Month: October 2017

Does a wife’s chapter 13 bankruptcy filing extinguish her ex-husband’s rights to Qualified Domestic Relations Orders (QDROs) arising from their divorce?

Not in the case of In re: Kim St. Clair, Case No: 08-27884 (12/29/2011) where the U.S. Bankruptcy Court for the District of New Jersey granted the husband’s motion for relief from stay to enforce the final decree of divorce in state court in order to obtain qualified domestic relations orders for his interest in his wife’s pension and 401K plan more than seven years after entry of the final decree of divorce.

In St. Clair, the husband and wife were divorced in 2004.  The final decree of divorce incorporated a property settlement agreement in which husband was given a share of wife’s 401K plan and defined pension benefit plan pursuant to a Qualified Domestic Relations Order (QDRO).  Neither party prepared the QDROs following the divorce.  The wife filed a chapter 13 bankruptcy seven years after entry of the final decree of divorce.  The husband filed a motion for relief from stay in the wife’s bankruptcy case under 11 U.S.C. §362, asking to be granted relief to enforce the terms of the divorce decree in state court, specifically to compel the production of the QDROS, to compel the wife to pay her share of the agreed joint responsibility for payment of their children’s college expenses, and to compel the wife to produce proof of life insurance coverage for their children.

 

The bankruptcy court judge noted that relief from the automatic stay on the grounds of cause is decided on a case by case basis.  The court relied on three factors in determining whether a party has demonstrated cause for relief (1) prejudice to the debtor’s bankruptcy estate, (2) hardship to the moving party, and (3) the probability of success on the merits, citing In re: Nortel Networks Corp., 445 B.R. 370 (2011) .  While the court recognized that a debtor can discharge equitable distribution debts under 11 U.S.C. §523(a)(15) in a chapter 13 bankruptcy case, the court disagreed with wife’s argument that husband interest in the retirement plans was a pre-petition claim for equitable distribution that fit within 11 U.S. C. §523(a) (15).  Instead, the court found that the husband had a separate property interest in the 401K plan and pension plan.  The bankruptcy court recognized that a majority of courts have held that a formers spouse’s interest in a pension plan becomes the sole and separate property of that spouse upon entry of the final decree of divorce, In re Potter, 159 B.R. 672, (Bankr. N.D.N.Y. 1993), as decided by state property law, In re Brown, 168 BR 331 (Bankr. N.D. Ill. 1994).   Thus, in this case, there was no creditor-debtor relationship creating a claim that could be discharged, but instead the debtor held bare legal title in her ex-husband’s shares in her retirement plans.

Further, the court held that the debtor had to hold the husband’s shares in a constructive trust, despite the failure of either party to prepare a QDRO following the divorce, to prevent unjust enrichment.  Thus, the husband’s interest was not property of the bankruptcy estate by virtue of 11 U.S.C. §541(d), and thus the debtor’s interest could not be a “claim” against the estate. In re Trout, No. 05-19591, 2006 WL 4452826, *3 (Bankr. D.N.J. Feb. 1, 2006), In re Allen,  No.11-26579 (Bankr. D.N.J.  Oct. 17, 2011).

In response to the debtor wife’s argument that she had full rights to the plans because an interest in the plans could only be transferred by a QDRO, which had not been done before the bankruptcy filing, the bankruptcy court judge ruled that the absence of a QDRO did not vitiate the husband’s interests in her plans, as the QDRO is merely a vehicle which enforces preexisting property rights in a pension.  The filing of a bankruptcy case does not act to give the debtor greater property rights than the debtor would have under state law, and thus the non-debtor spouse’s interest in the pension plans was fixed as of the entry of the final decree of divorce. In re Gendreau, 122 F.3d 815 (9^th Cir. 1997), In re Carbaugh, 278 B.R. 512 (10 Cir. B.A.P. 2002).

As the husband’s interest in the wife’s retirement plans was neither property of the estate nor property of the debtor, he could have pursued his interest in state court without first obtaining relief from the automatic stay.  Nevertheless, the St. Clair court granted relief from the automatic stay to provide clarification to the state family court.  The debtor wife’s equitable claim of laches, based on the husband’s delay in obtaining the QDROs, would be left to the experienced discretion of the state court judge.

You should consult with your Virginia bankruptcy and divorce law attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the effects of a bankruptcy filing by your spouse or ex-spouse on your rights under a final decree of divorce.

Can the lien for spousal support payments to wife from a divorce decree evidenced by a lis pendens on husband’s real property have priority over a recorded mortgage?

Yes, in the case of Benefit Bank v. Rogers, 2012 Ark. 3419, 424 S.W. 3d 812 (2012), the Supreme Court of Arkansas ruled that the wife’s lien for support payments, as evidenced by a lis pendens, took priority over the subsequently recorded mortgage granted by husband’s LLC.

In the Rogers case, the husband and wife were granted a divorce pursuant to the stipulated agreement of the parties (known in Virginia divorce law practice as a separation agreement, property settlement agreement, marital agreement, or stipulation and agreement, entered into the final decree of divorce in accordance with Virginia Code § 20-109 for spousal support and maintenance and  Virginia Code Section § 109.1 for the care, custody and maintenance of minor children, and authorized by Virginia Code § 20-155 for all lawful purposes between spouses).  The stipulated agreement provided that wife would receive the home and monthly support from the husband for a definite duration, and husband would receive another parcel of real property subject to a lien for the payment of his support obligation to wife.  The wife was allowed to file a lis pendens, which she did file in land records prior to entry of the final decree of divorce, referencing the divorce case and her lien (a lis pendens is a notice of the pendency of a case concerning real property which binds subsequent bona fide purchasers for value in Virginia, as authorized by Virginia Code § 8.01-268).   The lis pendens in Rogers was granted by the husband individually and as an authorized representative of the LLC which owned the real property.

