Vermont Supreme Court Reviews Parties’ Responsibilities to Satisfy Pre-Divorce Tax Liens Discovered Post-Divorce, in Light of a Hold-Harmless Provision

In Edward F. Flanagan v. Nancy duMont (Flanagan), 2016 VT 115, No. 2015-466 (Nov. 4, 2016), the Supreme Court reversed the trial court’s decision in part and remanded the remaining issues back to the trial court, allowing the wife to argue that her husband was solely liable for pre-divorce tax liens on the home that was ultimately awarded to her in the divorce.

Issue: In the parties’ divorce decree, entered on March 26, 2013, the wife was awarded “sole use, ownership, and possession” of the family home, free from any marital interests of the husband. Wife was required to pay the outstanding mortgage and husband was obligated to execute and deliver all documents required to give the wife “all right, title and interest in the property.” Conversely, husband was awarded sole ownership of his business, assuming “all liabilities in connection with the business,” and agreed to hold the wife harmless against any business expenses or debts. The divorce decree further required any debts in either party’s sole name to be paid only by the other, and each agreed to hold the other harmless in the event of a breach thereof. Tax obligations were not mentioned specifically in the decree. A year after the divorce decree was entered, the wife found herself no longer able to pay the monthly mortgage or refinance, and listed the property for sale. Having found a suitable buyer, wife entered into a purchase and sale agreement in November, 2014. During the title search, however, the buyer discovered tax liens issued both by the IRS and the State of Vermont for over $25,000 in unpaid taxes, and the sale fell through. Wife claimed that the liens were unknown to her, were in the husband’s name only, and were for tax liability associated with husband’s business. Husband asserted that, because the liens were not attached until after the divorce court awarded her the house, she was responsible for the mortgage and any liens on the property and he sought payment from her from past-due mortgage payments.

Holding: The Court held that the trial court erred in failing to consider the hold harmless provision of the divorce decree, and determined that the trial court also erred in declining to decide on the parties’ relative legal obligations, even if they could not immediately satisfy any financial judgments. Reading the divorce decree under contract principles, the Court interpreted the hold harmless provision as an effective indemnification of the wife against the tax liens, remanding the case for proceedings consistent with the opinion.