Is a divorce award of the former marital residence to wife enforceable against husband’s chapter 7 bankruptcy trustee?

Is a divorce award of the former marital residence to wife enforceable against husband’s chapter 7 bankruptcy trustee?

Yes, in the case of  In re: Timothy H. Thorpe, Reinbold, Trustee, v. Thorpe, No: 17-1766 (7th Cir. Ct. App., 2018), where the Seventh Circuit Court of Appeals affirmed the decision of the judge of the U.S. District Court for the Central District of Illinois ruling that the estate’s interest was subject to wife’s contingent interest under state law.

The parties were married for nearly 26 years before wife filed for divorce in Illinois. The spouses owned real property as joint tenants (what would be considered a tenancy in common under Virginia law) where each owned a half interest and either could convey his or her interest without the other spouse joining in on the transfer. Under Illinois law, both spouses acquire contingent rights in marital property upon the filing of a divorce case.    Eight months after wife’s divorce filing, husband filed a chapter 7 bankruptcy case.

Under 11 U.S.C. §541, when the husband filed chapter 7 bankruptcy, the bankruptcy estate acquired husband’s interest in the marital residence.    Two years later, the automatic stay under 11 U.S.C. §362 was modified to permit entry of a final order in the divorce case awarding husband’s interest in the real property to wife.  Husband’s chapter 7 trustee filed an adversary proceeding against wife to undo the divorce court judge’s ruling in order to sell husband’s interest in the real property.

The wife prevailed in the bankruptcy court and at the U.S. District Court level.  Husband’s chapter 7 trustee appealed to the Circuit Court of Appeals for the Seventh Circuit.  The appellate court first recognized that property rights in bankruptcy are determined according to state law, citing Butner v. U.S., 440 U.S. 48 (1979).  The court then recognized that Illinois occupied a middle ground in marital property rights law: independent ownership interests were not created upon acquisition of the property, as in a community property state, or only upon entry of a final decree of divorce.  Instead, in Illinois, the spouses acquire independent contingent interests upon the filing of a divorce which “blossom” into full interests upon entry of a Final Decree.

(In contrast, under Virginia Code § 20-107.3(B), spouses have rights and interests in marital property, but such interests and rights do not attach to legal title and are only used to determine a monetary award (equalizing payment) under Virginia Code § 20-107.3(E).  It appears a bankruptcy trustee’s rights in Virginia property would not be subject to a spouse’s interest until entry of a final decree of divorce.)

The appellate court reasoned that the bankruptcy estate acquired the husband’s contingent rights in the former marital residence, which disappeared when the final decree of divorce was entered awarding the entire property to wife.  In response to the trustee’s argument that the court’s holding would deprive trustees of the right to challenge state court divorce decrees, the court noted that federal powers were preserved by the fraudulent conveyances statutes and the trustee’s strong-arm powers under 11 U.S.C. §544.  Finally, the court reaffirmed the philosophy that bankruptcy is not intended to expand the debtor’s rights beyond what existed at the commencement of the case, citing Moody v. Amoco Oil, 734 F.2d 1200 (7th Cir, 1984).

You should discuss your marital rights and interests in property upon divorce with your lawyer or Glen Allen bankruptcy and divorce lawyer James H. Wilson, Jr.

Is husband’s divorce agreement to make wife’s mortgage payments nondischargeable in a chapter 13 bankruptcy?

Is husband’s divorce agreement to make wife’s mortgage payments nondischargeable in a chapter 13 bankruptcy?

Yes, in the case of  In re Thomas, 511 BR 89 (6th Cir. BAP, 2014), a  Bankruptcy Appellate Panel decision from the 6th District, on appeal from the U.S. Bankruptcy Court for the Western District of Kentucky.

In Thomas, the husband and wife married, divorce, re-married and divorced again.  In the course of each divorce proceeding, the husband and wife reached a final comprehensive separation agreement followed by an agreed divorce.  In the final separation agreement, the husband gave up his interests in the former marital residence and the wife agreed to make the mortgage payments on the first mortgage and to split the mortgage payments on the second mortgage with the husband.   As part of her assumption of the first mortgage payments, the wife agreed to hold husband harmless thereon.  A hold harmless agreement is “…a part in a contract when parties agree not to hold the other party responsible for loss, liability, or damage.’  Black’s Law Dictionary, Free Online Legal Dictionary, 2d Ed. Husband quitclaimed his interest in the former marital residence to the wife.  The parties agreed to divide any deficiency arising from the sale of the property, but with all the net proceeds going to the wife in the event of a surplus from a sale.  The parties did not address a judgment lien for more than $8,000 that attached to husband’s interest in the property before they entered into the separation agreement; the wife claimed she was unaware of the judgment lien at that time.