The husband subsequently gave Benefit Bank a substantial mortgage on the same property, the payment of which mortgage he personally guaranteed.  His creditor then filed a complaint for foreclosure in state court, alleging husband and his LLC had defaulted on the loan made by creditor. (Arkansas is a judicial foreclosure state which requires the filing of a legal proceeding, while Virginia is a nonjudicial foreclosure state which allows property to be sold at public auction through a power of sale granted to a trustee in a deed of trust.)  The wife was added as a party to the foreclosure suit with an allegation that the creditor’s mortgage lien had priority over any lien of the wife.  The wife filed an answer alleging the priority of her lis pendens over the mortgage.

The circuit court trying the case agreed with wife and found wife had a lien with priority over the subordinate mortgage lien of the creditor.  The court ruled in favor of the creditor with respect to the husband’s default and entered judgment for the creditor for foreclosure.

The creditor appealed on the grounds that the wife’s lien was invalid because the divorce court did not have jurisdiction to give wife a lien on husband’s real property for support payments, as state law provides that alimony does not create a lien on real estate, that the nature of alimony payments as a monthly obligation instead of a fixed amount prevented the judge from awarding a lien on real property, and that the lis pendens was not valid because there was no separate suit pending against the LLC that owned the real property and the document was not properly acknowledged by a notary.

While the appeals court agreed that state law provided that alimony did not become a lien on land, it noted that the lien for support in Rogers was created by agreement, not unilaterally, and the husband did not challenge the trial court’s authority at the time it entered the final decree of divorce incorporating the separation agreement of the parties.  Further, the appellate court disagreed with the creditor’s monthly payment argument, recognizing that the monthly payment was for a fixed period of time and the exact amount of any arrearage due could be determined.  Finally, the court dispensed with the creditor’s invalid lis pendens argument by finding that the lis pendens had been filed during pending litigation concerning real property in the divorce, prior to the entry of the final decree of divorce, and the purpose of a lis pendens was satisfied as the creditor had been put on notice of the lien against the real property, which lis pendens did not require an acknowledgement as it did not operate to convey real propery.

It is important to note that Virginia provides that support obligations by an order in Circuit Court become a judgment, as they become due and unpaid, by virtue of Virginia Code § 20-78.2, that the Virginia support order must give notice of this fact by virtue of Virginia Code § 20-60.3 (14), and that support obligations by an order Juvenile & Domestic Relations District Court become a judgment, as they become due and unpaid, by virtue of Virginia Code § 16.1 – 278.15 (C), but that it shall not become a lien against real property until docketed in the county or city where the real property is located.  A party obtaining a judgment for an unpaid support arrearage may also recover interest and attorney’s fees.  A monetary award can be enforced in Virginia just as any money judgment may be enforced. This blawg has previously described the potential benefits of recording the separation agreement or property settlement agreement or a properly timed deed, along with the final decree of divorce, in a Virginia divorce case.  A party seeking to enforce the obligations of a divorce case might also discuss with counsel the advisability of filing a mutually agreed, voluntary, lis pendens prior to entry of the final decree of divorce, given the limitations of Virginia’s lis pendens statute in Virginia Code § 8.01-268.

You should consult with your Virginia divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., concerning how best to secure the performance of obligations owed to you in a Virginia divorce or separation.

Are wife’s loans made before and during the marriage from her separate property to the husband for his business use dischargeable in bankruptcy?

Not in the case of Kinkade v. Kinkade, 707 F.3d 546 (5^th Cir. 2013), where the Fifth Circuit Court of Appeals affirmed the district and bankruptcy courts’ ruling that the loans were nondischargeable under 11 U.S.C. § 523(a)(15) .

In Kinkade, the wife made two substantial loans, one before the marriage and one during the marriage, from her separate property to her husband for his business.  The state divorce court judge entered judgment in her favor against her husband for the repayment of loans, along with an additional payment amount for her interest in community property to be sold.

Five years later, the husband filed chapter 7 bankruptcy case, in which he listed wife as a creditor.  The wife wisely filed an adversary proceeding in the husband’s chapter 7 bankruptcy case in order to have the debt declared to be nondischargeable.  (While the state courts and bankruptcy courts share concurrent jurisdiction over the dischargeability of family law debts, it is often best to have a decision made by the bankruptcy court judge during the course of the particular bankruptcy case.)  An adversary proceeding is a case ancillary to a bankruptcy case which can be used to determine issues related to claims, liens, property interests, and the dischargeability of debts, among other things.

Both husband and wife filed motions for summary judgment in the adversary proceeding.  The bankruptcy court judge granted wife’s motion for summary judgment, finding that the debt had been incurred during the course of the parties’ divorce, and was therefore nondischargeable under  11 U.S.C. § 523(a)(15) in a chapter 7 bankruptcy case.  The U.S. District Court affirmed the bankruptcy court’s decision on appeal.

The Fifth Circuit Court of Appeals first recognized the standard of review for an appeal based on summary judgment, that the court would consider the matter de novo to determine whether a fact issue exists that would have made summary judgment inappropriate, based on the facts and all reasonable inferences in the light most favorable to the non-moving party.  The appellate court framed the issue as whether the debt fit within the type of debt nondischargeable under  11 U.S.C. § 523(a)(15) in a chapter 7 bankruptcy case.  While Domestic Support Obligations, as defined in 11 U.S.C. §101(14A) , are nondischargeable in all bankruptcy cases, the non-DSO divorce-related debts under 11 U.S.C. § 523(a)(15) are dischargeable in a chapter 13 case, but not in a chapter 7 case.  As the debt arose out of a state court divorce case, the bankruptcy court judge found it to be a nondischargeable debt under 11 U.S.C. § 523(a)(15) .

