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Family Practice
The Newsletter for the TBA Family Law Section
September 2001
From the Chair
You will not want to miss the CLE program with Dr. Shannon Pratt, a renowned expert in business valuation. Appearing with Dr. Pratt will be Chris Mercer and Dan Patton, also experts in business valuation. We are pleased that Chair-Elect Miles Mason has developed the program and will be discussing Tennessee Business Valuation Law. The Tennessee Bar Association as well has been very supportive of this educational opportunity.
The Tennessee Bar Association Code Commission, under the able leadership of Mary Frances Lyle, continues to review family law legislation and to seek passage of improved statutory provisions. Amy Amundsen, a Commission member, will soon be seeking feedback on how the Parenting Plan Legislation is working in practice. We urge you all to provide your input.
An additional CLE program will be planned. Please share with me your ideas for the subject matter of this program. The Executive Committee is open to your suggestions.
Shelburne Ferguson, Jr. is our newsletter editor this year. Please submit materials to him for inclusion in the newsletter. His fax number is: 423-378-8801, and his e-mail address is: ferguson@hsdlaw.com. If you would like to become more involved in the section’s activities, please let me know. My phone number is: 615-242-2521, and my e-mail address is: marlene@marlenemoses.com.
Thanks to each of you for supporting our section. v
Marlene Eskind Moses
Marlene Eskind Moses graduated from Tulane University with a bachelor of arts and a masters of social work. She has been in private practice working mainly in the areas of family law, mediation and arbitration in family law, and probate law having graduated from the Nashville School of Law in 1980. She is a principal in the association of Eisenstein, Moses, & Mossman.
In this issue
Bankruptcy Law for the Divorce Practitioner — Part 2
A Note on Defined Benefit Retirement Plans as a Marital Asset in Divorce: The Tennessee Case — Part 2 of 2
Business Valuation Seminar
Bankruptcy Law for the Divorce Practitioner — Part 2
by Kendra Hazlett Armstrong
Jewell & Armstrong PC, Cordova
Non-Dischargeability of Attorney’s Fees as Alimony/Support
Generally, awards of attorney’s fees are non-dischargeable under section 523 (a)(5) as long as they are actually in the nature of support, even if the fee award is payable to the attorney and not to the former spouse. See, for example, In re Morello, 185 B.R. 753 (Bankr. E.D. Tenn. 1995). In the Morello case the court found that the attorney to whom the fee was awarded had standing to file the complaint to determine non-dischargeability in the bankruptcy court. Id. The Morello court distinguished the Sixth Circuit case of In re Perlin 30 F.3d 39 (6th Cir. 1994), which held that an award of attorney’s fees issued in the name of the client was dischargeable, because in Perlin the court relied on Arizona law which does not recognize an attorney’s right to enforce a judgment for attorney’s fees which were issued in the client’s name. But see In re LaRue, 204 B.R. 531 (E.D. Tenn. 1997). In LaRue, the bankruptcy court for the Eastern District of Tennessee held that attorney fees were not dischargeable where the debt was payable to the attorney instead of the spouse and where there was no hold harmless language in the order.
Non-Dischargeability of Attorney’s Fees as Child Support
The bankruptcy courts in Tennessee have generally held that attorney’s fees which were awarded pursuant to Tenn. Code Ann. §36-5-103(c), which provides for awards of attorney’s fees for successfully defending child custody actions, are non-dischargeable. In the case of In re Paulson, 27 B.R. 330 (W.D. Tenn. 1983), the court found that where an award of statutory attorney’s fees pursuant to Tenn. Code Ann. §36-822 (now §36-5-103(c)) was made to the Debtor’s former spouse for the successful defense of a post-divorce petition to change custody filed by the Debtor, the award of attorney’s fees was an ancillary obligation to the child support obligation and that it was therefore in the nature of spousal or child support. The court therefore excluded that debt from discharge. Similarly, and more recently, in Silverstein v. Glazer, 186 B.R. 85 (Bankr. W.D. Tenn. 1995), the bankruptcy court for the Western District of Tennessee found that an award of attorney’s fees was non-dischargeable as it was an ancillary to the child support obligation; however, the post-judgment interest on the past due award of attorney’s fees was not ancillary to the child support obligation and was therefore dischargeable.
Non-Dischargeability of Guardian Ad Litem Fees as Child Support
Guardian Ad Litem fees have been held to be non-dischargeable support obligations pursuant to 11 U.S.C. §523 (a)(5). In re Neville, 1997 Bankr. LEXIS 1106 (Bankr. W.D. Tenn. 1997). Using the analysis found in In re Calhoun, supra, the court in Neville found that guardian ad litem fees awarded by the state court were non-dischargeable, even though they were payable directly to the guardian ad litem. At the state court proceeding the guardian ad litem had testified that his work was essential to the assurance of the child’s welfare and best interests. The bankruptcy court therefore found that his work was of benefit to the debtor’s minor child and that it was necessary for the protection of the child’s best interest. The court noted that it could also have determined the guardian ad litem fees were so clearly in the nature of support in nature as to mandate dischargeability under In re Fitzgerald, supra. In re Neville, note 3.
