerald's application to modify and further proceedings on Linda's
garnishment of the IRA as to whether the IRA funds are reasonably necessary for Gerald's support
or the support of his dependents. See Novak v. Novak, 2 Neb. App. 21, 508 N.W.2d 283 (1993).

This court granted Gerald's petition for further review.

Gerald is a 53.5-percent owner of Novak & Sons, Inc., a closely held family corporation which
deals in real estate. Three other members of Gerald's family hold the remaining stock in Novak &
Sons.

At the time of these proceedings, Gerald's net monthly income from Novak & Sons was $2,092.12. He
testified that upon receipt of his paycheck, he converts $1,910 to a cashier's check for alimony
and child support and transfers it to the clerk of the district court, leaving him $182 to live on
each month. Gerald lives in a condominium furnished by his parents, who assist with his remaining
living expenses.

Gerald has no personal bank account and has no stocks or bonds except the stock of Novak & Sons.
Gerald has an IRA at Conservative Savings Bank comprised of various certificates of deposit, which
totaled $54,516.73 at the time of the hearing on this matter.

Gerald is a 50-percent partner in property Investment Co., a real estate holding partnership. At
the time of the hearing on this matter, Property Investment had liquidated all of its assets and
was in the process of dissolving the partnership.

Gerald's assignments of error as summarized are that the Court of Appeals erred in (1) holding
that the garnishment of Property Investment was governed by Neb. Rev. Stat. § 25-1056 (Reissue
1989) instead of Neb. Rev. Stat. § 25-1030 (Reissue 1989), (2) holding that the issue of the IRA
exemption must be remanded for further proceedings, and (3) determining that Gerald was in
contempt of court.

Linda did not respond to Gerald's petition for further review and concedes that the Court of
Appeals correctly reversed the trial court's order sustaining her demurrer to Gerald's application
to modify.

After Gerald missed the first scheduled property settlement payment of $11,000 on March 1, 1991,
Linda filed garnishment proceedings, and a summons and order of garnishment and interrogatories
were served on the garnishee, Property Investment. On May 9, 1991, Property Investment filed its
answer to the interrogatories. In response to the question: "Do you have property belonging to the
judgment debtor or credits or monies owing the judgment debtor, whether due or not, other than
earnings as defined above?" Property Investment responded, stating: "Judgment debtor is a partner
in garnishee company. The partnership currently holds one asset, real property located at 1112
Arbor Street, Omaha, Nebraska."

On August 13, 1991, Linda filed an application to determine garnishee liability alleging that on
July 27, Property Investment had transferred the property at 1112 Arbor Street to Novak & Sons
sometime after Property Investment had filed its answer to the interrogatories. The hearing held
by the trial court on October 31, 1991, included Linda's application to determine garnishee
liability.

The trial court found that Linda's application to determine garnishee liability was not filed
within 20 days as required by § 25-1030 and that Property Investment was released from any
liability as provided by the statute.

The Court of Appeals held that at the time Property Investment answered the interrogatories,
stating Gerald, the judgment debtor, was a partner in the garnishee, which held real estate at
1112 Arbor Street, the liability of Property Investment was fixed by § 25-1056(1), which provides
in part:

Except when wages are involved, the garnishee shall hold the property of every description and the
credits of the defendant in his or her possession or under his or her control at the time of the
service of the summons and interrogatories until the further order of the court.

The Court of Appeals went on to find that when Property Investment conveyed the real estate at
1112 Arbor Street to Novak & Sons after answering the interrogatories, it was in blatant disregard
of the provisions of § 25-1056, and that Linda's remedies included an attempt to set aside the
conveyance, as well as to hold Property Investment and Gerald in contempt.

Gerald contends that the Court of Appeals erred in its analysis of this issue. We agree.

Property Investment's answer to interrogatories showed that the garnishee is a partnership.
Evidence adduced at the hearing also established Property Investment's status as a partnership.
The only asset held by the partnership was the property at 1112 Arbor Street.

According to Neb. Rev. Stat. § 67-325 (Reissue 1990), Gerald's right in Property Investment's
property "is not subject to attachment or execution, except on a claim against the partnership."
The claim in this case was not against the partnership, but for a personal debt of Gerald.

