holding that husband's monthly obligation to pay wife his pension benefit until second mortgage was paid created a constructive trust, making wife the equitable owner of the monthly pension payment until the mortgage was paid, and that husband's bankruptcy could not "divest . . . wife of her separate property interest in the future payments to be received"Summary of this case from Brogan v. Brogan
November 13, 1992. Rehearing Denied January 5, 1993.
Appeal from the Circuit Court, Seminole County, Robert B. McGregor, J.
Clarine F. Smissman of Law Offices of Albert C. Eaton, Orlando, for appellant.
Gary E. Shader, Maitland, for appellee.
June Ethel Connor ("wife") appeals a declaratory judgment holding that certain payments to be made by George F. Connor, Jr. ("husband") pursuant to the parties' divorce decree were discharged in bankruptcy. We reverse.
Husband and wife were divorced in 1989, after 34 years of marriage. At the time of the divorce, the parties jointly owned three assets: (1) the marital residence; (2) a commercial building and lot from which the husband operated a pest control business; and (3) the wife's tailoring business which she operated from premises that were leased.
The final judgment of dissolution incorporated the parties' separation and property agreement ("separation agreement"). Under the separation agreement, wife conveyed to husband all her interest in the pest control business and the property on which it was located. Husband conveyed to wife his interest in the tailoring business and the marital home, which was then encumbered by both a first and second mortgage. The separation agreement provided for payment of the mortgages on the marital residence as follows:
The Wife agrees to assume the debt of the first mortgage. The Husband agrees to pay to the Wife his Military Retirement income, $760.00 plus whatever increase in the amount may be as and for payment of the second mortgage on the marital home until the said second mortgage is fully paid (in approximately 5 years). The Wife further agrees to assume all other debts including taxes and insurance on said former marital home and to hold the Husband harmless therefrom.
The separation agreement further provided:
13. WAIVER OF ALIMONY: The Wife hereby waives all right to alimony against the Husband and the Husband hereby waives all right to alimony against the Wife and both parties acknowledge that their respective waivers of alimony have been knowingly made.
The final judgment retained jurisdiction "for any support obligations, any unexecuted property divisions of this action and for the enforcement or modification of this Judgment."
For five months following entry of the final judgment, husband paid over to wife his military retirement income of $760 per month. Then husband filed a Chapter 7 bankruptcy petition and ceased making payments. Wife filed a petition for enforcement of support in Seminole County circuit court, seeking to recover husband's accrued but unpaid retirement income. Husband defended on the ground that the obligation had been discharged in bankruptcy. Wife then filed an amended complaint for declaratory judgment and petition for enforcement of support, alleging that the husband's payments on the mortgage were in the nature of "support," and seeking a declaration that the payments were nondischargeable in bankruptcy.
As of the filing of the petition, the arrearages totalled $4,752.
At trial, the parties agreed that husband's retirement income was not an asset of the bankruptcy estate. The parties further agreed that the dischargeability of the military income payments had not previously been determined by the bankruptcy court and that state courts had concurrent jurisdiction to decide the discharge issue.
11 U.S.C. § 523(c). See also In re Marriage of Wisdom, 833 P.2d 884 (Colo.Ct.App. 1992); In re Marriage of Porter, 229 Ill. App.3d 697, 171 Ill. Dec. 318, 593 N.E.2d 1138 (1992); Buccino v. Buccino, 397 Pa. Super. 241, 580 A.2d 13 (1990).
At the conclusion of the evidentiary hearing, the trial court observed:
I gather neither party contemplated the, you know, possibility of bankruptcy at the time of the agreement, but the Court is obliged to go on the agreement.
It is a bit strange that after 34 years of marriage that there isn't some kind of support, but in this case each had their respective businesses that they had pursued for a substantial period of years. I gather each business was providing an income. There was, you know, at the time, apparently no need to contemplate support because each business was providing income.
The agreement dealt with it as a property distribution rather than a support obligation. There was the waiver of the support obligation, any claim of alimony.