The husband argued that the debt did not fit within because it was a separate debt, not a community debt and that a portion of the debt, the amount lent prior to the marriage, was a contractual obligation, not a marital obligation.  The appellate court affirmed the bankruptcy court’s reasoning on the first argument that there was no distinction in the statutory language supporting the husband’s argument that separate debts were not included under 11 U.S.C. § 523(a)(15).  The Circuit Court of Appeals also rejected the second argument, by respecting the state court’s application of its own law in deciding to include the substantial premarital debt in the final decree of divorce.

It is important to note that this type of debt might have been discharged in a chapter 13 case under 11 U.S.C. §1328.

You should consult with your bankruptcy and divorce attorney or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr., to discuss whether a particular debt related to a marriage or divorce might be discharged in a Virginia bankruptcy case.

Can a wife discharge in a chapter 7 bankruptcy a divorce order requiring her to pay half her husband’s tax liability to the IRS?

Not in the New Hampshire case of In the Matter of Robin Mason and Martin Mason, 58 A.3d 1153, No: 2012-096 (2012), where the Supreme Court of New Hampshire reversed the trial court’s decision and ruled that the debt was automatically nondischargeable in the wife’s subsequent chapter 7 bankruptcy case.

In Mason, the husband and wife were divorce in 2007.  In the final divorce decree, the wife was ordered to pay one-half of the husband’s federal income tax liability for the 2006 tax year.  In 2010, the wife filed chapter 7 bankruptcy, listing the husband as an unsecured nonpriority creditor for a debt arising out of a divorce settlement and as a co-debtor on a federal tax lien.  She also included the Internal Revenue Service (“IRS”). as a creditor for a joint federal tax lien claim for the 2006 income tax liability.  The wife received a chapter 7 discharge in her bankruptcy case.

The husband and wife both petitioned the IRS for “innocent spouse” relief from their 2006 tax liability.  “Innocent spouse relief” relieves an innocent spouse who filed a joint income tax return from liability for his or her spouse’s failure to include income on the joint tax return.  The IRS granted the wife’s petition and denied the husband’s.

The husband then initiated a show cause against the wife in state court for violating the court’s order requiring her to pay one-half of his 2006 tax liability.  The state court judge found that the wife’s innocent spouse relief from the IRS had converted her obligation to the IRS into one to her ex-husband and that the wife had discharged her obligation to the ex-husband in her chapter 7 bankruptcy case.  The court denied the husband’s motion for contempt and his request for attorney’s fees.  The husband appealed the trial court’s ruling to the state’s highest appellate court.

The state supreme court first recognized the concurrent jurisdiction of state courts and the bankruptcy courts to address the dischargeability of  debts, in accordance with the original, but not exclusive, grant of bankruptcy jurisdiction to the federal district courts in 28 U.S.C. § 1334(b).  The court then ruled that the trial court judge had erred as a matter of law by holding that the wife’s debt to the husband had been discharged in bankruptcy, citing the exceptions to the discharge of debts for domestic support obligations (“DSO”) and non-DSO debts related to divorce in 11 U.S.C. § 523(a)(5) and (15).  The court further held that non-DSO family law debts under 11 U.S.C. § 523(a)(15) are automatically nondischargeable now, and do not require the filing of an adversary proceeding and determination of dischargeability in the bankruptcy court, as was required with a balancing act test prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005.  The court found that the wife’s obligation to pay the tax debt arising out of the divorce case was a debt under 11 U.S.C. § 523(a)(15).

The wife’s argument that the debt did not fit within the ambit of 11 U.S.C. 523(a)(15) because it was owed to a third party and not directly to her former spouse was rejected by the court, citing Howard v. Howard, 336 S.W.3d 433 (Ky. 2011), where the Kentucky Supreme Court held that argument was precluded by the broad definitions of “claim” – “…right to payment…or right to equitable remedy for breach of performance”, 11 U.S.C. §101(5), and  “debt” – “…liability on a claim”, 11 U.S.C. §101(12), in the Bankruptcy Code.

The court further held that the doctrine of res judicata barred the wife’s argument that the amount of the federal tax liability as determined by the trial court was incorrect because it included penalties on an early retirement account withdrawal that was not technically income.  The wife had not objected to the inclusion of such a penalty or appealed the trial court ruling and therefor could not raise the judicially settled matter five years later in this appeal of the show cause ruling.  Reversing the lower court’s decision that the debt had been discharged, the appellate court remanded the case to the trial court for a consideration of an award of attorney’s fees to the husband.

It is important to note that this kind of family law debt might have been discharged in a chapter 13 case, which excepts from discharge only Domestic Support Obligation family law debts.

You should discuss with your Virginia bankruptcy and divorce attorney or Richmond Divorce Lawyer James H. Wilson, Jr., whether a particular debt arising out of a divorce case might be discharged in bankruptcy.

Must a Virginia divorce court judge divide a home worth less than the mortgage balance?

 

No, as explained by the Virginia Court of Appeals in the case of Fox v. Fox, 61 Va. App. 185, 734 S.E.2d 662 ( Va. App. 2012), a judge conducting equitable distribution under Virginia Code Section 20-107.3 in a divorce case is not required to include property with negative equity or no value in equitable distribution.

 

In the Fox case, the husband and wife had been married for more than nine years when wife filed for a divorce in the Circuit Court of the City of Suffolk, Virginia.  The husband responded with an answer and cross bill.  Both parties requested equitable distribution, the process available in a Virginia divorce in which the divorce court judge can divide up the parties’ property and debts.  In Fox, the husband and wife owned real property in Virginia and in Florida.  Neither property had equity; each was worth less than what was owed on the mortgage.  In addition, the rent from either property was not sufficient to cover the mortgage payments on that parcel.  Further, the parties did not agree on the disposition of the properties in the divorce:  the husband wanted to keep both parties and equally divide the monthly deficit, while the wife wanted to sell both properties and equally divide the shortfall from the sales.

