Divorce Restraining Orders Requiring Deposit of Business Proceeds Do Not, Without More, Create a § 523(a)(4) Trust; Property-Division Judgments Are Not DSOs Absent Proof of Support Intent/Effect

Case: In re: Steven K. Bailey (B.A.P. 6th Cir.)
Date: February 2, 2026
Parties: Regina Cremeans (personal representative of Rebecca Bailey’s estate), Plaintiff-Appellant v. Steven K. Bailey, Defendant-Appellee

1. Introduction

This Bankruptcy Appellate Panel (“BAP”) decision resolves two related appeals following remand from the BAP’s prior opinion in Bailey v. Bailey (In re Bailey), No. 23-8001, 2024 WL 1511984 (B.A.P. 6th Cir. Apr. 8, 2024). The underlying dispute traces to a contentious Kentucky divorce involving Tri-State Roofing and Remodeling, Inc. (“Tri-State”). During the divorce, the family court entered a restraining order requiring business proceeds to be placed into a business account. The debtor-husband (Steven Bailey) did not comply and was held in contempt; the family court ultimately entered a judgment awarding the wife (Rebecca Bailey) $160,000—half of approximately $320,000 found to have been diverted during the divorce.

After Steven filed chapter 13, Rebecca sought to have the $160,000 judgment declared nondischargeable as (i) defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4) and/or (ii) a domestic support obligation (“DSO”) under 11 U.S.C. § 523(a)(5). Following remand and a trial at which only Steven testified, the bankruptcy court ruled for the debtor. In a separate, post-trial chapter 13 dispute, Rebecca sought stay relief to pursue setoff involving real property; the bankruptcy court denied the request (without prejudice), and compelled execution of a deed consistent with the confirmed plan and divorce decree.

The BAP affirmed across the board, emphasizing (1) the stringent federal-law trust requirement embedded in § 523(a)(4), (2) the evidence-driven inquiry demanded by Sixth Circuit DSO precedent under § 523(a)(5), and (3) the necessity of developed legal and factual argument for stay relief and setoff, as well as the consequences of waiver on appeal.

2. Summary of the Opinion

  • § 523(a)(4) defalcation: The BAP affirmed the finding that the divorce restraining order did not create an express or technical trust under Kentucky law, and therefore no “fiduciary capacity” existed for defalcation under § 523(a)(4). The appellant’s new statutory “technical trust” theories were deemed waived.
  • § 523(a)(5) DSO: The BAP affirmed that the $160,000 judgment was not proven to be “in the nature of alimony, maintenance, or support,” where the record lacked evidence of intent and actual support effect as required by In re Calhoun/In re Fitzgerald.
  • Evidentiary ruling: The BAP affirmed exclusion of the family court judge’s deposition on parol evidence/relevance grounds, reviewed for abuse of discretion (citing Graf v. Morristown-Hamblen Hosp. Ass'n).
  • Stay relief and setoff: The BAP affirmed denial of stay relief for setoff because the movant failed to present a developed legal argument for “cause” and failed to establish a setoff right under nonbankruptcy law; the court reiterated that the mere existence of a setoff right does not automatically establish cause (relying on I.R.S. v. Shultz (In re Shultz) and related authority).
  • Plan-confirmation effect / deed transfer / waiver: The BAP rejected the claim that the bankruptcy court held confirmation categorically barred setoff, and held that undeveloped issues (including those aimed at the confirmation order and Rule 9023 relief) were waived. The order compelling deed execution was affirmed because setoff was unproven and the plan/divorce decree required transfer.

3. Analysis

3.1 Precedents Cited

A. Bankruptcy finality and appellate jurisdiction

  • Ritzen Grp., Inc. v. Jackson Masonry, LLC and Bullard v. Blue Hills Bank: The BAP framed finality in bankruptcy as “dispute-by-dispute,” supporting appellate jurisdiction where orders finally dispose of discrete disputes.
  • Church Joint Venture, L.P. v. Bedwell (In re Blasingame) and Geberegeorgis v. Gammarino (In re Geberegeorgis): Used to confirm adversary-proceeding judgments are final for appeal.
  • Smith v. U.S. Bank Nat'l Assoc. (In re Smith) and the Sixth Circuit’s In re Jackson Masonry, LLC: Reinforced the “procedurally complete and determinative of substantive rights” formulation for bankruptcy finality.
  • Cattin v. Gen. Motors Corp. (quoted via In re Blasingame): Supported review of prior interlocutory rulings (e.g., evidentiary rulings) upon appeal from a final judgment.

