Erlandson v. Erlandson, II

UNITED STATES BANKRUPTCY COURT

WESTERN DISTRICT OF WISCONSIN

In re: Case Number: 20-11739-13

GARY E. ERLANDSON II,

Debtor.

SUSAN ERLANDSON,

Plaintiff,

v. Adversary Number: 21-23

GARY E. ERLANDSON II,

Defendant.

DECISION

This matter comes before the Court for a determination of whether the

Defendant and Debtor, Gary E. Erlandson II, is eligible to discharge an

obligation assumed by him stemming from divorce proceedings with the

Plaintiff, Susan Erlandson. The issue before the Court is whether that debt is

classified as a property division subject to discharge under 11 U.S.C. § 1328 or

is classified as a nondischargeable domestic support obligation under 11

U.S.C. § 523(a)(5).

STATEMENT OF FACTS

Gary E. Erlandson II (“Defendant”) and Susan Erlandson (“Plaintiff”) were

married in January 2001. Together, they had one child. On May 10, 2010,

Plaintiff and Defendant entered into a Stipulation for Separation (“Stipulation”),

which was later incorporated into a Decree for Separation ordered by the Iowa

District Court for Blackhawk County. Plaintiff was awarded the marital home

and was held responsible for the remaining mortgage balance, while Defendant

was to be solely responsible for a U.S. Bank home equity line of credit

(“HELOC”) and have it transferred to his name only. At the time of separation,

the balance of the HELOC was about $23,000. The Stipulation also awarded

joint custody of the parties’ child to both parents, but Plaintiff retained physical

placement of the child in the former marital home.

Defendant and Plaintiff reconciled after the Stipulation but officially

sought dissolution of the marriage on September 19, 2013. Because the

Stipulation did not expressly address spousal support, Plaintiff also sought an

Order for Temporary Spousal Support. A marriage dissolution was entered

December 31, 2015, and reaffirmed on March 30, 2016. The Iowa District

Court upheld the Stipulation and found the terms requiring Defendant to pay

the HELOC to be equitable. Plaintiff was thus ordered to refinance the marital

home to remove Defendant’s name, and Defendant was instructed to refinance

the HELOC to remove Plaintiff’s name. Plaintiff complied and refinanced the

mortgage to remove Defendant’s name, while Defendant has not removed

Plaintiff’s name from the HELOC. The District Court further ordered that

Defendant be exclusively liable for the HELOC and hold Plaintiff harmless.

Further, Plaintiff was awarded temporary alimony in the amount of $400

per month until December 31, 2018, along with an agreed-upon child support

obligation. At the time of the dissolution, Plaintiff was enrolled at Kaplan

University. Plaintiff had insufficient income to pay all her expenses including

the mortgage and tuition. The $400 per month in alimony represented the

education expenses that Plaintiff could not meet on her own based on a

significant disparity in the parties’ respective incomes. The parties expected

that completing her education would enable her to support herself, pay the

obligations assigned to her, and contribute toward the support of the parties’

child.

Defendant appealed the economic provisions of the decree to the Iowa

Court of Appeals, but the court affirmed the Stipulation and District Court’s

Order on August 2, 2017. The Iowa Court of Appeals upheld Plaintiff’s limited

award of spousal support based on her significantly lower earnings. Defendant

then appealed the decision to the Supreme Court of Iowa, and review was

denied on September 25, 2017.

Despite the terms of the Stipulation and dissolution, Defendant failed to

remove Plaintiff’s name from the HELOC. On February 13, 2020, Plaintiff filed

a contempt motion against Defendant for failing to follow the court order and

remove her name from the loan. On February 26, 2020, the Iowa District Court

set a contempt hearing for July 7, 2020. But Defendant filed his Chapter 13

petition on July 2, 2020, and claimed the contempt hearing violated

Defendant’s automatic stay, so the trial has been stayed. As of the petition

date, Plaintiff is still named on the HELOC. Plaintiff remains liable on the

HELOC. Upon completion of Defendant’s bankruptcy, his liability will be

discharged but Plaintiff will remain liable for any unpaid balance on the

HELOC.