Therefore, it is advisable that such language be used in drafting orders awarding guardian ad litem fees (and also attorney’s fees awarded under Tenn. Code Ann. §36-5-103(c)) in order to protect them from being discharged in bankruptcy, although a designation of guardian ad litem fees as child support may not be upheld on appeal in state court. In Brown v. Brown, 1998 Tenn. App. LEXIS 742 (W.S. Tenn.App. 1998), the Tennessee Court of Appeals for the Western Section held that a trial court’s designation of guardian ad litem’s fees as “child support” was error, because there is no statutory authority for designating guardian ad litem fees as child support. Instead, pursuant to Rule 54.04 of the Tennessee Rules of Civil Procedure, the court pointed out that guardian ad litem fees may be awarded as discretionary costs. However, not designating guardian ad litem fees as child support will not preclude the bankruptcy court from making a determination of the non-dischargeability of those fees in bankruptcy.
Attorney’s Fees Incurred in Dischargeability Proceeding in Bankruptcy Court ARE Dischargeable
All attorney’s fees which are incurred in pursuing a dischargeability action in bankruptcy court are dischargeable because there is no statutory authority under either federal or state law which allows such fees to be awarded or to be declared non-dischargeable. In re Morello, supra; In re Colbert, 185 B.R. 247 (Bankr. M.D. Tenn. 1995).
Non-Dischargeability Clauses & Waivers of Alimony in an MDA are NOT Binding on the Bankruptcy Court
Frequently the parties might classify certain obligations and debt assumptions as non-dischargeable support and the marital dissolution agreement might recite that those debts are non-dischargeable in bankruptcy. Furthermore, many times MDA’s contain alimony waivers and general “boilerplate” non-dischargeability provisions. While such classifications and statements of non-dischargeability might be persuasive evidence of the true nature of those debts, they are not binding on the bankruptcy court. In re Adkins, 151 B.R. 458, 461 (Bankr. M.D. Tenn. 1992).
When a bankruptcy court is examining marital obligations, the critical question is whether the obligation is truly in the nature of support, not whether or not the parties or state court have given a certain label to an obligation. “Substance must prevail over form.” Id., quoting Calhoun, supra at 1109.
In Adkins, supra, the bankruptcy court analyzed two prior MDA’s, both of which contained non-dischargeability clauses and waivers of alimony. First, the court held that the non-dischargeability clauses had no effect on the court’s determination of non-dischargeability. One of the reasons that the court came to this conclusion was based on the theory that one cannot contract away his or her bankruptcy rights, such as the right to a discharge and the right to a fresh start.
Second, the court concluded that alimony waivers in settlement agreements are not conclusive. The bankruptcy court has a right to determine whether or not an obligation actually functions as support regardless of whether or not a standard clause waiving alimony appears in an MDA. However, the court did consider the waivers of alimony in the Adkins case when it conducted the Calhoun analysis. The court concluded under the totality of the circumstances that the obligations were dischargeable, noting that underlying facts are determinative and that labels are irrelevant. Id.
Other Marital Obligations Designated as Non-Dischargeable Support
In the case of In re Prager, 181 B.R. 917 (Bankr. W.D. Tenn. 1995), the debtor and his former spouse had previously entered into a “property settlement agreement,” which provided that debtor’s child support obligation would continue beyond the age of eighteen (18) for any child who remained a full time student, until that child reached the age of twenty-two (22). In granting the non-debtor spouse’s motion for summary judgment, the bankruptcy court, applying the Fitzgerald analysis, held that even though Tennessee state law normally does not provide for post-majority support absent an agreement of the parties, the obligation was a non-dischargeable support obligation pursuant to section 523 (a)(5), because it was labeled support and because the parties clearly intended it to be support on the face of the document. The court noted that because the intent to create a support obligation was present and because the obligation was labeled as support, that no further analysis was necessary.
In another case, the bankruptcy court for the Eastern District of Tennessee held that a debt for unpaid day care, insurance and medical expenses of the debtor’s children were non-dischargeable support obligations pursuant to section 523(a)(5). In re Rouse, 212 B.R. 885 (Bankr. E.D. Tenn. 1997).
Pension Benefits Awarded as Property Division by State Court NOT Dischargeable Due to Imposition of a Constructive Trust
In the case of In re McCafferty, 96 F.3d 192 (6th Cir. 1996), the debtor sought to discharge a judgment obtained by his former wife in their divorce, which awarded approximately $100,000 to debtor’s former wife for her interest in debtor’s pension plan. Because the divorce court stated that the award was property division, the Sixth Circuit Court of Appeals held that under the first prong of the Calhoun test the debt was dischargeable debt under section 523 (a)(5) because it was not intended to be support.
However, the court further held that the Calhoun analysis was irrelevant in that case because when the debtor’s wife was awarded her interest in the pension plan by the divorce court, the debtor retained merely bare legal title to his wife’s share of the pension plan. A constructive trust was imposed upon the debtor to the extent of his ex-wife’s interest in the pension plan, and therefore his ex-wife’s interest never became a part of the bankruptcy estate and therefore it was not a dischargeable debt that debtor could avoid paying. It should be noted that section 523 (a)(15) was not in effect at the time the case was heard and therefore was not considered in the court’s analysis.
