Court: United States Bankruptcy Court, E.D. Virginia; June 13, 2016; Us Bankruptcy; United States Bankruptcy Court
Rachel Rosenblum filed a complaint against Gregory Hardesty in a chapter 13 bankruptcy case, seeking a ruling that her monetary damages from Hardesty's breach of a property settlement agreement are non-dischargeable under the Bankruptcy Code. The Court held a trial on May 3, 2016, and after reviewing the relevant law and arguments, concluded that the damages are dischargeable under section 1328(a) of the Bankruptcy Code, resulting in a judgment favoring Hardesty.
The Court established its jurisdiction based on 28 U.S.C. 157 and 1334, qualifying this as a core proceeding under 28 U.S.C. 157(b)(2)(I), with appropriate venue per 28 U.S.C. 1408.
The factual background indicates that Rosenblum and Hardesty were married in 2000, had two children, and entered into a property settlement agreement in January 2009 after a trial separation in 2008. They modified this agreement in September 2009, which the Virginia Circuit Court incorporated into the final divorce decree in November 2009. The Property Settlement Agreement assigned Hardesty custody of the children and outlined his responsibilities regarding the marital residence, including full payment of the mortgage and associated costs, along with an indemnity provision to hold Rosenblum harmless from these obligations. Hardesty was also required to refinance the mortgage or remove Rosenblum from liability.
Defendant filed a Chapter 13 bankruptcy petition on January 7, 2013, over three years after a Final Decree was entered. Following the petition, Defendant failed to make payments on a note secured by the marital residence, violating the Property Settlement Agreement. Between the petition date and the trial date, Defendant attempted to sell the marital residence three times, but all potential buyers withdrew. Plaintiff claims Defendant breached the Property Settlement Agreement by not removing her from mortgage liability, failing to make payments, neglecting property maintenance, and not completing the sale of the residence. As a result, Plaintiff's credit score dropped, leading to additional costs when seeking financing for a new home. She argues that the Indemnity Provision allows her to recover these damages, which she asserts should be classified as non-dischargeable domestic support obligations under 11 U.S.C. § 523(a)(5). The Property Settlement Agreement includes a Bankruptcy Provision stating that indemnity obligations are non-dischargeable and resemble alimony or spousal support, not property division. Conversely, Defendant argues that the Property Settlement Agreement's Waiver Provision indicates both parties waived any claims for support or maintenance, including child support. This waiver was made after considering various factors and included a complete release of claims for support and maintenance. The conflict between the Waiver Provision and the Bankruptcy Provision is central to the dispute.
A debtor who successfully completes all payments under a confirmed Chapter 13 plan is eligible for discharge as per 11 U.S.C. 1328(a). The discharge's effects are outlined in Section 524, while Section 523 identifies debts that cannot be discharged, including "domestic support obligations" as specified in Section 523(a)(5). A "domestic support obligation," defined in Section 101(14A), includes debts owed to a spouse, former spouse, or child, in the nature of alimony or support, and established through legal agreements or court orders, provided they are not assigned to a nongovernmental entity without voluntary consent.
Section 523(a)(15) addresses other debts incurred during divorce or separation, which are not categorized as domestic support obligations. Notably, Section 523 does not apply to Chapter 13 discharges, which are considered "super discharges" since they can eliminate certain debts non-dischargeable under other chapters, like Chapter 7. While Section 1328(a)(2) includes some exceptions from 523, it retains the domestic support obligation as non-dischargeable but excludes 523(a)(15). Thus, debts from property settlements that do not qualify as domestic support obligations may be discharged in Chapter 13.
The case at hand evaluates whether the Indemnity Provision is dischargeable under 523(a)(15) or non-dischargeable under 523(a)(5), hinging on whether it is classified as alimony, maintenance, or support. The determination falls under federal bankruptcy law, beginning with a presumption favoring dischargeability unless the objecting spouse proves otherwise, carrying the burden of proof to show the obligation is indeed in the nature of support.
A court must establish a "mutual intent" to create a domestic support obligation, such as alimony or maintenance, using a four-factor test applied in the Fourth Circuit. The factors include: 1) the substance and language of the agreement; 2) the parties' financial situation at the time; 3) the function of the obligation; and 4) any evidence of overbearing behavior during the agreement's formation. Courts may also consider evidence beyond the divorce decree or agreement to ascertain the nature of payments.
