Category: Uncategorized

Can husband’s transfers of real estate to wife under a separation agreement be set aside in a later bankruptcy?

Yes, in the case of  In re Paschall, 408 B.R. 79 (E.D. Va., 2009), in the Eastern District of Virginia, Richmond Division, the U.S. District Court judge affirmed the bankruptcy court’s  order holding that the Chapter 7 bankruptcy trustee established that the buyout of prior marital agreement with transfer of real estate was a preference under 11 U.S.C.A. § 547(b), and former spouse was an insider because estranged parties were still married when the transfer occurred.

After husband and wife were married, wife sold her separate real property and used the proceeds to purchase land in Virginia which was titled in the names of husband and wife, as tenants by the entirety with the common-law right of survivorship.  Husband and wife took out a mortgage loan against the property and deposited the proceeds into a joint checking account, from which husband paid his premarital unsecured debts and marital unsecured debts.  Later, the husband and wife bought residential real property in Midlothian, Virginia (a suburb of Richmond in Chesterfield County) from husband’s wife, using his separate property as a down payment and a joint mortgage loan.  They took title again as tenants by the entirety with the common-law right of survivorship.

The next year, the parties entered into a marital agreement, valid under Virginia Code Section 20-155,  and just as enforceable as a separation agreement or property settlement agreement, wherein husband agreed wife would become the sole owner of both real properties in return for a cash payment to husband.  The husband agreed to transfer the properties by quit claim deeds to wife as trustee of a living trust in her name.  After the husband become dissatisfied with the agreement, the parties negotiated a buyout agreement under which the properties would be transferred earlier in return for cash.  Wife paid husband the cash, but husband did not transfer the title to the real property by deed until more than a year later.  Although husband was not insolvent when he executed the marital agreement and the buyout agreement, he was insolvent when he transferred title to the two real properties.  Wife had filed for a divorce from husband in a Virginia Circuit Court before the transfers and obtained a final decree of divorce after the transfers.  The final decree of divorce was filed in the county clerk’s law and chancery order books nine months later, on the same day the ex-husband filed his chapter 7 bankruptcy case.  Neither the marital agreement nor the decree were ever filed in land records.

The chapter 7 trustee filed an adversary proceeding, a lawsuit within the bankruptcy permitted by 28 U.S.C. 157, and governed by Bankruptcy Rule 7001, to avoid husband’s transfers of real estate to the wife as preferences or fraudulent or voluntary conveyances under the Bankruptcy Code or Virginia law.  The bankruptcy court judge ruled against the trustee on the fraudulent or voluntary conveyance grounds, but ruled in favor of the trustee to avoid the transfers as preferences.  The wife was a creditor and an insider, and the transfers were made to satisfy an antecedent debt owed by the debtor at the time the debtor was insolvent.  Since the transfers were avoided, the property reverted the debtor and his ex-wife, who were now tenants in common by virtue of the entry of the decree of divorce, which severed the tenancy by the entirety under Virginia Code Section 20-111.  Thus, the chapter 7 trustee could administer the husband debtor’s interest in the real properties.  The wife and her trust appealed the bankruptcy court order, which was considered by the U.S. District Court as an appropriate interlocutory, or nonfinal, order for appeal under 28 U.S.C. 1292(b).

In Paschall, the District Court held that the former wife qualified as a creditor having a “claim” as defined in 11 U.S.C.A. § 101(5) because she could have obtained an equitable remedy if debtor did not fulfill his contractual obligations under the marital agreement to transfer his interest in properties.  The judge also ruled that former wife had to be regarded as an “insider,” as defined in 11 U.S.C.A. § 101(31), because a final decree of divorce was entered three weeks following the quitclaim deeds to transfer the property; See also Miller v. Schuman, 81 B.R. 583, 585 (9th Cir. BAP 1987); and the challenged transfers enabled former wife to receive more than she would have received in a hypothetical Chapter 7 liquidation [where former wife was an unsecured, nonpriority creditor, and unsecured creditors of the estate would receive less than 100% payout on their claims, the required elements of a preference under  11 U.S.C.A § 547(B)(5).

 

The Paschall case illustrates the benefit of recording agreements concerning real property and deeds promptly in land records.  One of the foundations for the judge’s decision was the fact that the agreement between the husband and wife had not been recorded, as required under Virginia Code Section 55-96, to become effective against purchasers for valuable consideration without notice, a statutory status the chapter 7 trustee enjoys under 11 U.S.C. 544(a)(3) to set aside or avoid transfers and recover property.  The case also illustrates the risks in accepting transfers when the transferor spouse is insolvent and such a transfer may be considered an avoidable preference under 11 U.S.C. 547.  Finally, the judge noted that the argument that the decree was entitled to full faith and credit had not been raised.

You should consult with your Virginia bankruptcy and family law lawyer to discuss how to best structure and execute your marital agreements.