 

At the equitable distribution hearing, the Virginia trial court found that both properties were underwater, with negative equity reflecting the fact that the mortgage balances exceeded the fair market value of each.  The husband testified that he was not able to refinance the mortgages by himself.  The Virginia Circuit Court judge trying the divorce case consequently decided that he would not divide the properties in equitable distribution, but would allow the husband and wife, upon entry of the final decree of divorce, to become tenants in common (with the termination of the right of survivorship in the tenancy by the entirety, as provided in Virginia Code §20-111), subject to a foreclosure or sale by the parties.  The husband made a motion to rehear and the court affirmed its ruling, but allowed the parties to present an alternate proposal.  None was forthcoming and the husband appealed the decision.

 

On appeal, the Virginia Court of Appeals first acknowledged that Virginia’s equitable distribution scheme found in Va. Code § 20-107.3 mandated that the divorce judge “determine legal title, ownership, value, whether property is marital or separate, and shall determine the nature of all debts, separate or marital.”  The court recited the three step process the judge is required to follow in equitable distribution: 1. Classify the property as separate, marital or hybrid (part separate and part marital); 2.  Assign a value to the property based on evidence provided by the parties; and 3.  Distribute the property to the parties, taking into consideration, the following factors set forth in Section 20-107.3(E) of the Code of Virginia:

“1. The contributions, monetary and nonmonetary, of each party to the well-being of the family;

2. The contributions, monetary and nonmonetary, of each party in the acquisition and care and maintenance of such marital property of the parties;

3. The duration of the marriage;

4. The ages and physical and mental condition of the parties;

5. The circumstances and factors which contributed to the dissolution of the marriage, specifically including any ground for divorce under the provisions of subdivisions (1), (3) or (6) of § 20-91 or § 20-95;

6. How and when specific items of such marital property were acquired;

7. The debts and liabilities of each spouse, the basis for such debts and liabilities, and the property which may serve as security for such debts and liabilities;

8. The liquid or nonliquid character of all marital property;

9. The tax consequences to each party;

10. The use or expenditure of marital property by either of the parties for a nonmarital separate purpose or the dissipation of such funds, when such was done in anticipation of divorce or separation or after the last separation of the parties; and

11. Such other factors as the court deems necessary or appropriate to consider in order to arrive at a fair and equitable monetary award.”

The Virginia Court of Appeals held that the trial court judge clearly considered factors numbered 7 and 8 above in deciding that the properties had negative equity.  The Court of Appeals further noted that the trial court judge’s options with respect to the disposition of joint property subject to equitable distribution is set forth in Virginia Code Section 20-107.3(C), which provides as follows:

“C. Except as provided in subsection G, the court shall have no authority to order the division or transfer of separate property or marital property, or separate or marital debt, which is not jointly owned or owed. The court may, based upon the factors listed in subsection E, divide or transfer or order the division or transfer, or both, of jointly owned marital property, jointly owed marital debt, or any part thereof. The court shall also have the authority to apportion and order the payment of the debts of the parties, or either of them, that are incurred prior to the dissolution of the marriage, based upon the factors listed in subsection E.”

Thus, the Virginia divorce court judge may transfer or order the transfer of jointly held property to one of the parties, or allow one to purchase the other’s interest and direct the allocation of the proceeds, or order a private or public sale.

In analyzing precedent, the court ruled that the case of Shaughnessy v. Shaughnessy, 1 Va. App. 136, 336 S.E.2d 166 (1985), cited by the husband was inapposite, as that divorce case concerned a situation where the trial court judge did not perform its duties under Section 20-107.3(E), but instead encourage the parties to resolve equitable distribution by themselves.  The court noted that its decision Alphin v. Alphin, 15 Va. App. 395, 424 S.E.2d 572 (1992), established that the “may” language of subsection (C) of Virginia Code Section 20-107.3 indicates that the judge’s three options are permissive, not mandatory, and only when those options are feasible.

The Virginia Court of Appeals upheld the trial court’s exercise of discretion and ruled that the court was not required to divide the two properties.

 

You should consult with your attorney or Richmond Divorce Lawyer James H. Wilson, Jr., concerning the possible disposition of your jointly owned real property in a Virginia divorce case.

Can a chapter 7 bankruptcy trustee avoid and recover a transfer of real property in an unrecorded Final Decree of Divorce in Virginia?

Yes, in the case of Phillips v. Chandler,  215 B.R. 684 (E.D. Va. 1997), the United States District Court for the Eastern District of Virginia reversed a bankruptcy judge’s decision and allowed the chapter 7 trustee to avoid and recover a transfer from a husband to a wife, based on the trustee’s strong-arm avoidance powers based on his status as a hypothetical judicial lien creditor in 11 U.S.C. §544(a)(1).  The Phillips v. Chandler case illustrates the benefits of recording divorce decrees and separation agreements or property settlement agreements in the appropriate county land records in Virginia, to best protect the interests of a spouse when either former spouse might later file bankruptcy.

In Chandler, the husband and wife were divorced in the Circuit Court of Hanover County Virginia.  Under the terms of the Final Decree of Divorce, the real property, which had been owned by the husband and wife as tenants by the entirety with the common-law right of survivorship, was transferred to the wife by virtue of Virginia Code Section 20-107.3(C) , which gives the Virginia divorce court judge authority to divide or transfer jointly owned marital property and jointly owned marital debt under Virginia’s equitable distribution statute.   In Virginia, by operation of law, Section 20-111 of the Code of Virginia, the survivorship in a tenancy by the entirety is terminated, thus converting the tenancy into a tenancy in common, with each spouse owning a half interest, unless otherwise indicated.  Thus, each former spouse’s interest in the real property, which was previously protected from the creditors of each spouse alone by the tenancy by the entirety, becomes subject to the liens of judgment creditor under Virginia Code §8.01-434.  Because of this consequence, Virginia divorce lawyers are advised to record a deed from both spouses to the recipient spouse prior to the entry of the divorce decree where there are recorded judgment liens or other interests of the transferring spouse which may attach if the tenancy should convert to a tenancy in common.

