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IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF
PENNSYLVANIA
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CIVIL ACTION, No. 00-955
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Keywords: Chapter 13, support, priority, nondischargeable, college
expenses, homestead, balloon
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September 5, 2000
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IN THE MATTER OF WILLIAM R. GROVATT
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ORDER & MEMORANDUM
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ORDER
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AND NOW, to wit, this 1st day of September, 2000, upon consideration
of the Brief of Appellant William R. Grovatt (Document No. 3, filed
March 9, 2000), Brief of Appellee, Lisa M. Lutterschmidt (Document
No. 4, filed March 21, 2000) and Reply Brief of Appellant William R.
Grovatt (Document No. 5, filed March 27, 2000), it is ORDERED, for the
reasons set forth in the attached Memorandum, that the decision of the
United States Bankruptcy Court, Eastern District of Pennsylvania,
overruling and dismissing Debtor's Objection to the Proof of Claim filed
by Lisa M. Lutterschmidt is AFFIRMED.
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MEMORANDUM
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This is an appeal from a decision of the United States Bankruptcy
Court for the Eastern District of Pennsylvania. Appellant William
Grovatt ("appellant") argues on appeal that the Bankruptcy
Court erred when it overruled his objection to a proof of claim filed by
his ex-wife, Lisa Lutterschmidt ("appellee"), for their
daughter's college education and a balloon payment on the mortgage on
the couple's former home.
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I. BACKGROUND
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Appellant and appellee were married on January 25, 1980. They had one
child--Alexandria--who was born on May 5, 1981. The couple separated in
December, 1986 and were divorced on October 6, 1992, pursuant to an
Order of the Court of Common Pleas of Lehigh County.
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As part of the divorce decree, the Common Pleas Court incorporated by
reference a Marital Settlement Agreement ("MSA") dated August
27, 1992, signed by appellant and appellee. The MSA provided, inter alia,
that appellee would maintain custody of Alexandria and that appellant
would pay $1,000 per month in child support. Two additional provisions
of the MSA are at issue in this appeal: (1) paragraph 9 of the MSA,
providing that appellant will pay for Alexandria's college education and
(2) paragraph 10(b) of the MSA, providing that appellant will pay the
mortgage on the couple's marital home at 3501 Congress Street in
Allentown, Pennsylvania ("3501 Congress").
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Appellant filed a voluntary bankruptcy petition pursuant to Chapter 13
of the Bankruptcy Code, 11 U.S.C. § 1301 et seq., on April 5, 1999, in
the United States Bankruptcy Court for the Eastern District of
Pennsylvania. On June 21, 1999, appellant filed a Chapter 13 plan in the
Bankruptcy Court.
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On July 15, 1999, appellee filed a Proof of Claim in the Bankruptcy
Court alleging that appellant owed her alimony, maintenance or support
in the total amount of $173,750.99--$9,492.37 for past due child
support, $56,180.02 as the principal balance owed to her on the mortgage
on 3501 Congress, $8,078.60 in missed payments on the mortgage and
$100,000 for their daughter's four-year undergraduate education.
Appellant filed an objection to appellee's proof of claim on October 27,
1999.
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On December 23, 1999, the Bankruptcy Court conducted a hearing on
appellant's objections to appellee's proof of claim. On January 11,
2000, the Bankruptcy Court issued an Order overruling appellant's
objections to appellee's proof of claim and dismissing those objections
with prejudice. On January 20, 2000, appellant filed a Notice of Appeal
of this Order.
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Appellant filed a brief in support of his appeal in this Court on
March 9, 2000. Appellee filed a brief in response on March 19, 2000;
appellant filed a reply on March 27, 2000.
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II. STANDARD OF REVIEW
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A district court's appellate review of a bankruptcy court decision is
two-fold. The bankruptcy court's findings of fact are reviewed under a
clearly erroneous standard. See In re Ciciliano, 13 F.3d 748, 750 (3d
Cir. 1994); Fed.R.Bankr.P. 8013. Under a clearly erroneous standard, it
is the "responsibility of an appellate court to accept the ultimate
determination of the fact-finder unless that determination either is
completely devoid of minimum evidentiary support displaying some hue of
credibility or bears no rational relationship to the supportive
evidentiary data." Fellheimer, Eichen & Braverman, P.C. v.
