Family Practice
June 2001 Newsletter for the TBA Family Law Section
In this issue
From the Chair
From the Immediate Past Chair
Divorce Litigation “Suicide” and How to Avoid It
New Laws: Automatic Injunctions & Marital Property Definitions
A Note on Defined Benefit Retirement Plans as a
Marital Asset in Divorce: The Tennessee Case — Part 1
Bankruptcy Law for the Divorce Practitioner — Part 1
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Thanks to Greg McMillian as the immediate past chair of the TBA Family Law Section for an impressive year. Under Greg’s leadership, and with the assistance of Miles Mason, Sr., four newsletters have been created. The continuing legal education seminars across the state introducing the Parenting Plan legislation were informative and well attended. Coming soon is an on-line CLE Program covering the Parenting Plan legislation. Scheduled for this fall is a business valuation seminar, which shall feature Dr. Shannon Pratt, Chris Mercer and our own section member, Miles Mason, Sr. Seminars are scheduled September 27, 2001 in Nashville, September 28, 2001 in Memphis, October 4, 2001 in Chattanooga and October 5, 2001 in Knoxville. The seminar will provide an excellent opportunity to learn from two of the nation’s foremost business valuation experts and recent case law developments.
Congratulations to the Family Law Code Commission, which, under the leadership of Mary Frances Lyle and Steve Cobb, our able TBA lobbyist, passed two very important pieces of legislation this year. Included in the first bill is a clarified definition of marital property, which has been enacted as public chapter 0274. The second bill creates an injunction restraining both parties from dissipating or disposing of marital assets or engaging in other misbehavior which goes into effect upon the filing of the petition and upon service of the complaint on the respondent which has been enacted as public chapter 0280. This year the TBA Code Commission and the Family Law Section will work closely together and will schedule some joint meetings. You will soon be receiving a questionnaire to solicit your interest in assisting the TBA Family Law Section. Please volunteer. I look forward to working with you throughout the coming year. v
Marlene Eskind Moses, Chair, Nashville, Eisenstein, Moses & Mossman; graduated from Tulane University with a bachelor of arts and a masters of social work.
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From the Immediate Past Chair
Well, my term as the Chair is now concluded. I have enjoyed the time spent leading the Family Law Section and look forward to continued involvement in the coming years. Looking back over the year, I am proud of the Section’s accomplishments: the Parenting Plan CLE; having published a substantive and helpful newsletter quarterly; the work of the Family Law Section Code Commission in assisting with the drafting and passage of two important new laws; and our steps toward the completion of an on-line CLE course for inclusion in the TBA’s on-line CLE catalog.
Without the help of the other officers: Marlene Esking Moses, the current Chair; Miles Mason, the Chair-elect; Mary Frances Lyle, the Chair of the Code Committee; and the District Representatives who have assisted with the Section’s CLE programs and newsletters, none of this could have been accomplished. I want to thank all of them for their time and hope that the members of the Section will step up to help them with this year’s projects.
Even with all that was accomplished this year, when I look to the Family Law Sections of other states, I am aware of how much more there could be. We’re off to a good start with this Fall’s Business Valuation CLE with the nationally renowned Dr. Shannon Pratt. To continue growing, the officers of the Section need two things from you: to know what you as members of the Section want the Section to do for you; and your help in accomplishing those desires. In the near future, the TBA will be sending out an interest survey to all the Section members. Please take a few moments to respond as those surveys are used to solicit assistance with the CLE, publications, and running of the Section. Without your help, the Section won’t be able to increase the benefits and services it provides to you, its members.
Thank you again for allowing me to serve as Chair.
Greg McMillan, Knoxville, Sheppeard & Swanson PLC; graduated from the University of Tennessee College of Law in 1992; member of the Knoxville, Tennessee, and American Bar Associations Family Law Sections.
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Advice for Clients
Divorce Litigation “Suicide” and How to Avoid It
by Barry L. Gold, McKoon, Billings, Gold & Presley PC, Chattanooga
The emotional trauma of a divorce suit can be overwhelming. Under the tremendous stress of a divorce, some people commit “litigation suicide.” Through carelessness, ignorance, or desperation, they sabotage their own case. This sabotage typically goes as follows:
Litigation Suicide Mission #1: “I’ve Been Hurt,” or “Go Tell It On the Mountain.” Why not expose my spouse’s treachery and deceit? I’ll tell the whole world about how devoted, loving, and virtuous I’ve been, and how miserable, ungrateful, and devious my spouse has been. I’ll be sure to grab the moral high ground — I’ll lay out every dirty little detail, and be careful to sound righteously indignant. When the world hears how I’ve suffered all these years, I’ll get sympathy and support for my side. Yeah! This is by far the most common of the divorce litigation “suicide missions.” Let me share with you a cynical little secret. No one else cares about how “devoted, loving, and virtuous” you have been. Nor do they care about how “miserable, ungrateful, and devious” your spouse has been. They may listen politely to your whining, but not because they are being “supportive” of you in your time of need. Your misery gives them an opportunity to feel superior (or at least, luckier), and pick up some tasty gossip to blab to the entire town. Worse still, some of your audience may (gasp!) feel sympathy for your spouse (say it isn’t so!). These “traitors” may even talk to your spouse and/or your spouse’s attorney, and end up testifying against you at trial. The result: Suicide Mission #1 successful; no survivors.
