Sorah, In re, 97-6335

Citation163 F.3d 397
Decision Date22 December 1998
Docket NumberNo. 97-6335,97-6335
Parties41 Collier Bankr.Cas.2d 221, Bankr. L. Rep. P 77,872 In re Perle Albert SORAH, Jr., Debtor. Karren L. SORAH, Appellant, v. Perle Albert Sorah, Jr., Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

James W. Gardner (argued and briefed), Henry, Watz, Gardner & Sellars, Lexington, Kentucky, for Appellant.

Guy M. Graves (argued and briefed), Elizabeth S. Hughes and Samuel G. Carneal (briefed), Gess, Mattingly & Atchison, Lexington, Kentucky, for Appellee.

Before: NELSON, CLAY, and GILMAN, Circuit Judges.

GILMAN, Circuit Judge.

The United States Bankruptcy Court for the Eastern District of Kentucky discharged Karren L. Sorah's former husband, Perle Albert Sorah, from an obligation to pay her $750 per month pursuant to a state court divorce decree. The bankruptcy court found that the payments, though decreed as "maintenance" by the state court, were not actually in the nature of maintenance, and were therefore dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(5)(B). The district court affirmed. Because we find that both the bankruptcy court and the district court incorrectly applied § 523 to the facts of this case, we REVERSE the district court's decision and REMAND for entry of an order consistent with this opinion.

I. BACKGROUND

Mr. and Mrs. Sorah were married in 1973. In 1993, Mr. Sorah was employed as an x-ray technician. He was forty-two years old and earned over $35,000 per year. Mrs. Sorah was then fifty years old and employed as a teacher's aide, earning approximately $8,000 per year. She also had rental income from property inherited from her mother. Mrs. Sorah suffers from varicose veins and thrombophlebitis that could limit the amount of work she will be able to undertake in the future.

In March of 1992, Mr. Sorah petitioned for divorce. In May of 1993, he filed a Chapter 7 bankruptcy petition. The Bell Circuit Court in Kentucky granted the divorce in November of 1993 and entered a Decree of Dissolution of Marriage. It awarded Mrs. Sorah direct payments that it designated as "maintenance" and that are structured to cease upon Mrs. Sorah's death, remarriage, or 62nd birthday, whichever first occurs. Mr. Sorah appealed the maintenance award to the Kentucky Court of Appeals, which upheld the award in 1995.

As part of his bankruptcy proceeding, Mr. Sorah then sought a ruling that his obligation to pay the $750 monthly "maintenance" payments was dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(5)(B). This section of the Bankruptcy Code discharges debts to spouses even though designated alimony, support, or maintenance, unless they are actually in the nature of alimony, support, or maintenance.

The bankruptcy court reviewed the state court record without hearing any additional proof. Based upon this review, it determined that the payments were not in fact in the nature of maintenance, but rather were intended to punish Mr. Sorah for his alleged marital infidelity. The bankruptcy court apparently reached this conclusion based upon the following language contained in the divorce decree:

The separation of the parties and the breakup of the marriage involved infidelity on [the] part of the Petitioner while he "frivolates", "cajoles", "Bevis and Buttheads" around in financial freedom as a result of his bankruptcy, searching for another victim....

The bankruptcy court further found that the Bell Circuit Court's findings of fact regarding the parties' respective incomes and Mrs. Sorah's rental income from the inherited property were without support in the record. The bankruptcy court, however, likewise failed to provide any backup for its own findings of fact.

After concluding that the $750 monthly payments to Mrs. Sorah were actually property distributions intended to punish Mr. Sorah, the bankruptcy court discharged the obligation. Mrs. Sorah then appealed the bankruptcy court's decision to the United States District Court for the Eastern District of Kentucky. The district court found that the bankruptcy court had properly conducted an independent inquiry into whether the payments actually constituted maintenance or were, instead, a division of marital property dischargeable in bankruptcy. It thus affirmed the bankruptcy court's determination that the payments were dischargeable. Mrs. Sorah now appeals the district court's decision.

