Robert A. Mark, Judge, United States Bankruptcy Court.
Debtor's complaint in this proceeding seeks a judgment declaring that certain obligations he owes to his ex-wife under a marital settlement agreement are not domestic support obligations ("DSOs"). The defendant ex-wife has filed a motion for abstention arguing that this Court should abstain and allow the state court judge to decide the issue. Based upon the history of the state court case and the Eleventh Circuit's guidance favoring deference to family court judges, the Court will abstain.
In 2013, the Debtor, Mark Zhuk (the "Debtor"), and his ex-wife, Alison Brooke Zhuk (the "Former Wife"), entered into a marital settlement agreement ("MSA") in their state court marital dissolution case.
When the Debtor failed to pay the $100,000 installment due on March 16, 2016, the Former Wife filed a motion for contempt (the "Contempt Motion") in the State Court Case. On November 14, 2016, following months of litigation over, and four amendments to, the Contempt Motion, the State Court reserved February 27, 2017 for a full-day evidentiary hearing (the "Contempt Hearing"). Transcript of Contempt Hearing ("Tr.") at 22:9-11, 30:7-13, 36:24-25 [DE # 92 in 17-12235].
On February 24, 2017, just three days prior to the Contempt Hearing, the Debtor filed a pro se chapter 7 petition initiating the above-styled bankruptcy case. Debtor's state court counsel advised the state court judge ("Judge Sarduy") that the Debtor was in bankruptcy, but the Former Wife's attorney, misquoting the statute, convinced Judge Sarduy that the Contempt Motion was excepted from the automatic stay,
Judge Sarduy conducted a day-long evidentiary hearing. At the conclusion of the hearing, the Judge announced his ruling holding the Debtor in contempt. Tr. 102:5-6. The court heard testimony from the Debtor and his Former Wife. The Former Wife's testimony was not transcribed. Tr. 47:4-6. The Debtor's testimony, which was transcribed, was probative of his financial condition when the parties signed the MSA. Tr. 47:23-25, 48, 49:1-6, 60-65, 66:1-5, 72:10-13. During that testimony, the court took judicial notice of the Petition for Dissolution of Marriage, which contained a claim for alimony, Tr. 65:19-24, and received in evidence a financial affidavit that was signed by the Debtor and that described the Debtor's financial condition when he executed the MSA, Tr. 60:17-25. The Former Wife's counsel's closing argument also referenced the Debtor's finances at the time of the MSA. Tr. 98:22-25, 99:1-2.
Significantly, the Contempt Hearing included argument about whether the Divorce Obligation should be treated as equitable distribution or as alimony. Tr. 43:5-15, 44:18-25, 45:1-6, 63:19-25, 64, 65:1-24, 97:18-25, 98:1-8, 23-25, 99:1-4. Judge Sarduy described his job, in that regard, as interpreting the parties' intent at the time of the MSA by examination of extrinsic evidence.
On March 13, 2017, Judge Sarduy entered an Order Granting Former Wife's Motion for Contempt [DE # 74-2 in 17-12235] (the "Contempt Order"). The Contempt Order held the Debtor in Contempt and ordered him to pay the Former Wife $100,000.00, representing the full amount of the second to last installment payment due under the MSA. At the time, the final installment payment was not yet due. That payment is now past due.
In the Contempt Order, Judge Sarduy also made the following specific and important findings:
After the Contempt Hearing, the Debtor's chapter 7 bankruptcy case was dismissed because the Debtor did not file his schedules. The case was reinstated on March 21, 2017 and is now pending under Chapter 13 of the Bankruptcy Code. Judge Sarduy entered the Contempt Order when no bankruptcy stay was in effect, because he entered the order after dismissal, but before reinstatement, of the bankruptcy case.
On March 29, 2017, the Debtor filed a Motion for Enforcement of the Automatic Stay [DE # 35 in 17-12235] seeking an order declaring the Contempt Order void because the Contempt Hearing was conducted during the pendency of the Debtor's chapter 7 case. The Court agreed and, on April 20, 2017, entered its Order Enforcing Automatic Stay (the "Stay Order") [DE # 54 in 17-12235]. In the Stay Order, the Court declared void Judge Sarduy's Contempt Order and stayed the State Court Case. The Court noted that the Contempt Order was signed when no bankruptcy stay was in effect but found that the Contempt Hearing was in violation of the stay and, therefore, any order entered pursuant to that hearing was also in violation of the stay.
On June 13, 2017, the Former Wife moved to dismiss the chapter 13 case [DE # 74 in 17-12235] and filed a motion asking the Court to reconsider the Stay Order or to abstain from determining whether the Divorce Obligation is a DSO [DE # 73 in 17-12235]. The Court scheduled the Motion to Dismiss and the Motion to Reconsider or Abstain for hearing on July 25, 2017.