Res Judicata and Collateral Estoppel
Oftentimes clever attorneys will include the following language, or a variation thereof, in a Marital Dissolution Agreement:
Husband and Wife agree that this Marital Dissolution Agreement evidences a stipulation by the parties to all facts necessary to a finding that any obligation for indemnification, payment of child support, and for payment of court costs created herein is an obligation in the nature of support, nondischargeable in Bankruptcy pursuant to 11 U.S.C. §523. Husband and Wife further agree that the entry of the Final Decree of Divorce in this cause shall constitute a finding and adjudication by a court of competent jurisdiction of the obligation’s characterization as support and shall constitute res judicata and collateral estoppel as to the question of nondischargeability of the obligation in Bankruptcy.
Is this language binding on the Bankruptcy Court and will it prevent litigation of the issue of dischargeability in Bankruptcy Court? Probably not. In fact, in order for collateral estoppel to apply, much more specific statements and findings of fact must be set forth in the Marital Dissolution Agreement.
Collateral estoppel and, under certain circumstances, res judicata, can be used to prevent re-litigation of issues and claims which have been previously determined in a state court divorce action. Pursuant to the doctrine of res judicata, also known as claim preclusion, a final judgment on a claim or cause of action bars the reassertion of that claim or cause of action in a subsequent lawsuit. Pursuant to the doctrine of collateral estoppel, which is a form of issue preclusion, a decision regarding an issue is binding in subsequent litigation between the parties and therefore re-litigation of that same issue is precluded.
Generally, the doctrine of res judicata (claim preclusion) does not apply in bankruptcy (with one exception noted below), and the bankruptcy court is therefore not bound by an earlier state court order. Brown v. Felsen, 442 U.S. 127, 138 (1979). However, the principle of collateral estoppel (issue preclusion) does apply in bankruptcy cases and the relitigation of facts actually and necessarily litigated in state court is precluded in a subsequent bankruptcy proceeding. 442 U.S. at 139, n. 10. Therefore, where a state court has determined factual questions using the same standards that the bankruptcy court would have used, then collateral estoppel should be applied to prevent re-litigation of those issues which have previously been determined. Spilman v. Harley, 656 F.2d 224, 228.
Although res judicata generally does not apply in bankruptcy cases, an exception to that rule exists when the issue before the court is the dischargeability of a §523 (a)(5) obligation. The holding in Brown v. Felsen that res judicata does not apply in bankruptcy is based on the fact that the bankruptcy code gives the bankruptcy court exclusive jurisdiction to determine the issue of dischargeability for most debts. However, both the bankruptcy court and state courts have concurrent jurisdiction to determine the dischargeability of alimony, maintenance or support obligations under section 523(a)(5). In re Rickman, 79 B.R. 753 (Bankr. W.D. Tenn. 1987). Therefore, both res judicata (claim preclusion) and collateral estoppel (issue preclusion) can apply in cases where the state court has actually determined non-dischargeability. Id.; In re Aurre, 60 B.R. 621 (Bankr. S.D.N.Y. 1986); see also 3 Collier on Bankruptcy, para. 523.06 (15th Ed. 1985).
In order to understand why the bankruptcy court has exclusive jurisdiction to determine the dischargeability of most debts, yet has concurrent jurisdiction with state court to determine the dischargeability of §523 (a)(5) obligations, one must look to 11 U.S.C. §523(c). Pursuant to Section 523(c), debts arising out of fraud, obtaining property through false pretenses, willful and malicious injury, and those debts not in the nature of support incurred in the course of or in connection with a separation agreement or divorce decree (section 523(a)(15)), will be discharged unless the court determines after notice and a hearing that the debt should be excepted from the discharge. The bankruptcy courts have exclusive jurisdiction to determine the dischargeability of those debts, because §523 (c)(1) specifically states that those debts will only be excluded from discharge if and when the bankruptcy court determines them to be excluded from discharge. However, debts actually in the nature of alimony and support (section 523(a)(5) debts) will automatically be excepted from discharge, because §523 (a)(5) is not referred to in §523 (c)(1). Therefore no action is necessary to trigger the exception from discharge, and therefore both bankruptcy courts and state courts have concurrent jurisdiction to determine whether or not that type of debt should be excepted from discharge. See In re Aurre at 624.
Obviously, if state courts, have no jurisdiction to determine the dischargeability of non-support debts, res judicata (claim preclusion) could not apply in bankruptcy court because the state courts would never have been able to litigate dischargeability in the first place. Claim preclusion therefore does not apply to non §523(a)(5) debts. However, in the case of determining the dischargeability of §523 (a)(5) support obligations, which state courts do have concurrent jurisdiction to determine, both res judicata and collateral estoppel can apply to prevent re-litigation of claims and issues already litigated.
It should be noted that in the Rickman case, which held that both res judicata and collateral estoppel could apply in §523 (a)(5) actions, the bankruptcy court abstained from hearing the complaint to determine dischargeability and referred the matter to the state Chancery Court, which was holding a hearing on the creditor spouse’s petition for contempt. Therefore in the Rickman case the court applied res judicata and collateral estoppel to prevent re-litigation of issues where the state court proceeding occurred during the bankruptcy, NOT prior to the bankruptcy. It appears that res judicata (claim preclusion) is limited to those cases in which a state court determines the dischargeability of obligations after a bankruptcy petition has been filed. In state court actions (e.g., divorce actions) which are litigated before a party files a petition for relief in bankruptcy, the issue of dischargeability is not truly before the court because there is no pending bankruptcy petition. Under the Calhoun analysis, the third prong of the test requires the court to determine the reasonableness of the obligation in light of the debtor’s right to a fresh start resulting from a discharge in bankruptcy. This determination cannot be made unless a bankruptcy case exists. Bankruptcy law cannot be applied if no bankruptcy case is pending, because the debtor’s condition at the time of filing is relevant to the determination of dischargeability. Because the principle of collateral estoppel also applies where there has been a consent order in the state court proceeding, Klingman v. Levinson, 831 F.2d 1292 (7th Cir. 1987), collateral estoppel can be used in certain cases where the parties have previously entered into a Marital Dissolution Agreement. In order for collateral estoppel to apply, the following requirements must be met:
1. The precise issue in the later proceedings must have been raised in the prior proceeding;
2. The issue must have been actually litigated in the prior litigation; and
3. The determination of the factual issue in the prior litigation must have been necessary to the outcome of the prior litigation.