Plaintiff filed this adversary proceeding on June 12, 2021. On August 17,

2021, a pretrial conference was held. At the hearing, the parties agreed that no

material facts were in dispute and that this Court could set a briefing schedule.

Plaintiff believes Defendant’s obligation to pay the HELOC is in the

nature of support. To support this position, Plaintiff asserts that the

Defendant’s obligation to pay the HELOC on the homestead, which is occupied

by Plaintiff and the parties’ child, who was a minor at the time of the divorce,

enabled Plaintiff to remain in the home. According to Plaintiff, because of the

income disparity at the time of the divorce, Plaintiff would not have been able

to afford the mortgage and HELOC on her own. The payment of the HELOC

was intended to be in lieu of support as it contributed to maintaining the

homestead, an important part of support.

Defendant, on the other hand, believes the obligation to pay the HELOC

is in the nature of a property division. Defendant believes there is no indication

by the Iowa courts that this property division was in lieu of additional spousal

maintenance beyond the spousal maintenance that was already set, ordered,

and subsequently paid by the Defendant to the Plaintiff.

JURIDICTION

This Court has jurisdiction over these matters pursuant to 28 U.S.C.

§§ 157 and 1334(a). Venue is proper under 28 U.S.C. §§ 1408 and 1409. The

issue before the Court relates to whether a debt owed to a creditor is classified

as a nondischargeable domestic support obligation pursuant to 11 U.S.C.

§ 523(a)(5). It falls within the parameters of “matters concerning the

administration of the estate.” 28 U.S.C. § 157(b)(2)(A).

A. NONDISCHARGEABILITY UNDER 11 U.S.C. § 523(a)(5)

The discharge provided by the Bankruptcy Code is meant to advance the

goal of allowing honest but unfortunate debtors a “fresh start” through

bankruptcy proceedings. The exceptions to discharge under 11 U.S.C. § 523

are strictly construed against objecting creditors and liberally in favor of

debtors. See In re Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998). The moving

party, Susan Erlandson, must prove each element of the discharge exception

by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291

(1991).

In a Chapter 13, claims that are domestic support obligations are

excepted from discharge under 11 U.S.C. § 1328(a)(2). This provision includes

debts excepted from discharge under 11 U.S.C. § 523(a)(5), which are debts

defined as domestic support obligations under 11 U.S.C. § 101(14A). Section

101(14A) of the Bankruptcy Code provides that a domestic support obligation

(“DSO”) is:

a debt that accrues before, on, or after the date of the order of relief

in a case under this title, including interest that accrues on that

debt as provided under applicable nonbankruptcy law

notwithstanding any other provision of this title, that is—

(A) owed to or recoverable by—

(i) a spouse, former spouse, or child of the debtor or such

child's parent, legal guardian, or responsible relative; or

(ii) a governmental unit;

(B) in the nature of alimony, maintenance, or support (including

assistance provided by a governmental unit) of such spouse,

former spouse, or child of the debtor or such child's parent,

without regard to whether such debt is expressly so

designated;

(C) established or subject to establishment before, on, or after

the date of the order for relief in a case under this title, by

reason of applicable provisions of—

(i) a separation agreement, divorce decree, or property

settlement agreement;

(ii) an order of a court of record; or

(iii) a determination made in accordance with applicable

nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity, unless that

obligation is assigned voluntarily by the spouse, former

spouse, child of the debtor, or such child's parent, legal

guardian, or responsible relative for the purpose of collecting

the debt.

B. DETERMINATION OF DOMESTIC SUPPORT OBLIGATION

For the HELOC to be considered a DSO, this Court must determine that

the obligation is (A) owed to or recoverable by Plaintiff; (B) is in the nature of

alimony, maintenance, or support; (C) was established before the Debtor filed

for bankruptcy relief by a separation agreement or divorce decree; and (D) has

not been assigned other than for collection purposes. 11 U.S.C. § 101(14A).

Both parties agree the only factor in dispute is whether the debt is in the

nature of alimony, maintenance, or support. Whether a claim qualifies as a

DSO is a fact specific inquiry, and the claimant has the burden of proof to

show that his or her claim is entitled to priority. See In re Trentadue, 527 B.R.

328, 329 (Bankr. E.D. Wis. 2015) (citing In re Clark, 441 B.R. 752, 755 (Bankr.