Charger Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995); Seaway
Painting, Inc. v. D.L. Smith Co., 242 B.R. 834, 837 (E.D.Pa. 1999). Due
regard must be given to the bankruptcy court's opportunity to judge
first-hand the credibility of the witnesses. See id.; Fed.R.Bankr.P.
8013. The bankruptcy court's conclusions of law are subject to plenary
review. See Gianakas v. Gianakas, 917 F.2d 759, 762 (3d Cir. 1990).
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III. DISCUSSION
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In the Bankruptcy Court, appellee argued that her claim was entitled
to priority under § 523 of the Bankruptcy Code, 11 U.S.C. § 523
("§ 523"). Section 523 provides, in relevant part, that a
discharge of debts under the Bankruptcy Code does not discharge an
individual debtor from any debt "to a spouse, former spouse, or
child of the debtor, for alimony to, maintenance for, or support of such
spouse or child, in connection with a separation agreement, divorce
decree or other order of a court of record...but not to the extent
that...(B) such debt includes 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.A. § 523(a)(5)
(West Supp. 2000). The determination whether a debt constitutes alimony,
maintenance or support is to be made according to federal law. See
Gianakas, 917 F.2d at 762 (citing H.R. Rep. No. 595, 95th Cong., 1st
Sess. 364 (1977)).
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A determination that an obligation is in the nature of alimony,
maintenance or support--as distinguished from a property
settlement--depends on the intent of the parties at the time the
settlement agreement was signed. See id. Determination of the intent of
the parties in drafting a settlement agreement is a question of fact for
the bankruptcy court to decide and is subject to the clearly erroneous
standard on appeal. See Boyle v. Donovan, 724 F.2d 681, 683 (8th Cir.
1984) (per curiam). In Gianakas, the Third Circuit held the intent of
the parties requires consideration of three factors: (1) the language
and substance of the agreement in the context of surrounding
circumstances, using extrinsic evidence if necessary; (2) the parties'
financial circumstances at the time of the settlement; and, (3) the
function served by the obligation at the time of the divorce or
settlement. 917 F.2d at 763.
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The Bankruptcy Court found that the MSA "clearly binds
[appellant] to obligations of support...[, that] a review of the parties
financial circumstances at the time the MSA was executed reveals that [appellee]
was in a far inferior financial position at the time the MSA was
executed...[and] that the function served by the obligations in question
at the time of the signing of the MSA and at the time of the Decree of
Divorce, which was entered less than six weeks after execution of the
MSA, was one of support for [appellee] and Alexandria." Because
such findings were not clearly erroneous, this Court affirms the
Bankruptcy Court.
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A. Educational expenses
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Paragraph 9 of the MSA provides, "Husband agrees to assume, pay
and be solely responsible for the total cost of providing the minor
child with a four-year undergraduate college education which shall
include, without limitation, tuition, room, board, books and other fees
imposed by the college, university or other institution of higher
learning." Record on Appeal ("Record"), ex. 10.
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Appellant's daughter enrolled at Cedar Crest College in Allentown,
Pennsylvania, in August, 1999. Appellant completed loan applications for
his daughter's education, but those applications were rejected. At a
hearing in front of the Bankruptcy Court, appellant testified that the
cost of his daughter's annual education was approximately $26,000 and
she received grants from Cedar Crest totaling approximately $8,000 and
from the state totaling approximately $6,600. According to appellant,
his daughter satisfied the remaining $11,000 with private loans which
appellee's current husband guaranteed. Appellant has made no financial
contribution towards his daughter's college education.
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Appellant argues that the Bankruptcy Court erred in finding paragraph
9 of the MSA to be in the nature of support because the text of the
paragraph does not say that it is intended to be in the nature of
support and there was no testimony in the Bankruptcy Court that it was
intended as a support obligation. Appellant also argues that the
Bankruptcy Court erred in valuing Alexandria's education at $100,000
because she is paying only $1,000 out of pocket annually and $17,311.48
including student loans annually. Finally, appellant argues that the
Bankruptcy Court should not have included Alexandria's expenses to live
on campus because Cedar Crest College is within two miles of 3501
Congress and the decision to live on campus is a life style choice
rather than a necessity.
