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Debt Owed to Ex-Husband for Overpayment Of Spousal Support Is Nondischargeable

Monday, December 16, 2013
By Diane Davis

Dec. 13 --A $50,660 debt that a Chapter 7 debtor wife owed to her ex-husband for overpayment of spousal support is nondischargeable under Bankruptcy Code Section 523(a)(15) because the wife incurred the debt “in connection with a separation agreement,” the U.S. Court of Appeals for the Tenth Circuit held Dec. 9 (Taylor v. Taylor (In re Taylor), 2013 BL 339882, 10th Cir., No. 12-2163, 12/9/13).

Affirming the bankruptcy court's ruling, Chief Judge Mary Beck Briscoe concluded that the ex-husband's claim is nondischargeable as a “domestic support obligation” under Section 523(a)(5).

The court also affirmed the Bankruptcy Appellate Panel of the Tenth Circuit's ruling that the ex-husband was not entitled to attorneys' fees because neither the BAP nor the bankruptcy court had authority to award attorneys' fees under the marital separation agreement's (MSA) fee-shifting agreement.

The court determined that the overpayment debt does not qualify as a domestic support obligation under Section 523(a)(5). Under the plain language of the statute, the court said, the debt must be “in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse.” Looking at the ordinary meaning of “such,” the court concluded that the debt must be in the nature of support to the creditor-spouse, or in this case, in support for the debtor's ex-husband.

According to the appeals court, under Section 523(a)(15)'s plain and unambiguous language, the overpayment debt qualifies as a nondischargeable debt. The debt arose as a result of a judgment against a spouse in favor of her former spouse by the state court “in connection with a separation agreement or divorce decree,” the court said. The state court entered the overpayment judgment after retaining jurisdiction to modify the amount of the ex-husband's spousal support obligation to the debtor, the court said.

Spousal Support

Debtor Eloisa Maria Taylor and her ex-husband Matthew Taylor were married in 1988, and divorced in 2005. They entered into a MSA, and a Virginia state court entered a final decree of divorce Sept. 22, 2005, which incorporated the MSA. As part of the decree, the court ordered the ex-husband to pay $2,500 per month to the debtor as spousal support and to continue until “the death of either party, or the remarriage of [Eloisa], or after ten years of payments, whichever event first occurred.”

In 2009, Matthew Taylor moved to terminate spousal support because Eloisa had been living with a man for the past two years and they were in a marriage-like relationship. He argued that her cohabitation should result in the termination of his spousal support obligation under the divorce decree under Va. Code § 20-109.

The state court agreed with Matthew and retroactively terminated his spousal support obligation, ordering the debtor to repay $40,660 in overpaid spousal support payments, plus $10,000 for Matthew's attorneys' fees incurred to prosecute the motion for termination. The court entered a judgment against the debtor for $50,660. 

Chapter 7 Filing

The debtor filed for Chapter 7 protection in 2010. Her ex-husband objected to the dischargeability of the $50,660 judgment and initiated an adversary proceeding.

The bankruptcy court found that the overpayment debt fell within the plain language of Section 523(a)(15), and the legislative history also supported a conclusion that the overpayment was nondischargeable. Thus, the court granted Matthew's motion for summary judgment and denied the debtor's motion for summary judgment. The court did not address Matthew's claim that he was entitled to attorneys' fees incurred while pursuing the bankruptcy adversary complaint.

Both parties appealed to the BAP. The BAP affirmed the bankruptcy court's ruling that the overpayment debt was not a “domestic support obligation” under Section 523(a)(5), and did not qualify for an exception from discharge under Section 523(a)(15).

The BAP also ruled that neither it nor the bankruptcy court had the authority to award attorneys' fees under the MSA's fee-shifting agreement.

The debtor appealed the bankruptcy court's summary judgment ruling to the Tenth Circuit, and Matthew cross-appealed the bankruptcy court's dismissal of his Section 523(a)(5) claim and the BAP's ruling on attorneys' fees.

