Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE.
Before the Court is the complaint (the "Complaint") filed by Rachel Rosenblum (the "Plaintiff") against the chapter 13
The Court conducted a trial on Plaintiff's Complaint (the "Trial") on May 3, 2016 (the "Trial Date"). At the conclusion of the Trial the Court took the matter under advisement. After considering the applicable statutory authority, the case law, the pleadings, and the arguments of counsel, the Court now concludes that the damages resulting from Defendant's breach of the property settlement agreement are dischargeable under § 1328(a) of the Bankruptcy Code and enters judgment in this Adversary Proceeding in favor of Defendant. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The Court has subject matter jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.
Plaintiff and Defendant were lawfully married on December 2, 2000. Plaintiff and Defendant had two children together arising from the marriage. Following a trial separation in 2008, the Plaintiff and Defendant entered into a property settlement agreement in January 2009 (the "Original Agreement"). In September 2009, Plaintiff and Defendant executed a supplemental property settlement agreement (the "Supplemental Agreement") that modified certain terms of the Original Agreement (the Original Agreement as modified by the Supplemental Agreement is hereinafter referred to as the "Property Settlement Agreement"). On November 16, 2009, the Virginia Circuit Court of the County of Hanover entered a final decree of divorce, dissolving the marriage between Plaintiff and Defendant (the "Final Decree"). The Final Decree affirmed, ratified and incorporated, but did not merge, the Property Settlement Agreement into the Final Decree. The Property Settlement Agreement did not provide for the payment of any spousal or child support. It granted Defendant 65% custody of the two children and gave the Plaintiff 35% custody.
The Property Settlement Agreement addressed the disposition of the marital residence, which was encumbered by two deeds of trust. Defendant was granted exclusive possession of the marital residence and was required to assume full responsibility for the payment of the note secured by the first priority deed of trust and "any and all insurance, utility, real estate taxes, homeowner association fees, and all repair and maintenance costs for [the] realty." Under the terms of the Property Settlement Agreement, Defendant agreed to "indemnify and hold [Plaintiff]
More than three years after entry of the Final Decree, Defendant filed a voluntary petition under chapter 13 of the Bankruptcy Code on January 7, 2013 (the "Petition Date"), in this Court. Sometime after the Petition Date, Defendant ceased making payments on the note secured by the first deed of trust on the marital residence in violation of the Property Settlement Agreement. During the time period between the Petition Date and the Trial Date, the Defendant presented three different motions to the Court requesting authority to sell the martial residence. No sale of the marital residence was ever consummated, however, as all three of the prospective purchasers backed out of their respective sales contracts.
Plaintiff alleges in her Complaint that Defendant has breached the Property Settlement Agreement because he failed to remove her name from liability for "the mortgage." She alleges additional breaches arising from Plaintiff's failure to make payments on the note secured by the first deed of trust, to keep the property in repair, and to consummate a sale of the marital residence. Plaintiff alleges that she was damaged as a result of these breaches because her credit score was lowered, causing her to incur additional fees and costs when she applied for her own financing for the purchase of a new home.
The Plaintiff contends that these damages should be characterized as non-dischargeable, domestic support obligations under § 523(a)(5) of the Bankruptcy Code. The Property Settlement Agreement purports to make the Indemnity Provision non-dischargeable, stating (the "Bankruptcy Provision"):
Defendant counters that the Property Settlement Agreement expresses the clear intent of the parties for the waiver of any claims for support or maintenance. One section of the Property Settlement Agreement waives the claims of both spouses for child support. In another section of the Property Settlement Agreement, after taking into consideration a list of thirteen separate factors, the parties agreed to waive any and all claims for spousal support and maintenance, stating (the "Waiver Provision"):
The interplay (and inconsistency) between the Waiver Provision that clearly waives any right to support and maintenance on the one hand, and the Bankruptcy Provision that seemingly resurrects a claim for support and maintenance for breach of the Property Settlement Agreement on the other hand, lies at the heart of the dispute between the parties.
A debtor who completes all payments under a confirmed chapter 13 plan is eligible to receive a discharge under 11 U.S.C. § 1328(a). Section 524 of the Bankruptcy Code describes the effect of a discharge in a case under chapter 13.
11 U.S.C. § 101(14A). Section 523(a)(15) creates a dischargeability exception 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.
Section 523 of the Bankruptcy Code, by its terms, is not applicable to a chapter 13
The issue presented in this case is whether the Indemnity Provision falls under § 523(a)(15) of the bankruptcy Code and is dischargeable or whether it falls under § 523(a)(5) of the Bankruptcy Code and is non-dischargeable. The determination of that issue rests on whether the Indemnity Provision is in the nature of alimony, maintenance, or support. That in turn is a question of federal bankruptcy law. See Matter of Long, 794 F.2d 928, 930 (4th Cir.1986).