The husband in Chandler filed chapter 7 bankruptcy after the parties’ divorce was finalized, but before the divorce decree was recorded.  The chapter 7 trustee in the husband’s bankruptcy case filed a motion to avoid and recover the transfer of husband’s interest in the real property to wife, based on his strong arm powers as a hypothetical judicial creditor who extends credit to the bankruptcy debtor at the time of the filing of his case and obtains a judicial lien on all property on which a creditor could have obtained, regardless of whether such a creditor actually exists.  The bankruptcy court judge, relying on Barnes v. American Fertilizer Co., 144 Va. 692, 130 S.E. 902 (1925), granted the husband Debtor’s motion to dismiss and motion for summary judgment on the grounds that the requirements of Virginia’s recording statute, found in Virginia Code §55-96(1)(A) , (which did not expressly include divorce decrees) cannot operate to void a transfer of real property in a divorce decree, even though the final decree of divorce was not yet recorded, as required under Virginia Code §20-107.3.

The United States District Court for the Eastern District of Virginia reversed and remanded the case to the bankruptcy court judge for damages.  The federal district court first recognized that a federal court interpreting state legislation must use that state’s rules of statutory construction, such that a court must assume that the legislature is familiar with existing Virginia case law and that a statute may not be construed in such a way to cast doubt on the otherwise clear language of a related statute.   The federal court found that the purpose of Virginia’s enactment of both the recording statute and the equitable distribution statute decree recording provision was to promote public notice and to eliminate hidden or unrecorded interests in real estate.  The court further held that the recording requirement of the Virginia equitable distribution statute was an absolute determinant of the validity of property transfers in divorce decrees.  The common law holding of Barnes was necessarily overruled by the enactment of the Virginia statutes.  The district court judge ruled that the Virginia recording statute must be broadly read and interpreted to include the recording requirements of the Virginia equitable distribution statute, such that it implicitly includes the recording of divorce decrees to give public notice.  Consequently Virginia Code Section 55-96(A)(1) voided the transfer of real property in the unrecorded final decree of divorce and the trustee would be able to avoid the husband’s transfer of his half interest to the wife using his strong arm powers in Bankruptcy Code Section 544(a)(1).

You should consult with your Virginia bankruptcy and divorce attorney or Richmond Divorce lawyer James H. Wilson, Jr., to discuss the effects of your former spouse’s bankruptcy on the results of your divorce case.

Would an unscheduled asset which the chapter 7 trustee had partially administered be deemed abandoned to the debtor’s ex-wife?

Yes, in the case of In re DeGroot, Case No: 11-8083 (BAP 6^th Cir., 2012), the Bankruptcy Appellate Panel for the Sixth Circuit upheld the decision of the U.S. Bankruptcy Court for the Western District of Michican, ruling that the asset was properly deemed to have been abandoned to the ex-wife under 11 U.S.C. §554(c) and (d).

In the DeGroot case, the husband and wife were divorced in 2002.  Husband was ordered to pay child support to the wife for two children.  The wife was awarded the house and ordered to pay husband for his share of the marital equity in three installments, the first after three months, the second after seven years, and the bulk upon the emancipation of the youngest child, the sale of the house, or the death or remarriage of the wife.  Under the divorce decree, the entire amount owed to husband by wife was, in effect, a judgment lien against the title to the real property.

After the first payment was made, the husband filed a no-asset chapter 7 bankruptcy case.  The husband listed the wife as a creditor in his chapter 7 case, but did not properly schedule his right to receive payments from her for his marital share or his security interest in the former marital home.

Meanwhile, the wife filed a show cause against the husband in state court to collect the delinquency in child support owed.  The husband and wife entered into negotiations to settle their differences.  The husband Debtor’s bankruptcy attorney informed the chapter 7 trustee of the child support arrearage and asked the trustee, in several letters, to abandon the bankruptcy estate’s interest in the lien for the balance owed by wife to husband.  The husband and wife’s negotiated settlement provided that wife would give up or waive any past or future child support owed in return for a lump sum settlement payment from husband to the wife and a release of his lien on the former marital residence.  Although the state court judge approved the proposed negotiated settlement, neither the Debtor husband nor the wife had first sought relief from the automatic stay to enter into a negotiations, as required by 11 U.S.C. § 362 (thus creating a voidable agreement).

The chapter 7 trustee filed a notice of assignment of lien in land records and had the bankruptcy case noticed as an asset case.  The wife failed to file a proof of claim in the husband’s chapter 7 bankruptcy case.  Nine months later, the chapter 7 trustee filed a Report of No Distribution (“NDR”) and the case was closed.

When the wife later attempted to refinance the former marital residence, the trustee’s notice of assignment came up in the title search.  The trustee refused to release the assigned lien on the home because the parties had not first obtained relief from the stay before reaching the negotiated settlement.  The bankruptcy court granted the chapter 7 trustee’s subsequent motion to reopen the case to administer the asset.  The trustee then subordinated his lien in return for a small lump sum payment to allow the wife to consummate her much needed refinance loan.  The wife filed a motion and a proof of claim for unpaid child support in excess of the amount of the lien claimed by the trustee.

 

After a hearing, the bankruptcy court judge ruled that the trustee could administer the small lump sum payment, but could not administer the rest of the balance as it was deemed abandoned under 11 U.S.C. §554(c) and (d). with the closing of the case. In re Joel DeGroot, 460 BR 159 (2011).  The court ordered the chapter 7 trustee to release his lien against the former marital residence.  The court found that the negotiated settlement was voidable as obtained in violation of the automatic stay, and determined that there were no equitable considerations against setting it aside.  Consequently the receivable was still valid and the wife had a valid claim for setoff against the estate for child support under 11 U.S.C. §553.

