Year: 2015

Can property received under a separation agreement after bankruptcy become property of the estate?

Generally, the property of the estate for bankruptcy purposes is determined as of the date of filing bankruptcy.  11 U.S.C. 541.  Property of the estate is very broad and includes every type of legal and equitable interest that the debtor has in every type of property.  It also includes community property of the debtor and the debtor’s spouse that is under the sole, equal, or joint management and control of the debtor, or subject to a claim against the debtor or the debtor and his or her spouse.  Property of the estate also includes interests in property recovered by the trustee as unreasonably excessive bankruptcy legal fees for debtor representation, 11 U.S.C.329(b), bid rigging in a sale of property, 11 U.S.C. 363(n), , from a custodian of property of the estate, 11 U.S.C. 543, from transferees of avoided transfers such as statutory liens, preferences and fraudulent transfers, 11 U.S.C. 550, of certain mutual offsets resulting in an “insufficiency” within 90 days before filing, 11 U.S.C. 553, and claims of partnership against general partners, 11 U.S.C. 723.

Earnings from services performed by the individual debtor after filing are not property of the estate, but property of the estate does include post-petition proceeds, products, offspring, rents and profits of property of the estate.

Property of the estate includes property acquired within one hundred eighty (180) days after filing by bequest, devise, or inheritance, as the beneficiary of a life insurance policy, and as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree.  These latter provisions were intended to discourage someone from discharging debts in anticipation of receiving money or property from an inheritance, life insurance policy, or the terms of a separation agreement or divorce decree.

You should consult with your Virginia bankruptcy or divorce attorney to discuss whether property of your bankruptcy estate will include any property from your separation or divorce.

Is a trust fund tax liability from husband’s business a marital debt in Virginia subject to apportionment in equitable distribution?

In the case of Gilliam v. McGrady, the Court of Appeals of Virginia reversed a trial court decision that a trust fund tax liability was a marital debt and sent the case back to the divorce court for further findings.

The parties were married for fifteen years before separating.  During the marriage, husband started a painting company.  Husband ran the company alone and was solely responsible for signing company checks.  The husband refused to discuss his business and its financial condition with his wife.  The wife’s parents helped support the couple’s lifestyle, which included private schools for their children and membership in a private country club.  Each party blamed the other for the couple’s overspending.  Instead of transferring funds to a joint personal account, the husband paid family bills from the company account.  While he operated the business, the husband failed to pay payroll taxes due the federal government.

Under the Internal Revenue Code, 26 U.S.C. 6672 an employer holds withholding taxes, federal income taxes and social security, as special funds in trust for the United States.   .  The officers of the company who are responsible for withholding and paying over these trust fund taxes and who willfully fail to do so become personally liable for the trust fund taxes along with the company.

When the wife discovered that husband was not paying payroll taxes, she hired an accountant to organize the husband’s business records and prepare its tax returns.  The husband terminated the accountant’s services after several months.  The wife began filing a separate tax return the following year.

The divorce court found that the payroll tax debt was a marital debt because the parties overspent, failed to discuss their budget, were equally at fault for not budgeting, knew the taxes were not being paid, and paid other bills instead of the taxes.  The divorce court judge found that funds which would have been used to pay the payroll taxes were instead used to pay the living expenses and other marital debt.

On appeal, the Virginia Court of Appeals first recognized the trial court’s authority for the apportionment of debt in equitable distribution in Section 20-107.3(A) of the Code of Virginia.  The court next recognized a logical extension of the presumption that property acquired by either spouse during the marriage and before the last separation is marital property to marital debt, so debt acquired by either party during the marriage should be presumed to be marital debt.  In classifying debt as separate or marital, the divorce court judge must consider the purpose of the expenditure, with particular attention to who benefited from the debt.  The Court of Appeals found error in the trial court’s approach in this case because the judge did not discuss the purpose of the original debt.  The divorce court judge should have considered who benefited from the original debt rather than the failure to pay the debt, noting that debt from any criminal activity such as gambling, criminal fines, or restitution could otherwise be found to be marital debt.  The Court of Appeals noted that the trial court’s ruling created an anomalous situation in which the husband had bettered his position by the crime of failing to pay his trust fund tax liability.  The trial court had correctly ruled that wife had the burden of proving that the trust fund taxes were not a marital debt, despite the cumbersome nature of husband’s records.  The case was remanded, or sent back, to the Virginia Circuit Court judge for further proceedings on the purpose of the trust fund tax debt and who benefitted from it.

