McGrath v. PearsonMcGrath v. Pearson
This matter comes before the Court on the Complaint filed by Mary V. McGrath (“Mary”) and Matthew S. Pearson (“Matthew” and collectively, “Plaintiffs”), by counsel, and the Response thereto and related Memorandum filed by Jennifer M. Pearson (“Debtor”), by counsel. The events and related arguments prompting this action stem from a separation agreement between the Debtor
Jurisdiction
This Court has jurisdiction pursuant to
Factual Background
I. History of the Case Prior to the Litigation
The Debtor is the mother of Mary and Matthew, the Plaintiffs in this case. The Debtor was previously married to the Plaintiffs’ father, Edward S. Pearson, III (“Edward”). Edward and the Debtor were legally divorced on November 8, 2010 when the Circuit Court for the City of
In the fall of 2011, Mary began college. Edward—who the parties testified struggled with depression—passed away on March 8, 2012 during Mary’s freshman year of college. Pls.’ Ex. 4. On March 31, 2012, the Debtor completed the application with Prudential to obtain the $200,000.00 in life insurance proceeds and named herself as the sole beneficiary under the policy. Pls.’ Ex. 3, at 4-6. Despite the obligation to do so under the separation agreement and final divorce decree, the Debtor never changed the beneficiary designation from herself to her children. The Debtor testified that she withdrew all the life insurance proceeds by the end of 2012, in part, to help cover expenses for the Plaintiffs. The extent to which she helped the children was credibly disputed by them.
In May of 2022, the Plaintiffs’ paternal aunt discovered a portion of the divorce decree and brought it to Mary’s attention. This led Mary to obtain a complete copy of the divorce decree and the separation agreement from the Fredericksburg City Circuit Court. Upon obtaining a copy of the separation agreement, Mary discovered the provision regarding the life insurance proceeds, prompting her to retain counsel. In late 2022, Mary contacted Matthew, informed him that she intended to file a lawsuit against their mother, and asked him to join her as a co-plaintiff. In early
II. The Fredericksburg City Circuit Court Proceedings
The Plaintiffs alleged four causes of action in the State Court Suit: Breach of Contract – Third Party Beneficiaries, Conversion, Unjust Enrichment, and Constructive Trust and Equitable Assignment. Pls.’ Ex. 5, at 3-7. In response, the Debtor, by state court counsel, filed a plea in bar asserting that all claims were barred by the statute of limitations and filed a demurrer as to all counts alleging the amended complaint failed to state a claim upon which relief may be granted. DR’s Ex. BB, ¶¶ 11-12.
After a hearing, the Fredericksburg City Circuit Court issued a Letter Opinion on February 28, 2024 granting the plea in bar in part and denying it in part, and overruling the demurrer as to the remaining count. DR’s Ex. EE. Specifically, the state court found that since the “suit was not brought until more than 10 years after the receipt of the funds by the defendant” the plea in bar should be granted as to the breach of contract claim “as the five-year statute of limitations bars any claim on contract from, at best, 2012 when the proceeds were claimed by the [Debtor].” Id. at 2. The state court also granted the plea in bar as to the conversion claim—as the pleading alleged a conversion in 2012, no applicable tolling provision applied, and the suit was brought outside the statute of limitations. The plea in bar was further granted as to the unjust enrichment claim because the statute of limitations runs from the date the conversion or enrichment occurred, not discovery of it, so that claim was barred. Id. However, the state court overruled the plea in bar as to the constructive trust claim finding that no statute of limitations existed as to that claim. Id. The state court then overruled the demurrer as to the constructive trust and equitable assignment claim, stating “[a] constructive trust may be imposed on funds fraudulently or innocently received where
On January 24, 2025, the Plaintiffs filed a Motion for Default Judgment in the state court action, and on February 7, 2025, the Debtor filed a Motion for Leave to file a Late Answer. Pls.’ Ex. 6. After holding a hearing on both motions, the substance of which this Court is not privy to, the Fredericksburg City Circuit Court entered a final order on February 24, 2025 disposing of the State Court Suit. Notably, although the only remaining count was the constructive trust and equitable assignment claim—a remedy in equity—the state court nevertheless awarded the Plaintiffs a monetary default judgment against the Debtor in the amount of $200,000, plus interest accruing from May 1, 2012 through January 31, 2025, for a total judgment of $418,821.41 (“Fredericksburg Judgment”). Id. at 2. The Plaintiffs then docketed the judgment in the Roanoke City Circuit Court to obtain a lien on the Debtor’s primary residence.
