Ashely M. Chan, United States Bankruptcy.
The debtor, Joseph L. LaSpina ("Debtor"), objects to the proof of claim ("Claim") filed by his ex-wife, Cynthia L. Stewart ("Ms. Stewart"), in the amount of $91,948.18 as a priority unsecured claim pursuant to 11 U.S.C. § 507(a)(1)(A) based upon an award that Ms. Stewart received in the parties' divorce proceedings which she characterizes as a nondischargeable domestic support obligation. Debtor argues that the underlying award actually constitutes an equitable distribution award and, therefore, the Claim should be reclassified as a general unsecured claim subject to discharge.
After consideration of the special master's intent in fashioning the underlying award in the parties' divorce proceedings, the Court finds that two-thirds of the Claim should be reclassified as a general unsecured claim subject to discharge, because the special master intended most of the award to serve as an equitable distribution of the parties' marital property. However, one-third of the Claim is properly characterized as a nondischargeable, priority claim, because the special master intended part of the award to serve as a domestic support obligation. Accordingly, the Court will sustain the Debtor's objection to the Claim, in part, and overrule it in part.
After the birth of their son in April 1992, the Debtor and Ms. Stewart married on July 29, 1994. Ex. C-1 p. 2 ¶¶ 1, 4. During their marriage, the Debtor owned and operated his own business, Hairworks Unlimited d/b/a LaSpina Salon and Spa ("LaSpina Salon"), which he had established prior to the marriage. Id. at p. 3 ¶ 7, p. 4 ¶ 8, p. 16 ¶ 14. For most of their marriage, Ms. Stewart worked lull-time as a licensed practical nurse ("LPN") while serving as the primary caregiver for their son, allowing the Debtor to work six days per week. Id. at p. 9 ¶ 4; Hrg. Tr. 15:17-16:13, 17:8-13, June 4, 2019 ("June 4 Tr.").
In September 2004, the Debtor moved one of the locations of LaSpina Salon to a larger facility. Ex. C-1 p. 4 ¶ 9. The Debtor invested $160,000, consisting of a $50,000 line of credit and $110,000 of marital assets and income, into renovating the new location. Id. at p. 4 ¶ 9, p. 10 n.7.
On April 6, 2005, Ms. Stewart, represented by counsel, filed a complaint in divorce in the Chester County Court of Common Pleas ("State Court") against the Debtor. Id. at p. 1, p. 2 ¶ 5. She did not file a request for alimony pendente lite
Although the Debtor and Ms. Stewart had agreed that the Debtor would receive credit towards child support payments for every mortgage payment that he made related to the Marital Residence, the Debtor stopped paying "support" in the form of mortgage payments at some point. Id. at p. 4 ¶ 11; July 23 Tr. 13:16-18, 55:24-56:9. As a result, Ms. Stewart could not afford the mortgage payments on her own and, in August 2006, Ms. Stewart moved out of the Marital Residence. Ex. C-1 p. 4 ¶ 11. At the time that Ms. Stewart moved out, the Debtor "had support arrearages in excess of $17,000." Id. at p. 10 ¶ 7. These support arrearages most likely refer to child support, as Ms. Stewart never sought spousal support and the Debtor was only ordered
As of January 2007, foreclosure proceedings on the Marital Residence had commenced. Ex. C-1 p. 5 ¶ 11. Subsequently, Ms. Stewart's boyfriend, Michael Bruno ("Mr. Bruno"), who was an accountant, made an offer to purchase the Marital Residence for $360,000, which the Debtor accepted. Id. at p. 5 ¶ 12, p. 8 ¶ 3. The Debtor and Ms. Stewart realized no net proceeds from the sale. Id. at p. 5 ¶ 12. Ms. Stewart moved back into the Marital Residence one week after Mr. Bruno closed on the purchase. Id.
On September 16, 2008, the Special Master held a trial with Ms. Stewart, the Debtor, and their counsel ("Trial"). Id. at p. 1. The Trial concluded on October 2, 2008. Id. Subsequently, on December 29, 2008, the Special Master submitted a report of her findings and recommendations to the State Court ("Report"). See id.
In the section of the Report entitled "Merits of Related Claims," the Special Master noted that, at the time of the Trial, Ms. Stewart was living with Mr. Bruno, who was then her fiance, and retained primary custody of the parties' minor son.