You should consult with your Virginia divorce lawyer concerning the apportionment of debts incurred during your marriage.

 

Will husband’s underreporting of his income justify a denial of his motion to modify spousal support following the bankruptcy of his former employer?

In the unpublished opinion of Argabright v. Argabright, the Virginia Court of Appeals upheld the decision of the Virginia Circuit Court denying the husband’s motion to terminate or reduce spousal support following the loss of a pension following the bankruptcy of his former employer.

At the time of the divorce, husband made approximately $100,000 a year from Chesapeake Corporation and wife was unemployed.  The husband was ordered to pay $2,400 a month in spousal support to wife.  The husband remarried a month later.  Ten years later, he retired from his employment with Chesapeake Corporation.  The husband received income from four sources: social security in the amount of $1,686 a month, two defined benefit plans or pensions from his former employer for $1,976 and $2,496 per month, and dividends and interest.  When Chesapeake Corporation filed for bankruptcy twelve years later, husband lost his pension of $2,496 per month and filed a motion to modify or terminate his spousal support obligation.

At the time of the hearing, the wife was working part-time making less than $11 an hour for 20-28 hours a week.  Husband had withdrawn money from an IRA, after accumulating more than $65,000 in a taxable account and $434,000 in an IRA.  As is customary during a support hearing, husband submitted an income and expense statement and testified about his income and household expenses.  The court found husband’s testimony and income and expense statement to be incredible and denied his motion.

On appeal, the Virginia Court of Appeals would not consider any of the husband’s questions presented as husband had failed to cite any legal authority to support his arguments, as required by Rule 5A:20(e) of the Rules of the Supreme Court of Virginia:

“The opening brief of appellant shall contain…

(e) The principles of law, the argument, and the authorities relating to each question presented. Where the question was not preserved in the trial court, counsel shall state why the good cause and/or ends of justice exceptions to Rule 5A:18 are applicable. With respect to each question, the principles, the argument, and the authorities shall be stated in one place and not scattered through the brief. At the option of counsel, the argument may be preceded by a brief summary.”

This case illustrates both the importance of truthfully presenting a party’s testimony and evidence at a hearing on a motion to modify support and the consequences of failing to follow the rules of appealing a case.

You should consult with your Virginia family law attorney concerning the best way to present evidence to justify a modification or termination of spousal support.

Can alimony increase after a Virginia divorce above the standard of living established during the marriage?

In Ramberg v. Ramberg, Civil Action No: 55466, the Circuit Court of Loudoun County, Virginia, ruled that support could not be modified in excess of the standard of living established during the marriage.

In Ramberg spousal support or alimony of $2,500 a month was set while the husband made approximately $11,250 a month and wife made approximately $1,250 a month and wife had custody of the two minor children of the parties.  Under Section 20-108.1(A)  of the Code of Virginia, the court shall consider all relevant evidence presented to the divorce court judge, relevancy depending upon the facts and circumstance of each particular case.  Under Section 20-109(A) of the Code of Virginia a party can petition a court for a modification of support, that is, an increase, decrease, or termination of support, as the circumstances may make proper.  In Virginia, this requires a showing of a material change in circumstances that warrants a modification of support.  Floyd v. Floyd, 1 Va. App. 42, 333 S.E.2d 364 (Va. App. 1985).  The Ramberg divorce court stated the rules on proving such a change: it must be shown by a preponderance of the evidence; it must relate to the financial needs and abilities of the parties, and it must be based on their current circumstances.  The judge pointed out a difference between modifications of child support and spousal support – while child support can increase beyond the standard established during the marriage under the parental generosity principle, Conway v. Conway, 10 Va. App. 653 (Va. App. 1990), spousal support is limited to the standard of living of the parties during the marriage based on Section 20-107.1(E)(2) of the Code of Virginia.  Consequently, increases in the payor spouse’s income do not necessary justify an increase in alimony or spousal support for the payee spouse.