The Cure for Litigation Suicide Mission #1: Take the vow of silence. Until your divorce is final, there are only 3 people in the world you can talk to about your marriage, marital problems, or pending divorce: (1) your attorney (2) your clergyman (3) your psychiatrist or psychologist. NO EXCEPTIONS. Conversations with your lawyer, clergyman, and mental health professional are confidential and legally privileged. Anyone else you talk to can be compelled to testify about your conversation. Even after your divorce is final, show some dignity and discretion. Remember that you don’t enhance your own self-esteem by bad-mouthing your spouse. Think about it. If your spouse is as bad as you now claim, how could you have been so stupid to marry this person in the first place? Keep your mouth shut.
Litigation Suicide Mission #2: “Anything You Can Do I Can Do Better.” What a louse my spouse is for cheating on me! Wait a minute … two can play at that game. I’m still a desirable, sexual creature, and I’m going to paint the town red proving it. Talk about a strategy for disaster! This one takes the cake. Look at the brilliant logic at work here: “My spouse committed adultery, which violated our sacred marriage vows. So I’m going to commit adultery, which will also violate our sacred marriage vows. Then, since we have both done something wrong, but since I have gotten my revenge, everything will be right.” This is insanity! The minute the Court hears that you and your spouse are both guilty of adultery, you are tarred and feathered. What gives you the right to complain about your spouse’s extra-curricular activities, if you are guilty of adultery, too? Your spouse’s attorney may even be able to convince the Court that (1) you strayed from the marital bed first, or (2) you didn’t object to your spouse’s adultery, as established by the fact that you also committed adultery. Sadly, the old double standard is often at work here. A husband’s adultery is generally viewed more leniently (a “minor indiscretion” or “little fling”) than a wife’s adultery (“whorish” or “shattering the marriage vows”). And there is more bad news. If you are planning on receiving alimony for financial support (and many divorcing women depend upon such alimony, at least temporarily), the consequences of marital infidelity can be disastrous. The Court can consider relative fault, among other factors, in determining whether or not to award alimony. The result: Suicide Mission #2 successful; no survivors.
The Cure for Litigation Suicide Mission #2: Take the vow of celibacy. No sex with anyone until after your divorce is final. (Not even with your spouse. This is particularly important if you are alleging that your spouse committed adultery, because of the legal doctrine of condonation.) Your best revenge, and your best divorce litigation strategy, is to rise above your spouse’s adultery. Let your virtue and fidelity contrast sharply with your spouse’s infidelity. Make the difference as striking as possible. If your spouse is out cheating during the week, make sure that you are personally at church or temple on the weekend. If your spouse pretends to be out of town on a “business trip,” take the kids on a picnic or some other family function. If you have no children, visit with elderly relatives or do volunteer work while your spouse is out sowing wild oats.
Be everything that your spouse is not: loving, caring, faithful, spiritual, and family-oriented. In addition to sparing yourself the risk of AIDS and other sexually transmitted diseases, your virtue will absolutely maximize the negative impact of your spouse’s adultery. When it comes time for the Court to decide the issues of alimony, child support, and property division, you will get your revenge. If you need any further incentive to be chaste, remember: Until your divorce is final, sexual intercourse with anyone other than your spouse is still adultery, even if you are legally separated from your spouse and even though divorce proceedings are pending. Wait until the divorce is final. There will be plenty of time to get back in circulation once you are officially single again.
Litigation Suicide Mission #3: “Diamonds Are a Girl’s Best Friend.” I’m so miserable! What a fool I was, making all those sacrifices for my marriage. I’m entitled to buy a little something to cheer me up, especially after all the money my spouse wasted during the marriage. I think I’ll go out and [choose any one of the following]: (a) buy myself a new Mercedes (b) bid for the Hope Diamond (c) re-decorate the entire house, or (d) pay off the national debt. After all, I’m under a lot of stress, and my therapist says I should learn to be nice to myself. You’d love to get your mind off of your divorce, right? In a moment of inspiration, it hits you: “When the going gets tough, the tough go shopping. If I charge my purchases on joint credit cards, my spouse may have to pay for half!” A shopping spree sounds harmless enough, doesn’t it? What happens if you decide to scurry around the local malls, showering yourself with expensive and frivolous gifts? Divorce judgment day — the day of reckoning — awaits. Think of it as a big Thanksgiving celebration, and you are the turkey. The festivities usually start with written discovery requests. Your spouse’s lawyer asks, in writing, for all of your financial records, including (but unfortunately, not limited to) credit card receipts, checking account records, and receipts for cash purchases. The bad news is that you must furnish these documents. You didn’t expect to have to furnish documentation of those frivolous purchases (you know — the 10 pound box of Godiva Chocolates, the expensive clothing, the jewelry), and you are starting to feel a little embarrassed about all of the money you spent.