There was no spousal support owed to either party under the separation agreement.  The wife was given primary custody of the children and husband agreed to pay child support to the wife.

After the parties were divorced from each other for the second time, the wife sold the former marital residence.  As the proceeds of sale were not sufficient to satisfy all liens against the property, the wife paid money at settlement to close the sale.

Four months later, the state court divorce decree was modified to provide that the husband owed the wife $7,500 for his half of the second mortgage and an additional $5,000 for the negotiated settlement payoff of the judgment lien against the property.

The husband subsequently filed chapter 13 bankruptcy.  He listed the wife as a priority creditor for one month’s child support and a general, nonpriority, unsecured creditor for $15,000.  The wife filed a proof of claim for a $12,500 priority claim for the second mortgage debt and judgment lien debt, with priority as a “Domestic Support Obligation”, a term defined in Bankruptcy Code Section 101(14A) and nondischargeable in any kind of bankruptcy under 11 U.S.C. §523(a)5Priority debts are defined in Section 507 of the Bankruptcy Code and must be paid in full under the chapter 13 plan by virtue of 11 U.S.C. §1322(a)(2), unless the holder of the claim agrees to different treatment.

The husband objected to wife’s claim as a domestic support obligation on the grounds that it was not in the nature of alimony, maintenance, or support, but was for liens that had already been paid off.  Husband’s argument relied on the fact that a non-DSO debt arising from divorce or separation, a debt that fits within 11 U.S.C. §523(a)(15) is dischargeable in a chapter 13 bankruptcy case (but not in a chapter 7 bankruptcy case) and is not a priority debt which must be paid in full.

The bankruptcy court judge found the wife’s claim was in the nature of alimony, maintenance or support and overruled husband’s objection to her proof of claim.  The husband appealed the decision to the Bankruptcy Appellate Court, and neither party requested that the appeal be heard by the U.S. District Court, as permitted by 28 U.S.C. §§158(a), (b) (6) and (c)(1).

The appellate court first recognized that the dischargeability of domestic support obligation is a mixed question of fact and law with two different review standards on appeal, a “clearly erroneous” review standard for fact findings and a de novo review standard for the rulings based on interpretations of 11 U.S.C. §523.  The court then recognized the public policy reasons behind the nondischargeable domestic support obligations, and the different treatment afforded post-divorce obligations under 11 U.S.C. §523(a)(15) only in chapter 13 bankruptcy cases.  The court then restated the four-part analysis in the 6th Circuit for determining whether an obligation is in the nature of support or maintenance, citing Long v. Calhoun (In re Calhoun), 715 F.2d 1103, 1109-10 (6th Cir. 1983), and Fitzgerald v. Fitzgerald (In re Fitzgerald), 9 F.3d 517, 520 (6th Cir. 1993) :

“First, the obligation constitutes support only if the state court or parties intended to create a support obligation. Second, the obligation must have the actual effect of providing necessary support. Third, if the first two conditions are satisfied, the court must determine if the obligation is so excessive as to be unreasonable under traditional concepts of support. Fourth, if the amount is unreasonable, the obligation is dischargeable to the extent necessary to serve the purposes of federal bankruptcy law.”

The burden of demonstrating that the obligation is in the nature of support is on the nondebtor.  Fitzgerald v. Fitzgerald (In re Fitzgerald), 9 F.3d 517, 520 (6th Cir. 1993) .

In Thomas, the dispute centered only on the first factor: whether the parties intended to create an  obligation in the nature of support.  The bankruptcy court had found the parties intended the second mortgage debt as support for five reasons: 1. it protected the children’s home; 2. the previous divorce decree included an upward deviation from the child support obligations to allow the wife to pay the mortgage, which the second decree lacked; 3. the decree’s provision to split any deficiency from the sale; 4. the hold harmless in the previous divorce decree does not relieve the husband from an obligation to pay the disputed claim; and 5. the agreements do not show the husband was entitled to support.

