Month: April 2015

Can a Virginia divorce court judge enforce discovery sanctions despite a bankruptcy filing through equitable distribution?

In the case of Spreadbury v. Spreadbury tried in the Circuit Court of Fauquier County, Case No: CH04-125 (February 20, 2009) and affirmed on appeal to the Virginia Court of Appeals, a judge enforced his discovery sanctions order by providing that wife would receive no less than a certain amount for her unsecured creditors.  The case started when wife filed for a divorce in the Virginia Circuit Court.  Husband sent discovery requests, Interrogatories and Requests for Production of Documents, to wife which wife failed to answer.  Husband filed a motion to compel wife’s responses to discovery.  The husband and wife then settled the case before trial.  On the original trial date, the wife disavowed the settlement and the parties continued discovery with a new trial date.  The husband filed a second motion to compel responses to discovery and the case was rescheduled for a trial.  The court entered an order compelling wife to answer husband’s interrogatories.  The husband filed a motion for sanctions.  When wife still refused to answer discovery, the divorce court judge entered an order limiting wife’s opposition to husband’s claims and defenses and limiting the evidence that wife could introduce at trial.

After the discovery sanctions order was entered, the wife filed a chapter 11 bankruptcy case.  The bankruptcy court judge modified the automatic stay to allow the divorce case to proceed to trial with the condition that the wife would have the rights of a debtor in possession with all the claims and defenses of a chapter 11 trustee, without the limits imposed by the Virginia divorce court’s discovery sanctions order, including the trustee’s avoiding powers as a hypothetical judicial lien creditor, creditor with an execution, or bona fide purchaser under Section 544(a) of the Bankruptcy Code. 

The divorce case trial was rescheduled again for 8 months later.  Although the husband and wife each introduced evidence of fault grounds at trial, the divorce court judge granted the parties a no fault divorce.  The judge recognized that the wife’s bankruptcy filing was an attempt to collaterally attack the previous discovery sanctions order.  In order to protect the rights of the wife’s unsecured creditors, the divorce court judge accepted the husband’s proposed stipulation that the total sum owed to the wife’s unsecured creditors was approximately $691,000 and that the wife would receive at least that amount in the divorce before any evidence was presented to the court.  The court approved the husband’s stipulation because it obviated the Bankruptcy Court’s concern for wife’s unsecured creditors and upheld the integrity of the divorce court judge’s order and the discovery process necessary for equitable distribution.  The court upheld its previous sanctions order with the provision for at least $691,000 to wife’s creditors.  Since the wife was barred from introducing evidence of matters in discovery, the court accepted, in general, husband’s evidence of the valuation of marital property and debts.

The wife disputed the trial court’s jurisdiction over, or right to adjudicate, the property held by the couple in a revocable, intervivos trust, including the marital residence, the parties’ most valuable asset.  The divorce court judge held that the property in trust was still marital property as the parties had reserved the right to remove the property from the trust.  The judge divided the equity in the marital residence 65% to husband and 35% to wife, with a 50-50 split of the other assets.  The divorce court judge provided that the equitable distribution order, the division of property and debts, should be consistent with, and subject to, the relief from stay order in the wife’s bankruptcy case and to the review of the bankruptcy court.  The divorce court judge retained jurisdiction of the case to allow the parties to submit the order to the bankruptcy court for approval, and to petition the divorce court to modify its opinion consistent with the bankruptcy court’s order.  As the wife had been barred from presenting evidence on her need for spousal support, the divorce court judge did not award any spousal support to wife.  In addition, the judge awarded husband $75,000 in attorney’s fees for the abusive procedural actions of the wife.

You should consult with your Virginia bankruptcy or divorce lawyer concerning the effects of a bankruptcy filing on orders entered in a divorce case.

Can a husband or wife get a second chance to stop a foreclosure sale of the marital residence in a chapter 13 bankruptcy case?

Yes, a husband or wife can often get a second chance to stop a Virginia foreclosure sale in a chapter 13 bankruptcy case.  As discussed in answer to the question, “Must both husband and wife file bankruptcy together to protect the marital residence from a foreclosure sale in Virginia?”, a bankruptcy filing by either spouse can protect the marital residence from a foreclosure sale.  Unfortunately, not all chapter 13 bankruptcy cases are completed successfully without any problems.  In fact, statistics inform us that only about a third of all chapter 13 cases are successfully completed.  Bankruptcy By The Numbers, Measuring Performance in Chapter 13: Comparisons Across States, Gordon Bermant and Ed Flynn (1998).