Final judgment was entered in favor of husband, finding that the payments to wife had been discharged in bankruptcy. The final judgment stated:
1. That the court specifically finds that the parties entered into an equitable distribution agreement. That it was uncontroverted that the equitable distribution was genuinely equal on both sides and that the clause was contained in a separate and distinct paragraph, drafted by the Former Wife's attorney and that Former Wife testified that she had sufficient time to read and analyze this agreement, specifically Paragraph 5 of the Separation and Property Settlement Agreement dated December 29, 1989.
2. That there was contained within the agreement a specific and clear waiver of spousal support entitled "Waiver of Alimony" in Paragraph 14.
Wife has appealed the final judgment, contending that the lower court erred in its conclusion that husband's duty to pay over to her his monthly retirement benefit of $760 until the second mortgage was paid was discharged in bankruptcy.
The record in the instant case amply supports the factual finding by the trial court that the assignment of George Connor's pension fund to June Connor, to the extent necessary to discharge the second mortgage on her property, was a property distribution rather than a support obligation. Findings of fact by a trial court are presumed to be correct and are entitled to the same weight as a jury verdict. A district court should not improperly substitute its judgment for the trial court's. Marsh v. Marsh, 419 So.2d 629 (Fla. 1982).
Nevertheless, we do not agree with the trial court's legal conclusion emanating from its factual finding. Rather, we agree with the constructive trust analysis outlined in Bush v. Taylor, 893 F.2d 962, 964-965 (8th Cir.), opinion on rehearing en banc, 912 F.2d 989 (8th Cir. 1990). Given the property settlement agreement executed between the Connors in 1989, it is clear, pursuant to Bush, that June Connor became the equitable owner of the monthly pension payment to the extent necessary to liquidate the second mortgage. George Connor was merely the legal title holder, or trustee, of those incoming funds, and his bankruptcy cannot divest his former wife of her separate property interest in the future payments to be received. As to the arrearages of $4,752.00 extant at the time of filing of the bankruptcy petition (the result of George Connor's conversion of prior checks), that sum constitutes a "debt" owed by George Connor to June Connor. Such a debt, created by "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" should not be discharged in bankruptcy, but the catch is that a creditor to whom such a debt is owed must timely request a noticed hearing before the bankruptcy court, which has exclusive jurisdiction to determine dischargeability of such debts, and obtain a determination by that court that the debt is not dischargeable. See 11 U.S.C. § 523(a)(4) (c).
Moreover, the appellant must still prevail under the "post-petition claim" analysis explained by the Eighth Circuit Court of Appeals in Bush. The separation agreement in this case shows that the monthly obligation of husband to wife was not a "debt" at the time husband filed for bankruptcy. Upon receipt of each retirement payment, husband had to turn it over to wife. Receipt of it by husband was a condition precedent to accrual of the obligation to pay wife. The pension payments were for a specific purpose — payment of the second mortgage. If at any point in time the second mortgage ceased to be owed (either due to payment, foreclosure or other event), the obligation would cease. Such post-petition monthly payment obligations, which were to be paid by post-petition pension payments, were not a "debt" within the meaning of the bankruptcy code and would not be discharged by husband's bankruptcy. See, e.g., Bush, 912 F.2d at 993; In re Peterson, 133 B.R. 508 (Bankr.W.D.Mo. 1991). Even if husband's obligations to wife, which had accrued as of the filing of bankruptcy, were dischargeable because they were not support and not subject to a constructive trust, husband could not thereby discharge the pension payments owed post-petition.
Although the constructive trust theory has already received criticism, the post-petition claim analysis appears to be consistent with the "fresh start," "debt adjustment" policy of the Bankruptcy Code. See Pamela Belt, Bush v. Taylor: A New Exception to Discharge in Bankruptcy, 144 Ark.L.Rev. 757, n. 4 at 761-765 (1991); But see In re Ryan, 100 B.R. 411 (Bankr.N.D.Ill. 1989); Justus v. Justus, 581 N.E.2d 1265 (Ind. Ct. App. 1991).
REVERSED and REMANDED.
COBB and PETERSON, JJ., concur.
GRIFFIN, J., concurs in part, dissents in part, with opinion.
