Agreement Between Exes After Divorce Not a Valid Domestic Support Obligation

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By Stephanie M. Acree

A “property dissolution agreement” entered into by two ex-spouses was found to be dischargeable because it was not a domestic support obligation May 6 by the U.S. District Court for the Middle District of Florida (Gatto v. Gatto (In re Gatto), M.D. Fla., No. 2:12-cv-00483-UA, 5/6/13).

Judge Roy B. Dalton Jr. affirmed the bankruptcy court's decision, finding that the property dissolution agreement was not linked to the divorce and could not meet the legal definition of a domestic support obligation. 

'Sham Divorce.'

Kelly and Franco Gatto were married in the state of New York on July 7, 1991. They divorced in New York the following year, but continued living together. According to Franco Gatto's appellate brief, “in the judgment for divorce, the parties waived any right to alimony, maintenance or support from each other.” According to Kelly Gatto's appellate brief, they “never intended to divorce; it was a divorce of necessity to protect the income of Kelly because Franco inadvertently put her in a position to have her wages garnished because of his child support obligation to a previous spouse.” Kelly alleged that but for the potential garnishment, there would have been no “sham divorce” and she would have remained married to Franco until 2008.

The couple eventually purchased a house in Tennessee and, according to Kelly, “shared everything in common as man and wife,” including “credit cards, checking accounts, tax returns, real estate, and the payment of debts.” The couple separated in 2008 and Franco moved to Florida while Kelly remained in the house they jointly owned. 

Non-Dischargeability Provision

Kelly presented Franco with several documents before he left, all of which he signed, including a “property dissolution agreement.” The agreement stated that the parties wished to “settle and adjust” their rights with regard to the assets and liabilities that “[arose] out of their relationship.” The agreement stipulated that the couple would pay equal shares of the home's mortgage, that Franco would help Kelly pay for credit card expenses, medical bills, household bills, and maintenance of the home, among other things, and that Franco's interest in a worker's compensation claim would be paid to Kelly until she was paid “the money that is owed to her.”

The agreement also contained a non-dischargeability provision which stated: “With respect to each party's responsibility for payment of certain debts and liabilities, and their obligation to hold the other harmless for payment thereof, the parties understand and agree that their obligation is not a dischargeable debt under the bankruptcy code, this obligation being part of the final financial support settlement for both parties.”

Kelly alleged in her brief that Franco entered into the agreement “voluntarily” and with a “full understanding” of the agreement. Kelly also alleged that the agreement “supersede[d] and modifie[d] the divorce decree from New York in 1992” and that the parties “intended [the agreement] to be the first real husband-and-wife division of property and support.” 

Breach of Contract

Franco eventually defaulted on the agreement and Kelly brought a suit for breach of contract in Tennessee. After Franco failed to respond to the suit, a default judgment was entered against him. Franco filed for Chapter 7 protection on Nov. 23, 2010, and sought to discharge the default judgment and his obligations under the agreement. Kelly opposed the discharge and argued that the debt was not dischargeable pursuant to Section 523(a)(5) of the Bankruptcy Code because it was a domestic support obligation.

The bankruptcy court found that the agreement did not meet the definition of a domestic support obligation under Section 101(14A) of the Bankruptcy Code because it was not “in the nature of alimony, maintenance, or support of a former spouse.” Kelly appealed the decision to the district court. 

'Beyond the Label.'

The district court said that in order to determine if a pre-petition debt meets the definition of a domestic support obligation, the court must look “beyond the label the parties have given to a particular debt.” The court said that some of the factors to consider include: “(1) state law; (2) the agreement's language; (3) the parties' financial positions when the agreement was made; (4) the amount of division; (5) whether the obligation ends upon death or remarriage; (6) the frequency or number of payments; (7) the waiver of other support rights; and (8) how the agreement is treated for tax purposes.”

In this case, the district court found that the bankruptcy court was correct in determining that the agreement was not a non-dischargeable domestic support obligation. The court noted that the couple was not married at the time of the agreement and had not been married in the 16 years preceding the agreement.

The court also noted that the agreement was not considered a separation agreement under Tennessee law and that the agreement “did not purport to waive or enforce other rights of support, nor did it evince by its language or provisions to be a settlement related to the parties' former marriage.”

Finally, the court said that Kelly chose to enforce the agreement in Tennessee state court rather than through contempt proceedings in New York, which further evinced that the agreement was not related to the divorce. Therefore, the court concluded that the agreement was not a domestic support obligation but rather an agreement to unwind the Gatto's shared property and debts. Accordingly, the bankruptcy court's order was affirmed.

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