United States Court of Appeals
For the First Circuit
No. 09-9005
IN RE: NELSON J. SMITH,
Debtor.
NELSON J. SMITH,
Appellee,
v.
RITA M. PRITCHETT,
Appellant.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Torruella and Boudin, Circuit Judges,
and Saris,* District Judge.
Clifford P. Gallant, Jr., with whom Beliveau, Fradette, Doyle
& Gallant, P.A., was on brief for appellant.
Mark P. Cornell, with whom Kelly Ovitt Puc and Cornell and
Ovitt Puc, PLLC, was on brief for appellee.
November 6, 2009
*
Of the District of Massachusetts, sitting by designation.
TORRUELLA, Circuit Judge. This is an appeal of an order
of the Bankruptcy Appellate Panel ("BAP") reversing an order of the
Bankruptcy Court. The BAP held that a late payment penalty was not
a domestic support obligation and thus dischargeable in bankruptcy.
After thorough consideration, we affirm.
I. Facts & Procedural History
The issue in this appeal arises from the marriage and
subsequent divorce of Nelson J. Smith and Rita M. Pritchett. The
parties were married on April 20, 1986. No children were born of
the marriage. A little over nine years later, the parties filed
for divorce in the Middlesex County Probate and Family Court,
citing an irretrievable breakdown of the marriage. On October 26,
1995, the Probate Court approved a Separation Agreement
("Agreement") filed jointly by the parties. The court's order
provided that the Agreement survived as an independent contract.
The Agreement stated that it resolved all issues between
the parties, and that the parties' respective financial
circumstances had been taken into account, although the parties'
specific circumstances were not disclosed in the Agreement.
The Agreement contained and incorporated Exhibits A, B,
C, D, E, F, and G, detailing the duties of the parties. The
Exhibits were entitled "ALIMONY," "MEDICAL INSURANCE," "DIVISION OF
ASSETS," "LIFE INSURANCE," "ALLOCATION OF MARITAL DEBTS," "INCOME
TAX RETURNS," and "SPECIAL PROVISIONS," respectively. Exhibit A
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awarded Pritchett alimony payments beginning at $2,300 per month
and decreasing to $1,600 per month on a set schedule that would
terminate approximately five years after the signing of the
Agreement. In the event of Pritchett's remarriage, the Agreement
stated that alimony payments were to decrease to $1,000 per month
but nevertheless continue through the five year period. The
Agreement also included a provision requiring Smith to purchase and
transfer to Pritchett a term life insurance policy on his life for
the five year term of the alimony payments to ensure that the
alimony payments would survive Smith's death.
Under "Exhibit 'A'," entitled "ALIMONY," the Agreement
also provided that:
All alimony payments shall be due in funds
available to the Wife on or before the first
of each month, and shall be subject to a late
payment penalty in the amount of $50.00 for
each day after the first of each month upon
which they are received by or become available
to the Wife.
Exhibit A further provided that "[t]he payments made by the Husband
. . . shall be deductible for the Husband and taxable to the Wife
for income tax purposes."
With the exception of debts related to one property,
Smith was to be responsible for the parties' marital debts. In
addition, the Agreement also provided that the Husband would "pay
to the Wife $150 per month toward the maintenance of a health plan
of the Wife's choice for her benefit." Finally, the Agreement
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provided that either party would be entitled to reasonable
attorney's fees in the event of a breach.
Smith appears to have fallen in arrears almost
immediately after the Agreement became effective, and in 1998, he
filed a Complaint for Modification with the probate court. On
August 20, 1998, the court entered a Judgment of Modification
amending the terms of the alimony payments to a total payment of
$42,373 payable at a rate of $500 per month until paid in full.
Other than this change, the Separation Agreement remained in full
force and effect.
In 2005, Pritchett filed a Complaint for Contempt with
the appropriate Massachusetts probate court seeking accrued late
payment penalties from Smith. The court found that although Smith
was current on his alimony payments, and had only one remaining
payment due, his payments had been consistently late. As a result,
on September 16, 2005, the court entered judgment against Smith in
the amount of $75,010, which represented the late payment penalties
that had accumulated since the 1998 modification.