The appeals court affirmed the bankruptcy court’s view that the later separation agreement and second divorce superseded the terms of the previous separation agreement and divorce, although a comparison of the two could help the court determine the parties’ intent.  The appeals court disagreed with the husband’s argument – that child support was lowered in the second divorce because he was unemployed and not because his new support obligation included the second mortgage payment – as a fact that was not mutually exclusive with the bankruptcy court’s inference that his unemployment created the need for the second mortgage payment to be considered support while his regular child support payment was decreased.  In support of this, the appellate court cited  In re Palmieri, No. 11-51224, 2011 WL 6812336, at *5 (Bankr. E.D. Mich. Nov. 21, 2011) for the majority rule (and a list of supporting cases) that mortgage payments are in the nature of support because they provide a basic necessity: allowing the family members to remain in the marital residence.  Further, the wife testified at the bankruptcy court hearing that her income was insufficient to pay the first and second mortgage payments.

The appellate court dismissed the husband’s argument that the obligation was really property settlement and not support, as the parties had waived spousal support in the separation agreement by recognizing that the bankruptcy court is free to find an obligation is in the nature of support even though the state court labeled it otherwise.  In fact, the mortgage payment obligation had not been labeled by the parties as either support or property settlement in the separation agreement.  The husband’s argument that the obligation to make second mortgage payments could not be in the nature of support because the parties contemplated the sale of the marital residence was dismissed by the appellate court, which supported the bankruptcy court’s reading of an ambiguity in the splitting of a deficiency and award of a surplus to wife as an intent to provide the children with a residence – a possible down payment on a future home.

The appellate court affirmed the bankruptcy court’s ruling based on the totality of the circumstances, which ruling was not clearly erroneous, that the second mortgage payments were in the nature of support.  As the judgment lien was entirely the husband’s responsibility, was not addressed in the separation agreement, and prevented the wife from realizing any surplus from the sale of the former marital residence intended to be support, it too must be a domestic support obligation.  The court disagreed with the husband’s argument that it could not be in the nature of support as it was owed to a third party, not his spouse or former spouse, as not supported by the case law, citing Holliday v. Kline (In re Kline), 65 F.3d 749 (8th Cir.1995) and Rugiero v. DiNardo, 502 F. App’x 436, 439 (6th Cir. 2012).  As further support for the bankruptcy court’s ruling allowing the claim as a nondischargeable, priority Domestic Support Obligation, the court noted that the state court had treated the second mortgage debt as part of an order arising out of a support contempt hearing in 2009.

You should consult with your Virginia bankruptcy and divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether any particular obligation arising out of separation or divorce might be considered to be in the nature of support.

Is a husband’s agreement to pay his wife half the monthly payment amount for her parent’s loan to them during the marriage nondischargeable in husband’s chapter 7 bankruptcy after a divorce?

Is a husband’s agreement to pay his wife half the monthly payment amount for her parent’s loan to them during the marriage nondischargeable in husband’s chapter 7 bankruptcy after a divorce?

Yes, the court ruled in Shaver v. Shaver, Adversary Proceeding Number 14-5005, from the U.S. Bankruptcy Court for the Western District of Virginia, Harrisonburg Division.

In Shaver, the wife’s parents lent $30,000 to the couple during the marriage.  The wife’s parents drew the money from a home equity line of credit on their home.  There were no written documents evidencing the loan between the parents and their daughter and son-in-law.  The husband and wife orally agreed to repay the wife’s parents with monthly payments of $280 directly to the parents’ lender until the loan was paid in full.

The husband and wife subsequently entered into two written separation agreements, both prepared by the husband, when they decided to divorce.  In the first agreement, the husband agreed to pay half the monthly loan payment directly to the wife.  The next day, the parties signed a second agreement in which they divided up responsibility for paying the marital debts, without specifically mentioning the debt to the wife’s parents.  The husband and wife were later divorced.

