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Ninth Circuit BAP Finds Retirement Funds Received in Divorce Are Not Spousal Support - In re Diener

December 17, 2012

In a bankruptcy, financial payment obligations created through divorce are treated differently from other income and expenses. Vincent Howard and our Norco personal bankruptcy lawyers frequently tell clients that child support and spousal support (alimony) are not dischargeable in bankruptcy, but the other side of that coin is that people who receive those support payments can exempt them from bankruptcy. However, as Stephanie Diener discovered in In re Diener, that rule doesn't apply to other money received as part of a divorce settlement. Diener separated from David Diener after 28 years of marriage, and filed for bankruptcy while the divorce was proceeding. The bankruptcy trustee challenged her claim for an exemption for all the funds in a retirement account, and the Ninth Circuit's Bankruptcy Appellate Panel affirmed a denial of the exemption.

The Dieners' final divorce decree awarded Stephanie spousal support for five months, plus half of a 401k and all of a MetLife Non-Qualified Retirement Account. She amended her bankruptcy to list both accounts and claimed both as exempt retirement accounts. Her trustee objected to the exemption for the MetLife account, arguing that it was not exempt by law and not necessary for her support, and also filed in bad faith because she had not disclosed the asset before. The bankruptcy court denied the exemption without a finding of bad faith, and Stephanie amended her bankruptcy to claim the account as spousal support. The trustee again objected, and at a hearing, Stephanie testified that the account was intended to "buy out" David's spousal support obligation because his checks were late and often bounced, and she wanted no further contact with him. The bankruptcy court ultimately denied the exemption, finding the MetLife account was awarded more in the nature of property division than spousal support.

Stephanie appealed to the BAP of the Ninth U.S. Circuit Court of Appeals. That panel found that the bankruptcy court made an error, but held it harmless and upheld the result. Bankruptcy courts must look at the intents of the parties and the nature of obligations in divorce to determine whether they're exempted support or non-exempted property division, the court noted. However, the panel analyzed at length the issue of whether it should use the rules for discharge exemptions on this case, which was about exempted property. It finally agreed with the Fifth Circuit in a pre-BAPCPA case, which held that different rules should apply, but declined to use the Fifth's test because this exemption stems from California's bankruptcy exemptions. Applying contract law, the panel then concluded that the divorce decree expressly called the MetLife account a property division award. Thus, it said, the bankruptcy court erred when it even considered extrinsic evidence of subjective intent, though the error was ultimately harmless. Thus, it affirmed the bankruptcy court.

The Westminster consumer bankruptcy attorneys at Howard Law, P.C., suspect this decision will be appealed--and if it is, we hope the Ninth Circuit reverses it. The panel's decision turned on its interpretation of caselaw as requiring it to strictly apply all contracts as written. It's not hard to see that other courts may give more weight to other cases, that call for weighing the intent of the parties rather than the letter of the divorce decree. And of course, Diener presented evidence that the parties intended the property award to replace spousal support, though of course a court would have to agree to that interpretation. Vincent Howard and our Ontario individual bankruptcy lawyers will be interested to see whether this case is appealed and if so, what its outcome might be.

If you are so deep in debt that you don't believe you can ever get out, and you'd like to discuss your legal options with an experienced attorney, call Vincent Howard and the team at Howard Law. You can reach us through our website or call 1-800-872-5925.

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