In 2006, Pritchett commenced an action in the
Hillsborough Superior Court in the state of New Hampshire to
enforce the judgment and obtained an ex parte attachment to Smith's
homestead in New Hampshire. A lien was recorded accordingly in the
Hillsborough County Registry of Deeds on July 21, 2006. On
March 2, 2007, the New Hampshire court approved a stipulation by
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the parties for a judgement of $75,010 plus applicable statutory
interest and costs.
On October 5, 2007, Smith filed a voluntary petition
under Chapter 13 of the Bankruptcy Code with the United States
Bankruptcy Court for the District of New Hampshire. Smith's
bankruptcy schedules listed Pritchett's claim to late payment
penalties in Schedule D, "Creditors Holding Secured Claims."
Smith filed a proposed Chapter 13 Plan on October 11,
2007, disclosing his intent to file a motion to avoid Pritchett's
lien pursuant to 11 U.S.C. § 522(f), maintaining that it impaired
his homestead exemption under N.H. Rev. Stat. Ann. § 480:1.1 On
November 29, 2007, Pritchett filed a proof of claim in the amount
of $81,932.04.2 Pritchett also filed an objection to confirmation
of Smith's proposed Chapter 13 plan asserting that her claim was
secured and that it was a domestic support obligation and thus
entitled to priority under 11 U.S.C. § 507(a)(1)(A). See also 11
U.S.C. § 1328(a)(2) (excepting from discharge domestic support
1
The Bankruptcy Code states that a Chapter 13 Plan shall "provide
for the full payment, in deferred cash payments, of all claims
entitled to priority under Section 507 of this title, unless the
holder of a particular claim agrees to a different treatment of
such claim." 11 U.S.C. § 1322(a)(2).
2
"When a debtor declares bankruptcy, each of its creditors is
entitled to file a proof of claim-i.e., a document providing proof
of a right to payment-against the debtor's estate." Travelers Cas.
and Sur. Co. of America v. Pacific Gas and Elec. Co., 549 U.S. 443,
449 (2007) (internal quotations omitted); see also 11 U.S.C. § 101
(5)(A).
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obligations). On December 6, 2007, Smith filed an objection to
Pritchett's proof of claim, and a motion to avoid Pritchett's lien.
The bankruptcy court conducted a non-evidentiary hearing
on the motions and held that Pritchett's claim was a domestic
support obligation and thus denied Smith's motion to avoid
Pritchett's lien. Conceding it was a "close call," the bankruptcy
court concluded that the $50 fee "looks, smells, and feels too much
like attorneys' fees collecting alimony and support payments, which
have historically . . . been treated as in the same nature" as
alimony. Consequently, the court entered orders denying Smith's
motion to avoid Pritchett's lien on his home and overruling his
objection to Pritchett's claim. Smith appealed to the BAP, which
held oral arguments on December 29, 2008. The BAP reversed the
bankruptcy court on both counts, holding that the obligation at
issue was not in the nature of support and thus the lien on Smith's
home was avoidable and the claim was a general unsecured claim not
entitled to priority status. See In re Smith, 398 B.R. 715 (1st
Cir. BAP 2008). The BAP held that "the bankruptcy court's
statement that ' . . . it looks, smells and feels too much like
attorneys' fees" was not supported by the Agreement or the state
court order since the Agreement separately provided for attorneys'
fees. Id. at 722. Subsequent to the BAP's decision, Smith's
residence was foreclosed upon by a senior lien holder, rendering
the lien avoidance issue moot.
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II. Standard of Review
On this appeal, we are essentially in the same position
as the BAP, "reviewing the bankruptcy court's findings of fact for
clear error and affording de novo review to its conclusions of
law." In re Werthen, 329 F.3d 269, 272 (1st Cir. 2003). The
question of intent is one of fact, see In re Werthen, 282 B.R. 553,
556 (B.A.P. 1st Cir. 2002) (collecting cases), but also implicates
questions of law. See, e.g., In re Hale, 289 B.R. 788, 791 (B.A.P.
