Saturday, November 12, 2016

Unraveled

Flanagan v. duMont (Flanagan), 2016 VT 115

By Elizabeth Kruska

The facts of this post-divorce action remind me of pulling on a loose thread and then everything unravels. I think Weezer put it best when they sang, “If you want to destroy my sweater, hold this thread as I walk away.”

Flanagan (Husband) and duMont (Wife) were married and then divorced. They partly negotiated a divorce agreement, but had to have a contested hearing regarding some other issues. The appeal in this case has to do with a few provisions in the final order.

The first issue is the marital home in Stowe. The house was awarded to Wife, free of any marital interests of Husband. Wife was ordered to refinance the loan on the house within about a year, and if she couldn’t do that, she had to sell the house at a price that was agreeable to both she and Husband. Since they were jointly on the mortgage, if Wife fell behind and failed to make a payment, Husband was authorized to make the payment, but could then offset that against what he owed Wife for maintenance and support. Seems reasonable so far.

Husband owned a business called The Dayboat Fish Company. I can’t see the word “Dayboat” and not immediately sing the word to the tune of “Dayman” Unfortunately, although It’s Always Sunny in Philadelphia, it wasn’t always sunny for Dayboat, which apparently had some IRS issues and racked up some tax debt. It’s not clear if Wife knew about the debt, but in the final order, Husband was given the business and wife was to be held harmless and indemnified from Dayboat debts. I’m the worst at suspense: Do you see where this is going?

The last provision of the final divorce order also dealt with allocation of debts, but mostly had to do with credit card debt. It says nothing of tax debts.

Wife couldn’t refinance the house in her own name so she found a buyer. Things seemed promising until the buyers did a title search and discovered there were both IRS and State of Vermont Tax liens on the property. The total tax debt looks to have been about $15,000, which would have been about half of the net proceeds Wife would have received from the sale of the house.

You’d think, “Okay, so they pay off the tax debt and everyone moves on.” You’d be wrong, because if that was the case we wouldn’t have a SCOV opinion. The problem is that the divorce order became final in 2013. The liens were recorded in 2014. The big IRS debt was based on underpayment of 2011 taxes, and it was never really clear about whether or not Wife knew about the liens. Both the IRS and the State liens were filed against Husband/Dayboat only, but against the marital home.

Again, it was sort of unclear whether Wife knew about the IRS liens. She had, in 2013 filed something with the IRS to be relieved of the 2010 debt, but it wasn’t clear whether she knew that there was a lien regarding that debt.

In any case, the sale went sideways and Wife had some tenants in the house who had to move out. This led to a loss of rental income which caused her to miss some mortgage payments. Husband eventually made those payments and then pro-rated his support payments to Wife, as allowed by the divorce order. This is the unravelling.

Wife says, essentially, “Back up, Captain. The sale of this house became a minor disaster because your stupid tax debt encumbered the property and caused me to be unable to sell. And oh, by the way, the divorce decree says I’m to be held harmless from your stupid debt.” I assume Wife was displeased with the situation which led to her filing a motion to enforce the final order.

Off to the Family Court they go, where Wife asked the court to order Husband to pay that stupid debt or otherwise have it discharged so she could sell the house. And, now that she didn’t have a tenant anymore, she was losing income, so she asked the court to stay the part of the order that allowed Husband to pay the mortgage and reduce his support payments. Finally, she asked to be held harmless from damages regarding the tax liens.

Husband, unsurprisingly, disagreed and argued that the liens were actually inoperative since the property had been awarded to Wife before the liens were put in place. He sought a contempt finding since she didn’t pay the mortgage, and he asked for the court to order her to repay him for any costs he incurred by having to pay the past-due mortgage.

They had a two-day hearing that resulted in Husband being ordered to pay Wife $94.30. The Court didn’t think that it had jurisdiction to do anything about the liabilities arising from the tax liens. The Court also didn’t order Husband to do anything about the tax liens. Wife appeals, and SCOV reverses.

First of all, with respect to the tax liens, SCOV says that the Family Court needed to address that issue. There was evidence that Husband didn’t have the ability to pay off the debts underlying the liens. Practically speaking, Husband was in no financial position to pay off those debts. But the problem is that here, Wife couldn’t comply with the divorce order due to those debts, and as a result, the situation was sort of stuck. SCOV agrees that the Family Court has no jurisdiction over the enforceability of the liens, but says the Family Court absolutely has jurisdiction to make a decision regarding the parties’ respective obligations to those particular debts.

Turning to the issue of indemnification, Wife argues that under the divorce order that she was supposed to have been held harmless from Husband’s debts anyway. SCOV reminds us that a divorce decree is interpreted the same way a contract is interpreted. Where there’s confusion or ambiguity about the terms of a contract, and where the interpretation is a question of law, this is something that needs to be addressed by the Family court.

SCOV looks at the various provisions and decided that the part of the order awarding Dayboat to Husband didn’t trigger any legal obligation to Wife. Since the tax debts were both against Husband/Dayboat, those debts don’t extend to Wife. She isn’t obligated to pay anything, and has no damages, so there’s nothing to indemnify.

SCOV then turns to the larger obligation under the debts clause. The original divorce order said that each Husband and Wife was to hold the other harmless from each other’s debts. The clause did a couple other things, also. First, it prohibited both of them from incurring debts for which the other—including the other’s property or estate—would be responsible. Second, it also provides for payment of expenses for damages arising from a breach of that obligation.

SCOV does not interpret this to mean that it only applied to post-divorce debts. This clause also applied to debts incurred during the marriage. If it was meant only to go to post-divorce debts, it would say that.

So, SCOV concludes that subject to the debts clause that Husband may have breached his obligations with respect to one of the federal tax liens. One was from 2010, and it appears that Husband and Wife filed a joint tax return, which means their debt is a joint debt. With respect to the later debt, though, it isn’t actually clear if they filed jointly or not. The trial court did find that the tax lien with respect to that debt was recorded with respect to Husband only. So, SCOV reverses to the trial court to figure out if the 2011 federal tax debt is a debt of Husband’s—and thus subject to the debts clause—or whether it is a joint debt.

Because that is remanded, it’s possible Wife has damages if the Family Court finds Husband breached the debts clause. It’s really up to the trial court to decide what the appropriate remedy is if it turns out that particular breach occurred.

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