In the Matter of Mason: Debt to a former spouse is non-dischargeable in bankruptcy

The Facts

Husband and Wife divorced, and the final decree directs Wife to pay 50% of Husband’s 2006 taxes. Wife later files for Chapter 7 bankruptcy, listing her obligation under the divorce decree in the bankruptcy petition. She lists Husband as a co-debtor on the tax debt, and as a creditor holding an unsecured non-priority claim. Wife received a discharge from the U.S. Bankruptcy Court. Each spouse petitioned the IRS for “innocent spouse” relief from their federal income tax liability for 2006. The Wife’s petition was granted, the Husband’s denied.

Husband filed a motion for contempt, asking the trial court to compel the wife to pay the obligation to him as ordered in the divorce decree. The trial court denied the motion, reasoning that:

[Wife] sought to have her debt to [Husband] discharged in bankruptcy. Toward [that] end, in her bankruptcy petition [Wife] noticed [Husband] as a creditor for “2010: divorce settlement” in the amount of the original debt to the IRS. [Husband] was duly noticed that he was listed as a creditor and had the opportunity to litigate the issue in the bankruptcy court. [Husband] was granted a bankruptcy and the debt was discharged.

The Appeal

Husband appealed, arguing that: 1) the trial court erred as a matter of law when it found that Wife’s obligation to pay 50% of his 2006 federal income taxes had been discharged in bankruptcy because he failed to litigate in the bankruptcy court that her obligation was non-dischargeable; and, 2) that the trial court erred as a matter of law and unsustainably exercised its discretion when it declined to award him attorney’s fees and costs.

The Supreme Court issued an opinion on November 28, 2012. 

The Holding

Wife’s debt to Husband to pay 50% of his 2006 taxes was automatically non-dischargeable under 11 U.S.C. § 523(a)(15) as a debt to a former spouse. Even if the Wife was ordered to make payments on the obligation to a third party instead of directly to Husband, it is still a debt to the spouse and therefore non-dischargeable.

The trial court did not err when it declined to award Husband attorney’s fees. The general rule in New Hampshire is that each party must bear their own costs in litigation. A prevailing party may only recover attorney’s fees when it is authorized by statute, there is an agreement between the parties allocating or awarding attorney fees, or there is an established judicial exception to the general rule. Exceptions to the general rule include:

(W)here an individual is forced to seek judicial assistance to secure a clearly defined and established right if bad faith can be established; where litigation is instituted  or unnecessarily prolonged through a party’s oppressive, vexatious, arbitrary, capricious or bad faith conduct; as compensation for those who are forced to litigate in order to enjoy what a court has already decreed; and for those who are forced to litigate against an opponent whose position is patently unreasonable.

The Supreme Court noted that although it held that Wife’s position was erroneous under the law, her position was not patently unreasonable. Therefore, Husband was not entitled to an award of attorney’s fees.

The Takeaway

Whether a financial obligation to a former spouse is incurred by an agreement approved by the court or by court order, that obligation cannot be discharged in bankruptcy. Plan on the obligation surviving the discharge, and ask your bankruptcy attorney whether the bankruptcy court can restructure the repayment of the debt.