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Georgia Case Law Update – Sutherlin v. Sutherlin (Part 2)

The blog entitled “Georgia Case Law Update – Sutherlin v. Sutherlin (Part 1)” discussed one contempt issue flowing from the case Sutherlin v. Sutherlin. There are several other contempt issues in that case, another of which is discussed here. To recap, Sutherlin v. Sutherlin involved parties who divorced in 2012, but the Wife filed for contempt three years later, alleging that the Husband failed to comply with several provisions of their Separation and Property Division Agreement. Sutherlin v. Sutherlin, S17F0613 (June 26, 2017). 

The second allegation of contempt stemmed from the Husband’s alleged failure to indemnify with Wife for liabilities incurred with regard to past-due taxes owed by a family business awarded to the Husband in the divorce settlement. According to the Agreement, the Husband is required to buy out Wife’s interest in three family owned businesses and “shall also indemnify and hold Wife harmless as to any corporate income tax liability for any of the three corporations named above, as Wife has had nearly no access to the financial records of those corporations until very recently, while Husband has had open access to the records and to the corporate accounts and funds.” Id. A couple years after the divorce, the IRS attempted to collect unpaid payroll taxes for one of the businesses and, since the Husband had not completed his buyout obligation, the IRS determined that the Wife was liable for a share of the tax debt and garnished her federal income tax refund for payment. In her contempt motion, the Wife claims that the Husband violated the part of the Agreement requiring him to hold her harmless as to the corporate tax liability. The Husband objected, claiming that payroll taxes do not fall within a company’s corporate tax liability and, thus, he is not responsible for holding her harmless as it relates to this specific tax liability. The trial court agreed with the Wife, holding that payroll taxes were encompassed in the term “corporate tax liability,” and ordered the Husband to reimburse her for sums paid on this debt and assume responsibility for the balance. The Husband appealed.

In reviewing the case, the Supreme Court of Georgia sought to determine “whether the trial court’s construction of the term ‘corporate tax liability’ was a reasonable clarification of the Agreement or instead was so contrary to its apparent intention as to constitute an improper modification.” Id. The Court found that, due to the company’s status as an S corporation which has no true “corporate tax liability,” strictly construing the term would give it no meaning, which the Court must avoid. Thus, the Court looked to the intent of the parties, and held that the intent of the Agreement as a whole was clear – Husband would buy Wife out from the companies and, until the payment was made, Wife would be shielded from any liability related to the companies. The Court, therefore, held that “corporate income tax liability” referred to any tax liability that flows from the corporation.

After this holding however, the Court reversed the finding of contempt on this issue, holding “we cannot find that the term in question is so clear and definite that Husband’s failure to comply with his obligations constitutes a willful violation of the Agreement.” The Court did note that the Husband was now on notice as to his obligation under the Agreement with respect to tax liability and any future violation may subject him to contempt.

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