Month: May 2015

Can property received under a separation agreement after bankruptcy become property of the estate?

Generally, the property of the estate for bankruptcy purposes is determined as of the date of filing bankruptcy.  11 U.S.C. 541.  Property of the estate is very broad and includes every type of legal and equitable interest that the debtor has in every type of property.  It also includes community property of the debtor and the debtor’s spouse that is under the sole, equal, or joint management and control of the debtor, or subject to a claim against the debtor or the debtor and his or her spouse.  Property of the estate also includes interests in property recovered by the trustee as unreasonably excessive bankruptcy legal fees for debtor representation, 11 U.S.C.329(b), bid rigging in a sale of property, 11 U.S.C. 363(n), , from a custodian of property of the estate, 11 U.S.C. 543, from transferees of avoided transfers such as statutory liens, preferences and fraudulent transfers, 11 U.S.C. 550, of certain mutual offsets resulting in an “insufficiency” within 90 days before filing, 11 U.S.C. 553, and claims of partnership against general partners, 11 U.S.C. 723.

Earnings from services performed by the individual debtor after filing are not property of the estate, but property of the estate does include post-petition proceeds, products, offspring, rents and profits of property of the estate.

Property of the estate includes property acquired within one hundred eighty (180) days after filing by bequest, devise, or inheritance, as the beneficiary of a life insurance policy, and as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree.  These latter provisions were intended to discourage someone from discharging debts in anticipation of receiving money or property from an inheritance, life insurance policy, or the terms of a separation agreement or divorce decree.

You should consult with your Virginia bankruptcy or divorce attorney to discuss whether property of your bankruptcy estate will include any property from your separation or divorce.

Is a trust fund tax liability from husband’s business a marital debt in Virginia subject to apportionment in equitable distribution?

In the case of Gilliam v. McGrady, the Court of Appeals of Virginia reversed a trial court decision that a trust fund tax liability was a marital debt and sent the case back to the divorce court for further findings.

The parties were married for fifteen years before separating.  During the marriage, husband started a painting company.  Husband ran the company alone and was solely responsible for signing company checks.  The husband refused to discuss his business and its financial condition with his wife.  The wife’s parents helped support the couple’s lifestyle, which included private schools for their children and membership in a private country club.  Each party blamed the other for the couple’s overspending.  Instead of transferring funds to a joint personal account, the husband paid family bills from the company account.  While he operated the business, the husband failed to pay payroll taxes due the federal government.

Under the Internal Revenue Code, 26 U.S.C. 6672 an employer holds withholding taxes, federal income taxes and social security, as special funds in trust for the United States.   .  The officers of the company who are responsible for withholding and paying over these trust fund taxes and who willfully fail to do so become personally liable for the trust fund taxes along with the company.

When the wife discovered that husband was not paying payroll taxes, she hired an accountant to organize the husband’s business records and prepare its tax returns.  The husband terminated the accountant’s services after several months.  The wife began filing a separate tax return the following year.

The divorce court found that the payroll tax debt was a marital debt because the parties overspent, failed to discuss their budget, were equally at fault for not budgeting, knew the taxes were not being paid, and paid other bills instead of the taxes.  The divorce court judge found that funds which would have been used to pay the payroll taxes were instead used to pay the living expenses and other marital debt.

On appeal, the Virginia Court of Appeals first recognized the trial court’s authority for the apportionment of debt in equitable distribution in Section 20-107.3(A) of the Code of Virginia.  The court next recognized a logical extension of the presumption that property acquired by either spouse during the marriage and before the last separation is marital property to marital debt, so debt acquired by either party during the marriage should be presumed to be marital debt.  In classifying debt as separate or marital, the divorce court judge must consider the purpose of the expenditure, with particular attention to who benefited from the debt.  The Court of Appeals found error in the trial court’s approach in this case because the judge did not discuss the purpose of the original debt.  The divorce court judge should have considered who benefited from the original debt rather than the failure to pay the debt, noting that debt from any criminal activity such as gambling, criminal fines, or restitution could otherwise be found to be marital debt.  The Court of Appeals noted that the trial court’s ruling created an anomalous situation in which the husband had bettered his position by the crime of failing to pay his trust fund tax liability.  The trial court had correctly ruled that wife had the burden of proving that the trust fund taxes were not a marital debt, despite the cumbersome nature of husband’s records.  The case was remanded, or sent back, to the Virginia Circuit Court judge for further proceedings on the purpose of the trust fund tax debt and who benefitted from it.

You should consult with your Virginia divorce lawyer concerning the apportionment of debts incurred during your marriage.

