The Interplay Between Bankruptcy and Divorce Law in Virginia

Is an overpayment of spousal support nondischargeable in a chapter 7 bankruptcy case?

Yes, in the case of In re: Eloisa Maria Taylor, Matthew E. Taylor v. Eloisa Maria Taylor, 737 F.3d 670 (10^th Cir., 2013), where the Tenth Circuit Court of Appeals affirmed the U.S. Bankruptcy Court’s holding, on appeal from the Bankruptcy Appellate Panel for the 10^th Circuit, that the overpayment was nondischargeable under 11 U.S.C. §523(a)(15) as a debt incurred in connection with a separation agreement.

In the Taylor case, the husband and wife were married for seventeen years before obtaining a divorce in the Circuit Court of Fairfax County, Virginia.  The final decree of divorce incorporated a Marital Settlement Agreement between the parties, also referred to variously in Virginia divorce law as a separation agreement, property settlement agreement, marital agreement, or agreement and stipulation in accordance with §20-109 and §20-109.1 of the Code of Virginia, as permitted by the Virginia Premarital Agreement Act, Virginia Code Section 20-155.  In accordance with the terms of the parties’ separation agreement, the Virginia Circuit Court judge ordered the husband to pay spousal support of $2,500 a month to wife until the death of either party, or the remarriage of wife, or ten years of payments, whichever first occurs.  After less than four years the husband moved the court to terminate the alimony payments on the grounds wife was living with another man in a relationship analogous to marriage, a basis for the termination of court-ordered spousal support under Virginia Code Section 20-109(A).  The divorce court judge agreed with the husband and retroactively terminated the spousal support obligation to the wife, resulting in a money judgment against the wife of more than $50,000 for the husband’s overpayment of support for the period after her cohabitation.  Less than two months later, the wife filed a chapter 7 bankruptcy case.

The husband then filed an adversary proceeding, under Federal Rules of Bankruptcy Procedure 7001(6), ancillary to the wife’s bankruptcy case for a determination that the overpayment of support was a nondischargeable debt under 11 U.S.C. § 523(a)(2)(A), (5) and (15).  The bankruptcy court granted the husband’s motion for summary judgment (Federal Rules of Bankruptcy Procedure 7056 and Federal Rules of Civil Procedure 56) and ruled that the overpayment debt was nondischargeable under 11 U.S.C. 523(a)(15) as a debt “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement…”  The bankruptcy court did not, however, address the husband’s request for attorney’s fees in connection his nondischargeability complaint.  Husband and wife both appealed the decision.

On appeal, the Bankruptcy Appellate Panel (“BAP”) affirmed the bankruptcy court judge’s rulings that the debt was not a nondischargeable “domestic support obligation” (as defined in 11 U.S.C §101(14A) ) under 11 U.S.C. §523(a)(5) and that it was a nondischargeable debt under 11 U.S.C. § 523(a)(15).  The BAP also ruled that the bankruptcy court did not have authority to award attorney’s fees to the husband under the parties’ Marital Separation Agreement. Both parties appealed again.

On appeal, the Tenth Circuit Court of Appeals first recognized the applicable standards of review in bankruptcy court appeals: fact findings by the bankruptcy court would be upheld unless clearly erroneous and questions of law would be decided de novo, or, as if for the first time.  The BAP’s decision was merely persuasive as a subordinate appellate court.  In addition, in family law cases, the decision whether a debt is “…in the nature of support…” constituting a Domestic Support Obligation under 11 U.S.C. §101(14A) is a fact finding, subject to the clear error standard.

The Federal Court of Appeals then recognized the two types of family law debts that are exceptions to discharge: “domestic support obligations” under 523(a)(5) and non-DSO debts arising out of divorce proceedings or separation agreements under 523(a)(15).  The 10^th Circuit Court analyzed whether the debt was in the nature of support by a dual inquiry, looking at both the intent of the parties and the nature of the obligations. While the description of the nature of the debt by the parties in the property settlement agreement is not controlling, state law may inform the court of the nature of the debt.  The appellate court held the support overpayment was not a domestic support obligation because it was not owed to the creditor spouse husband in this case, thus failing to meet the second requirement, “..in the nature of support…of such spouse…”, in 11 U.S.C. §101(14A)(B).  In other words, in order to be a domestic support obligation under the plain meaning of the statute, the creditor must be the spouse who was owed support.  In this case, the debt was an overpayment of support of the debtor, not the creditor.