III. The Bankruptcy Proceedings
a. The Bankruptcy Pleadings
On August 26, 2025, the Debtor filed a voluntary Chapter 7 petition in this Court listing the $418,821.41 Fredericksburg Judgment on Schedule D secured by the Debtor’s primary residence. Prior to the entry of the discharge order, the Debtor filed a Motion to Avoid Lien pursuant to
The Plaintiffs seek a determination that the Fredericksburg Judgment is nondischargeable under section 523(a)(2)(A), section 523(a)(4), and/or section 523(a)(6) of the Bankruptcy Code, and seek a declaratory judgment that the claim is nondischargeable under section 523(a)(5) or, in the alternative, under section 523(a)(15) of the Bankruptcy Code. Id. at 1. The Plaintiffs allege that the Debtor, who at the time was fully aware that the separation agreement and divorce decree required her to list the Plaintiffs as beneficiaries of the life insurance proceeds, nevertheless filled out the necessary paperwork to obtain the $200,000.00 in life insurance proceeds and affirmatively failed to disclose that the insurance had been assigned—thus, designating herself as the sole beneficiary to such proceeds. Id. at ¶¶ 18-19. The Plaintiffs further allege that the Debtor knew she had assigned her right to the proceeds and that she knowingly made the statement on the life insurance application to Prudential that she had not assigned her right with the intent to defraud Prudential and Plaintiffs of the $200,000.00. Id. at ¶¶ 20, 22. The Plaintiffs, having no reason to know or believe they had any entitlement to the policy’s life insurance proceeds, relied on the Debtor’s failure to inform them about their designation as the policy’s beneficiaries, and upon discovering their entitlement to the proceeds in 2022, acted promptly to initiate the State Court Suit and obtain the Fredericksburg Judgment based on the Debtor’s fraudulent actions. Id. at ¶¶ 25-27.
As a direct and proximate result of the Debtor’s fraud and failure to designate the Plaintiffs as beneficiaries, the Plaintiffs allege they sustained actual damages as they did not have additional
As to the section 523(a)(5) claim, the Plaintiffs allege that since the Fredericksburg Judgment is for a debt designated by the separation agreement as alimony and is deemed by such agreement to be a nondischargeable domestic support obligation should bankruptcy occur, it is, therefore, nondischargeable under subsection (a)(5), or alternatively (a)(15), as it is debt owed by the Debtor to her children incurred in connection with a separation agreement and/or divorce decree. Id. at ¶¶ 10, 34, 57; see Pls.’ Ex. 2, at ¶¶ 22-23.
The Debtor filed a response to the Complaint (“Answer”) principally asserting that she never possessed any intent to deceive or defraud any party—including the Plaintiffs—because, prior to the execution of the separation agreement, she contends she explicitly instructed her divorce attorney to remove the life insurance provision; however, her divorce attorney failed to do so, and the Debtor testified she was unaware of this failure. DR’s Ans. at ¶¶ 18, 20-23, 25-27, 30-31, 43-44. Accordingly, the Debtor, at all relevant times, believed that she was the beneficiary of the life insurance proceeds. Therefore, her “failure to designate [the] Plaintiffs as beneficiaries was due to error, and was not ‘knowing and intentional,’ ” and was not committed with the intent to defraud or to deceive either Prudential or the Plaintiffs. Id. at ¶¶ 32-33. Moreover, the Debtor asserts that the life insurance proceeds she received were used to support Mary and Matthew.2 Thus, the Plaintiffs were not deprived of any benefit from the proceeds and suffered no damages. Id. at ¶¶ 34, 38, 43. Even assuming the Plaintiffs suffered damages, the Debtor argues the Plaintiffs do not hold a claim in bankruptcy because the underlying conduct giving rise to the Fredericksburg Judgment is barred by the applicable statute of limitations, even though such judgment was
During a conference call with the parties prior to the trial, the Court asked the parties to be prepared to address what impact, if any, the State Court Suit and the Fredericksburg Judgment have on this Court’s ability to decide the issues in this case under a theory of collateral estoppel. The Debtor thereafter filed a Memorandum as to Collateral Estoppel and Trial Memorandum (“Memorandum”) on July 13, 2026. A.P. ECF No. 41.