M.D.N.C. 2011)).

Federal bankruptcy law, not state law, determines whether a debt is in

the nature of support. County of La Crosse v. Stevens (In re Stevens), 436 B.R.

107, 109 (Bankr. W.D. Wis. 2010). But a bankruptcy court may look to state

law for guidance in making this decision. Id. Further, the inquiry of the

bankruptcy court addresses the nature of the obligation at the time of the

divorce, and thus the current needs of the recipient spouse are irrelevant. In re

Messnick, 104 B.R. 89, 92 (Bankr. E.D. Wis. 1989) (citing In re Fryman, 67 B.R.

112 (Bankr. E.D. Wis. 1986)).

The main principles guiding bankruptcy courts in determining if a debt is

a nondischargeable DSO are the intent of the parties or the state court in

creating the obligation as well as the purpose of the obligation considering the

parties’ circumstances at that time. Tadisch v. Tadisch (In re Tadisch), 220 B.R.

371, 374 (Bankr. E.D. Wis. 1998). If intent is not explicitly expressed, the court

may look beyond the document to the circumstances of the parties at the time

of divorce. In re Messnick, 104 B.R. at 92.

When determining whether the parties or the divorce court intended the

obligation to be a property division or support, and whether the actual effect of

the obligation resulted in a property division or provided support, a bankruptcy

court may consider many factors, including:

1. Whether a maintenance award is also made for a spouse;

2. Whether there was a need for support at the time of the divorce and

whether support would be inadequate absent the obligation in

question;

3. Whether the court intended to provide for support by the obligation

in question;

4. Whether the debtor's obligation terminated at the death or remarriage

of the recipient spouse;

5. Whether the amount or duration of payments can be altered upon a

change of circumstances;

6. The age, health, educational level, work skills, earning capacity and

other financial resources of the parties independent of the obligation

in question;

7. Whether payments are extended over time or are in a lump sum;

8. Whether the debt is characterized as property division or support

under state law;

9. Whether the obligation balances disparate incomes of the parties;

10. Tax treatment of payments; and

11. Whether one party relinquished a right to support under state law in

exchange for the obligation in question.

Id. at 92–93.

The Stipulation does not expressly designate the HELOC as support.

Instead, the assumed obligation to pay the HELOC is listed under “Real

Estate.” However, the Seventh Circuit has held that “in determining whether an

obligation is a liability for support, the court must look to the substance of the

obligation and not labels imposed by state law.” In re Maitlen, 658 F.2d 466,

467 (7th Cir. 1981) (citing Shacter v. Shacter, 467 F. Supp. 64 (D. Md. 1979),

aff'd, 610 F.2d 813 (4th Cir. 1979)). A court can and must look behind a label

to determine the true nature of the obligation. Tadisch, 220 B.R. at 375.

Defendant believes “there is essentially no evidence in the record to

clearly demonstrate that there was any clear intent that the U.S. Bank, N.A.

home equity loan assumed by Defendant was intended to be a support

payment.” To support this position, Defendant makes several arguments:

1. The Iowa courts found it equitable to provide temporary alimony

solely to allow Plaintiff to attend school, and there is no mention of

the Defendant’s assumption of the HELOC in this analysis.

2. The District Court Order found that each party left the marriage “in

relatively decent financial shape with the expectation of being able to

look after his or her own future needs.”

3. The Iowa courts found that “[e]ach party is fairly young and in good

physical and emotional health.”

4. Plaintiff received “the majority of the marital assets including the

marital home (and its equity) and one half of the Defendant’s military

pension.”

5. The Defendant was not taking a tax deduction on his annual taxes for

payment of the HELOC as spousal support payment.

6. The assumed HELOC does not bear typical qualities of a DSO, such

as an ability in the divorce agreement to modify or alter the payment,

or end the payment upon the remarriage of the Plaintiff.

7. The only evidence that Plaintiff could not afford the HELOC is what he

describes as a “self-serving affidavit” filed by the Plaintiff, which is

rebutted by Defendant’s own affidavit stating that there was never any

discussion that the undertaking of the HELOC was in lieu of spousal

maintenance.

