Where's My Refund? How to Address Overpaid Domestic Support Obligations Under the Bankruptcy Code

• Jurisdiction: United States,Federal
• Publication year: 2020
• Citation: Vol. 36 No. 2

Where's My Refund? How to Address Overpaid Domestic Support Obligations under the Bankruptcy Code

Amanda Nowak

WHERE'S MY REFUND? HOW TO ADDRESS OVERPAID DOMESTIC SUPPORT OBLIGATIONS UNDER THE BANKRUPTCY CODE

Abstract

Domestic support obligations are a source of much debate among bankruptcy courts throughout the United States. Concomitantly, overpayments of domestic support obligations are no exception. Courts across the nation are split as to whether overpayments of support debts fall within the definition of a domestic support obligation listed in 11 U.S.C. §101(14A). The specific language enumerated in §101(14A) giving rise to the jurisdictional split pertains to whether the debt in question is "in the nature of alimony, maintenance, or support." Courts that deem overpaid support debts as domestic support obligations focus on the debt's function at the time of the original agreement whereas other courts reject this approach and view the overpayment as a simple money judgment. This discrepancy has led to an inequity for families across the nation as jurisdictions throughout the United States produce distinctive interpretations of overpaid support debts. This Comment will specifically analyze overpaid domestic support obligations with reference to the 11 U.S.C. §507 list of priorities and §523 exceptions to discharge. In order to remedy the jurisdictional split, I propose a new set of standards for bankruptcy courts to follow when confronted with overpaid domestic support obligations.

Instead of understanding child support and alimony collectively within the term domestic support obligation, I propose that the two obligations should be considered independently. The emerging standards include three main factors: (1) all domestic support obligations should be excepted from discharge, (2) the overpayment of child support should be entitled to priority status whereas (3) the overpayment of alimony should not. These standards are determined after analyzing the jurisdictional split, Congress's intent in drafting the U.S. Bankruptcy Code, the substance of the obligation, and the intent and current condition of the parties. Exceptions to the standards arise when confronted with unique circumstances; however, this interpretation should be followed as a general rule.

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INTRODUCTION

Courts across the nation attempt to comply with two competing principles laid out in the U.S. Bankruptcy Code (Code):¹ (1) the debtor's fresh start and (2) the creditors' right to payment.² When confronted with an overpaid support obligation,³ it becomes difficult for courts to appropriately apply these principles.⁴ The Code inadvertently fails to clarify what "overpaid support obligations" are and how these debts should be managed throughout bankruptcy proceedings.⁵ This gap in the Code creates an inequity for families across the nation because different jurisdictions produce differing outcomes on how these debts are treated.

In the Southern District of Ohio, in In re Norbut, Margaret and Theodore Norbut were divorced after twenty-seven years of marriage.⁶ The Judgment Entry and Decree of Divorce dictated that Margaret was entitled to fifteen years of alimony payments that remained in effect until Theodore's retirement.⁷ Years later, Theodore sought termination of the alimony payments in state court as a result of his early retirement.⁸ After years of litigation, the state court retroactively terminated his alimony payments, resulting in Margaret owing $72,694.14 in overpayment expenses.⁹ Subsequently, Margaret filed a petition under chapter 7 of the Code.¹⁰ Theodore then commenced an adversary proceeding against Margaret seeking summary judgment for the non-dischargeability of the debt declaring it a domestic support obligation.¹¹ In other words, while Margaret would no longer owe her other debts once she concludes the bankruptcy process, her obligation to Theodore would survive. The Bankruptcy Court for the Southern District of Ohio relied on the previous state court decision and granted Theodore's motion for summary judgment.¹² Specifically, the court found "that an obligation consists of support whenever

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there is a legal duty to pay such an obligation."¹³ The court followed previous decisions that found overpaid support obligations to be "in the nature of alimony, maintenance or support."¹⁴

