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.