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In determining the parties' intent, the Bankruptcy Court properly
considered the three factors set forth in Gianakas. The question for
this Court, then, is whether the Bankruptcy Court's finding was clearly
erroneous.
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With respect to the first factor listed in Gianakas--the language and
substance of the agreement--appellant is correct that the MSA does not
say that it is in the nature of support. In many cases, "neither
the parties nor the divorce court contemplated the effect of a
subsequent bankruptcy" when a settlement agreement is signed.
Gianakas, 917 F.2d at 762. Nonetheless, the language and substance of
the agreement requires appellant to provide a benefit to
Alexandria--specifically, a "start in life comparable to that which
[appellant] enjoyed." Boyle, 724 F.2d at 683. The Bankruptcy
Court's finding that the language and substance of the MSA evinces the
parties' intent to create a support obligation is therefore supported by
some evidence of record. Accordingly, this Court concludes such a
finding is not clearly erroneous.
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As to the second factor listed in Gianakas--the parties' financial
circumstances at the time the MSA was signed--Bankruptcy Court found
that appellant enjoyed earnings of $50,000-$60,000 per year in 1992 and
found that appellee did not work during the parties' marriage and had
little, if any, earning capacity. Appellant does not dispute this
finding and it is supported by the testimony before the Bankruptcy
Court.
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Finally, as to the third factor listed in Gianakas--the function
served by the obligation at the time of the divorce or settlement--the
Eighth Circuit has noted that an agreement to pay for a college
agreement "could be considered as providing for the economic safety
of the [children] during their college years," and an agreement
with such a provision could be seen as evincing an intent to support the
children. Boyle, 724 F.2d at 683; see also Harrell v. Sharp, 754 F.2d
902, 905 (11th Cir. 1985) (holding that agreements to pay for college
expenses are non-dischargeable in bankruptcy). This Court agrees with
the analysis of the Eighth Circuit in Boyle and concludes that the
Bankruptcy Court was not clearly erroneous in finding that the function
served by appellant's obligation to pay for Alexandria's college
education was in the nature of support.
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In light of all of the forgoing, this Court concludes that the
Bankruptcy Court was not clearly erroneous in finding that appellant's
obligation to pay for Alexandria's college education was in the nature
of support. The Court will therefore turn to appellant's arguments that
the Bankruptcy Court erred in allowing the full $100,000 claim.
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Appellant argues that the Bankruptcy Court should have reduced his
obligation under paragraph 9 of the MSA to exclude the grants that
Alexandria obtained--making the total cost of her education
approximately $74,000, not $100,000. On that issue, appellant testified
in the Bankruptcy Court that the cost of Alexandria's education,
including tuition, room and board, was approximately $26,000 per year
without reduction for any grants. In addition, the parties submitted an
invoice to the Bankruptcy Court from Cedar Crest College which detailed
Alexandria's college expenses. *fn1
Based on this evidence the Bankruptcy Court found appellant's obligation
to be $100,000.
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Paragraph 9 of the MSA sets forth appellant's support obligation as
including, "without limitation, tuition, room, board, books and
other fees imposed by the college...." (emphasis added). The MSA
does not contain a provision for set off of grants or a requirement that
Alexandria obtain grants to help pay for her education. Although
requiring appellant to pay for Alexandria's education when she can
obtain grants may be arguably unreasonable, federal courts in bankruptcy
proceedings do not review the reasonableness of state-imposed alimony
and support payments. See Fraser v. Fraser, 196 B.R. 371, 377 (E.D.Tex.
1996) (citing Forsdick v. Turgeon, 812 F.2d 801, 803-04 (2d Cir. 1987)).
Moreover, there was no evidence before the Bankruptcy Court that
Alexandria would continue to receive such grants in the future.
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Appellant also argues that the Bankruptcy Court should have excluded
Alexandria's room and board because the decision to live on campus is a
lifestyle choice, not an educational expense, and therefore such
expenses are unreasonable. As discussed above, paragraph 9 of the MSA
requires appellant to pay all expenses--including room and board--for
Alexandria's education, "without limitation." This provision
clearly contemplates appellant paying for Alexandria to live on a
college campus, and the "without limitation" language supports
appellee's argument that it is applicable even if Alexandria attends
school close to home. As discussed above, federal courts in bankruptcy
proceedings do not review the reasonableness of state-imposed support
and alimony awards. See Fraser, 196 B.R. at 377.