When you give your deposition, you can’t help noticing that your spouse’s lawyer smiles when he questions you about your spending spree. He makes sure to scrutinize and dissect every single purchase, in loving detail. FOR THE LADIES: You’ll be thrilled to confront questions like “Why exactly did you need to spend $500 on a new dress?” FOR THE GENTLEMEN: Your heart will jump with joy when you are hit with questions like “How can you afford $300 for a new pair of shoes, when you say that you don’t have the money to pay your wife any alimony? ”If you have fun during your deposition trying to conjure up some credible explanation for your lavish spending, just wait until you get to testify before the judge. Your spouse’s attorney will make your shopping spree sound like something out of Lifestyles of the Rich and Famous. Care to guess what happens to spendthrifts and “high rollers” when the Court rules on alimony, child support, property division, and allocation of debt? Here’s a little hint: Suicide Mission #3 successful; no survivors.
The Cure for Litigation Suicide Mission #3: Take the vow of poverty. Resist the urge to splurge. This is not a time for luxuries or indulgences. Your goal is to look for ways not to spend money. Hold on to every penny you can. Better still, grab the nearest penny, and begin pinching it. Don’t even consider spending money, except on necessities. There are two good reasons for this advice, one for the short term, the other for the long haul. The Short Term: Let’s oversimplify a bit, to make an important point. In divorce cases, you are either the spouse who pays support (the “payor”), or the spouse who receives it (the “recipient”). If you are the payor, your goal is to keep the support payments to a minimum.
Your best strategy for minimizing support payments is to show that (1) there’s not much money to go around, (2) your own living expenses are reasonable and necessary, and (3) your spouse’s living expenses are excessive. If you are the recipient, your goal is to get as much money as possible. Your best strategy for maximizing support payments is to show that (1) there’s enough money to go around, (2) your own living expenses are reasonable and necessary, and (3) your spouse’s living expenses are excessive. Note that regardless of whether you are the payor or the recipient, your goal is to show that your own living expenses are reasonable and necessary, but your spouse’s living expenses are excessive. No matter which side of the fence you’re on, any spending on your part which is not plainly reasonable and necessary helps your spouse’s case against you. Now that you know the strategy, you can appreciate why it is crucial to take the vow of poverty, and fight the urge to spend.
Until your divorce is final, your expenses and spending habits are “under the microscope.” Your spouse’s attorney is going to use the discovery process as a fine-tooth comb, to uncover and scrutinize all of your expenditures. Any money which you spend unnecessarily gives your spouse more ammunition to use against you in court. Even if you are discussing an out-of-court settlement, prodigal spending only weakens your negotiating position.
Once your spouse’s attorney discovers the chink in your armor — and any attorney worth his sheepskin is going to ferret out this type of spending — the settlement process can take a decidedly nasty turn. I recall one case, where the wife “got even” with her husband by charging thousands of dollars on joint credit cards just before she filed for divorce. She then filed a temporary support motion, swearing under oath that she had no money or other means of sustaining herself. At the temporary support hearing, her husband’s attorney asked her about her spending habits. Smiling sweetly, she claimed to have been thrifty and frugal throughout the marriage. When her husband’s attorney whipped out the monthly credit card statements, she looked a bit ill. Shortly after he began questioning “Mrs. Thrifty” about her thousands of dollars in credit card charges, her credibility was completely destroyed.
After the hearing, she quickly attempted to settle her divorce case, but her husband declined. He was encouraged by the Court’s ruling on the temporary support motion, and convinced that he should hold out for trial. Not only was the temporary support hearing a disaster for “Mrs. Thrifty,” but the judge remembered her testimony when it came time for her divorce trial. By the time the divorce was over, “Mrs. Thrifty” paid dearly for her shopping spree. Learn from her mistake. The Long Haul: At the risk of sounding gloomy, some tough financial challenges lie ahead. What am I talking about? A divorce can cost big bucks. Before you know it, you may be hemorrhaging money: attorney’s fees, legal expenses, court costs, babysitting/day care expenses, time lost from work, etc.
You may have some unanticipated medical expenses, such as mental health counseling or medication (going through a divorce can be extremely stressful). Even if you and your spouse have agreed to a simple, uncontested divorce, beware. All the “quickie” divorce does is conserve legal fees and expenses. It does nothing to reduce the cost of setting up separate households. The fact remains that whether you have a “quickie” divorce or a long, drawn-out divorce, at least one of you still has to move out of the marital residence. There will be moving expenses, additional rental expenses, utility deposits, and other incidental costs associated with setting up separate households. You may need to buy a car, if you and your spouse have been sharing a car. Regardless of who ends up shelling out the money for separate households, the bottom line is that the same pre-divorce income must now be stretched to cover increased expenses.
WARNING: Don’t start throwing your money around like a drunken sailor, just because your spouse has agreed to pay (or has been ordered by the Court to pay) child support, alimony, or joint debts and liabilities. Your spouse may decide to hit the road, and you may never get a cent. Even if your spouse’s intentions are honorable, he or she may run into some unanticipated financial difficulties or reversals which ultimately cut off your money supply. For example, your spouse may (1) become seriously ill or disabled, (2) lose a job, (3) suffer a temporary lay-off, (4) receive a pay cut, or (5) incur unexpected expenses or losses. If you raise your standard of living in anticipation of receiving money from your spouse, you are courting disaster. For the time being, your focus must be on saving money, not spending it. Take the vow of poverty.