In the Memorandum, the Debtor argues that the Plaintiffs are collaterally estopped and barred from seeking declaratory relief that the Fredericksburg Judgment be declared nondischargeable pursuant to section 523(a)(5), or alternatively section 523(a)(15), because that demand is based on the terms of the separation agreement and the state court already ruled that contract claim was barred due to the applicable statute of limitations. Id. at 2. As to the section 523(a)(4) claim, the Debtor argues that claim is based entirely upon conversion, and since the state court held the conversion claim was barred by Virginia’s applicable statute of limitations, collateral estoppel applies to the bankruptcy claim and it should be dismissed. Id. Finally, the Debtor argues the section 523(a)(2)(A) and section 523(a)(6) claims are barred for two separate reasons. First, under Virginia state law, a claim for civil fraud must generally be brought within two years; however, Virginia recognizes the “discovery rule” to civil fraud to toll the statute of limitations, so the period does not begin until the fraud is actually discovered or should have been discovered. Id. (citing
b. The July 14th, 2026 Trial
A trial was held by this Court on July 14, 2026 at which the Plaintiffs, the Debtor, and Jason Copp, the Debtor’s oldest son and the Plaintiffs’ half-brother, appeared and testified. Mary testified that she was nineteen and attending college at Randolph-Macon College when Edward passed away. Mary denied having any knowledge—either from Edward or any other source—of the separation agreement and her entitlement to life insurance proceeds prior to the discovery of the divorce decree. Mary denied living at her mother’s home once she began college and testified that the only financial assistance she received from her mother after 2012 was $5,000.00 paid toward her wedding, and there was never any mention of paying that money back.
Matthew testified that, although he was asked to sign a cover page to the separation agreement as an attesting witness, he was not privy to the contents of the separation agreement.
In her testimony, the Debtor strenuously asserted that when she initially received the proposed separation agreement and saw the life insurance provision contained in paragraph eighteen that she immediately instructed her divorce attorney to take the provision out. Upon Edward’s death, the Debtor admitted that she applied for the $200,000.00 in proceeds and claimed herself as the beneficiary; however, the Debtor stated she only did so because she believed the provision had been removed. The Debtor, nevertheless, conceded that she did not read the agreement before she signed it. The Debtor’s oldest son, Jason Copp, testified that he believed the Debtor was unaware of the provision regarding the life insurance proceeds prior to receiving Matthew’s phone call. The Debtor also testified that, out of the life insurance proceeds, she spent at least $173,800.00 from January 3, 2012 until May 24, 2023 on expenses for Mary and Matthew. See DR’s Ex. A. Again, the Plaintiffs credibly denied the validity of the vast majority of these expenditures.
Discussion
I. The Statute of Limitations and Collateral Estoppel
The Debtor’s first argument rests on the assertion that the Plaintiffs hold no claim in bankruptcy because the underlying basis for the Fredericksburg Judgment is premised on a fraud claim based on the separation agreement, and under Virginia state law, any such claim would be
The doctrine of collateral estoppel “precludes relitigation of an issue decided previously in judicial…proceedings provided the party against whom the prior decision was asserted enjoyed a full and fair opportunity to litigate that issue in an earlier proceeding.” In re McNallen, 62 F.3d 619, 624 (4th Cir. 1995). The doctrine of collateral estoppel is generally applicable to dischargeability proceedings in bankruptcy. Grogan v. Garner, 498 U.S. 279, 284 (1991). When determining the preclusive effect of a state-court judgment in the context of a dischargeability action, the bankruptcy court must apply the forum state’s law on collateral estoppel—here, Virginia state law. McNallen, 62 F.3d at 624 (citing Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481-82 (1982); Bugna v. McArthur (In re Bugna), 33 F.3d 1054, 1057 (9th Cir. 1994)).
Under Virginia state law, the following requirements must be met for the doctrine of collateral estoppel to be invoked:
(1) the parties to the prior and subsequent proceedings, or their privies, must be the same, (2) the factual issue sought to be litigated actually must have been litigated in the prior action, (3) the factual issue must have been essential to the judgment in the prior proceeding, and (4) the prior action must have resulted in a judgment that is valid, final, and against the party against whom the doctrine is sought to be applied. In addition to these elements, there also must be “mutuality,” i.e., a litigant cannot invoke collateral estoppel unless he would have been bound had the litigation of the issue in the prior action reached the opposite result.