The Report also reflected that the Debtor was in "good health" at the time of Trial, still owned and operated LaSpina Salon, and was residing with his own fiance. Id. at p. 3 ¶¶ 5, 7, p. 4 ¶ 9, p. 7 ¶ 28. The parties had stipulated that the Debtor earned $160,000 per year from LaSpina Salon. Id. at p. 8 ¶ 3. The Special Master also discussed the circumstances surrounding the sale of the Marital Residence in this section of the Report, as well as the fact that post-separation, Ms. Stewart had incurred approximately $35,000 in credit card debt and, separately, $120,000 in counsel fees which largely resulted from the Debtor's refusal to produce documentation relating to secret accounts solely within his possession and control, forcing Ms. Stewart to file numerous motions to compel, requests for sanctions, and subpoenas, mostly to no avail. Id. at p. 4 ¶ 11, p. 5 ¶ 12, p. 6 ¶¶ 15, 18, 19, 22-24, 26, p. 11-12, p. 28.
Under the section of the Report entitled "Alimony," the Special Master explained "[w]ife's request for alimony was not pursued as she is cohabiting with her fiancé. Her claim for alimony is therefore denied and dismissed." Id. at p. 28. Because Ms. Stewart chose not to pursue alimony, she did not provide the Special Master with any information about her personal expenses. Id. at p. 8 ¶ 3.
In the section of the Report entitled "Division of Property — Marital Property
In weighing these factors, the Special Master recognized that the Debtor was in a "far superior position given his income, after consideration of taxes actually paid, is over four times greater than Wife's income." Id. at p. 9 ¶ 5. She also recognized that the "[w]ife has incurred debt of approximately $150,000 post-separation in the form of credit card debt and attorney fees. Husband is in a superior position as he retains the business which has a significant non-marital component." Id. at p. 10 ¶ 8. Furthermore, the Special Master concluded that "given the proximity of the parties' separation to the opening of the salon, it is Husband who reaps the benefits, particularly as it appears that marital funds were used to fund the new salon." Id. at p. 10 ¶ 7.
Accordingly, under the section of the Report entitled "Division of Marital Property — Summary and Equitable Distribution of Marital Property," the Special Master determined:
In the same section, the Special Master valued the marital portion of LaSpina Salon at $350,878 and charged Debtor with possession of this amount. Id. at p. 23-26. As for the remainder of the marital estate, the Special Master charged Ms. Stewart with possession of the following marital assets: (1) her Jaguar, which she had sold for $4,000; (2) her Wachovia account with a separation date value of $553.41; (3) her Morgan Stanley IRA, which she had cashed in post-separation, valued at $5,136.60 as of April 30, 2005; and (4) her NY Life insurance policy, which she had liquidated on June 27, 2005, valued at $5,902.05. Id. at p. 6 ¶¶ 16, 17, 20, 21, p. 25.
The Special Master charged Debtor with possession of the following assets of the marital estate, many of which he had kept hidden from Ms. Stewart during their marriage and post-separation until the divorce proceedings, and liquidated prior to Trial: (1) Debtor's Wachovia account with an April 15, 2005 balance of $6,695.49; (2) Debtor's Commerce Bank account with a $10.00 value; (3) Debtor's Scottrade IRA, which he had cashed out post-separation, valued at $7,080.89; (4) an "MFS purchase pension plan" with a March 31, 2006 value of $940.44; (5) a NY Life policy ending in x992 which the Special Master assigned a marital value of $88,980.39;
From the Debtor's portion of the marital estate, the Special Master recommended that the Debtor pay Ms. Stewart $290,462.73 cash in 120 consecutive monthly payments of $2,420.52 plus interest at the legal rate to be compounded annually ("Award"). Id. at p. 25-27. The Award represented 57% of the value of the marital portion of the salon and 60% of the value of the remainder of the marital estate, less the marital assets already in Ms. Stewart's possession. Id. at p. 25-26. In describing the terms of the Award, the Report explained that "[t]hese payments are in equitable distribution and are not taxable to Wife nor are the payments deductible from the income of Husband." Id. at p. 27. Finally, under the section of the Report entitled
On February 23, 2009, the State Court entered the divorce decree, which incorporated and adopted the findings and recommendations contained in the Report ("Divorce Decree"). See Obj. Ex. A Decree p. 1-4; July 23 Tr. 54:8-12. The Divorce Decree discussed the Award in a section labeled "Equitable Distribution" and addressed the voluntary dismissal of Ms. Stewart's alimony request in a section labeled "Alimony." Obj. Ex. A Decree p. 1-4. In a section labeled "Attorneys' Fees and Costs," the Divorce Decree further ordered the Debtor to pay Ms. Stewart's counsel the $20,000 of counsel fees recommended by the Special Master. Id. at p. 4. The Debtor subsequently satisfied his obligation to pay this portion of Ms. Stewart's counsel fees. July 23 Tr. 54:16-55:2.