With regard to the Debtor’s failure to properly schedule the asset and the chapter 7 trustee’s failure to administer it, the court held the “…unless the court orders otherwise..” language in Section 554(c) and (d), gave the court the discretionary ability to avoid a miscarriage of justice.  Here, the trustee and the Debtor were at fault, not the ex-spouse.

The chapter 7 trustee appealed.  The Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling, reaffirming that the bankruptcy court judge had the discretion both to modify or revise any technical abandonment (caused by closure of the case) and to excuse any nondisclosure of financial information.  The court was within its discretion to deem the asset abandoned to the ex-spouse pursuant to the “…orders otherwise…” language of 11 U.S.C. §554(c) and (d) to prevent a miscarriage of justice.  The appropriate circumstances supporting that exercise of discretion included the fact that the Debtor failed to schedule the asset but did disclose it, that the trustee knew of the asset and did not administer it, that the trustee caused the case to be noticed as an asset case, and that the trustee filed the notice of lien in land records.  The BAP also noted that the only one who suffered from all the defaults was the ex-spouse.

You should consult with your bankruptcy and divorce attorneys or Virginia bankruptcy and divorce lawyer James H. Wilson, Jr., to discuss your rights in property when your spouse or ex-spouse files bankruptcy.

 

To what extent may a bankruptcy trustee avoid a transfer of real property from one spouse to another incident to a divorce settlement?

A trustee may avoid a transfer and obtain a money judgment against a non-debtor ex-spouse to the extent that the Debtor spouse did not receive reasonably equivalent value in return for the transfer of real property, as shown by In re Neal, No. 11-8081 (2012), a 6^th Circuit Bankuptcy Appellate Panel case.

Before signing the separation agreement, the wife in the Neal case paid off in full the second mortgage/home equity line of credit on the former marital residence in the amount of $28,000 by a loan from her parents.  The wife conveyed her half interest in the former marital residence to the husband by a Quit Claim Deed (a deed containing no warranties).  The real property was shown to be worth approximately $77,000 with a $50,000 first mortgage, so there was effectively no equity when the Wife paid off the home equity line of credit, and only $27,000 when she conveyed her half interest to her husband.  In the separation agreement, the Husband and Wife agreed that the Wife had waived, or given up, any interest in the former marital residence.  The Husband assumed sole responsibility for payment of the mortgage on the real property.

The property settlement agreement provided that the Husband would keep a vehicle and two motorcycles while the Wife would keep an older vehicle and her pension.  The Wife and Husband also agreed that Husband had sole ownership of his separate property, which included two lots and several more vehicles.

As is the customary legal practice in Virginia, the Ohio divorce court approved and incorporated the separation agreement between the parties into the final decree of divorce.  Six months later, the Debtor wife filed a chapter 7 bankruptcy case in the U.S. Bankruptcy Court for the Northern District of Ohio, Eastern Division.  Fifteen months later, after the Debtor wife received her discharge in bankruptcy, the chapter 7 bankruptcy trustee filed an adversary proceeding against her ex-husband to avoid and recover the value of the constructively fraudulent transfer of real property to him, relying on the trustee’s avoidance powers contained in Bankruptcy Code Sections 548(a) (11 U.S.C. §548(a)), 544 (11 U.S.C. §544),  and 550 (11 U.S.C. §550),  and Ohio state fraudulent conveyance statutes.

In response to the trustee’s allegation that the Debtor wife did not receive reasonably equivalent value for the transfer of real estate, the ex-husband alleged that he would have likely received spousal support, continued health insurance, and half the Debtor’s pension had the case been tried in divorce court.  He also contended that the Debtor’s credit card debt and debt to her parents for the loan to pay off the home equity line of credit (which she discharged in bankruptcy) would not have been considered marital debt for which he might have been held liable.

At trial in the bankruptcy court, the evidence demonstrated that the Debtor was the primary breadwinner and the spouse who managed the household finances.  Most of the debts during the marriage had been incurred in the Wife’s name alone, but had been used for family or marital purposes.  The bankruptcy court held that the Debtor had made a prepetition transfer of an interest in property, that the transfer had been made within 2 years of filing bankruptcy, and that the Debtor was insolvent at the time the transfer was made due to the amount of debt the Debtor had assumed and the short period of time between the entry of the divorce decree and the filing of the chapter 7 bankruptcy case.

In deciding whether the Debtor had received reasonably equivalent value for the transfer of real property to her husband, the court analyzed state law rather than bankruptcy law.  The court noted that Ohio’s equitable distribution law presumes an equal apportionment of property and debt between the husband and wife, unless such a division would be inequitable.  Since both parties were capable of supporting themselves, there would not likely have been an award of spousal support and there was no evidence of a waiver of any rights to further health insurance in the separation agreement or the divorce decree.  The bankruptcy judge found that although the ex-husband would likely have been entitled to half the wife’s pension, worth about $9,000, he would have been responsible for half the substantial credit card debt and loan to her parents in the sum of approximately $90,000.

The bankruptcy court judge further held, sua sponte, that the analysis of reasonably equivalent value underlying the trustee’s avoidance action was not precluded by collateral estoppel due to a provision in the separation agreement which characterized the exchange of value as “fair and equitable”, because the bankruptcy proceeding and the divorce had different policy goals, citing In re Fordu,  201 F.3d 693 (6^th Cir., 1999), where the 6^th Circuit noted that the standards for determining fair and equitable in context of the domestic relations arena are different from determining reasonably equivalent value in the context of a bankruptcy avoidance action.