The husband or wife filing bankruptcy may lose a job, suffer an illness, or encounter unanticipated emergency expenses that prevent that spouse from making the mortgage payments or the plan payments.  The repercussions of a default in payments could be a motion for relief from the automatic stay filed by the mortgage lender or a motion to dismiss filed by the chapter 13 trustee.  What are the remaining options for saving the marital residence?

In the event of missed mortgage payments, the debtor spouse may file a modified chapter 13 plan that includes the missed post-petition mortgage payments in the arrearage amount to be cured under the plan if equitable grounds exist, as recognized in Matter of Mendoza, 111 F.3d 1264 (C.A.5 (Tex), 1997).

In the event of missed plan payments, the debtor spouse may file a modified plan to match the proposed chapter 13 plan payments to the actual plan payments made, thus curing a default in plan payments.  Alternatively, the debtor spouse may allow the case to be dismissed on the chapter 13 trustee’s motion, preserving the debtor spouse’s right to refile a second chapter 13 case if and when conditions improve and start over in a better position.

Alternatively, the nonfiling spouse on title to the marital residence, or liable on the mortgage loan, may decide to file a chapter 13 bankruptcy case to stop a foreclosure sale and cure the mortgage arrearage through a plan.

Finally, even though the mortgage lender may have obtained relief from the automatic stay in bankruptcy, the mortgage lender may still be willing to enter into a modification agreement or forbearance agreement with the homeowners.  All homeowners are encouraged to attempt to work out a solution to a mortgage default with their lenders in or out of bankruptcy, starting with the Making Home Affordable government website at http://www.makinghomeaffordable.gov/ Homeowners are well advised to be careful, however, about foreclosure rescue scams and mortgage modification scams promising high success rates, claiming insider information, and requiring money upfront.

You should consult with your Virginia bankruptcy attorney or divorce lawyer regarding all of your options to save the marital residence in the event of separation or divorce.

 

 

Must both husband and wife file bankruptcy together to protect the marital residence from a foreclosure sale in Virginia?

As answered in the question, “Do I receive protection from my husband or wife’s bankruptcy?”, the automatic stay in bankruptcy protects a debtor who files bankruptcy, and in some instances a codebtor, from collection actions and foreclosure proceedings against property of the debtor or of the bankruptcy estate.  A husband and wife who separate in Virginia may enter into a separation agreement or property settlement agreement in which one of the spouses remains in the marital residence pending a sale or refinance of the property.  The purpose of the agreed upon sale or refinance is to release the liability of the spouse who is not occupying the property or agrees to transfer title.  The husband or wife may agree to make the mortgage payments in lieu of support or to preserve the property until its final disposition.  In some cases, the husband or wife with physical custody of the children may wish to remain in the marital residence until all of the children reach the age of majority.

Alternatively, a court may order either the husband or wife to make the payments on the mortgage secured by the former marital residence, while the divorce case is pending so the property will be available as a residence and for equitable distribution, or as a debt apportioned between the parties.  Such a court order in a Virginia divorce case normally would not bind third parties such as the mortgage lender who holds a note secured by a lien against the property.  After a foreclosure sale of the marital residence, the note holder could look to either the husband or wife, or both, for collection of any resulting deficiency in the payment of the note.

During the recent economic recession, more and more separated couples are not able to sell or refinance the marital residence due to a lack of equity in the property.  In some instances, the spouse who has agreed to make the mortgage payments, or who has been ordered to make the mortgage payments, is not able to keep up with all his or her financial obligations and the mortgage will go into default.

Will the marital residence be protected from a threatened foreclosure sale by a bankruptcy filing by either the husband or wife?  Yes, if the spouse filing bankruptcy is on the title to the real property or is a borrower on the promissory note secured by a deed of trust or mortgage on the real property, a bankruptcy filing by that spouse alone will stop a foreclosure sale of the real property in Virginia.  It is not necessary for both husband and wife to file bankruptcy together as all the owners, or all the borrowers, in order to realize the benefits of the automatic stay in bankruptcy with respect to the marital residence; a filing by either spouse with an interest in the property or liability to the lender on the loan is sufficient.  While a chapter 7 bankruptcy case by either husband or wife will temporarily delay the threatened foreclosure sale of the marital residence unless other arrangements can be reached with the lender, a chapter 13 bankruptcy case by either husband or wife can allow the parties to keep the house and cure the arrearage in the chapter 13 plan.