B. Standards of review and trial-level deference

  • Kraus Anderson Cap., Inc. v. Bradley (In re Bradley) and Bank of Montreal v. Off. Comm. of Unsecured Creditors (In re Am. HomePatient, Inc.): Established the mixed law/fact review framework for dischargeability.
  • U.S. Bank N.A., Trustee ex rel. CWCapital Asset Mgmt. v. Vill. at Lakeridge, LLC and Doe v. Boland (In re Boland): Emphasized that the standard for mixed questions depends on whether the work is primarily legal or factual.
  • Anderson v. City of Bessemer City, N.C. and King v. Zamiara: Anchored deference to trial-court credibility assessments and “two permissible views of the evidence.”
  • State Bank of Florence v. Miller (In re Miller): Provided the abuse-of-discretion standard for stay-relief decisions.
  • Graf v. Morristown-Hamblen Hosp. Ass'n: Supplied the abuse-of-discretion standard for evidentiary rulings (here, excluding a deposition).

C. § 523(a)(4): defalcation and the “fiduciary capacity” trust requirement

  • Long v. Piercy (In re Piercy), Bd. of Trs. of the Ohio Carpenters' Pension Fund v. Bucci (In re Bucci), and Commonwealth Land Title Co. v. Blaszak (In re Blaszak): Together provided the controlling Sixth Circuit test for defalcation and the narrow definition of “fiduciary capacity” requiring an express or technical trust with a specific res.
  • Nyamusevya v. CitiMortgage, Inc. (In re Nyamusevya): Used to enforce waiver of issues raised for the first time on appeal (critical to the appellant’s newly elaborated “technical trust” statutory theory).
  • Gross v. Adcomm, Inc.: Cited to undercut the appellant’s late-blooming claim that corporate fiduciary duties run to shareholders; Kentucky law recognizes duties run to the corporation.

D. § 523(a)(5): domestic support obligations and Sixth Circuit’s Calhoun framework

  • Long v. Calhoun (In re Calhoun) and Fitzgerald v. Fitzgerald (In re Fitzgerald): Provided the four-part intent/effect/reasonableness framework for determining whether an obligation not labeled “support” is nonetheless in the nature of support.
  • In re Thomas: Reinforced application of the Calhoun/Fitzgerald approach and burden allocation to the non-debtor.

E. Automatic stay, “cause,” and setoff

  • Laguna Assocs. Ltd. P'ship v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P'ship) and Indus. Ins. Servs., Inc. v. Zick (In re Zick): Established that “cause” for stay relief under § 362(d)(1) is case-by-case and discretionary.
  • I.R.S. v. Shultz (In re Shultz): The BAP relied on this decision to reject the idea that the mere existence of a setoff right automatically supplies cause for stay relief.
  • Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.) and Lee v. Schweiker: Quoted for the proposition that setoff can effectively elevate an unsecured claim toward secured status, but that does not eliminate the need to show cause.
  • Citizens Bank of Md. v. Strumpf and Studley v. Boylston Nat'l Bank: Used to explain the basic purpose of setoff—avoiding circular payments where parties owe each other.
  • Ky. Cent. Ins. Co. v. Brown (In re Larbar Corp.): Provided the Sixth Circuit articulation of § 553’s preservation of setoff rights for mutual prepetition debts.

F. Plan confirmation’s binding effect and enforcement

  • Salt Creek Valley Bank v. Wellman (In re Wellman) and In re Crady: Cited for the binding effect of a confirmed chapter 13 plan under § 1327.
  • United Student Aid Funds, Inc. v. Espinosa: Reinforced that confirmation orders can be binding and enforceable even where legal error exists, if notice and opportunity to object were present.