Two provisions of the Bankruptcy Code except from discharge debts arising out of obligations to the family: Section 523(a)(5) excepts from discharge any domestic support obligation as defined in the Bankruptcy Code, and Section 523(a)(15) excepts from discharge obligations arising in connection with a divorce proceeding or settlement agreement, the appeals court said. These provisions, the court said, reflect the congressional preference for the rights of spouses to alimony, maintenance, or support over the rights of debtors to a “fresh start” free of debts. 

Domestic Support Obligation

A domestic support obligation, the court said, is defined in Section 101(14A) and now explicitly includes support obligations that accrue post-petition, and the order, agreement, or determination creating the obligation can now be either pre- or post-petition. “Assistance provided by a governmental unit” is also now expressly included in the definition, the court said.

According to the appeals court, when determining whether an obligation is in the nature of alimony, maintenance, or support, the court conducts a “dual inquiry” looking first to the intent of the parties at the time they entered into their agreements, and then to the substance of the obligation. As the party seeking to hold the debt nondischargeable, Matthew has the burden of establishing by a preponderance of the evidence that the parties intended the debt to be in the nature of support and that the obligation was in substance support, the court said.

According to the court, there are four requirements for a domestic support obligation: (1) the debt must be owed to either a “spouse, former spouse, or child of the debtor,” which is listed under subpart (i) or a “governmental unit,” which is listed under subpart (ii); (2) the “nature” of the debt must be “alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor … without regard to whether such debt is expressly so designated;” (3) the debt must arise from the separation agreement, divorce decree or property settlement agreement; and (4) the debt must not have been assigned to a nongovernmental entity, unless for collection purposes. The only one at issue in this case is whether the debt meets the second requirement that it be in the nature of support, the court said.

Under the plain language of the statute, the court said, the debt must be “in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse.” Looking at the ordinary meaning of “such,” the court concluded that the debt must be in the nature of support to the creditor-spouse, or in this case, in support for Matthew.

The appeals court rejected Matthew's argument that the plain language of the statute needs some analysis, concluding that he alleged no facts to support his contention that the nature of the overpayment debt was actually for his support. Thus, the bankruptcy court did not err by dismissing his Section 523(a)(5) claim, the court said. The overpayment debt does not qualify as a domestic support obligation, the court said. 

Debt Is Nondischargeable

Under Section 523(a)(15)'s plain and unambiguous language, the court said, the overpayment debt qualifies as a nondischargeable debt. The debt arose as a result of a judgment against a spouse in favor of her former spouse by the state court “in connection with a separation agreement or divorce decree, the court said. The state court entered the overpayment judgment after retaining jurisdiction to modify the amount of Matthew's spousal support obligation to the debtor, the court said. Thus, under the plain language of the statute, the overpayment judgment is nondischargeable debt, the court said.

The debtor argued that Section 523(a)(15) was enacted to protect the dependent spouse, and that the plain language of the statute should be applied in that context. According to the debtor, if the debt is not dischargeable, she will be “left in the lurch” because her wages will be garnished for decades in order to satisfy the overpayment judgment. The debtor invoked the “absurdity doctrine,” which applies to unambiguous statutes “as a means to avoid applying the unequivocal language of a statute.”

The appeals court rejected the debtor's argument, concluding that there is no indication that congressional concern extended to the protection of a debtor-dependent spouse who may be responsible for repayment of wrongfully paid spousal support. “It is not unthinkable that Congress would place importance on all marital obligations, regardless of whether the debt was owed to or by the dependent spouse--even above the need for the debtor's fresh start,” the court said. 

Attorneys' Fees

Matthew also appealed the BAP's ruling that neither it, nor the bankruptcy court, had authority under the MSA to award Matthew attorneys' fees incurred pursuing the adversary proceeding. After reviewing the provision in the MSA, the appeals court concluded that the BAP's ruling on this issue is clearly correct.

Judges Stephanie K. Seymour and Carlos F. Lucero joined the opinion.

Karl F. Kalm of Kalm Law Firm, P.C., Albuquerque, N.M., represented the debtor/appellant. Bonnie B. Gandarilla and George M. Moore of Moore, Berkson & Gandarilla, P.C., Albuquerque, N.M., represented Matthew E. Taylor/appellee.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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