You should consult with your Virginia bankruptcy attorney to discuss how a bankruptcy filing may be used to preserve your marital residence.

Will a Virginia divorce court set aside an unfair separation agreement if it leaves wife in necessitous circumstances?

Yes, when the gross disparity in the division of assets in a property settlement agreement or separation agreement is so extreme as to prove pecuniary necessities, the contract can be set aside as unconscionable because the state has an interest in preventing the wife from becoming a public charge.  Sims v. Sims, 55 Va. App. 340, 685 S.E.2d 869 (Va. App. 2009).  In the Sims case, the husband and wife separated after 38 years of marriage.  The wife had only a third grade education and suffered from numerous health problems, including diabetes, arthritis and mood swings.  The husband and wife entered into a separation agreement or property settlement agreement prepared by husband’s attorney in which wife gave up spousal support, gave up the joint marital residence with $200,000 in equity in return for husband’s promise to pay the mortgage, and gave up her interests in husband’s retirement plans in return for a pickup truck and her “yard sale” belongings.  Later, in the divorce case, the wife asked the judge to set aside the agreement as unconscionable.  At the time of the divorce court hearing, wife was totally disabled and receiving food stamps.  The trial court found the property settlement agreement to be unconscionable on the grounds of the gross disparity in the division of marital assets.  Husband filed a motion for reconsideration and the trial court reversed itself, finding the agreement valid because wife had not met her burden of proving any overreaching or oppressive behavior by husband.  The property settlement agreement was incorporated into a final decree of divorce.

The Virginia Court of Appeals reversed the divorce court judge and remanded, or sent back, the case to the trial court.  The appeals court first recognized that the recitations in a separation agreement create a prima facie presumption that they are factually correct.  In this case, the recitations of fairness in the agreement put the burden on the wife to prove by clear and convincing evidence that the agreement was unconscionable.  Next, the court recognized that the trial court must find two elements to set aside a property settlement agreement as unconscionable in Virginia, (1) a gross disparity in the division of assets and (2) overreaching or oppressive influences.  The court recognized, however, that a marital contract is different from an ordinary commercial contract because the relationship between a husband and wife is particularly susceptible to overreaching and because the state has an interest in preventing a spouse from becoming a public charge. After analyzing Virginia case law, the Sims court concluded that when the gross disparity in the division of property is so extreme as to prove pecuniary necessities, it establishes both elements of the unconscionability test.  In this case, the evidence established, as a matter of law, both extreme inequality in value and pecuniary necessity along with a degree of infirmity.  The wife agreed to a grossly unfair division of assets, the wife was destitute and not capable of supporting herself, and the wife suffered from infirmities.   In Sims, the Virginia Court of Appeals recognized that a separation agreement cannot be so unfair as to leave a destitute spouse in need of public assistance.

You should consult with your Virginia divorce lawyer regarding whether your separation agreement or property settlement agreement is so unfair as to be voidable as unconscionable.

 

Is a Virginia divorce court required to apply any particular formula, like those from the Brandenburg or Keeling cases, consistently to trace separate and marital interests during equitable distribution?

No, a Virginia divorce court is not required to apply either the Brandenburg formula or the Keeling formula or any particular formula consistently, as long as the outcome is equitable.  In the published opinion of Rinaldi v. Rinaldi, 53 Va. App. 61, 669 SE2d 359 (Va. App. 2008), the Virginia Court of Appeals reviewed a divorce court judge’s decision to use two different formulas in equitable distribution of the parties two parcels of real estate.  The husband owned a house in the City of Richmond titled in his name alone.  After the parties married, they moved into his house and later refinanced it with a joint mortgage loan.  The husband received an inheritance from his mother two years after the parties were married, which would be considered separate property under Virginia law.  He used a portion of that separate property along with a small amount of marital property as a 25% down payment on a parcel of riverfront property.  The husband and wife used marital funds to pay the mortgage on the riverfront property.  The property appreciated substantially during the marriage.  During the course of the party’s marriage, wife earned more than twice as much as husband, as wife worked as a lawyer and husband tended to a construction business on an unsteady basis.  Wife testified that husband had used marijuana on a daily basis which hurt his business and his family life, ultimately causing wife to file for divorce.

