Hendren v. Evert ( 2003 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS August 6, 2003
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 02-50411
IN THE MATTER OF: ELIZABETH ANN EVERT,
Debtor.
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MARSHA G. MILLIGAN, TRUSTEE;
C. DANIEL ROBERTS & ASSOCIATES P.C.,
Appellants,
versus
ELIZABETH ANN EVERT,
Appellee.
Appeal from the United States District Court
for the Western District of Texas
Before GARWOOD, SMITH and BARKSDALE, Circuit Judges.
GARWOOD, Circuit Judge:
After Elizabeth Ann Evert (Evert) filed for bankruptcy under
Chapter 7 of the Bankruptcy Code, Appellant Marsha G. Milligan,
Trustee, (Milligan) was appointed trustee. Milligan objected to
Evert’s attempt to claim as exempt property under 11 U.S.C. §
522(d)(10)(D) a $65,000 promissory note payable to her and executed
by her former husband which she had received pursuant to their
divorce. The bankruptcy court found that the promissory note
constituted “alimony, support, or separate maintenance” and
therefore could be shielded from Evert's creditors under section
522(d)(10)(D). The district court affirmed. We reverse.
Proceedings Below
Evert filed a voluntary petition for relief under Chapter 7 of
the Bankruptcy Code on March 26, 2001, and filed her amended
Schedules B & C on June 4, 2001. The Chapter 7 Trustee timely
filed an objection to the Debtor's amended schedules. On June 5,
2001, Evert moved the bankruptcy court to convert her case to a
Chapter 13 bankruptcy. The Chapter 13 Trustee timely filed a
notice of intent to prosecute the Chapter 7 Trustee's objection.
After conducting a hearing and reviewing the record, the bankruptcy
court entered an Order on October 31, 2001, denying the Trustee's
Objection to Debtor's Amended Exemptions, as well as a Memorandum
Opinion. After the Trustee timely filed a notice of appeal, the
district court on April 2, 2002, affirmed the bankruptcy court.
Milligan timely filed a notice of appeal to this court.
Facts
On April 15, 1999, Evert and her then husband Keith Colvin
2
were divorced pursuant to a judgment of divorce signed and entered
that day by the 345th Judicial District Court of Travis County,
Texas. The judgment is also signed “Agreed and Approved as to Form
And Substance” by Evert and Colvin, is entitled “Agreed Final
Decree of Divorce,” and includes the recitation that “[t]he parties
have agreed to the terms of this Decree and further stipulate that
the provisions for division of assets and liabilities are
contractual.” The decree is divided into sections.
In the section entitled “Child Support” Colvin is ordered to
pay Evert $1,000 a month for the support of their two minor
children (born in 1986 and 1988) until they become 18 (or die or
marry), with provision for reduction to $800 a month when there is
only one eligible child. The child support payments are ordered
“made through the Travis County Domestic Relations Office . . . and
then remitted by that agency to” Evert “for support of the
children.” Colvin is also ordered to provide and pay for health
insurance covering the children.
A subsequent section of the decree divides the assets and
liabilities of the parties. This section begins by stating:
“THE COURT finds the following provisions regarding
the parties’ assets and liabilities are contractual and
enforceable as a contract. IT IS ORDERED AND DECREED
that the estate of the parties, including both separate
and community property, be divided as follows:
Petitioner [Evert] is awarded the following as
Petitioner’s sole and separate property, and Respondent
[Colvin] is hereby divested of all right, title and
interest, in and to such property.”
3
Thereafter nine separately numbered paragraphs describe the various
assets awarded Evert including cemetery lots, the couple’s former
house, furniture and fixtures, and one of their automobiles. The
last item in this list is the $65,000 note in question, described
in the list’s numbered paragraph 9 as follows:
“A promissory note executed by Respondent, payable to
Petitioner in the original principal sum of $65,000.00
bearing interest at 8% per annum and payable in sixty
(60) equal monthly installments of $1,317.97 each,
including interest, with the first installment due and
payable on May 1, 1999, and a like installment of
$1,317.97 due on the 1st day of each succeeding
thereafter until the note is paid in full.”
Immediately thereafter, the decree states:
“Respondent [Colvin] is awarded the following as
Respondent’s sole and separate property, and Petitioner
[Evert] is hereby divested of all right, title, interest,
and claim in and to such property.”