On April 19, 2010, in response to Ms. Stewart's "Petition for Enforcement of Agreement, Enforcement of Court Order and for Contempt," the State Court found Debtor in contempt for failure to make payments due under the Divorce Decree. Ex. C-2 ¶ 1. As a result, the State Court ordered the Debtor to abide by an agreement the parties had entered into on September 29, 2009 providing that (1) through September 1, 2010, the Debtor would make payments to Ms. Stewart on the first day of each month in the amount of $1,020 and (2) that starting October 1, 2010, the Debtor would pay Ms. Stewart monthly payments of $3,807.66 in accordance with an attached amortization schedule until the balance due was paid in full ("Enforcement Order"). Id. at ¶¶ 3, 4. The Enforcement Order also required the Debtor to provide Ms. Stewart with a life insurance policy naming her as the beneficiary in an amount equal to the total amount due pursuant to the Divorce Decree. Id. at ¶ 5.
Going forward, the Debtor struggled to maintain his business and pay Ms. Stewart. June 4 Tr. 21:19-22:13. Accordingly, on February 14, 2018, the Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code. Case No. 18-11012 ECF 1. Shortly thereafter, in or around March 2018, the Debtor gave up LaSpina Salon, which he had relocated to a smaller facility about a year prior, and moved to Florida to care for his aging parents. June 4 Tr. 9:3-10, 10:4-12, 22:1-5; July 23 Tr. 72:1-8, 77:13-15. On April 11, 2018, Ms. Stewart filed a proof of claim in the amount of $91,948.18, the alleged balance due under the Award as of the petition date, characterizing her claim as a priority claim for a domestic support obligation pursuant to 11 U.S.C. § 507(a)(1)(A).
On October 13, 2018, the Debtor filed an objection to the Claim, disputing Ms. Stewart's characterization of the Claim as a domestic support obligation and seeking a determination that the Award was dischargeable as an equitable distribution obligation.
As of the summer 2019 hearings, the Debtor was working part-time as a hairstylist making around $300/week and living with his girlfriend. June 4 Tr. 8:21-24, 9:15-21; July 23 Tr. 73:9-12. At that time, he owned no real estate and had no more than $3,000-$4,000 in his bank account. June 4 Tr. 26:13-15, 20-21; July 23 Tr. 72:18-19.
At the conclusion of the July 23 hearing, the Court invited the parties to submit supplemental briefing. The Debtor, after seeking and obtaining an extension of the briefing schedule, filed a supplemental brief on September 20, 2019. Case No. 18-11012 ECF 59, 60, 64. Ms. Stewart filed a response on October 18, 2019. Id. at ECF 67. The Court has reviewed the submissions and the matter is now ripe for disposition.
The Debtor argues that the Claim cannot be classified as a domestic support obligation, because the Special Master did not award Ms. Stewart alimony, maintenance, or support. Obj. ¶ 12. Instead, he argues that the Claim should be classified as an equitable distribution obligation because the Special Master only intended to divide the parties' marital property. Id. at ¶¶ 4, 11. Ms. Stewart, on the other hand, argues that part of the Claim should be classified as a domestic support obligation because the Special Master intended to give her the Award in lieu of alimony and to provide her with additional financial support. Resp. to Obj. ¶¶ 3, 10, 11. See July 23 Tr. 60:18-61:7.