First, the Plaintiffs have established a debt, as their state law claim has been reduced to a valid, final judgment. See In re Gergely, 110 F.3d 1448, 1453 (9th Cir. 1997); see also In re McKendry, 40 F.3d 331, 337 (10th Cir. 1994). Second, the Plaintiffs timely filed their Complaint to have this established debt declared nondischargeable in compliance with limitations periods set forth by federal bankruptcy law, and Virginia’s statute of limitations should not disrupt rights created under the Bankruptcy Code. McKendry, 40 F.3d at 337 (holding that once “the debt has already been established…the state statute of limitations is immaterial. The only applicable limitations period is the sixty day period provided by § 523(c)”); CBR, Inc. v. Naff (In re Naff), No. 96-21436, A.P. No. 96-2112, 1997 WL 1088126, at * 8 (Bankr. E.D. Va. July 18, 1997) (holding “so long as there exists, on the date the bankruptcy petition was filed, a legally enforceable claim, the time within which the creditor may seek a determination that the debt is nondischargeable under one of the exceptions in § 523 of the Bankruptcy Code is governed by the Bankruptcy Rules and not by any non-bankruptcy statute of limitations.”).
Although the Fourth Circuit has not addressed how to reconcile the state law statute of limitations in the context of section 523(a) nondischargeability proceedings, the Tenth Circuit’s approach in In re McKendry is especially informative here,3 providing:
We…find two distinct issues in a nondischargeability proceeding. The first, the establishment of the debt itself, is governed by the state statute of limitations—if
suit is not brought within the time period allotted under state law, the debt cannot be established. However, the question of the dischargeability of the debt under the Bankruptcy Code is a distinct issue governed solely by the limitations periods established by bankruptcy law.
McKendry, 40 F.3d at 337; See generally Brown v. Felsen, 442 U.S. 127 (1979). Since the issuance of the McKendry opinion, the Ninth Circuit and other courts adopted this approach to reject the exact argument the Debtor makes here: that the failure to bring a fraud action before the applicable state law limitations period expired precludes the Plaintiffs from arguing that fraud is a basis for nondischargeability under section 523(a)(2). Gergely, 110 F.3d at 1450, 1453-54 (relying on McKendry to reject the defendant-debtor’s argument that the plaintiff-creditor, who obtained a state court judgment of $780,282 in damages, was not precluded from bringing a fraud action under section 523(a) despite the expiration of the applicable California limitations period for fraud and the state court’s failure to specify the theory under which it awarded the damages); In re Glunk, 343 B.R. 754, 760-61 (Bankr. E.D. Pa. 2006) (adopting McKendry to reject the plaintiffs’ argument the state statute of limitations for fraud barred the section 523(a)(2)(A) claim and to find “[w]hether or not the Plaintiffs asserted a timely fraud claim in the underlying state litigation bears no significance in the bankruptcy court’s ultimate determination of the nature of the debt and whether such debt is dischargeable”). The determinative inquiry is whether a valid prepetition state court judgment exists, not whether the state law statute of limitations as to the theory underlying the claim for which the judgment is based has expired. In re Yerushalmi, 393 B.R. 288, 294 (Bankr. E.D.N.Y. 2008) (internal citations omitted) (“[I]f a creditor bringing an adversary proceeding under § 523 already has an enforceable state court judgment, he will not be barred from proving the nondischargeability of the debt even if the state statute of limitations for the alleged fraud (or other allegation as the case may be) expired prior to the filing of the debtor’s petition.”). Having determined that this Court may consider fraud as a basis for nondischargeability despite
The Bankruptcy Code defines “debt” as “liability on a claim.”
Since a valid prepetition judgment exists, the final inquiry is whether the Plaintiffs complied with the applicable deadlines and statute of limitations set forth by the Bankruptcy Rules. In a Chapter 7 case, for nondischargeability claims brought under section 523(a)(2), section 523(a)(4), and section 523(a)(6), the complaint “must be filed within 60 days after the first date
Accordingly, since all of the Plaintiffs’ claims were timely filed in compliance with the applicable deadlines set forth by the Bankruptcy Rules and a valid prepetition judgment exists, this Court may consider whether the Fredericksburg Judgment is nondischargeable under section 523(a) despite the doctrine of collateral estoppel.