The remedy for Gerald's individual creditor, Linda, was to apply for a charging order against
Gerald's interest in the partnership. See Neb. Rev. Stat. § 67-328 (Reissue 1990). See, also,
Wills v. Wills, 750 S.W.2d 567 (Mo. App. 1988).

When Property Investment answered the interrogatories, stating it was a partnership in which
Gerald was a 50-percent partner and that the partnership held the property at 1112 Arbor Street,
Property Investment's garnishee liability was not, as the Court of Appeals found, "fixed" by § 25-
1056. If Linda was dissatisfied with Property Investment's answer and wished to controvert or
traverse its response to the interrogatories, she had 20 days within which to do so. See § 25-
1030. The provisions of this statutory remedy are mandatory. NC + Hybrids v. Growers Seed Assn.,
228 Neb. 306, 422 N.W.2d 542 (1988). The trial court correctly dismissed Linda's application for
garnishee liability because she failed to file it within 20 days of Property Investment's answer.

Next, Gerald argues that the Court of Appeals erred in determining that the issue of whether
Gerald's IRA is exempt from garnishment must be remanded for a factual finding by the trial court
as to whether Gerald's IRA funds are reasonably necessary for his support or the support of his
dependents, because if not, the IRA is not exempt from garnishment. According to Gerald, a factual
finding on this issue was already determined in his favor by the trial court. We agree.

Neb. Rev. Stat. § 25-1563.01 (Reissue 1989) provides:

In bankruptcy and in the collection of a money judgment, the following benefits shall be exempt
from attachment, garnishment, or other legal or equitable process and from all claims of
creditors: To the extent reasonably necessary for the support of the debtor and any dependent of
the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or
contract payable on account of illness, disability, death, age, or length of service unless:

(2) Such plan or contract does not qualify under section 401(a), 403(a), 403(b), or 408 of the
Internal Revenue Code of 1986 or the successors of such sections.

The Court of Appeals held that IRA's are generally protected, from attachment and garnishment
under § 25-1563.01 to the extent the funds contained therein are reasonably necessary for the
support of the debtor or any dependent of the debtor, and Linda concedes that the Court of Appeals
was correct in its holding. However, the Court of Appeals also found that the trial court failed
to completely analyze the issue because it made no finding regarding whether Gerald's IRA funds
are reasonably necessary for his support or the support of his dependents. The Court of Appeals
was incorrect in finding that the trial court had failed to completely analyze the issue of
whether Gerald's IRA was exempt from attachment by Linda.

The trial court correctly found that Gerald's IRA was exempt from attachment by Linda. It is clear
from the record that it specifically found the IRA was necessary for the support of Gerald and his
dependents. In its order of November 8, 1991, the trial court stated:

The Court finds that respondent's request to release garnishee Conservative Savings Bank should be
sustained and the garnishee is released and discharged by reason of the Courts prior ruling on the
same issue that the IRA funds in question are exempt pursuant to Sec. 25-1563.01 R.R.S. Neb 1989,
and that all child support and alimony payments are current as ordered.

Linda had previously attempted to garnish Gerald's IRA for payment of her court-ordered attorney
fees. In its prior order, following a hearing on the matter, the trial court found that the funds
on deposit in the IRA were reasonably necessary for the support of Gerald.

The record supports the Conclusion and order of the trial court concerning the issue of whether
Gerald's IRA is exempt from garnishment by Linda. The Court of Appeals erred in remanding the
cause for further proceedings on the issue of whether the IRA funds are reasonably necessary for
Gerald's support or the support of his dependents.

Finally, Gerald contends that the Court of Appeals erred in finding him in contempt of court for
failing to make the first two scheduled property settlement payments. We believe the Court of
Appeals erred in its reasoning for finding Gerald in contempt of court; however, we find that
Gerald should have been held in contempt of court for his failure to pay the first two property
settlement payments.

In its opinion, the Court of Appeals incorrectly held that the required burden of proof in this
civil contempt proceeding is by a preponderance of the evidence and that the appropriate standard
of review is whether the trial court abused its discretion in finding that Gerald was not in
contempt.