Spilman v. Harley, 656 F.2d 224, 228 (6th Cir. 1981).
In the case of consent decrees, the “actually litigated” standard is altered somewhat. In re Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987). The main inquiry in determining the preclusive effect of a consent judgment is the intention of the parties in entering into the consent decrees. Id.
It should be noted, however, that collateral estoppel applies only to the re-litigation of issues of fact. Once again, just because parties state in an MDA that a debt is non-dischargeable, that does not mean that the bankruptcy court must determine that debt to be non-dischargeable. Adkins, supra, at 461. Dischargeability is determined under bankruptcy law (even though state courts have concurrent jurisdiction to determine non-dischargeability of section 523(a)(5) obligations).
The critical inquiry is whether or not the obligation is truly in the nature of support (and has the effect of being actual support). Id. If the requirements for collateral estoppel are met, then facts which were set forth in the MDA or Final Decree will be considered to be facts by the bankruptcy court in determining whether or not a debt is dischargeable. Therefore the divorce practitioner representing the economically disadvantaged spouse in a divorce trial should put in the Marital Dissolution Agreement or request that the court declare all support obligations which are to be paid by the other spouse to be :
1. Non-dischargeable support obligations actually in the nature of support pursuant to 11 U.S.C. §523(a)(5);
2. Intended by the court to provide support ;
3. Reasonable in light of the obligor spouse’s ability to pay and future ability to pay.
The order then needs to be carefully drafted to included this language (which should satisfy the Calhoun test). Furthermore, if appropriate in order to satisfy the Sorah requirements, the divorce practitioner should ask that these obligations be labeled “alimony” or “support,” that they be made payable to the economically disadvantaged spouse, and that they be made contingent upon future events, such as death or re-marriage.
Burden of Proof under 11 U.S.C. 523 (a)
The creditor bears the burden of proving that an obligation is nondischargeable under §523 (a) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991). Generally, the exceptions to discharge are to be strictly construed against the creditor. Manufacturer’s Hanover Trust Co. v. Ward (In re Ward), 857 F.2d 1082,1083 (6th Cir. 1988). However an exception to this rule of statutory construction is found when interpreting section 523(a)(5). In interpreting section 523 (a)(5), the term “support” has been given a broad construction by most courts in order to promote the Congressional policy of promoting the enforcement of obligations for spousal support and child support. In re LaRue, 204 B.R. 531, 533 (Bankr. E.D. Tenn. 1997), quoting 4 COLLIER ON BANKRUPTCY P 523.05 (15th ed. Rev. 1996).
Construction of Documents and Parol Evidence
In determining the intent of the parties under the first prong of the Calhoun test, one must construe the divorce decree and the Marital Dissolution Agreement which it incorporated. A divorce decree is construed as other written instruments. Hale v. Hale, 838 S.W.2d 206 (W.S.Tenn.App. 1992); Frisbee, supra, at 840. The general rules involving the admission of parol evidence apply when construing a divorce decree. Hale v. Hale at 209. The parol evidence rule bars the use of evidence of verbal negotiations and stipulations before or contemporaneous with the execution of a written instrument which contradict, alter, or vary the terms of that written instrument. If the evidence of verbal negotiations merely explains or clarifies the written instrument it is admissible.
Non-Dischargeability of Divorce-Related Debt
Before the 1994 amendments to the bankruptcy code, any debts arising from marital obligations which were determined to not be actually in the nature of support under section 523(a)(5) were discharged. However, pursuant to the 1994 amendments, Congress created an additional exception to discharge for non-support marital obligations. This exception will be broadened under the proposed Bankruptcy Reform Act. Under section 523(a)(15), non-support obligations (property settlement debts) are non-dischargeable, with two exceptions. Section 523(a)(15) does not apply to support debts under section 523 (a)(5), and it is used as an alternative means for excluding from discharge debts which arise from a divorce decree. This section only applies if the debt in question is determined to be a non-support debt.
11 U.S.C. §523(a)(15), in pertinent part, states:
(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—
(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless—
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor;
(Emphasis added.)
The analysis under §523 (a)(15) is therefore as follows:
1. The court must first determine whether or not the debt is a support obligation pursuant to §523 (a)(5).
2. The court must then determine debt was assumed as a part of a divorce decree or separation agreement.
3. The debtor must have the ability to pay the debt.
4. If the debtor has the ability to pay the debt, the court must determine whether or not the detriment to the creditor spouse would outweigh the benefit to the debtor of the discharge.
