Dennis, Matter of

• Citation: 25 F.3d 274
• Decision Date: 13 July 1994
• Docket Number: No. 93-8613,93-8613
• Parties: , Bankr. L. Rep. P 76,047 In the Matter of Lebaron DENNIS, Debtor. Lebaron DENNIS, Appellee, v. Audrey H. DENNIS, a/k/a Joyce Dennis, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 274

25 F.3d 274

63 USLW 2115, Bankr. L. Rep. P 76,047

In the Matter of Lebaron DENNIS, Debtor.

Lebaron DENNIS, Appellee, v. Audrey H. DENNIS, a/k/a Joyce Dennis, Appellant.

No. 93-8613.

United States Court of Appeals, Fifth Circuit.

July 13, 1994.

Louis LeLaurin, Marita Emmett, San Antonio, TX, for appellant.

Paul W. Rosenbaum, Rosenbaum Law Services, Noe Reyna, Jack Minyard Partain, Jr., Fulbright & Jaworski, San Antonio, TX, for appellee.

Appeal from the United States District Court for the Western District of Texas.

Before JOHNSON, BARKSDALE, and DeMOSS, Circuit Judges.

JOHNSON, Circuit Judge:

After more than thirty-one years of marriage, LeBaron and Audrey ("Joyce") Dennis divorced. The divorce court awarded Joyce one-half of LeBaron's military retirement benefits, and LeBaron agreed to pay the taxes thereon. Six years after the divorce, LeBaron filed a petition for bankruptcy. He sought a discharge of his obligation to pay the taxes on Joyce's share of the retirement benefits. The bankruptcy court determined that LeBaron's obligation to pay the taxes constituted alimony, maintenance, or support under section 523(a)(5) of the Bankruptcy Code. The bankruptcy court therefore ruled that LeBaron's tax obligation was nondischargeable. The district court, reviewing the case on appeal, reversed. Finding that the bankruptcy court properly ruled that the debt in question was nondischargeable, we reverse.

I. Facts and Procedural History

Joyce and LeBaron Dennis married on December 18, 1954. At that time, LeBaron was a medical student at Harvard Medical School with three semesters remaining until graduation. Joyce obtained a clerk-typist job to pay for their living expenses. She financially supported the family throughout LeBaron's last three semesters of medical school, as well as throughout LeBaron's internship after medical school. Upon completion of his internship, LeBaron entered the Air Force as a physician. He made it clear to Joyce that he did not want his wife--the wife of a doctor--working outside the home. For the next twenty-eight years, therefore, Joyce worked as a full-time wife and mother.

In 1981, LeBaron retired from the Air Force as a full colonel. He then entered into private practice as a plastic surgeon. LeBaron experienced great financial success in the private sector. In 1982, just one year after retirement from the Air Force, LeBaron more than doubled his income. In 1985, LeBaron earned well over $284,000 from his medical practice alone. While the Dennis family was reaping significant monetary benefits, they were, at the same time, encountering grave family problems. On July 14, 1985, LeBaron and Joyce separated. They divorced approximately one year later, after more than thirty-one and a half years of marriage.

On the day before trial on the divorce issues, LeBaron and Joyce entered into a settlement agreement. Among other things, they agreed that Joyce would obtain fifty percent of LeBaron's military pension. During the settlement negotiations, LeBaron verbally offered to pay all of the taxes due on Joyce's share of the benefits. Because Joyce had no degree, no skills, no job, and no prospects for a job, she accepted the offer. ¹ LeBaron agreed to--and did--memorialize this agreement in a writing. ²

During the trial before the bankruptcy court, LeBaron testified that he wanted to preserve an interest in Joyce's share of the benefits should she predecease him. LeBaron believed that to preserve such an interest, he was required to have the Air Force deposit all of the funds into his bank account. He therefore offered to pay all of the income taxes due on Joyce's share of the pension if she would give up her right to have the Air Force send the money directly to her and allow the Air Force to deposit all of the funds into LeBaron's account instead. Joyce agreed. However, soon after signing the agreement, LeBaron learned that he did not have to have the money deposited into his account in order to preserve his interest in Joyce's share of the benefits. He thus decided not to pay any taxes on Joyce's amount. He instead declared that the benefits given to Joyce constituted alimony and deducted that amount from his gross income on his income tax forms. LeBaron chose not to inform Joyce of these decisions. Hence, she assumed that LeBaron was paying the taxes as required by their agreement.