In Ramberg, the parties had initially agreed to $3,000 a month in spousal support at the time of the divorce.  Three years later, spousal support was decreased by the court to $2,500 due primarily to an increase in the wife’s monthly income.  By the time of the instant case, wife had become permanently disabled due to fibromyalgia and was unable to work.  Her income had decreased to $146 a month.  The court refused to allow the fact that the parties’ two children had become emancipated to affect its decision on spousal support, noting that the money received for child support is not paid to benefit the payee parent.   Nevertheless, in light of the wife’s decreased income and increased expenses, the Ramberg court modified spousal support up to $3,250, an amount the court found equivalent to the parties’ initial agreed-upon amount based upon the parties standard of living established during the marriage.

You should consult with your Virginia divorce lawyer concerning any limitations on the amount of spousal support you can receive.

Is wife’s half of husband’s retirement benefits a property interest of hers or a debt dischargeable in bankrupt?

Although the decision was based on the Bankruptcy Code as it existed in 1990, the case of Brogan v. Brogan, 31 Va. App. 769, 525 S.E.2d 618 (Va. App. 2000), which held that the wife’s interest was a property interest, not a debt dischargeable in bankruptcy, is historically useful for its analysis of a debt in the context of family law issues.

As discussed in Brogan, before the 1994 amendments to the Bankruptcy Code, spousal and child support obligations were the only marital debts not dischargeable in bankruptcy.  The inquiry was whether a given debt was “in the nature of alimony or support” or was a division of property.  The 1994 amendments added Section 523(a)(15) in an attempt to prevent spouses from discharging sums other than alimony owed to the other spouse under a property settlement agreement.  Brogan v. Brogan, 31 Va. App. 769, 778, 525 S.E.2d 618, 623 n.5.  With the addition of Section 523(a)(15) in 1994 until its revision in 2005, nonsupport family law debts could be declared to be nondischargeable in Chapter 7 with the filing of an adversary proceeding within 60 days of the meeting of creditors unless the debtor could not reasonably pay the debt or the benefit of the discharge outweighed the harm to the spouse, former spouse or child.

The current statutory basis for the dischargeability of family law debts in consumer bankruptcy cases after the wholesale revision of the Bankruptcy Code following the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is contained in Title 11 of the U.S. Code, in several sections as follows:  Sections 101(14A) defining “domestic support obligation”, Section 523(a)(5) and (15), containing “Exceptions to Discharge”, and Sections 727, 1141 and 1328(a) delineating the discharge in bankruptcy under the various chapters.

In a nutshell, after the 2005 amendments to the Bankruptcy Code, “domestic support obligations” are not dischargeable in chapters 7 or 13.  Some family law debts that are not domestic support obligations may be dischargeable in chapter 13, but may not be discharged in a chapter 7 case or with a chapter 13 hardship discharge.

In Brogan, the husband and wife had entered into a written stipulation agreement (also known as a separation agreement or property settlement agreement) under which wife became entitled to one-half of husband’s gross retirement funds, to be paid directly to wife.  The agreement was incorporated into the final decree of divorce between the parties.  The husband filed chapter 7 bankruptcy two months later and received a discharge of his debts.  Nine years later, the wife filed a petition for an order to show cause in the Virginia Circuit Court that granted the divorce because she was not receiving her share of her former husband’s retirement funds.  The husband claimed that the obligation was a debt that had been discharged in bankruptcy and that the Virginia divorce court lacked jurisdiction, or the power to hear, the dischargeability of the obligation.  The divorce court judge held that the obligation was not a debt subject to discharge in bankruptcy, but was instead a division of property.  The Virginia Circuit Court judge entered judgment in favor of the wife for the disputed amount and found husband in contempt for his failure to pay the disputed amount.

On appeal, the Virginia Court of Appeals held that the bankruptcy court and Virginia Circuit Courts have concurrent jurisdiction to determine whether an obligation was a debt under the bankruptcy code and whether it arose pre-petition (before filing) or post-petition (after filing), citing 28 U.S.C. 1334(b).

Brogan v. Brogan, 31 Va. App. 769, 774, 525 S.E.2d 618, 621.

