Is an overpayment of spousal support nondischargeable in a chapter 7 bankruptcy case?

Is an overpayment of spousal support nondischargeable in a chapter 7 bankruptcy case?

Yes, in the case of In re: Eloisa Maria Taylor, Matthew E. Taylor v. Eloisa Maria Taylor, 737 F.3d 670 (10th Cir., 2013), where the Tenth Circuit Court of Appeals affirmed the U.S. Bankruptcy Court’s holding, on appeal from the Bankruptcy Appellate Panel for the 10th Circuit, that the overpayment was nondischargeable under 11 U.S.C. §523(a)(15) as a debt incurred in connection with a separation agreement.

In the Taylor case, the husband and wife were married for seventeen years before obtaining a divorce in the Circuit Court of Fairfax County, Virginia.  The final decree of divorce incorporated a Marital Settlement Agreement between the parties, also referred to variously in Virginia divorce law as a separation agreement, property settlement agreement, marital agreement, or agreement and stipulation in accordance with §20-109 and §20-109.1 of the Code of Virginia, as permitted by the Virginia Premarital Agreement Act, Virginia Code Section 20-155.  In accordance with the terms of the parties’ separation agreement, the Virginia Circuit Court judge ordered the husband to pay spousal support of $2,500 a month to wife until the death of either party, or the remarriage of wife, or ten years of payments, whichever first occurs.  After less than four years the husband moved the court to terminate the alimony payments on the grounds wife was living with another man in a relationship analogous to marriage, a basis for the termination of court-ordered spousal support under Virginia Code Section 20-109(A).  The divorce court judge agreed with the husband and retroactively terminated the spousal support obligation to the wife, resulting in a money judgment against the wife of more than $50,000 for the husband’s overpayment of support for the period after her cohabitation.  Less than two months later, the wife filed a chapter 7 bankruptcy case.

The husband then filed an adversary proceeding, under Federal Rules of Bankruptcy Procedure 7001(6), ancillary to the wife’s bankruptcy case for a determination that the overpayment of support was a nondischargeable debt under 11 U.S.C. § 523(a)(2)(A), (5) and (15).  The bankruptcy court granted the husband’s motion for summary judgment (Federal Rules of Bankruptcy Procedure 7056 and Federal Rules of Civil Procedure 56) and ruled that the overpayment debt was nondischargeable under 11 U.S.C. 523(a)(15) as a debt “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement…”  The bankruptcy court did not, however, address the husband’s request for attorney’s fees in connection his nondischargeability complaint.  Husband and wife both appealed the decision.

On appeal, the Bankruptcy Appellate Panel (“BAP”) affirmed the bankruptcy court judge’s rulings that the debt was not a nondischargeable “domestic support obligation” (as defined in 11 U.S.C §101(14A) ) under 11 U.S.C. §523(a)(5) and that it was a nondischargeable debt under 11 U.S.C. § 523(a)(15).  The BAP also ruled that the bankruptcy court did not have authority to award attorney’s fees to the husband under the parties’ Marital Separation Agreement. Both parties appealed again.

On appeal, the Tenth Circuit Court of Appeals first recognized the applicable standards of review in bankruptcy court appeals: fact findings by the bankruptcy court would be upheld unless clearly erroneous and questions of law would be decided de novo, or, as if for the first time.  The BAP’s decision was merely persuasive as a subordinate appellate court.  In addition, in family law cases, the decision whether a debt is “…in the nature of support…” constituting a Domestic Support Obligation under 11 U.S.C. §101(14A) is a fact finding, subject to the clear error standard.

The Federal Court of Appeals then recognized the two types of family law debts that are exceptions to discharge: “domestic support obligations” under 523(a)(5) and non-DSO debts arising out of divorce proceedings or separation agreements under 523(a)(15).  The 10th Circuit Court analyzed whether the debt was in the nature of support by a dual inquiry, looking at both the intent of the parties and the nature of the obligations. While the description of the nature of the debt by the parties in the property settlement agreement is not controlling, state law may inform the court of the nature of the debt.  The appellate court held the support overpayment was not a domestic support obligation because it was not owed to the creditor spouse husband in this case, thus failing to meet the second requirement, “ the nature of support…of such spouse…”, in 11 U.S.C. §101(14A)(B).  In other words, in order to be a domestic support obligation under the plain meaning of the statute, the creditor must be the spouse who was owed support.  In this case, the debt was an overpayment of support of the debtor, not the creditor.

Nevertheless, the appellate court did hold that the overpayment was nondischargeable as the second type of family law debt,  a non-DSO arising out of a divorce case or separation agreement.  In doing so, the court disregarded the wife’s argument that the literal application of 523(a)(15) in this case was contrary to intentions of the legislators in drafting that bankruptcy provision to protect the dependent spouse.  The absurdity doctrine advanced by the wife was inapplicable in this case where there were no extreme circumstances or shocking result from application of the plain meaning.  In addition, the legislative intent behind 523(a)(15) was to prevent a spouse from discharging a larger debt assumed by the filing spouse, with a “hold-harmless” provision, in exchange for a reduction in a domestic support obligation owed to the nonfiling spouse.  The court applied the plain meaning of both 11 U.S.C. § 101(14A) and 11 U.S.C. § 523(a)(15) in ruling the support overpayment debt was nondischargeable.  The denial of husband’s attorney’s fees was affirmed, as not supported by the marital separation agreement between the parties.

As an interesting note, the wife might have discharged this debt had she filed chapter 13 bankruptcy instead of chapter 7 bankruptcy, under the broader discharge provided in 11 U.S.C. §1328(a), which allows for the discharge of non-DSO debts arising from divorce proceedings or a separation agreement.

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a particular family law debt may be excepted from discharge.

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