Before the July 25th hearing, on July 10, 2017, the Debtor filed his complaint initiating this adversary proceeding (the "DSO Adversary"). The Complaint seeks a judgment declaring that the Divorce Obligation is not a DSO and, as such, may be treated as an unsecured claim in the chapter 13 plan and discharged when the Debtor completes payments under his plan.
On August 2, 2017, the Court denied the Former Wife's Motion to Reconsider, and denied without prejudice the Former Wife's Motion to Dismiss [DE # 95 in 17-12235]. The Court also denied the Former Wife's Motion to Abstain but without prejudice to the Former Wife filing a motion for abstention in the DSO Adversary. In deferring ruling on abstention pending further
The Former Wife filed her Motion for Abstention in the DSO Adversary on August 18, 2017 [DE # 9].
Whether the Divorce Obligation is a DSO is an issue of federal law. However, the state court has concurrent jurisdiction to make the determination. Cummings v. Cummings, 244 F.3d 1263, 1267 (11th Cir. 2001). The narrow issue before the Court is which court should resolve the matter — the bankruptcy court or the state court — where, as here, the Debtor has moved for a bankruptcy court determination of the issue and the Former Wife has moved the bankruptcy court to abstain.
A bankruptcy court has broad discretion to abstain from hearing a proceeding "in the interest of justice, or in the interest of comity with State courts or respect for State law." 28 U.S.C. § 1334(c)(1). Bankruptcy courts have identified a number of factors relevant to a court's inquiry on discretionary abstention in the family law context, see, e.g., In re Tremaine, 188 B.R. 380, 385 (Bankr. S.D. Ohio 1995), all of which are instructive as opposed to binding on this Court. Overlaying these considerations is the Eleventh Circuit's guidance that bankruptcy courts should not embroil themselves in family law matters. Carver v. Carver, 954 F.2d 1573, 1578-79 (11th Cir. 1992).
In holding that the bankruptcy court should have abstained from hearing a chapter 13 debtor's stay violation claim, the court in Carver stated:
Carver at 1579, (quoting In re MacDonald, 755 F.2d 715, 717-19 (9th Cir. 1985).
The Court is by no means finding that the Eleventh Circuit's policy statements in Carver and Cummings require bankruptcy courts to abstain from hearing adversary complaints to determine whether marital obligations are DSOs. Absent a request to abstain, bankruptcy courts typically adjudicate DSO issues. However, when presented with a motion to abstain, this Court does view these Eleventh Circuit decisions as "encouragement" to abstain if, like here, the record shows that the state court has particular knowledge of relevant issues and, therefore, is the more appropriate court to make the decision.
The facts of this case strongly support abstention, most significantly the evidence presented at, and the findings arising from, the Contempt Hearing. In that hearing, the state court heard extensive argument by counsel for both parties, considered exhibits relevant to the parties' finances and the nature of the Divorce Obligation, and heard testimony from both the Debtor and his Former Wife. After the day-long hearing, the state court held the Debtor in contempt of court for failing to pay the overdue $100,000 installment of the Divorce Obligation.
As described earlier, the contempt finding is critical in this case because, under Florida family law, if a payment obligation in a marital dissolution case is treated as equitable distribution rather than alimony or support, the payment is not enforceable by contempt.
Thus, to find the Debtor in contempt, the state court had to determine the nature of the Divorce Obligation and the parties' intent at the time of the MSA. Even though Judge Sarduy's Contempt Order is void, the arguments and evidence presented at the Contempt Hearing, and the court's findings, both in the transcript of the Contempt Hearing and in the Contempt Order, are very relevant to the abstention issue. In particular, Judge Sarduy expressly found that the Divorce Obligation is alimony and not equitable distribution after he considered, at minimum, the plain language of the MSA, the disparity in the parties' earning capacities, the Debtor's educational background, and the benefits that each party would have received if marriage had continued, all of
As noted at the beginning of this discussion, a DSO determination is an issue of federal law and is not identical to a finding that, under Florida state law, a payment obligation can be enforced by contempt proceedings because the payment is for alimony or support.
The Debtor argues that the state court has no special knowledge of the facts relevant to the parties' intent because the Debtor's obligations were contained in a settlement agreement rather than ordered by the judge. See Battaglia v. Battaglia (In re Battaglia), 321 B.R. 67 (Bankr. M.D. Fla. 2005) (where divorce decree is based on a settlement, bankruptcy court can hear the testimony and determine the parties' intent); In re Smith, 263 B.R. 910, 918 n.8 (Bankr. M.D. Fla. 2001) (where obligation at issue arose from an agreement, the state court was in no better position than the bankruptcy court to determine the intent of the parties in creating the obligation).
