Bankruptcy Court Abstains from Deciding Whether Debtor’s Obligations to Ex-wife Were Domestic Support Obligations

Bankruptcy Court Abstains from Deciding Whether Debtor’s Obligations to Ex-wife Were Domestic Support Obligations

Debtor’s complaint in this proceeding seeks a judgment declaring that certain obligations he owes to his ex-wife under a marital settlement agreement are not domestic support obligations (“DSOs”). The defendant ex-wife has filed a motion for abstention arguing that this Court should abstain and allow the state court judge to decide the issue.

In 2013, the Debtor, and his ex-wife (the “Former Wife”), entered into a marital settlement agreement (“MSA”) in their state court marital dissolution case.  Section II of the MSA is titled “Equitable Distribution” and includes paragraph 10, which reads as follows: “The Husband shall pay the Wife the sum of five hundred and twenty thousand dollars ($520,000.00) as lump sum alimony and child support.” The $520,000.00 sum was to be paid in various installments. It is undisputed that the final two installment payments in the aggregate amount of $200,000.00 are due and owing (the “Divorce Obligation”). The second to last installment payment was due on March 15, 2016, prior to the filing of the Debtor’s bankruptcy case on February 24, 2017. The final installment payment came due postpetition, on March 15, 2017.

When the Debtor failed to pay the $100,000 installment due on March 16, 2016, the Former Wife filed a motion for contempt (the “Contempt Motion”) in the State Court Case. On November 14, 2016, following months of litigation over, and four amendments to, the Contempt Motion, the State Court reserved February 27, 2017 for a full-day evidentiary hearing (the “Contempt Hearing”).

On February 24, 2017, just three days prior to the Contempt Hearing, the Debtor filed a pro se chapter 7 petition initiating the above-styled bankruptcy case. Debtor’s state court counsel advised the state court judge (“Judge Sarduy”) that the Debtor was in bankruptcy, but the Former Wife’s attorney, misquoting the statute, convinced Judge Sarduy that the Contempt Motion was excepted from the automatic stay, and the Contempt Hearing went forward.

The Contempt Hearing and Order        Judge Sarduy conducted a day-long evidentiary hearing. At the conclusion of the hearing, the Judge announced his ruling holding the Debtor in contempt.  The court heard testimony from the Debtor and his Former Wife. The Former Wife’s testimony was not transcribed. The Debtor’s testimony, which was transcribed, was probative of his financial condition when the parties signed the MSA. During that testimony, the court took judicial notice of the Petition for Dissolution of Marriage, which contained a claim for alimony,  and received in evidence a financial affidavit that was signed by the Debtor and that described the Debtor’s financial condition when he executed the MSA. The Former Wife’s counsel’s closing argument also referenced the Debtor’s finances at the time of the MSA.

Significantly, the Contempt Hearing included argument about whether the Divorce Obligation should be treated as equitable distribution or as alimony.  Judge Sarduy described his job, in that regard, as interpreting the parties’ intent at the time of the MSA by examination of extrinsic evidence. The state court had to make that determination because the contempt remedy was available under Florida law only if the Divorce Obligation was considered alimony.

On March 13, 2017, Judge Sarduy entered an Order Granting Former Wife’s Motion for Contempt (the “Contempt Order”). The Contempt Order held the Debtor in Contempt and ordered him to pay the Former Wife $100,000.00, representing the full amount of the second to last installment payment due under the MSA. At the time, the final installment payment was not yet due. That payment is now past due.

In the Contempt Order, Judge Sarduy also made the following specific and important findings:

[T]he MSA is not vague or ambiguous. The provision to pay $520,000.00 in installments constitutes alimony and not an equitable distribution. The MSA describes the payment as lump sum alimony and provides for enforcement by contempt. This was a nine year marriage in which the Former Husband was the breadwinner. Under such circumstances the Former Wife would be entitled to some form of alimony, yet the MSA makes no other provision for alimony.

The Bankruptcy Case and Adversary Proceeding        After the Contempt Hearing, the Debtor’s chapter 7 bankruptcy case was dismissed because the Debtor did not file his schedules.  The case was reinstated on March 21, 2017 and is now pending under Chapter 13 of the Bankruptcy Code. Judge Sarduy entered the Contempt Order when no bankruptcy stay was in effect, because he entered the order after dismissal, but before reinstatement, of the bankruptcy case.

On March 29, 2017, the Debtor filed a Motion for Enforcement of the Automatic Stay seeking an order declaring the Contempt Order void because the Contempt Hearing was conducted during the pendency of the Debtor’s chapter 7 case. The Court agreed and, on April 20, 2017, entered its Order Enforcing Automatic Stay (the “Stay Order”) [DE #54 in 17-12235]. In the Stay Order, the Court declared void Judge Sarduy’s Contempt Order and stayed the State Court Case. The Court noted that the Contempt Order was signed when no bankruptcy stay was in effect but found that the Contempt Hearing was in violation of the stay and, therefore, any order entered pursuant to that hearing was also in violation of the stay.

On June 13, 2017, the Former Wife moved to dismiss the chapter 13 case  and filed a motion asking the Court to reconsider the Stay Order or to abstain from determining whether the Divorce Obligation is a DSO. The Court scheduled the Motion to Dismiss and the Motion to Reconsider or Abstain for hearing on July 25, 2017.

Before the July 25th hearing, on July 10, 2017, the Debtor filed his complaint initiating this adversary proceeding (the “DSO Adversary”). The Complaint seeks a judgment declaring that the Divorce Obligation is not a DSO and, as such, may be treated as an unsecured claim in the chapter 13 plan and discharged when the Debtor completes payments under his plan.

On August 2, 2017, the Court denied the Former Wife’s Motion to Reconsider, and denied without prejudice the Former Wife’s Motion to Dismiss. The Court also denied the Former Wife’s Motion to Abstain but without prejudice to the Former Wife filing a motion for abstention in the DSO Adversary. In deferring ruling on abstention pending further briefing in the DSO Adversary, the Court noted the following:

Judge Sarduy had to consider the nature of the $520,000 obligation in order to enter his Contempt Order, and the Contempt Order did include a specific finding that the $520,000 obligation was alimony, not an equitable distribution. Nevertheless, the transcript did not include extensive argument on the issue and the Contempt Order itself is void under this Court’s April 24th Order.

The Former Wife filed her Motion for Abstention in the DSO Adversary on August 18, 2017.

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