In re Duffy

• Court: U.S. Bankruptcy Court — Southern District of New York
• Writing for the Court: Adlai S. Hardin, Jr.
• Citation: In re Duffy, 331 B.R. 137 (Bankr. S.D.N.Y. 2005)
• Decision Date: 16 September 2005
• Docket Number: Bankruptcy No. 04B23560(ASH).,Adversary No. 04-08855A.
• Parties: In re James Lincoln DUFFY, Debtor. James Lincoln Duffy, Plaintiff, v. Laura Mayer Taback, Defendant.

331 B.R. 137

In re James Lincoln DUFFY, Debtor James Lincoln Duffy, Plaintiff, v. Laura Mayer Taback, Defendant.

Bankruptcy No. 04B23560(ASH).

Adversary No. 04-08855A.

United States Bankruptcy Court, S.D. New York.

September 16, 2005.

Sidney Turner, P.C., By Sidney Turner, Esq., White Plains, NY, Kramer Kozek, LLP, By Barry Abbott, Esq., White Plains, NY, for Debtor-Plaintiff.

Kitson Kitson & Bisesto, LLP, By Patricia T. Bisesto, Esq., Theresa A. Girolamo, Esq., New York City, Wilson, Elser, Moskowitz, Edelman & Dicker, By David L. Tillem, Esq., White Plains, NY, for Defendant.

OPINION AFTER TRIAL

ADLAI S. HARDIN, JR., Bankruptcy Judge.

Plaintiff-debtor James Lincoln Duffy ("debtor" or "Duffy") commenced this adversary proceeding against defendant Laura Mayer Taback ("Taback"), Duffy's ex-wife, in October 2004 seeking a determination of the dischargeability under Section 523(a)(5) and (15) of the Bankruptcy Code of a $74,000 debt remaining on a state court judgment of divorce requiring him to pay $240,000 in $2,000 monthly payments over ten years.

The adversary proceeding was tried to the Court without a jury. The following constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

Jurisdiction

The Court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the standing order of referral to bankruptcy judges signed by Acting Chief Judge Robert J. Ward on July 10, 1984. This is a core proceeding under 28 U.S.C. § 157(b).

Background

The parties were married in July 1984. They have two children born in 1986 and 1989. In 1993 Taback commenced a relationship with Sheldon Taback (whom she married shortly after the judgment of divorce ended her marriage to Duffy four years later) and asked the debtor to move out of the marital home, which he did. In 1994 she commenced an action for divorce. After several years of discovery, negotiations and delay, the divorce action came on for trial before the Honorable Fred Shapiro on June 27, 1997. At the instance and with the active participation of Justice Shapiro, the parties settled the single agreed issue of equitable distribution on which they went to trial. The judgment of divorce states as follows in relevant part:

ADJUDGED AND DECREED that the Defendant [Duffy] shall pay monthly spousal maintenance to the Plaintiff [Taback] commencing July 1, 1997 in the sum of $2,000 per month payable in monthly installments which shall be made on the first day of each month for the term of ten (10) consecutive years, which payments shall be non-dischargeable in bankruptcy and paid unconditionally to the Wife irrespective of her cohabitation or remarriage.

For several years following the 1997 judgment of divorce Duffy complied fully with his obligations to make the $2,000 monthly "spousal maintenance" payments referred to above, as well as his over $2,000 a month child support payments to Taback.

However, in May 2002 Duffy consented to relinquish his license to practice medicine because of certain allegations of professional misconduct. Duffy had been treated for depression during his high school and college years. Contemporaneous with the allegations of professional misconduct and his surrender of his medical license and profession, Duffy suffered further mental or emotional stress and disability (obsessive-compulsive disorder) which rendered him incapable of effectively defending himself against the charges of alleged misconduct, and thereafter from successfully pursuing a new career. Nevertheless, the trial record before me demonstrates Duffy's good faith in seeking to obtain new employment to support himself and honor his financial obligations.

As a consequence of the loss of his medical license and professional employment, Duffy was deprived of income and was no longer able to fulfill his obligations under the judgment of divorce. After exhausting his savings and retirement accounts, and having no other financial resources of his own, Duffy fell into arrears in his divorce judgment obligations.