The husband remarried and subsequently filed a joint chapter 7 bankruptcy case with his new wife, listing his now ex-wife as one of his creditors.  The ex-wife filed an adversary proceeding, a separate case associated with a bankruptcy case, to determine the dischargeability of the debt evidenced by the first agreement.  The ex-wife claimed the debt was nondischargeable in a chapter 7 case under 11 U.S.C. §523(a)(15), which makes nonsupport debts owed to a spouse or former spouse, incident to a divorce or separation , nondischargeable.  [The ex-wife did not claim the debt was as a “domestic support obligation” under 11 U.S.C. §101(14A), as being in the nature of support or maintenance, which would have made the debt nondischargeable under 11 U.S.C. §523(a)(5) in any kind of bankruptcy, not just chapter 7.]

The main issue in Shaver is whether the debt is owed to a spouse or former spouse, such that it is nondischargeable.  The husband claimed the debt was owed to the ex-wife’s parents, not to the ex-wife, and the first agreement merely altered the payment terms, but did not create a new debt to the ex-wife.

The court first determined that the first and second agreements were to be read together as a single document, citing the Fourth Circuit Court of Appeals case of Lansdowne on the Potomac Homeowners Ass’n, Inc. v. OpenBand at Lansdowne, LLC, 713 F.3d 187, 205 (4th Cir. 2013).  The court then held that the new obligation to pay $140 directly to the wife was a new debt, part of the parties’ overall division of marital debts evidenced by the first and second agreements, creating the ex-wife’s right to receive a payment directly from the husband.  As the new debt was owed to a former spouse, the debt met all the elements of 11 U.S.C. §523(a)(15) and was nondischargeable in the husband’s chapter 7 bankruptcy case.  Further, the bankruptcy court ordered the husband to pay the ex-wife’s attorneys fees and costs as allowed by the second agreement.

The husband could have avoided the outcome in Shaver by not preparing the first agreement, or by specifying the effect of the second agreement upon the first, or by filing a chapter 13 bankruptcy case instead of a chapter 7 bankruptcy case.  Divorce counsel would typically address the effect that a comprehensive separation agreement would have on any prior agreements between the parties, typically by providing that the later, comprehensive agreement supersedes those agreements and renders them void and a nullity, if that is what the parties had intended.  While it is not rare for spouses to sign their own brief written agreement before consulting counsel for a comprehensive separation agreement, it is unusual for divorcing spouses to have more than one controlling separation agreement.

While a debt under 11 U.S.C. §523(a)(15) is nondischargeable in a chapter 7 case, it would be dischargeable in a chapter 13 case under 11 U.S.C. §1328(a) .  Perhaps the husband and the new wife should have filed a joint chapter 13 case to discharge the debt to the ex-wife, or the new wife could have filed a chapter 7 case, and the husband could have filed a chapter 13 case on his own at a different time.

You should consult with your Virginia bankruptcy and divorce attorney or Richmond Divorce Lawyer James H. Wilson, Jr., to discuss how to best address debts owed to or from former spouses in bankruptcy.

Does wife have a claim in husband’s chapter 7 bankruptcy case for an equitable share of the marital property before entry of the final decree of divorce?

Does wife have a claim in husband’s chapter 7 bankruptcy case for an equitable share of the marital property before entry of the final decree of divorce?

Yes, in the case of In re Ruitenberg, 745 F.3d 647 (3d Cir., 2014), where the U.S. Court of Appeals for the Third Circuit affirmed the decision of the U.S. Bankruptcy Court for the District of N.J. in In re Ruitenberg, 469 B.R. 203 (D.N.J., 2012), overruling the chapter 7 trustee’s objection to wife’s claim to an equitable interest in marital property in husband’s bankruptcy case during the pendency of the parties’ divorce case in state court.

In Ruitenberg, the husband filed a chapter 7 bankruptcy case while a divorce case was pending in state court.  No final decree of divorce had been entered in the state court divorce case in N.J., an equitable distribution state like Virginia.  The wife filed a proof of claim in the husband’s chapter 7 case for $577,935, representing her estimated interest in marital property subject to equitable distribution in the divorce case.  The chapter 7 trustee in the husband’s bankruptcy case objected to the claim as a claim that did arise prepetition and should be disallowed.  Almost a year after the husband filed bankruptcy, the wife filed her own chapter 7 bankruptcy case, thus allowing the chapter 7 trustee in her case to pursue her claim in the husband’s bankruptcy case.  The chapter 7 trustee in the wife’s bankruptcy case argued that wife’s claim should be allowed.

