Bankruptcy Law

Editor:
David N. Gunn, Esquire

In determining whether an award contained within a divorce decree is a "domestic support obligation," the plain function of the award is not undermined by a disparity in property distribution; award of attorney fees is a domestic support obligation. In re Phegley, 443 B.R. 154 (B.A.P. 8th Cir. 2011).
Debtor and his wife filed for divorce in 1998. The divorce decree awarded a greater share of martial assets to Debtor, including Debtor's residual income from insurance commissions.  Debtor's spouse was awarded $325 per month in child support, $1,250 per month for 48 months in maintenance, and $9,178.69 in attorney fees. 
Debtor filed for Chapter 13 bankruptcy protection and listed as dischargeable debts his obligations to pay his former spouse maintenance and attorney fees. Former spouse filed a complaint to determine that these obligations were non-dischargeable domestic support obligations under 11 U.S.C. Section 523(a)(5). Debtor contended that the obligations were not domestic support obligations, but rather property distributions contemplated under 11 U.S.C Section 523(a)(15), the latter being dischargeable in a Chapter 13 bankruptcy.
The bankruptcy court ruled in favor of the Debtor's former spouse and the Debtor appealed the ruling to the Bankruptcy Appellate Panel. On appeal the Debtor argued that even though the divorce decree specifically stated that the monthly maintenance award was intended to provide support to the spouse while she pursued an education to better her income, the bankruptcy court should instead look to the fact that the Debtor was awarded a greater share of the martial assets, in particular the residual insurance commissions, and that the maintenance was in fact a means of compensating the spouse for this distribution of martial property. 
Held: Judgment in favor of the former spouse. The court noted that whether an award in a divorce decree is in the nature of support is a matter of federal bankruptcy law, not state law. However, even though the state court's characterization of an award is not binding on the bankruptcy court, the language and substance of the award in the context of the surrounding circumstances is persuasive. Here, the divorce decree clearly found a disparity of income potential between the parties and was attempting to balance that disparity by awarding maintenance to the spouse while she was obtaining a college degree. The fact that the Debtor was awarded a greater share of marital assets does not contradict the clear intent of the divorce decree to obligate the Debtor to financially support his ex-wife after the dissolution of their marriage.
Additionally, the court found that the award of attorney fees for the former spouse was in the nature of support because the record reflected a financial disparity between the parties and that awarding attorney fees for the former spouse was a means of balancing this disparity.