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The Bankruptcy Court's finding that the amount of appellant's support
obligation for his daughter's college education was $100,000 is
supported by the evidence and is not "completely devoid of minimum
evidentiary support displaying some hue of credibility." Fellheimer,
Eichen & Braverman, P.C., 57 F.3d at 1223. Accordingly, this Court
concludes that the Bankruptcy Court's finding was not clearly erroneous.
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B. Mortgage payments
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Paragraph 10(b) of the MSA provides, in relevant part, "Upon
execution of this Agreement, Husband agrees to assume, pay and be solely
responsible for the note or loan agreement and the first mortgage lien
[on the marital home] to Meridian Bank as necessary support to help Wife
meet her financial needs as well as those of the minor child, and
Husband agrees to fully pay and excuse said mortgage to be satisfied on
or before July, 1999, the anticipated date the parties' minor child will
graduate from high school." Pursuant to this provision, appellant
was required to pay the monthly mortgage payments on the marital home
and, on or before July, 1999, to satisfy the mortgage (the "balloon
payment").
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Appellant last made a payment on the mortgage on 3501 Congress in
September, 1998; since that time, appellee's second husband has paid the
mortgage in monthly installments of $811.80. Appellant did not make the
balloon payment in July, 1999 or any time thereafter.
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Appellant argues that the Bankruptcy Court erred in ruling that the
parties intended the balloon payment to be in the nature of support
because: (1) the language of paragraph 10(b) does not support such a
conclusion; (2) the balloon payment came due after Alexandria reached
adulthood; and, (3) the other evidence in front of the Bankruptcy Court
supported a conclusion that the parties intended the balloon payment to
be a property settlement.
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With respect to the first factor of Gianakas--the language and
substance of the agreement in the context of surrounding
circumstances--appellant argues that the Bankruptcy Court misread the
MSA and ignored the evidence on this point. Paragraph 10(b) of the MSA
states that appellant is responsible for the mortgage on 3501 Congress
"to help Wife meet her financial needs as well as those of the
minor child, and Husband agrees to fully pay and cause said mortgage to
be satisfied on or before July, 1999...." According to appellant,
the "comma after the words `minor child' effectively separates the
subsequent language regarding the balloon payment obligation from the
previous language regarding `necessary support.'" Brief of
Appellant, p. 8. Appellant would have the Court apply the language
regarding the purpose of the payments as applying only to the monthly
mortgage payments, and not to the balloon payment obligation which comes
after the comma.
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Appellant argues that the timing of the balloon payment, when
considered in light of the language of paragraph 10(b), supports a
conclusion that the parties intended the balloon payment to be a
property settlement. In this vein, appellant points to the fact that the
balloon payment was to be made one month after Alexandria reached the
age of majority--and appellant's child support obligation under the MSA
terminated--suggests that the parties did not intend the balloon payment
to provide support for Alexandria. Appellant also relies on the language
of paragraph 10(b) itself, specifically to the statement of intent,
which refers to helping "wife meet her financial needs as well as
those of the minor child...." (emphasis added). According to
appellant, the reference to helping the minor child means the parties
intended such a support obligation to terminate when the
child--Alexandria--was no longer a minor.
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It is appellant's position that the MSA, in whole, does not evince the
parties' intent to have appellant continue supporting appellee.
Specifically, appellant points to paragraph 7 of the MSA--which sets
forth appellant's child support requirements--and paragraph 10 of the
MSA--which deals with a variety of property issues. Appellant argues
that because paragraph 7 of the MSA terminated his child support
obligation when Alexandria turned 18 and imposed no alimony payments,
the parties' intent was to end all support payments when Alexandria
reached the age of 18. Appellant further argues that because paragraph
10(e) requires appellee to split any proceeds of sale on 3501 Congress
if she sold it before Alexandria reached the age of majority, but does
not impose such an obligation for after Alexandria reached the age of
majority, the MSA evinces the intent of the parties to provide housing
until Alexandria reached the age of majority, but not thereafter.