Generally, the court’s have interpreted §523 (a)(15) narrowly, allowing non-support debts to be excluded from discharged only in limited circumstances. Yvonne M. Lada, Something Every Divorce Attorney Should Know About Bankruptcy Law, 23 So. Ill. Univ. L. J. 735, 743 (1999). Section 523 (a)(15) was designed to deal with abusive bankruptcy filings in which the debtor seeks to avoid marital obligations that the debtor is able to pay after the bankruptcy, and it also addresses situations in which the creditor spouse will not truly be harmed by the discharge of certain debts and debt assumptions. Janet Leach Richards, Tennessee Family Law (1997), p. 355.
Burden of Proof Under §523 (a)(15)
In an action to exclude a debt from discharge pursuant to section 523 (a)(15), the creditor has the burden to prove that the debt falls within §523 (a)(15) (that it is an obligation arising from a divorce decree or separation agreement), and then the burden of proof shifts to the debtor to show the debtor either doesn’t have the ability to pay the debt (§523 (a)(15)(A)) or that the benefit to the debtor of the discharge would outweigh the detriment to the creditor spouse or child of the debtor (§523 (a)(15)(B)). In re Windom, 207 B.R. 1017 (Bankr. W.D. Tenn. 1997).
The Debt Must Have Been Incurred “In the Course of” a Divorce or Separation or “In Connection With” a Divorce Decree or Separation Agreement
In order for a debt to be non-dischargeable pursuant to §523 (a)(15), it must have been incurred in the course of a divorce or separation or in connection with a separation agreement, divorce decree, or other order of a court of record. In the case of In re LaRue, 204 B.R. 531 (Bankr. E.D. Tenn. 1997), the court found that the state court’s order in a divorce decree for the Debtor to pay certain marital debts was not a non-dischargeable obligation to the debtor’s former spouse, but was merely an order to pay third party creditors and was therefore dischargeable. The LaRue court reasoned that because the Final Decree of Divorce did not contain a “hold harmless” provision, it established no entitlement to indemnification or reimbursement in favor of the creditor spouse if the debtor fails to make the payments required under the Final Decree of Divorce. In re LaRue at 535.
Because the Final Decree contained no “hold harmless” language requiring the debtor to indemnify or reimburse the creditor spouse for any portion of the parties’ joint obligations which the creditor spouse is required to pay, this Final Decree addresses only obligations to pay third party creditors, not the former spouse. As a result, the court held that those obligations were not ones which were incurred “in connection with” a Final Decree of Divorce, and therefore section 523 (a)(15) did not apply and cannot be used to exclude these debts from discharge. Id. See also, Belcher v. Owens (In re Owens), 191 Bankr. 669, 674 (Bankr. E.D. Ky. 1996). HOWEVER, this approach has been criticized by In re Gibson, 219 B.R. 195, 203 (B.A.P. 6th Cir. Ohio 1998).
All assumptions of debts owed to third parties should contain “hold harmless” language.
Proving that the Debtor Does Not Have the Ability to Pay — §523 (a)(15)(A)
In determining whether or not the debtor does not have the ability to pay a debt arising out of a divorce decree or separation agreement, there is a split of authority regarding how to formulate an appropriate test for making this determination. Yvonne Lada, supra, at 743-744. The majority view requires the court to use a “disposable income” test which calculates the debtor’s disposable income by subtracting all of the debtor’s reasonable expenses from the debtor’s net income, while the minority view calls for the court to determine whether the debt would create an undue hardship for the debtor (which is the same test used to determine the dischargeability of student loans). Id.
In the case of In re Windom, 207 B.R. 1017 (Bankr. W.D. Tenn. 1997), the bankruptcy court held that the disposable income test should be applied. The court stated that if the debtor has enough disposable income to pay all or a material part of the debt within a reasonable amount of time, then the debtor has the ability to pay the debt in question. The court considered the following factors in determining the debtor’s ability to pay:
1. The debtor’s “disposable income” as measured at the time of trial;
2. The presence of more lucrative employment opportunities which might enable the debtor fully to satisfy his divorce-related obligation;
3. The extent to which the debtor’s burden of debt will be lessened in the near term;
4. The extent to which the debtor previously has made a good faith effort toward satisfying the debt in question;
5. The amount of the debts which a creditor seeking to have held non-dischargeable and the repayment terms and condition of those debts;
6. The value and nature of any property the debtor retained after his bankruptcy filing;
7. The amount of reasonable and necessary expenses which the debtor must incur for the support of the debtor, the debtor’s dependents and the continuation, preservation and operation of the debtor’s business, if any;\
8. The income of debtor’s new spouse as such income should be included in the calculation of the debtor’s disposable income;
9. Any evidence of probable changes in the debtor’s expenses.
In re Windom at 1021,22.
Proving that the Benefit to the Debtor Outweighs Detriment to the Creditor — §523 (a)(15)(B)
In evaluating §523 (a)(15)(B), the court must compare the parties’ standard of living. In balancing the equities of the parties, the court in Windom considered the following factors:
1. The amount of debt involved, including all payment terms;
2. The current income of the debtor, objecting creditor and their respective spouses;
3. The current expenses of the debtor, objecting creditor and their respective spouses;
4. The current assets, including exempt assets of the debtor, objecting creditor and their respective spouses;
5. The current liabilities, excluding those discharged by the debtor’s bankruptcy, of the debt, objecting creditor and their respective spouses;
6. The health, job skills, training, age, and education of the debtor, objecting creditor and their respective spouses;
7. The dependents of the debtor, objecting creditor and their respective spouses;
8. Any changes in the financial conditions of the debtor and the objecting creditor which may have occurred since the entry of the divorce decree;
9. The amount of debt which has been or will be discharged in the debtor’s bankruptcy;
10. Whether the objecting creditor is eligible for relief under the Bankruptcy Code; and
11. Whether the parties have acted in good faith in the filing of the bankruptcy and the litigation of the §523 (a)(15) issues.