There then follow seven numbered paragraphs describing the property
awarded Colvin, including a described automobile and “[a]ny and all
interest in and to the business known as Colvin Automotive, Inc.”
The decree next provides that, “as a part of the division of the
estate of the parties,” Evert shall pay and hold Colvin harmless
from certain described debts, including the first and second liens
on their house awarded to Evert, and Colvin shall pay and hold
Evert harmless from certain described debts including “[a]ny and
all charges, debts, liens or other obligations arising from or
secured by property awarded to Respondent [Colvin] herein.”
A still later section of the decree, entitled “Post-Divorce
4
Spousal Support (Alimony) Agreement,” provides in relevant part as
follows:
“Post-Divorce Spousal Support (Alimony) Agreement
1. Purpose and Intent of Agreement. It is the
mutual desire of the parties that . . . COLVIN
(“Husband”) provide a continuing measure of support for
[EVERT] (“Wife”) after divorce. These support payments
are intended to qualify as alimony as that term is
defined in Section 71 of the Internal Revenue Code of
1954 (“the Code”), as amended, and are intended to be
included in the gross income of Wife under Section 71 of
the Code as amended, and deductible by Husband under
Section 215 of the Code as amended. It shall include
such payments in her gross income for federal and state
income tax reporting purposes, and Husband shall deduct
said payments from his gross income for federal and state
income tax reporting purposes.
2. Amount of Alimony. Husband shall pay to Wife
monthly payments of alimony in the amount of $1,350.00
per month, with the first payment in the amount of
$1,350.00 being due and payable on May 1, 1999, and with
like payment in the amount of $1,350.00 being due and
payable on the same day of each month thereafter, until
April 1, 2004, with the last payment being due and
payable on said date, or on the date Wife dies, whichever
date is earlier in time.
3. Contractual Obligations. This support obligation
undertaken by Husband is contractual in nature and is not
an obligation imposed by order or decree of the Court.
4. Termination. The amount of monthly alimony not
yet accrued and then payable under this article shall
terminate with the April 1, 2004, payment, or on the date
Wife, dies, whichever date is earlier in time. There is
no liability for Husband to make any payments accruing
after the death of Wife, and there is no liability for
Husband to make any payment in cash or property as a
substitute for such payments accruing after the death of
Wife.
. . .
6. Nontransferability. Neither the agreement to
5
pay alimony nor the right to receive alimony under this
Article is assignable or transferable.”
Colvin executed and delivered the $65,000 note to Evert and
thereafter made the monthly payments called for thereby.
Evert declared bankruptcy on March 26, 2001. Milligan argued
that the $65,000 promissory note should be part of the debtor's
estate while Evert maintained the note is “support” exempt under 11
U.S.C. § 522(d)(10)(D).
Standard of Review
Findings of fact are reviewed under the “clearly erroneous”
standard; conclusions of law are subject to de novo review. Matter
of Midland Indus. Service Corp., 35 F.3d 164, 165 (5th Cir. 1994).
Discussion
By virtue of 11 U.S.C. § 522(d)(10)(D) a debtor may exempt
from his or her bankruptcy estate “(10) the debtor’s right to
receive . . . (D) alimony, support, or separate maintenance, to the
extent reasonably necessary for the support of the debtor and any
dependent of the debtor.”1 The dispute in this case solely
1
Section 522, entitled “Exemptions,” provides in part as follows:
“(b) Notwithstanding section 541 of this title, an individual debtor may exempt
from property of the estate the property listed in either paragraph (1) or, in the
alternative, paragraph (2) of this subsection. . . . Such property is –
(1) property that is specified under subsection (d) of this section, unless the
State law that is applicable to the debtor under paragraph (2)(A) of this
subsection specifically does not so authorize; or, in the alternative,
(2) . . .
...
(d) The following property may be exempted under subsection (b)(1) of this
6
involves whether the $65,000 note represents “alimony, support, or
separate maintenance,” and does not involve whether at the time of
Evert’s bankruptcy the note payments were reasonably necessary for
the support of Evert and her dependents.
Because there is little precedent concerning what qualifies as
“alimony, support, or separate maintenance” under 11 U.S.C. §
section:
(1) . . .