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Appellant relies on the district court opinion in Gianakas, which
noted that a court can find an intent to create a support obligation, in
part, from structuring an obligation to "be paid in installments
rather than a lump sum...." Gianakas v. Gianakas, 112 B.R. 737, 742
(W.D.Pa. 1990). It is appellant's position that the parties' decision to
alter appellant's obligation on the mortgage from monthly payments to a
balloon payment evinces an intent to use the balloon payment as a
property settlement.
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Finally, appellant argues that the evidence before the Bankruptcy
Court of the circumstances surrounding the signing of the MSA mandates a
conclusion that the balloon payment was not intended in the nature of
support, but rather as a property settlement. In support of this
argument, appellant points to his testimony before the Bankruptcy Court
that the balloon payment was intended as a property settlement and to a
letter dated June 8, 1992, from appellee's attorney to appellant's
attorney discussing the MSA. In that letter, appellee's attorney stated,
"You are reminded that the marital home is Mrs. Grovatt's property
settlement."
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Appellant's reading of paragraph 10(b) is a fair one and appellant has
presented some evidence in support of his position that the balloon
payment was intended as a property settlement for appellee. However, the
Bankruptcy Court's reading of paragraph 10(b) as evincing an intent to
create a support obligation is also supported by the evidence and is not
"completely devoid of minimum evidentiary support displaying some
hue of credibility." Fellheimer, Eichen & Braverman, P.C., 57
F.3d at 1223. Accordingly, this Court concludes that the Bankruptcy
Court's finding was not clearly erroneous.
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Moreover, even if the Bankruptcy Court was clearly erroneous in
finding that the language and substance of the MSA supports a conclusion
that the parties intended the balloon payment to be in the nature of
support, such error would not be sufficient to warrant reversing the
Bankruptcy Court. The language and substance of the agreement is only
the first factor of the Gianakas test for the parties' intent. The other
factors in Gianakas--the parties' relative financial situation at the
time the MSA was signed and the function served by the obligation at the
time of the divorce or settlement--support the Bankruptcy Court's
conclusion that paragraph 10(b) of the MSA was intended as a support
obligation.
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The second factor of the Gianakas test is the parties' financial
circumstances at the time of the settlement. In this vein, the Third
Circuit has stated that the "facts that one spouse had custody of
minor children, was not employed, or was employed in a less remunerative
position than the other spouse are aspects of the parties financial
circumstances at the time the obligation was fixed shed light on the
inquiry into the nature of the obligation as support." Gianakas,
917 F.2d at 763. The parties do not dispute that appellee had custody of
Alexandria--a minor child. In addition, as discussed above, the
Bankruptcy Court found that appellee did not work during the parties'
marriage, that appellee had little, if any, earning capacity at the time
of the parties' divorce, and that appellant had earnings of $50,000 to
$60,000 at the time of the divorce.
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The third factor of the Gianakas test is the function served by the
obligation at the time of the divorce or settlement. The Third Circuit
noted that an "obligation that serves to maintain daily necessities
such as food, housing and transportation is indicative of a debt
intended to be in the nature of support." Id. There is no question
that appellant's obligation provided a daily necessity--housing--to
appellee. Appellant argues that if the balloon payment had been intended
to provide such a necessity, appellant could have continued to make
mortgage payments, rather than a balloon payment. As discussed above,
federal courts sitting in bankruptcy are not tasked with evaluating the
reasonableness of the method in which the parties to a settlement
agreement accomplished their goals. See Fraser, 196 B.R. at 377. The
Bankruptcy Court's finding that the balloon payment was designed to
support appellee was not without evidentiary foundation, given that it
provided her with housing.
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After consideration of the three Gianakas factors, this Court
concludes that the Bankruptcy Court's finding that the mortgage
obligation--including the balloon payment--was intended as a support
obligation was not clearly erroneous because it was not completely
devoid of minimum evidentiary support. Accordingly, the Court affirms
the Bankruptcy Court's decision with respect to the mortgage issue.
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IV. CONCLUSION
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The Bankruptcy Court did not commit clear error when it determined
that appellant's obligations to pay for his daughter's education and for
the mortgage on 3501 Congress were intended to be support obligations.
Accordingly, the decision of the Bankruptcy Court is affirmed.
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JAN E. DUBOIS, J.
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Opinion Footnotes |
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*fn1 A copy of the invoice is not
included in the record before this Court. |