When a party to an action fails to comply with an order of the court made for the benefit of the
opposing party, such act is ordinarily a civil contempt, which requires willful disobedience as an
essential element. Bahm v. Raikes, 200 Neb. 195, 263 N.W.2d 437 (1978); Megel v. City of
Papillion, 190 Neb. 238, 207 N.W.2d 377 (1973). Most recently in Dunning v. Tallman, 244 Neb. 1,
504 N.W.2d 85 (1993), a case involving a civil contempt of court, this court held that a
defendant's contempt must be established by proof beyond a reasonable doubt. See, also, In re
Contempt of Liles, 217 Neb. 414, 349 N.W.2d 377 (1984); Bahm v. Raikes, supra; Paasch v. Brown;
199 Neb. 683, 260 N.W.2d 612 (1977); Megel v. City of Papillion, supra. All of these cases
involved civil contempt proceedings.

An appellate court, reviewing a final judgment or order in a contempt proceeding, reviews for
errors appearing on the record. Dunning v. Tallman, supra; In re Contempt of Liles, supra. A trial
court's factual finding in a contempt proceeding will be upheld on appeal unless the finding is
clearly erroneous. Id.

After listing a number of Novak & Sons' corporate accounts and the balances contained in those
accounts around the time that each of the first two property settlement payments became due, the
Court of Appeals found that Gerald was in contempt for failure to pay the property settlement
payments due on March 1 and September 1, 1991. According to the Court of Appeals, Gerald had the
means to pay the obligation under the decree, since he was signatory on the various Novak & Sons
accounts and he had failed to show why he could not use them to make the payments.

At the hearing, when Gerald was asked why he did not use the funds contained in the Novak & Sons
accounts to pay his property settlement obligations, Gerald testified that they were corporate
accounts and that he was not authorized to use those funds to pay his personal debts. This court
has previously held that corporate "officers may not pay their personal debts by transfer or
encumbrance of corporate property." Val-U Constr. Co. v. Contractors, Inc., 213 Neb. 291, 294, 328
N.W.2d 774, 776 (1983). See Burke v. Munger, 138 Neb. 74, 292 N.W. 53 (1940). The Court of Appeals
erred in finding Gerald in contempt of court for failing to use corporate funds to pay his
personal obligation under the, property settlement agreement.

Although the Court of Appeals erred in its reason for reversing the finding of the trial court
concerning the contempt issue, we believe that the trial court's finding that Gerald was not in
contempt should be reversed for a different reason.

In order for Gerald's failure to comply with the terms of the divorce decree to be contemptuous,
his failure to comply must be willful. See Megel v. City of Papillion, supra. Gerald attempted to
defend against the contempt charge by showing it was impossible to comply with the terms of the
property settlement agreement because he had no personal funds available to pay the obligation. If
it is impossible to comply with the order of the court, the failure to comply is not willful. Id.

The evidence showed, however, that Gerald has an IRA at Conservative Savings Bank with deposits
totaling $54,516.73 at the time of the hearing on this matter. Although the IRA is exempt from
garnishment by Linda, that does not mean that Gerald cannot voluntarily withdraw the funds to
satisfy the obligations under the decree. After paying the income tax and a 10-percent penalty for
early withdrawal of the IRA funds, there would still be enough left over for Gerald to pay the
first two installments under the divorce decree. The trial court erred in not holding Gerald in
contempt for this reason, and not for the reason given by the Court of Appeals.

The judgment of the Court of Appeals concerning the garnishment of Property Investment and the
remand of the issue regarding the IRA exemption are reversed. The Court of Appeals judgment to
remand for further proceedings Gerald's application to modify is affirmed, and its decision
finding Gerald in contempt for failure to pay the March 1 and September 1, 1991, property
settlement payments is affirmed. The cause is remanded to the Court of Appeals with directions to
remand that part of the cause concerning the application of the respondent, Gerald H. Novak, to
modify the decree of dissolution and the application of the petitioner, Linda Novak, to hold the
respondent in contempt for further proceedings consistent with this opinion.

AFFIRMED IN PART, AND IN PART REVERSED AND REMANDED WITH DIRECTIONS.