Unless you are independently wealthy, don’t fall into the trap of believing that you will continue to enjoy the same standard of living after the divorce as you did during the course of the marriage. It just doesn’t work out this way. Any way you want to slice it, two households are more expensive to maintain than one. If you doubt my advice, just ask anyone who has gone through a divorce. Even if you are lucky enough to have friends or family who can help you out, keep this in mind: for the immediate future, you are likely to have substantial additional expenses — many of them unanticipated — and decreased income to meet these expenses. To make things worse, you may not be able to obtain credit as easily, since you will no longer be able to rely on your spouse’s income (on the brighter side, if your spouse’s credit was lousy, a divorce may enhance your credit standing). The bottom line is simple. Your best defense against financial disaster is to keep your expenses and spending to an absolute minimum.
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New Laws: Automatic Injunctions & Marital Property Definitions
by R. Miles Mason Sr., Memphis
As of the date of the Family Practice Newsletter, we have two important new laws. Our new law addressing and clearing up the marital property definition may be found at:
http://www.state.tn.us/sos/acts/102pub/pc0274.pdf. Tennessee’s important new law containing the automatic injunction provisions may be found at: http://www.state.tn.us/sos/acts/102pub/pc0280.pdf. It is also reprinted below. More information should follow in future Tennessee Bar Association publications. Other Public and Private Acts may be found on the Internet at: http://www.state.tn.us/sos/acts/acts.htm.
PUBLIC ACTS, 2001, CHAPTER NO. 280, AN ACT to amend Tennessee Code Annotated, Section 36-4-106 relative to contents of petition for divorce and legal separation. BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF TENNESSEE:
SECTION 1. Tennessee Code Annotated, Section 36-4-106, is amended by adding the following as a new subsection (d):
(d) Upon the filing of a petition for divorce or legal separation except on the sole ground of irreconcilable differences and upon personal service of the complaint and summons on the respondent or upon waiver and acceptance of service by the respondent, the following temporary injunctions shall be in effect against both parties until the final decree of divorce or order of legal separation is entered, the petition is dismissed, the parties reach agreement or until the court modifies or dissolves the injunction, written notice of which shall be served with the complaint:
(1)(A) An injunction restraining and enjoining both parties from transferring, assigning, borrowing against, concealing or in any way dissipating or disposing, without the consent of the other party or an order of the court, of any marital property. Nothing herein is intended to preclude either of the parties from seeking broader injunctive relief from the court.
(B) Expenditures from current income to maintain the marital standard of living and the usual and ordinary costs of operating a business are not restricted by this injunction. Each party shall maintain records of all expenditures, copies of which shall be available to the other party upon request.
(2) An injunction restraining and enjoining both parties from voluntarily canceling, modifying, terminating, assigning or allowing to lapse for nonpayment of premiums, any insurance policy, including but not limited to life, health, disability, homeowners, renters and automobile, where such insurance policy provides coverage to either of the parties or the children, or that names either of the parties or the children as beneficiaries without the consent of the other party or an order of the court. “Modifying” includes any change in beneficiary status.
|(3) An injunction restraining both parties from harassing, threatening, assaulting or abusing the other and from making disparaging remarks about the other to or in the presence of any children of the parties or to either party’s employer.
(4) An injunction restraining both parties from relocating any children of the parties outside the state of Tennessee, or more than one hundred (100) miles from the marital home, without the permission of the other party or an order of the court, except in the case of a removal based upon a well-founded fear of physical abuse against either the fleeing parent or the child. In such cases, upon request of the nonrelocating parent, the court will conduct an expedited hearing, by phone conference if appropriate, to determine the reasonableness of the relocation and to make such other orders as appropriate.
(5) The provisions of these injunctions shall be attached to the summons and the complaint and shall be served with the complaint. The injunctions shall become an order of the court upon fulfillment of the requirements of subsection (d) of this act. However, nothing in this subsection shall preclude either party from applying to the court for further temporary order, an expanded temporary injunction or modification or revocation of this temporary injunction.
SECTION 2. This act shall take effect upon becoming a law, the public welfare requiring it. PASSED: May 16, 2001.
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A Note on Defined Benefit Retirement Plans as a
Marital Asset in Divorce: The Tennessee Case — Part 1
by Michael W. Butler Ph.D, San Angelo, Texas
During recent years, divorce attorneys have been hiring forensic economists as expert witnesses in disputed divorce cases. Economists are assigned the task of determining the present value of retirement benefits. Divorce attorneys contend that in most marriages there are two valuable marital assets: equity that the couple has in a residence and the value of one or both of the spouses’ retirement benefits (DiFranza 1980).