 

 

 

Can a wife collect mortgage and house insurance payments from the husband without violating the automatic stay in a Chapter 7 bankruptcy proceeding?

Not necessarily  in the U.S. Bankruptcy Court for the district of Kansas, according to In re: Craig Michael Ullrich, Case No. 10-40329 (June 2, 2010).  The reasoning of the Ullrich case may also apply to a bankruptcy case pending in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division. In Ullrich, the ex-wife obtained a court order requiring the ex-huband, a debtor in a chapter 7 bankruptcy case, to appear in state divorce court to answer allegations that he had not fulfilled his financial obligations agreed to in the parties’ divorce.  In response, the debtor husband filed a Motion for an Order to Show Cause in his bankruptcy case, alleging that his ex-wife had violated the automatic stay imposed by § 362 of the Bankruptcy Code.

The bankruptcy judge in Ullrich requested a copy of the underlying divorce documents to determine whether the issuance of a rule to show cause was appropriate.  Husband and wife had prepared their own separation agreement or property settlement agreement, without benefit of counsel.   A review of the documents showed that the debtor husband had agreed to pay $1700 a month for mortgage and house payments. The bankruptcy court judge tried to determine if the payments were intended to be construed as child support or a property settlement agreement. The U.S. Bankruptcy Court judge restated the rule that: “Section 362(b)(2)(B) specifically states that the filing of the bankruptcy petition does not operate as a stay “of the collection of a domestic support obligation from property that is not property of the estate.” The definition of a domestic support obligation includes anything that is “in the nature of alimony, maintenance, or support . . . without regard to whether such debt is expressly so designated.” 11 U.S.C. § 101(14A).

In this case, it was difficult for the court to ascertain if the $1700 a month for mortgage and house payments were child support. There were some indications that the payments were intended to be child support and not a property settlement agreement: 1) there was no marital property to be divided, no marital debts or spousal support; 2) The language in the Separation Agreement suggested that Debtor would support his children by paying the mortgage.  However, there were also indications that the payments could be part of a property settlement agreement: 1) sworn Affidavit signed by Debtor stating that he has no child support obligation, but only a property settlement obligation arising out of divorce. 2) Debtor has custody of the parties’ third child.  The debtor husband had responded to the controversy by filing a motion to convert his chapter 7 case to a chapter 13 case, in order to discharge non-domestic support obligation family law debts under 11 U.S.C. 523(a)(15).

The Court stressed that if ex-wife were indeed attempting to enforce a property settlement debt rather than a domestic support obligation, she will have violated “the automatic stay imposed by the Bankruptcy Code and could be liable for damages, including actual damages, attorney fees, and potentially punitive damages.” However, the Court denied the debtor’s Motion for an Order to Show cause, because the bankruptcy court judge could not definitively determine whether the husband’s obligation were “in the nature of” child support. In part, the Court had difficulty deciding the nature of the obligation since the ex-wife did not appear at the scheduled hearing.

Although the Court denied the debtor’s Motion for an Order to Show cause, the court used its equitable powers under Section 105 of the Bankruptcy Code, to stay the ex-wife’s motion and any similar proceeding, pending further order from the Court.

The Ullrich case illustrates the inherent risks in structuring particular obligations as support or property settlement obligations.   Although the bankruptcy court judge will look beyond the labeling of the obligation to determine if it is truly in the nature of support, structuring an obligation as support in a separation agreement, without the benefit of counsel, may have unintended consequences in a later bankruptcy case.

You should consult with your Virginia bankruptcy and family attorney concerning the applicability of the automatic stay in a bankruptcy proceeding to any family law obligations.

 

 

Should husband’s early retirement lead to a decrease in spousal support to wife in Virginia?

Not in the case of Johnson v. Johnson where the Virginia Court of Appeals ruled that the Chesterfield County Circuit Court divorce judge did not err by refusing to terminate husband’s spousal support obligation even though he had retired and wife was receiving a portion of his retirement as income.

When the parties were divorced in 1994, the wife was awarded $600 a month in spousal support from her husband.  Ten years later, the husband tried to terminate spousal support in accordance with Virginia Code Section 20-109(A), on the grounds that wife was co-habiting with another man in a relationship analogous to a marriage for one year or more.  The Chesterfield Circuit Court denied husband’s motion to abate spousal support.  See,  Johnson v. Johnson, No. 1736-03-2 (Va. Ct. App. June 8, 2004).

Five years later, the husband moved the Chesterfield County Circuit Court to modify the spousal support because wife was living with another man, the husband had retired at age 60, and wife was receiving income from her share of the marital share of his retirement awarded in the divorce.  The trial judge found that husband had met the threshold requirement of proving a change in circumstances, but denied the husband’s motion based on wife’s need for support and husband’s ability to provide support.  The wife testified that she had “large medical bills” and that her car needed “expensive repairs.” She was not employed at the time of the hearing, but had received workers’ compensation benefits.  Husband owned a house and a car, and was able to pay spousal support.