Nevertheless, the appellate court did hold that the overpayment was nondischargeable as the second type of family law debt,  a non-DSO arising out of a divorce case or separation agreement.  In doing so, the court disregarded the wife’s argument that the literal application of 523(a)(15) in this case was contrary to intentions of the legislators in drafting that bankruptcy provision to protect the dependent spouse.  The absurdity doctrine advanced by the wife was inapplicable in this case where there were no extreme circumstances or shocking result from application of the plain meaning.  In addition, the legislative intent behind 523(a)(15) was to prevent a spouse from discharging a larger debt assumed by the filing spouse, with a “hold-harmless” provision, in exchange for a reduction in a domestic support obligation owed to the nonfiling spouse.  The court applied the plain meaning of both 11 U.S.C. § 101(14A) and 11 U.S.C. § 523(a)(15) in ruling the support overpayment debt was nondischargeable.  The denial of husband’s attorney’s fees was affirmed, as not supported by the marital separation agreement between the parties.

As an interesting note, the wife might have discharged this debt had she filed chapter 13 bankruptcy instead of chapter 7 bankruptcy, under the broader discharge provided in 11 U.S.C. §1328(a), which allows for the discharge of non-DSO debts arising from divorce proceedings or a separation agreement.

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a particular family law debt may be excepted from discharge.

Is a chapter 13 bankruptcy case filed one month after a divorce a bad faith filing in Virginia?

Not in the case of In re: James Christopher Haney, Case no: 10-10258-SSM (EDVA, Aug. 2010), where the bankruptcy judge for the Eastern District of Virginia ruled that the chapter 13 case had not been filed in bad faith.

In the Final Decree of Divorce, the Virginia Circuit Court divorce judge ordered the husband to pay a portion of the mortgage on the marital residence until it was sold, several credit card debts, and $20,000 toward wife’s attorney’s fees.  The husband filed a chapter 13 bankruptcy case in the United States Bankruptcy Court for the Eastern District of Virginia about a month after the entry of the divorce decree.  The debtor husband’s first proposed chapter 13 plan included a provision that the wife would pay the mortgage on the former marital residence until it sold, then all debts would be paid from the proceeds.  The plan drew an objection from the creditor wife for failing to pay priority debts in full, as required by 11 U.S.C. §1322(a)(2), and on the grounds that the plan was not feasible, as required by 11 U.S.C. §1325(a)(6), and was not proposed in good faith, as required by 11 U.S.C. §1325(a)(3) and (7).

The bankruptcy court judge sustained the wife’s objection to confirmation of the first chapter 13 plan because it failed to include the treatment of the mortgage payment contributions by the wife or the credit card payment obligations of the husband arising under the divorce decree.  However, the judge did find that the case and the first plan were not filed or proposed in bad faith, simply because it compromised the claim for wife’s attorney’s fees, which were not a Domestic Support Obligation as defined in 11 U.S.C. §101(14A), and were not entitled to priority treatment in the plan.

As allowed under 11 U.S.C. §1323 and Local Bankruptcy Rule 3015-2, the husband filed a modified chapter 13 plan, within the required 21 day period after denial of confirmation, in which he proposed to reimburse wife for her share of the full mortgage payments and to pay debts required to be paid in the divorce decree, all from the net proceeds of sale of the real estate.  The wife objected to the modified plan on four grounds: (1) her priority claim was not being paid in full; (2) the husband could not defer his requirement to contribute to the monthly mortgage payment as required by the divorce decree; (3) the case and the plan were not filed or proposed in good faith; and (4) the plan was not feasible.

The bankruptcy court judge sustained the wife’s first objection by finding that the divorce decree had created an equitable lien in the husband’s share of the net proceeds for the payment of the monetary award to wife or “equalizing payment” as described by the judge, and the payment of the Best Buy credit card.  The court recognized that property settlement and equitable distribution debts were not priority debts and did not have to be paid in full, citing the case of In re Uzaldin, 418 B.R. 172 (Bkr. E.D.Va. 2009), also decided in the bankruptcy court for the Eastern District of Virginia (and also the subject of another blawg post herein).  Nevertheless, as these debts were secured by an equitable lien, they would have to be paid in full.   As the modified plan still did not specify that these non-priority amounts would be paid exclusively from husband’s share of the net proceeds, it could not be confirmed.  The proposed modified plan was “unquestionably ambiguous” as to when the monetary award and the payment of the credit card debt assigned to husband in the divorce decree would be paid.

