The Interplay Between Bankruptcy and Divorce Law in Virginia « A Virginia lawyer explores the interplay between bankruptcy law and divorce law in Virginia The Interplay Between Bankruptcy and Divorce Law in Virginia

Is a chapter 13 bankruptcy case filed one month after a divorce a bad faith filing in Virginia?

March 30th, 2013

Is a chapter 13 bankruptcy case filed one month after a divorce a bad faith filing in Virginia?

Not in the case of In re: James Christopher Haney, Case no: 10-10258-SSM (EDVA, Aug. 2010), where the bankruptcy judge for the Eastern District of Virginia ruled that the chapter 13 case had not been filed in bad faith.

In the Final Decree of Divorce, the Virginia Circuit Court divorce judge ordered the husband to pay a portion of the mortgage on the marital residence until it was sold, several credit card debts, and $20,000 toward wife’s attorney’s fees. The husband filed a chapter 13 bankruptcy case in the United States Bankruptcy Court for the Eastern District of Virginia about a month after the entry of the divorce decree. The debtor husband’s first proposed chapter 13 plan included a provision that the wife would pay the mortgage on the former marital residence until it sold, then all debts would be paid from the proceeds. The plan drew an objection from the creditor wife for failing to pay priority debts in full, as required by 11 U.S.C. §1322(a)(2), and on the grounds that the plan was not feasible, as required by 11 U.S.C. §1325(a)(6), and was not proposed in good faith, as required by 11 U.S.C. §1325(a)(3) and (7).

The bankruptcy court judge sustained the wife’s objection to confirmation of the first chapter 13 plan because it failed to include the treatment of the mortgage payment contributions by the wife or the credit card payment obligations of the husband arising under the divorce decree. However, the judge did find that the case and the first plan were not filed or proposed in bad faith, simply because it compromised the claim for wife’s attorney’s fees, which were not a Domestic Support Obligation as defined in 11 U.S.C. §101(14A), and were not entitled to priority treatment in the plan.

As allowed under 11 U.S.C. §1323 and Local Bankruptcy Rule 3015-2, the husband filed a modified chapter 13 plan, within the required 21 day period after denial of confirmation, in which he proposed to reimburse wife for her share of the full mortgage payments and to pay debts required to be paid in the divorce decree, all from the net proceeds of sale of the real estate. The wife objected to the modified plan on four grounds: (1) her priority claim was not being paid in full; (2) the husband could not defer his requirement to contribute to the monthly mortgage payment as required by the divorce decree; (3) the case and the plan were not filed or proposed in good faith; and (4) the plan was not feasible.

The bankruptcy court judge sustained the wife’s first objection by finding that the divorce decree had created an equitable lien in the husband’s share of the net proceeds for the payment of the monetary award to wife or “equalizing payment” as described by the judge, and the payment of the Best Buy credit card. The court recognized that property settlement and equitable distribution debts were not priority debts and did not have to be paid in full, citing the case of In re Uzaldin, 418 B.R. 172 (Bkr. E.D.Va. 2009), also decided in the bankruptcy court for the Eastern District of Virginia (and also the subject of another blawg post herein). Nevertheless, as these debts were secured by an equitable lien, they would have to be paid in full. As the modified plan still did not specify that these non-priority amounts would be paid exclusively from husband’s share of the net proceeds, it could not be confirmed. The proposed modified plan was “unquestionably ambibuous” as to when the monetary award and the payment of the credit card debt assigned to husband in the divorce decree would be paid.

The bankruptcy court judge also sustained the wife’s second objection to the husband’s deferred mortgage contributions. The court recognized that such contributions were domestic support obligations and noted that 11 U.S.C. §1325(a)(8) requires full payment of all post-petition domestic support obligations prior to confirmation, without any allowance for delayed payments provided they were not prejudicial to the recipient spouse, as argued by the husband in this case. Further, the husband’s modified chapter 13 plan was too tenuous because there was no guarantee the mortgage lender would accept partial payments from the wife alone and no specifics as to when and how the house would be sold. In fact, after performing the estimated calculations, it appeared the net proceeds from the proposed home sale would not even be sufficient to pay husband’s past-due domestic support obligations.

In support of the wife’s good faith objection, the court noted that the case was filed only one month after entry of the final decree of divorce and that the debtor’s correspondence with his ex-wife’s divorce counsel mischaracterized the bankruptcy court’s prior order allowing relief from the automatic stay, which mischaracterization evidenced the husband’s intention to use the bankruptcy to thwart enforcement of the divorce decree. On the other hand, the debtor had substantial debts, including attorney’s fees owed to his own divorce counsel, and was proposing to pay a substantial majority of the amount of his debt in the chapter 13 plan. Ultimately, the court overruled the good faith objection because the bankruptcy court judge could not find that the debtor had filed the bankruptcy case solely to avoid his obligations to his ex-wife as opposed to attempting to adjust all his debts.