Marital Property
In no-fault divorce states, such as Tennessee, retirement benefits are considered a marital asset even though only one spouse contributed to a retirement plan. Shelburn and Chastain refer to the South Carolina statute and state that “career assets known as pension rights seem to be included as marital property” (Shelburn 1987). Launey and Launey (1993) say that pension rights are part of the marital pot, while Gelman and Mathis (1991) say that pension rights are one of the most valuable marital assets.
Tennessee law defines marital property to include all property acquired by either spouse during the marriage. Each spouse has a right to a marital asset if each substantially contributed to its increase in value. According to the Tennessee Code Annotated (TCA) (1988), indirect contributions of a spouse or homemaker are specifically considered a substantial contribution. Pension rights belong to the worker and his or her spouse in Tennessee.
The provision of the law that requires marital assets to be equitably divided, including the increase in value of a spouses’ pension, has been upheld by the Tennessee Appellate Court. The decision in the case of Batson v. Batson (1988) includes the following statements:
The General Assembly amended Tenn. Code Ann. § 36-4-121(b)(1) in 1983 to provide that “marital property” includes “the value of vested pension, retirement or other fringe benefit rights accrued during the marriage.” Therefore, pension benefits earned by a spouse during the marriage are marital property even though the other spouse did not contribute directly to their preservation or appreciation.
A later statement in the Appellate Court decision reads:
Tennessee Code Annotated § 86-4-121 (a) provides that marital property should be divided equitably without regard to fault.
It is the responsibility of the economist or other similar expert witness to determine the present value of retirement benefits at the time of the divorce. In this paper will be developed a method of evaluating the present value of a defined pension benefit plan that is accepted by Tennessee courts. A case example will be used.
Contrary to the statement by Launey and Launey (1993) that defined benefit plans are noncontributory, there are a number of such plans to which the employee makes a financial contribution. The Tennessee Consolidated Retirement System (TCRS) is a contributory defined benefit plan with the guarantee of a minimum return of total contributions plus interest. Although the state of Tennessee has paid each employee’s contribution since 1981, it is still considered an employee contribution. Although some defined benefit plans may have a fixed benefit payment (Hanson 1991), others include a cost of living adjustment (Launey and Launey, 1993), as does the Tennessee plan.
Issues
Several factors should be considered in the evaluation of defined benefit plans. Projector (1975) refers to discounting for interest, discounting for mortality, and discounting for vesting. Stoller (1992) refers to job tenure assumptions, mortality tables, and discount rates as well as cost of living assumptions. Allman (1993) presents four issues to be considered: retirement age, discount rate, the value of continued employment, and current versus average market value.
In this paper the case is examined in which one party in a disputed divorce case is vested in a defined benefit retirement plan and the other party to the divorce has not made a direct financial contribution to the plan. A number of assumptions must be made by the economist including the expected rate of inflation, the discount rate, and the plan participant’s life expectancy and retirement age. The administrator of the retirement plan will make available to attorneys the amount of benefit that will accrue to the plan participant at varying retirement ages or present a determination formula with which benefits can be calculated using recent income data. In Tennessee only earnings to date may be used to determine potential retirement benefits. The Tennessee courts will not allow assumptions about future earnings. For this reason, future job tenure becomes a nonissue in evaluating a Tennessee case. Retirement benefits form an annuity payable on a periodic basis (usually monthly) from retirement until death. For expository purposes, the method presented in this paper is to assume an annuity paid once a year.
The first issue to be addressed in this case is life expectancy. The United States Department of Health and Human Services publishes and periodically updates mortality tables which are widely used by life insurance agents. A 1992 supplement to Tennessee Code Annotated includes mortality and life expectancy tables. The data are from several different bases with the 1983 Individual Annuity Table being the most recent. The data from this supplement are readily accepted by both attorneys and judges in Tennessee even though more recent data are available. In addition to the data not being current, another weakness of these data used in Tennessee courts is that the only life expectancy stratification is by sex. Other states may not have these constraints that likely introduce some bias in the calculations.
The second issue is a cost of living adjustment or expected rate of inflation. The initial retirement benefit may be increased according to some rate of inflation during the time the plan participant is receiving benefits. This is usually based upon an index such as the Consumer Price Index (CPI). It is impossible to determine an actual future rate of change in prices. The expert witness must rely on historical data to achieve an acceptable estimate. Such an estimate is often based on the average rate of price increase over the past five-year, ten-year, or longer time period. Although most retirement plans are adjusted annually by a fixed percentage, some plans have unusual adjustment characteristics. For example, the Tennessee Consolidated Retirement System allows an annual adjustment of up to three percent, based on change in the CPI for the preceding calendar year. However, the adjustment is made to the initial retirement allowance by the Tennessee Consolidated Retirement System.
A third issue concerns a discount rate. A relevant discount rate in Tennessee cases is often based on a long-term rate at which funds could be invested from the time of the divorce until the plan participant reaches retirement age. The commonly used discount rate is the current average yield on long-term U. S. government securities. The selection of a discount rate must be to minimize risk and to protect the financial interest of both spouses. v
End of Part 1. Part 2 will continue in the next issue of Family Practice.