This argument and these cases would be persuasive here if the state court had not conducted any hearings involving interpretation of the MSA. But that is not the case. As is clear from the transcript of the Contempt Hearing and the Contempt Order arising from that hearing, Judge Sarduy has already analyzed the Divorce Obligations in the MSA and determined, under similar state law, that the Divorce Obligation should be treated as alimony.
In Cummings v. Cummings, cited earlier, the Eleventh Circuit reversed the bankruptcy court's determination that a state court divorce obligation was all intended to be equitable distribution and was dischargeable. Significantly, in remanding the proceeding, the court cited to Carver and invited the former spouse to
Another fact in the record influencing this Court's decision to abstain is the following provision in the MSA: "If the parties are unable to agree as to the meaning or intent of any part of this agreement, then these issues will be submitted to Allison Weinger, Esquire for her binding decision." [DE # 9, Ex. "1," ¶ 32]. At the Contempt Hearing, Debtor's counsel argued that by including this provision in the MSA, the parties agreed to give Ms. Weinger exclusive authority to interpret the nature of outstanding payment obligations under the MSA. Counsel urged Judge Sarduy to refer this issue to Ms. Weinger rather than go forward with the Contempt Hearing.
Judge Sarduy ultimately ruled that the Contempt Hearing could proceed notwithstanding this arbitration-type clause in the MSA. However, Judge Sarduy's ruling was based primarily on waiver because the Contempt Hearing had been scheduled more than three months earlier, and the Debtor did not raise the issue until the day of the hearing, after litigating the contempt issue without protest.
Upon abstention, this matter will go back to Judge Sarduy to specifically determine whether the parties intended the Divorce Obligation to be in the nature of alimony or support when they executed the MSA. In this procedural setting, Judge Sarduy may choose to consider de novo whether the intent of the parties should be determined by Allison Weinger as agreed to in the MSA. This Court expresses no opinion on whether the "arbitration" provision in the MSA should or should not be enforced. What is clear is that the issue of whether to enforce this provision in the MSA is purely a state law issue that the state court should decide.
An additional factor courts consider in deciding whether to abstain is whether the bankruptcy proceeding involves forum shopping. That factor supports abstention here. The Debtor had actively defended against the Former Wife's Motion for Contempt in State Court, which Motion was amended four times and heavily litigated. The Contempt Hearing before Judge Sarduy had been scheduled since November 14, 2016. The Debtor filed a skeletal petition for relief under Chapter 7 of the Bankruptcy Code on February 24, 2017, only three days before the February 27th Contempt Hearing before Judge Sarduy. The Debtor neglected to file schedules or any other papers in his Chapter 7 bankruptcy case, which was dismissed due to such filing deficiencies, and did not seek to reinstate his bankruptcy case or to convert his case from Chapter 7 to Chapter 13 until after Judge Sarduy ruled against him. In addition, the DSO Adversary was not filed until a month after the Former Wife asked the Court to grant stay relief to allow her to request a DSO determination in the State Court Case.
The fact that the Debtor will not be prejudiced by abstention tips the scale further in the Former Wife's favor. If Debtor's bankruptcy counsel is prepared to litigate the DSO issue here, he is equally qualified to litigate the identical issue in the State Court Case. Moreover, if it takes longer to resolve the DSO issue in state court, the delay will benefit the Debtor, not the Former Wife. Debtor's proposed chapter 13 plan [DE # 109 in 17-12235] presumes that the Divorce Obligation will not be deemed a DSO and his monthly
Finally, based upon the record, the Court has no hesitation in sending this matter back to the state court to exercise its concurrent jurisdiction. The transcript of the Contempt Hearing shows that Judge Sarduy is patient and thoughtful and certainly capable of applying the federal law on what constitutes a DSO. This Court trusts that Judge Sarduy will address the issue of whether the Divorce Obligation is a DSO as an issue of federal law that he has not yet decided, and that he will give the Debtor a full and fair opportunity to present argument and evidence.
Therefore, it is —
1. The Motion for Abstention is granted.
2. The Former Wife is granted relief from stay to seek a ruling in the State Court Case on whether the Divorce Obligation is a DSO.
3. The Court also abstains from adjudicating the Debtor's Objection to the Former Wife's proof of claim in this case. The DSO determination by the state court will determine whether the Former Wife's claim is a priority claim or a general unsecured claim in this case.
4. This proceeding is dismissed without prejudice to the Debtor seeking a declaration in the State Court that the Divorce Obligation is a DSO.