II. The Nondischargeability Claims
When considering exceptions to discharge under section 523(a), courts must construe such exceptions narrowly to protect the Bankruptcy Code’s purpose of providing debtors with a fresh start. Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 219 (4th Cir. 2007); Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir. 1999) (citing Century 21 Balfour Real Estate v. Menna (In re Menna), 16 F.3d 7, 9 (1st Cir. 1994)). However, courts must be equally concerned with protecting against and deterring the perpetrators of fraud from abusing the Bankruptcy Code. Id. (citing Cohen v. de la Cruz, 523 U.S. 213, 217 (1998)). The plaintiff must prove the nondischargeability of the debt under section 523(a) by a preponderance of the evidence. Grogan, 498 U.S. at 291; Faurouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 299 (4th Cir. 1994). Accordingly, the Plaintiffs must prove by a preponderance of the evidence standard that the Fredericksburg Judgment is excepted from discharge under one of the section 523(a) claims set forth in the Complaint.
Section 523(a)(2)(A) provides that the Bankruptcy Code will not discharge a debtor from any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—false pretenses, a false representation, or actual fraud.”
The Fourth Circuit mandates that for a debt to be declared nondischargeable under section 523(a)(2)(A) as arising from false pretenses, false representation or actual fraud, the creditor plaintiff must prove all of the following elements of common law fraud: “(1) false representation, (2) knowledge that the representation was false [at the time it was made], (3) intent to deceive, (4) justifiable reliance on the representation, and (5) proximate cause of damages.” In re Sharp, 340 Fed. Appx. 899, 901 (4th Cir. 2009) (quoting Rountree, 478 F.3d at 218); In re Matkins, 605 B.R. 62, 87 (Bankr. E.D. Va. 2019). In this case, the key element is element two. To satisfy element two, “the plaintiff must prove that the debtor knew or should known that the representation was false when it was made.” Matkins, 605 B.R. at 88 (citing In re Hathaway, 364 B.R. 220, 234 (Bankr. E.D. Va. 2007); In re Robinson, 340 B.R. 316, 347 (Bankr. E.D. Va. 2006) (internal citations omitted)).
In the Complaint, the Plaintiffs made conclusory allegations that the Debtor “clearly knew that her statement to Prudential on the application for the life insurance proceeds that the Policy
At trial, the Plaintiffs themselves even conceded that they were not privy to the discussions that occurred surrounding the negotiation of the separation agreement. The only evidence the Plaintiffs provided to rebut the Debtor’s claim was Mary’s testimony at trial that she knew the only thing her father asked for during the negotiation of the separation agreement was for the children to be the beneficiaries of the life insurance proceeds. However, on cross-examination, she testified the basis of her knowledge was her review of the exhibits in this case many years later and her general knowledge of Edward’s character. Additionally, since the Plaintiffs failed to provide any evidence to negate the Debtor’s claimed defense regarding removal of the provision, and the Debtor continuously testified under oath at trial that she instructed it be removed and believed it had been, the Court will accept that fact as true, as self-serving as it may be. Accordingly, the Court finds that the Debtor neither knew nor should have known—because the
As discussed above, the Fourth Circuit requires every element of common law fraud to be satisfied for a debt to be excepted from discharge under section 523(a)(2)(A). The Plaintiffs have failed to meet their burden of proving by a preponderance of the evidence that the Debtor knew or should have known that provision contained in paragraph eighteen of the separation agreement regarding the life insurance proceeds was not removed. Therefore, the Fredericksburg Judgment cannot be declared nondischargeable under section 523(a)(2)(A) and the Plaintiffs’ claim is denied on that basis.