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Bankruptcy Law for the Divorce Practitioner — Part 1
by Kendra Hazlett Armstrong, Jewell & Armstrong PC, Cordova
Congress has been working over the past several years to reform the current Bankruptcy Laws. In March of this year, both the House and the Senate passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2001. The bill is in the process of being finalized, and President Bush is expected to sign a final version of this bill into law. If enacted, the new law should go into effect 180 (one-hundred eighty) days after it is enacted, and it would only apply to those cases commenced after the effective date.
The proposed Bankruptcy Reform Act would dramatically affect the Bankruptcy Court’s treatment of “domestic support obligations” and would include provisions which would make collection efforts against delinquent support debtors much easier. The exceptions to discharge would be greatly broadened in regard to domestic support obligations, offering favorable protection to the spouses, former spouses, and children of debtors.
With those things in mind, many of the issues discussed below may become a thing of the past in the not-so-distant future. Nonetheless, many of us will still have to deal with the complexities that arise when trying to apply the Bankruptcy Code as it is written today to domestic relations cases. The following article will address many of those problems which currently exist.
Please keep in mind that many of the issues discussed below could change with enactment of the proposed bankruptcy legislation.
Unfortunately, there is a high correlation between the occurrence of bankruptcy and the occurrence of divorce. When you find one, you will oftentimes find the other present. Frequently, financial troubles lead to divorce and vice versa. One of the most difficult challenges for newly separated or divorced individuals is supporting a household on a substantially decreased income.
To further complicate matters, the objectives of bankruptcy law and domestic relations law oftentimes conflict. Economically, the goal of a state court in a divorce action is to equitably distribute marital assets, equitably allocate marital debt, and provide for the support of minor children and for the economically disadvantaged spouse. On the other hand, the goals of a bankruptcy court in a bankruptcy case are to provide the debtor with a financial fresh start, wiping the slate clean so that the debtor can start anew financially, and to distribute non-exempt assets among creditors.
Frequently the non-dischargeability of marital support obligations frustrate a debtor’s financial fresh start. The concept of non-dischargeability of marital support, however, comes from the view that marital support is a duty and not a debt, and this duty of support overrides the debtor’s right to a fresh start. David S. Kennedy and Tisha Federico, The Trial of Domestic Relations Issues in Bankruptcy Cases, 7 J. Bankr. Law & Prac. 433 (1998).
As a result of the high number of post-divorce bankruptcy filings, the bankruptcy courts are allowing spouses to discharge debts which the state divorce courts have ordered them to pay or which they have agreed to pay in state court under a valid Marital Dissolution Agreement. Fortunately, the bankruptcy laws do provide for the non-dischargeability of actual support obligations as well as for the non-dischargeability of certain obligations to assume debts and to hold the other spouse harmless for same, with two exceptions (see 11 U.S.C. § 523 (a)(15), which is discussed below). If the proposed Bankruptcy Reform act is enacted, even more protection will be available to spouses, former spouses, and children of debtors.
Purpose of the Bankruptcy Discharge
The purpose of a discharge in bankruptcy is to provide a financial “fresh start” for honest but unfortunate debtors. A discharge relieves the debtor of personal liability on all dischargeable debts, AND it permanently enjoins those creditors from attempting to collect any such debts. Generally a debtor can obtain a discharge from most of his debts in exchange for surrendering his non-exempt assets for distribution among his creditors, as in the case of a Chapter 7 liquidation, or in exchange for surrendering a portion of his future income to pay creditors, as in the case of a Chapter 13 “debt adjustment.” Of course, there are some exceptions to this rule.
Although debtors are entitled to a fresh start, some debts are not subject to discharge (see, for example, 11 U.S.C. § 523 (a)(5) and (a)(15), § 1141(d), § 1228, and § 1328), and certain individuals do not qualify for a discharge at all, such as those debtors who have attempted to defraud or impede creditors in their collection efforts (see 11 U.S.C. § 727(a)(2) – (a)(5)), and those debtors who received a Chapter 7 or Chapter 11 discharge in a case commenced within 6 years before the filing of the petition (see 11 U.S.C. 727(a)(8)) and those debtors who received a discharge in a Chapter 13 or Chapter 12 case commenced within 6 years before the date of the filing of the petition, unless certain conditions are met (see 11 U.S.C. § 727(a)(9)). Under the proposed Bankruptcy Legislation, that six year period will be extended to eight years.
History of the Non-Dischargeability
of Marital Support Obligations
The first time that the courts recognized an exception to discharge for marital support obligations, such as alimony and child support, occurred when the U.S. Supreme Court in Audubon v. Shufeldt, 181 U.S. 575 (1901) ruled that payments for marital support are non-dischargeable debts. The Court made this ruling, even though the former Bankruptcy Act of 1898, which was in effect at the time, did not specifically except marital obligations from the bankruptcy discharge. The Supreme Court reasoned that a husband’s obligation to support his wife or his child should not be dischargeable because such an obligation is founded on the “natural and legal duty of the husband to support the wife, ” and it does not arise from a business transaction but from the marital relationship. Id. at 577.