The Virginia divorce court used two different approaches to tracing the separate and marital interest in the two parcels of real estate, the first approach having been established on the Kentucky case of Brandenburg v. Brandenburg, 617 SW2d 871 (Ky. App., 1981) and recognized in Virginia in Hart v. Hart, 27 Va. App. 46, 497 S.E. 2d 496 (Va. App., 1998) and the second approach having been established in Virginia in the case of Keeling v. Keeling, 47 Va. App. 484, 624 S.E.2d 687 (Va. App., 2006).  On the house in the City of Richmond, the judge used the Brandenburg approach, which can be summarized as dividing the equity in the property according to the same percentages of separate property contributions to total contributions and marital property contributions to total contributions.  On the riverfront property, the divorce court judge used a variation of the Keeling approach, which can be summarized as dividing the equity in the property according to the percentages of separate property contributions to the original purchase price with the balance of equity being marital property.  After determining what was separate and what was marital, the divorce court judge equitably divided the marital property 60% to wife and 40% to husband, based on wife’s greater monetary and nonmonetary contributions to the marriage.  Husband appealed, objecting to the division of marital property and that the judge used two different approaches to tracing separate and marital property in the real estate.

The Virginia Court of Appeals upheld the trial court judge’s decision.  The appeal court ruled that it had not adopted an exclusive method for tracing the separate and marital portions of hybrid property.  In Keeling the court had recognized that the Brandenburg formula could produce an unfair result when there is a significant down payment of separate property, a significant marital mortgage, substantial appreciation due to market forces, and no evidence that either the down payment or the mortgage disproportionately contributed to the couple’s ability to acquire and hold the property. Keeling, 497 Va. App. at 491, 624 S.E.2d at 690.  As long as the result was equitable, the divorce court judge could use the Brandenburg approach for the City of Richmond home and the Keeling approach for the riverfront property.  Furthermore, Virginia does not require that a spouse who retraces separate funds used to make a down payment on property held by the husband and wife together must be awarded appreciation in the exact percentage in which the divorce court judge awards appreciation on the marital share.  Addressing the division of marital property, the Virginia Court of Appeals restated the rule that there is no presumption of an equal distribution of marital assets, or that the divorce court must start with a 50-50% presumption.  The appeals court upheld the trial court’s 40-60 division of marital property based on the factors in Virginia’s equitable distribution statute, Section 20-107.3 of the Code of Virginia.

You should consult with your Virginia divorce lawyer concerning the various approaches to tracing separate and marital property during equitable distribution.

Does payment of a mortgage with joint funds change the proper classification of the house from husband’s separate property to marital property under Virginia’s equitable distribution scheme?

Husband bought a house in his sole name five months prior to his marriage.  The husband and wife lived in the house for a year and then leased it for the rest of their marriage.  The rental income was deposited into a special joint bank account exclusively for the rent.  The rent was then transferred to another general joint bank account, into which husband’s pay was deposited and which was used to pay the couple’s marital debts.  After eleven years of marriage, wife filed for a divorce.  As part of the equitable distribution order, the Virginia divorce court judge classified the house as marital property because the bulk of the mortgage was paid with marital funds, even though it was purchased by husband prior to the marriage and titled in his name alone.  The Virginia Circuit Court judge held that marital funds were commingled with the separate property and transmuted into marital property.

In the published opinion of  Duva v. Duva, 685 S.E.2d 842 (Va. App. 2009), the Virginia Court of Appeals reversed and remanded, or sent the case back to the divorce court judge to correct this error.

The Court of Appeals first recognized the standard of review: that the divorce court’s classification of property as marital or separate is a factual finding, that will be reversed on appeal only if it is plainly wrong or without evidence to support it.  The Court of Appeals then recognized the definitions of marital, separate and hybrid property:  marital property is all property titled in the names of both property and all other property acquired by each party during the marriage which is not separate property, that is, property received during the marriage by bequest, devise, descent, survivorship or gift from someone other than the spouse.  Property acquired during the marriage by either party until the parties separate is presumed to be marital property.  Hybrid property is a mixture of marital and separate property.

The Court of Appeals stated the rule missed by the divorce court judge in Section 20-107.3(A)(3)(d):

“When marital and separate property are commingled by contributing one category of property to another, resulting in the loss of identity of the contributed property, the classification of the contributed property shall be transmuted to the category of the property receiving the contribution.  However, to the extent the contributed property is retraceable by a preponderance of the evidence and was not a gift, such contributed property shall retain its original classification.”