Id. at 1023.
The court in Windom stated that if the debtor will “suffer more” from a non-dischargeable than the creditor would from the discharge, then the debt will be discharged. Id. In Windom, the bankruptcy court held that the debtor did not prove either defense to the non-dischargeability of the non-support debts.
What Can You Do to Protect Your Clients?
In order to be an efficient and thorough divorce practitioner, you must carefully evaluate the total financial picture of the parties who are getting divorced. This evaluation includes discovering all of the assets and debts of the parties as well as carefully considering the distribution of marital assets, allocation of debts, the need for alimony and child support, and the likelihood that one or both parties will need to file bankruptcy. Every divorce practitioner needs to consider all of these issues in order to get the best result for his or her clients.
During the Divorce
· Carefully analyze the financial situation of both parties and discuss these matters thoroughly with your client.
· Discuss the bankruptcy issues with opposing counsel if bankruptcy appears eminent, and negotiate accordingly.
· If the other party is assuming a joint debt, be sure to include a “hold harmless” clause.
· If the other party is going to assume a marital obligation, be sure to state that the parties intend for that obligation to be support and that it is necessary for your client’s support.
· If you represent the party assuming the debt, state that the parties intend the debt assumption to be purely property division, and do not include a hold harmless clause (if at all possible).
To Protect Your Attorney’s Fees
· If feasible, have attorney’s fees made payable to your client as non-dischargeable, non-deductible alimony, necessary for your client’s support. Regardless of whether the attorney’s fees are made payable to you or to your client, make sure the order states that the obligation to pay attorney’s fees is non-dischargeable support obligation, necessary for the support of your client, and that the parties agree (or the court found) that payment of those fees by the other party is necessary for your client’s support.
· If you are awarded attorney’s fees for successfully defending a child custody action pursuant to Tenn. Code Ann. §36-5-103(c), state in the order that the attorney’s fees awarded were awarded pursuant to Tenn. Code Ann. §36-5-103(c) for successfully defending a child custody action, that the attorney’s fees were incurred in protecting the child’s welfare and best interests, and that work benefitted the child and was necessary for the best interest of the child.
· If you are awarded a guardian ad litem’s fee, make sure that the order states that the work of the guardian ad litem was essential to the assurance of the child’s welfare and best interest, that the guardian ad litem’s work benefitted the minor child, and that the guardian ad litem’s work which generated the fees was necessary for the protection of the child’s best interest.
During Bankruptcy
Chapter 7
If you represent the creditor spouse (or if you are a creditor because of an attorney’s fee award):
· Forward a consent order to the debtor’s attorney declaring debts in question to be non-dischargeable support obligations.
· If that doesn’t work, file a complaint to determine the dischargeability of the debts in question under §523 (a)(5) and, in the alternative, pursuant to §523 (a)(15). Make sure that you meet the deadline for the §523 (a)(15) claim (it must be filed not later than 60 days after the date set for the first section 341 meeting of creditors).
· Depending on the wording of the divorce decree and/or marital dissolution agreement, you may be able to win a motion for summary judgment. Give it a shot!
· If the grounds exist, you can file a complaint objecting to dischargeability under §727; however, these cases are oftentimes hard to win, lengthy, and costly.
If you represent the Debtor
· You might wish to file a complaint to determine dischargeability of certain debts, asking the court to declare them to be dischargeable.
Chapter 13
If you represent the creditor spouse
· File a proof of claim
· If grounds exist, object to the confirmation of the plan on the basis that:
1. It is an impermissible classification of claims pursuant to §1332 (b)(1), which might violate §1322 (a)(2) and §1325 (a)(1) if, for example, the debtor classifies a priority unsecured §523 (a)(5) claim as non-priority unsecured §523 (a)(15) claim. §523 (a)(5) debts are non-dischargeable priority debts and are to be paid in full.
2. The plan was not proposed in good faith, pursuant to §1325 (a)(3). Good faith is determined on a case-by-case basis. See In re Kitchens, 702 F.2d 885 (11th Cir. 1983) for a list of factors to be used in determining good faith.
· File a complaint under §523 (a)(5) and §1328 (a)(2) to determine dischargeability of the debts in question. If you would like for the divorce court to hear the dischargeability issue (under §1334 (b) state courts have concurrent jurisdiction with bankruptcy courts to determine dischargeability of §523 (a)(5) debts, but not (a)(15) debts), you can file a motion for relief from the automatic stay and for permissive abstention.
· You can file a motion to dismiss or to convert the case to a Chapter 7 case pursuant to §1307 (c). In a Chapter 7 case, §523 (a)(15) debts are non-dischargeable, while they are dischargeable in a Chapter 13 case.
If you represent the Debtor
· Make sure you schedule the debts correctly. Be certain that you do not list non-priority unsecured (§523 (a)(15)) claims as priority unsecured (§523 (a)(5)) claims.