In 1903 the former 1898 Bankruptcy Act was amended to specifically except debts for alimony, maintenance and support of a wife or child from discharge, and in 1978 the term “wife” was replaced with the gender-neutral term “spouse.” Until 1994, however, only those debts which were actually in the nature of support were non-dischargeable, while those post-divorce marital obligations which were considered “property division” were dischargeable. As many divorce practitioners know, under 11 U.S.C. § 523 (a)(5) debts for alimony, maintenance and support of a spouse or child, which are actually in the nature of support, cannot and will not be discharged. As a result, as the law stands now, individuals are able to discharge obligations which they were ordered to pay by the state court in a divorce action (or which they agreed to pay and hold the other spouse harmless), oftentimes leaving the former spouse “holding the bag” and forced to pay third party creditors or even forced to file for relief under the Bankruptcy Code themselves.
In response to this problem, pursuant to H.R. 5116, the Bankruptcy Reform Act of 1994, Congress enacted 11 U.S.C. § 523 (a)(15) to provide for the non-dischargeability of certain non-support debts arising from a final decree of divorce, which are classified as “property division,” such as an agreement to pay certain credit card debts.
In 1994 Congress also helped to resolve the problem of non-dischargeable support debts being uncollectible due to their low priority by giving debts which are in the nature of alimony, maintenance, and support a higher priority, as long as they are not assigned to another entity. 11 U.S.C. § 507(a). These support debts are now the seventh priority, and they are to be paid before taxes and unsecured creditors. Because all priority claims in Chapter 11 and Chapter 13 cases are to be paid in full (see 11 U.S.C. § 1129 (a)(9) and § 1322 (a)(2)), all support obligations must be paid in full in Chapter 11 and Chapter 13 cases. It appears that Congress intended to provide far greater protection for marital obligations to spouses, former spouses, and children of bankruptcy debtors than previously existed, based on the enactment of 11 U.S.C. § 523 (a)(15) and the related provisions of the 1994 Act. Kennedy and Federico, supra, at 435.
It should be noted that the exceptions for dischargeability found in 11 U.S.C. § 523 apply in Chapter 7 and Chapter 11 cases (11 U.S.C. § 727 and §1141). Chapter 13 provides a much broader discharge than Chapter 7 and 11 cases. Only a few types of debts are excepted from discharge in a Chapter 13. These exceptions are referred to in 11 U.S.C. § 1328. While section 1328 does refer to section 523(a)(5) and therefore provides for the non-dischargeability of marital obligations which are actually in the nature of alimony, maintenance or support, section 1328 does not refer to section 523(a)(15) and therefore does not except from discharge those marital obligations which are classified as “property division” (non-support) debts.
Non-Dischargeability of Debts Under 11 U.S.C. § 523(a)(5)
Debts which are actually in the nature of alimony, maintenance or support are excluded from discharge pursuant to 11 U.S.C. § 523 (a)(5). Regular child support is clearly non-dischargeable and those obligations which are clearly alimony (e.g., a specific award of alimony in futuro, which is taxable to the payee and deductible to the payor, and which terminates upon death or re-marriage of the payee) are non-dischargeable and no further analysis is necessary. Fitzgerald v. Fitzgerald (In re Fitzgerald), 9 F3d. 517(6th Cir. 1993). In Fitzgerald the Sixth Circuit Court of Appeals held that obligations which are
1) intended to be alimony, maintenance, or support and 2) are labeled as alimony, maintenance, or support, are clearly non-dischargeable support obligations, and the court’s inquiry should therefore end.
However, oftentimes the line between true support obligations and what is actually property division is blurred and further analysis is needed in order to distinguish between the two types of debt. For example, there is frequently debate over whether or not the assumption of a debt to a third party and the indemnification of the former spouse for that debt is truly support, and whether obligations to pay the former spouse’s attorney’s fees and agreements to pay for a child’s post-majority college education are actually in the nature of support and therefore non-dischargeable. Although Section 523 (a)(15) has given the creditor spouse an additional way to prevent the discharge of marital obligations, it is still important for the divorce practitioner to understand the analysis used by the court in determining which obligations are actually in the nature in support and are therefore non-dischargeable under 11 U.S.C. § 523(a)(5).
Tests to Determine Whether an Obligation Which is Not Denoted as Support is Actually in the Nature of Support
Section 523(a)(5) provides in material part:
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[.]
11 U.S.C. § 523 (a)(5) (emphasis added).
The Sixth Circuit Court of Appeals set out a four prong test to determine whether a marital obligation which is not denominated as support (such as an obligation to pay a credit card debt and hold the other party harmless) is non-dischargeable in the case of Long v. Calhoun (In re Calhoun), 715 F.2d 1103 (6th Cir. 1983). The Calhoun court specifically determined whether or not an assumption of debt which was not designated as support was actually in the nature of support and therefore non-dischargeable. The Calhoun test is therefore limited to those cases in which the nature of the debt is unclear ; when there is no dispute as to the nature of the debt (i.e., where an obligation is labeled as alimony, maintenance, and support and where the parties intended to create a support obligation), no further analysis is needed and the court’s analysis should end. In re Fitzgerald, supra. The four part Calhoun test is as follows:
1. Intent — The court must determine if the court or the parties intended to create a debt in the nature of support. If not, the inquiry ends and the debt is discharged (unless another section of the bankruptcy code, such as section 523 (a)(15) would apply and prevent discharge). In re Calhoun at 1109. In determining the parties’ intent the court can look to state law which is the source of the obligation to provide support (see Tenn. Code Ann. § 36-5-101(d)).1 In re Calhoun at 1107.