On appeal, the Virginia Court of Appeals first restated the rule that “a moving party in a petition for modification of support is required to prove both a material change in circumstances and that this change warrants a modification of support.” citing Schoenwetter v. Schoenwetter, 8 Va. App. 601, 383 S.E.2d 28 (1989).

Although there was a material change of circumstances, the Virginia Court of Appeals affirmed the trial court ruling to deny termination of spousal support since husband had been employed with the railroad and was able to meet his expenses, including his spousal support obligation. Additionally, there was sufficient evidence to prove that wife continued to have a need for spousal support.  The husband had failed to preserve his right to argue three issues on appeal because he did not present a complete record of the proceeding below with his arguments and objections, as required by Rule 5A:18 of the Supreme Court of Virginia.   The Johnson case illustrates that “not every material change of circumstance justifies a modification of spousal support”, citing Blackburn v. Michael, 30 Va. App. 95, 515 S.E.2d 780 (1999),   and the risk of relying on a statement of facts at the Virginia Circuit Court level, instead of a court reporter’s transcript, for an appeal to the Virginia Court of Appeals.

You should consult with your Virginia family law lawyer to discuss whether a material change in circumstances justifies a modification of spousal support.

Will the Automatic Stay in Bankruptcy Stop Family Law Matters?

When filing a Chapter 7 or 13 bankruptcy petition, an automatic stay provided by Bankruptcy Code section 362(a), immediately goes into effect which prohibits all creditors’ attempts to pursue collection of a claim against the debtor or against property of the debtor’s bankruptcy estate unless excepted.   Section 362(b) of the Code provides for certain exceptions, including many family law matters and domestic support obligations.  (Some family law obligations may also be considered priority claims under Section 507(a)(1) of the Bankruptcy Code, entitled to a priority in payment in bankruptcy.

Specifically, Bankruptcy Code Section 362(b)(2)(A)(ii) provides:

The automatic stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding for-

1) The establishment of paternity

2) The establishment or modification of an order for a Domestic Support Obligation such as child support,

3) The determination of child custody or visitation issues, or

4) The dissolution of marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest.

Although a spouse may file a motion to increase child support, the safer course may be to first obtain relief from the automatic stay to continue any family law matter in state court.  The bankruptcy court will often grant a “comfort order” clarifying that the automatic stay is modified or lifted, or does not apply to certain state law proceedings.

While a divorce decree can be granted without first obtaining relief from the automatic stay, the marital property and debts cannot be divided without obtaining such relief.  For example if a spouse files for bankruptcy in the middle of his or her divorce case, the Virginia Circuit Court judge can still continue to hear and decide issues relating to establishing support.  However, with regard to issues of equitable distribution, the divorce court should not proceed without relief from the stay from bankruptcy court order that permits the divorce case to continue.  See In re: Richard J. Dryja where a Bankruptcy Court granted stay relief to allow a divorce court to continue with its action to divide marital property.

The automatic stay also does not prevent the post-petition collection of Domestic Support Obligations such as alimony or child support:

1) From any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in said property,

2) Wage deduction orders created by a statute or judicial or administrative order,

3) From the interception of debtor’s federal or state income tax refunds, or

4) From the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license.

Therefore, there is no protection in U.S. Bankruptcy Court from the obligations imposed by a Domestic Support Obligation in Chapter 7 Bankruptcy, but there may be in Chapter 13 as the estate includes post-petition “earnings.”  11 U.S.C. Section 541 [a][6] as modified by 11 U.S.C. 1306(a)(2). Because payments to creditors have to come from the debtor’s post petition earnings, the earnings are property of the Chapter 13 estate.  Hence, the claimant seeking to collect support obligations may not be free to pursue the Chapter 13 debtor’s post petition earnings in Circuit Court or the Juvenile and Domestic Relations District Court, except as permitted under under Bankruptcy Code Section 362(b)(2)(B) or (C).

Nevertheless, a spouse or child owed support has additional protections in chapter 13 bankruptcy.  Under Section 1325(a)(8) of the Bankruptcy Code, the debtor must have paid all domestic support obligations that became due after filing under a judicial or administrative order, or by statute, in order to have a chapter 13 plan confirmed.  Under Section 1328(a), in order to receive a discharge after completion of all plan payments, the debtor must certify that he or she paid not only such post-petition domestic support obligations, but also the pre-petition domestic support obligations provided for in the plan.  Finally, domestic support obligations are not dischargeable in either chapter 7 or chapter 13 under Bankruptcy Code Section 523(a)(5).

You should consult with your Virginia bankruptcy lawyer to discuss the limits of automatic stay in bankruptcy proceedings.

Is a Penalty for Late Payment of Alimony or Spousal Support a Domestic Support Obligation in Bankruptcy?