...
(10) The debtor’s right to receive –
(A) A social security benefit, unemployment
compensation, or a local public assistance benefit;
(B) a veterans’ benefit;
(C) a disability, illness, or unemployment benefit;
(D) alimony, support, or separate maintenance, to
the extent reasonably necessary for the support of
the debtor and any dependent of the debtor;
(E) a payment under a stock bonus, pension, profit-
sharing, annuity, or similar plan or contract on
account of illness, disability, death, age, or length of
service, to the extent reasonably necessary for the
support of the debtor and any dependent of the
debtor, unless –
(I) such plan or contract was
established by or under the auspices
of an insider that employed the
debtor at the time the debtor’s rights
under such plan or contract arose;
(ii) such payment is on account of
age or length of service; and
(iii) such plan or contract does not
qualify under section 401(a), 403(a),
403(b), or 408 of the Internal
Revenue Code of 1986.
(11) . . .” (emphasis added).
7
522(d)(10)(D), the bankruptcy court and district court relied on
precedent interpreting 11 U.S.C. § 523(a)(5). While section 522
governs exemptions of various assets and rights to income of the
debtor from the debtor’s bankruptcy estate, section 523 (entitled
“Exceptions to discharge”) governs what debts of the debtor may be
discharged in bankruptcy. 11 U.S.C. § 523(a) provides in relevant
part that:
“A discharge . . . does not discharge an individual
debtor from any debt –
(1) . . .
. . .
(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 [42 USCS
§ 608(a)(3)], 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;
(6) . . .”
The district and bankruptcy courts in this circuit have
generally looked to In Re Joseph, 16 F.3d 86 (5th Cir. 1994), and
8
In Re Dennis, 25 F.3d 276 (5th Cir. 1994), for their interpretation
of 11 U.S.C. § 523(a)(5) and applied that standard to interpreting
11 U.S.C. § 522(d)(10)(D). In Dennis and Joseph, it is stated that
in interpreting section 523(a)(5) courts will generally look beyond
the labels which state courts - and even parties themselves - give
obligations which debtors seek to have discharged. This court in
Dennis and Joseph held that a nonexclusive list of factors that
should be considered in determining whether a Texas divorce related
obligation constitutes alimony, support, or maintenance is: “the
parties' disparity in earning capacity, their relative business
opportunities, their physical condition, their educational
background, their probable future financial needs, and the benefits
each party would have received had the marriage continued.” In Re
Dennis, 25 F.3d at 279; In re Joseph, 16 F.3d at 88.
These factors were first outlined in In Re Nunnally, 506 F.2d
1024, 1027 (5th Cir. 1975). In Nunnally, this court held that the
obligation to make a lump sum payment and pay attorney's fees of
the former spouse contained in a divorce settlement were alimony or
support and therefore were not dischageable. Noting that Texas did
not have alimony at the time, this court in Nunnally observed that
the equitable distribution of property is accordingly often used in
Texas as a substitute to compensate for the difference in earnings
between husband and wife. The Nunnally court explained:
“Although there is no permanent alimony in Texas, Francis
9
v. Francis, 412 S.W.2d 29, 32 (Tex. 1967), the divorce
court is authorized at the time of the divorce to divide
the separate and community property between the spouses
in whatever manner the court deems equitable and just.
Tex. Family Code Ann. § 3.63. Factors which the Texas
courts may take into account in making the division and
award ‘include the disparity of the earning power of the
parties, as well as their business opportunities, . . .
the physical condition of the parties, probable future
need for support, and educational background; . . . [t]he
fault in breaking up the marriage and the benefits
innocent spouse would have received from a continuation
of the marriage . . ..’ Cooper v. Cooper, 513 S.W.2d
229, 233-234 (Tex.Civ.App.--Houston [1st Dist.] 1974,
writ history unknown) (emphasis added). See also Keton
v. Clark, 67 S.W.2d 437 (Tex.Civ.App.--Waco 1933, writ
ref'd). Thus, it is clear support in the future can play
a significant role in the divorce court's property
division and that what may appear to be a mere division
of assets may in fact, under a Texas decree, contain a
substantial element of alimony-substitute, support or
maintenance, however termed.”