· Object to the proof of claim, if the creditor spouse classifies possible non-support §523 (a) (15) debts as §523 (a)(5) priority unsecured debts.
· If the creditor spouse (in either a Chapter 13 or a Chapter 7) does not timely file a proof of claim, the debtor may do so and should do so pursuant to §501 (c) and Fed. R. Bankr. P. 3004. Filing a proof of claim for creditors who did not timely file a proof of claim will allow the debtor to get the full benefit of the bankruptcy, by allowing the creditor to be paid in full or in part by the Chapter 13 trustee or the Chapter 7 trustee. Not doing so could result in malpractice.
One Final Note
In the alternative, you can take no action in the bankruptcy case, and if and when your client is sued on one or more of the debts in question, you can ask the state court to determine dischargeability under section 523 (a)(5), because such a complaint can be filed at any time, even after the bankruptcy discharge has occurred, Fed. R. Bankr. P. 4007(b). Both the state court and the bankruptcy court have concurrent jurisdiction to determine the non-dischargeability of section 523 debts (28 U.S.C. §1334(b), 523(c)), although only bankruptcy law may be applied in making such a determination. In re Rickman, 79 B.R. 753 (Bankr. W.D. Tenn. 1987); Houghland v. Houghland, 844 S.W.2d 619 (Tenn. App. 1992). Don’t forget, however, that complaints to determine dischargeability under §523 (a)(15) must be filed before the deadline; you cannot wait until the discharge has occurred to bring a cause of action under §523 (a)(15).
Although you can wait and do nothing during the bankruptcy, it is better practice to deal with dischargeability issues during the bankruptcy instead of waiting until after a discharge is granted.
©2001 Tennessee Bar Association
Kendra Hazlett Armstrong is a 1988 Graduate of Rhodes College in Memphis. She obtained a Master of Science Degree in Psychology from the University of Memphis in 1991, and in 1993 she obtained her Juris Doctor degree from the University of Memphis. She is a member of the law firm of Jewell & Armstrong PC, in Cordova where she practices primarily in the areas of family law, personal injury, and bankruptcy.
A Note on Defined Benefit Retirement Plans as a Marital Asset in Divorce: The Tennessee Case — Part 2 of 2
by Michael W. Butler Ph.D, San Angelo, Texas
Example
Alan and Beth married in 1970 when both were 25 years old. Alan began working for company Z with a defined benefit retirement plan with vestiture after 10 years of employment. Beth worked for a few years, but quit working to raise a family. She was not vested in her company’s plan when she ceased employment and benefits were forfeited.
In 1995, after 25 years of marriage. Alan and Beth chose to divorce. Alan stated in his divorce deposition that he planned to retire from company Z at age 65 and to begin drawing from his retirement plan.
Company Z’s retirement plan administrator stated that based upon earnings to date, Alan would be eligible to draw $1,000 per month ($12,000 per year) from his retirement plan at age 65. The plan included a three percent annual COLA. The 1992 Tenn. Code Ann. supplement states that a 50 year old male has a lift expectancy of 31 years, and this value was used to evaluate this case.
In table 1 Alan’s retirement benefits are estimated from his retirement at age 65 until age 81. He is expected to live 16 years beyond his retirement at age 65. His retirement benefits increase at 3% compounded annually. The benefit is considered an end of year payment. The present value (beginning of year one) of each year’s retirement benefit is estimated using a discount rate of 7.5%. That approximates the mid-1995 average yield on long-term U. S. government securities. The sum of the annual present values is the present value of all payments from age 65 through age 81 (16 years). That is, if at age 65, the amount of $132,133.60 were invested to earn an annual return of 7.5%, the year-end retirement benefits could be made until all funds were exhausted at the end of 16 years.
Alan plans to continue to work and accumulate more retirement benefits after the divorce. Beth has no rights to any additional benefits accruing to Alan after their marriage is dissolved. The present value of benefits at retirement must be further discounted to the time of the divorce. Using the same discount rate of 7.5%, the present value of Alan’s retirement benefits at the time of the divorce is $41,541.09. If that amount were invested at the time of the divorce at a return of 7.5% compounded annually, it would total $132,133.60 after 15 years.
The judge must consider the present value of Alan’s retirement plan along with the market value of Alan and Beth’s residence in order to distribute the marital assets in an equitable manner. That is, in Tennessee assets will not necessarily be equally divided when each spouse receives half of the couple’s net worth. Other things taken into consideration are custody and support of minor children, future employment of each spouse, and other factors that may be relevant to an equitable distribution.
Conclusion
In this paper is presented the justification for retirement benefits to be included as a marital asset in divorce cases, particularly as it applies to Tennessee. The issues of life expectancy, cost of living adjustments, and discount rates are also explored. A case using a defined benefit retirement plan is used to show how present value of benefits at the time of divorce is determined. v
Endnotes
1. One anonymous referee pointed out that evaluation of retirement benefits is also an issue in other cases, such as wrongful termination and death cases. Depending on the court jurisdiction, the approach in this note may or may not be applicable to other cases.
References
Books and Periodicals
Allman, Phillip A. 1993, “Four Economic Issues in Pension Valuations.” Journal of Legal Economics 3(2): 61-67.
DiFranza, Barbara, and Donald W. Parkyn, 1980. “Dividing Pensions on Marital Dissolutions.” California State Bar Journal 55:464-9.
