Month: December 2016

Will a woman have to return the gift of an engagement ring in Virginia if she breaks off the engagement?

Yes. In Hicks v. Jordan, CL09-4244, the Circuit Court ruled that an engagement ring was a conditional gift, which upon the dissolution of an engagement had to be returned to the giver. Although this case does not directly concern bankruptcy or divorce, it does concern gifts made in contemplation of marriage.

In this detinue action under Section 8.01-114 of the Code of Virginia,   the Court examined the nature of gifts and held that the facts of the case established that the gift was made in contemplation of marriage, making it conditional upon the marriage union.  According to Lumsden v. Arbaugh, 207 Mo. App. 561, 564, 227 S.W. 868, 869 (1921), an engagement ring must be returned to the donor upon breach of the engagement due to its nature as a conditional gift.

In Pretlow v. Pretlow, 177 Va. 524, 544, 14 S.E.2d 381 (1941)  the Supreme Court of Virginia ruled similarly, stating, “If an intended husband makes a present, after the treaty of marriage has been negotiated, to his intended wife, and the inducement for the gift is the fact of her promise to marry him, if she breaks off the marriage, he may recover from her the value of such present.” Furthermore, in Hicks the Court found that Virginia’s Statute of Frauds, Virginia Code §11-2, did not present a bar to the plaintiff’s case in this detinue action for the wrongful detention of the engagement ring.  Accordingly, the Court held that the action was merited, ordered that the defendant return the ring to the donor, and affirmed that the defendant was estopped from pleading the statute of frauds.

You should consult with your Virginia family law lawyer to determine if you are legally entitled to the return of, or obligated to return, an engagement ring.

What techniques can minimize or avoid the effects of a bankruptcy in a Virginia separation or divorce?

There are a number of techniques savvy divorce counsel can employ to minimize or avoid the effects of a bankruptcy when his or her client is separating or divorcing in Virginia.  Two of the least effective, yet most common, approaches favored by divorce lawyers in the greater Richmond metropolitan area, including Chesterfield County, Hanover County, Henrico County, and the City of Richmond in separation agreements or property settlement agreements, are to declare all obligations to be support and/or to state that the agreement represents a bargained for exchange which creates support obligations.  These two approaches ignore three important aspects of bankruptcy law: (1) that labeling an obligation as a “domestic support obligation” does not make it a “domestic support obligation” as defined in the Bankruptcy Code; (2) that prepetition agreements, including an agreement that a debt be treated a certain way, may still be discharged in bankruptcy; and (3) that not every legal obligation under a separation agreement or divorce decree necessarily creates a matured, pre-petition “claim” dischargeable in bankruptcy.

Labeling an obligation as support may not be effective because Section 101(14A)(B) of Title 11 of the U.S. Code, the Bankruptcy Code, establishes that a “domestic support obligation” is “in the nature of alimony, maintenance, or support (including assistance provided by a government unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated…[emphasis mine]. A domestic support obligation is not a domestic support obligation because it is labeled as such; instead, it must include the four elements contained in the definition in 11 U.S.C. 101(14(A).

These common approaches also ignore a second fundamental aspect of bankruptcy – that it discharges certain agreements giving rise to a claim or debt.  If this were not the case, then every credit agreement would include a provision that the debt could not be discharged in bankruptcy.  Agreeing that a debt is nondischargeable does not make it nondischargeable.

Finally, these approaches may ignore the distinctly different types of divorce obligations in a separation agreement, and the impact of the timing of the bankruptcy itself.  For example, labeling the division of the spouses’ respective interests in jointly titled marital property as a “domestic support obligation” may be an unnecessary tradeoff in negotiations, as a breach of the obligation may not give rise to a dischargeable debt or “claim” under 11 U.S.C. 101(5), but instead simply reflect an interest in property.  Similarly, the debt or claim first must come into existence, through contract or equitable distribution, before it could possibly be discharged in the other spouse’s subsequent chapter 13 filing; if either spouse has already filed bankruptcy, inchoate rights or obligations may not be affected, and it may be a fruitless waste of bargaining position to discuss the dischargeability of debts in a separation agreement (particularly if relief from stay were not first obtained).

