Tilley v. Jessee

• Decision Date: 05 May 1986
• Docket Number: No. 85-2219,85-2219
• Citation: Tilley v. Jessee, 789 F.2d 1074, 14 C.B.C.2d 1376 (4th Cir. 1986)
• Parties: , 14 Collier Bankr.Cas.2d 1376, Bankr. L. Rep. P 71,129 William J. TILLEY, Jr., # 7-85-0031 A, Appellant, v. Joyce JESSEE, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1074

789 F.2d 1074

54 USLW 2655, 14 Collier Bankr.Cas.2d 1376,

Bankr. L. Rep. P 71,129

William J. TILLEY, Jr., # 7-85-0031 A, Appellant, v. Joyce JESSEE, Appellee.

No. 85-2219.

United States Court of Appeals Fourth Circuit.

Argued March 4, 1986.

Decided May 5, 1986.

Solomon Lee Van Meter (Eugene E. Derryberry, Gentry, Locke, Rakes & Moore, Roanoke, Va., on brief), for appellant.

Neil E. McNally (Barry M. Tatel, Key & Tatel, Roanoke, Va., on brief), for appellee.

Before HALL and WILKINSON, Circuit Judges, and MICHAEL, United States District Judge for the Western District of Virginia, sitting by designation.

K.K. HALL, Circuit Judge:

William J. Tilley, Jr., is a debtor in a Chapter 11 bankruptcy proceeding. He appeals from an order of the district court affirming a determination of the bankruptcy court that an obligation contained in a separation agreement executed between Tilley and his ex-wife, Joyce Jessee, was "in the nature of alimony, maintenance or support" and, therefore, non-dischargeable in bankruptcy pursuant to 11 U.S.C. Sec. 523. Because we find the bankruptcy court's factual conclusion with regard to the central question of the parties' mutual intent to be clearly erroneous, we reverse.

I.

Tilley and Joyce Jessee were married in 1963 in Bristol, Tennessee. They were divorced by decree dated August 27, 1971, entered by the Circuit Court of Washington County, Virginia. The decree incorporated a Post-Nuptial Agreement of the parties (the "agreement") dated August 23, 1971. It is the nature of the obligations created by that agreement that is the subject of this appeal.

Paragraph 3 of the agreement provided that the husband, during his lifetime and commencing on the fifth day of the calendar month following the granting of a divorce incorporating the agreement, would pay alimony to the wife for her support and maintenance of $1,000.00 monthly, to continue until the wife's death or remarriage or until the husband's death. In paragraph 4, the husband further agreed to maintain hospitalization and medical insurance for the wife.

In paragraph 5, which is the crux of the matter at issue, the parties agreed as follows:

p 5. Property Interest of Wife in Husband's Property and Estate. Husband will execute and deliver to Wife a note in the form of Exhibit 1 hereto payable to her order in the principal amount of $125,000 with interest at the rate of 7% per annum, payable quarter-annually. Interest only shall be paid on this note during the first 7 1/2 years after its date, and thereafter payments of principal and interest payable quarter-annually shall be made for a period of 7 1/2 years so that at the end of fifteen years after the date of the note, the entire principal and interest shall have been paid. To secure the payment of this note, Husband shall assign a life insurance policy or policies on his life aggregating $125,000. When payments of principal begin on this note, then the portion of the life insurance policy or policies assigned as security shall automatically reduce by the amount of such principal payments as they are made.

Husband shall furnish to Wife a copy of the insurance policy or policies and a certificate certifying that the premiums have been paid, upon the execution of this agreement, and a like certificate on or before the due date of each succeeding premium. If such premiums are not paid by Husband, then Wife may pay such premiums if she elects to do so. The amount of any premiums on such life insurance policy or policies paid by the Wife shall be added to and constitute a part of the principal of said note. In consideration of the execution and delivery of said note secured by said life insurance policy, Wife agrees upon the execution of this agreement and its approval by the court in which her divorce proceeding is pending, to execute, acknowledge and deliver special warranty deeds conveying to Husband her interest in all real property owned by Husband and Wife as tenants in common or as joint tenants and/or tenants by the entireties with right of survivorship as at common law.

The note provided for and was executed in the amount of $125,000 contemporaneously with the agreement. Payments were made as provided over a fourteen-year period, reducing the amount to the present balance of approximately $32,000.00.

Tilley subsequently filed a petition for reorganization under Chapter 11 of the Bankruptcy Act, and sought to have Jessee's remaining claim included among those of other unsecured creditors subject to discharge. Jessee filed an adversary proceeding with the bankruptcy court seeking to have the note and sums owed under it declared non-dischargeable pursuant to 11 U.S.C. Sec. 523(a)(5). ¹

On April 16, 1985, a hearing was held in the bankruptcy court on the adversary proceeding. Both Jessee and Tilley testified. Jessee testified that at the time of the divorce, Tilley was unable to provide more than $1,000.00 a month in support as required in the agreement. She further stated that her intent was to somehow obtain $2,000.00 a month because ill health rendered her otherwise unable to support herself. She asserted that the property transfer embodied in paragraph 5 of the agreement required payments sufficient to provide the monthly income of $2,000.00 which she had originally sought. Jessee further testified that she used all sums received from Tilley, including the payments on the note, as support.

Tilley testified that paragraph 5 of the agreement was drafted in response to his desire to regain full control of jointly held property. He further stated that he had treated the payments on the note as non-deductible for income tax purposes rather than as deductible alimony. Tilley conceded on cross-examination that he assumed Jessee was using all payments received for her support.

Relying upon this Court's opinion in In re Melichar, 661 F.2d 300 (4th Cir.1981), the bankruptcy court held that the question of whether an obligation contained in a divorce settlement is non-dischargeable alimony turns principally on the intent of the parties at the time the agreement was executed. The substance of the agreement rather than the terms affixed to it controls the nature of the obligation. The court concluded, therefore, that it was required to look beyond the plain language of the agreement and examine additional evidence on the intent of the parties.

In conducting its inquiry, the bankruptcy court found a number of factors significant. Jessee's ongoing medical requirements and her perceived need to maintain her status in the community were seen as relevant to her claim that support beyond the $1,000.00 a month was intended in the agreement. The court found it particularly significant that the property settlement was secured by a life insurance policy rather than by the traditional mechanism of liens on the real property. Weighing these factors, the bankruptcy court determined that it was the intent of the parties at the time of the agreement that all periodic payments made by Tilley were to be maintenance and support for Jessee and, therefore, non-dischargeable under the Bankruptcy Code.

Tilley appealed the bankruptcy court's determination to the district court. Applying the "clearly...