After reviewing the factors used by the Special Master to craft the Award of equitable distribution under 23 Pa.C.S.A. § 3502(a) and her statements in the Report, the Court finds that the Special Master's primary intent in crafting the Award was to equitably divide the parties' marital property. However, the Court also finds that the Special Master intended part of the Award to serve as a domestic support obligation to Ms. Stewart, given her concern for the significant income disparity between the parties. The Court therefore concludes that two-thirds of the Claim will be characterized as an equitable distribution obligation which will be treated as a general unsecured claim subject to discharge, and one-third of the Claim will be characterized as a domestic support obligation which will be treated as a nondischargeable, priority unsecured claim.
Section 507(a) of the Bankruptcy Code "sets forth ten categories of expenses and claims that are entitled to priority payment in a bankruptcy case." In re Anthony, 453 B.R. 782, 785 (Bankr. D.N.J. 2011). See 11 U.S.C. § 507(a). Pursuant to 11 U.S.C. § 507(a)(1)(A), "[a]llowed unsecured claims for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor ..." have first priority. Additionally, 11 U.S.C. § 523(a)(5) renders debts incurred for a domestic support obligation nondischargeable.
Under 11 U.S.C. § 101(14A), the Bankruptcy Code defines a "domestic support obligation" as:
It is clear that the Award in this case is owed to the Debtor's former spouse, the obligation was established in a divorce decree entered before the order for relief, and the Award has not been assigned. See 11 U.S.C. § 101(14A)(A)-(D). Accordingly, whether the Award constitutes a domestic support obligation depends on whether the Award is in the nature of alimony, maintenance, or support. See 11 U.S.C. § 101(14A)(B).
In Gianakas v. Gianakas (In re Gianakas), 917 F.2d 759 (3d Cir 1990), the Third Circuit Court of Appeals ("Third Circuit") declared that "whether the obligation is in the nature of alimony, maintenance or support for purposes of the Bankruptcy Code is a question of federal, not state, law." 917 F.2d at 762. Accordingly, a debt could still be "in the nature of support" even though it would not legally qualify as alimony or support under state law. Id. Ultimately, courts must look beyond the label attached to an obligation to examine its true nature.
By way of background, "alimony, maintenance, and support" generally refer to obligations of one spouse to make payments to the dependent spouse in order to
In contrast, property settlements stemming from the division of marital assets in divorce proceedings without regard for either spouse's need for financial support are considered to be in the nature of equitable distribution. See e.g., Shirey v. Shirey, No. 97-CV-7818, 1998 WL 107031, at *4-5 (E.D. Pa. Mar. 11, 1998) (finding debtor's obligation to compensate his former spouse for rental value of jointly-owned property where debtor resided post-separation without paying mortgage to be in the nature of equitable distribution due to the state court's lack of consideration for any financial need of the former spouse in imposing the obligation); Mannix v. Mannix (In re Mannix), 303 B.R. 587, 594-95 (Bankr. M.D. Pa. 2003) (debtor's obligation to reimburse his former spouse for a loan used to pay creditors of debtor's business did not constitute alimony, maintenance, or support as demonstrated by the lack of evidence that the former spouse would be unable to meet her needs in the absence of debtor's reimbursement for and further assumption of the loan); Rankin v. Alloway (In re Alloway), 37 B.R. 420, 426 (Bankr. E.D. Pa. 1984) ("unless ... the debt is more akin to alimony, maintenance or support rather than a mere distribution of property, the debt will be discharged.").
Ultimately, in considering the types of obligations which constitute "alimony, maintenance or support," the Third Circuit in Gianakas held that "[w]e believe that whether an obligation is in the nature of alimony, maintenance or support, as distinguished from a property settlement, depends on a finding as to the intent of the parties at the time of the settlement agreement." Gianakas, 917 F.2d at 762. Where the controlling document is a family court order, such as a divorce decree, the bankruptcy court must look to the intent of the underlying court at the time the order was entered. Shirey, 1998 WL 107031, at *3; In re Marker, 139 B.R. at 621 n.2 ("the analysis set forth in Gianakas applies with equal force to [a decree issued by a court]. The only salient difference is that the intent to be ascertained is that of the state court rather than that of the parties to the divorce proceeding."); In re Pollock, 150 B.R. at 588. When, as in the instant case, a
Ultimately, Gianakas instructed that intent can be determined by examining three principal factors:
Based upon the foregoing, the Court will review the language and substance of the Report, the parties' financial circumstances at the time the Report was issued, and the function of the Award.