What are some effective techniques to employ?

• Create domestic support obligations as defined by the Bankruptcy Code. Instead of merely labeling an obligation as a domestic support obligation, make sure an obligation includes the four elements contained in the definition so that it will be, in fact, a domestic support obligation nondischargeable in any type of bankruptcy.

 

• Render your spouse ineligible for chapter 13 relief through debt allocation or division of liabilities. Since a chapter 13 bankruptcy may allow your spouse to discharge non-DSO family law debts defined in 11 U.S.C. 523(a)(15), you want to make your spouse unable to qualify for chapter 13 relief.  Here’s how you do it: there are limitations on the amount of debt, contained in 11 U.S.C. 109(e), (currently $383,175 in noncontingent, liquidated, unsecured debt and $1,149,525 in noncontingent, liquidated, secured debt) that an individual may have in order to qualify for chapter 13 relief.  By properly allocating an amount of either unsecured or secured, noncontingent, liquidated debt to your spouse in excess of the maximum amount allowed, you can render your spouse ineligible for the very type of bankruptcy that would allow your spouse to discharge non-DSO family law debts to you, at least for the time being.

 

• Make obligations payable to you and not to a third party. There is case law support for the notion that an obligation payable directly to a third party and not to the spouse does not fit within the definition of 11 U.S.C. 523(a)(15),  In re Forgette,  379 B.R. 621 (Bankr. W.D. Va., 2007), and is, therefore, not subject to the automatic stay, or nondischargeable in a chapter 13 case.  You may be better off requiring your spouse to pay you directly, instead of a third party, for certain obligations, particularly if you intend to remain in possession of property securing the payment of that obligation.

 

• Include indemnification and hold harmless provisions on obligations payable to third parties, then incorporate the agreement as soon as possible into a court order or decree. By taking these steps, you can improve your chances of enforcement by creating an obligation to you that is not simply based on a contract, but can also be enforced through the Virginia Circuit Court judge’s contempt of court powers.

 

• Make contemporaneous exchanges for new value given to prevent preferential payments and structure transfers to avoid voluntary or fraudulent transfers. If you spouse files chapter 7 bankruptcy, the chapter 7 trustee may attempt to avoid and/or recover transfers of property to you as voluntary or fraudulent transfers, or as preferences under 11 U.S.C. 547, as was successfully done recently in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division, in the case of Terry v. Prunty, In re: Paschall, Chapter 7 Case no:  07-32048.You should be careful to structure any transfers of property to minimize your exposure to these risks.

 

• Record any deeds and the separation agreement as soon as possible. As demonstrated in the Paschall case, you and your spouse meet the bankruptcy definition of an “insider”,  and you may gain an advantage by recording your separation agreement and any deeds as soon as possible so the one year period for preferential payments to insiders begins to run.

 

• Consider that acquiring or becoming entitled to acquire any interest in property as a result of a property settlement agreement or an interlocutory or final divorce decree within 180 days after filing bankruptcy, can relate back to the filing date and become property of the bankruptcy estate under 11 U.S.C. 541(a)(5)(B).

 

• Seek relief from the automatic stay immediately if your spouse files bankruptcy to pursue your state court rights and remedies. You may also need a court order allowing employment of counsel for the debtor in state court and approving any separation agreement.  There is some concurrent jurisdiction over family law matters in state court and bankruptcy court.  In general, you should have your separation and divorce matters decided by the Virginia Circuit Court judge experienced in family-law matters, and your bankruptcy matters decided by the U.S. Bankruptcy judge experience in bankruptcy matters.  Actions taken in violation of the automatic stay of bankruptcy may be void, so it is important for you to obtain relief from the stay as early as possible, should your spouse file bankruptcy, to commence or continue divorce matters in most appropriate court.  Waiting to see what happens in your spouse’s bankruptcy case may work to your disadvantage if you later try to assert your state law rights in bankruptcy court.