Joyce learned otherwise in November 1988, when the Internal Revenue Service informed her that she owed taxes, interest, and penalties on all of the retirement benefits she had received in the previous two years. A tax court later found her liable for taxes and interest in the amount of $19,720.33. ³ Joyce thereafter filed suit against LeBaron in a Texas county court at law for breaching his agreement to pay the taxes on the retirement benefits. In her petition to that court, she quoted her divorce decree which "provided in part that 'this Judgment is part of the division of community property between the parties and shall not constitute or be interpreted to be any form of spousal support, alimony, or child support.' " Rec. at 41. Joyce asked the Texas county court to find LeBaron liable for the $19,720.33 and to require LeBaron to specifically perform his duties outlined in the agreement by reporting the gross amount of the retirement benefits as income, by paying the taxes on the gross amount, and by not deducting the benefits from his gross income as alimony or spousal support.

The Texas county court, referring to language in the divorce decree, found that LeBaron's agreement to pay the taxes "was part of the division of community property between the parties and did not constitute nor should it be interpreted to be any form of spousal support, alimony or child support." ⁴ Rec. at 45. The Texas county court held LeBaron liable for the taxes, ruled that LeBaron was required to pay the taxes in the future, and forbade LeBaron from deducting the military benefits from his gross income and claiming that the benefits constituted alimony or support. The Texas county court signed its judgment, which was actually a consent decree, on Friday, January 3, 1992.

Four days--two working days--later, on Tuesday, January 7, 1992, LeBaron filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code. He sought to have his past and future tax obligations to Joyce discharged. LeBaron and his new wife filed a Chapter 13 proceeding in July of 1992. They listed Joyce as one of only two creditors and proposed to make no payments whatever on the taxes due on Joyce's share of the retirement benefits. LeBaron contended that because the Texas county court had found that the obligation did not constitute alimony or spousal support, the doctrine of collateral estoppel prevented the bankruptcy court from finding to the contrary.

The bankruptcy court disagreed. The bankruptcy court ruled that it was bound neither by the characterization which the parties had given the obligation nor by the decision of the Texas county court at law. Reviewing the facts of the case de novo, the bankruptcy court found that although the parties and the Texas county court had given the obligation another name, "it still smell[ed] like alimony or support." The court therefore ruled that LeBaron's duty to pay Joyce's taxes was nondischargeable.

LeBaron appealed to the federal district court, and that court reversed. It ruled that the doctrine of collateral estoppel was applicable in the facts of this case and therefore prohibited the bankruptcy court from finding that the tax payments constituted alimony, maintenance, or support. Joyce now appeals.

II. Discussion

A. The Law Stated

Section 523 of Title 11 sets forth the exceptions to the general rule that all debts are dischargeable through bankruptcy. Subsection (a)(5)(B) is the provision in issue here. It reads:

A discharge ... of this title does not discharge an individual debtor from any debt 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 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. Sec. 523(a)(5)(B). Since 1970, the determination of whether a debt is nondischargeable under this provision has been a matter of federal bankruptcy law, not state law. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991); In re Joseph, 16 F.3d 86, 87 (5th Cir.1994); In re Biggs, 907 F.2d 503, 504 (5th Cir.1990); see also Brown v. Felsen, 442 U.S. 127, 136, 99 S.Ct. 2205, 2211, 60 L.Ed.2d 767 (1979) (stating that "[b]y the express terms of the Constitution, bankruptcy law is federal law").

Bankruptcy courts must therefore look beyond the labels which state courts--and even parties themselves--give obligations which debtors seek to have discharged. ⁵ 5] In re Davidson, 947 F.2d 1294, 1296 (5th Cir.1991); In re Benich, 811 F.2d 943, 945 (5th Cir.1987); In re Nunnally, 506 F.2d 1024, 1027 (5th Cir.1975). Indeed, the mere fact that a creditor previously reduced her claim to a judgment does not preclude the bankruptcy court from inquiring into the true nature of the debt--and ruling contrary to the first court's judgment, if necessary. Brown, 442 U.S. at 138, 99 S.Ct. at 2212; In re Brody, 3 F.3d at 39. In fact, a spouse is not barred from arguing in bankruptcy court that certain obligations constitute alimony or support even if that spouse argued to the contrary in state court. In re Brody, 3 F.3d at 39. To be sure, "[t]he ultimate finding of whether [a debt is nondischargeable, as 'defined' by the bankruptcy law] is solely [in] the...