b. 11 U.S.C. § 523(a)(4) Claim
Section 523(a)(4) provides that the Bankruptcy Code will not discharge a debtor from any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
The Bankruptcy Code does not define the term “fiduciary;” however, “[c]ourts generally agree that whether a debtor is acting as a fiduciary for purposes of section 523(a)(4) is determined by federal law.” In re Vito, 598 B.R. 809, 817 (Bankr. D. Md. 2019) (citing In re Heilman, 241 B.R. 137, 155-56 (Bankr. D. Md. 1999) (“It is well-settled that the determination of fiduciary capacity is a question of Federal law.”)) In the bankruptcy context, the term “fiduciary” should be
In this case, the Plaintiffs made no allegations of the existence of an express trust in their Complaint to create a “fiduciary” relationship as contemplated by section 523(a)(4). See generally Pls.’ Compl. No trust relationship existed here, and even if one did, it would have been the imposition of a constructive trust which does not qualify to create a fiduciary relationship under section 523(a)(4). Accordingly, the Debtor was not a “fiduciary” for purposes of section 523(a)(4). Thus, for the Fredericksburg Judgment to be excepted from discharge under this subsection, the debt must have arisen either from embezzlement or fraud.
For a debt to be declared nondischargeable under section 523(a)(4) because it arises from embezzlement, the Fourth Circuit requires the plaintiff to prove: “(1) that the funds were rightfully in the possession of the Debtor; (2) that the Debtor appropriated the funds for a use other than that for which it was entrusted; and (3) circumstances indicating fraud.” In re Parker, 141 F.4th 583, 587 (4th Cir. 2025) (internal citations omitted). The Plaintiffs cannot prove that the Fredericksburg Judgment should be excepted from discharge on the basis of embezzlement because element one
This Court previously held, and reaffirms here, that the federal common law definition of larceny applies to section 523(a)(4) nondischargeability actions. In re Shreve, 386 B.R. 602, 607 (Bankr. W.D. Va. 2008) (J. Krumm) (internal citations omitted). The federal common law defines larceny as the “fraudulent taking and carrying away [of] the property of another with intent to convert such property to the taker’s use without the consent of the owner.” Id. (internal citations omitted). Other bankruptcy courts in the Fourth Circuit have similarly adopted the federal common law definition. In re Wilkerson, 644 B.R. 349, 372 (Bankr. E.D. Va. 2022); In re McKnew, 270 B.R. 593, 632 (Bankr. E.D. Va. 2001); In re Davis, 262 B.R. 663, 672 (Bankr. E.D. Va. 2001). In contrast to embezzlement, larceny requires that felonious intent existed at the time the taking of the property occurred. Wilkerson, 644 B.R. at 372; In re Aman, 498 B.R. 592, 606-07 (Bankr. N.D.W. Va. 2013) (citing 4 Collier on Bankruptcy ¶ 523.10[2]).
For the reasons discussed above, the Plaintiffs failed to prove that the Debtor possessed the requisite mens rea at the time she acquired the life insurance proceeds for the taking to constitute larceny. The Debtor asserted that, at the time she completed the application with Prudential and designated herself as beneficiary, she believed paragraph eighteen of the separation agreement had been removed. Thus, the Debtor believed she had not assigned her right to the proceeds to the children and that she was the beneficiary. The Plaintiffs failed to rebut this claim. Accordingly, the Plaintiffs failed to meet the burden of establishing by a preponderance of the evidence that the
As the Plaintiffs failed to meet their burden of proving by a preponderance of the evidence that the Fredericksburg Judgment is for “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny,” the Plaintiffs’ objection to dischargeability under section 523(a)(4) is therefore overruled.
c. 11 U.S.C. § 523(a)(6) Claim
Section 523(a)(6) provides that the Bankruptcy Code will not discharge a debtor from any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.”
For the reasons discussed above, the Plaintiffs failed to meet their burden of proving by a preponderance of the evidence that the Debtor acted with actual intent to cause injury to the Plaintiffs as required by Geiger. The Plaintiffs failed to prove that the Debtor knew that she had assigned her right to the proceeds under the Prudential life insurance policy to Mary and Matthew pursuant to the separation agreement. Therefore, she could not have acted with the actual intent to cause the injury that occurred—the conversion of the life insurance proceeds. Although she clearly acted with the intent to commit the act leading to the conversion of the proceeds by completing the life insurance application and submitting it to Prudential to collect, Geiger requires more to have the Fredericksburg Judgment excepted from discharge under section 523(a)(6).