Nunnally at 1026-27 (emphasis added).
In Matter of Benich, 811 F.2d 943 (5th Cir. 1987), this court
applied those very same criteria in determining that payments made
by a man to his former wife under a Texas property settlement
agreement were, despite the title of the agreement, in reality
support and therefore could not be discharged in bankruptcy. In
Dennis and Joseph, this court used the same list of factors
enumerated in Nunnally and Benich in making this determination
except the fault in breaking up the marriage, which is not
mentioned in Dennis or Joseph. In effect, this court has applied
the factors Texas courts use in determining what is an equitable
division of property upon divorce to the question of what
10
constitutes alimony, support, or maintenance under section
523(a)(5).
Applying the Nunnally factors, including fault in breaking up
the marriage, the bankruptcy court here concluded that the $65,000
promissory note payments were support under section 522(d)(10)(D).
The bankruptcy court emphasized that Evert lacks a college degree
or vocational training, had not worked outside the home since 1986,
and has a monthly mortgage payment on the house she received of
approximately $1,900. The record indicates that the couple's
income while married was almost exclusively from Colvin's
automobile business built during their marriage, with which Evert
had helped out some. That business had produced between $6,000 and
$8,000 of income per month. The lower courts cited these facts as
illustrative of the difference in the parties' earning capacity,
business opportunities, need for future support, and the benefits
they would have received had the marriage continued.
The bankruptcy court, however, made one important clearly
erroneous finding of historic fact. The court stated, “It is also
instructive that under the Divorce Decree, although the payments
under the Note are labelled as 'property settlement,' they are to
last as long as the Alimony payments. Both payments cease on the
earlier of five years or the Debtor's death.” Milligan correctly
asserts that this finding is clearly erroneous, as the Decree
actually states that the note payments are to continue “until the
11
note is paid in full.” Therefore, one of the factors that the
bankruptcy court cited for construing the note obligation in
question as alimony actually points toward classifying it as part
of the property settlement.
Milligan also argues that the bankruptcy court applied the
wrong law because the Nunnally factors used to define alimony,
support, and maintenance in the discharge context are not
applicable to the interpretation of the exemption under 11 U.S.C.
§ 522(d)(10)(D), especially when, as Milligan asserts in the case
here, the parties' intent at the time of their agreement is clear
and unambiguous. Milligan observes that the record in the case sub
judice shows: 1) under one section of the decree Evert receives a
monthly payment of $1,000 for child support, 2) another, separate
section of the decree additionally provides for the note from
Colvin to Evert, 3) under still another, separate section of the
decree Evert additionally receives a monthly payment of $1,350 for
alimony, 4) the payments under the note do not cease on the
Debtor's remarriage or death, but the alimony payments expressly
cease on Evert's death, 5) the note may be transferred or assigned
by the Debtor while the alimony payments are expressly made non-
assignable and non-transferrable, 6) the note is not subject to
being modified upon any subsequent change of circumstances of the
parties, and 7) the note closely equalized the division of the two
major components of the parties' marital property. It is
12
undisputed that the note at issue was in the section of the
agreement expressly dealing with the property division and that a
wholly separate section was expressly devoted to alimony.
The threshold question is whether the same approach this
circuit has used for determining what constitutes alimony in the
context of dischargeability under 11 U.S.C. § 523(a)(5) should
apply to exemptions under 11 U.S.C. § 522(d)(10)(D). As we have
not heretofore considered this question, the bankruptcy court
relied on In re Ellertson, 252 Bankr. 831, 833 (Bankr. S.D. Fla.
2000) (“This Court believes that, for the purposes of both
dischargeability and exemptions, a bankruptcy court may look behind
a label applied by a state court to ascertain the true nature of an
award”); In re Sheffield, 212 Bankr. 1019, 1020-21 (Bankr. M.D. Fla
1997) (“Logic dictates that what constitutes alimony for purposes
of Section 523(a)(5), and what constitutes alimony for purposes of
Section 522(d)(10)(D), should involve the same criteria”); and In
the Matter of Joseph, 157 Bankr. 514, 518 (Bankr D. Conn. 1993)
(“There is no readily apparent reason why a bankruptcy court should
use different standards in reviewing alimony awards in the
nondischargeability instance and in the exemption instance. The
overarching principle is that the primacy of the bankruptcy laws
may not be subverted by labels placed on obligations by the parties
themselves or by nonbankruptcy courts”).