The bankruptcy court judge also sustained the wife’s second objection to the husband’s deferred mortgage contributions.  The court recognized that such contributions were domestic support obligations and noted that 11 U.S.C. §1325(a)(8) requires full payment of all post-petition domestic support obligations prior to confirmation, without any allowance for delayed payments provided they were not prejudicial to the recipient spouse, as argued by the husband in this case.  Further, the husband’s modified chapter 13 plan was too tenuous because there was no guarantee the mortgage lender would accept partial payments from the wife alone and no specifics as to when and how the house would be sold.  In fact, after performing the estimated calculations, it appeared the net proceeds from the proposed home sale would not even be sufficient to pay husband’s past-due domestic support obligations.

In support of the wife’s good faith objection, the court noted that the case was filed only one month after entry of the final decree of divorce and that the debtor’s correspondence with his ex-wife’s divorce counsel mischaracterized the bankruptcy court’s prior order allowing relief from the automatic stay, which mischaracterization evidenced the husband’s intention to use the bankruptcy to thwart enforcement of the divorce decree.  On the other hand, the debtor had substantial debts, including attorney’s fees owed to his own divorce counsel, and was proposing to pay a substantial majority of the amount of his debt in the chapter 13 plan.  Ultimately, the court overruled the good faith objection because the bankruptcy court judge could not find that the debtor had filed the bankruptcy case solely to avoid his obligations to his ex-wife as opposed to attempting to adjust all his debts.

While the bankruptcy court judge expressed doubts about whether the debtor could propose any feasible plan, considering the need to make up for the debtor’s share of the mortgage payments he had already missed and to satisfy the equalizing payment and credit card debt, the judge was willing to allow the debtor one more chance to file a modified plan.  The court reminded that debtor that although Local Bankruptcy Rule 3015-2(H) normally allowed the debtor 21 days after denial of confirmation to file another modified plan, a chapter 13 case could be dismissed under 11 U.S.C. §1307(c)(5) by both a denial of confirmation and a denial of additional time to file another plan or under 11 U.S.C. §1307(c)(11) for failure to pay post-petition domestic support obligations.

The author finds that the most interesting aspects of the Haney case are not only the bad faith analysis in light of a prior divorce, but also the implication that a bankruptcy case filed solely to avoid obligations to a spouse from a divorce case would constitute a bad faith bankruptcy filing.

You should consult with your Virginia bankruptcy and divorce lawyer or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a particular bankruptcy filing following the entry of a divorce decree might be considered a bad faith filing.

Must support obligations be paid in full in chapter 13 before the debtor’s attorney’s fees?

Not in the case of In re Reid, Case No: 06-50147 ( Bkr. MDNC, July 19, 2006), where the United States Bankruptcy Court for the Middle District of North Carolina overruled that part of the trustee’s objection to a debtor’s chapter 13 plan because it did not pay Domestic Support Obligations (“DSOs”) in full prior to payment of compensation for Debtor’s counsel.

In Reid, the husband debtor filed a chapter 13 bankruptcy case listing two county child support enforcement agencies as creditors holding claims for past due child support arrearages.  Child support is a “domestic support obligation” as defined in 11 U.S.C. 101(14A), entitled to priority claim status in bankruptcy.  The chapter 13 plan in Reid provided that the child support arrearages would be paid in monthly payments at the same time as payments to secured creditors and the attorney’s fees of the debtor’s counsel.  There were no payments provided in the chapter 13 plan for general unsecured, non-priority creditors.  The husband debtor had filed the certification required under 11 U.S.C. 1325(a) indicating that he was current in the payment of all post-petition domestic support obligations.  The chapter 13 trustee objected to confirmation of the plan on the grounds that the plan did not pay prepetition arrearages on domestic support obligations in full before payment of the administrative expenses of attorney’s fees of the debtor.

At the chapter 13 confirmation hearing on the objection, the United State Bankruptcy Court judge first recognized that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced new protections for domestic support obligations such as spousal support and child support.  In particular, section 1325 requires that post-petition domestic support obligations be current before a chapter 13 plan can be confirmed; section 1307 allows conversion or dismissal of a chapter 13 case if the debtor fails to pay “any domestic support obligation that first become payable after the date of the filing of the petition”; and section 1328 requires that all domestic support obligations be paid in order for the debtor to receive a discharge.

