Where a separation agreement was the source of debt between the debtor and his former spouse, the debt was nondischargeable pursuant to 11 U.S.C § 523(a)(15).
Creditor Yvette Nonte and debtor Kent David Burstein are former spouses. On or about April 27, 2011, they entered into a property settlement agreement that was subsequently incorporated but not merged into their divorce. Section six of the separation agreement, in relevant part, required the debtor to pay the creditor a portion of any cash distributions he received from his companies and to provide her with access to related accounting documentation.
In March 2014, the creditor filed a lawsuit in Maryland state court, alleging that the debtor breached section six of the separation agreement. The parties entered a May 2015 settlement agreement, in which the debtor agreed to pay the creditor a sum in exchange for dismissal of the lawsuit with prejudice.
On June 27, 2019, the debtor filed a Chapter 7 voluntary petition. The creditor filed an adversary complaint against the debtor in May 2020, alleging that the debt to her is nondischargeable pursuant to 11 U.S.C § 523(a)(15). In March 2022, the bankruptcy court determined that the debt was nondischargeable. Before the court is the debtor’s appeal of that order.
For a debt to be deemed nondischargeable under § 523(a)(15), the debt must (1) be to a spouse, former spouse or child of the debtor, (2) not be a domestic support obligation and (3) have been incurred during a divorce or separation or “in connection with a separation agreement, divorce decree, or other order of a court of record.”
The parties agree that the debt at issue is owed to a former spouse and does not qualify as a domestic support obligation. Thus, the sole question before the court is whether the debt at issue was “incurred … in connection with a separation agreement.” The bankruptcy code does not define “in connection with” as it relates to § 523(a)(15), and there is no binding case law directly addressing the meaning of this statutory language.
The most natural reading of “in connection with” in this statutory context would require the debt to be logically or causally related to a separation agreement, divorce decree or other order of a court of record. This reading is also consistent with § 523(a)(15)’s legislative and drafting history.
The debtor raises two arguments that the debt at issue is not “in connection with” the separation agreement. First, he argues that the combined effect of each agreement’s release clause is to change the nature of the debt. Second, the debtor claims that the settlement agreement constitutes a novation and is therefore separate and distinct from the separation agreement. The court finds that the separation agreement is a but-for cause of the debt. Neither of the debtor’s arguments to the contrary change the nature of the underlying debt.
In addition to his arguments regarding the causal connection, the debtor raises both a constitutional and a policy-based argument to the bankruptcy court’s interpretation of “in connection with.” First, the debtor argues that the bankruptcy court erred as a matter of law because its application of § 523(a)(15) prohibits and preempts the creditor’s right to contract. To the extent that the debtor is relying on substantive due process for his constitutional right-to-contract claim, more recent Supreme Court cases have largely foreclosed that argument.
Next, the debtor argues that the bankruptcy court’s decision, as a matter of policy, is a “paternalistic” application of § 523(a)(15) because “it suggests that all debtors will never be able to negotiate with finality with a former spouse” and “rejects [the creditor]’s ability to freely negotiate and release any divorce related debt.” The court finds the merits of the debtor’s argument unavailing for at least three reasons.
Burstein v. Nonte, Case No. 2:22-cv-267, Aug. 23, 2023. EDVA at Norfolk (Walker). VLW 023-3-505. 15 pp.