G. Waiver for undeveloped arguments

  • McPherson v. Kelsey (quoted) and Est. of Barnwell v. Grigsby: The BAP applied the rule that perfunctory arguments without developed reasoning are waived.
  • In re Prather: Reinforced that appellate courts will not construct arguments “out of whole cloth.”

3.2 Legal Reasoning

A. The § 523(a)(4) holding turns on the narrow Sixth Circuit concept of “fiduciary capacity”

The key doctrinal move is the BAP’s adherence to Sixth Circuit authority that § 523(a)(4)’s “fiduciary capacity” is not a broad, equitable concept, but one confined to express or technical trusts “arising from placement of a specific res in the hands of the debtor,” as articulated in In re Blaszak. Thus, misconduct—even contemptuous violation of a family-court order—does not become “defalcation” unless the debtor was acting as a trustee of an identified trust res for an identified beneficiary.

On remand, the bankruptcy court examined the restraining order itself (a step the prior BAP opinion indicated was necessary before deciding trust intent). It found the order lacked key features of a trust: no trust terminology, no express entitlement of the wife to funds, and no trustee administration of a defined res for a beneficiary. The BAP affirmed because those are factual/legal conclusions consistent with the Sixth Circuit’s strict trust requirement and because the appellant did not supply additional admitted evidence to fill those gaps.

Critically, the BAP treated the appellant’s later-developed “technical trust by statute/corporate officer duties” theory as waived: the record showed it was not properly presented with citations and analysis in the bankruptcy court. This illustrates how § 523(a)(4) litigation can hinge as much on issue preservation and proof development as on moral equities.

B. The § 523(a)(5) holding reinforces that “support” is an evidence-based federal characterization, not a state-law label or inference

Applying In re Calhoun as restated in In re Fitzgerald, the BAP emphasized two threshold requirements: (1) intent to create a support obligation and (2) actual effect of providing necessary support. Here, the divorce decree separately provided monthly maintenance ($250), while the $160,000 award was tied to diverted business proceeds—hallmarks of property/equitable distribution.

The appellant attempted to transform the property award into support by arguing Kentucky maintenance statutes require considering property in setting maintenance. The BAP rejected that as a substitute for evidence: even if a state judge considers property awards while setting maintenance, it does not follow that the property award is “support” unless the record proves support intent and support effect. The bankruptcy court catalogued missing evidence (income, expenses, standard of living, assets, valuations, ability to meet needs), and the BAP held those findings were not clearly erroneous.

C. Excluding the family-court judge’s deposition: intent is central, but the evidentiary path still matters

The appellant sought to introduce the family court judge’s deposition as “clarifying” intent. The bankruptcy court excluded it under Kentucky parol evidence principles and relevance, finding no ambiguity in the decree and no showing the testimony explained any specific term. On appeal, the BAP found no abuse of discretion (citing Graf v. Morristown-Hamblen Hosp. Ass'n), and further observed that the deposition, as proffered, did little more than confirm the judge followed Kentucky law.

The decision underscores a practical boundary: while federal bankruptcy courts must determine whether a divorce obligation is “in the nature of support,” parties cannot necessarily retrofit state-court judgments through after-the-fact testimony unless they can clear state evidentiary rules and show true interpretive need (e.g., ambiguity).

D. Stay relief for setoff: “setoff exists” is not the same as “cause exists,” and mutuality must be proven

The bankruptcy court denied stay relief because the motion did not engage § 362(d)’s “cause” standard and did not establish setoff under nonbankruptcy law. The BAP affirmed, quoting I.R.S. v. Shultz (In re Shultz) for the proposition that the mere existence of a setoff right is a “tenuous” basis for cause; secured status (or setoff-like status) does not entitle a party to stay relief without a showing tailored to the case.

Separately, the BAP agreed the appellant failed to explain how a deed-transfer obligation under a divorce decree and a money judgment constitute “mutual debt” suitable for setoff under § 553, as described in In re Larbar Corp.. The BAP also corrected a key framing issue: the bankruptcy court did not hold plan confirmation categorically extinguished setoff; it denied relief because the right was not established, while noting § 553 would protect a later-proven right.