"The analysis of dischargeability under section 523 must begin with the assumption that dischargeability is favored under the Code, unless the complaining spouse, who has the burden of proof, demonstrates the obligation at issue `is actually in the nature of alimony, maintenance or support.'" Tilley v. Jessee, 789 F.2d 1074, 1077 (4th Cir.1986) (emphasis in original) (quoting In re Morris, 10 B.R. 448 (Bankr. N.D.Iowa 1981)). The burden of proof rests with the objecting spouse. Id. For a court to characterize an obligation as a domestic support obligation, the court must find there was a "mutual intent" to create an obligation in the nature of alimony, maintenance, or support. Id. To help determine whether the mutual intent standard has been satisfied, courts in the Fourth Circuit have applied a four-factor test. See Catron v. Catron (In re Catron), 164 B.R. 912, 918-20 (E.D.Va.1994); Combs v. Combs (In re Combs), 543 B.R. 780, 798-800 (Bankr.E.D.Va.2016); In re Johnson, 397 B.R. 289, 297 (Bankr. M.D.N.C.2008); see also Catron v. Catron, 43 F.3d 1465 (4th Cir.1994) (approving a lower court's use of the four factor analysis). A court should consider: "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 (i.e. daily necessities), and 4) whether there is any evidence of overbearing at the time the agreement." Johnson, 397 B.R. at 297. However, "courts may look beyond the four corners of a divorce decree or the agreement of the parties to determine the nature of the payments constituting debts sought to be discharged." Id.
Plaintiff has failed to carry her burden of proving that the substance and
Most of the Property Settlement Agreement concerns issues involving the distribution of the property to and the assumption of liability by the former couple. The only provisions of the Property Settlement Agreement that relate to alimony, maintenance, or support are the express waivers of the right to pursue such claims. Paragraph eighteen (18) of the Property Settlement Agreement, titled "SUPPORT FOR THE CHILDREN," expressly waives any right to child support for either party. Paragraph twenty-nine (29) of the Property Settlement Agreement, titled "SPOUSAL SUPPORT," waives any right to the receipt of spousal support or maintenance for either party.
These waiver provisions serve as a permanent and broad bar insulating the Defendant against any claims advanced by Plaintiff. Plaintiff very clearly "waiv[ed] any and all claims to support and maintenance for herself and ... release[d] and discharge[d] the Husband ... from any and all claims and demands, past, present or future, for support and maintenance." This waiver and release does not contain any carve out or exception — it is an absolute and permanent waiver of the right to seek support and maintenance and an absolute and permanent release of the Defendant from any such liability.
Plaintiff, however, wants the Court to ignore the Waiver Provision.
The Court finds the Waiver Provision demonstrates the parties' clear mutual intent. The Waiver Provision is located in the section of the Property Settlement Agreement titled "SPOUSAL SUPPORT". It unambiguously waives any right of either party to assert a claim for support or maintenance. See Johnson, 397 B.R. at 297 (citing Tilley, 789 F.2d at 1077-78) ("The labels attached to certain provisions in a separation agreement are not dispositive of their "nature," but the labels are persuasive evidence of the parties' intent.").
Plaintiff argues that the Waiver Provision becomes inapplicable upon breech of the Property Settlement Agreement. Plaintiff contends that the Bankruptcy Provision serves to resurrect Plaintiff's waived claim for support and maintenance upon the event of a default. The Court does not agree. The Court finds nothing in the text of the Waiver Provision that supports Plaintiff's interpretation. 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. See In re Uzaldin, 418 B.R. 166, 171-72 (Bankr.E.D.Va.2009) ("A debt owed to a former spouse that is in the nature of `alimony, maintenance, or support'... does not include a debt arising from a property settlement agreement...."). The Indemnity Provision is not located in the spousal support section of the Property Settlement Agreement where support and maintenance are clearly and unambiguously waived "forever." See Bangert v. McCauley (In re McCauley), 105 B.R. 315, 319 (E.D.Va.1989) (emphasizing the significance of whether the divorce decree "contained another provision explicitly for alimony or support."). The Waiver Provision does not contain any conditions or exceptions — it is a waiver "absolutely and forever". See In re Deberry, 429 B.R. 532, 539 (Bankr.M.D.N.C. 2010) (finding a domestic support obligation despite the presence of a spousal support waiver when the waiver contained an "express condition[]"). There is no language in the Waiver Provision that suggests the absolute waiver becomes inoperable upon breach of the Property Settlement Agreement.
Objective scrutiny lends further support to the Court's conclusion. The Indemnity Provision simply lacks the true characteristics of alimony, maintenance, or support. First, the Property Settlement Agreement does not provide for the termination of the Indemnity Provision if one of the parties dies or chooses to re-marry. See In re Austin, 271 B.R. 97, 106 (Bankr.E.D.Va. 2001) ("A contingency such as whether the obligation terminates upon the death or remarriage of the creditor spouse is relevant."). "The termination of the obligation upon the remarriage or death of the ex-spouse evidences the shared intention of the parties to create an obligation in the nature of alimony maintenance or support...." Pagels v. Pagels (In re Pagels), 2011 WL 577337, at *12 (Bankr.E.D.Va. Feb. 9, 2011). As the Indemnity Provision does not terminate upon remarriage, death of a spouse, or a change in financial circumstances, it cannot be characterized as an obligation in the nature of alimony, maintenance, or support.
