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Gravatt v. Caruso-Long

A-6347-02T3 (N.J. Super. App. Div. 2004) (Unpublished)

BANKRUPTCY; DISCHARGE; DIVORCE—A court is not bound by labels in a property settlement agreement and if it finds that an ex-spouse’s obligation to continue making mortgage payments was intended as a property settlement rather than as an alimony payment, that obligation can be discharged in bankruptcy.

A couple’s home was encumbered by two mortgages. They then entered into a divorce property settlement agreement. It provided that the wife would receive title to the home. She would be responsible for the first mortgage and her husband would be responsible for the second. The agreement anticipated that the husband might not be able to pay the second mortgage. Consequently, the agreement provided that if the second mortgagee foreclosed on the house and took possession of the property, the husband would be liable to the wife.

Eventually, the husband filed for bankruptcy, but did not list his wife as a creditor. At the same time, the wife, who had remarried, signed a listing agreement to sell the home. To facilitate the sale, she moved to enforce her ex-husband’s obligation to pay the second mortgage. In response, the husband moved to amend his bankruptcy petition to join his ex-wife as a creditor holding an unsecured, non-priority claim. He then filed an adversary complaint in the bankruptcy court seeking to discharge his obligation to pay the second mortgage.

The lower court concluded that the husband’s second mortgage obligation was in the nature of alimony, and thus it was exempt from any discharge in bankruptcy. It also found that the wife’s remarriage did not terminate that alimony obligation. On appeal, the husband claimed that the parties did not intend that the second mortgage payment to be alimony, but was intended to facilitate division of the property. The Appellate Division pointed out that to determine the intent of parties at the time of a settlement agreement, courts must consider the language and substance of the agreement in the context of surrounding circumstances; the parties’ financial circumstances; and the function served by the obligation. In addition, courts are not bound by the label attached by the parties to an obligation. Following those rules, the Court concluded that the parties, here, did not intend that the ex-husband’s payment of the second mortgage be a support payment to his ex-wife. It held the transaction to simply be an allocation of marital debt. Here, the wife anticipated that her ex- husband might be financially unable to pay the second mortgage, and, that reason, the Court held that the husband’s obligation was dischargeable in bankruptcy.

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