In the spring of 2004 Taback moved in the state court for sanctions to enforce her rights under the divorce judgment. Although Duffy had no property, de minimis income barely sufficient to support himself¹ and no ability to pay the arrears, the state court nevertheless entered an order on May 26, 2004 requiring him to pay the sum of $42,600 on or before 11:00 A.M. June 1, 2004 on pain of incarceration in the event that he failed to do so.² Faced with debtor's prison, Duffy appealed to his father, who thereupon paid the $42,600 to Taback, which the state court had referred to at the May 26, 2004 hearing as the "get out of jail free card, an automatic purge of the underlying contempt amount [which] will result in an automatic release from incarceration." May 26, 2004 Transcript at 30-3. Still unable to earn enough money to comply with his $2,000-plus a month child support and additional $2,000 a month "spousal maintenance" payment obligations to Taback under the divorce judgment, Duffy once again fell into arrears. Faced with the prospect of further orders for sanctions and incarceration, Duffy filed his voluntary petition under Chapter 7 of the Bankruptcy Code on October 12, 2004 and commenced this adversary proceeding on October 29, 2004.

Discussion

Section 523(a)(5)

Section 523(a)(5) of the Bankruptcy Code 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 —

(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise (other than debts assigned pursuant to section 408(a)(3) of the Social Security Act, or any such debt which has been assigned to the Federal Government or to a State or any political subdivision of such State); or

(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;

The threshold issue which the Court must decide is whether the above-quoted provision of the divorce judgment requiring Duffy to pay $240,000 in $2,000 monthly installments over ten years constituted alimony/maintenance within the meaning of Section 523(a)(5) of the Bankruptcy Code. If those payments constitute alimony or maintenance for bankruptcy purposes, they are not dischargeable under the express terms of Section 523(a)(5), and that determination would resolve the adversary proceeding without more. If, on the other hand, those payments constitute equitable distribution of marital property for bankruptcy purposes, the issue would then arise whether the obligation is dischargeable under Section 523(a)(15).

Taback argues that the payments in question must be deemed to be alimony/maintenance, and certain facts support that conclusion. The divorce judgment itself refers to the payments as "spousal maintenance," and Duffy consistently referred to the payments as "alimony" and he deducted the payments for tax purposes, which he could not do if they were designated as a property settlement.

But the law is clear that the question whether obligations under a divorce decree constitute alimony/maintenance within the meaning of Section 523(a)(5), or equitable distribution of marital property not within subsection (5), is a question of bankruptcy law to be decided by the bankruptcy court on the basis of all the facts and circumstances, and that the bankruptcy court may, indeed must, reject the characterization applied to the obligation by the divorce court or the parties if warranted by a consideration of all of the facts. Indeed, subsection (B) of Section 523(a)(5) expressly mandates that the exception in subsection (5) does not apply "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" (emphasis supplied). The legislative history of Section 523(a)(5) confirms that the power of decision on this issue is vested in the bankruptcy court. H.R. REP. No. 95-595, pp. 364 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6320 ("What constitutes alimony, maintenance, or support, will be determined under the bankruptcy laws, not State law.").

The case law universally follows the legislative mandate. Bieluch v. Cook (In re Bieluch), 216 F.3d 1071 (table) (2d Cir.2000) ("[A] bankruptcy court must make its own factual findings regarding the nature of a debt to a former spouse, but in doing so may consider the state court's characterization of the payment."); Brody v. Brody (In re Brody), 3 F.3d 35, 38 (2d Cir.1993) ("Although a written manifestation of agreement is persuasive evidence of intent, the label that the parties attach to a payment is not dispositive; the court must look to the substance, and not merely the form, of the payments." (internal citations omitted)); Pauley v. Spong (In re Spong), 661 F.2d 6, 9 (2d Cir.1981) ("[It is a] well established principle of bankruptcy law that dischargeability must be determined by the substance of the liability rather than the form."); Biggs v. Biggs (In re Biggs), 907 F.2d 503, 505 (5th Cir.1990) ("Congress specifically stated its intention that bankruptcy courts look not at the label a state court or the parties applied to a debt but instead at the purpose of the obligation."); Kerzner v. Kerzner (In re Kerzner), 250 B.R. 487, 491 (Bankr.S.D.N.Y.2000) ("An obligation's status as alimony, maintenance or support exempted from discharge by section 523(a)(5) is a question of federal bankruptcy law separate and distinct from state law, and any label given the...