Accordingly, since the Plaintiffs failed to satisfy the heightened Geiger standard to declare the Fredericksburg Judgment nondischargeable under section 523(a)(6), the objection is overruled.
d. 11 U.S.C. § 523(a)(5) Claim
Section 523(a)(5) provides that the Bankruptcy Code will not discharge a Chapter 7 debtor from any debt “for a domestic support obligation.”
Fourth Circuit courts look at the mutual or shared intent of the parties to create a support obligation when determining whether an obligation is in the nature of alimony, maintenance, or support. In re Johnson, 397 B.R. 289, 297 (Bankr. M.D.N.C. 2008); In re Combs, 543 B.R. 780, 794 (Bankr. E.D. Va. 2016) (citing Tilley v. Jessee (In re Tilley), 789 F.2d 1074, 1078 (4th Cir. 1986)). At least four courts in the Fourth Circuit have adopted a four-factor test to evaluate the intent of the parties to create a support obligation:
(1) the actual substance and language of the agreement, (2) the financial situation of the parties at the time of the agreement, (3) the function served by the obligation at the time of the agreement (i.e., daily necessities), and (4) whether there is any evidence of overbearing at the time of the agreement that should cause the court to question the intent of a spouse.
Johnson, 397 B.R. at 297 (citing In re Catron, 164 B.R. 912, 919 (E.D. Va. 1994) (internal citations omitted)); Combs, 543 B.R. at 794; In re Deberry, 429 B.R. 532, 539 (Bankr. M.D.N.C. 2010). This is a non-exhaustive list, so courts should consider all relevant evidence. Johnson, 397 B.R. at 297 (internal citations omitted). Importantly, “[t]he labels attached to certain provisions in a separation agreement are not dispositive of their ‘nature,’ but the labels are persuasive evidence of the parties’ intent.” Id. (citing Tilley, 789 F.2d at 1077-78). Although it is not determinative on the issue, when the plain language of a separation agreement labels an obligation to be “in the nature of alimony, maintenance, or support,” a “substantial obstacle” exists which the party contesting that the debt is nondischargeable under subsection (a)(5) must overcome. Tilley, 789 F.2d at 1078.
i. The actual substance and language of the agreement
Factor one weighs strongly in favor of deeming this a domestic support obligation, as the agreement explicitly labeled the life insurance proceeds to be nondischargeable in the event of bankruptcy under section 523(a)(5) in paragraphs twenty-two and twenty-three of the separation agreement. In pertinent part, paragraph twenty-two provides: “The Husband‘s and Wife‘s agreement to pay said obligations hereinbefore or hereinafter provided for [word illegible] this Agreement on behalf of one another shall be considered to be in the nature of alimony, and shall, therefore, be nondischargeable in bankruptcy under 11 U.S.C. Section 523(a)(5).” Pls.’ Ex 2 at ¶ 22. Paragraph twenty-three then provides, in pertinent part:
The parties further covenant, warrant and agree that all hold harmless provisions, debt assumption agreements and/or agreements to pay attorney‘s fees and costs specified in this Agreement, which is a “separation agreement” as contemplated by 10 [sic] USC §523, shall not be dischargeable in bankruptcy as they are intended by the parties to be in the nature of alimony, maintenance and support.
Id. at ¶ 23.
It is indisputable that the express language of the separation agreement labels the life insurance obligation from which the Fredericksburg Judgment arises to be a nondischargeable domestic support obligation, as contemplated by section 523(a)(5). As the Fourth Circuit explained in Tilley, this creates a “substantial obstacle” the Debtor must rebut. Furthermore, the Debtor and Edward labeled the life insurance obligation to be a section 523(a)(5) obligation in not only one, but two separate paragraphs of the separation agreement—further evidencing their mutual intent and requiring the Debtor to meet a heightened burden to overcome the obstacle that
Accordingly, factor one weighs against the Debtor.
ii. The financial situation of the parties at the time of the agreement
Factor two weighs against the Debtor because all parties testified that the Debtor was the primary wage earner between the two spouses, and Edward had minimal financial resources at the time of the separation.
