U.S. Bankruptcy Judge Robert D. Martin held on Sept. 29 that, where a marital settlement agreement classified marital debts as being part of the financial support settlement, rather than the property settlement, the debts are not dischargeable in bankruptcy.
Mark D. Wedeward and Christine Ellen Weaver were divorced on Aug. 6, 2003. The parties executed a marital settlement agreement that was incorporated into the divorce judgment. The agreement provided for the payment by Weaver of certain martial debts, and provided that traditional maintenance was waived by both parties.
However, the agreement also provided that Weaver’s payment of the debts “are non-dischargeable debts under sec. 523(a)(5) of the Bankruptcy Act, these obligations being part of the final financial support settlement for both parties. These financial obligations on the part of both parties are not part of the property settlement.”
In 2004, Weaver declared bankruptcy pursuant to Chapter 7. Wedeward then filed an adversary action, claiming that the debt obligations are not dischargeable, and Judge Martin agreed.
What the court held
Case: In the Matter of Weaver: Wedeward v. Weaver, Case No. 04-10807-7, Adversary No. 04-97.
Issue: When a marital settlement agreement classified a debtor’s marital debt obligations as a form of maintenance, rather than property division, are the debts dischargeable in bankruptcy?
Holding: No. Where the parties clearly intended that the division of the debts be a form of maintenance, and the division has the actual effect of a traditional maintenance transfer, the debt is nondischargeable pursuant to 11 U.S.C. 523(a)(5).
Counsel: Michael E. Kepler, Madison, for plaintiff; Roger Merry, Monroe, for defendant.
11 U.S.C 523(a) excepts from discharge 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.”
Although the marital settlement agreement specifically indicated that the debts were in the nature of maintenance, rather than property division, the court noted that the parties’ characterization is not dispositive. “The obligations must actually be in the nature of alimony, maintenance, or support in order not to be discharged,” the court concluded.
Where the parties’ intent is not clear, state law determines whether the obligations are to be construed as a division of property or support. Matter of Woods, 561 F.2d 27, 29-30 (7th Cir. 1977).
The court concluded that the negative inference of Woods is that, if the parties’ or the divorce court’s intent is clear, there is no need to consult state law. In this case, the court found that the parties’ intent was clear.
The agreement explicitly provided, “With respect to each party’s responsibility for the payment of certain debts and obligations, and the obligation to hold the other harmless for the payment of those debts and obligations, the parties understand and agree that their obligations are non-dischargeable debts under sec. 523(a)(5) of the Bankruptcy Act, these obligations being part of the final financial support settlement for both parties. These financial obligations on the part of both parties are not part of the property settlement.
“It is also understood that while these obligations are related to the support of both parties, they in no way affect any other portion of this Marital Settlement Agreement which specifically denies maintenance to both parties, and are not intended to confer additional subject matter jurisdiction in the Courts with respect to any maintenance obligation. This understanding and agreement is set forth in detail so as to clarify the intention of the parties with respect to the payment and legal responsibilities for the payment of certain debts and obligations, with the hold harmless provisions.”
The court also concluded that, by incorporating the agreement into the divorce judgment, the divorce court implicitly recognized the intent that the obligations were in the nature of support, and found them to be equitable.
The bankruptcy court noted, “After their divorce, Mr. Wedeward paid child support, and Ms. Weaver had significantly more income than Mr. Wedeward. In [Nichols v. Nichols, 469 N.W.2d 619 (Wis.1991)], the Wisconsin Supreme Court allowed equalization by maintenance of disparities in the property settlement. It follows that the parties can waive maintenance in the formal sense, but equalize income by assigning debts as part of the marital support.”
Accordingly, the court held that the obligations were in the nature of spousal maintenance, and ordered that the debt not be discharged.
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David Ziemer can be reached by email.