Thus, in this case, the marital payments became separate property, unless wife was able to retrace those payments to preserve their classification as marital.  The divorce court made an error of law by not considering the mortgage payments losing their classification as marital property when commingled with husband’s separate property, the house.  The divorce court did not consider whether wife had met her burden in tracing the payments to preserve their classification.  On appeal, wife claimed that the court should consider that the house was acquired during the marriage, not before the marriage, when the equity was realized.  The Court of Appeals rejected wife’s contention and held that the date of taking title is the date of acquisition.  One acquires property either as separate or marital; one cannot acquire property as hybrid.  The concept of hybrid property is relevant only after the initial classification.  The source of the funds rule is a vehicle to determine whether property has been transmuted into hybrid property, it does not determine the original classification.

You should consult with your Virginia divorce lawyer to discuss how your property might be classified in an equitable distribution proceeding.

 

Can a civil contempt citation in a Virginia divorce case convert into a criminal contempt citation not protected by the automatic stay in bankruptcy?

In In re Rook, 102 B.R. 490 (Bankr. E.D.Va. 1989), the husband filed for a permanent injunction in bankruptcy court staying two contempt order issued in his Virginia Circuit Court divorce case.  The first contempt order, entered in 1983, suspended a jail sentence provided the husband made all payments required under the parties’ separation agreement or property settlement agreement, but preserved husband’s right to a hearing on the validity of the agreement.  Husband contended that the separation agreement was invalid and unenforceable as void against public policy. The divorce court agreed with husband and wife appealed. The Supreme Court of Virginia agreed with wife and upheld the validity of the property settlement agreement, remanding the case to the Circuit Court.  Rook v. Rook, 233 Va. 92, 353 S.E.2d 756 (1987).  Husband filed chapter 7 bankruptcy.   In 1989, the Circuit Court judge entered the second contempt order, finding that husband had continued to be in contempt of the 1983 order and ruling that husband was not protected from this later contempt by the automatic stay in bankruptcy.

The bankruptcy judge recognized that the purpose of the automatic stay is to protect the relative positions of creditors and shield the debtor from financial pressure during the pendency of a bankruptcy proceeding.  Furthermore, the judge recognized that in “the realm of domestic relations litigation, matters which do not bear on a debtor’s economic status, such as the dissolution of the marital relationship, are not stayed by a bankruptcy court…”, while “[m]atters which involve the distribution of marital assets are perforce subject to the automatic stay.’’ Rook at 492.  (Section 362 of the Bankruptcy Code has since been amended to reflect this distinction.)   Consequently, the court first ruled that the portions of the 1989 order addressing the funds or property of the debtor’s estate were void as obtained in violation of the automatic stay, regardless of the divorce court judge’s knowledge of the bankruptcy filing.

Regarding the citations for contempt, the judge recognized three lines of authority: first, that proceedings excepted from the automatic stay must be criminal in nature; second, that the circumstances surrounding the issuance of the order of contempt must be examined to determine whether the intent of the court was to satisfy a judgment or simply to punish; and third, a line upholding the dignity of the issuing court – that the divorce court must retain the ability to compel compliance with its orders.  In this case, the judge adopted the analysis of the courts which examine all aspects surrounding the issuance of a contempt order.  Here, the 1983 contempt order was designed to exact payment of debts from the debtor and the automatic stay would apply to prevent the “coerced dilution of the estate.” Rook at 494.  The automatic stay did not, however, apply to the second 1989 order, which punished the debtor and was designed to uphold the dignity of the prior circuit court orders.  The debtor’s opportunity to purge himself of contempt had expired and the civil and remedial contempt order thereby converted to a criminal and punitive contempt order, one not protected by the bankruptcy filing.

You should consult with your bankruptcy or divorce lawyer regarding the applicability of the automatic stay to a contempt proceeding in a Virginia divorce case.

Is husband’s bankruptcy filing a change in circumstances justifying a modification of spousal support?