The Virginia Court of Appeals recognized that the bankruptcy courts have exclusive jurisdiction over the dischargeability of debts based on fraud, false pretenses, use of a false financial statement in writing, larceny, embezzlement, and willful and malicious injury which require the filing of a complaint under Section 523(c).

In this case, the appeals court held that the husband’s obligation was not a debt within the meaning of the bankruptcy code and that filing bankruptcy could not give the husband greater interests in the retirement plan than what he had before filing.  Citing Section 541(d) of the Bankruptcy Code, the court concluded that Virginia law governed what property interests the spouses had in the retirement funds.

In some states, courts have imposed a constructive trust upon retirement funds held by a spouse for the benefit of the other spouse.  In Brogan, the court ruled that the language in the agreement that wife’s share was to be paid directly to her “was sufficient under Virginia law to give wife a separate property interest in husband’s future benefits.” Brogan v. Brogan, 31 Va. App. 769, 776, 525 S.E.2d 618, 622.  The court also ruled, alternatively, that the wife’s share was not a pre-petition debt because the payments were not yet due and payable at the time the bankruptcy was filed.

You should consult with your Virginia bankruptcy or divorce lawyer concerning the dischargeability of family law debts in bankruptcy.

Can a Virginia divorce court judge enforce discovery sanctions despite a bankruptcy filing through equitable distribution?

In the case of Spreadbury v. Spreadbury tried in the Circuit Court of Fauquier County, Case No: CH04-125 (February 20, 2009) and affirmed on appeal to the Virginia Court of Appeals, a judge enforced his discovery sanctions order by providing that wife would receive no less than a certain amount for her unsecured creditors.  The case started when wife filed for a divorce in the Virginia Circuit Court.  Husband sent discovery requests, Interrogatories and Requests for Production of Documents, to wife which wife failed to answer.  Husband filed a motion to compel wife’s responses to discovery.  The husband and wife then settled the case before trial.  On the original trial date, the wife disavowed the settlement and the parties continued discovery with a new trial date.  The husband filed a second motion to compel responses to discovery and the case was rescheduled for a trial.  The court entered an order compelling wife to answer husband’s interrogatories.  The husband filed a motion for sanctions.  When wife still refused to answer discovery, the divorce court judge entered an order limiting wife’s opposition to husband’s claims and defenses and limiting the evidence that wife could introduce at trial.

After the discovery sanctions order was entered, the wife filed a chapter 11 bankruptcy case.  The bankruptcy court judge modified the automatic stay to allow the divorce case to proceed to trial with the condition that the wife would have the rights of a debtor in possession with all the claims and defenses of a chapter 11 trustee, without the limits imposed by the Virginia divorce court’s discovery sanctions order, including the trustee’s avoiding powers as a hypothetical judicial lien creditor, creditor with an execution, or bona fide purchaser under Section 544(a) of the Bankruptcy Code. 

The divorce case trial was rescheduled again for 8 months later.  Although the husband and wife each introduced evidence of fault grounds at trial, the divorce court judge granted the parties a no fault divorce.  The judge recognized that the wife’s bankruptcy filing was an attempt to collaterally attack the previous discovery sanctions order.  In order to protect the rights of the wife’s unsecured creditors, the divorce court judge accepted the husband’s proposed stipulation that the total sum owed to the wife’s unsecured creditors was approximately $691,000 and that the wife would receive at least that amount in the divorce before any evidence was presented to the court.  The court approved the husband’s stipulation because it obviated the Bankruptcy Court’s concern for wife’s unsecured creditors and upheld the integrity of the divorce court judge’s order and the discovery process necessary for equitable distribution.  The court upheld its previous sanctions order with the provision for at least $691,000 to wife’s creditors.  Since the wife was barred from introducing evidence of matters in discovery, the court accepted, in general, husband’s evidence of the valuation of marital property and debts.