In this case, the Plaintiff has not demonstrated that the Property Settlement Agreement reflects a mutual intent to create an obligation resembling alimony or support. Conflicting terms in the agreement suggest it is more aligned with property settlement obligations under 11 U.S.C. § 523(a)(15). The agreement includes explicit waivers of any rights to alimony, maintenance, or child support, effectively barring the Plaintiff from future claims. Specifically, the waivers in paragraphs eighteen and twenty-nine permanently release the Defendant from any support obligations. The Plaintiff's attempt to bypass these waivers by invoking a "BANKRUPTCY" provision, which claims certain obligations are non-dischargeable and akin to spousal support, is flawed, as the obligations outlined in the Indemnity Provision do not meet that definition.
The Indemnity Provision, found in the "MARITAL RESIDENCE" section, allows the Plaintiff to recover damages from the Defendant for failing to fulfill obligations related to a note secured by the marital residence's deed of trust. The Waiver Provision, located in the "SPOUSAL SUPPORT" section, clearly states that both parties waive any claims for support or maintenance. The court emphasizes that the labels of provisions do not determine their nature but indicate the parties' intent. Obligations cannot be mischaracterized to avoid dischargeability under bankruptcy law. The Waiver Provision prevents any interpretation that would allow claims for support to arise, even in cases of breach of the Property Settlement Agreement. The court finds no textual support for the Plaintiff’s argument that the Waiver Provision becomes ineffective upon breach. The Indemnity Provision is characterized as a property liability allocation, not alimony or support. Moreover, the Property Settlement Agreement does not stipulate the termination of the Indemnity Provision upon the death or remarriage of either party, further indicating it is not in the nature of support. The court concludes that the Indemnity Provision lacks key features of spousal support obligations, reinforcing the finality of the Waiver Provision.
The Indemnity Provision in the Property Settlement Agreement remains effective regardless of remarriage, the death of a spouse, or changes in financial circumstances, disqualifying it from being labeled as alimony, maintenance, or support. The Agreement lacks the necessary tax treatment for the Indemnity Provision to be considered as such, as established by the Internal Revenue Code, which states that alimony must be included in gross income and deductible by the paying spouse unless otherwise specified. The Agreement explicitly states that payments related to the Indemnity Provision are not taxable income for the recipient and not deductible for the payer, indicating they are not intended as support payments. Furthermore, neither party treated these payments as alimony for tax purposes, reinforcing the characterization of the Indemnity Provision as a property settlement rather than support. The court also notes that the financial circumstances of the parties suggest the Indemnity Provision reflects property distribution and debt allocation rather than obligations of alimony or maintenance.
Defendant had a weaker financial position at the time of the divorce compared to Plaintiff, despite similar incomes; Plaintiff had a more stable employment history. Both parties shared child-related expenses, with Defendant receiving 65% custody. Defendant's inability to afford an attorney during the negotiation of the Property Settlement Agreement further indicated his financial vulnerability. The Court evaluated the purpose of the Indemnity Provision, determining it was meant for property division and debt allocation rather than providing daily necessities. The obligation for Defendant to pay the note secured by the marital residence did not impact Plaintiff’s living conditions, as she was not at risk of losing the residence and was able to rent and later purchase a new home independently. No evidence of overreaching was presented, although Plaintiff's counsel drafted the Agreement. The Court concluded that Plaintiff failed to prove the mutual intent of the spouses for the Indemnity Provision to serve as alimony or support, emphasizing their intent to waive claims for maintenance. Consequently, the Court ruled that Defendant's obligations under the Property Settlement Agreement fell under 523(a)(15) of the Bankruptcy Code and were dischargeable under 1328(a). A judgment in favor of Defendant will be entered, with findings of fact and conclusions of law to be properly construed as needed.
The application of the Indemnity Provision regarding the note secured by the second deed of trust lien on the marital residence remains ambiguous, as it was not intended to apply to that obligation. The Court focused solely on whether the Plaintiff's claim for damages was non-dischargeable, deferring the determination of the damages amount. Chapter 5 of the Bankruptcy Code is applicable to cases under chapters 7, 11, 12, and 13, as stated in 11 U.S.C. 103(a). A discharge acts as an injunction against attempts to collect prepetition obligations from a debtor, regardless of whether the discharge of such debts is waived (11 U.S.C. 524(a)). Certain debts are excepted from discharge, including those incurred during divorce or separation proceedings (11 U.S.C. 523(a)(15)). Section 1328(a)(2) limits exceptions from the chapter 13 super discharge to specified debts under section 523(a). Notably, the Plaintiff's evidence omitted a page containing the Waiver Provision from the Property and Settlement Agreement until the Court inquired about it. While the Plaintiff may have suffered damages due to the Defendant's default, the obligation's nature as maintenance or support should have significantly affected the Plaintiff's ability to meet her basic needs.