 

Will husband’s underreporting of his income justify a denial of his motion to modify spousal support following the bankruptcy of his former employer?

In the unpublished opinion of Argabright v. Argabright, the Virginia Court of Appeals upheld the decision of the Virginia Circuit Court denying the husband’s motion to terminate or reduce spousal support following the loss of a pension following the bankruptcy of his former employer.

At the time of the divorce, husband made approximately $100,000 a year from Chesapeake Corporation and wife was unemployed.  The husband was ordered to pay $2,400 a month in spousal support to wife.  The husband remarried a month later.  Ten years later, he retired from his employment with Chesapeake Corporation.  The husband received income from four sources: social security in the amount of $1,686 a month, two defined benefit plans or pensions from his former employer for $1,976 and $2,496 per month, and dividends and interest.  When Chesapeake Corporation filed for bankruptcy twelve years later, husband lost his pension of $2,496 per month and filed a motion to modify or terminate his spousal support obligation.

At the time of the hearing, the wife was working part-time making less than $11 an hour for 20-28 hours a week.  Husband had withdrawn money from an IRA, after accumulating more than $65,000 in a taxable account and $434,000 in an IRA.  As is customary during a support hearing, husband submitted an income and expense statement and testified about his income and household expenses.  The court found husband’s testimony and income and expense statement to be incredible and denied his motion.

On appeal, the Virginia Court of Appeals would not consider any of the husband’s questions presented as husband had failed to cite any legal authority to support his arguments, as required by Rule 5A:20(e) of the Rules of the Supreme Court of Virginia:

“The opening brief of appellant shall contain…

(e) The principles of law, the argument, and the authorities relating to each question presented. Where the question was not preserved in the trial court, counsel shall state why the good cause and/or ends of justice exceptions to Rule 5A:18 are applicable. With respect to each question, the principles, the argument, and the authorities shall be stated in one place and not scattered through the brief. At the option of counsel, the argument may be preceded by a brief summary.”

This case illustrates both the importance of truthfully presenting a party’s testimony and evidence at a hearing on a motion to modify support and the consequences of failing to follow the rules of appealing a case.

You should consult with your Virginia family law attorney concerning the best way to present evidence to justify a modification or termination of spousal support.

Can alimony increase after a Virginia divorce above the standard of living established during the marriage?

In Ramberg v. Ramberg, Civil Action No: 55466, the Circuit Court of Loudoun County, Virginia, ruled that support could not be modified in excess of the standard of living established during the marriage.

In Ramberg spousal support or alimony of $2,500 a month was set while the husband made approximately $11,250 a month and wife made approximately $1,250 a month and wife had custody of the two minor children of the parties.  Under Section 20-108.1(A)  of the Code of Virginia, the court shall consider all relevant evidence presented to the divorce court judge, relevancy depending upon the facts and circumstance of each particular case.  Under Section 20-109(A) of the Code of Virginia a party can petition a court for a modification of support, that is, an increase, decrease, or termination of support, as the circumstances may make proper.  In Virginia, this requires a showing of a material change in circumstances that warrants a modification of support.  Floyd v. Floyd, 1 Va. App. 42, 333 S.E.2d 364 (Va. App. 1985).  The Ramberg divorce court stated the rules on proving such a change: it must be shown by a preponderance of the evidence; it must relate to the financial needs and abilities of the parties, and it must be based on their current circumstances.  The judge pointed out a difference between modifications of child support and spousal support – while child support can increase beyond the standard established during the marriage under the parental generosity principle, Conway v. Conway, 10 Va. App. 653 (Va. App. 1990), spousal support is limited to the standard of living of the parties during the marriage based on Section 20-107.1(E)(2) of the Code of Virginia.  Consequently, increases in the payor spouse’s income do not necessary justify an increase in alimony or spousal support for the payee spouse.

In Ramberg, the parties had initially agreed to $3,000 a month in spousal support at the time of the divorce.  Three years later, spousal support was decreased by the court to $2,500 due primarily to an increase in the wife’s monthly income.  By the time of the instant case, wife had become permanently disabled due to fibromyalgia and was unable to work.  Her income had decreased to $146 a month.  The court refused to allow the fact that the parties’ two children had become emancipated to affect its decision on spousal support, noting that the money received for child support is not paid to benefit the payee parent.   Nevertheless, in light of the wife’s decreased income and increased expenses, the Ramberg court modified spousal support up to $3,250, an amount the court found equivalent to the parties’ initial agreed-upon amount based upon the parties standard of living established during the marriage.

You should consult with your Virginia divorce lawyer concerning any limitations on the amount of spousal support you can receive.