According to Defendant, considering all these facts together makes the

assumption of the HELOC appear more like a property division rather than a

DSO.

The Court disagrees with Defendant’s contention that “there is no

evidence” to establish an intent that the HELOC assumption was intended to

be a DSO. On the contrary, several factors support finding the obligation to pay

the HELOC a domestic support obligation.

First, the plain language of the Stipulation, which was later incorporated

into a Decree for Separation and repeatedly upheld by the Iowa District Court

and Court of Appeals, shows a clear intention that the assumption of the

HELOC was a domestic support obligation. In particular, paragraph 4 of the

Stipulation states that “[t]o the extent that either party is assuming liabilities

incurred during the marriage[,] that assumption is in the nature of fulfilling his

or her support obligation to the other party.” The HELOC was a debt incurred

during the marriage. Thus the plain language of the Stipulation shows the

parties’ intention that Defendant’s assumption of the HELOC was in the nature

of support.

Second, the facts surrounding the assumption of the HELOC show an

intent to support both the Plaintiff and the parties’ child by enabling both

Plaintiff and the child to remain in the family home. While this Court has not

held so expressly, Plaintiff cites in her brief a string of cases from courts in and

beyond this district holding that an obligation enabling one’s family to

maintain their shelter is an obligation in the nature of support and

nondischargeable under 11 U.S.C. § 523(a)(5). See, e.g., Linet v. Azia (In re

Azia), 159 B.R. 71, 74 (Bankr. D. Mass. 1993); In re Robinson, 921 F.2d 252,

253 (10th Cir. 1990); In re Gianakas, 917 F.2d 759, 764 (3d Cir. 1990); In re

Yeates, 807 F.2d 874, 879 (10th Cir. 1986); In re Balvich, 135 B.R. 327, 325–

26 (Bankr. N.D. Ind. 1991); In re Rogers, 117 B.R. 122, 125 (Bankr. M.D. Pa.

1990); In re Lariccia, 110 B.R. 822, 826 (Bankr. N.D. Ohio 1989); In re Cacolici,

108 B.R. 578, 584 (Bankr. N.D. Ohio 1989).

This Court agrees with the line of reasoning presented in these cases.

The HELOC has a clear, tangible relationship to the welfare of both the Plaintiff

and the parties’ child. The parties agreed that Plaintiff would be awarded the

family homestead and that physical placement of the child should be with

Plaintiff. Further, each party was awarded all assets currently in each party’s

possession at the time of the separation. This shows an intention to preserve

both the Plaintiff’s and the child’s routines and way of life despite the pending

divorce. It also shows an understanding that it was in the child’s best interest

to remain in the house where she was accustomed to living.

To maintain the status quo and enable both Plaintiff and the parties’

daughter to remain in the family home, both the mortgage and the HELOC

needed to continue to be paid. Plaintiff submitted an affidavit stating she could

not afford the HELOC payments at the time of the divorce because at the time

of the separation, Plaintiff was making significantly less than Defendant.

Indeed, Plaintiff’s income was about half of Defendant’s at the time of the

separation. This significant income disparity suggests an inability for Plaintiff

to make both the mortgage and the HELOC payments. As a result, without

Defendant’s help in paying the HELOC, Plaintiff and the parties’ child could not

have remained in the family home, contrary to what the parties intended.

Additionally, the fact that the Iowa District Court found each party

expected to be able to financially look after his or her own future needs does

not mean that Plaintiff could do so fully at the time of the separation. In fact, it

was expected that completing her education would enable the Plaintiff to

increase her earnings. Temporary alimony was awarded to help Plaintiff meet

the portion of her Kaplan University expenses that she could not afford. Upon

graduation, Plaintiff believed she should be able to better provide for herself

without a permanent need for alimony. For that reason, Plaintiff’s ability to

look after her own future needs was contingent on her graduating from Kaplan

and subsequently securing employment that enabled her to become more

financially independent. This was material to the award of alimony being

temporary.

The purpose of a DSO is to limit any unfair economic consequences

stemming from a divorce by helping a spouse maintain the financial status

quo. See, e.g., Edl v. Kinast (In re Edl), 207 B.R. 611, 617 (Bankr. W.D. Wis.

