494 B.R. 786
Bankr. E.D.N.Y.2013Background
- Debtor filed Chapter 7; ex-wife Alisa filed a proof of claim for $211,546.66 as a priority domestic support obligation (DSO) based on Debtor’s contractual obligation to indemnify her for an SBA mortgage encumbering the marital residence.
- Settlement Agreement (incorporated in the divorce judgment) labeled Alisa as waiving maintenance and characterized the Debtor’s obligations as equitable distribution; it also gave Alisa a mortgage on Debtor’s Cape Coral Property as security and a right to foreclose if the SBA lien was not removed.
- At divorce, Alisa had limited disposable income and could not afford to remain in the marital residence absent the Debtor’s agreement to assume/indemnify the SBA loan.
- Rockstone (largest unsecured creditor) moved to disallow or reclassify Alisa’s claim, arguing the Settlement Agreement labels the obligation as property distribution (not support) and limits recovery to foreclosure proceeds on the Cape Coral Property; the chapter 7 trustee partially joined, seeking reclassification to unsecured to the extent foreclosure proceeds satisfy the claim.
- Court analyzed the post-BAPCPA definition of DSO (11 U.S.C. §101(14A)) and considered whether the debt was "owed to or recoverable by" Alisa and whether it was "in the nature of alimony, maintenance, or support," regardless of the Settlement Agreement’s labels.
Issues
| Issue | Alisa's Argument | Rockstone/Trustee's Argument | Held |
|---|---|---|---|
| Whether Debtor’s indemnity for the SBA mortgage is a DSO under §101(14A) | The obligation effectively provides shelter to Alisa; intent and structure show it is support in nature | Settlement Agreement labels it equitable distribution and waives maintenance; recovery limited to security (foreclosure proceeds) | Claim is a DSO; priority under §507(a)(1)(A) denied Motion to disallow/reclassify |
| Whether the court must defer to the Settlement Agreement’s characterization (“without regard” issue) | Court may look beyond labels to substance and parties’ intent at execution | Settlement Agreement’s express waiver and labels control; court should not second-guess parties | Statute requires "without regard" to label; court may determine nature de novo for bankruptcy priority purposes |
| Whether the payee requirement bars DSO treatment because debt was payable to a third party (SBA) | Alisa is "recoverable by" the former spouse under §101(14A)(A); she can enforce indemnity, so payee identity does not bar DSO | Payee is third party (SBA); pre-BAPCPA payee text would preclude DSO absent exception | Post-BAPCPA "owed to or recoverable by" language covers Alisa; Spong-type exception effectively codified |
| Whether recovery must be reduced by foreclosure proceeds and reclassified to unsecured for any deficiency | Alisa concedes claim must be reduced by what she realizes from foreclosure; seeks priority for remaining amount | Trustee seeks reclassification of any deficiency as general unsecured and challenges added fees | Court ruled Claim is a DSO but made no determination of amount; foreclosure proceeds will reduce claim and amount/reclassification issues remain for further resolution |
Key Cases Cited
- Pauley v. Spong (In re Spong), 661 F.2d 6 (2d Cir. 1981) (holds debtor’s obligation to pay third-party fees may be non-dischargeable support where it effectively protects spouse from liability)
- Brody v. Brody (In re Brody), 3 F.3d 35 (2d Cir. 1993) (party intent at time of settlement governs whether obligation is support under bankruptcy law)
- Gianakas v. Gianakas (In re Gianakas), 917 F.2d 759 (3d Cir. 1990) (courts may look to substance over form to determine support nature)
- Johnson (In re Johnson), 397 B.R. 289 (Bankr. M.D.N.C. 2008) (interprets §101(14A) to include obligations recoverable by a spouse for third-party payee situations)
- Sampson v. Sampson (In re Sampson), 997 F.2d 717 (10th Cir. 1993) (obligation to make mortgage payments enabling spouse to remain in home can be support)
- Trump (In re Trump), 309 B.R. 585 (Bankr. D. Kan. 2004) (second-mortgage payment obligations held to be in the nature of support)