The language and much of the substance of the Report and Divorce Decree
Furthermore, the Report discusses the factors informing the Award in a section titled "Division of Property — Marital Property and Equitable Distribution," and the terms of the Award in a section entitled "Division of Property — Summary and Equitable Distribution of Marital Property." See Ex. C-1 p. 7, 11. In the "Summary and Equitable Distribution of Marital Property" section, the Report calculates the total value of the marital estate based upon the assets held by each of the parties and the percentage of the total marital estate that the Debtor must pay to Ms. Stewart.
Although the Special Master characterizes the Award as one of equitable distribution throughout the Report, the factors actually used by the Special Master to determine the appropriate division of the marital estate pursuant to 23 Pa.C.S.A. § 3502(a) relate to both domestic support obligations as well as equitable distributions. For instance, the following factors considered by the Special Master under § 3502(a) reflect concerns related to support and maintenance rather than property division:
On the other hand, other factors under § 3502(a) relate primarily to property division, such as:
In addition, as discussed supra, the court must look beyond labels attached to an obligation. Gianakas, 917 F.2d at 762. See In re Tyndall, 360 B.R. at 71-72 (an obligation labeled "not alimony" in a property settlement agreement and which was to be made "in lieu of [wife's] interest in the Business" was nevertheless in the nature of support). As previously discussed, under appropriate circumstances, an obligation could be "in the nature of support" even though it would not legally qualify as alimony or support under state law. Gianakas,
The Report reflects that the Special Master did consider, to a certain extent, the parties' financial circumstances, including that "[h]usband out-earns Wife by more than four times over," "is in a far superior position given his income," and maintained a significant non-marital component of LaSpina Salon.
However, the Special Master had no information about Ms. Stewart's ongoing expenses. Id. at p. 8 ¶ 3. In fact, even though she earned less than the Debtor, she did not specifically seek spousal support, alimony pendente lite, or alimony. Id. at p. 28; June 4 Tr. 22:20-22; July 23 Tr. 29:19-24. At the time of the Trial, she enjoyed employment as an LPN and resided with her fiance, an accountant who purchased the Marital Residence for over $350,000 so that she could continue to live there. Ex. C-1 p. 3 ¶ 6, p. 5 ¶ 12, p. 7 ¶ 28, p. 8 ¶ 3; July 23 Tr. 41:9-10. While it is clear that Ms. Stewart's financial circumstances were a consideration for the Special Master in the Report, they were not the focus of the Report. As noted above, much of the Report was focused on the value and division of the marital property.
Finally, the Court considers the intended function of the Award. As the Third Circuit stated in Gianakas, "an obligation that serves to maintain daily necessities such as food, housing and transportation is indicative of a debt intended to be in the nature of support." Gianakas, 917 F.2d at 763. Other factors also shed light on the intended function of an obligation stemming from a divorce. For instance, that an obligation is payable in installments generally signals that the obligation functions to provide support. Gianakas v. Gianakas (In re Gianakas), 112 B.R. 737, 742 (W.D. Pa. 1990). Similarly, courts tend to find obligations which terminate upon a condition or the death or remarriage of the recipient spouse as in the nature of support. Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir. 1984); In re Gianakas, 112 B.R. at 742.
Conversely, courts tend to view obligations which remain consistent regardless of changes in the recipient spouse's circumstances as true property settlements. Shaver, 736 F.2d at 1316. In determining the intended function of an obligation, some courts have also considered whether "the debt was allocated in lieu of a greater allowance of alimony" and "whether the support award would be inadequate
Here, because the Special Master had no knowledge of Ms. Stewart's specific expenses other than the $35,000 of general credit card debt and $120,000 of counsel fees, this Court has no basis upon which to conclude that the intended function of the Award was to help Ms. Stewart maintain her basic, daily necessities such as food, housing, and transportation. The Special Master, therefore, could not have intended the Award to assist Ms. Stewart in meeting her daily necessities if she had no idea what her daily necessities were or how much they cost, nor was there any suggestion in the Report that Ms. Stewart could not meet her basic needs at the time of Trial.
