Opinion
Bankruptcy Case No. 02-31399DM, Adversary Proceeding No. 02-3220DM
August 29, 2003
AMENDED MEMORANDUM DECISION INTRODUCTION
This case raises the question of whether an obligation to fund and maintain an investment account, created in an enforceable Judgment of Dissolution of Marriage (the "Settlement Agreement") exclusively for the debtor's children's college or university education, constitutes child support such that the funds inappropriately removed from that account qualify as a nondischargeable debt under 11 U.S.C. § 523(a)(5).
Unless otherwise indicated, all section and rule references are to the Bankruptcy Code, 11 U.S.C. § 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
Trial took place on July 11, 2003. Appearances were noted on the record. For the reasons stated herein, the court concludes that the debtor's obligation to replace the improperly withdrawn funds is in the nature of child support and therefore nondischargeable under § 523(a)(5).
FACTS
The following discussion constitutes the court's findings of 28 fact and conclusions of law. F.R.Bankr.P. 7052(a).
John Stacey ("Plaintiff") and Deborah Kuhman Stacey, the debtor and defendant in this adversary proceeding ("Defendant"), were married on March 3, 1984. During their marriage they had two children, Kendall Stacey and John Stacey III. The parties' marital separation on August 10, 1994, ended with a divorce and the Settlement Agreement filed on December 12, 1996. The Settlement Agreement structure provides for (1) division of property, (2) spousal support, (3) child custody and timeshare, and (4) child support. The child support section allocates funds for overall maintenance and support of the children (¶ 17), medical insurance and uninsured medical costs (¶ 18), and private school education and extra-curricular activities (¶ 19). The Settlement Agreement terminates child support payments at the age of 18, assuming the child is not married, self-supporting, or a high school graduate prior to that age (¶ 20). Paragraph 21 of the Settlement Agreement states:
As and for additional child support, each party shall within sixty days of the execution of this Judgment, deposit the sum of $50,000 into a joint investment account to be used exclusively to pay for the children's college or university education. This shall include tuition, required fees, room and board, books, and travel costs. Neither party shall be required to pay for any additional costs; provided, however, the parties may agree to use available funds from this account to pay such costs if they so agree. The parties shall consult with their estate planning and/or tax counsel to determine the best method of accomplishing the foregoing.
Pursuant to the Settlement Agreement, each party opened two investment accounts, one for each child, and deposited a total of $25,000 in each account in three separate installments over separate calendar years. Neither party contested that the sequential deposits were to protect against the imposition of gift tax in the event the taxing authorities characterized the accounts as gifts to the children. Such a protective structure follows from the Settlement Agreement instruction to consult estate counsel regarding deposits.
Before the children reached university age, Defendant withdrew $29,000 from Kendall Stacey's account and $29,887.96 from John Stacey III's account. In superior court, Defendant testified that she used the money for private school tuition for the children and was unaware at that time that she could not withdraw the funds as needed. Pl.'s Ex. 2, 3-4. On September 13, 2001, Plaintiff filed a motion asking the court to order
Defendant to replenish the accounts as well as assign him custodial rights on the account. The superior court granted both requests, ordering Defendant to replenish the accounts plus interest at the legal rate of 10%. Two weeks subsequent to that order (the "Superior Court Order"), Defendant filed a Chapter 7 bankruptcy petition naming the two children as creditors owed a total of $58,887.96.
Defendant held custodial authority on the accounts prior to the motion.
Superior Court of California, County of San Mateo, No. F022471, In Re the Marriage of Petitioner: Deborah Kuhman Stacey and Respondent: John Markell Stacey, filed May 9, 2002.
On August 19, 2002, Plaintiff filed a Complaint to Determine the Nondischargeability of Debt under § 523(a)(5). Defendant answered the complaint on September 16, 2002, characterizing the debt as a property settlement rather than child support, thus dischargeable. On December 20, 2002, Plaintiff filed a Motion for Summary Judgment. This court denied that motion based on the genuinely disputed issues surrounding the exact nature of the debt.