In deciding the matter in the lower court, the bankruptcy court judge first recognized that the court had jurisdiction over the validity of the case under 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a), and a local order of the U.S. District Court referring Title 11 cases to the bankruptcy court, and had jurisdiction over the validity of the claim as a core matter under 11 U.S.C. § 157(b)(2)(B).  The bankruptcy court judge then analyzed whether the wife’s right to equitable distribution constituted a “claim”, as defined in 11 U.S.C. §101(5), analyzing the different approaches of the courts to a pre-divorce claim for equitable distribution, or an equitable interest in marital property.  The court noting that some court allowed such a contingent claim as a prepetition debt and general unsecured claim subject to discharge, citing In re Schorr, 299 B.R. 97 (W.D. Pa., 1993), et al., while others courts have not allowed such a claim as not ripe and not subject to discharge, citing In re Scholl 234 B.R. 636 (E.D. Pa., 1999) , et al.  As the equitable claim in marital property can give rise to a monetary award under state law, the nondebtor spouse has been recognized by some courts as having a claim under 11 U.S.C. §101(5) against the debtor spouse’s property in bankruptcy.  In re Lawrence, 237 B.R. 61 (D. N.J., 1999).

The Ruitenberg bankruptcy court judge recognized that he had ruled otherwise in the case of In re Howell, 311 B.R. 173 (D. N.J., 2004), where the court followed In re Berlingeri, 246 B.R. 196 (D. N.J. 2000), in holding that a spouse did not need relief from the automatic stay to pursue equitable distribution because it concerned a post-petition interest of the non-debtor spouse [This issue should been made moot everywhere with the 2005 revisions to 11 U.S.C. §362(b)(2) .].  As the Third Circuit Court of Appeals had recently expanded the definition of “claim”, In re Grossman, 607 F.3d 114 (3d Cir., 2010) (claim arises when conduct giving rise to injury occurs) and In re Kane, 628 F.3d 631 (3d Cir., 2010) (spouse must list inchoate interest in equitable distribution as asset of the bankruptcy estate), the bankruptcy court judge was required to revisit the issue.  The reasons in favor of considering the nonfiling spouse’s interest in equitable distribution a claim included (1) the fairness of a parallel broad treatment of both property in 11 U.S.C. §541 and “claim” in 11 U.S.C. §101(5), (2) the precedent in a distinction drawn in Kane between interests in property (asset) and present rights to property (claim) should be limited to considering only what is property of the estate under 541, (3) the accrual of claims should be treated alike, whether they are product liability injuries or equitable distribution rights, and (4) the concerns about the dischargeability of pre-petition equitable distribution claims against spouses has been remedied by revisions to 11 U.S.C. §523(a)(5) and (15).

The bankruptcy court then reversed its previous reliance on Belingeri, as overruled by Grossman, and held the equitable distribution claim of the wife’s chapter 7 bankruptcy trustee should be allowed in the husband’s chapter 7 bankruptcy case.  The husband’s chapter 7 trustee appealed the bankruptcy court’s decision, and the U.S. District Court certified the case for direct appeal to the Circuit Court of Appeals.

On appeal, the Third Circuit Court of Appeals clarified the wife’s actual interest in equitable distribution to be a partnership interest held in the husband’s name alone, presumed to be marital property subject to equitable distribution in New Jersey, N.J. Stat. Ann. § 2A:34-23.1.  The court noted that if the claim were held to be a prepetition claim, wife could share in the distribution in the husband’s bankruptcy case, while wife would be left to merely the remains if the claim were a postpetition claim. [Although a Virginia divorce judge might still equitably divide marital property in light of such a consequence].  The court noted that the wife’s claim, even though unliquidated, contingent, and perhaps unmatured, was still literally a claim under 11 U.S.C. §101(5), as “…a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured..”.  The court recognized in its decision in Grossman that Congress and the Supreme Court had indicated that the defined term “claim” should be given the broadest application.  The appellate court rejected the trustee’s argument that Grossman should be limited to tort cases, and instead, held that the broader definition of claim was applicable to all types of cases.  Recognizing that the wife had a prepetition claim to equitable distribution also made sense in light of the court’s previous decision in Kane, that such an interest must be disclosed as an asset in a bankruptcy case.  The recognition of a prepetition claim in equitable distribution after a divorce case has been filed respects state property law, as N.J. recognizes the marital estate was in the custody of the law at that point.  Carr v. Carr, 576 A.2d 336 (1990) .  Consequently, the appellate court affirmed the bankruptcy court’s allowance of the prepetition claim for equitable distribution.