Not in the case of Smith v. Pritchett, 586 F.3d 69 (1st Cir. 2009) where the United States Court of Appeals for the First Circuit ruled that a $50 a day penalty for late payment of alimony or permanent spousal support was not a nondischargeable “domestic support obligation” under Bankruptcy Code Section 101(14A).  While this case is not binding authority in the Fourth Circuit, which includes the U.S. Bankruptcy Court for the Eastern District of Virginia, the analysis is useful to an understanding of divorce and bankruptcy law in Virginia.

In Smith, the United States Court of Appeals addressed a divorce agreement (also known as a property settlement agreement or separation agreement) filed jointly by the parties.  The agreement provided that husband would pay wife a $50 fee for each day that he was late in alimony or spousal support payments. Shortly after the divorce agreement became effective, husband appeared to have fallen in arrears and subsequently filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Wife filed a proof of claim for $82,000 in his bankruptcy case. The claim was for $50 per day penalties that had accumulated under the terms of the parties’ divorce agreement since the debtor had been consistently late in his alimony payments. Wife argued that her claim was for a “domestic support obligation” and, was entitled to priority and was nondischargeable under Section 523(a)(5) of the Bankruptcy Code.

The Court disagreed with the ex-wife and ruled that a penalty for late payment of alimony provided in the divorce agreement was not itself alimony and was not a domestic support obligation, so it is dischargeable. The court came to this conclusion by analyzing the divorce agreement which described the penalty as fixed, compared to the monthly alimony payment which ranged from $2,300 to as low as $1,000, depending on the year and if ex-wife remarried. Since the $50 fee was a fixed, the court ruled that the fee had “no connection to the actual alimony owed to Wife.” Furthermore, the court concluded that the fee could not be regarded as having been intended to compensate Wife for any tardiness in receipt of the monthly alimony, but was rather meant as a punitive sanction for late payments. The ex-wife’s claim is a general unsecured claim not entitled to priority status and can be discharged in the husband’s (the debtor’s) bankruptcy.

Hence, a Chapter 13 debtor in Virginia may be able obtain a bankruptcy discharge of late payment penalties assessed pursuant to similar alimony provision in his or her divorce agreement.

You should consult with your Virginia divorce lawyer concerning the likely effects of including a late penalty fee for alimony payments within a divorce agreement.

Could wife reopen her bankruptcy case in the Eastern District of Virginia to add her husband’s attorney as a creditor?

Yes under a former local procedure, although it would not make any difference was the holding of the bankruptcy judge in the unpublished case of In re Cintron, Case No: 00-60937-T (EDVA 2001) Cintron debt discharged without scheduling.  In the Cintron case, wife filed a chapter 7 bankruptcy case in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division.  The wife received a chapter 7 discharge and the case was closed.  In accordance with a now repealed Local Rule 1009-1(C) of the Local Rules of Bankruptcy Procedure, wife filed a notice (which the judge treated as a motion) to add her husband’s attorney as a creditor.  Under Federal Bankruptcy Rule 9029, each federal district can make and amend local rules that are consistent with the federal bankruptcy rules.  In the course of the parties’ divorce case, wife had been ordered by the state court divorce judge to pay her husband’s attorney’s fees in a decree, as is permitted by Virginia Code Sections 20-79, and 20-99.  The local bankruptcy rule in effect at the time of the Cintron case allowed debtors to add previously unscheduled creditors in a closed bankruptcy case.  The bankruptcy court judge noted that the local rule served two purposes, to give debtors a way to schedule unscheduled creditors and to persuade previously unscheduled creditors that their claims were discharged.  The judge noted that re-opening a case to add a previously unscheduled creditor had no real effect on the dischargeability of a debt.  Section 523(a)(3) of the Bankruptcy Code provides that a debt which requires the filing of a complaint to determine dischargeability, such as a debt based on use of a false financial statement, fraud, defalcation in a fiduciary capacity, larceny, embezzlement, or an intentional injury to another person or another person’s property, is not discharged if the debt was not scheduled or listed in time to file such a complaint, unless the creditor has timely, actual knowledge of the case.  Otherwise, a dischargeable debt will be discharged even though the debt or claim was not scheduled by the debtor.  There is no time limit to determine the dischargeability of a family law debt.  One that is dischargeable would be discharged, regardless of whether it was scheduled, and one that is not dischargeable would not be discharged.

 

In Citron, the judge recognized that (under the version of Section 523(a)(5) in effect at that time) if the attorney’s fees owed to the husband were in the nature of support, they would not be discharged in any event.  [Under today’s law, the relevant inquiry would be whether the attorney’s fees were a domestic support obligation nondischargeable under Section 523(a)(5) or a nonsupport family law debt that fits under Section 523(a)(15).  Both the Virginia Circuit Courts and the U.S. Bankruptcy Court for the Eastern District of Virginia can hear these family law nondischargeability matters – they have “concurrent jurisdiction”, regardless of whether the case was reopened.  In Citron, the judge overruled the husband’s objection to re-opening the case to add the husband’s attorney as a creditor, but noted that it would not make any difference in the outcome.  The comments to the current Local Bankruptcy Rule 1009-1 address the repeal of the previous subsection as follows:  “Paragraph (C) has been removed as it no longer conforms to applicable case law on this subject.”