The court noted that while section 507 of Title 11, the Bankruptcy Code, establishes the general rule that priority debts shall be paid first in full before other debts, specific provisions in chapter 13 displace the priority of domestic support obligations to allow for the payment of the debtor’s attorney’s fees.  In particular, section 1326(b) provides as follows:  “(b) Before or at the time of each payment to creditors under the plan, there shall be paid – (1) Any unpaid claim of the kind specified in section 507(a)(2) of this title;…

The kind of claim specified in section 507(a)(2) is an administrative claim under section 503(b).”  An administrative claim under section 503(b)(2) is a claim for compensation and reimbursement awarded under section 330(a) of the Bankruptcy Code.  Under section 330(a)(4)(B), the court may award reasonable compensation to the debtor’s attorney in a chapter 13 case.

While BAPCPA changed the precise language of section 1326, the court ruled that the revised section maintained the pre-BAPCPA treatment of administrative expenses in chapter 13 – that they be paid before or concurrent with payments to other creditors.

The bankruptcy court judge also noted that while section 726(a)(1) requires that the distribution from a chapter 7 liquidation be paid in the order specified in section 507, section 1322(a)(2), governing the contents of a chapter 13 plan, includes no such requirement.  In addition, section 1325, governing confirmation, similarly does not require that plan follow the distribution order in section 507.  In fact, section 1325(a)(1) requires for confirmation that the plan comply with chapter 13, and “other applicable provisions of this title”, instead of all provisions of title 11.

The judge in Reid denied the trustee’s objection to confirmation based on the full payment of the priority claim for past-due child support before debtor’s attorney fees, but sustained the trustee’s objection based on the failure of the plan to provide for interest on the DSO claim.

In addition to the judge’s reasoning in the Reid case, there are public policy reasons for allowing debtor’s counsel to be paid at the same time as prepetition domestic support obligation arrearages.  Most chapter 13 attorneys allow for the majority of their attorney’s fees to be paid in the plan, rather than requiring the debtor to pay most of the fees before filing.  Requiring all DSOs to be paid in full before debtor’s counsel’s compensation would discourage debtors’ counsel from representing chapter 13 debtors who owed domestic support obligations and would not further the purpose of chapter 13 bankruptcy to allow consumer debtors to repay their creditors while receiving the protection of the automatic stay in bankruptcy.

You should consult with your Virginia bankruptcy and divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the proper treatment of domestic support obligations in a bankruptcy case.

Is an award of lump sum spousal support to compensate wife for husband’s bankruptcy an abuse of the trial court’s discretion?

Yes, in the case of Mosley v. Mosley, 19 Va. App. 192, 450 S.E.2d 161 (1994) , where the Virginia Court of Appeals reversed the trial court’s award of lump sum spousal support due to the consequences of husband’s bankruptcy proceeding.

In Mosely, the husband and wife were married for twenty years before separating.  After a year of separation, the wife filed for a no fault divorce.  The husband responded with an answer and cross-bill for divorce based on adultery.  The wife filed a demurrer to the husband’s cross-bill.  The following year, while the divorce case was pending, the husband filed a chapter 7 bankruptcy case and received a discharge.  The divorce case was subsequently tried and two months after the husband’s bankruptcy discharge, the trial court issued it letter opinion, awarding wife a no-fault divorce, one-half of the husband’s military pension, and lump sum spousal support in the amount of $29,330.  The husband filed a motion to rehear the spousal support award and the equitable distribution decision.

In making his award of lump sum spousal support, the divorce court judge stated that the award was to compensate wife for husband’s use of the marital residence on which he did not make mortgage payments, for one-half the debt to the credit union, and for one-half of the secured and unsecured marital debt, debt the husband had discharged in his bankruptcy case.  After a rehearing, the court issued a final decree of divorce three months later based on its letter opinion.  The husband appealed on three grounds: (1) that he was not permitted enough time to present evidence relevant to equitable distribution; (2) that trial court erred in awarding the lump sum award of spousal support, which lacked sufficient supporting evidence; and (3) that the trial court erred in awarding half his military pension, instead of half of the marital share.

With regard to the husband’s first issue, the Virginia Court of Appeals recognized that the trial court’s equitable distribution duties under Virginia Code § 20-107.3 to determine legal title, ownership and value of all property did not require the court to classify or value every item of property, where the parties were given a reasonable opportunity to provide the necessary evidence but failed to do so due to a lack of diligence, citing Bowers v. Bowers, 4 Va. App. 610, 359 S.E. 2d 546 (1987).  While the parties must be given a reasonable opportunity to develop and present evidence for equitable distribution, and the court cannot reject evidence simply because better evidence might exist, the court can refuse to accept additional evidence by one of the parties, particularly when the court set an additional deadline for the parties, as did the trial court judge in Mosley.