While the bankruptcy court judge expressed doubts about whether the debtor could propose any feasible plan, considering the need to make up for the debtor’s share of the mortgage payments he had already missed and to satisfy the equalizing payment and credit card debt, the judge was willing to allow the debtor one more chance to file a modified plan. The court reminded that debtor that although Local Bankruptcy Rule 3015-2(H) normally allowed the debtor 21 days after denial of confirmation to file another modified plan, a chapter 13 case could be dismissed under 11 U.S.C. §1307(c)(5) by both a denial of confirmation and a denial of additional time to file another plan or under 11 U.S.C. §1307(c)(11) for failure to pay post-petition domestic support obligations.

The author finds that the most interesting aspects of the Haney case are not only the bad faith analysis in light of a prior divorce, but also the implication that a bankruptcy case filed solely to avoid obligations to a spouse from a divorce case would constitute a bad faith bankruptcy filing.

You should consult with your Virginia bankruptcy and divorce lawyer or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a particular bankruptcy filing following the entry of a divorce decree might be considered a bad faith filing.

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Must support obligations be paid in full in chapter 13 before the debtor’s attorney’s fees?

March 18th, 2013

Must support obligations be paid in full in chapter 13 before the debtor’s attorney’s fees?

Not in the case of In re Reid, Case No: 06-50147 ( Bkr. MDNC, July 19, 2006), where the United States Bankruptcy Court for the Middle District of North Carolina overruled that part of the trustee’s objection to a debtor’s chapter 13 plan because it did not pay Domestic Support Obligations (“DSOs”) in full prior to payment of compensation for Debtor’s counsel.

In Reid, the husband debtor filed a chapter 13 bankruptcy case listing two county child support enforcement agencies as creditors holding claims for past due child support arrearages. Child support is a “domestic support obligation” as defined in 11 U.S.C. 101(14A), entitled to priority claim status in bankruptcy. The chapter 13 plan in Reid provided that the child support arrearages would be paid in monthly payments at the same time as payments to secured creditors and the attorney’s fees of the debtor’s counsel. There were no payments provided in the chapter 13 plan for general unsecured, non-priority creditors. The husband debtor had filed the certification required under 11 U.S.C. 1325(a) indicating that he was current in the payment of all post-petition domestic support obligations. The chapter 13 trustee objected to confirmation of the plan on the grounds that the plan did not pay prepetition arrearages on domestic support obligations in full before payment of the administrative expenses of attorney’s fees of the debtor.

At the chapter 13 confirmation hearing on the objection, the United State Bankruptcy Court judge first recognized that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced new protections for domestic support obligations such as spousal support and child support. In particular, section 1325 requires that post-petition domestic support obligations be current before a chapter 13 plan can be confirmed; section 1307 allows conversion or dismissal of a chapter 13 case if the debtor fails to pay “any domestic support obligation that first become payable after the date of the filing of the petition”; and section 1328 requires that all domestic support obligations be paid in order for the debtor to receive a discharge.

The court noted that while section 507 of Title 11, the Bankruptcy Code, establishes the general rule that priority debts shall be paid first in full before other debts, specific provisions in chapter 13 displace the priority of domestic support obligations to allow for the payment of the debtor’s attorney’s fees. In particular, section 1326(b) provides as follows: “(b) Before or at the time of each payment to creditors under the plan, there shall be paid – (1) Any unpaid claim of the kind specified in section 507(a)(2) of this title;…

The kind of claim specified in section 507(a)(2) is an administrative claim under section 503(b).” An administrative claim under section 503(b)(2) is a claim for compensation and reimbursement awarded under section 330(a) of the Bankruptcy Code. Under section 330(a)(4)(B), the court may award reasonable compensation to the debtor’s attorney in a chapter 13 case.

While BAPCPA changed the precise language of section 1326, the court ruled that the revised section maintained the pre-BAPCPA treatment of administrative expenses in chapter 13 – that they be paid before or concurrent with payments to other creditors.

The bankruptcy court judge also noted that while section 726(a)(1) requires that the distribution from a chapter 7 liquidation be paid in the order specified in section 507, section 1322(a)(2), governing the contents of a chapter 13 plan, includes no such requirement. In addition, section 1325, governing confirmation, similarly does not require that plan follow the distribution order in section 507. In fact, section 1325(a)(1) requires for confirmation that the plan comply with chapter 13, and “other applicable provisions of this title”, instead of all provisions of title 11.

The judge in Reid denied the trustee’s objection to confirmation based on the full payment of the priority claim for past-due child support before debtor’s attorney fees, but sustained the trustee’s objection based on the failure of the plan to provide for interest on the DSO claim.

In addition to the judge’s reasoning in the Reid case, there are public policy reasons for allowing debtor’s counsel to be paid at the same time as prepetition domestic support obligation arrearages. Most chapter 13 attorneys allow for the majority of their attorney’s fees to be paid in the plan, rather than requiring the debtor to pay most of the fees before filing. Requiring all DSOs to be paid in full before debtor’s counsel’s compensation would discourage debtors’ counsel from representing chapter 13 debtors who owed domestic support obligations and would not further the purpose of chapter 13 bankruptcy to allow consumer debtors to repay their creditors while receiving the protection of the automatic stay in bankruptcy.