On appeal, the Bankruptcy Appellate Panel (BAP) first decided that the “fair and equitable” provision in the state divorce decree would not be given any preclusive effect in this bankruptcy avoidance action.  The court further held that the purpose of the trustee’s avoidance powers under 11 U.S.C. §550 against a transferee like the ex-husband was to restore the bankruptcy estate to the position it would have been in if the transfer had not been made. The BAP recognized that the only issue in dispute on appeal was that of reasonably equivalent value.

The Bankruptcy Appellate Panel concluded that the bankruptcy court had erred in its analysis of reasonably equivalent value by considering the amount of unsecured debt assumed by the Debtor wife, since it appeared the husband would not have been liable for the credit card debts in the wife’s name, and there was no evidence that the husband was liable to her parents for the loan to pay off the home equity line of credit.  Consequently, by assuming these debts in the divorce case, the Debtor wife had not conferred a benefit upon her ex-husband.  In addition, the liability of the ex-husband to the trustee was limited to the difference between the value transferred and reasonably equivalent value.  In this case, the Wife traded her interest in half the equity in the former marital residence worth $13,750 in exchange for the Husband’s release of his half interest in her pension worth $9,217.02.  Thus the ex-husband’s liability to the trustee was limited to the difference in the amount of $4,532.98.  Finally, the BAP determined that the bankruptcy court was not required in an avoidance action to determine the likely outcome of a contested divorce case when analyzing reasonably equivalent value, it was only required to compare the value transferred to the value received in the marriage dissolution.

You should consult with your Virginia divorce and bankruptcy law lawyer or Richmond Divorce and Bankruptcy Law Lawyer James H. Wilson, Jr., to discuss your actual or potential liability to a bankruptcy trustee for transfers to or from your spouse in connection with a Virginia divorce case.

How to file bankruptcy in Virginia after filing for divorce:

It may be advantageous to file bankruptcy in Virginia after filing for divorce, depending on the particular circumstances and timing of your cases, and the relief you seek.  The actual mechanics of filing the bankruptcy itself are fairly straight forward.  You can file yourself, use a bankruptcy petition preparer, or use a lawyer who has been admitted to practice in the U.S. Bankruptcy Court.  The official forms required for filing bankruptcy are posted on the website for the U.S. Bankruptcy Court for the Eastern District of Virginia.  Before filing bankruptcy you must complete a required credit counseling course from a provider approved by the U.S. Trustee’s office, or request an exception for certain grounds.  You must pay the filing fee in whole when you file, or you may ask the court for permission to pay in installments.  About a month after filing bankruptcy, you will be required to attend a scheduled meeting of creditors, where the trustee appointed in your case will ask you certain questions.  Creditors have a right to attend this meeting, but rarely show up.  In order to receive a discharge in a chapter 7 case, you must also complete a required debtor education course from an approved provider no later than sixty days after your meeting of creditors and file a certification with the court.  In a chapter 13 case, you must complete the required debtor education before completing your plan payments and receiving a discharge.  In the event you elect to reaffirm a debt in your chapter 7 case, you may have to attend a hearing concerning whether the court will approve the proposed reaffirmation agreement.

After filing for divorce, you should consider several issues before filing a bankruptcy case in Virginia.  First, should you file a joint bankruptcy case with your spouse after filing for divorce?  You and your spouse are eligible to file a joint case while you are still married.  A joint bankruptcy case may save you both in fees and costs and will discharge your dischargeable marital debts (along with your dischargeable separate debts), which are often a point of contention in divorce cases.  By getting rid of your marital debts in bankruptcy, you have eliminated an area to litigate in equitable distribution in your divorce case, or an area that may prevent you from negotiating a separation agreement or property settlement agreement.  You should consider whether there is actual conflict of interest with your spouse before filing a joint case.  While a joint chapter 7 case for estranged spouses may make sense, it is much more difficult to justify a joint chapter 13 case after filing for divorce because of the ongoing responsibilities and payments required in chapter 13, and the potential for one spouse to discharge a debt to the other spouse.  You should also consider whether your spouse might have engaged in some conduct which could jeopardize your prospects for obtaining bankruptcy relief, such as transferring or concealing assets to defraud creditors, submitting false or fraudulent loan applications, or withdrawing large amounts of cash or buying luxury items with no intention of repaying the debt.

Second, what kind of bankruptcy case should you file after you have filed for divorce in Virginia?  The answer to this question will depend on the relief you seek and the nature of your debts.  Some folks need bankruptcy protection to preserve valuable property, such as the marital residence, so it will be available for equitable distribution in Virginia.  Other filers primarily need a discharge of credit card debt, or protection from a garnishment of wages or a bank account.  Chapter 13 bankruptcy discharges a broader range of family law debts than chapter 7 bankruptcy will.    Domestic support obligations, such as alimony, child support, or spousal support are not dischargeable in either chapter 7 bankruptcy or chapter 13 bankruptcy.  Other debts owed to a spouse, former spouse or child of the debtor which are not domestic support obligations and that were incurred in a divorce or separation, or in a separation agreement or property settlement agreement, or from a divorce decree or court order of a court of record, may be dischargeable in a chapter 13 bankruptcy case, but are not dischargeable in a chapter 7 bankruptcy case.

Third, what is best time to file for bankruptcy after filing a divorce in Virginia?  The timing of a bankruptcy case filing can be critically important, and has been addressed in detail in a separate page in this blawg:  “Should I file for bankruptcy before divorce, or divorce before bankruptcy?”.  Certainly, if you wish to discharge family law debts that are not domestic support obligations in a chapter 13 case, it is important that those claims have come into existence, and are not merely potential claims.  All other factors being equal, you may wish to wait until the conclusion of equitable distribution or the execution of a separation agreement or property settlement agreement, or the entry of a divorce decree or other court order, before filing for chapter 13 bankruptcy relief.  The downside to waiting is the possibility that the nonpayment of a particular obligation required by the court may potentially subject the debtor to a contempt of court charge.