In addition, although the Award is payable in installments, the reality is that, with few remaining assets besides LaSpina Salon, the Debtor would have been unable to pay Ms. Stewart her portion of the marital estate in a lump sum without selling the business he had recently renovated and expanded. July 23 Tr. 55:9-18. Therefore, the installment structure appears to have been driven purely by practical considerations.
Furthermore, while Ms. Stewart argues that the Special Master awarded her equitable distribution payments in lieu of alimony, the reality is that she simply would not have qualified for alimony under Pennsylvania law because she was cohabiting with her fiance at the time of Trial. See 23 Pa.C.S.A. § 3706 ("No petitioner is entitled to receive an award of alimony where the petitioner, subsequent to the divorce pursuant to which alimony is being sought, has entered into cohabitation with a person of the opposite sex who is not a member of the family of the petitioner within the degrees of consanguinity."). While the Award could still serve as support under federal law, the Special Master could not have intended to have the equitable distribution payments replace an award of alimony which Ms. Stewart would have never qualified for in the first place. In any event, the Report itself lacks any express indication suggesting that the Special Master intended to award equitable distribution in lieu of alimony.
Moreover, it appears unlikely that the Special Master would have intended this Award to primarily serve a support function when Ms. Stewart was gainfully employed, received at least some child support, and resided with another professional who had provided her with housing, especially given that Ms. Stewart had never sought spousal support or alimony pendente lite during the divorce proceedings. See Ex. C-1 p. 3 ¶ 6, p. 5 ¶ 12, p. 7 ¶ 28; June 4 Tr. 22:20-22; July 23 Tr. 20:22-21:2, 29:19-24, 56:4-6, 59:5-6, 68:2-23.
As discussed supra, the Report is primarily focused on the division of the marital property held by each party. In addition, the Special Master was concerned about compensating Ms. Stewart for the Debtor's substantial investment of marital property into LaSpina Salon prior to the divorce and the Debtor's concealment and dissipation of marital property prior to Trial. All of these factors reflect the Special Master's intent to divide the marital property in a manner consistent with traditional principles of equitable distribution.
At its core, therefore, this Award appears to primarily function as a division of the parties' marital assets in order to (1) compensate Ms. Stewart for her investment of marital property into the renovation of LaSpina Salon by giving her a fair portion of the marital value of the Salon and (2) ensure she received a fair share of the marital assets that the Debtor had hidden from her and liquidated prior to Trial. In light of the foregoing, the Court finds that this third factor weighs in favor of the Debtor's position that this Award was, for the most part, intended to effectuate a fair and equitable division of the marital property.
Nevertheless, the Court cannot ignore the Special Master's concern for the disparity in the parties' income and earning potential and the post-separation credit card debt Ms. Stewart had incurred presumably in order to provide for herself and her son. Even without documentation of Ms. Stewart's ongoing expenses, the Special Master recognized Ms. Stewart's financial vulnerability comparative to the Debtor's. It is undeniable that the disparity in the parties' earning capacity, income, and financial circumstances was a partial justification for the Award.
Based upon the foregoing, the Court concludes that two-thirds of the Award served as an equitable distribution of the parties' marital property and one-third of the Award served as a domestic support
After weighing the three Gianakas factors, the Court concludes that the Debtor's Claim objection is sustained in part and overruled in part. One-third of the Claim is entitled to priority treatment pursuant to § 507(a)(1)(A) and is nondischargeable pursuant to § 523(a)(5) and two-thirds of the Claim is reclassified as a general unsecured claim subject to discharge.
AND NOW, this 3rd day of January 2020, for the reasons given in the accompanying opinion, it is hereby ORDERED that:
THE COURT: So is it your argument that he said that she was basically owed X thousands of dollars in spousal support, and then that's what's being paid out over time? This is all spousal support?
MR. RUF: No, it's not all spousal support, it's the business and also it was the EQ, and also it was spousal support and potentially alimony. Just because she didn't make the specific claim of alimony doesn't mean that, you know, it doesn't mean that that's not part of what this is. It's part of a support payment in general.
THE COURT: Do you acknowledge that part of this award could be considered property settlement, but part of it could also be considered spousal support and possibly now alimony, you're saying?
MR. RUF: Yes.
July 23 Tr. 60:18-61:7