During the trial, Mary explicitly testified that Edward had no financial resources at the time of the divorce. Although the Debtor‘s testimony did not specifically address whether Edward was insolvent at the time of the divorce, it did corroborate that there was significant disparity between their relative financial positions at the time the separation agreement was executed and the divorce
iii. The function served by the obligation at the time of the agreement (i.e., daily necessities)
Factor three is neutral. At the time of the separation agreement‘s execution, paragraph eighteen regarding the life insurance proceeds served no support obligation to the children. Mary‘s and Matthew‘s rights to the life insurance proceeds had not vested, and they quite possibly may never have vested. Pursuant to the separation agreement, the Debtor was only obligated to designate the Plaintiffs as beneficiaries until Mary graduated college. Pls.’ Ex. 2 at ¶ 18. Thus, the Plaintiffs’ rights would never have vested if either the Debtor changed the beneficiary designation upon Mary graduating college, or if they predeceased Edward. The life insurance proceeds in no way were providing support to Mary and Matthew for basic necessities such as food, clothing, or housing at the time the separation agreement was executed. But the insurance proceeds would have been there to help Mary with her education if Edward passed away while she was in college. Factor three, on balance, sways in favor of neither party.
Factor four weighs against the Debtor and in favor of classifying the life insurance provision from which the Fredericksburg Judgment arises as a nondischargeable domestic support obligation for two reasons.
First, the Debtor and Mary testified during trial that Edward was not represented by counsel during the negotiation of the settlement agreement that was incorporated into the final divorce decree. This testimony is corroborated by the divorce decree itself which is only endorsed by the Debtor‘s divorce counsel. Pls.’ Ex. 1, at 7. Accordingly, this supports a finding that factor four should weigh against the Debtor, as she was in a position of superior bargaining power and had a more advanced understanding of the law by virtue of her divorce counsel‘s guidance; however, the Debtor failed to revise the language of the separation agreement to reflect the classification of the life insurance provision that she now seeks to attribute to it. Bruce, 2016 WL 4626126, at *7 (finding whether only one spouse versus both spouses are represented by counsel during the separation settlement negotiations to be relevant as to whether there is any evidence of overbearing at the time the agreement was executed). The Debtor had ample opportunity and resources when the separation agreement was drafted and executed to change the language of it. Although she says she instructed her attorney to change it, it did not change. She now asks this Court to change the meaning of the language included in such agreement because it is now beneficial to the Debtor to diverge from the explicit and plain meaning of the language included. The Court declines to do so.
Second, the Plaintiffs and the Debtor testified at trial that Edward suffered from serious mental health issues that ultimately led to his death. Mary‘s testimony during trial was that despite
For the reasons set forth above, the Plaintiffs sufficiently proved that the life insurance provision the Fredericksburg Judgment is based on created a domestic support obligation, as three of the four factors weigh in favor of this classification. Accordingly, the Court finds that the Fredericksburg Judgment is nondischargeable pursuant to section 523(a)(5).
e. 11 U.S.C. § 523(a)(15) Claim
Section 523(a)(15) provides that the Bankruptcy Code will not discharge a debtor from any debt “to a...child of the debtor and 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 [or] divorce decree.”
For a debt to be deemed nondischargeable under this subsection, three requirements must be met. “[T]he debt must (1) be to a spouse, former spouse, or child of the debtor, (2) not be a domestic support obligation, and (3) have been incurred during a divorce or separation or ‘in connection with a separation agreement, divorce decree, or other order of a court of record.’ ” Burstein v. Nonte, 688 F.Supp.3d 314, 317 (E.D. Va. 2023) (quoting
Here, the debt is owed to the Debtor‘s two children. If the Fredericksburg Judgment does not qualify as a domestic support obligation, it meets the remaining parameters of section 523(a)(15). Although the debt arises from a contingent claim—the death of Edward while Mary was still in college—at the time the separation agreement was executed, given that “in connection with” should be interpreted liberally post-BAPCPA, the Court finds that there is a sufficient logical relationship between the separation agreement and the life insurance proceeds that the Fredericksburg Judgment meets the standard for nondischargeability.
Accordingly, if the Debtor‘s obligations under the separation and divorce decree are not in the nature of a domestic support obligation, since the elements of section 523(a)(15) are satisfied, the Court finds that the Fredericksburg Judgment is nondischargeable under section 523(a)(15) and the Plaintiffs’ claim of nondischargeability under this subsection is granted.
For the reasons stated above, the Plaintiffs’ claims of nondischargeability of the judgment under
A separate order will be entered contemporaneously herewith.
**END OF ORDER**