Next, the Virginia Court of Appeals reversed the trial court’s decision awarding lump sum alimony to compensate wife for the husband’s bankruptcy filing.  The court first recognized that a spouse may not discharge a spousal support obligation under 11 U.S.C. 523(a)(5) .  However, a court is not required to accept the characterization of a particular award as “spousal support or maintenance”, when such an award may not actually be in the nature of alimony or support.  Carter v. Carter, 18 Va. App. 787, 447 S.E.2d 522 (1994).  [The analysis of whether a claim is “in the nature of alimony or support” remains relevant, even after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in October 2005, due to the four-part definition of a “Domestic Support Obligation” in 11 U.S.C. 101(14A)].

In analyzing a spousal support award, the appellate court noted that the critical issue is the purpose of the award.  In this case, the trial court stated that the lump sum spousal support award was to compensate wife for the consequences of the husband’s bankruptcy filing and the discharge of his share of the marital debts.  Further, although the trial court has the authority to make a lump sum award of spousal support under Virginia Code § 20-107.1, there was no evidence supporting the husband’s ability to make the lump sum support awarded by the judge.  The appellate court recognized that a lump sum spousal support payment may be appropriate in special circumstances or for compelling reasons, citing Blank v. Blank, 10 Va. App. 1, 389 S.E.2d 723 (1990) .  However, in this case, the trial court judge failed to consider the relative needs and abilities of the parties when fashioning the award, as required under Collier v. Collier, 2 Va. App. 125, 341 S.E.2d 827 (1986),  and Virginia Code § 20-107.1, specifically the earning capacity of the husband.  The lump sum spousal support award was reversed as an abuse of the trial court’s discretion.

Finally, the Virginia Court of Appeals reversed the trial court’s award of fifty percent of the husband’s military pension, which exceeded its statutory authority to award up to fifty percent of the “marital share” of the pension, under Virginia Code § 20-107.3(G)(1).

You should discuss with your Virginia bankruptcy and divorce attorney or Richmond divorce lawyer James H. Wilson, Jr. , how a bankruptcy might affect your rights and duties in a divorce case.

Was husband’s use of marital funds in his individual name to pay temporary spousal support proper at the time?

Yes, it was in the case of Wright v. Wright, 61 Va. App. 432,737 S.E.2d 519 (2013), where the Court of Appeals of Virginia ruled that husband properly expended marital funds in his own account to pay pendente lite spousal support and legal expenses he owed during the divorce case, instead of using his post-separation earnings from his law practice or other separate property.   Virginia Code Section 20-103, pertaining to pendente lite relief, was subsequently amended, as a result of the Wright case, to require that temporary spousal support and other pendente lite awards be paid from post-separation income, but it is still useful to understand the reasoning behind the Wright decision.

In Wright, the husband and wife were married for 24 years before separating from the marital residence in the City of Richmond.  The wife filed a complaint for divorce and the husband filed an answer and cross-complaint.  The case was tried 2 years later and a final decree of divorce was issued in April 2012, from which both husband and wife appealed.  Before entry of the final decree of divorce, the trial court judge issued a letter opinion outlining his decision.  The wife filed a motion to reconsider this letter opinion, requesting an additional reservation of spousal support, which request was granted in in a second revised letter opinion and the final decree of divorce.

 

The attorney husband in the Wright case was a successful Virginia lawyer who worked in downtown Richmond for a large U.S. law firm, where he was an equity partner and a highly-compensated head of a practice group.  The valuable marital property in the divorce case included the marital share of the husband’s law practice and the husband’s three retirement plans with the law firm, including a supplemental retirement plan (SRP).  The wife’s expert valued the husband’s interest in the law practice at nearly 1.5 million dollars, while the husband’s expert valued it at just over half a million dollars.  While the husband argued that there was no marital property in the SRP as it had not vested and might not be approved, the trial judge awarded 25% of the value of the SRP, not just the marital share, when and if the account should become payable after vesting.

In addition, the husband had two separate accounts in his individual name, which he used to pay temporary spousal support to the wife and his legal expenses during the divorce case.  The wife moved the trial court to value the property at the date of separation, an alternate valuation date to the hearing date, as permitted by Virginia Code § 20-107.3 for good cause shown, in order to attain the ends of justice, by motion made no later than 21 days before the equitable distribution hearing.