 

You should consult with your Virginia family law lawyer or bankruptcy attorney to discuss whether your particular family law debt can be discharged.

Is a wife’s claim for equitable distribution in divorce a debt discharged in bankruptcy or an interest in property (part 2 of 2)?

As discussed in the first part of the answer to this question, there have been different approaches in the U.S. Bankruptcy Courts to the treatment of a spouse’s claim for equitable distribution in a bankruptcy case.  Part 1 included a discussion of In re: Scholl, 234 B.R. 636 (Bankr. E.D. Pa., 1999), and In re: Roberge, 188 B.R. 366 (Bankr. E.D. Va., 1995), which recognized that a spouse’s equitable distribution rights are not a claim discharged in bankruptcy, but rather vested property rights not affected by the spouse’s bankruptcy filing, except for the need to seek relief from the automatic stay to determine those rights in state court.

A contrary result was reached In re: Schorr, 299 B.R. 97 (W.D. Pa. 1993), where the U.S. Bankruptcy Court held that a wife’s equitable distribution rights were a claim or a debt discharged in her husband’s bankruptcy case.  In Schorr, the husband filed for a divorce from his wife in state court.  The wife filed an answer requesting equitable distribution and a counterclaim for her own relief.  The husband filed a chapter 7 bankruptcy case before any order had been entered in the state divorce proceeding.  The wife did not file an objection to husband’s claimed exemptions within the 30 days following the conclusion of the meeting of creditors, the deadline set by Bankruptcy Rule 4003(b)(1).  The wife did not file a motion for relief from the automatic stay under 11 U.S.C. 362(d), to continue her request for equitable distribution in the state court divorce case or file an adversary proceeding objecting to the dischargeability of her claim under 11 U.S.C. 523(15). [Although neither of these actions are normally necessary to preserve one’s rights to later pursue a domestic support obligation or other family law debt, sometimes it is preferable.]  The chapter 7 trustee found no non-exempt assets to administer in husband’s bankruptcy and filed a no asset report.

After the husband’s bankruptcy case was concluded and closed, the wife continued her divorce and equitable distribution proceedings in state court.  The husband asserted his discharge in bankruptcy as a defense in state court to wife’s demand for equitable distribution.  The state court judge required the husband to reopen his bankruptcy case for a decision on this crucial issue.  Consequently, the husband filed an adversary proceeding in bankruptcy court for a determination of the dischargeability of wife’s claim for equitable distribution.  The wife denied that her request for equitable distribution was a claim or debt that could be discharged in bankruptcy, relying on the Scholl case discussed in Part 1.

The Schorr court first recognized the danger of collusion when an estranged spouse files bankruptcy – that the debtor spouse may transfer all his or her assets to his or her spouse in the divorce proceeding to gain a divorce rather than lose those assets to the creditors in bankruptcy.  The court then distinguished the Schorr case from the Scholl case.  In contrast to the Schorr case, the non-debtor spouse in Scholl sought relief from the automatic stay to pursue equitable distribution and filed an adversary proceeding against the debtor spouse for a determination that she did not have a claim and that there was no debt to her to be discharged.  The judge in Schorr disagreed, however, with the Scholl court’s holding that, in the absence of a separation agreement or a court order, the non-debtor spouse did not have a claim or debt that would be discharged in bankruptcy.  The Schorr  judge ruled that the wife’s request for equitable distribution was a cause of action and a pre-petition “claim”.  The court noted that the definition of a “claim” in 11 U.S.C. 101(5A) did not require a contract or court order, but simply a right to payment.

The court next recognized the public policy argument against the Scholl holding: that the division of marital property in state court would thereby be allowed to take place without any consideration of the effects of such distribution on the creditors.  The judge in Schorr further disagreed with the bankruptcy court judge’s application of the in custodia legis doctrine to marital property in divorce proceedings without the authority of a decision of the highest appellate court of the state.  The Schorr court also disagreed with the impossibility of applying the balancing test required under [the previous version of] 11 U.S.C. 523(a)(15) to determine if a family law debt should be discharged without a prior equitable distribution order, finding it possible if the non-debtor spouse filed an adversary proceeding and re-opened the bankruptcy case after conclusion of the state court equitable distribution.  The court concluded by ruling that the wife had an unliquidated, disputed, unsecured claim that was discharged in her husband’s bankruptcy case.

You should consult with your Virginia bankruptcy or divorce lawyer concerning whether your equitable distribution rights can be discharged in bankruptcy.

