We previously blogged about the Bisbing matter with respect to the precedent-setting decision that modified the standard for a custodial parent seeking to relocate with the minor children outside of the State of New Jersey, and law that followed. Well, Bisbing has returned in another published (precedent-setting) decision, this time with respect to whether counsel fee awards stemming from child-related litigation are dischargeable in bankruptcy proceedings. The answer, generally, is no. Here’s why.
In Bisbing, the primary parent/plaintiff sought to relocate to Utah shortly after entering into the Marital Settlement Agreement and, upon remand from the Supreme Court, the request was denied and the defendant was awarded $425,000 in counsel fees. Plaintiff did not appeal. Of course, in a not so shocking turn of events, plaintiff likewise did not pay the counsel fee award and tried to evade the obligation. Motion practice and bankruptcy petitions ensured, as follows:
- October 2019 – defendant filed an enforcement application with respect to the unpaid fees, which was dismissed without prejudice (i.e.: can be filed again).
- March 2020 – the Bankruptcy Court dismissed two Chapter 13 Petitions that plaintiff had filed during/around the time of the enforcement application.
- June 1, 2020 – the family trial court had reinstated the dismissed enforcement application and ordered that the fees were not dischargeable in bankruptcy per 11 U.S.C. § 523(a)(15) (Section 15). Plaintiff did not appeal. What is Section (a)(15) – good question – it declares that certain divorce related obligations are not dischargeable in bankruptcy Section 13. Specifically:
- (a)A discharge … of this title does not discharge an individual debtor from any debt
- (15) to a spouse, former spouse, or 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, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.
- Thereafter, the court granted defendant’s motion to have the prior fees + the fees for the June 1, 2020 Order deemed non-dischargeable under Section 5 and denied plaintiff’s cross-motion for reconsideration of the June 1, 2020 Order.
- Plaintiff appealed the Order declaring the fees non-dischargeable under Section 5 (in all aspects of Bankruptcy, i.e.: Chapter 7, 11, 12, 13;, and thus not limited to Chapter 13).
So, now that the history is covered, what makes the counsel fee awards, both for the relocation trial and the enforcement/non-discharge Order, not dischargeable in bankruptcy? Simply put, the fee awards stemmed from child-related litigation, causing the non-debtor spouse to expend money it could have otherwise used to support the children.
The trial court relied on prior law requiring broad interpretations when adjudicating whether an obligation qualifies as support and the substance of the liability is controlling. This is key because the substance of the counsel fee awards are child-related because of the issues litigated that resulted in the fee award. Despite this, the plaintiff threw out whatever arguments she could to evade the obligation.
1. Advisory Opinion – Not So Fast
The Appellate Division rejected plaintiff’s argument that the trial court issued an advisory opinion because the plaintiff did not have a pending Bankruptcy petition at the time the fees were deemed non-dischargeable. The trial court properly determined there there need not be a pending bankruptcy petition for the ruling. Indeed, the Appellate Division agreed and cited to prior case law regarding non-dischargeability without a pending bankruptcy action. Moreover, the plaintiff had previously filed two bankruptcy petitions that were dismissed; thus, the trial court determined it could rule on the issue.
Here, even though a pending action was not required, the plaintiff was in an even worse position because she had tried to discharge the obligations twice so the prospect of her doing it again was certainly a reality. Moreover, the plaintiff’s payment of the fee awards was an ongoing dispute, thereby lending itself to a controversy over which the court could rule and issue an opinion – not an advisory one. To add insult to injury, the plaintiff filed for reconsideration of the June 1, 2020 Order regarding dischargeability so she made it an issue, even though she later claimed the trial court’s opinion was improperly advisory.
2. Counsel Fees Are Not Qualified As Support – Think Again
The trial court relied on Orlowski v. Orlowski, which cites the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:
[A]mended the Bankruptcy Code to clarify that a debt for a “domestic support obligation” owed to, or recoverable by, a spouse, former spouse, or child of the debtor in the nature of alimony, maintenance, or support of such spouse, former spouse, or child, established by a separation agreement, divorce decree, property settlement agreement, or court order is nondischargeable.
And Owlowski relied on In Re Gruber finding that a counsel fee award “…in matrimonial proceedings is a non-dischargeable domestic support obligation”.
Of major significance in the trial court’s decision, affirmed by the Appellate Division:
“The judge bolstered his conclusion by finding the funds defendant expended here could have been used for the children’s direct benefit by paying for tuition, child support, and other needs. He held the award had the ultimate effect of providing the parties’ children with necessary support.”
The Appellate Division turned to the definition of “domestic support obligation” not dischargeable in bankruptcy, and quoted the following
[A] debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is —
(A) owed to or recoverable by —
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or . . . .
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of —
(i) a separation agreement, divorce decree, or property settlement
agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
The Appellate Division reasoned that while Federal law rules as to the dischargeability of debts, New Jersey courts have jurisdiction as to whether the obligation constitutes support based on Federal law and using New Jersey law for “valuable guidance” given that the obligation was entered per New Jersey law.
The Appellate Division looked to Gruber, above, and In re Maddigan (relying on older version of Section 5 to create a 3-part test), which both found counsel fee awards stemming from child-related issues to be non-dischargeable in bankruptcy. Simply put, as found in Gruber, the label attached to the payment does not control the qualification of that obligation (just like title to a property does not control the marital/non marital nature of it). Here, the Appellate Division expressly found:
“We conclude that the court properly determined the counsel fee award here to be non-dischargeable under Section 5, as it was a domestic support obligation and was “in the nature of support.” This matter involved defendant’s attempt to preserve his ability to visit with his daughters regularly, despite plaintiff’s attempt to relocate them across the country. The trial court’s findings here further established that the funds in this matter could have been used for the children’s support, such that the counsel fee award was tantamount to an award of support to defendant for the benefit of the children.”
3. Economic Disparity Matters – Wrong Again
The plaintiff’s last argument reviewed by the Appellate Division, namely that the trial court needed to consider the economic disparity between the parties, also failed. The plaintiff cited to a case (In Re Gianakas) wherein the debtor had agreed to make mortgage payments in the divorce agreement, which he was ultimately unable to make. The trial court created a three-part test that applies to agreed upon obligations: “(i) the language and substance of the agreement in the context of surrounding circumstances: (ii) “the parties’ financial circumstances at the time of the settlement; and (iii) the function served by the obligation at the time of the divorce or settlement.”
Here, as the long history of this case proves, the counsel fee award was not an agreed upon obligation. Additionally, the Appellate Division noted that the trial court did review the parties’ finances in a prior decision.
Takeaway
This case is an important one. Time and time again counsel fee orders are entered against recalcitrant parties and they sit while the party evades payment and the party who incurred the fees remains obligated to pay the balance with the promise of being reimbursed later should the award be paid. We do whatever we can to enforce the fees and chase the payment, and the non-debtor spouse incurs the related fees. Now we have another case further clarifying that the debtor cannot use the last resort of bankruptcy to evade the obligation when the fees stem from child-related litigation and could have otherwise been used by the non-debtor spouse to pay toward the children’s support.
Remember, the plaintiff in this case is a recalcitrant party who demonstrated bad faith from her efforts to relocate to Utah at the outset of this litigation, through failure to pay the counsel fee award. I don’t think the case will result in every single counsel fee award being deemed as non-dischargeable from an initial request for fees (and bearing in mind that family court is one of equity), and there ostensibly must be a violation (or more) of a court-ordered payment and/or egregious custody issue at play to soundly make the request, but I do think that we will see a lot more successful applications in this regard, particularly when dealing with bad faith litigants. Only time will tell.
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