1st Cir. 2003). In this case, we agree with the BAP that the
bankruptcy court judge's determination that the $50 fee was like
attorneys' fees is not supported by the Agreement and thus clearly
erroneous. In any event, the parties agree that the relevant facts
are undisputed and therefore our review is de novo.
III. Discussion
The term "domestic support obligation" ("DSO") is a newly
defined term in the Bankruptcy Code, as updated by the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").
See Pub. L. 109-8, 119 Stat. 23 (2005). As relevant here, a DSO is
defined as
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 [owed to] a former spouse
[and that is] in the nature of alimony,
maintenance, or support . . . without regard
to whether such debt is expressly so
designated.
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11 U.S.C. § 101(14A). Thus, pursuant to the statute, for an
obligation to a former spouse to be considered a DSO, it must
actually be in the nature of support. This issue is one of federal
bankruptcy law, and not state law. See In re Werthen, 329 F.3d at
272-73.
DSO creditors receive special treatment in bankruptcy.
They are given priority over most other creditors, see 11 U.S.C.
§§ 507(a)(1)(A), (B), and their claims are also nondischargeable
under chapters 7 and 13. See 11 U.S.C. §§ 727(b), 1328(a)(2). The
party seeking to have a debt determined a DSO and thus
nondischargeable bears the burden of proving that the obligation is
in the nature of support. In re Werthen, 329 F.3d at 271-72
(stating that moving party "bore the burden of showing that the
debts were nondischargeable") (citing Grogan v. Garner, 498 U.S.
279, 287-88 (1991)).
"[S]upport payments are, roughly speaking, what is given
to provide for the upkeep of the recipient spouse and children."
In re Werthen, 329 F.3d at 273. The label applied to the
obligation by the court or the parties is not necessarily
controlling for Bankruptcy Code purposes. Id. We have said that
one of the principal issues is "whether the divorce court judge
'intended' a particular award to be for support or for something
else." Id. In other words, the intended purpose the obligation was
meant to serve. To discern this intent, "courts look to a range of
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factors, including the language used by the divorce court and
whether the award seems designed to assuage need, as discerned from
the structure of the award and the financial circumstances of the
recipients." Id. This Court has not adopted a specific multi-
factor test used to discern intent when determining whether an
obligation is in the nature of support. See In re Soforenko, 203
B.R. 853, 859 (Bankr. D. Mass. 1997) (describing the multitude of
multi-factor tests used in this Circuit). Agreeing with the BAP
that "[a]s in all fact intensive inquiries, the critical factors
depend on the totality of circumstances of a particular case," we
decline to do so now. In re Smith, 398 B.R. at 722.
A trial court may look beyond the separation agreement to
discern the parties' relative financial circumstances at the time
of the divorce as evidence of the intent of the parties. See,
e.g., In re Werthen, 329 F.3d at 273-74. In this case, the
bankruptcy court decided that supplementing the record with
additional information was unnecessary, because
whatever [the parties'] relative status was is
totally subsumed by the fact that they agreed
to a schedule of alimony payments that were
fixed . . . and that was approved by the
Court, so that, to me, is the final reflection
by the agreement of the parties and by the
order of the Court on what their economic
disparity in terms of assets and earning
potential and income were at the time.
Hearing Tr. Jan. 30, 2008, at 38. The parties do not dispute this
holding.
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The question then is whether, given the language of the
agreement, the $50 per day late payment fee provision was intended
as support to Pritchett, or, alternatively was intended as a
punitive measure to deter Smith from paying late. Pritchett argues
that the language in the Agreement supports her position that the
$50 fee was intended to serve as alimony, maintenance, or support.
