Concurrent Jurisdiction to Determine Dischargeability of Domestic Support Obligations
The State Court has concurrent jurisdiction with the Bankruptcy Court to decide whether a debt constitutes a nondischargeable domestic support obligatiaon (“DSO”) under § 523(a) (5) of the Bankruptcy Code. This critical piece of information can save you and your clients unnecessary litigation and frustration. Bankruptcy courts do not appreciate a filing done merely to avoid a marital settlement agreement (“MSA”), final judgment obligation, or DSO and will dismiss a petition for bad faith under proper circumstances. 1
This interaction between the Bankruptcy Court and the State Court can be exemplified in a case study of In re Mark Zhuk, Case Number 17-12235-BKC-RAM, a relentless ongoing Chapter 13 proceeding, pursued by the debtor-former husband.
Once Upon A Time
Dr. and Ms. Zhuk entered into an MSA in which the Debtor-former husband, Dr. Zhuk, (the “FH”) was to pay his former wife, Ms. Zhuk, (the “FW”) $520,000 in payments over time as alimony and child support. The FH did not pay the 4th installment. The FW filed for contempt and in response the FH filed a Chapter 7 bankruptcy petition the day before the scheduled contempt hearing, but thereafter converted the case to Chapter 13. Nevertheless, the State Court conducted a full day contempt hearing (one of the attorneys advised the State Court that the automatic stay did not apply to a contempt hearing) and the State Court found the FH in contempt.
On October 27, 2017, the Bankruptcy Court issued a detailed Abstention Order and Order of Dismissal of the FH’s bankruptcy (the “October Opinion”), 2 where the Bankruptcy Court decided that the contempt order entered by the State Court was void because the contempt hearing was conducted while the automatic stay was in effect, even though the Final Judgment was entered after the dismissal of the Chapter 7 and before the refiled Chapter 13 Petition. The Bankruptcy Court also ruled that it would abstain from hearing whether the debt under the MSA was nondischargeable and returned the case to the State Court to make that determination. Case law required the State Court to follow “federal family law” to make this determination (although there is no actual “federal family law”). 3
The Contempt Hearing and Alimony
The State Court conducted the hearing and after considering of the applicable case law, including various factors, and issued a detailed 13-page opinion thereon. 4 Factors that the courts review to determine whether an award is alimony or support include the following 5 :
1. Any disparity in the parties earning capacity
2. Parties’ relative business or employment opportunities
3. Parties’ physical condition
4. Parties’ education background
5. Parties’ probable future financial needs
6. Benefits that each party would have received if the marriage had continued
7. The agreement’s language
8. The parties’ financial positions when the agreement was made
9. The amount of the division
10. Whether the obligation ends upon death or remarriage of the beneficiary
11. The frequency and number of payments
12. Whether the agreement waives other support rights
13. Whether the obligation can be modified or enforced in state court
14. How the obligation is treated for tax purposes
These factors are very similar to both the Florida alimony statute (Fla. Stat. § 61.08), which sets forth the types of alimony and factors the court must consider to award alimony, and the Equitable Distribution statute (Fla. Stat. § 61.075), which is used to divide the assets and liabilities of the parties. Under § 523(a)(5), a DSO is not dischargeable if it is alimony, support or property settlement. However under § 523(a) (15), a property settlement/division is subject to discharge in a Chapter 13 plan which is why the FH ultimately filed under that chapter. A dischargeability complaint § 523(a)(15) can only be filed in the bankruptcy court.
However, Florida statutes and bankruptcy discharge can be confusing because sometimes an equitable distribution operates as a form of support since it may generate income or can be distributed to the party who needs alimony so that s/he can sell it for income. Nevertheless, after applying the foregoing factors, the State Court decided that the payments were intended to be alimony and in the nature of support, and therefore constituted a nondischargeable DSO.
Bankruptcy Court Redux and Attorneys’ fees
The case returned to the Bankruptcy Court where Judge Mark entered the next Order (the “Claim Objection Order”) which overruled the FH’s objection to claim because the State Court had already determined that his DSO was non dischargeable. The FH argued that he owed only $250,000 of the $289,436 claim. Consequently, the Bankruptcy Court returned that portion of the claim to the State Court to determine how much of the claim the FH owed.
As part of the Claim Objection Order, the Bankruptcy Court also granted the FW stay relief to return to the State Court to seek an award of attorneys’ fees and costs, and reserved jurisdiction for the Bankruptcy Court to determine the dischargeability of any attorneys’ fees awarded.
Generally, attorneys’ fees awarded under Fla. Stat. § 61.16 in a marital matter are nondischargeable.[i] Florida statutes and cases make clear that § 61.16 fees are based upon need and ability to pay and are considered a support item. However attorneys’ fees awarded as a sanction can be discharged as they are not in the nature of support.[ii]
Where Are The Parties Now?