Is a wife’s claim for equitable distribution in divorce a debt discharged in bankruptcy or an interest in property (part 1 of 2)?

There appears to be a split of authority across the U.S. on the treatment of a spouse’s claim for equitable distribution in a bankruptcy case.  Pennsylvania, like Virginia, is a marital property state that provides for equitable distribution in divorce cases.  Although the amendments to the Bankruptcy Code in October 2005 with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) has altered the treatment of family law debts in bankruptcy by defining Domestic Support Obligations in Section 101(14A), and revising two categories of exceptions to discharge of divorce debts in 523(a)(5) and (15), understanding these two approaches may prove useful to litigating divorce matters in the Virginia county circuit courts or the U.S. bankruptcy courts in Virginia.  The Third Circuit Court of Appeals declined to decide this split of opinion in the unpublished case of Fox v. Fox, Case No: 06-4075 (3^rd Cir. 2007).  The two leading bankruptcy cases cited in that federal circuit illustrating the two different approaches are In re: Schorr, 299 B.R. 97 (Bankr. W.D. Pa., 2003), and In re: Scholl, 234 B.R. 636 (Bankr. E.D. Pa., 1999).

In the Scholl case, the wife filed for divorce in state court, asking for equitable distribution, pendente lite spousal support, attorney’s fees and costs.  The property subject to equitable distribution included the marital residence, husband’s pension and husband’s Individual Retirement Account (IRA).  The husband filed a chapter 7 case in the federal bankruptcy court in the Eastern District in state.  The husband listed wife as an unsecured creditor in his bankruptcy case with a possible debt from marriage not to include alimony or spousal support.  Pensions and retirement accounts are usually exempt from creditor process, and thereby protected in bankruptcy from administration by the chapter 7 trustee.   The wife filed an adversary proceeding in the husband’s bankruptcy case for a judicial determination that her right to equitable distribution was not dischargeable in husband’s chapter 7 case.  The wife also sought, and was granted, relief from the automatic stay to continue the divorce case in state court.  In her adversary proceeding, the wife contended that she had vested property rights in the state court equitable distribution procedure that were not discharged by the husband’s bankruptcy.  In defense, the husband contended that the wife had a contingent, unliquidated, disputed claim comparable to a tort claim that could be discharged in bankruptcy.  The bankruptcy court judge recognized that marital property subject to equitable distribution is placed under the divorce court’s jurisdiction, held in custodia legis  (“in the custody of the law”) until the conclusion of the state divorce case.  While the definition of a claim in bankruptcy is broad under Section 101 (5)(A), it does not encompass rights that do not include enforceable obligations.  The filing of a divorce action itself does not give rise to a right to payment, so there is no claim to discharge in the subsequent bankruptcy filing.  In resolving the matter, the bankruptcy court judge looked to state law to determine whether the wife had a right to payment or “claim” at the time the bankruptcy case was filed.  In this case, there was no equitable distribution order or separation agreement supporting a right to payment under state law.  Consequently, the judge held that the wife would take her interests in the marital property free of the creditors of husband’s bankruptcy estate, and husband’s interests in the marital property were property of the bankruptcy estate subject to administration unless exempted.

In a supporting footnote, the judge in the Scholl case cited the case of In re: Roberge, 188 B.R. 366 (Bankr. E.D. Va., 1995), an appeal from the U.S.  Bankruptcy Court for the Eastern District of Virginia, Richmond Division.  In the Roberge case, the bankruptcy judge denied the wife’s motion for relief from the automatic stay in her husband’s chapter 7 case in order to allow her to prosecute an equitable distribution in a Florida.  The husband had left the marital residence to move to Virginia, where he obtained an ex parte divorce from the wife, then filed a chapter 7 bankruptcy two months later.  As the Virginia court never had personal jurisdiction over the wife and could not therefore affect her property rights, the wife was able to file an equitable distribution suit in Florida.  The chapter 7 bankruptcy trustee opposed wife’s motion in the bankruptcy court for relief from the stay to pursue her Florida equitable distribution case.  On appeal, the U.S. District Court for the Eastern District of Virginia first recognized that the Florida case was stayed by the husband’s bankruptcy filing.  The court then recognized that the stay may be lifted for cause under 11 U.S.C. 362, and that the grant of jurisdiction over bankruptcy matters to the district court allowed the district court to abstain from deciding state law matters in the interest of justice or in the interest of comity or respect for state law under 28 U.S.C. 1334(c)(1).

The wife argued in Roberge that domestic relations law is essentially state law best left to the state courts to decide.  The bankruptcy trustee argued that the wife’s equitable distribution rights, an unsecured claim in bankruptcy, were cut off by husband’s bankruptcy filing, based on the trustee’s superior avoidance powers as a hypothetical judgment lien creditor under 11 U.S.C. 544.  The trustee’s argument depended upon state law that recognized equitable distribution rights as being subject to a prior perfected lien.