E. Enforcement of the plan and deed execution

Once setoff was unproven and stay relief denied, the appellant lacked a bankruptcy-law basis to withhold executing a deed required by the divorce decree and contemplated by the confirmed plan. The bankruptcy court relied on § 1327 and authorities including In re Crady and In re Wellman, and the BAP affirmed. The opinion’s citation to United Student Aid Funds, Inc. v. Espinosa situates the holding in a broader principle: confirmed plans are binding and enforceable when parties had notice and opportunity to object.

3.3 Impact

  • For § 523(a)(4) litigation in domestic-relations contexts: The decision reinforces that contempt findings or asset-preservation orders in divorce proceedings do not automatically translate into nondischargeability for defalcation. Creditors must prove an express or technical trust with an identifiable res, trustee role, and beneficiary—typically requiring careful pleading, targeted evidence, and (where applicable) a clearly identified statute creating a trust-like duty.
  • For § 523(a)(5) disputes over property vs. support: The opinion signals that “support-like” economic realities (e.g., maintenance set low because property is awarded) are not self-proving. Parties must build a record on intent and actual support function—income, needs, budgets, asset values, and the decree’s structure—consistent with In re Calhoun/In re Fitzgerald.
  • For evidentiary strategy: Attempting to establish intent through a judge’s later testimony faces significant hurdles; absent ambiguity or another recognized basis, parol evidence objections may be sustained. Litigants should instead focus on the decree’s text, the divorce record, and admissible evidence of need and function.
  • For stay-relief and setoff motions: The BAP’s emphasis on developed argument and proof is a cautionary rule of practice: cite § 362(d), articulate “cause,” establish mutuality under applicable nonbankruptcy law, and address discretion and prejudice. Generic invocations of a “presumption” in favor of setoff will not suffice.
  • For appellate practice: The decision is also a waiver case. Arguments raised perfunctorily or for the first time on appeal are likely lost, invoking McPherson v. Kelsey and In re Nyamusevya.

4. Complex Concepts Simplified

  • “Defalcation while acting in a fiduciary capacity” (§ 523(a)(4)): Not every fiduciary relationship in everyday speech counts. In the Sixth Circuit, it generally requires a preexisting express or technical trust—meaning identifiable trust property (the “res”), a trustee role, and a beneficiary—before the misconduct occurred.
  • Express trust vs. technical trust: An express trust is intentionally created (often in writing) and typically looks like a trust (trustee, beneficiary, trust property). A technical trust can be imposed by statute in some circumstances, but the statute must clearly create trust-like duties over specific property, not just general duties of honesty or care.
  • Domestic support obligation (DSO) (§ 523(a)(5)): A DSO is a debt “in the nature of alimony, maintenance, or support.” Courts look beyond labels and ask what the obligation was meant to do and what it actually does—support the recipient’s basic needs, or divide property.
  • Parol evidence rule: Generally prevents using outside statements to change or add to an unambiguous, fully integrated written agreement/order. If a decree is unambiguous, courts often refuse testimony offered to “explain” what it “really meant.”
  • Automatic stay and “cause” (§ 362(d)(1)): The automatic stay stops collection actions. To lift it, the movant must show “cause,” a flexible, fact-specific standard—more than simply asserting an entitlement.
  • Setoff (§ 553): Setoff allows A and B, who owe each other money, to net the amounts rather than pay in circles. It requires mutual debts (each owing a debt to the other), typically both arising before bankruptcy.
  • Plan confirmation binding effect (§ 1327): Once confirmed, the chapter 13 plan binds debtor and creditors. Disputes must be raised timely, and plan terms may be enforced (including compelling acts like executing documents) absent a valid basis to deviate.

5. Conclusion

The BAP’s affirmance in In re: Steven K. Bailey is less about redefining discharge exceptions in the abstract and more about enforcing the Sixth Circuit’s disciplined, proof-driven frameworks: § 523(a)(4) requires an actual express/technical trust relationship, not merely a violated divorce restraining order; § 523(a)(5) requires evidence of support intent and support effect, not inference from state-law maintenance methodology. Procedurally, the decision highlights the decisive role of evidentiary foundations, developed motion practice (especially for stay relief and setoff), and appellate waiver rules.