You should consult with your Virginia bankruptcy and divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the proper treatment of domestic support obligations in a bankruptcy case.

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Is an award of lump sum spousal support to compensate wife for husband’s bankruptcy an abuse of the trial court’s discretion?

March 5th, 2013

Is an award of lump sum spousal support to compensate wife for husband’s bankruptcy an abuse of the trial court’s discretion?

Yes, in the case of Mosley v. Mosley, 19 Va. App. 192, 450 S.E.2d 161 (1994) , where the Virginia Court of Appeals reversed the trial court’s award of lump sum spousal support due to the consequences of husband’s bankruptcy proceeding.

In Mosely, the husband and wife were married for twenty years before separating. After a year of separation, the wife filed for a no fault divorce. The husband responded with an answer and cross-bill for divorce based on adultery. The wife filed a demurrer to the husband’s cross-bill. The following year, while the divorce case was pending, the husband filed a chapter 7 bankruptcy case and received a discharge. The divorce case was subsequently tried and two months after the husband’s bankruptcy discharge, the trial court issued it letter opinion, awarding wife a no-fault divorce, one-half of the husband’s military pension, and lump sum spousal support in the amount of $29,330. The husband filed a motion to rehear the spousal support award and the equitable distribution decision.

In making his award of lump sum spousal support, the divorce court judge stated that the award was to compensate wife for husband’s use of the marital residence on which he did not make mortgage payments, for one-half the debt to the credit union, and for one-half of the secured and unsecured marital debt, debt the husband had discharged in his bankruptcy case. After a rehearing, the court issued a final decree of divorce three months later based on its letter opinion. The husband appealed on three grounds: (1) that he was not permitted enough time to present evidence relevant to equitable distribution; (2) that trial court erred in awarding the lump sum award of spousal support, which lacked sufficient supporting evidence; and (3) that the trial court erred in awarding half his military pension, instead of half of the marital share.

With regard to the husband’s first issue, the Virginia Court of Appeals recognized that the trial court’s equitable distribution duties under Virginia Code § 20-107.3 to determine legal title, ownership and value of all property did not require the court to classify or value every item of property, where the parties were given a reasonable opportunity to provide the necessary evidence but failed to do so due to a lack of diligence, citing Bowers v. Bowers, 4 Va. App. 610, 359 S.E. 2d 546 (1987) . While the parties must be given a reasonable opportunity to develop and present evidence for equitable distribution, and the court cannot reject evidence simply because better evidence might exist, the court can refuse to accept additional evidence by one of the parties, particularly when the court set an additional deadline for the parties, as did the trial court judge in Mosley.

Next, the Virginia Court of Appeals reversed the trial court’s decision awarding lump sum alimony to compensate wife for the husband’s bankruptcy filing. The court first recognized that a spouse may not discharge a spousal support obligation under 11 U.S.C. 523(a)(5) . However, a court is not required to accept the characterization of a particular award as “spousal support or maintenance”, when such an award may not actually be in the nature of alimony or support. Carter v. Carter, 18 Va. App. 787, 447 S.E.2d 522 (1994). [The analysis of whether a claim is “in the nature of alimony or support” remains relevant, even after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in October 2005, due to the four-part definition of a “Domestic Support Obligation” in 11 U.S.C. 101(14A)].

In analyzing a spousal support award, the appellate court noted that the critical issue is the purpose of the award. In this case, the trial court stated that the lump sum spousal support award was to compensate wife for the consequences of the husband’s bankruptcy filing and the discharge of his share of the marital debts. Further, although the trial court has the authority to make a lump sum award of spousal support under Virginia Code § 20-107.1 , there was no evidence supporting the husband’s ability to make the lump sum support awarded by the judge. The appellate court recognized that a lump sum spousal support payment may be appropriate in special circumstances or for compelling reasons, citing Blank v. Blank, 10 Va. App. 1, 389 S.E.2d 723 (1990) . However, in this case, the trial court judge failed to consider the relative needs and abilities of the parties when fashioning the award, as required under Collier v. Collier, 2 Va. App. 125, 341 S.E.2d 827 (1986), and Virginia Code § 20-107.1, specifically the earning capacity of the husband. The lump sum spousal support award was reversed as an abuse of the trial court’s discretion.

Finally, the Virginia Court of Appeals reversed the trial court’s award of fifty percent of the husband’s military pension, which exceeded its statutory authority to award up to fifty percent of the “marital share” of the pension, under Virginia Code § 20-107.3(G)(1).

You should discuss with your Virginia bankruptcy and divorce attorney or Richmond divorce lawyer James H. Wilson, Jr. , how a bankruptcy might affect your rights and duties in a divorce case.

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