In In re Harbaugh, 257 Bankr. 485, 489 (E.D. Mich. 2001), the
13
court concluded that it “is unable to find any empirical basis upon
which to reach a definite conclusion as to whether Congress
intended for the alimony provisions of sections 522 and 523 to
directly parallel one another.” The Harbaugh court concluded that
section 522 exempts any payments from the bankruptcy estate that 1)
are intended by the parties or the state court to support a spouse
and 2) are, in the judgment of the bankruptcy court, reasonably
necessary for such purpose. Harbaugh at 491. Harbaugh also held
that the labels that the parties or nonbankruptcy courts place on
an obligation are not dispositive and should not be allowed to
subvert the bankruptcy laws. The bankruptcy court here also relied
on this circuit's holdings recognizing Texas' courts use of a
liberal construction when interpreting state exemption statutes.
Matter of Walden, 12 F.3d 445 (5th Cir. 1994); Matter of Volpe, 943
F.2d 1451 (5th Cir. 1991). “A review of the legislative history of
11 U.S.C. § 522 . . . reveals no intention on the part of Congress
to depart from the well-accepted general approach to construing
exemption statutes liberally in favor of debtors.” In re Coleman,
5 Bankr. 76, 79 (Bankr. M.D. Tenn. 1980).
The bankruptcy court correctly observed that nearly all the
courts that have considered the question have determined that the
same interpretation given to 11 U.S.C. § 523(a)(5) should also be
applied to 11 U.S.C. § 522(d)(10)(D). We note, however, there are
several arguments against this.
14
First, qualifying language that exists in 11 U.S.C. §
523(a)(5) is not found in 11 U.S.C. § 522(d)(10)(D). A phrase that
is present in section 523(a)(5) but is absent from section
522(d)(10)(D) is “unless such liability is actually in the nature
of alimony, maintenance, or support.” The statutes may also differ
somewhat in their underlying purpose. A liberal or broad
interpretation of “alimony” may be particularly appropriate under
section 523(a)(5) because of the desire to avoid harming someone
who is completely innocent and depends on their former spouse for
their support (and often for their children's support as well)
because of the bankruptcy of that former spouse. Moreover, there
is an incentive on the part of the debtor in the dischargeability
context to try to characterize the obligation as something other
than support so it can be discharged. In contrast, in the section
522(d)(10)(D) context, the person seeking the exemption is the
individual who has taken bankruptcy so there is an arguable
element of fault and there is no incentive to hurt an innocent
third party, except perhaps the creditor. In the section 523(a)(5)
context, the need to look beyond the labels may stem from the fact
that the obligated party has an incentive to craft the agreement to
disguise support as part of a property settlement so it is
dischageable. However, in the exemption context of section
522(d)(10)(D), the incentive would be with the obligee party
receiving what is actually a property settlement to disguise it as
15
support so it is sheltered in bankruptcy. We also note that in the
section 523(a)(5) context the interests of the debtor and former
spouse in the proceedings before the bankruptcy court are virtually
always adverse, while in the section 522(d)(10)(D) context they are
likely to be aligned against the third party creditor. Therefore,
in the latter context it becomes more than normally questionable to
rely on oral testimony of the spouse and former spouse as to their
prior subjective intent with respect to the character of the
indebtedness where that testimony runs counter to the clear purport
of the relevant documents, which were likely all that would have
been available to a third party extending credit.
We also observe that in 1994 Congress amended section 523, but
without a parallel amendment to section 522, creating 11 U.S.C. §
523(a)(15), which precludes discharge of obligations:
“(15) not of the kind described in paragraph (5) that is
incurred by the debtor in the course of a divorce or
separation or in connection with a separation agreement,
divorce decree or other order of a court of record, a
determination made in accordance with State or
territorial law by a governmental unit unless–
(A) the debtor does not have the ability to
pay such debt from income or property of the
debtor not reasonably necessary to be expended
for the maintenance or support of the debtor
or a dependent of the debtor and, if the
debtor is engaged in a business, for the
payment of expenditures necessary for the
continuation, preservation, and operation of
such business; or
(B) discharging such debt would result in a
benefit to the debtor that outweighs the
detrimental consequences to a spouse, former
spouse, or child of the debtor.”