The wife disputed the trial court’s jurisdiction over, or right to adjudicate, the property held by the couple in a revocable, intervivos trust, including the marital residence, the parties’ most valuable asset.  The divorce court judge held that the property in trust was still marital property as the parties had reserved the right to remove the property from the trust.  The judge divided the equity in the marital residence 65% to husband and 35% to wife, with a 50-50 split of the other assets.  The divorce court judge provided that the equitable distribution order, the division of property and debts, should be consistent with, and subject to, the relief from stay order in the wife’s bankruptcy case and to the review of the bankruptcy court.  The divorce court judge retained jurisdiction of the case to allow the parties to submit the order to the bankruptcy court for approval, and to petition the divorce court to modify its opinion consistent with the bankruptcy court’s order.  As the wife had been barred from presenting evidence on her need for spousal support, the divorce court judge did not award any spousal support to wife.  In addition, the judge awarded husband $75,000 in attorney’s fees for the abusive procedural actions of the wife.

You should consult with your Virginia bankruptcy or divorce lawyer concerning the effects of a bankruptcy filing on orders entered in a divorce case.

Can a husband or wife get a second chance to stop a foreclosure sale of the marital residence in a chapter 13 bankruptcy case?

Yes, a husband or wife can often get a second chance to stop a Virginia foreclosure sale in a chapter 13 bankruptcy case.  As discussed in answer to the question, “Must both husband and wife file bankruptcy together to protect the marital residence from a foreclosure sale in Virginia?”, a bankruptcy filing by either spouse can protect the marital residence from a foreclosure sale.  Unfortunately, not all chapter 13 bankruptcy cases are completed successfully without any problems.  In fact, statistics inform us that only about a third of all chapter 13 cases are successfully completed.  Bankruptcy By The Numbers, Measuring Performance in Chapter 13: Comparisons Across States, Gordon Bermant and Ed Flynn (1998).

The husband or wife filing bankruptcy may lose a job, suffer an illness, or encounter unanticipated emergency expenses that prevent that spouse from making the mortgage payments or the plan payments.  The repercussions of a default in payments could be a motion for relief from the automatic stay filed by the mortgage lender or a motion to dismiss filed by the chapter 13 trustee.  What are the remaining options for saving the marital residence?

In the event of missed mortgage payments, the debtor spouse may file a modified chapter 13 plan that includes the missed post-petition mortgage payments in the arrearage amount to be cured under the plan if equitable grounds exist, as recognized in Matter of Mendoza, 111 F.3d 1264 (C.A.5 (Tex), 1997).

In the event of missed plan payments, the debtor spouse may file a modified plan to match the proposed chapter 13 plan payments to the actual plan payments made, thus curing a default in plan payments.  Alternatively, the debtor spouse may allow the case to be dismissed on the chapter 13 trustee’s motion, preserving the debtor spouse’s right to refile a second chapter 13 case if and when conditions improve and start over in a better position.

Alternatively, the nonfiling spouse on title to the marital residence, or liable on the mortgage loan, may decide to file a chapter 13 bankruptcy case to stop a foreclosure sale and cure the mortgage arrearage through a plan.

Finally, even though the mortgage lender may have obtained relief from the automatic stay in bankruptcy, the mortgage lender may still be willing to enter into a modification agreement or forbearance agreement with the homeowners.  All homeowners are encouraged to attempt to work out a solution to a mortgage default with their lenders in or out of bankruptcy, starting with the Making Home Affordable government website at http://www.makinghomeaffordable.gov/ Homeowners are well advised to be careful, however, about foreclosure rescue scams and mortgage modification scams promising high success rates, claiming insider information, and requiring money upfront.

You should consult with your Virginia bankruptcy attorney or divorce lawyer regarding all of your options to save the marital residence in the event of separation or divorce.

 

 

Must both husband and wife file bankruptcy together to protect the marital residence from a foreclosure sale in Virginia?

As answered in the question, “Do I receive protection from my husband or wife’s bankruptcy?”, the automatic stay in bankruptcy protects a debtor who files bankruptcy, and in some instances a codebtor, from collection actions and foreclosure proceedings against property of the debtor or of the bankruptcy estate.  A husband and wife who separate in Virginia may enter into a separation agreement or property settlement agreement in which one of the spouses remains in the marital residence pending a sale or refinance of the property.  The purpose of the agreed upon sale or refinance is to release the liability of the spouse who is not occupying the property or agrees to transfer title.  The husband or wife may agree to make the mortgage payments in lieu of support or to preserve the property until its final disposition.  In some cases, the husband or wife with physical custody of the children may wish to remain in the marital residence until all of the children reach the age of majority.