Gelman, Bruce, and Edward J. Mathis. 1991. “Pensions on Marital Assets: A Summary of the Issues.” Journal of Legal Economics 1(3): 22-32.
Hanson, Richard X. 1991. “Future Transactions in Pension Evaluations.” Journal of Legal Economics 1(2): 66-73.
Launey, David V., and George V. Launey. 1993, “Valuation of Vested Pension Benefits in Divorce and Wrongful Death Actions: Using the PBGC Tables.” Journal of Legal Economics 3(3): 1-10.
Projector, Murray. 1975. “Valuation of Retirement Benefits in Marriage Dissolutions.” Los Angeles Bar Bulletin 50(April): 229-38.
Shelburn, Marsha R., and Randall W. Chastain. 1987. “Career Assets and the Equitable Apportionment of Marital Property.” South Carolina Law Review 38:755-88.
Stoller, Michael. 1992. “Estimating the Present Value of Pensions: Why Different Estimators Get Varying Results.” Journal of Legal Economics 2(3): 49-61.
Tennessee Consolidated Retirement System (TCRS). 1993. “Retirement Benefit Option Plans.”
Legal Cases and Codes
Batson v. Batson, 769 S.W. 2nd 849 (Tenn. Ct. App., 1988)
Tenn. Code Ann. §36-4-121 (1991).
©2001 Tennessee Bar Association
|
| Table 1: Estimate of Retirement Benefits |
| Year |
Retirement Benefit |
Present Value |
|
End of Year * |
Beginning of Year ** |
| 1 |
$12,000.00 |
$11,162.79 |
| 2 |
12,360.00 |
10,695.51 |
| 3 |
12,730.80 |
10,247.79 |
| 4 |
13,112.72 |
9,818.81 |
| 5 |
13,506.10 |
9,407.79 |
| 6 |
13,911.28 |
9,013.98 |
| 7 |
14,328.62 |
8,636.65 |
| 8 |
14,758.48 |
8,275.12 |
| 9 |
15,201.24 |
7,928.72 |
| 10 |
15,657.27 |
7,596.82 |
| 11 |
16,126.99 |
7,278.81 |
| 12 |
16,610.80 |
6,974.12 |
| 13 |
17,109.13 |
6,682.18 |
| 14 |
17,622.40 |
6,402.46 |
| 15 |
18,151.07 |
6,134.45 |
| 16 |
18,695.60 |
5,877.66 |
|
Sum of Present Value |
$132,133.60 |
| * Retirement benefits increase at 3% annually. |
| ** Present values are determined using a discount rate of 7.5%. |
|
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Business Valuation Seminar
Nashville-Memphis-Chattanooga-Knoxville
Self-employed obligors should owe child support based on their company’s income, not what is brought home. Self-employed parents also are notorious for taking aggressive positions for federal income tax purposes, with fringe benefits such as company-provided luxury cars and entertainment and personal expenses. When borrowing money, the company’s financial position often differs dramatically from those figures presented to the Internal Revenue Service on its returns. Business law regularly intersects with family law. Specifically, business valuation law appears in every case in which a party owns part of a closely-held company, whether a doctor, a computer consultant, or a concrete manufacturer.
Whether you are preparing to hire your first business valuation expert or planning your fortieth deposition script, the specific valuation methods and specific valuation experts involved cause each case to be different. Better lawyers demand of themselves a commitment which requires reading, learning, and reliance upon the expert for guidance on each case.
This year’s Tennessee Bar Association’s Family Law Section’s Business Valuation Seminar was designed to expose its members to the very highest level of advocacy and provide an excellent resource to begin work on cases with business valuation issues, whether the first or fortieth. Family Law Section Chair, Marlene Moses, suggested the topic and its panel. Familiar with Dr. Shannon Pratt and his international reputation for being arguably the most preeminent expert in the business valuation universe, she wanted the Section members to benefit from a presentation usually only found at a national-level seminar. Dr. Pratt will appear in person at the Nashville and Memphis seminars, and the Chattanooga and Knoxville presentations will feature videotaped footage of his Nashville presentation. Chris Mercer, founder and CEO of Mercer Capital Management, Inc., also shares the seminar’s stage because his firm, based in Memphis, Tennessee, similarly values businesses on a global scale. Ken Patton, Senior Appraiser from Mercer Capital will appear in the Chattanooga and Knoxville locations.
T.B.A. Family Law Section Chair-elect, Miles Mason, Sr., has prepared a very detailed outline on Tennessee Business Valuation Law. He hopes his brief presentation will make the seminar valuable for everyone. “I drafted the Tennessee Business Valuation Law Outline as if I were an associate providing thorough legal research to a partner without knowing the facts of the particular case at hand,” says Mason. “There are so many excellent business valuation books, including those written by our presenters, that I saw the need to only supplement them with Tennessee case law by outlining as many positions taken by our appellate courts as possible. The advocate should be able to finish research by checking the outline and reviewing the brief comments on what the courts have not addressed.”
Most law practices and firms are closely-held companies. Similar to law firms, most other closely-held companies also run into business valuation issues regularly with line of credit concerns, stock options and restrictions, buy-sell agreements, and other ownership transfer issues. This year’s business valuation seminar will provide every attorney attending with serious and substantive knowledge for a better understanding of the issues faced in everyday practice as well as offer a starting point for follow-up research.
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