16
The fact that Congress saw a need to add this provision to
section 523 strongly suggests that the language in section 523
(a)(5) does not cover obligations incurred as part of a property
division incident to divorce. The existence of this new provision
suggests Congress envisioned that there would be other types of
payments authorized in divorce agreements that would not qualify as
alimony, maintenance, or support. That a parallel to this
provision was not also appended to section 522 may also suggest a
congressional intent not to have a scheme of exemptions as broad as
the scheme of discharge disallowance in respect to obligations to
former spouses arising in the divorce context.
We do not find it necessary to decide today whether the
Nunnally factors that apply to section 523(a)(5) should also be
applied to section 522(d)(10)(D), or indeed the weight to be
assigned these factors given that Texas now has an alimony statute
or, as is the case here, where the agreement being interpreted was
reached through settlement, thereby making the state limitations on
alimony largely irrelevant.2 We hold only that, at least for
purposes of section 522(d)(10)(D), where in the agreed divorce
2
In 1997 Texas amended its statutes to for the first time provide for court ordered post-
divorce spousal maintenance (in a relatively narrow range of circumstances) and also to provide
for the first time for enforcement by contempt of contractual agreements between the divorcing
spouses, approved by the divorce court, for post-divorce spousal maintenance payments. These
provisions are now codified at §§ 8.051-8.059, Texas Family Code. A Texas divorce court may
approve an agreement of the parties and incorporate it in the decree if it finds the agreement “just
and right.” Texas Family Code § 7.006(b).
17
decree there is 1) also a meaningful separate alimony provision, 2)
the obligation in question is described as being part of the
property division, 3) the label given to the obligation in question
is matched by its actual characteristics, and 4) the evidence does
not suggest the parties conspired to disguise the true nature of
the obligation in order to subvert the bankruptcy or tax laws,
there is no ambiguity necessitating the use of the Nunnally factors
to essentially work backwards to determine the nature of the
obligation. Because we conclude that that is the situation here,
we reverse.
Under bankruptcy law, the intent of the parties at the time a
separation agreement is executed determines whether a payment
pursuant to the agreement is alimony, support or maintenance within
the meaning of section 523(a)(5). See generally In re Davidson,
947 F.2d 1294, 1296-97 (5th Cir. 1991); In re Gianakas, 917 F.2d
759, 762 (3d Cir. 1990). A written agreement between the parties
is persuasive evidence of their intent. Tilley v. Jessee, 789 F.2d
1074, 1077 (4th Cir. 1986). Thus, if the agreement between the
parties clearly shows that the parties intended the particular debt
in question to reflect either support or a property settlement,
then that characterization will normally control. In re Yeates, 807
F.2d 878 (10th Cir. 1986). On the other hand, if the agreement is
ambiguous, then the court must determine the parties' intentions by
looking to extrinsic evidence. Id. If an agreement fails to
18
provide explicitly for spousal support, a court may presume that a
so-called "property settlement" is intended for support when the
circumstances of the case indicate that the recipient spouse needs
support. Stout v. Prussel, 691 F.2d 859, 861 (9 Cir. 1982); Shaver
v. Shaver, 736 F.2d 1314, 1316 (9th Cir. 1984) (J.M. Wisdom, J.,
sitting by designation).
Yeates, Tilley, Stout, and Shaver are instructive. Here, both
the labels given to the obligation at issue in the agreement and
the substantive characteristics of the obligation clearly reflect
it is part of a property settlement. Furthermore, because there is
an explicit, separate provision for nontrivial alimony in the
agreement, there is no basis for judicially refashioning the note
contained in the property settlement portion of the agreement as
alimony. In Yeates, the court noted, “The agreement between the
parties in the present case does not provide clear evidence of
intent. Unlike the agreement in Tilley, it does not clearly
segregate the property settlement provisions from the alimony
provisions.” Yeates at 878-79. This is indicative of the extent
to which the existence of separate provisions is probative of the
parties' intent at the time of the agreement.