Is wife’s half of husband’s retirement benefits a property interest of hers or a debt dischargeable in bankrupt?

Although the decision was based on the Bankruptcy Code as it existed in 1990, the case of Brogan v. Brogan, 31 Va. App. 769, 525 S.E.2d 618 (Va. App. 2000), which held that the wife’s interest was a property interest, not a debt dischargeable in bankruptcy, is historically useful for its analysis of a debt in the context of family law issues.

As discussed in Brogan, before the 1994 amendments to the Bankruptcy Code, spousal and child support obligations were the only marital debts not dischargeable in bankruptcy.  The inquiry was whether a given debt was “in the nature of alimony or support” or was a division of property.  The 1994 amendments added Section 523(a)(15) in an attempt to prevent spouses from discharging sums other than alimony owed to the other spouse under a property settlement agreement.  Brogan v. Brogan, 31 Va. App. 769, 778, 525 S.E.2d 618, 623 n.5.  With the addition of Section 523(a)(15) in 1994 until its revision in 2005, nonsupport family law debts could be declared to be nondischargeable in Chapter 7 with the filing of an adversary proceeding within 60 days of the meeting of creditors unless the debtor could not reasonably pay the debt or the benefit of the discharge outweighed the harm to the spouse, former spouse or child.

The current statutory basis for the dischargeability of family law debts in consumer bankruptcy cases after the wholesale revision of the Bankruptcy Code following the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is contained in Title 11 of the U.S. Code, in several sections as follows:  Sections 101(14A) defining “domestic support obligation”, Section 523(a)(5) and (15), containing “Exceptions to Discharge”, and Sections 727, 1141 and 1328(a) delineating the discharge in bankruptcy under the various chapters.

In a nutshell, after the 2005 amendments to the Bankruptcy Code, “domestic support obligations” are not dischargeable in chapters 7 or 13.  Some family law debts that are not domestic support obligations may be dischargeable in chapter 13, but may not be discharged in a chapter 7 case or with a chapter 13 hardship discharge.

In Brogan, the husband and wife had entered into a written stipulation agreement (also known as a separation agreement or property settlement agreement) under which wife became entitled to one-half of husband’s gross retirement funds, to be paid directly to wife.  The agreement was incorporated into the final decree of divorce between the parties.  The husband filed chapter 7 bankruptcy two months later and received a discharge of his debts.  Nine years later, the wife filed a petition for an order to show cause in the Virginia Circuit Court that granted the divorce because she was not receiving her share of her former husband’s retirement funds.  The husband claimed that the obligation was a debt that had been discharged in bankruptcy and that the Virginia divorce court lacked jurisdiction, or the power to hear, the dischargeability of the obligation.  The divorce court judge held that the obligation was not a debt subject to discharge in bankruptcy, but was instead a division of property.  The Virginia Circuit Court judge entered judgment in favor of the wife for the disputed amount and found husband in contempt for his failure to pay the disputed amount.

On appeal, the Virginia Court of Appeals held that the bankruptcy court and Virginia Circuit Courts have concurrent jurisdiction to determine whether an obligation was a debt under the bankruptcy code and whether it arose pre-petition (before filing) or post-petition (after filing), citing 28 U.S.C. 1334(b).

Brogan v. Brogan, 31 Va. App. 769, 774, 525 S.E.2d 618, 621.

The Virginia Court of Appeals recognized that the bankruptcy courts have exclusive jurisdiction over the dischargeability of debts based on fraud, false pretenses, use of a false financial statement in writing, larceny, embezzlement, and willful and malicious injury which require the filing of a complaint under Section 523(c).

In this case, the appeals court held that the husband’s obligation was not a debt within the meaning of the bankruptcy code and that filing bankruptcy could not give the husband greater interests in the retirement plan than what he had before filing.  Citing Section 541(d) of the Bankruptcy Code, the court concluded that Virginia law governed what property interests the spouses had in the retirement funds.

In some states, courts have imposed a constructive trust upon retirement funds held by a spouse for the benefit of the other spouse.  In Brogan, the court ruled that the language in the agreement that wife’s share was to be paid directly to her “was sufficient under Virginia law to give wife a separate property interest in husband’s future benefits.” Brogan v. Brogan, 31 Va. App. 769, 776, 525 S.E.2d 618, 622.  The court also ruled, alternatively, that the wife’s share was not a pre-petition debt because the payments were not yet due and payable at the time the bankruptcy was filed.

You should consult with your Virginia bankruptcy or divorce lawyer concerning the dischargeability of family law debts in bankruptcy.