Alternatively, a court may order either the husband or wife to make the payments on the mortgage secured by the former marital residence, while the divorce case is pending so the property will be available as a residence and for equitable distribution, or as a debt apportioned between the parties.  Such a court order in a Virginia divorce case normally would not bind third parties such as the mortgage lender who holds a note secured by a lien against the property.  After a foreclosure sale of the marital residence, the note holder could look to either the husband or wife, or both, for collection of any resulting deficiency in the payment of the note.

During the recent economic recession, more and more separated couples are not able to sell or refinance the marital residence due to a lack of equity in the property.  In some instances, the spouse who has agreed to make the mortgage payments, or who has been ordered to make the mortgage payments, is not able to keep up with all his or her financial obligations and the mortgage will go into default.

Will the marital residence be protected from a threatened foreclosure sale by a bankruptcy filing by either the husband or wife?  Yes, if the spouse filing bankruptcy is on the title to the real property or is a borrower on the promissory note secured by a deed of trust or mortgage on the real property, a bankruptcy filing by that spouse alone will stop a foreclosure sale of the real property in Virginia.  It is not necessary for both husband and wife to file bankruptcy together as all the owners, or all the borrowers, in order to realize the benefits of the automatic stay in bankruptcy with respect to the marital residence; a filing by either spouse with an interest in the property or liability to the lender on the loan is sufficient.  While a chapter 7 bankruptcy case by either husband or wife will temporarily delay the threatened foreclosure sale of the marital residence unless other arrangements can be reached with the lender, a chapter 13 bankruptcy case by either husband or wife can allow the parties to keep the house and cure the arrearage in the chapter 13 plan.

You should consult with your Virginia bankruptcy attorney to discuss how a bankruptcy filing may be used to preserve your marital residence.

Will a Virginia divorce court set aside an unfair separation agreement if it leaves wife in necessitous circumstances?

Yes, when the gross disparity in the division of assets in a property settlement agreement or separation agreement is so extreme as to prove pecuniary necessities, the contract can be set aside as unconscionable because the state has an interest in preventing the wife from becoming a public charge.  Sims v. Sims, 55 Va. App. 340, 685 S.E.2d 869 (Va. App. 2009).  In the Sims case, the husband and wife separated after 38 years of marriage.  The wife had only a third grade education and suffered from numerous health problems, including diabetes, arthritis and mood swings.  The husband and wife entered into a separation agreement or property settlement agreement prepared by husband’s attorney in which wife gave up spousal support, gave up the joint marital residence with $200,000 in equity in return for husband’s promise to pay the mortgage, and gave up her interests in husband’s retirement plans in return for a pickup truck and her “yard sale” belongings.  Later, in the divorce case, the wife asked the judge to set aside the agreement as unconscionable.  At the time of the divorce court hearing, wife was totally disabled and receiving food stamps.  The trial court found the property settlement agreement to be unconscionable on the grounds of the gross disparity in the division of marital assets.  Husband filed a motion for reconsideration and the trial court reversed itself, finding the agreement valid because wife had not met her burden of proving any overreaching or oppressive behavior by husband.  The property settlement agreement was incorporated into a final decree of divorce.

The Virginia Court of Appeals reversed the divorce court judge and remanded, or sent back, the case to the trial court.  The appeals court first recognized that the recitations in a separation agreement create a prima facie presumption that they are factually correct.  In this case, the recitations of fairness in the agreement put the burden on the wife to prove by clear and convincing evidence that the agreement was unconscionable.  Next, the court recognized that the trial court must find two elements to set aside a property settlement agreement as unconscionable in Virginia, (1) a gross disparity in the division of assets and (2) overreaching or oppressive influences.  The court recognized, however, that a marital contract is different from an ordinary commercial contract because the relationship between a husband and wife is particularly susceptible to overreaching and because the state has an interest in preventing a spouse from becoming a public charge. After analyzing Virginia case law, the Sims court concluded that when the gross disparity in the division of property is so extreme as to prove pecuniary necessities, it establishes both elements of the unconscionability test.  In this case, the evidence established, as a matter of law, both extreme inequality in value and pecuniary necessity along with a degree of infirmity.  The wife agreed to a grossly unfair division of assets, the wife was destitute and not capable of supporting herself, and the wife suffered from infirmities.   In Sims, the Virginia Court of Appeals recognized that a separation agreement cannot be so unfair as to leave a destitute spouse in need of public assistance.