You should consult with your Virginia bankruptcy and divorce attorney, or Richmond divorce lawyer James H. Wilson, Jr., as to your rights in a spouse’s bankruptcy case pending a divorce.

Does a divorce attorney have standing to contest the dischargeability of attorney’s fees as a domestic support obligation in bankruptcy?

Does a divorce attorney have standing to contest the dischargeability of attorney’s fees as a domestic support obligation in bankruptcy?

Yes, in the case of Collins v. Solomon, Case No: 12-14664 (Oct. 29, 2013) where the United States District Court for the Eastern District of Virginia denied the husband’s motion to dismiss an adversary proceeding filed in the U.S. Bankruptcy Court, Eastern District of Virginia, by wife’s former divorce lawyer.

In Collins, the wife had been granted a final decree of divorce in a state other than Virginia.  The final decree of divorce included a provision for the award of wife’s attorney’s fees of $39,500 payable to wife’s divorce lawyer in monthly installments of $5,000 until paid in full.  In making its award, the divorce court cited the Virginia Supreme Court case of Chawla v. Burgerbusters, 255 Va. 616, 499 S.E.2d 829 (1998) in support of the reasonableness of the substantial award of attorney’s fees to wife, due to the husband’s intentional concealment of his income and business records in the divorce case.

Following the divorce case, the husband filed for chapter 13 bankruptcy relief in the U.S. Bankruptcy Court for the Eastern District of Virginia.  Chapter 13 bankruptcy is favored by former spouses after a divorce because it allows the former spouse to discharge a non-domestic support obligation debt owed to a former spouse, former spouse, or child of the debtor that was incurred in the course of a separation or divorce, or in connection with a separation agreement, divorce decree or court order.  11 U.S.C. §1328(a).   In his bankruptcy case forms filed, the husband listed the wife’s divorce attorney as a general unsecured creditor on his Schedule F, rather than a priority creditor for a domestic support obligation on his Schedule E.  The wife and her attorney filed an adversary proceeding in the bankruptcy court seeking a determination that the attorney’s fees debt owed to wife’s attorney was both a priority debt under 11 U.S.C. § 507(a)(1)(A) and a nondischargeable debt under 11 U.S.C. §523(a)(5) as a “domestic support obligation”, as defined in 11 U.S.C. 101(14A).  In general, priority debts must be paid in full under a debtor’s confirmed chapter 13 plan.  Domestic support obligations cannot be discharged in bankruptcy under any chapter of the bankruptcy code.

Almost a year after the husband’s chapter 13 bankruptcy filing, the wife filed a chapter 7 bankruptcy case pro se in the United States Bankruptcy Court for the Eastern District of Virginia.  She also terminated her relationship with the divorce attorney who was owed fees by the ex-husband in his chapter 13 bankruptcy.  In her chapter 7 case, the wife sought, and later obtained, a discharge of the debt owed to her divorce lawyer.  The husband filed a motion to dismiss the adversary proceeding on the grounds that the debt owed to the wife’s former lawyer was now no longer “in the nature of support”, and thus could not be a domestic support obligation .  Further, the husband argued that wife’s divorce lawyer lacked standing to be a party Plaintiff in the adversary proceeding against the husband in his bankruptcy case because the wife was no longer asserting her claim for attorney’s fees against husband.  The husband also alleged the separation agreement between husband and wife represented a settlement of any claims between them, and included a provision whereby each party was responsible for his or her own counsel’s fees and costs.

The Bankruptcy court judge ignored the separation agreement between the parties, as it had not been incorporated into the final decree of divorce, was therefore not properly part of the record for consideration.  On appeal, the U.S. District Court held that, even if part of the record, the separation agreement would not have supported the husband’s argument.  The U.S. Bankruptcy Court denied the husband’s motion to dismiss the adversary proceeding and declared that the attorney’s fees owed to wife’s attorney were nondischargeable in the husband’s chapter 13 bankruptcy case under 11 U.S.C. §523(a)(5) as a domestic support obligation.  The husband appealed the bankruptcy court’s decision to the U.S. District Court, where the matter was decided on the briefs, without oral argument.

