Lawson, In re
| Decision Date | 09 December 1993 |
| Docket Number | Nos. 92-2154,92-2163,s. 92-2154 |
| Citation | 14 F.3d 595 |
| Parties | NOTICE: Fourth Circuit I.O.P. 36.6 states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Fourth Circuit. In re: Frank G. LAWSON, Debtor. Susanna C. Lawson, Individually and as Guardian of Frank Lawson; Kimberly Lawson, Plaintiffs-Appellants, v. Frank G. Lawson, Debtor-Appellee. In re: Frank G. Lawson, Debtor. Frank G. Lawson, Plaintiff-Appellant, v. Susanna C. Lawson, Individually and as Guardian of Frank Lawson, Jr.; Kimberly Lawson, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Before MURNAGHAN and LUTTIG, Circuit Judges, and SPROUSE, Senior Circuit Judge.
OPINION
Appellants Susanna, Kimberly, and Frank Lawson, Jr., the wife and children of Frank Lawson, Sr., appeal from an order of the bankruptcy court, confirmed by the district court, declaring a post-nuptial agreement to be an executory contract and capable of rejection by the debtor/appellee, Frank Lawson, Sr. While still married, Frank Lawson, Sr. and Susanna Lawson signed a post-nuptial contract which stated that, in the event of divorce, all real property owned jointly by the couple would be transferred to a trust to be held for the benefit of the couple's children (Kimberly and Frank, Jr.) and their heirs. Subsequently, in 1989, the couple separated and filed for divorce, but, on January 22, 1991, one day before the judgment of divorce was to be entered, Frank Lawson, Sr. filed a petition for voluntary bankruptcy under Chapter 11. The bankruptcy court permitted Frank Lawson, Sr.'s rejection of the post-nuptial agreement, deciding that it was an executory contract. The district court affirmed. Susanna and her children contend on appeal that the post-nuptial agreement does not qualify as an executory contract under the terms of the bankruptcy code, and that, even if it does, the post-nuptial agreement constitutes a non-dischargeable obligation.
Because the underlying facts of this case are unique, we recount them in some detail.
Frank Lawson, Sr. and Susanna were married in 1973, and subsequently had two children, Kimberly and Frank, Jr. On June 16, 1981, Frank and Susanna entered into a post-nuptial agreement. The agreement began by listing four pieces of real property and designating them to be the community property of the couple. It went on to state that:
4. The parties to this agreement desire to make provisions for these four pieces of property and any others that they may hold in the future as their community property in the event their marriage is dissolved for whatever reason.
II. In the event FRANK G. LAWSON and SUSANNA C. LAWSON become divorced, all pieces of real property owned by them as their community property, including the four pieces of real property mentioned above or the traced proceeds from the sale of said real properties, shall be deeded to CALIFORNIA FIRST BANK, as Trustee, to be held, managed and distributed as hereinafter provided[.]
The agreement then outlined the terms of the trust. It directed the Trustee to provide for the "proper support, care, maintenance and education" of the children as long as they were under the age of twenty-one by paying the children "as much of the net income and principal of the trust as the Trustee in the Trustee's discretion deems necessary." Under the agreement, the corpus of the trust was to be divided in equal shares and distributed to the children in thirds as they reached the ages of 25, 30, and 35.
On September 8, 1981, Frank and Susanna added an addendum to the post-nuptial agreement, which provided that pension plans and retirement benefits, including military retirement benefits, derived by either party throughout the marriage would be considered community property, notwithstanding any case law to the contrary.
The properties listed in the post-nuptial agreement had been purchased with loans from Susanna Lawson's parents, Ngar Nam Chung and Chan Ying of Hong Kong. The Lawsons lived in two of the four properties for a period of time, but purchased the other two as rental investments. Later all four properties were converted to rental properties. After the post-nuptial agreement was entered into, Frank and Susanna Lawson executed joint promissory notes in favor of Susanna's parents confirming their indebtedness for the amounts received, and began paying back the funds with proceeds of the rentals.
