When a former husband filed bankruptcy after a Virginia divorce but before transferring title to his former wife, can their real property be sold in the former husband’s bankruptcy case?
In a divorcing couple’s Property Settlement Agreement, a husband and wife agreed to split the net equity in the former marital residence. The parties further agreed that the husband would make all the payments on the property and claim all the tax deductions, and that title would be transferred to the wife in the future. The Property Settlement Agreement was incorporated into the final decree of divorce in Virginia. As provided under Virginia law, the former husband and wife became tenants in common of the real estate upon divorce. Neither the divorce decree nor the separation agreement were recorded in the land records in which the property was located. The ex-husband subsequently filed chapter 7 bankruptcy before conveying title to his ex-wife. The trustee sought to sell the former husband’s one half interest in the property.
The former wife claimed that the separation agreement created a constructive trust with respect to the real estate, completely divesting the ex-husband of his interest, leaving the ex-husband with bare legal title. As opposed to an express trust created by the parties, constructive trusts are trusts imposed by law to prevent what would otherwise be a fraud by the party who holds legal title. A constructive trust can arise in two instances: (1) where the title was acquired by fraud or improper means, or (2) where allowing the owner to retain the property for his benefit would be contrary to fairness.
In ruling on a summary judgment motion in the 2006 bankruptcy court decision of In re Robinson, 346 B.R. 172 (Bankr. E.D. Va.), the judge held that the contract to convey real estate did not create a constructive trust. In Robinson, the judge found that the Property Settlement Agreement was atypical and was driven by the husband’s attempt to keep his entire military pension and to minimize the income tax consequences of the divorce. In return for the wife agreeing to give up her interest in the husband’s pension, the husband agreed to pay the mortgages on the former marital residence. The judge held that the mere fact that the real property had not been conveyed was not sufficient to create a constructive trust, reasoning that the parties agreed to transfer title at a later date for their mutual benefit. By providing for a future transfer of title, the parties had assumed the risk of possible, but unanticipated, events such as the former husband’s future financial difficulties. The consequences of the parties’ risky choices in structuring their Property Settlement Agreement as they did, did not justify the application of a constructive trust that would harm third parties, the former husband’s creditors. In Robinson the judge resolved the tension between balancing the rights of the former husband and wife versus the former husband’s creditors in favor of the former husband’s creditors. A constructive trust would not be used to defeat the rights of the third-party creditors.
You should consult with your Virginia bankruptcy or divorce attorney concerning how to best structure your separation agreement or property settlement agreement for a possible bankruptcy.