Debt Based on Breach of Pre-Divorce Stipulation Nondischargeable

Posted by NCBRC - August 26, 2022

A debt based on breach of a Stipulated Agreement that was incorporated but not merged into the final Judgment of Divorce was a debt “in connection with” a divorce decree within the meaning of section 523(a)(15) and was therefore nondischargeable in bankruptcy. Monassebian v. Monassebian, No. 21-41251, Adv. Proc. No. 21-1162 (Bankr. E.D.N.Y. Aug. 1, 2022).

While going through their divorce, the debtor (defendant) and her ex-husband (plaintiff) agreed to give the apartment they owned (Property) to their daughter, Deborah, though they did not actually transfer the title. The couple later resolved the remaining issues in the divorce with a Stipulation of Settlement. The Stipulation provided that the parties would sell the Property after obtaining a general release from Deborah. In addition, the agreement provided that neither party would assist Deborah in opposing the sale of the Property and that the parties would indemnify each other for the cost of defending any claim Deborah might assert with respect to the sale. The Stipulation also provided for reimbursement of attorney’s fees and costs in the event of legal action based on breach of the agreement. The Stipulation was incorporated in, but not merged with, the Judgment of Divorce, with the proviso that the parties were to comply with the terms of the Stipulation as if set forth in their entirety in the Judgment of Divorce.

Shortly after the divorce judgment was entered, state court litigation ensued. The defendant sought to have the Stipulation set aside, and the plaintiff counterclaimed that the defendant had breached the agreement by assisting Deborah in her efforts to take title to the property. The defendant’s action was dismissed, and the plaintiff’s action went to trial. The state court entered judgment in favor of the plaintiff finding that the defendant had breached the contract by paying for and assisting Deborah in her efforts to take title to the property. The state court entered judgment against the defendant in the amount of $515,430.26. Three weeks later, the defendant filed for chapter 7 bankruptcy and the plaintiff filed an adversary complaint seeking a finding that the state court judgment was nondischargeable under section 523(a)(15). Both sides filed for summary judgment.

Section 523(a)(15) provides that a debt “to a spouse, former spouse, or child of the debtor . . .  that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree. . .” is not dischargeable in bankruptcy. The only issue in dispute was whether the debt in this case was in connection with a divorce decree.

The defendant raised two arguments in favor of dischargeability: first, that the debt was based on a judgment for breach of contract rather than the Judgment of Divorce and therefore did not fall within the confines of section 523(a)(15); and second, that the parties’ relative wealth should be considered in the court’s analysis.

The court made quick work of the second argument, finding that although relative wealth was a consideration pre-BAPCPA, the 2005 amendment eliminated that factor from the statutory defenses.

Turning to the defendant’s argument that the state court judgment was for breach of contract and was too far removed from the divorce Judgment to meet the requirements for nondischargeability, the court found the defendant was “putting form over substance.” It found that the basis for the plaintiff’s claim was not the state court judgment, but the Stipulated Agreement. “In other words, it was the Stipulation that created the nondischargeable obligation; the Judgment merely liquidated it.”

Furthermore, the court found that, by including debts “in connection with” a divorce decree, section 523(a)(15) is broader than the defendant would have it. The court took note that the Judgment of Divorce referred to the Stipulated Agreement and instructed the parties to comply with it as if set forth in the Judgment of Divorce.

The court found this case similar to the facts in Gilman v. Golio (In re Golio), 393 B.R. 56 (Bankr. E.D.N.Y. 2008), which likewise involved an agreement that was incorporated into the parties’ divorce decree. There, the agreement was for child support and damages should one spouse refuse to vacate the marital property. The plaintiff in that case was awarded a judgment from the state court which the bankruptcy court found was clearly connected to, and in enforcement of, the divorce decree.

The court here concluded that “it is clear that the Judgment, which merely assigned the dollar value to the Plaintiff’s claim for breach of the Stipulation incorporated in the Judgment of Divorce, was incurred ‘in connection with a separation agreement, divorce decree or other order of a court of record.’”

The court also rejected the defendant’s argument that the discharge exception is limited to debts based on alimony or property settlement, finding again that it is broad enough to encompass any debt connected to the divorce or separation agreement including indemnification and fee-shifting provisions.

The court noted that if the defendant’s position were accepted, a nondischargeable debt incurred under a divorce or separation agreement would routinely be transformed into a dischargeable debt when reduced to Judgment based on breach of contract.

The court granted the plaintiff’s motion for summary judgment.

Monassebian Bankr ED NY Aug 2022


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