7th Circuit determines $435K arbitration award was money judgment, not property interest

A $435,000 arbitration award was a money judgment that is subject to discharge in a bankruptcy case, the 7th Circuit Court of Appeals ruled in a dispute between ex-spouses.

After a 25-year marriage, Donald and Elizabeth Anne Harshaw divorced in 1996. They got back together shortly after but separated again in 2013. But because they had not remarried when they reconciled, Anne could not secure relief through the familiar channels of divorce law.

Instead, she sued Donald in state court under equitable theories of express or implied contract, unjust enrichment and quantum meruit. When the separated couple agreed to submit the dispute to binding arbitration, an arbitrator issued a final award with detailed findings about Anne’s contributions to the relationship.

The arbitrator ultimately determined that Donald was liable to Anne and awarded her the sum of $435,000, half the increase in value of Donald’s retirement savings during their years of unmarried cohabitation. However, the award also included language referring to Donald’s retirement savings accounts and a qualified domestic relations order.

The Lake Superior Court entered judgment on the arbitration award, and the Court of Appeals of Indiana affirmed in relevant part. Donald subsequently filed for bankruptcy, and a dispute broke out about whether the arbitrator had awarded Anne a money judgment or an interest in specific property.

The bankruptcy court ruled in favor of Anne, but the U.S. District Court for the Northern District of Indiana reversed in February 2021. The district court concluded, among other things, that the award was a money judgment — and thus subject to discharge in the bankruptcy case — because the award said Anne would receive “the sum of Four Hundred Thirty‐Five Thousand Dollars & 00/100 ($435,000.00), plus post‐judgment interest.”

Affirming the district court, the 7th Circuit agreed based on the text of the award, the broader legal context of Indiana domestic relations law and the extent of an arbitrator’s authority.

The appellate court found several instances of money-judgment language in Paragraph 55 of the award, including “plus post‐judgment interest.” It also concluded that unlike in Paxton v. Paxton, 709 N.E.2d 31 (Ind. App. 1999), and Brown v. Pitzer, 249 B.R. 303 (S.D. Ind. 2000), the instant arbitration award did not include language such as, “the assets are hereby divided equally between the parties,” or, “Anne shall receive half of Donald’s retirement account.”

“Nor did it mandate a specific source of payment. The arbitration award here simply did not contain property‐division language,” Circuit Judge David Hamilton wrote Wednesday.

The 7th Circuit continued by noting an arbitrator cannot determine conclusively that an award is not dischargeable merely because the arbitrator wants that to be the case.

“An award will be non‐dischargeable if it meets one of the statutory exceptions to discharge. The closest exception here is (11 U.S.C. § 523(a)(5)), which prohibits discharge for awards of domestic support, but only such support that goes to the debtor’s spouse, former spouse, or child,” Hamilton wrote. “The parties stipulated in the bankruptcy court that the arbitration award was not a domestic support obligation for purposes of § 523(a)(5), and for good reason; as a non‐spouse, Anne does not meet the statutory requirements under the facts identified by the arbitrator.

“… For these reasons, we agree with the district court that the arbitrator awarded Anne a money judgment, not a property interest in Donald’s retirement account.”

The case is In Re: Donald Wayne Harshaw, Elizabeth Anne Harshaw v. Donald Wayne Harshaw, 21‐1423.

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