Plaintiff did not seek relief under 523(a)(4), "for fraud or defalcation while acting in a fiduciary capacity . . .", and at trial Plaintiff's counsel reiterated that Plaintiff was not 28 seeking relief on that basis.
At trial, Plaintiff contended that the plain language in paragraph 21 of the Agreement connotes "child support" and therefore no ambiguity exists as to the nature of the support. Pl.'s Trial Br., 5, lines 25-28. In addition, Plaintiff asked this court to defer to the Superior Court Order finding that the funds were solely meant to support the children's university education. Def.'s Trial Br., 6, lines 2-9.
Defendant agreed that the money from the accounts belonged to the children and not to either spouse, but characterized the funds as part of a property settlement for the benefit of the children. Defendant's Trial Brief, 5, lines 12-15. Because such a characterization takes the funds out of the enumerated exceptions of § 523(a), Defendant requested that the debt be discharged.
DISCUSSION
Section 523(a)(5) excepts from an individual debtor's discharge any debt owed to a spouse, former spouse, or child of the debtor for alimony, maintenance or support in connection with a separation agreement, divorce decree or other order of a court of record. See 11 U.S.C. § 523(a)(5). A debtor discharges a liability designated as alimony, maintenance, or support unless such liability is actually in the nature of alimony, maintenance, or support. 11 U.S.C. § 523(a)(5)(B). These exceptions to discharge depart from the "fresh start" principle of bankruptcy in favor of enforcing familial obligations as a public policy. Shaver v. Shaver, 736 F.2d 1314, 1315-1316 (9th Cir. 1984). Hence, in order for Defendant to discharge the debt at issue, the court would have to conclude that the investment fund was not in the nature of support for her children.
California Family Code § 3901(a) requires that parents continue the duty of support imposed by § 3900 "as to an unmarried child who has attained the age of 18 years, is a full — time high school student, and who is not self-supporting, until the time the child completes the 12th grade or attains the age of 19 years, whichever occurs first." Although the Family Code does not require parents to provide college tuition to their children, it does allow them to agree to provide additional support, as well as authorizes the court to inquire as to whether an agreement to provide additional support has been made. Cal. Fam. Code Ann. § 3901(b) (2003). The Settlement Agreement executed by both Plaintiff and Defendant contains such a contractual agreement to pay for their children's post-majority education.
"Subject to this division, the father and mother of a minor child have an equal responsibility to support their child in the manner suitable to the child's circumstances." Cal. Fam. Code Ann. § 3900 (2003).
However, this court need not affirmatively rule on whether this contractual child support obligation conflicts with California law because federal law dictates whether an obligation arising out of a divorce decree or settlement agreement is nondischargeable support under § 523(a)(5). Seixas v. Booth (In re Seixas), 239 B.R. 398, 402 (9th Cir. BAP 1999). Congress did not include specific language to restrict § 523(a)(5) to only those obligations owed to minor children. Therefore, a contractual obligation to pay a child's post-majority college education expenses may still be nondischargeable under federal law, even though California state law imposes no such obligation.Seixas, 239 B.R. at 402.
Furthermore, bankruptcy courts, in determining the nature of a debt, are not bound by the labels used in the state court, nor are they required to accept the language chosen by the parties to define terms of a contract as conclusive of their intended meaning. Seixas, 239 B.R. at 402. It then follows that in this case, the court cannot merely accept the seemingly unambiguous wording of paragraph 21 to determine conclusively the nature of the debt as child support. Nor does the Superior Court Order's characterization of the funds as child support bind the bankruptcy court to a similar conclusion. "The intent of the parties and substance of the obligation are the touchstone of the § 523(a)(5) analysis in the Ninth Circuit." Seixas, 239 B.R. at 404.