In the Middle District of Florida, in In re Galiardo, Joyce Lynn Galiardo and Frederick Galiardo were divorced in 1992.¹⁵ A separation agreement ordered Frederick to pay Joyce alimony payments in installments over a number of years.¹⁶ Following the satisfaction of the installments, Frederick unintentionally continued to pay Joyce alimony for an additional two years.¹⁷ Upon recognizing this mistake, Frederick brought suit in state court where Joyce was ordered to pay him $222,650.00 for unjust enrichment.¹⁸ Subsequently, Joyce filed a petition for chapter 7 relief under the bankruptcy code which was later converted to a chapter 13 case.¹⁹ Similar to the Norbut case, the question at issue was whether the $222,650.00 retained its character as a domestic support obligation.²⁰ In reaching its conclusion in In re Galiardo, the Bankruptcy Court for the Middle District of Florida reasoned that Frederick did not have any personal need for support in regard to the repayment of the debt.²¹ The court found that the debt was not in the nature of support and therefore was not a domestic support obligation.²² In contrast to In re Norbut, the bankruptcy court in this case decided to overlook the state court's decisions and declared the overpaid debt as dischargeable.²³

These two cases consider the same issue but reach two vastly different conclusions.²⁴ Both courts attempt to decipher how overpaid support obligations should be treated under the Code. Different conclusions emerge because the Code does not provide clear instructions on how to proceed when confronted with an overpaid support obligation. This complication affects the personal lives of individuals across the country.²⁵ An equitable remedy must rise to the surface

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to allow individuals to obtain uniform treatment in bankruptcy proceedings across the country.

Federal bankruptcy law and state family law inevitably overlap with one another. Domestic relations are traditionally matters reserved for state courts,²⁶ but once a debtor files a petition for bankruptcy relief, federal law comes into play.²⁷ The balance between state and federal law in bankruptcy is clear from the plain language of the Code. The Code, throughout its many provisions, respects the decisions of the states²⁸ and looks to state law for guidance when considering issues of family law that are not clearly discernable.²⁹ When a domestic support obligation (DSO) has been overpaid by a creditor, the relevant state law must be addressed to determine the nature of the debt. When federal bankruptcy courts neglect state court decisions, an incohesive, mechanical approach is forced upon federal courts when deciphering whether a judgment can be stretched to fit within the definition of a DSO or contracted to be excluded from its terms. Because the Code does not provide clear guidelines on how to settle an overpaid support debt, sound arguments can be crafted for either interpretation resulting in inequitable outcomes.

This Comment proposes a new set of standards to remedy this inequity. The standards are characterized as follows: (1) all overpaid DSOs must be excepted from discharge,³⁰ (2) the overpayment of child support should be entitled to priority status,³¹ whereas (3) the overpayment of alimony and maintenance should not be entitled to priority status. These standards are determined after analyzing the jurisdictional split, Congress's intent in drafting the Code, the substance of the obligation, and the intent and current condition of the parties. The division between alimony and child support is vital because the mothers and fathers of society should not be disincentivized from continuing to pay their child support. If an overpaid support debt is not returned to the provider, this may cause future providers to withhold their child support payments. Exceptions

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to the listed standards arise when there is a unique circumstance, but courts should follow this interpretation as a general rule.

I. Background

This Comment first considers foundational principles underlying the proposed standards. Generally, the foundation arises from (1) the family unit, divorce, and support obligations, (2) the definition of a domestic support obligation and how it relates to overpayments, (3) why overpayments occur, and (4) how these debts function within the Code.

A. The Family Unit, the Introduction of Divorce, and Emerging Support Obligations

The family unit is a delicate yet resilient facet of society. The significance of bankruptcy decisions concerning overpayments of DSOs are best understood through a discussion of the values and evolving functions of the family unit. The family unit is the central and most important part of civilization.³² "Marriage and family are perhaps society's oldest and most resilient institutions."³³ Since the creation of humanity, individuals have situated themselves into units of families as a defense mechanism for various types of support.³⁴ Over thousands of years, families have surmounted economic, legal, and societal fluctuations while evolving along the way.³⁵ In whichever way a family decides to function, it is in society's best interest to create a positive outlook and environment for families across the world.³⁶ The legal system must consider familial values when dictating how to treat certain DSOs within bankruptcy because efficient legal systems are tailored to deep societal structures.

As time has passed, the family unit has endured the introduction of divorce. Now commonplace in American culture, statistics from the American Psychological Association indicate that forty to fifty...