2. Necessity — Does the debt assumption have the effect of providing for support necessary to ensure that the daily needs of the former spouse and children are met. If the debt is not found necessary to provide support for the former spouse and children at the time of the bankruptcy, the debt will not be excluded from discharge pursuant to section 523(a)(5). Id. at 1109.
3. Reasonableness — The court is then required to determine the reasonableness of the amount of support provided by the debt assumption in light of the code’s “fresh start” policy. The question is whether the amount of the debt assumption is so excessive that it is “manifestly unreasonable under traditional concepts of support.” Id. at 1110. This step requires the court to balance the needs of the creditor spouse with the debtor’s ability to pay the debt at the time that the debt was assumed. If the court finds that the amount of support is not so excessive as to be manifestly unreasonable, the inquiry ends there and the debtor’s continuing obligation is non-dischargeable.
Under this prong of the Calhoun test, the court normally considers the debtor’s ability to pay the debt at the time the debt was assumed (at the time of the divorce). However, if the debtor has had a change of circumstances since the original state court order or Marital Dissolution Agreement, such that it would make the support obligation inequitable, then the bankruptcy court may consider the debtor’s current ability to pay and then reduce or terminate the obligation accordingly.
4. Impose Reasonable Limits on Non-Dischargeability — If the amount is found to be unreasonable under the third prong of the Calhoun test, the court shall discharge the debt to the extent necessary to serve the purposes of federal bankruptcy law. In other words, if the amount of the debt assumption is too excessive, then the court must set a “reasonable limit on the non-dischargeability of that obligation for the purposes of bankruptcy.” Id. More recently the Sixth Circuit Court of Appeals held in Sorah v. Sorah, 163 F.3d 397 (6th Cir. 1998) that an award under a divorce decree that is designated as support by the state court and which bears the “indicia” of a support obligation should be treated as a support obligation by the bankruptcy court. The “indicia” of a support obligation were identified by the court to be the following:
(a) A label such as “alimony,” “support” or “maintenance” in the decree or agreement;
(b) A direct payment to the former spouse (as opposed to the assumption of a third party debt); and
(c) Payments that are contingent upon events such as death or remarriage.
In re Sorah at 402.
In Sorah, the Sixth Circuit Court of Appeals held that a marital obligation which has the above indicia of a support obligation should be conclusively presumed to be a support obligation by the bankruptcy court. A creditor spouse who shows that these indicia are present has satisfied his or her burden of proving that the obligation constitutes support within the meaning of § 523, and is thus nondischargeable. Id. The burden then shifts to the debtor spouse to demonstrate that although the obligation is actually in the nature of support, the amount of the obligation is not reasonable in light of the debtor spouse’s financial circumstances. Id.
Therefore, once the creditor spouse proves the three indicia of support are present, the debtor has the burden of proving the third prong of the Calhoun test, that is the debtor has to show that the amount of the support obligation is manifestly unreasonable and the court will then discharge it to the extent that it exceeds what the debtor can reasonably be expected to pay. Id.
The Sorah court went on to state that Section 523 places no limitation upon a state court’s ability to award alimony, maintenance, or support (see Fitzgerald, 9 F.3d at 531) and the bankruptcy court should not act as a “super-divorce” court by second-guessing the state court support award unless there is evidence that the burden on the debtor spouse is excessive. Id. v
End of Part 1; Part 2 will continue in the next issue.
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1. Tenn. Code Ann. §36-5-101(d) states, in pertinent part:
º[T]he court [in determining whether or not an award of alimony is appropriate] shall consider all relevant factors, including:
(A) The relative earning capacity, obligations, needs, and financial resources of each party, including income from pension, profit sharing or retirement plans and all other sources;
(B) The relative education and training of each party, the ability and opportunity of each party to secure such education and training, and the necessity of a party to secure further education and training to improve such party’s earning capacity to a reasonable level;
(C) The duration of the marriage;
(D) The age and mental condition of each party;
(E) The physical condition of each party, including, but not limited to, physical disability or incapacity due to a chronic debilitating disease;
(F) The extent to which it would be undesirable for a party to seek employment outside the home because such party will be custodian of a minor child of the marriage;
(G) The separate assets of each party, both real and personal, tangible and intangible;
(H) The provisions made with regard to the marital property as defined in § 36-4-121;
(I) The standard of living of the parties established during the marriage;
(J) The extent to which each party has made such tangible and intangible contributions to the marriage as monetary and homemaker contributions, and tangible and intangible contributions by a party to the education, training or increased earning power of the other party;
(K) The relative fault of the parties in cases where the court, in its discretion, deems it appropriate to do so; and
(L) Such other factors, including the tax consequences to each party, as are necessary to consider the equities between the parties.
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