You should consult with your Virginia divorce lawyer regarding whether your separation agreement or property settlement agreement is so unfair as to be voidable as unconscionable.

 

Is a Virginia divorce court required to apply any particular formula, like those from the Brandenburg or Keeling cases, consistently to trace separate and marital interests during equitable distribution?

No, a Virginia divorce court is not required to apply either the Brandenburg formula or the Keeling formula or any particular formula consistently, as long as the outcome is equitable.  In the published opinion of Rinaldi v. Rinaldi, 53 Va. App. 61, 669 SE2d 359 (Va. App. 2008), the Virginia Court of Appeals reviewed a divorce court judge’s decision to use two different formulas in equitable distribution of the parties two parcels of real estate.  The husband owned a house in the City of Richmond titled in his name alone.  After the parties married, they moved into his house and later refinanced it with a joint mortgage loan.  The husband received an inheritance from his mother two years after the parties were married, which would be considered separate property under Virginia law.  He used a portion of that separate property along with a small amount of marital property as a 25% down payment on a parcel of riverfront property.  The husband and wife used marital funds to pay the mortgage on the riverfront property.  The property appreciated substantially during the marriage.  During the course of the party’s marriage, wife earned more than twice as much as husband, as wife worked as a lawyer and husband tended to a construction business on an unsteady basis.  Wife testified that husband had used marijuana on a daily basis which hurt his business and his family life, ultimately causing wife to file for divorce.

The Virginia divorce court used two different approaches to tracing the separate and marital interest in the two parcels of real estate, the first approach having been established on the Kentucky case of Brandenburg v. Brandenburg, 617 SW2d 871 (Ky. App., 1981) and recognized in Virginia in Hart v. Hart, 27 Va. App. 46, 497 S.E. 2d 496 (Va. App., 1998) and the second approach having been established in Virginia in the case of Keeling v. Keeling, 47 Va. App. 484, 624 S.E.2d 687 (Va. App., 2006).  On the house in the City of Richmond, the judge used the Brandenburg approach, which can be summarized as dividing the equity in the property according to the same percentages of separate property contributions to total contributions and marital property contributions to total contributions.  On the riverfront property, the divorce court judge used a variation of the Keeling approach, which can be summarized as dividing the equity in the property according to the percentages of separate property contributions to the original purchase price with the balance of equity being marital property.  After determining what was separate and what was marital, the divorce court judge equitably divided the marital property 60% to wife and 40% to husband, based on wife’s greater monetary and nonmonetary contributions to the marriage.  Husband appealed, objecting to the division of marital property and that the judge used two different approaches to tracing separate and marital property in the real estate.

The Virginia Court of Appeals upheld the trial court judge’s decision.  The appeal court ruled that it had not adopted an exclusive method for tracing the separate and marital portions of hybrid property.  In Keeling the court had recognized that the Brandenburg formula could produce an unfair result when there is a significant down payment of separate property, a significant marital mortgage, substantial appreciation due to market forces, and no evidence that either the down payment or the mortgage disproportionately contributed to the couple’s ability to acquire and hold the property. Keeling, 497 Va. App. at 491, 624 S.E.2d at 690.  As long as the result was equitable, the divorce court judge could use the Brandenburg approach for the City of Richmond home and the Keeling approach for the riverfront property.  Furthermore, Virginia does not require that a spouse who retraces separate funds used to make a down payment on property held by the husband and wife together must be awarded appreciation in the exact percentage in which the divorce court judge awards appreciation on the marital share.  Addressing the division of marital property, the Virginia Court of Appeals restated the rule that there is no presumption of an equal distribution of marital assets, or that the divorce court must start with a 50-50% presumption.  The appeals court upheld the trial court’s 40-60 division of marital property based on the factors in Virginia’s equitable distribution statute, Section 20-107.3 of the Code of Virginia.

You should consult with your Virginia divorce lawyer concerning the various approaches to tracing separate and marital property during equitable distribution.