The judge disagreed with the trustee’s argument in Roberge, holding that the mere filing of a bankruptcy petition does not divest otherwise vested equitable distribution rights.  The judge recognized that property rights are created and defined by state law and that bankruptcy law generally does not act as substantive law.  While bankruptcy should not be used as a weapon in divorce proceeding, the court was mindful of the possibility of collusion by the spouses to cut off creditors’ rights, so relief from the automatic stay is properly a matter of the discretion of the bankruptcy court judge.  The court noted that the bankruptcy court’s decision would contradict the state’s public policy of fostering marriage, by allowing a spouse to abandon his spouse by obtaining an ex parte divorce and cutting off her equitable distribution rights.  Relief from the stay should have been granted in this case, according to the three part test of the Fourth Circuit Court of Appeals in In re: Robbins, 964 F.2d 342 (4^th Cir., 1992), because domestic law matters are best left to the states to decide, modifying the stay promotes judicial economy, and the creditors would not be prejudiced by allowing equitable distribution to proceed.  The bankruptcy court judge’s decision was reversed on appeal and the case was remanded back to bankruptcy court.

You should consult with your Virginia bankruptcy or divorce lawyer concerning whether your equitable distribution rights can be discharged in bankruptcy.  The answer to this question is completed in Part 2, where a contrary result in the Schorr case is discussed.

Must a chapter 13 bankruptcy debtor pay a child support arrearage in full for confirmation of the plan in Virginia?

Not necessarily in the U.S. Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, according to In re: Edwards,  Case No. 09-16765-SSM, (Bankr., E.D. Va, January 20, 2010), and In re: Sosa, Case No. 09-13389-SSM, (Bankr., E.D. Va, January 21, 2010).  The issue in both cases was whether a claim entitled to priority under Section 507 of the Bankruptcy Code must be paid in full under the chapter 13 plan.

In the Edwards case, the debtors filed for bankruptcy relief under chapter 13 with priority claims of $80,038 in taxes and unpaid child support.  Their budget showed an income withholding order for child support to the California Department of Child Support Services (DCSS).  The debtor husband had two adult children for which he owed child support arrearage and it was not clear whether the unpaid child support would be paid over by DCSS to the mother of the children or retained by DCSS to recoup public assistance paid or welfare paid, such as Aid to Families with Dependent Children (AFDC) or its successor Temporary Assistance to Needy Families (TANF).  In their proposed modified chapter 13 plan, the debtors were to pay priority claims with no payout to the general unsecured creditors.  The plan provided that priority taxes would be paid 100%, but the priority domestic support obligations would be paid less than 100%.  Domestic support obligations, including spousal support or alimony, and child support are priority claims under 11 U.S.C. 507(a)(1), even when the domestic support obligation is owed to a governmental unit, 11 U.S.C. 101(14A), although a domestic support obligation claim of a parent has priority over a domestic support obligation claim of a governmental unit.  The chapter 13 trustee objected to confirmation of the debtors’ proposed modified chapter 13 plan because it did not pay priority claims in full.  The bankruptcy judge recognized that under Section 1322(a)(4), a chapter 13 plan may provide for less than full payment of a certain assigned domestic support obligation claim owed directly to, or recoverable by, a governmental unit, as long as the plan provides that all of the debtor’s projected disposable income will be applied to make plan payments and the chapter 13 plan extends for at least sixty (60) months.  The unpaid balance of the domestic support obligation is not discharged and may be collected from the debtor at the conclusion of the plan.  While the case is pending, the existing income withholding order is not stayed by the automatic stay in bankruptcy.

In the Sosa case, the debtors originally filed a chapter 7 bankruptcy case, then moved the court to convert their case to a chapter 13 case.  A chapter 7 case may be converted to chapter 13 case under Section 706 of the Bankruptcy Code, provided the conversion is not in bad faith, Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S. Ct. 1105, 166 L.Ed. 2d 956 (2007).  In their chapter 13 plan, the Sosa debtors proposed to pay only 26% of the priority domestic support obligation. The debtors’ budget included $500 a month in voluntary child support payments as an expense, leaving only $104 a month for plan payments.  The plan provided nothing for the holders of general, nonpriority, unsecured claims.   The chapter 13 trustee objected to confirmation of the plan as not being proposed in good faith, as required under 11 U.S.C. 1325(a)(3), and because the plan did not pay priority creditors in full.   The bankruptcy judge recognized that certain domestic support obligation claims could be subordinated, or paid less than 100% in a chapter 13 plan.  Claims owed to a parent or assigned voluntarily to a governmental unit for the purpose of collection cannot be subordinated.  Again, if the subordinated domestic support obligation claim is to be paid less than 100%, the plan can still be confirmed if all the debtors’ disposable monthly income is paid into the plan for the full sixty (60) months.  The judge held that the objecting party, in this case the chapter 13 trustee, has the initial burden of proving that the domestic support obligation was assigned voluntarily for the purpose of collection, and thus could not be subordinated in the plan.