In 1989, Susanna initiated divorce proceedings against Frank Lawson, Sr. Her Bill of Complaint alleged cruelty and desertion, and the Cross-Bill of Complaint also charged cruelty and constructive desertion. A Commissioner's hearing as to the grounds for the divorce was conducted in December 1990. At the hearing, counsel for Susanna Lawson moved to allege an additional ground for divorce, voluntary separation for one year, as the couple had ceased co-habitating in August 1989. The Commissioner found insufficient evidence of cruelty and desertion, although he noted that the primary cause of the voluntary separation was Frank Lawson, Sr.'s "outbursts of temper" and "sometimes brutal treatment of the children," which resulted in a deterioration of the marriage relationship. The Commissioner recommended that Susanna Lawson be granted a final decree of divorce, a vinculo matrimonii, and scheduled a hearing for entry of a final divorce decree and determination of property settlement for January 23, 1991.
One day prior to the scheduled entry of divorce, Frank Lawson, Sr. filed a voluntary petition under Chapter 11 of the Bankruptcy Code. 1 He listed as potential creditors his wife's parents, stating claims of $474,793 in personal loans from them. In June of 1990, Susanna's parents had filed three lawsuits against Frank and Susanna, claiming in excess of $258,421 due on the promissory notes signed by them for the monies advanced to buy the properties. Other than the money owed to the in-laws, Frank Lawson, Sr. listed only about $6,000 worth of debt.
Frank Lawson, Sr.'s Amended Plan of Reorganization provided for the sale of the four rental properties in order to satisfy the debts to the in-laws. The proposed sales were estimated to produce about $62,000 more than what was needed to pay all claims, taxes and expenses, which amount would be paid over as directed by the circuit court in the equitable distribution proceedings in the divorce case, with Susanna Lawson being given credit to the extent that joint funds from the sales of the real property were used to pay Frank Lawson, Sr.'s individual debt. The Plan rejected the post-nuptial agreement as an executory contract under 11 U.S.C. Sec. 362(a) since the divorce had not yet occurred. The Plan did not provide for alimony, but provided child support for the one minor child.
Appellants Susanna Lawson and her two children filed a declaratory action in the Bankruptcy Court for the Eastern District of Virginia, seeking enforcement of the post-nuptial agreement, alleging that it created a debt in the nature of maintenance and child support which was non-dischargeable in bankruptcy under 11 U.S.C. Sec. 523(a)(5). Debtor-appellee Frank Lawson, Sr., seeking to reject the post-nuptial agreement, argued that the agreement was an executory contract, and that his continued liability on the notes to Susanna Lawson's parents warranted retention of the bankruptcy estate's interest in the property that is the subject of the post-nuptial. After a hearing, the bankruptcy court decided in a decision rendered from the bench that the post-nuptial agreement was an executory contract, and took under advisement the issue of whether it could be rejected. The court requested and received supplemental briefs on the issue of rejection of the agreement and decided in favor of Frank Lawson, Sr. several months after the hearing. It also decided that the obligation was not non-dischargeable as support under Sec. 523(a)(5), because the debtor's obligation under the post-nuptial contract had not yet been determined by the state court, and had not even arisen because the condition precedent --the divorce--had not occurred. The District Court for the Eastern District of Virginia affirmed the Bankruptcy Court's decision, but remanded the case to the Bankruptcy Court for a"determination[ ] on any issue not resolved by the Court in the original proceeding."
The remand pertained to Frank Lawson, Sr.'s contention that the bankruptcy court had been requested to enter judgment for the plaintiff and against the defendant with respect to damages, but failed to do so. Susanna Lawson's action had asked for damages for breach of contract if the agreement was found to be rejected as an executory contract. She claimed $750,000 on her own behalf, and $500,000 on behalf of each of the children. However, she did not produce any evidence of damages at trial. Because there was nothing in the record as to damages, the district court included the order of remand to "clear up" any unresolved issues.
Susanna Lawson and her children herein appeal the district court's order. She contends that the post-nuptial agreement is not executory and therefore not subject to rejection under 11 U.S.C. Sec. 365(a). She claims in the alternative that whether the agreement is executory or not, it is non-dischargeable under 11 U.S.C. Sec. 523(a)(5) because it is "in the nature of child support."
The case presents us with the application and interaction of two different provisions of the bankruptcy code, Secs. 365(a) and 523(a)(5). Under section Sec. 365(a), a trustee or debtor-in-possession, subject to the court's...
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