When people divorce there are assets to divide, debts to pay off, and other financial arrangements to be made by the parties. Unsurprisingly, many divorcees face such crushing financial burdens that they file for bankruptcy seeking relief. However, divorcees must be aware that, generally, the Bankruptcy Code makes divorce-related debts nondischargeable in bankruptcy—meaning the debt will not go away. And sometimes a divorcee’s expectation as to what does or doesn’t qualify as a divorce-related debt results in litigation. Indeed, a recent example of this is In re Monassebian, a case from the Eastern District of New York Bankruptcy Court, in which the court ruled that “divorce-related debt” is not limited to a divorce proceeding; instead, it encompasses even a debt “‘one step removed’ from the divorce proceeding” since the debt was based on the breach of a pre-divorce stipulated agreement (incorporated but not merged into the final Judgment of Divorce).1
Our review of In re Monassebian below serves as a reminder to exercise caution and seek experienced counsel when filing for bankruptcy with the expectation of discharging an obligation created by a divorce decree, separation agreement, or something arguably “in connection with” such a divorce or separation agreement.
Shortly before their second divorce in 2009, husband and wife (Debtor) jointly agreed, inter alia, to gift an apartment owned by them to their daughter. However, upon commencement of the Divorce Action, the title to the apartment had not been transferred yet.
In 2013, the parties entered into a Stipulation of Settlement (Stipulation) which resolved the Divorce Action and settled certain martial disputes. In the Stipulation, the parties agreed: (1) that their daughter still had a possible claim of ownership to the apartment; (2) to sell the apartment upon receipt of general release from their daughter; (3) to indemnify each other, equally, for the cost of defending any claim that their daughter might bring against either one of them pertaining to the property transfer; and (4) to refrain from assisting, financing, or encouraging their daughter in commencing litigation to obtain title. Significantly, the Stipulation provided for “reimbursement of attorney's fees and legal expenses in connection with any legal action seeking enforcement or other remedy for a breach of the Stipulation, to be paid to the aggrieved party by the breaching party.”2
The parties’ Divorce Action concluded in 2014, and the Stipulation was incorporated, but not merged, in the Judgment of Divorce. It was clear in the Judgment of Divorce that the parties were to comply with the Stipulation’s terms as if the terms were set forth in their entirety in the Judgment of Divorce.
Soon after the entry of Judgment of Divorce, Debtor brought an action in state court to set aside the Stipulation, which prompted her ex-husband to counterclaim—alleging that Debtor violated the Stipulation by assisting their daughter in a lawsuit against both parents in which their daughter sought title to the apartment. Ultimately, the state court ruled that Debtor had breached the contract and entered judgment against her in the amount of $515,430.26. Less than one month later, Debtor filed for Chapter 7 bankruptcy hoping to discharge that amount. Debtor’s ex-husband filed an adversary complaint claiming the state court judgment was a Bankruptcy Code section 523(a)(15) nondischargeable debt.
As the bankruptcy court noted, the language of section 523(a)(15) provides that bankruptcy will not discharge any debt:
to a spouse, former spouse, or child of the debtor and not of the kind described in [section 523(a)(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, or a determination made in accordance with State or territorial law by a governmental unit.3
The court also considered relevant case law which discussed the statutory language as being comprised of three elements, reflecting that:
the debt: (1) must “be to a spouse, former spouse, or child of the debtor;” (2) must “not be the type described in section 523(a)(5) , i.e., not a domestic support obligation;” and (3) must “have been incurred in the course of divorce or separation in connection with a separation agreement, divorce decree, or other order of a court.”4
According to the court, since the parties didn’t dispute the first two elements of section 523(a)(15), the only point of contention was the interpretation of the final element. Specifically, the court indicated that “the resolution of this adversary proceeding turns on the interpretation of the relevant statute and determination of the scope of its applicability, which is a question of federal law.”5
The Debtor presented two arguments for dischargeability. First, Debtor maintained that the debt—a breach of contract debt—was outside the scope of section 523(a)(15) and conflicted with the intent of the statute. Second, the Debtor claimed that the parties’ financial circumstances—relative needs and abilities—should be considered. The court’s own review of statutory history and policy considerations resulted in its dismissal of both of Debtor’s arguments, emphasizing that:
accepting the [Debtor’s] narrow reading of the statute could lead to troubling results. Potentially, it would incentivize a party to extinguish her otherwise nondischargeable obligation by breaching it, which, under the [Debtor’s] interpretation, would transform the obligation into a dischargeable one.
Ultimately, the court ruled against Debtor, stating that:
Although the Stipulation was not merged into the Judgment of Divorce, the Judgment of Divorce clearly directed the parties to comply with all legally enforceable provisions of the Stipulation as if they were entirely set forth in the Judgment of Divorce. The Judgment debt was incurred precisely in connection with the Stipulation resolving the Divorce Action because the damages were awarded based on the terms of the Stipulation itself.6
The intersection of divorce and bankruptcy is stressful and complex. In re Monassebian is just one example of why a divorcee considering bankruptcy should exercise caution and seek experienced counsel to help them make the best choices in their particular circumstances. Contact our team today at (410) 497-5947 or you can use our brief contact form to schedule a confidential consultation.