Although the wife had an MBA from a prestigious national university, she did not work outside the home after the parties’ children were born, except to assist in entertaining husband’s business interests and to engage in volunteer work.  At trial, the husband’s vocational expert opined that the wife was capable of earning $85,000 a year as an established financial representative.  Although the wife asked the court for an award of spousal support in the amount of $30,000 a month for undefined duration, she was awarded $10,000 a month for four years as rehabilitative alimony – enough to allow her to update her skills for entry into the job market. The judge did award a reservation of spousal support to the wife, without expressly limiting the reservation to a particular term.  Under Virginia Code § 20-107.1(D), there is a rebuttable presumption that a reservation of spousal support period will continue for a period of time equal to half the length of the marriage to the date of separation.   Both parties appealed the trial court judge’s opinion.

In response to the husband’s argument that the trial court erred in reserving support to the wife only after she first requested it in her motion to reconsider, the Virginia Court of Appeals held that a request for spousal support also includes a request for a reservation of support, as decided in Vissicchio v. Vissicchio, 27 Va. App. 240, 498 S.E.2d 425 (1998).  The wife had requested support and the parties had stipulated there was no bar to her receiving spousal support.

The Court of Appeals, however, agreed with the husband’s argument that the trial court should have limited its reservation of support for a particular duration of time – 11 years – as requested by the wife.  The appellate court reversed this decision of the trial court and remanded the case for a correction of the judge’s decision.

In regard to the equitable distribution decision, the Court of Appeals deferred to the trial court’s finding that the SRP contained marital property, as not plainly wrong or without evidence to support it.  The appellate court noted that the language of Virginia Code §20-107.3(G)(1) is intended to treat uniformly all plans of compensation, whether vested or not, payable now or upon retirement, provided it was earned during the marriage.   The evidence at trial supported the finding that some portion of the SRP was earned during the marriage, as the wife supported the husband’s success at his law firm and he became an equity partner during the marriage and before the parties separated.   Nevertheless, the trial court erred in awarding wife 25% of the total SRP instead of a fixed percentage of the marital share of the SRP.  The court agreed with the trial judge that the “deferred distribution method approach”, as described in Torian v. Torian, 38 Va. 167, 562 S.E.2d 355 (2002), with an award of a percentage of the marital share of the pension, to be paid only as benefits are paid, would be an appropriate method for awarding the wife’s share.  The appellate court remanded this issue to the trial court with instructions to determine the marital share by using a fraction, the numerator of which would be the number of years the husband was a partner while the parties were married until they separated and the denominator of which would be the number of years the husband was a partner until his retirement and approval of the SRP by the executive committee at the firm, with the actual amount to wife not to exceed 50% of that amount.

The appellate court upheld the trial court’s valuation of the husband’s law practice based on the “bottoms up” method of determining the intrinsic value of a professional practice used by wife’s expert, which had been similarly approved in Howell v. Howell, 31 Va. App. 332, 523 S.E.2d 514 (2000), a prior case involving the same expert witness and an attorney in the same firm as husband’s.  The trial court’s findings were not plainly wrong or without evidence to support them in using this methodology.

The Virginia Court of Appeals disagreed with wife’s contention that a different valuation date should have been used for the marital funds in husband’s accounts in his own name.  In support of her motion for an alternate valuation date, the wife maintained that the husband should have used his post-separation earnings from his law practice or other separate funds.  The court noted that the trial court should use the most current and accurate valuation which avoids an inequitable result, citing Gaynor v. Hird, 11 Va. App. 588, 400 S.E.2d 788 (1991).  Although dissipation of marital assets for separate purposes in contemplation of separation or divorce may be charged to that party, in this case the husband met his burden of proving the funds were properly spent.  A separated spouse may properly use marital funds for court-ordered spousal support, mortgage payments, household expenses, a child’s tuition expenses, and legal expenses for the divorce case.  In this case, the appellate court held the trial court judge was within his discretion in finding no good cause for an alternate valuation date and in finding that the payments were not waste as the husband was under no obligation to use his separate funds.

Finally, the appellate court upheld the trial court’s award of spousal support for a defined duration.  An award of spousal support is within the sound discretion of the trial court judge and will not be reversed unless plainly wrong or without evidence to support it. Calvert v. Calvert, 18 Va. App. 781, 447 S.E.2d 875 (1994).  The award was supported by expert testimony and the reasonable inferences that could be drawn from such testimony.

You should consult with your Virginia attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss how certain post-separation payments might be treated in a Virginia divorce case.

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.