In the Fourth Circuit, which includes Virginia, the standard for judging good faith is the totality of circumstances, under the case of Deans v. O’Donnell, 692 F.2d 968 (4th  Cir. 1982).  In Sosa, the judge was troubled by the debtors’ purpose in converting to chapter 13 when they were current on their mortgages and by the discrepancy between the $500 a month in child support they listed and the $185 claimed by the child support enforcement governmental unit.  As such, the Sosa case was continued for an evidentiary hearing on the issue of good faith.

You should discuss with your Virginia bankruptcy attorney whether your child support arrearage must be paid in full in a chapter 13 plan.

Should a husband or wife consent to relief from the automatic stay if he or she falls behind on the mortgage payments during a chapter 13 case in Virginia?

One of the best reasons for filing a chapter 13 bankruptcy case is to save a home from foreclosure by allowing the homeowner to make the regular post-petition mortgage payments directly to the mortgage lender outside the plan while the arrearage amount is cured in the plan through the plan payments.  Alternatively, a chapter 13 debtor may propose to sell or refinance a home with equity at some point in the plan to cure a default.  The homeowner in chapter 13 receives the protection of the automatic stay in bankruptcy found in Section 362 of the Bankruptcy Code, which prevents the creditors from trying to collect a pre-petition debt from the debtor, the debtor’s property, or the property of the estate.  This stops the mortgage lender from selling the debtor’s home at a foreclosure auction in Virginia.

Despite the best of intentions, statistics tell us that the vast majority of chapter 13 cases are not successfully completed to allow a homeowner to save his or her home.  This may happen in one of two ways, because the case is dismissed or because the lender obtains relief from the automatic stay and forecloses on the home.  A case may be jeopardized due to an unanticipated setback while the case is pending such as a job loss or unexpected illness.  In spite of these setbacks, a debtor may still be able to save the bankruptcy case itself by filing an amended or modified chapter 13 plan which makes up for missed plan payments, or by re-filing a second chapter 13 case when the debtor is back on his or her feet, provided the lender has not yet foreclosed.  If the debtor is married and the other spouse has not filed bankruptcy, the other spouse may wish to file his or her own chapter 13 case to save the home from foreclosure.

If, on the other hand, the case is continuing, but the debtor fails to make one or more of the regular mortgage payments directly to the lender, the lender will often file a Motion for Relief from the Automatic Stay, asking the bankruptcy judge to allow the lender to pursue the lender’s state law rights and remedies, including a foreclosure sale of the property in Virginia.

The debtor has a number of options when responding to a Motion for Relief from Stay.  A debtor may wish to contest the matter and request an evidentiary hearing on the issue of whether cause exists for relief from stay.  Sometimes the mortgage lender has not properly accounted for the post-petition payments made, or the party filing the motion is not the proper party or does not have standing to enforce the mortgage note in bankruptcy court.   On the other hand, a debtor may decide not to contest the motion or to consent to relief from stay.  If the case is close to dismissal for other grounds, such as default in the plan payments, the debtor may simply allow the case to be dismissed without addressing the motion, relying on the possibility of a good faith re-filing with a motion to extend or impose the automatic stay.  Again, in the case of a married couple where only one spouse has filed bankruptcy, the other spouse may now wish to file a separate chapter 13 case to save their home from foreclosure.

Perhaps the most common, though not always most advantageous, resolution of a Motion for Relief from Stay in U.S. Bankruptcy Court for the Eastern District of Virginia is known as a “drop dead order” or a “six month cure order”.  This order provides that the debtor will make up for the missed payments, plus attorney’s fees and costs, by making extra direct payments for six months to bring the post-petition account current.  This often imposes an impossible burden on a cash-strapped chapter 13 debtor, who is also responsible for making plan payments and the regular mortgage payments at the same time, particularly if all of the debtor’s disposable income is being devoted to plan payments.  If the debtor defaults in the regular payments or extra 6 payments under the drop dead order, then the lender may have to first file an affidavit of default, which, if unanswered, allows the mortgage lender to resort to its state law rights.

Under the holding of Matter of Mendoza, 111 F.3d 1264 (C.A.5 (Tex), 1997), the debtor has another option.  In certain circumstances, a debtor may be able to put the post-petition arrearage into a modified plan, to be cured along with pre-petition arrearage.  The Mendoza holding rests on the existence of equitable grounds allowing modification in the circumstances and on the particular language of 11 U.S.C. 1322(b)(5) which does not expressly limit the debtor’s right to cure a default to a pre-petition default.

You should consult with your Virginia bankruptcy attorney concerning all of your options when you must respond to a Motion for Relief from Stay in your chapter 13 bankruptcy case.