1997) (stating that the purpose of alimony is to support “those legally

dependent upon the pensioner for support and maintenance”). Because

Plaintiff required support payments until she graduated from Kaplan, this

strongly suggests that at the time of the separation there was an inability for

Plaintiff to financially take care of her own needs. This includes the need to

make both the mortgage and HELOC payments to maintain the status quo for

her and her daughter and remain in the family home. Thus, Plaintiff’s

statement in her affidavit that she could not afford to make the HELOC

payments accords with the rest of the record and the findings and

determinations of the Iowa courts.

In response, Defendant submitted his own affidavit asserting that

“discussions revolving around the U.S. Bank, N.A. home equity loan were all in

the context of the splitting of assets like the retirement accounts and personal

vehicles” and that “[d]uring the entirety of the legal separation and subsequent

divorce, there was never any discussion that [Defendant’s] undertaking of the

U.S. Bank, N.A. home equity loan was in lieu of a separate spousal

maintenance.”

Defendant’s affidavit is self-serving and the statements contained within

it are unavailing. First, Defendant’s affidavit contradicts the plain language of

the Stipulation that Defendant entered into—specifically, the provision that

“[t]o the extent that either party is assuming liabilities incurred during the

marriage[,] that assumption is in the nature of fulfilling his or her support

obligation to the other party.” This language shows a mutual understanding

between the parties that the HELOC was support.

Second, Defendant’s history of making and breaching agreements and

failing to follow court orders makes his statements lack credibility. Since 2010,

Defendant has agreed to be held exclusively liable for the payment of the

HELOC against the former marital home and to transfer the HELOC to

Defendant’s name only. This agreement was later incorporated into the divorce

decree and reaffirmed by the Iowa District and Appeals Courts. Further, since

2016, Defendant has been ordered to hold Plaintiff harmless for the HELOC.

Many courts have held that hold harmless clauses create nondischargeable

obligations when related to alimony or support. See, e.g., In re Calhoun, 715

F.2d 1103, 1107 (6th Cir. 1983); In re French, 9 B.R. 464, 466–67 (Bankr. S.D.

Cal. 1981) (citing S. Rep. No. 95-989 at 5865 (1978); In re Johnson, 397 B.R

289, 298 (Bankr. M.D.N.C. 2008)).

For over 10 years, Defendant has both agreed and been ordered to be

exclusively liable for the HELOC, remove Plaintiff’s name from the HELOC, and

hold her harmless for the payment of the debt. For over 10 years, Defendant

has refused to do so. Plaintiff sought to enforce this order and agreement

through the 2020 contempt action against Defendant, but this action was

stayed because of Defendant’s Chapter 13 filing. Defendant does not explain

why he failed to follow the terms of his own agreement and court orders. It

would be inequitable to permit Defendant to utilize the Chapter 13 discharge to

keep avoiding responsibility for this debt.

CONCLUSION

The totality of the circumstances, including intent, the financial situation

of the respective parties, the type of debt assumed, and the credibility of the

parties, all show that Defendant’s obligation to pay the HELOC was in the

nature of domestic support and thus nondischargeable under 11 U.S.C.

§ 523(a)(5). The parties’ financial circumstances at the time of the Stipulation

establish that Plaintiff would not have been able to maintain the family home

without Defendant’s payment of the HELOC given the significant income

disparities at the time of the separation. And the great weight of authority

holds that a spouse's assumption of debts enabling members of the family to

remain in the marital residence is a nondischargeable obligation in the nature

of support, maintenance, or alimony rather than a dischargeable property

division.

The Court concludes the debt is nondischargeable as a domestic support

obligation under 11 U.S.C § 523(a)(5).

Plaintiff includes a request for reasonable attorney’s fees as part of the

relief. No information about the amount sought or the entitlement has been

submitted. This decision does not make any findings about attorney’s fees. If

such fees are requested, counsel must submit a detailed request for fees. Any

such request is subject to objection and further proceedings.

This decision shall constitute findings of fact and conclusions of law

pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil

Procedure.

A separate order and judgment consistent with this decision will be

entered.

Dated: March 28, 2022

BY THE COURT:

Hon. Catherine J.Furay SSSOC~™S

U.S. Bankruptcy Judge

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