Second, the Property Settlement Agreement does not provide the appropriate tax treatment for the Indemnity Provision to be characterized as an obligation in the nature of alimony, maintenance, or support. The Court of Appeals for the Fourth Circuit has adopted a quasi-estoppel theory that "forbids a party from accepting the benefits of a transaction or statute and then subsequently taking an inconsistent position to avoid the corresponding obligations or effects." Robb-Fulton v. Robb (In re Robb), 23 F.3d 895, 898 (4th Cir.1994) (quoting Matter of Davidson, 947 F.2d 1294, 1297 (5th Cir.1991)) (internal quotation marks omitted). The Property Settlement Agreement treats the Indemnity
The Property Settlement Agreement does just that, however. It provides that any payments made on account of the Indemnity Provision are not includable in gross income and not deductible. Paragraph thirty-three (33) of the Agreement provides that "the parties further agree that the payment of such debts by either party as agreed shall not be taxable to the other party and deductible by the paying party as alimony for the purposes of filing State and Federal income taxes." This provision demonstrates that payments made under the Indemnity Provision would not be deemed support or maintenance payments under the Internal Revenue Code. See Beiler v. Beiler, 80 B.R. 63, 64 (E.D.Va.1987) ("As further evidence that the parties did not agree or intend the said payment to be in the nature of alimony, maintenance or support, or in lieu thereof, wife did not report the sums received as income, nor did the husband take a deduction therefor."); In re Krueger, 457 B.R. 465, 478 (Bankr.D.S.C.2011) ("If the parties do not derive any tax benefit from the obligations imposed by the Agreement, it suggests that the payments are in the nature of a property settlement and not for maintenance and support."). The Bankruptcy Provision contained in the Property Settlement Agreement purports to give Plaintiff all the benefits of an obligation for maintenance and support under the Bankruptcy Code without the necessary tax consequences of maintenance or support under the Internal Revenue Code. See Robb, 23 F.3d at 899 (holding that once a debtor classifies their obligations for tax purposes, he or she cannot "avoid[] the corresponding obligations or effects of this classification under the Bankruptcy Code.").
The Court also must consider the financial situation of the parties as part of its determination whether there was a mutual intent to create an obligation in the nature of alimony, maintenance, and support. "Common sense dictates that the party with weaker financial means, upon marital separation from a party with strong financial means, is less likely to incur an obligation in the nature of alimony, maintenance and support." Pagels, 2011 WL 577337 at *13; Combs, 543 B.R. at 798-99.
The Court finds that the financial condition of the parties demonstrates that the Indemnity Provision was in the nature of property distribution and debt allocation rather than in the nature of alimony, maintenance, or support. Defendant was the party with the weaker financial condition at the time of the divorce. Plaintiff and Defendant each had similar incomes, but the Plaintiff had a much more consistent employment history. The two spouses split many of the expenses for their children,
The Court must next consider the purpose of the Indemnity Provision and evaluate what role the obligation was intended to fulfill. Combs, 543 B.R. at 799. "An agreement that serves to provide such daily necessities as food, clothing, shelter and transportation is indicative of debt intended to be in the nature of support." Pagels, 2011 WL 577337 at *15; see Combs, 543 B.R. at 799.
The Court finds that the function of the Indemnity Provision was to advance the division of property and the allocation of debt. It was not to provide any daily necessities to Plaintiff. The obligation of the Defendant to pay the note secured by the first deed of trust encumbering the former marital residence did not affect the shelter or living conditions of Plaintiff. Defendant was the party entitled to exclusive possession of the marital residence. Plaintiff was never at risk of being removed from the martial residence due to the Defendant's default under the terms of the Property Settlement Agreement. C.f., Gianakas v. Gianakas (In re Giankakas), 917 F.2d 759, 763-64 (3d Cir.1990) (finding that a mortgage payment that allowed the objecting spouse to maintain the family home to be a domestic support obligation); Johnson, 397 B.R. at 297-98 ("[A]n obligation that is essential ... to protect a residence constitutes a nondischargeable obligation.") (emphasis added). Plaintiff was able to rent an apartment and later upgrade to a larger apartment on her own. Despite Defendant's subsequent default under the Property Settlement Agreement, Plaintiff was ultimately able to purchase a new home for herself. The Court is hard pressed to find that the Defendant's default impacted the daily necessities of the Plaintiff. Her living condition appeared unaffected by the default.
The Court did not hear any evidence of overreaching by either party, but it was established that counsel for the Plaintiff drafted the Agreement during the separation proceedings.
Weighing the four factors, the Court finds that Plaintiff has not met her burden of proving that the mutual intent of the two spouses was for the Indemnity Provision to create an obligation in the nature of alimony, maintenance, and support. The Court finds that the parties unambiguously expressed their clear intent to waive their respective claims for support and maintenance. Other objective factors favor the Court's conclusion that the Indemnity Provision is not in the nature of alimony, maintenance or support. The Court finds that the Defendant's obligations under the Property Settlement Agreement are of the nature of those set forth in § 523(a)(15) of the Bankruptcy Code. Accordingly the obligations arising out of the Indemnity Provision are dischargeable under § 1328(a) of the Bankruptcy Code.