I concur in the majority's conclusion that husband's bankruptcy did not divest wife's entitlement to post-petition pension payments, but I also believe the trial court erred in finding the use of husband's pension to pay the second mortgage on the marital home was part of a property settlement rather than support. If state law were applicable to this case, I would agree with my colleagues that the record could support the lower court's "property settlement" finding. However, this is a question which must be determined primarily with reference to federal bankruptcy law. The bankruptcy code provides that an obligation in the nature of alimony, maintenance or support, is nondischargeable in bankruptcy and federal courts have taken a very strict approach to bankruptcy discharge of such marital dissolution obligations. In deciding whether an obligation is support, a court is not bound by either a state law definition or the characterization contained in the parties' dissolution decree; the court must determine what function the award was intended to serve. In re Maune, 133 B.R. 1010, 1013 (Bankr. E.D.Mo. 1991). Where the trial court fails to apply the correct federal law to decide this issue, it is appropriate to remand the issue to the trial court to reconsider in light of the controlling law. In re Calhoun, 715 F.2d 1103 (6th Cir. 1983).
The legislative history appended to the section states, "What constitutes alimony, maintenance, or support, will be determined under the bankruptcy laws, not State law." Historical and Revision Notes, 11 U.S.C. § 523.
Section 523(a)(5) of the Bankruptcy Code provides that:
(a) A discharge under Section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —
* * * * * *
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree, or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement, but not to the extent that —
* * * * * *
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support;
In an extensive body of law, the federal courts have developed a catalogue of indicia to distinguish support from a true "property settlement." See, e.g., In re Peterson, 133 B.R. 508, 511 (Bankr. W.D.Mo. 1991); In re Pattie, 112 B.R. 437 (Bankr.M.D.Fla. 1990); In re Hill, 133 B.R. 126, 130 (Bankr.N.D.Ind. 1989). Bankruptcy courts have consistently held that an obligation that serves to maintain a former spouse's daily necessities, such as food, housing and transportation, are support, notwithstanding the characterization in the agreement. In re Yeates, 807 F.2d 874, 879 (10th Cir. 1986); Calhoun, 715 F.2d at 1109. Also, the agreement of one party to be responsible for a joint debt qualifies for maintenance or support if, without the debt assumption, the spouse would be inadequately supported. Martin v. Martin, 832 P.2d 390 (Nev. 1992). "The great weight of authority" holds that a spouse's duty to make mortgage payments on the former marital residence is an obligation in the nature of support, nondischargeable in bankruptcy, if the former spouse resides there.
Such judicial contortions have been necessary because the bankruptcy code does not recognize that support and property distributions are often confused or intertwined in separation agreements or divorce judgments under state law. See Pamela Belt, Bush v. Taylor: A New Exception to Discharge In Bankruptcy, 144 Ark.L.Rev. 757, 760 (1991).
In re Gianakas, 917 F.2d 759, 764 (3d Cir. 1990) (bankruptcy court did not err by finding that debtor's obligation for second mortgage on former marital residence was in nature of support where husband conveyed marital home to wife, she assumed responsibility for first mortgage and she testified that if she had to pay for second mortgage, she could not continue to live in home). See also Yeates, 807 F.2d 874 (second home loan assumed by debtor was in nature of support where evidence showed that agreement was necessary to enable former spouse to keep marital home); Calhoun, 715 F.2d at 1109 (home loan was nondischargeable where necessary to insure daily needs of spouse were met); Hill, 133 B.R. 126 (debtor's obligation to pay off mortgage on marital residence where wife continues to reside constituted nondischargeable support obligation); In re Szuch, 117 B.R. 296 (Bankr.N.D.Ohio 1990) (obligation to assume second mortgage on marital residence was support obligation since assumption had effect of providing necessary support to ensure that daily needs of former spouse were satisfied); In re Kornguth, 111 B.R. 525 (Bankr.W.D.Pa. 1990) (debtor's assumption of second mortgage on marital residence was in nature of support, although it arose under section of agreement labeled equitable property distribution); In re Coverdale, 65 B.R. 126 (Bankr.M.D.Fla. 1986) (obligation imposed on debtor by divorce decree to make second mortgage payments on residence awarded to wife was support obligation); Buccino v. Buccino, 397 Pa. Super. 241, 580 A.2d 13 (1990) (recognizing general rule). The few cases which have found that the mortgage payments involved therein were dischargeable concerned cases in which either the payee spouse did not intend to live in the marital home, In re Bedingfield, 42 B.R. 641 (Bankr. N.D.Ga. 1983), or involved a situation where the wife was awarded substantial alimony apart from the mortgage payments, In re Grijalva, 72 B.R. 334 (Bankr.S.D.W. Va. 1987), although the fact that the payments continue beyond death or remarriage has been considered dispositive. In re Marriage of Wisdom, 833 P.2d 884 (Colo.Ct. App. 1992); In re Kaufman, 115 B.R. 435 (Bankr. E.D.N.Y. 1990).