In addition to the separate provisions for alimony and
property division, there are several other substantive
characteristics of the note that reinforce its designation as part
of the property division. First, payments under the note do not
19
cease on the Debtor's death while the alimony payments do. One
hallmark of a support obligation is that it terminates upon death.
In re Ferradino, 14 Bankr. 196, 198 (Bankr. D.Nev. 1981); In re
Ingram, 5 Bankr. 232, 235 (Bankr. N.D.Ga. 1980). It is obvious that
a payment solely to provide maintenance and support would no longer
be warranted after the death of the beneficiary. Also, while the
alimony payments in the agreement are explicitly non-assignable and
non-transferrable, there is no provision limiting the ability of
Evert to dispose of the note (and it is hence assignable as a
matter of law). In addition, the note is not subject to being
modified upon any subsequent change of circumstances of the
parties. One characteristic indicative of alimony is that it is
normally subject to modification if the beneficiary no longer needs
the support while one sign that an obligation is part of a property
division is that it is not altered by a change in the circumstances
of the beneficiary. In re Benjamin, 136 Bankr. 574, 578 (Bankr.
S.D. Fla. 1992).
Finally, the note equalized the division of the two major
components of the parties' marital property. The bankruptcy court
found that the testimony indicated Colvin had equity in his
business of $230,000 while there was approximately $100,000 equity
in the home. Therefore, the note in the principal amount of
$65,000 was exactly half of the $130,000 difference, thereby
equalizing the property division. While there was some conflicting
20
evidence in the bankruptcy court on the value of the business, the
bankruptcy court concluded the equity in it was $230,000 and Evert
does not challenge that finding on appeal. Similarly, the court in
Benjamin cited evidence that a payment to a spouse was designed to
offset the other spouse's interest in a business as being one
factor indicating the payment was part of the property division
rather than alimony. Benjamin at 578.
The only characteristic of the note that would suggest it
would be properly classified as alimony is that it provides
payments over time, rather than one lump sum payment. Bowsman v.
Morrell (In re Bowsman), 128 Bankr. 485, 487 (Bankr. M.D. Fla.
1991). However, this factor is not dispositive and, where there is
evidence the obligation, bearing (as it does here) a realistic rate
of interest, was spread out over time for legitimate reasons, such
as for convenience, it tends to be a factor favoring classification
of the obligation as part of the property settlement. In re
Brackett, 259 Bankr. 768, 775 (Bankr. M.D. Fla. 2001). Here,
Colvin’s undisputed testimony is that the reason for spreading out
the payments in the form of the note instead of making a lump sum
payment was convenience. The testimony of the parties in this case
as to their intent is not entirely conclusive, but it provides some
reinforcement for the conclusion that the note was part of the
property settlement. Colvin testified that, from his perspective,
the purpose of the note was to equalize the property distribution
21
because the house Evert received was worth significantly less than
the business he kept. While Colvin also stated that he thought
that Evert needed the payments on the note for her living expenses,
this of itself is not meaningfully probative of his relevant intent
at the time of the agreement. Under the clear language of section
522(d)(10)(D), the obligation must first be determined to be
“alimony, support, or separate maintenance” and, if so, then it is
exempt “to the extent reasonably necessary for the support of the
debtor and any dependent of the debtor.” Therefore, Colvin's
testimony and other evidence indicating Evert needs the payments on
the note to pay her expenses has ultimate relevant only if the note
constitutes “alimony, support, or separate maintenance.”
Colvin's testimony that the intent of the note was to equalize
the property division is particularly credible in light of his
statement that he would prefer that Evert be able to exempt the
note from the bankruptcy proceedings since she has custody of his
child. It does not appear that Colvin had any motive to testify
that the note was part of the property division when it was not.3
For her part, Evert testified that she only “skimmed” the
agreed judgment. She stated that she knew that it provided for
spousal support, child support, and contained this note, but did
3
In addition, in order for alimony to be deductible by the payor under federal income tax
laws, such payments must terminate upon the payee's death. 26 U.S.C. § 71. It did not serve
Colvin's financial interest in terms of his federal tax burden to classify the note as part of the
property division.
22
not attend to the characteristics of the note. Evert further
testified that she did not have an attorney in the divorce and
largely trusted and deferred to Colvin with regard to the terms of
the agreement. In short, it appears Colvin's clear intent was that
the note was, as the agreement states, to be part of the property
division while Evert did not form an intent as to the note.