Fourth, will you need relief from the automatic stay in bankruptcy to continue or conclude your divorce case?  The automatic stay in bankruptcy allows a spouse to seek the dissolution of a marriage, as long as the spouse does not seek equitable distribution of property of the bankruptcy estate.  The safest course is to file a motion for relief from the automatic stay in a chapter 13 bankruptcy case or in a lengthy chapter 7 case, before proceeding with equitable distribution in your divorce case, or entering into a separation agreement or property settlement agreement if you intend to affect marital property or debts, or even post-petition earnings of the debtor, which are property of the estate in a chapter 13 case.  Actions taken in violation of the automatic stay are void.  The cost of seeking relief from stay may be small compared to the consequences of a void separation agreement or void equitable distribution decree.

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss the advantages and disadvantages of filing bankruptcy after divorce.

Can the chapter 7 bankruptcy trustee recover property transferred from the debtor divorced wife to her parents on fraudulent transfer grounds where the property transferred would have been exempt under state law?

In the case of Sullivan v. Welsch, 457 B.R. 748 (B.A.P. 8^th Circuit, 2011), (In re: Mary Lumbar, Case No: 11-6018), the bankruptcy appellate panel for the Eighth Circuit Court of Appeals rejected the “no harm, no foul” rule and held that the debtor ex-wife might have fraudulently transferred property to her parents, even though the property would have been exempt under state law.

The wife’s parents entered into an installment sales contract or contract for deed for the purchase of certain real property, the title to which would remain with the parents until the contract payments were paid in full, at which time title would be conveyed to the married couple.  Under the contract, the husband and wife were to make installment payments and two balloon payments to the wife’s parents over the course of seven years, with the final balloon payment paying off the contract in full.  The contract for deed was recorded in land records after it was fully ratified.  The husband and wife failed to make the first balloon payment.  The parents continued to accept installment payments from the couple and subsequently transferred the contract to themselves as trustees of their living trust.  The husband and wife failed to make the second and final balloon payment.  Nevertheless, the wife’s parents continued to accept monthly payments from the couple.  Five years later, the husband filed for divorce from his wife.  The parents then declared a default in contract for deed.  As the property had appreciated in the interim from the contract sales price of approximately $150,000 to more than $560,000, with a balance due of only $188,000, the husband took legal action against his wife, her parents, and their family living trust to enforce the contract for deed and realize the appreciation in value.  The state court legal actions were settled with a cash payment from the wife’s parents to the husband in return for a release of his rights in the real property and his rights to other marital property.  In accordance with the comprehensive settlement, the husband and wife quit claimed their equitable interests in the real property to the wife’s parents.  The wife’s quit claim deed to her parents was not recorded.  A year later, the wife filed a chapter 7 bankruptcy case without listing any interest in the real property or claiming any exemption in it.

The chapter 7 trustee filed an adversary proceeding to set aside the transfer and recover the real property as an unperfected, voluntary and fraudulent transfer under Bankruptcy Code Sections 544(a), 548(a) and 550 and certain Minnesota state statutes.

The bankruptcy court first recognized that state law determines property rights in bankruptcy.  The bankruptcy court judge next recognized that Minnesota state law provided that one could not fraudulently transfer exempt homestead property, as creditors could not claim they were prejudiced by a transfer or claim that it was a fraud when there would be no recovery of value.  The bankruptcy court judge further held that that Minnesota protection extended to bankruptcy fraudulent transfers under 11 U.S.C. § 548 and denied the trustee’s avoidance actions.

On appeal, the bankruptcy appellate panel (“BAP”) held that the bankruptcy court judge erred by failing to analyze the alleged fraudulent transfer under Bankruptcy Code Section 548.  The BAP recognized two bases for the chapter 7 bankruptcy trustee’s avoidance powers:  (1) the avoidance powers of an unsecured creditor using state or federal law under Bankruptcy Code Section 544(b), and (2) the power to avoid a voluntary or involuntarily transfer within two years of filing found to be constructive fraud for lack of full, fair-market consideration while the Debtor was insolvent under Bankruptcy Code Section 548(a)(1)(B).  The BAP agreed with the chapter 7 trustee’s assertion that Minnesota law did not extend to avoidable fraudulent transfers in bankruptcy under 11 U.S.C. § 548.  The BAP recognized five elements to the trustee’s fraudulent conveyance avoidance powers under 11 U.S.C. § 548, and only the first one – the interest of the Debtor in property – depended upon an interpretation of state law.  The other four elements – (2) a voluntary or involuntary transfer, (3) within two years of filing bankruptcy, (4) for less than reasonably equivalent value, and (5) while the debtor was insolvent – all depended upon an interpretation of federal bankruptcy law.  The BAP ruled that the debtor, by entering into a settlement agreement and transferring the property, did have an interest in property under state law.  It also ruled that the transfer took place within two years of the wife filing her chapter 7 bankruptcy case.  As the other three elements were disputed, the BAP reversed and remanded the case for further findings by the bankruptcy court judge.

In reaching its decision, the BAP reasoned that the debtor could not claim the property as exempt because she voluntarily transferred the property before filing bankruptcy and her parents could not claim the exemption she might otherwise have.  By so doing, the BAP rejected the “no harm, no foul” rule that a minority of the courts have used to restrict the trustee’s avoidance power to those transfers involving nonexempt property.  The Fourth Circuit Court of Appeals, which includes the U.S. Bankruptcy Court for the Eastern District of Virginia, similarly rejected the “no harm, no foul” rule in a non-family law case in Tavenner v. Smoot, 257 F.3d 401 (4^th Cir., 2001).

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss how you or your spouse’s your divorce transactions might affect a Virginia bankruptcy case.