You should consult with your Virginia family law lawyer or bankruptcy attorney to discuss the best way to structure your divorce matters in contemplation of a possible bankruptcy filing.

Will gifts from wife’s father be considered marital property subject to equitable distribution in a Virginia divorce?

It depends upon the circumstances and the donative intent of the gift giver.  It is not unusual for parents to give gifts to their married children.  In Virginia equitable distribution proceedings, the question then becomes whether the gifts were intended to be separate property of the married child, or joint marital property of the couple.  In Cummings v. Cummings, CL09-1260, the Henrico County Circuit Court held that sale profits for a gift of a real property were subject to equitable distribution as marital property, but the gift of a Toyota Sequoia automobile to wife while the parties were separating should be classified as her separate property.

Prior to the parties’ marriage, wife owned a home on Hanover Avenue in Richmond, Virginia, as well as an automobile without any outstanding liens.  The parties lived in the Hanover residence after their marriage, but they subsequently sold the property, using the proceeds from the sale and gifts from wife’s parents to purchase a home in Goochland County and later a home in Henrico County, Virginia. Throughout the marriage, the wife’s father contributed significant funds to the parties, including child support due by his son-in-law for two children from a prior marriage, income from investments of his investment company, and annual gifts, all claimed as gifts by father for estate planning purposes.

In June 2001, the husband and wife bought a condominium at the Wintergreen Resort in Virginia for $300,000, a property they owned as tenants by the entirety.  For the initial down payment, the parties jointly paid $50,000, and they borrowed the remaining $250,000 from the wife’s father.  In January 2002, the wife’s father drafted a check to her for $132,226.76, which was used to pay off the Hanover Avenue home (which the parties agreed was separate property), as well as a check for $237,713.26 with the memo stating “Unified Credit Payoff Wintergreen mortgage.” After her father wrote the checks, wife repaid the balance of the mortgage on the Hanover property and later paid the remaining balance on the Wintergreen property.  Six years after the purchase of the Wintergreen property, the parties sold it for $522,507.00, the sum of which was divided into three accounts.

The issue in this Henrico County, Virginia, divorce proceeding involved the distribution of the three accounts and the classification of the property as marital or separate for equitable distribution purposes. In evaluating the factors established by Virginia Code §20-107.3, the Henrico County Circuit Court judge examined the monetary and non-monetary contributions of both parties, the debts and liabilities of the spouses, and whether wife’s father’s payments and financial assistance qualified as gifts to both parties, or to wife alone.  Under Virginia law, a gift requires three key elements: intent, delivery and acceptance, which must be established by clear and convincing evidence. To determine this fact, the Henrico County divorce court judge considered the unpublished case of Beck v. Beck, (2000 Va.App.), where, in a similar factual situation, the Virginia Court of Appeals stated, “The mere fact that the property acquired was jointly titled and was intended to be used as their residence, was insufficient to establish a gift by clear and convincing evidence.”  Here, however, the Henrico County Circuit Court found that making the Wintergreen property a gift for tax purposes required it to be made to both parties in order to receive the maximum tax benefit.  Husband’s divorce attorney had wisely introduced into evidence wife’s father’s gift tax returns which showed the maximum amount claimed for a gift to both husband and wife.  Based on the statutory factors of Virginia Code Section 20-107.3(E), the divorce court judge determined that the wife should receive 60% of the marital assets while the husband should receive 40%.  Each party received 50% of the marital share of the retirement funds.  In regards to the automobile, however, the father had given the SUV to the wife knowing that the parties were considering separation.  As a result, only wife received that property as a gift, and, as wife’s separate property, it was not subject to equitable distribution.  Therefore, the circumstances surrounding the gifts were determinative in their classification as marital or separate property.

You should consult with your Virginia divorce lawyer concerning how gifts received during your marriage would likely be classified in equitable distribution proceedings in a Virginia divorce.

http://www.vsb.org/site/publications/divorce-in-virginia/