II. ANALYSIS
A. Standard of Review

We review the factual determination of whether an obligation constitutes nondischargeable support under the "clearly erroneous" standard. See In re Perlin, 30 F.3d 39, 40 (6th Cir.1994). On the other hand, the interpretation of § 523 is a legal issue that we review de novo. See In re Calhoun, 715 F.2d 1103, 1111 (6th Cir.1983) (stating that the application of the wrong legal standard, and the district court's misallocation of the burdens of proof, would be reviewed de novo ).

B. The requirements of § 523

Section 523 of the Bankruptcy Code, titled "Exceptions to discharge," provides in relevant part that debts to a former spouse are discharged, "but not to the extent that ... such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support." 11 U.S.C. § 523(a)(5)(B). Thus, in order to be held nondischargeable in bankruptcy, an award in a divorce decree or settlement agreement must actually be in the nature of support. The inquiry that the bankruptcy court must undertake in making this determination depends upon the nature of the obligation and the language of the state court decree.

In Calhoun, this court held that the bankruptcy court should have engaged in an independent inquiry to determine whether a third-party debt assumption contained in a separation agreement was in the nature of support, or whether it was in actuality a division of marital property. See 715 F.2d at 1109. The court set out a three-part test that required the bankruptcy court to determine whether the award was intended as support, whether it had the effect of support in light of the recipient's present needs, and whether, even if in the nature of support, it was nonetheless unreasonable in amount. See id.

In In re Fitzgerald, 9 F.3d 517, 520 (6th Cir.1993), this court noted that the Calhoun standard had been too expansively applied by the bankruptcy courts, and held that the "present needs" of the non-debtor spouse should not be considered when the obligation was intended as support. The court found no cases in which direct-payment obligations that were intended as support were discharged in bankruptcy. See id.

Distinguishing a direct payment between spouses from the third-party debt assumption addressed in Calhoun, the Fitzgerald court further said that "here the only question is whether something denominated as alimony is really alimony and not, for example, a property settlement in disguise." See id. at 521. In finding that the award was alimony, and not a disguised property settlement, the court noted that the payments "were to end upon the wife's remarriage or death, another conventional restriction on alimony." See id. Thus Fitzgerald stands for the proposition that a state court's award of alimony is entitled to deference when labeled and structured as such.

Despite the admonition in Fitzgerald that bankruptcy courts should not second-guess state court alimony determinations, the bankruptcy court in the present case engaged in an independent inquiry into whether the award was actually in the nature of support, hypothesizing in particular that the Bell Circuit Court granted maintenance to Mrs. Sorah based upon its disapproval of Mr. Sorah's behavior during the marriage. We find that such an independent analysis under the circumstances of this case is inconsistent with Fitzgerald and fails to give proper deference to state divorce court decrees.

C. The Bankruptcy Reform Act of 1994

In 1994, Congress amended § 523 to make most divorce-related obligations nondischargeable. See 11 U.S.C. § 523(a)(15). The amended section contains two exceptions: a debt is dischargeable (1) if the debtor cannot afford to pay it, or (2) if the discharge benefits the debtor more than it harms the debtor's spouse and children. See id. The statute, as amended, has spawned a great deal of litigation. See Mary Jo Newborn Wiggins, Commentary on Bankruptcy Reform, 4 Am. Bankr.Inst. L.Rev. 551 (1996). The Bankruptcy Reform Act does not apply to the present case, which was filed before the Act's effective date. See Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106 (codified as amended in scattered sections of 11 U.S.C.) ("[T]he amendments made by this Act shall not apply with respect to cases commenced under title 11 of the United States Code before the date of the enactment of this Act."). Its effect on the Calhoun analysis in future cases remains unclear. Because this case involves an award that bears all of the traditional indicia of support, however, we need not discuss the extent to which § 523 as amended will affect third-party debt assumptions as dealt with in Calhoun.

D. The standard applicable to awards that bear the indicia of support

1. Burden on the non-debtor spouse

There is a saying that if something looks like a duck, walks like a duck, and quacks like a duck, then it is probably a duck. In determining whether an award is actually support, the bankruptcy court should first consider whether it "quacks" like support. Specifically, the court should look to the traditional state law indicia that are consistent with a support obligation. These include, but are not necessarily limited to, (1) a label such as alimony, support, or maintenance in the decree or agreement, (2) a direct payment to the former spouse, as opposed to the assumption of a third-party debt, and (3) payments that are contingent upon such events as death, remarriage, or...

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