While a husband’s discharge in bankruptcy may constitute a change in circumstances justifying a modification of spousal support in Virginia, the mere filing of husband’s bankruptcy and expectation of a discharge would be entirely too speculative for a modification. Rogers v. Rogers, 656 S.E.2d 436, 51 Va. App. 261 (Va. App. 2008).  In the Rogers case, when the Virginia Circuit Court divorce judge entered a final decree of divorce, the husband and wife represented that they had settled all equitable distribution issues and reserved the issue of alimony or permanent spousal support for later determination.  As part of the settlement, husband had agreed to pay two of the parties’ joint debts.  The divorce court determined the amount of alimony or spousal support at a later hearing.  The husband then filed a motion to reduce spousal support.  The husband did not pay the joint debts as agreed and subsequently filed a chapter 7 bankruptcy.  At the second hearing on alimony or spousal support, the divorce court judge assumed that the husband would receive a discharge of the joint debts in bankruptcy and that the creditors would pursue wife for collection of the debts.  The divorce court judge used husband’s expected discharge to justify a modification of spousal support for wife.

After reviewing Virginia case law concerning spousal support in divorce cases and the discharge of debts in bankruptcy, the Virginia Court of Appeals recognized several rules.  First, a court may not order a lump sum spousal support award to compensate a non-debtor spouse for the other spouse’s discharge of marital obligations in bankruptcy because that would re-create a debt discharged in bankruptcy and violate the preemption of Virginia state law by federal bankruptcy law.  Rogers, 51 Va. App. at 269 (Va. App. 2008)(citing Mosley v. Mosley, 19 Va. App. at 197, 450 S.E.2d at 164 (1994).   Second, where a material change in circumstances due to a bankruptcy otherwise occurs, a court may modify a spousal support order. Rogers, 51 Va. App. at 269 (Va. App. 2008)(citing Dickson v. Dickson, 23 Va. App. at 85-86, 474 S.E.2d at 171 (1996).   Third, a spousal support award must have its basis in current circumstances. Rogers, 51 Va. App. at 270 (Va. App. 2008)(citing Poliquin v. Poliquin, 12 Va. App. at 676, 406 S.E.2d at 403-04 (1991). Finally, in modifying spousal support, a Virginia Circuit Court divorce judge may not base an award on speculation of future events, but may consider reasonable foreseeable events.  Rogers, 51 Va. App. at 270 (Va. App. 2008)(citing Donell v. Donell, 20 Va. App. at 41, 455 S.E.2d at 258 (1995) and Srinivasan v. Srinivasan, 10 Va. App. at 735, 396 S.E.2d at 679 (1990).

In Rogers, the appeals court concluded that the divorce court erred in presuming husband would receive a discharge of the joint debts and in assuming that the creditors would pursue wife for collection.  The appeals court remanded, or sent back, the case to the divorce court judge for further proceedings consistent with its decision.

You should consult with your bankruptcy or divorce lawyer regarding whether a bankruptcy might constitute a change in circumstances justifying a modification of spousal support or alimony.

 

After a wife files bankruptcy, should the bankruptcy court or the Virginia divorce court determine the validity of a separation agreement?

When one spouse files bankruptcy during a divorce, the majority of bankruptcy courts in the U.S. have lifted the automatic stay to allow the husband and wife to complete equitable distribution in the state divorce court, while the bankruptcy court retains its exclusive jurisdiction to determine the priority of claims, including the claim of the spouse who did not file bankruptcy. Bogart v. Bogart, 464 S.E.2d 157, 21 Va. App. 280 (Va. App. 1995).  In the Bogart case, the Virginia Court of Appeals decided that the Virginia Circuit Court is the proper forum to decide the validity of a separation agreement and conduct an equitable distribution hearing during a bankruptcy case by a wife.

A husband and wife owned several parcels of real estate with deeds of trust, or mortgages, on them.  After the wife filed for a divorce in the Virginia Circuit Court, the husband stopping making payments on the mortgage loans and the lenders started to foreclose on the properties.  The wife then a Chapter 11 bankruptcy case seeking protection from her creditors.  A month later, the husband and wife executed a separation agreement in a letter resolving spousal support and equitable distribution by transferring the real estate to husband in return for his promise to make the mortgage payments on the properties.  More than four months later, the wife requested and was granted relief from the automatic stay to conclude the divorce case in state court.

On the same day that the divorce was granted in the Virginia divorce court, the bankruptcy court refused wife’s request for approval of the separation agreement, finding that the agreement was not in the best interests of the wife or her creditors.  Two months later, the state divorce court held a hearing on the equitable distribution portion of the divorce case over wife’s objection.  Wife claimed that the bankruptcy court had asserted jurisdiction over the separation agreement, had refused to approve it, and that the Virginia divorce court  no longer had the authority to decide the validity of the agreement or conduct an equitable distribution hearing.  The wife filed for an injunction in bankruptcy court to stop the state court equitable distribution proceeding and her request was denied by the bankruptcy judge, who ruled that the Virginia divorce court was the proper forum to determine the validity of the contract and to decide equitable distribution.