Therefore, the testimony of the parties to the agreement partially
supports the conclusion that the note was part of the property
division and does not demonstrate either party had an intent
contrary to the written agreement, which provides “persuasive
evidence of intent,” Yeates at 878, and "erected a substantial
obstacle” for the party challenging its express terms to overcome,
Tilley at 1078. There is no evidence that the parties sought to
disguise the true nature of the note or other obligations in the
agreement in order to subvert the bankruptcy laws or for any other
reason. And there is no evidence that at the time of the divorce
either party anticipated or considered the possibility of going
into bankruptcy.
In sum, the bankruptcy court in this case made an error of law
in prematurely resorting to the Nunnally factors. The Nunnally
factors are, of course, binding law within this circuit at least as
to 11 U.S.C. § 523(a)(5), but we have never applied them in a
situation such as this where the written agreement and divorce
decree in both form and substance clearly establish the nature of
23
the obligation and where there are distinct provisions for
nontrivial alimony and for the property settlement. In contrast,
Nunnally and its progeny have involved the interpretation of Texas
divorce “just and right” divisions before the advent of alimony in
Texas where, by necessity, all obligations ordered were grouped
together as part of the property division.4
As this court has not had the opportunity prior to the case
sub judice to consider a situation where the written agreement in
both form and substance clearly establishes the nature of the
obligation and where there are distinct provisions for nontrivial
alimony and for the property division, we find that Yeates, Tilley,
Stout, and Shaver are persuasive. In the present context, the
approach of those cases provides guidance for divorce courts and
parties entering into divorce agreements and avoids unnecessary
subsequent subjective judicial determinations of extrinsic factors
where the judgment and/or agreement is unambiguous. And, in such
a context the approach we take minimizes the risk that what the
parties and the divorce court unambiguously intended as a division
of property may be recharacterized by the bankruptcy court as
alimony merely because of its determination that in effect the
parties and divorce court should have made or required provision
for an amount of alimony greater than the nontrivial amount thereof
4
Likewise, Harbaugh is inapposite because the court there relied on the fact that the
obligation at issue was classified in the agreement as alimony and terminated upon death, neither
of which is the case here.
24
specifically called for by the decree and the agreement of the
parties.
The bankruptcy court cited this court's decisions in Matter of
Walden, 12 F.3d 445 (5th Cir. 1994), and Matter of Volpe, 943 F.2d
1451 (5th Cir. 1991), recognizing that Texas state courts broadly
construe bankruptcy exemptions to help the debtor and relied on In
re Coleman, 5 Bankr. 76, 79 (Bankr. M.D. Tenn. 1980), for the
proposition that “[a] review of the legislative history of 11
U.S.C. § 522 . . . reveals no intention on the part of Congress to
depart from the well-accepted general approach to construing
exemption statutes liberally in favor of debtors.” However, Walden
and Volpe are not controlling here because here it is the federal
exemption that is at issue. We find it unnecessary to determine
whether this circuit should also liberally construe 11 U.S.C. §
522(d)(10)(D) because, under any reasonable construction, the note
at issue is properly classified as part of the property division.
We think it plain that section 522(d)(10)(D) is not intended to
embrace payments or transfers made simply to equalize the division
of the spouses’ existing property.5 Where, as here, the
unimpeached relevant documents unambiguously reflect that a
particular payment is part of the division of the existing property
5
This is also evidenced by § 523(a)(15) which reflects Congressional recognition that there
are inter-spousal payment obligations arising out of but continuing after divorce which are not
alimony, support or maintenance and which thus do not fall within § 523(a)(5), and, by
implication, do not fall within § 522(d)(10)(D).
25
and that separate provision is made for nontrivial alimony
payments, the former obligation may not be post-hoc recharacterized
in bankruptcy as alimony or support under section 522(d)(10)(D)
simply on the basis of a finding that the obligee spouse also had
need of the former payments for support.
Conclusion
For the foregoing reasons, the bankruptcy court's judgment
that the note at issue constituted spousal support under 11 U.S.C.
§ 522(d)(10)(D), and the district court’s affirmance of that
judgment, are
REVERSED.
26