Debt Owed to Trust is DSO

Posted by NCBRC - March 9, 2023

Where the debtor’s payments to his ex-wife’s Trust were in lieu of alimony and were understood by both the debtor and his ex-wife to be for her future support, the payments were in the nature of a domestic support obligation not dischargeable in bankruptcy. Hundt v. Ventrone (In re Ventrone), No. 21-11643, Adv. Proc. Nos. 22-00005, 22-00026 (Bankr. E.D. Pa. Jan. 2023).

In order to buy a house, the plaintiff and her then-husband, the debtor, withdrew $415,000 from a Trust established for the plaintiff’s benefit. They then entered into a post-nuptial agreement providing that in the event of divorce, “the original Distribution invested in the Property of $415,000, . . . shall be returned to the Trust at the time of sale, free and clear from any and all claims by [Debtor].”

Three years later, the debtor and the plaintiff divorced. They entered into a property settlement agreement (PSA) which incorporated the post-nuptial agreement and PSA further provided that:

“The parties agree that in the event that the sale of the Marital Residence does not satisfy their $415,000.00 obligation to the Trust, that they shall divide the deficiency between the net sale proceeds returned to the Trust and the $415,000.00 liability with [Debtor] being responsible for 37.5% of the deficiency and [Plaintiff] being responsible for 62.5% of the deficiency.”

In 2018, the parties sold the property but the proceeds were not sufficient to fully repay the trust. The debtor failed to make the payments required by the PSA to make up his share of the deficiency. After the Family Court issued a couple of contempt orders and held a contempt hearing, it ordered the debtor to make a one-time payment to the court for $30,625, and to make three other payments in the amount of $1,225 each. All the payments represented amounts owed to the Trust. The debtor complied with the order except that each of the checks he submitted to the Family Court contained conditional language that ultimately prevented the plaintiff from depositing them. The debtor refused to submit acceptable replacement checks.

The Family Court issued a bench warrant and after a hearing on that warrant, the court ordered the debtor to liquidate his 401K accounts and pay the proceeds to the plaintiff to satisfy Marital Obligations. The court also ordered the debtor to pay $4,500 in attorney’s fees.

The debtor filed for chapter 13 bankruptcy. The Trust filed a claim for $174,451.79 plus the attorney’s fees as awarded by the Family Court. “Out of an abundance of caution,” the plaintiff filed the identical claim. The debtor objected to the claim on the bases that the contempt order was for only $113,913.28, that attorney’s fees should not have been included, and that the claim was not for a domestic support obligation. The debtor and the plaintiff (along with the Trust) filed opposing adversary complaints relating to whether the plaintiff’s claims were nondischargeable domestic support obligations under various paragraphs in section 523(a).

The case came before the court on the plaintiff’s motion for summary judgment. Though the plaintiff cited several provisions of section 523(a), the court rested its decision on section 523(a)(5) which excepts domestic support obligations (DSO) from discharge in chapter 13.

The court began its analysis with the question of whether the plaintiff’s claim was for a DSO, finding that to qualify as such the debt must be, “(i) ‘owed to or recoverable by’ a governmental unit or a person with a specific relationship to the Debtor such as a spouse, former spouse, or child of the Debtor; (ii) the underlying obligation [must be] in the nature of alimony, maintenance, or support of such person; (iii) the obligation [must arise] from an agreement, court order, or as otherwise defined; and (iv) the debt [must not be] assigned to a non-governmental entity unless voluntarily done by the spouse, former spouse, or child of the Debtor.”

The court rejected the debtor’s argument that the claim was not a DSO because it was payable to the Trust rather than to the plaintiff herself. The court found that where the obligation is in the nature of support for a spouse or child, it qualifies as a DSO even though it may be payable to another entity.

The court looked to three factors to determine whether the payments were intended for support: “(i) the language and substance of the agreement; (ii) the parties’ financial circumstances; and (iii) the function of the obligation.”

Here, under the terms of the PSA, the debtor was obligated to make payments to the Trust “in lieu of alimony” for the plaintiff’s support. The court noted that the plaintiff’s income was substantially less than the debtor’s and the plaintiff had the responsibility of paying her own and their children’s expenses. In testimony in the Family Court the debtor acknowledged that the Trust constituted the plaintiff’s future support and that his payment into it was in furtherance of that end. That the obligation was for support was reinforced by the fact that the plaintiff sought and received enforcement by the Family Court.

Having found the plaintiff’s claim was a nondischargeable DSO, the court turned to whether the plaintiff’s claim for $4,500.00 in attorney’s fees was also nondischargeable as a DSO. It found the law well-settled that an award of attorney’s fees in connection with a divorce proceeding are in the nature of a DSO.

The court concluded that the claim in the modified amount of $118,413.28, as well as the $4,500 attorney’s fee award and any additional legal fees awarded by the Family Court, were nondischargeable under section 523(a)(5). It granted summary judgment to Plaintiffs. The debtor filed a motion to reconsider on March 7.

Ventrone Bankr ED Pa Jan 2023




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