Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
June 17 — A Chapter 13 debtor's obligations under a property settlement agreement with his ex-wife aren't in the nature of alimony, maintenance, or support and are dischargeable under the Bankruptcy Code, a bankruptcy court in Virginia held June 13 ( In re Hardesty, 2016 BL 187821, Bankr. E.D. Va., No. 13-30075-KRH, 6/13/16 ).
Judge Kevin R. Huennekens of the U.S. Bankruptcy Court for the Eastern District of Virginia concluded that the plaintiff Rachel Rosenblum, the debtor's ex-wife, failed to meet her burden of proving that the mutual intent of the two spouses was for the indemnity provision in the property settlement agreement to create an obligation in the nature of alimony, maintenance, and support.
The parties unambiguously expressed their clear intent to waive their respective claims for support and maintenance, the court said.
The court also looked at other objective factors such as the financial situation of the parties and the function of the obligation at the time of the agreement, and determined that the indemnity provision isn't in the nature of alimony, maintenance, or support.
Bankruptcy Code Section 523 (11 U.S.C. §523), which lists certain obligations that are excepted from a bankruptcy discharge, isn't applicable to Chapter 13 discharge under Section 1328(a), the court said. Section 1328(a)(2) incorporates some but not all of the exceptions to discharge in Section 523, such as the discharge exception for a domestic support obligation (DSO).
The discharge exception under Section 523(a)(15) for “all other kinds of debts that a debtor may incur to a spouse in the course of a divorce or separation not included in the definition of a domestic support obligation” is omitted from Section 1328(a)(2), the court said. Thus, an obligation incurred as part of a property settlement agreement that isn't in the nature of a DSO can be discharged in a Chapter 13 case, the court said.
Rosenblum and debtor Gregory Hardesty were married in 2000. In 2009, they entered into a property settlement agreement that was affirmed, ratified, and incorporated into their final divorce decree.
In addition to providing for custody of their two children, an indemnity provision provided that the debtor would be granted exclusive possession of the marital residence and would assume full responsibility for paying the mortgage, plus all repairs and maintenance costs. The agreement also stated that the debtor agreed to “indemnify and hold [Plaintiff] harmless for the payment of these items, debts, and obligations.” The agreement also required the debtor to remove the plaintiff's name or refinance the mortgage.
Three years after entry of the final divorce decree, Hardesty filed for Chapter 13 bankruptcy, which allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, however, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.
Subsequently, the debtor stopped making payments on the mortgage in violation of the property settlement agreement. During the period of time between the petition date and the trial date, the debtor presented three different motions to the bankruptcy court requesting authority to sell the marital residence but the property was never sold because three prospective purchasers backed out of their contracts.
Rosenblum filed a complaint alleging that the debtor breached the property settlement agreement because he failed to remove her name from the liability for the mortgage. She also alleged that the breaches resulted from the debtor's failure to make payments on the note, keep the property in good repair, and sell the marital residence.
Rosenblum alleged that she was damaged as a result of these breaches and her credit score was lowered, which caused her additional fees and costs when she applied for her own financing to purchase a new home. According to Rosenblum, the indemnity provision in the property settlement agreement allows her to recover damages.
Rosenblum argued that the damages should be characterized as nondischargeable in the debtor's bankruptcy case as domestic support obligations under Bankruptcy Code Section 523(a)(5), which are excepted from discharge.
The debtor, however, contended that the property settlement agreement expressed the clear intent of the parties for the waiver of any claims for support or maintenance.
The court applied a four-factor test in Catron v. Catron (In re Catron), 164 B.R. 912 (E.D. Va. 1994), to determine whether the mutual intent standard had been satisfied. The burden of proof rests with the objecting spouse, the court said. The court looked at: “(1) the actual substance and language of the agreement; (2) the financial situation of the parties at the time of the agreement; (3) the function served by the obligation at the time of the agreement …; and (4) whether there is any evidence of overbearing at the time of the agreement.
The plaintiff failed to carry her burden of proof, the court said. The conflicting provisions in the property settlement agreement don't show a clear intent to create an obligation in the nature of alimony, maintenance, or support, the court said. The indemnity provision is “more appropriately characterized as an obligation arising out of a property settlement agreement under Section 523(a)(15),” the court concluded.
According to the court, the waiver provision in the agreement shows the parties' clear mutual intent. “It unambiguously waives any right of either party to assert a claim for support or maintenance,” the court said.
Further, the indemnity provision “bears every semblance of an allocation of liability arising out of the distribution of property, not of an obligation involving alimony, maintenance, or support,” the court said. There is no language in the waiver provision that suggests the absolute waiver becomes inoperable upon breach of the Property Settlement Agreement,” the court said.
The function of the indemnity provision was to advance the division of property and the allocation of debt, the court said. It wasn't to provide any daily necessities to the plaintiff, the court said.
Jacqueline W. Sharman of Bowen Ten Cardani, P.C., Richmond, Va., represented the plaintiff Rachel Rosenblum; Amanda Erin DeBerry of Boleman Law Firm, PC, Richmond, Va., and Barry W. Spear of Boleman Law Firm, P.C., Virginia Beach, Va., represented the defendant/debtor Gregory Patrick Hardesty.
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