She points out that the fee provision was included in an Exhibit
entitled "ALIMONY." She also points out that the Agreement did not
distinguish between the alimony schedule and the $50 late fee, and
stated that any payments made by Smith under the Exhibit were to be
treated the same way alimony is normally treated for income tax
purposes. That is, the payments were deductible as alimony to him,
and taxable to her.3
We find Pritchett's arguments to be unavailing. First,
at the same time that the provision was located under a heading
called "ALIMONY" in the Agreement, the language of the provision
referred to it as a "late payment penalty."4 In any event, the
3
At oral argument and in response to this Court's question,
Pritchett argued that the fee was intended to compensate her for
the time value of her alimony payments, and the cost of procuring
interim financing while her alimony payments were outstanding.
This court will generally "not consider an issue raised for the
first time at oral argument," Piazza v. Aponte Roque, 909 F.2d 35,
37 (1st Cir. 1990), but our holding in this case would not be
different even if Pritchett had advanced this position in her
brief.
4
This part of the Agreement read, in relevant part:
All alimony payments shall be due in funds available to
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labels parties give to obligations are not controlling here, as
discussed supra. See also In re Werthen, 329 F.3d at 273 (noting
that "federal courts have been unwilling to treat the label applied
by the divorce court as controlling for Bankruptcy Code purposes").
While the tax treatment of the provision constitutes a factor
favoring Pritchett, we are persuaded that the late fee was intended
to encourage payment of alimony and was not itself alimony.
First, the fee was contingent on Smith's tardiness to
pay, and was not certain to materialize at all. Since Pritchett
had no expectation of this payment unless and until Smith was late,
it follows that the only way this contingent payment could be
considered alimony is if it was meant to compensate Pritchett for
the time during which she was waiting for her alimony payment.5
However, that argument is belied by the fact that the $50 fee was
a fixed charge that had no connection to the actual alimony owed to
Pritchett. Whether Smith was late by a single dollar or by the
entire alimony payment, he would still owe Pritchett the same $50.
Second, the Agreement called for Smith's monthly alimony
payments to decrease every year, from $2,300 to $1,600, and to as
the Wife on or before the first of each month, and shall
be subject to a late payment penalty in the amount of
$50.00 for each day after the first of each month upon
which they are received by or become available to the
Wife.
5
This was a position that was not advanced by Pritchett, as noted
above, but which we consider here only for the sake of argument.
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low as $1,000 if Pritchett remarried. In contrast, the fee for a
late payment was fixed throughout the term of the Agreement. A $50
per day fee completely disconnected from any amount that Smith owed
Pritchett cannot have been expected to be directly related to her
recouping those costs. Had the parties provided for an interest-
based fee, contingent on the amount of alimony outstanding,
Pritchett would have a stronger argument.6
The substantial provisions for Pritchett's support
outlined in the agreement also weigh against finding that the late
payment fee was intended to provide for Pritchett's support. The
Agreement that Smith and Pritchett entered into was relatively
sophisticated. In addition to alimony that continued even in the
event of Pritchett's remarriage, the Agreement provided for
contributions toward her medical insurance premiums, and mandated
that the support outlive Smith's death. Legal fees incurred in
enforcing the agreement, a provision not always contemplated in
such contracts, were clearly provided for in this instance.
Pritchett also received the only real estate owned by the parties
that was not in foreclosure, and Smith was solely responsible for
the parties' debts incurred prior to the divorce.
We therefore agree with the BAP's conclusion that the
obligation to pay a $50 fee per day that Smith was late in alimony
6
Massachusetts provides statutory interest for judgments
precisely to mitigate the incremental costs arising from late
payments. See Osborne v. Biotti, 533 N.E.2d 1341 (1989).
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payments was "intended to ensure that Pritchett's need was
assuaged, though it was not itself intended to assuage the need."
In re Smith, 398 B.R. at 723. Accordingly, we conclude that
Pritchett's claim is a general unsecured claim not entitled to
priority status and can be discharged in Smith's bankruptcy. See
11 U.S.C. §§ 523(a)(15), 1328(a)(2).7
Affirmed.
7
We clarify that our holding today does not speak to the validity
of the Agreement between the parties. Our decision only affects
the treatment of Pritchett's claim in bankruptcy.
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