The Virginia divorce judge found the separation agreement was a valid contract over wife’s objection that the contract had been obtained by fraud or duress and incorporated the agreement into an order of the court.  Wife appealed the decision of the Virginia Circuit Court.

The Virginia Court of Appeals held that the bankruptcy court judge’s refusal to approve the agreement did not invalidate the separation agreement.  When the wife was granted relief from the automatic stay, the bankruptcy court only retained jurisdiction over the allowance of claims against wife’s estate in bankruptcy.  This was supported by the bankruptcy court judge’s subsequent denial of wife’s request for an injunction to stop the Virginia divorce court judge.  The Virginia Court of Appeals approved a bankruptcy court’s opinion that “[i]t is appropriate for bankruptcy courts to avoid incursions into family law matters ‘out of consideration of court economy, judicial restraint, and deference to our state court breathren and their established expertise in such matters.’ ” Bogart, 21 Va. App. at 288, [citing Wilson, 85 B.R. at 727 (quoting MacDonald, 755 F.2d at 717)].  In this case, the Virginia Circuit Court can define what the debtor wife’s rights are in marital property through equitable distribution, including the validity of the separation agreement, and the bankruptcy court has the power over the administration of the wife’s property which has become property of the bankruptcy estate.

You should consult with your bankruptcy or divorce lawyer to discuss which court has the authority to decide the various issues arising from your separation or divorce.

Can a wife enforce a Virginia divorce decree ordering husband to pay a vehicle loan during his chapter 13 bankruptcy case?

Husband and wife were divorced in Virginia in 2006.  The husband and wife were both obligated on a loan secured by a sport utility vehicle.  In the final decree of divorce, the Virginia Circuit Court judge decreed that husband was the sole owner of the sport utility vehicle in his name and that he would be obligated for the payments on the loan secured by the vehicle, except for one monthly payment due immediately prior to the divorce which wife had to pay while wife had possession of the vehicle.  Neither husband nor wife made any payments on the sport utility vehicle loan.  The lender sued husband and wife and obtained a judgment against both parties.

The husband filed a chapter 13 bankruptcy case in the Western District of Virginia, In re Forgette, 379 B.R. 623 (Bankr. W.D. Va. 2007).  The vehicle lender garnished wife’s income or assets.  Wife filed a proof of claim for a priority claim against husband for spousal support, child support and the unpaid judgment, all as a “Domestic Support Obligation”, a term defined in the bankruptcy code in 11 U.S.C. 101(14A).  The vehicle lender also filed a proof of claim for the judgment amount.  The wife filed a Motion for Relief from Stay in husband’s bankruptcy case, asking the bankruptcy judge to allow her to enforce the divorce decree in the Virginia Circuit Court.  The bankruptcy judge denied the wife’s request for relief in her motion.

The bankruptcy judge found that the key issue was whether the obligation to pay the vehicle loan was a “Domestic Support Obligation”.  If the obligation was found to be a Domestic Support Obligation, then husband was not protected by the automatic stay in bankruptcy and wife could pursue husband for the obligation through a show cause proceeding in the Virginia divorce court.  In addition, if the obligation was found to be a Domestic Support Obligation, then husband could not discharge the obligation in his chapter 13 bankruptcy case.  As discussed in the answer to the question herein, “Can my spouse discharge a family law debt in bankruptcy?”, a Domestic Support Obligation has four elements.  In this case, the obligation was missing the first element, it was not “owed to or recoverable by….(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) government unit.”  Instead it was owed to a third party, the vehicle lender.  As such, husband’s obligation to pay the vehicle loan was not a Domestic Support Obligation and wife could not pursue husband in the Virginia divorce court.   The bankruptcy judge further ruled that good cause did not exist for relief from the automatic stay because wife did not establish a claim against husband’s estate.

The Forgette opinion is not necessarily the majority view on the issue of whether an obligation owed to a third party is a Domestic Support Obligation.  You should consult with your Virginia bankruptcy or divorce lawyer regarding whether you have a right to pursue your former spouse in his or her bankruptcy case.