Shaver set out factors to guide the court in determining whether allocation of funds within a settlement agreement is "in the nature of alimony, maintenance, or spousal support" or alternatively, a dischargeable debt arising from a property settlement. See Shaver, 736 F.2d at 1314 (whether debtor's contractual obligation to make monthly payments to former wife constituted spousal support or a property settlement). Such factors include whether the agreement explicitly called for spousal support outside of the clause in question, the presence of minor children, and a significant imbalance in the earning capacity of the parties. Id. at 1316. There, because no other provision in the divorce decree allocated support, the obligee maintained custody of three minor children, and possessed no job related skills while the debtor owned his own car dealership, the court found the obligation to be in the nature of spousal support, thus nondischargeable. Shaver, 736 F.2d at 1317.
The Shaver Court also noted in its findings that the obligor claimed the payments as tax deductible, and to be deductible the 28 payments must constitute support. 736 F.2d at 1315 n. 1.
Although courts commonly apply these factors to determine whether an obligation constitutes spousal support, those factors do not directly carry over as easily to determine obligations in the nature of child support. Seixas, 239 B.R. at 404. Thus, courts must look at the surrounding circumstances and all other relevant information revealing whether the parties intended a particular obligation to be in the nature of child support. Id. In Seixas, the court looked at the plain language and purpose of the contract clause in question, similar language as paragraph 21 in the Settlement Agreement, and found that although it was labeled as "ADDITIONAL BENEFITS FOR CHILDREN," its sole purpose created support for the children throughout their college education. Id. at 405. The court also took notice that no other provision of the agreement set aside money for their children and that the obligation was of limited duration, before affirming the bankruptcy court's finding that the obligation constituted child support and should not be discharged. Id.
Using a combination of the factors applied in Shaver and in Seixas persuades this court to conclude that the debt at issue is in the nature of child support. First, looking past the label "as additional child support", the plain and unambiguous purpose of the paragraph exclusively provides protection and support for the university education of the children. Next, unlike Shaver, other provisions in the Settlement Agreement do allocate support for the children, but only to the extent required by California state law. Only this paragraph offers any support to the children upon reaching the age of majority. Also, although the paragraph allows for the parties to stipulate to use of the funds beyond the enumerated provisions within the paragraph, the obligation limits itself in duration to extend only from the time of first deposit, through graduation from the college or university.
Additional factors in support of the court's conclusion stand in direct conflict with the arguments of the Defendant. The timing and structure of the deposits to minimize a tax burden does not affect the court's qualification of the nature of the debt because taxing authorities are not bound by the parties' assigned labels or characterization of debt.Kritt v. Kritt (In re Kritt), 190 B.R. 382, 389 (9th Cir. BAP 1995). Therefore, the deposit installments were nothing more than safeguarding the parties from adverse tax consequences. Finally, the court rejects the Defendant's characterization of the funds as property settlement because both parties already fulfilled their property settlement obligations to one another. For example, each party retaining one of the two cars, and half of the proceeds from the sale of the family home, both represent portions of the property settlement. Even without such specific evidence of property settlement, paragraph 21 of the Settlement Agreement directs that funds already owned by each of the parties be allocated to the children's college education, through the investment accounts. Hence, even if thesource of the accounts' deposits originated from the property settlement, Defendant's obligations under paragraph 21 of the Settlement Agreement were for child support.
Even if the Defendant filed bankruptcy prior to initial funding of the accounts, the court would still conclude that paragraph 21 is in the nature of child support, thus a nondischargeable obligation.
So, too, Defendant's obligation to replace the $58,887.96 (plus interest) as ordered in the Superior Court Order bear the same label. The court rejects Defendant's contention that once she made the two $25,000 deposits for her children's education her "support" obligations ended. To do so would elevate form over substance, constitute irresponsible disregard for the essence of the Superior Court Order, and ignore the true nature of her obligation, namely to adhere to, and be bound by, her agreement to provide for her children's college education. Stated otherwise, her obligation to restore the removed funds was just as much a nondischargeable obligation as was her obligation to fund those accounts in the first place.
DISPOSITION
The court finds Defendant's debt to be nondischargeable and has issued its judgment on August 4, 2003, consistent with this Amended Memorandum Decision.