In this case, the marital home that wife received in the divorce was subject to two mortgages. Wife testified that she had been self-employed as a tailor, but at the time of the divorce her health was extremely poor since she had recently had lung cancer and had had surgery to remove half of one lung. She had been unable to maintain her former income and, without her husband's retirement income to pay the second mortgage, she could not have met both the first and second mortgage payments on the marital home. Until their separation, husband had been contributing between $2,900 and $3,160 per month to the household in addition to the payments he made on the business; wife drew $1,800 from her business. No one established any value for either business. Upon separation, the trial court had awarded husband's $760 monthly retirement income to wife as temporary support. Wife testified that her husband "knew that I could not generate that much capital to pay the second mortgage. And he knew that I had worried about paying that." She also testified that her waiver of alimony assumed she would receive the $760 per month in support until the second mortgage was paid off.
Husband testified he was paying the second mortgage because he had been making more money at the time of the divorce, commercial property was worth more at that time and he was "just distributing the money back to Mrs. Connor." Husband acknowledged that since his bankruptcy he was acting as an unpaid "consultant" for a pest control business being operated by his new wife on the commercial property where his (now defunct) pest control business had been located.
The trial judge who heard the matter was not the judge who entered the original divorce decree. At the conclusion of the hearing, the trial court asked husband's counsel if there had been an equitable distribution of the parties' assets when the parties entered into their settlement agreement at the time of the divorce judgment. Husband's counsel represented at the hearing that the $760 monthly pension payments to wife were due to a discrepancy between the equitable distribution made to the parties which resulted from the fact that husband's business was considered more valuable. Wife's counsel disagreed and stated that no valuing of assets had been attempted when the settlement was reached, nor had they ever prepared an equitable distribution sheet.
The court entered a final judgment in favor of husband, ruling that the payments to wife had been discharged in bankruptcy. The final judgment stated:
1. That the court specifically finds that the parties entered into an equitable distribution agreement. That it was uncontroverted that the equitable distribution was genuinely equal on both sides and that the clause was contained in a separate and distinct paragraph, drafted by the Former Wife's attorney and this Former Wife testified that she had sufficient time to read and analyze this agreement, specifically Paragraph 5 of the Separation and Property Settlement Agreement dated December 29, 1989.
2. That there was contained within the agreement a specific and clear waiver of spousal support entitled "Waiver of Alimony" in Paragraph 14.
In this case, the key factors cited by the trial judge relate principally to the language contained in the settlement agreement. However, as the federal cases consistently recognize, the terminology used in dissolution agreements lacks the accuracy and precision required to determine whether any particular obligation is support or an equitable division of property. See, e.g., In re Orr, 99 B.R. 109 (Bankr.S.D.Fla. 1989) (notwithstanding language in separation agreement whereby wife waived claims for alimony or support, husband's obligations were nondischargeable support). I would prefer to remand this matter to the trial court to apply the proper test under federal bankruptcy law to determine dischargeability. The basis on which we have reversed the discharge of post-petition pension payments was not presented to the trial court nor argued on appeal. If, after remand, the court were again to reach the conclusion that these payments are part of a property settlement, the court should enter an order that only unpaid pre-petition sums are subject to discharge.
The other factor was that "it was uncontroverted that the equitable distribution was genuinely equal on both sides." In fact, this statement was controverted by wife's attorney and, in any event, there is no evidence in the record from which this determination could be made.