On appeal, the parties agreed that the only issue was whether the wife’s former divorce lawyer was a proper party to bring the nondischargeability complaint in the bankruptcy court.  The U.S. District Court for the Eastern District of Virginia first recognized the standard of review in bankruptcy appeals: fact findings would be set aside if clearly erroneous, citing Bankruptcy Rule 8013, and legal issues, or mixed issues of law and fact, were decided de novo, citing In re: Johnson, Canal Corp v. Finnman, 960 F.2d 396 (4th Cir., 1992) .  The court then noted that the bankruptcy court judge relied on the final decree of divorce in reaching its holding that the wife was the real party in interest, with payment to be made to her attorney.  Under Federal Bankruptcy Rule 4007(a), the debtor or any creditor may file a complaint to determine the dischargeability of any debt.  “Creditor” is defined in 11 U.S.C. §101(10) as an “…entity that has a claim against the debtor…” and a “claim” is defined in 11 U.S.C. §101(5) as a “…right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured…”

The U.S. District Court disregarded the husband’s reliance on In re Macys, 115 B.R. 883 (EDVA, 1990) decided in the Richmond Division, because that decision did not include the specific language of the final decree of divorce, thus rendering it impossible to understand the basis for the decision.  The court instead found the decision in In re Bulman, 123 B.R. 24 (1990) to be on point.  In Bulman, the bankruptcy court held both the spouse, to whom an award of attorney’s fees was made, and the attorney, to whom the fees were to be paid, had a sufficient interest in the payment of the attorney’s fees to make each of them a real party in interest.  As the wife alone had filed an adversary proceeding in Bulman, the attorney was required to submit a letter indicating his ratification of the filing.

The U.S. District Court also noted decisions from two other circuits, one from the Second Circuit Court of Appeals in In re Spong, 661 F.2d. 6 (1981) and one from the Ninth Circuit Bankruptcy Appellate Panel in Matter of Gwinn, 20 B.R. 233 (1982).  In Spong, the husband and wife entered into a separation agreement under which the husband agreed to pay wife’s attorney’s fees to her attorney.  The agreement was incorporated into a final decree of divorce.  The Second Circuit Court of Appeals held in Spong that the attorney was entitled to file a dischargeability complaint as a third party beneficiary of the agreement.

Similarly, in the Gwinn case, the divorce court judge ordered the husband to pay the wife’s attorney for her legal fees incurred in the divorce.   When the lawyer filed a nondischargeability complaint against the debtor husband, the bankruptcy court granted summary judgment to the debtor husband, ruling that the divorce lawyer lacked standing to claim nondischargeability under the literal wording of 11 U.S.C. §523(a)(5) and 11 U.S.C. §101(14A), as he was not a “…spouse, former spouse, or child of the debtor…” and the debt did not satisfy the not “assigned to a nongovernmental entity…” requirement of a domestic support obligation.   Citing the Second Circuit’s decision in Spong, the Ninth Circuit BAP reversed the bankruptcy court and ruled the debt was not dischargeable and had not been assigned to the attorney.

Consequently, the appellate court in Collins held that the attorney had standing to bring a nondischargeability complaint against the debtor husband, whether the attorney was a party to the obligation or a third-party beneficiary, because the divorce court judge intended that the husband pay the wife’s attorney’s fees in the final decree of divorce.  Further, the court noted that bankruptcy court judges have equitable powers “…invoked to the end that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done…”, quoting Pepper v. Litton, 308 U.S. 295 (1939). [The bankruptcy court’s equitable powers are now codified in 11 U.S.C. §105].  In this case, the court concluded, it would be unjust to deny the wife’s attorney the attorney’s fees based on both the plain language of the final decree and the record of husband’s conduct in the divorce proceedings.

You should consult with your bankruptcy divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the dischargeability of attorney’s fees in your particular circumstances.

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

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 (10th 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 10th 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 10th 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?

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?

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?

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?

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.