While the attorneys’ fees issue is still pending before the State Court, the FH filed a 7th Amended Plan. The FW filed an Objection to Confirmation of Plan and a Motion to Dismiss for Cause, both of which motions were set for a March 2019 hearing before the Bankruptcy Court. The FW argued that the FH filed bankruptcy simply to avoid paying alimony and that the FH avoided making those payments for over two years.
The FH’s plan proposed to pay the FW over five (5) years at a minimal monthly amount with a substantial balloon in the fifth year. The FW argued that the plan was not feasible and filed in bad faith. The FW further argued that the bankruptcy case should be dismissed entirely and the matter returned to the State Court that is more familiar with the parties and previously found FH in contempt.
Shortly before the March 2019 hearings scheduled in front of the Bankruptcy Court, the FH voluntarily dismissed his Chapter 13 case. So what did he accomplish in these two years of litigation? He still owes the DSO and now he owes an increased amount to his former wife.
What Can We Learn from this Case?
1. Don’t ever mislead a trial court judge! In this case, incorrect information to the State Court judge resulted in a void judgment after a full day evidentiary hearing. What a terrible waste of resources and money for both parties. Although the FW convinced the State Court that the FH had the ability to pay and was in contempt for willfully not paying, this order was set aside as void.
2. If a hearing is held in violation of the bankruptcy automatic stay, even if the Order is entered after the bankruptcy is dismissed and therefore there is no stay in effect, the Order is still void.
3. In making the decision as to which court should decide whether an MSA provision or final judgment award is a DSO and therefore non-dischargeable, consider whether there has been a state court finding that noncompliance with a payment provision is contempt of court. This should help you decide where to have a determination of dischargeability hearing. Under Florida law, only support obligations can be the subject of contempt proceedings. Property settlements cannot be enforced by contempt.[iii] If the State Court judge has previously found contempt then it is likely that s/he will find that the obligation is a DSO. Under those circumstances perhaps filing in Bankruptcy Court would be a better choice for the debtor. But remember, both courts look at the language in the Final Judgment or agreement and consider the intention of the parties.
4. Abstention is not necessarily the choice of Bankruptcy Courts, however the facts of the case are significant. How much work has the State Court done on the case? Is there an appearance of forum shopping by the debtor?
5. Even if the issue is to be determined by State Court judge, s/he will still have to decide it in accordance with federal law.
6. Reminder: if an alimony award is determined to be a property settlement award or an equitable distribution property award, it will not be a DSO and therefore under a Chapter 13 plan it will be treated as an general unsecured debt and dischargeable in whatever Chapter 13 plan is approved by the Bankruptcy Court (so it could be a 20% payment). This 20% payment must be fully paid under the Chapter 13 plan. Under Chapter 7 and Chapter 11, all obligations arising out of a dissolution judgment or agreement are excepted from discharge whether the obligation is a DSO or equitable distribution.[iv] However, the DSO obligation is entitled to priority in the distribution of funds by the chapter 7 trustee.
7. Compare bankruptcy schedules (which includes a list of debts, assets, and schedules of income and expenses) with the family law financial affidavit (which also includes debts, assets and income) – especially in connection with contempt proceedings. (Remember to advise your client that these documents, whether in Bankruptcy or State Court, are filed under oath).
Conclusion
Be a good lawyer and counselor. Dissolution proceedings are difficult enough for both parties regardless of who “prevails”. No one in a family dispute wins. Prolonging litigation is expensive, both emotionally, physically, and financially. The Zhuk case has gone through unnecessary court proceedings. And what has been accomplished by the Debtor? After a substantial amount of time and expense in the bankruptcy court, he has only increased his nondischargeable support obligation.
If your advice to a client depends on an area of law in which you do not have expertise, make friends with a colleague who practices family law to check your instincts. If you are in doubt, you and your client should consult with family law counsel. Try to avoid litigating in two courts.
1 See for example In re Moog, 159 B.R. 357 (Bankr. S.D. Fla. 1993); In re Bandini, 165 B.R. 317 (Bankr. S.D. Fla. 1994).
2 In re Zhuk, 576 B.R. 273 (Bankr. S.D. Fla. 2017).
3 Cummings v Cummings, 244 F.3d 1263 (11th Cir. 2001).
4 Harrell v. Sharp (In re Harrell) F.2d 902(11th Cir. 1985); Strickland v. Strickland, 90 F.3d 444 (11th Cir. 1996).
5 In re Fussell, 303 B.R 539 (S.D. Ga. 2003); In re Benson, 441 Fed. Appx. 650 (11th Cir. 2011).
6 See Strickland, supra n. 4.
7 In re Lopez, 405 B.R. 382 (Bankr. S.D. Fla. 2009).
8 Farghali v. Farghali, 187 So.3d 338 (Fla. 4th DCA 2016); Randall v. Randall, 948 So.2d 71 (Fla. 3d DCA 2007).
9 11 U.S.C. § 523(a)(15).
