Year: 2016

Will a woman have to return the gift of an engagement ring in Virginia if she breaks off the engagement?

Yes. In Hicks v. Jordan, CL09-4244, the Circuit Court ruled that an engagement ring was a conditional gift, which upon the dissolution of an engagement had to be returned to the giver. Although this case does not directly concern bankruptcy or divorce, it does concern gifts made in contemplation of marriage.

In this detinue action under Section 8.01-114 of the Code of Virginia,   the Court examined the nature of gifts and held that the facts of the case established that the gift was made in contemplation of marriage, making it conditional upon the marriage union.  According to Lumsden v. Arbaugh, 207 Mo. App. 561, 564, 227 S.W. 868, 869 (1921), an engagement ring must be returned to the donor upon breach of the engagement due to its nature as a conditional gift.

In Pretlow v. Pretlow, 177 Va. 524, 544, 14 S.E.2d 381 (1941)  the Supreme Court of Virginia ruled similarly, stating, “If an intended husband makes a present, after the treaty of marriage has been negotiated, to his intended wife, and the inducement for the gift is the fact of her promise to marry him, if she breaks off the marriage, he may recover from her the value of such present.” Furthermore, in Hicks the Court found that Virginia’s Statute of Frauds, Virginia Code §11-2, did not present a bar to the plaintiff’s case in this detinue action for the wrongful detention of the engagement ring.  Accordingly, the Court held that the action was merited, ordered that the defendant return the ring to the donor, and affirmed that the defendant was estopped from pleading the statute of frauds.

You should consult with your Virginia family law lawyer to determine if you are legally entitled to the return of, or obligated to return, an engagement ring.

What techniques can minimize or avoid the effects of a bankruptcy in a Virginia separation or divorce?

There are a number of techniques savvy divorce counsel can employ to minimize or avoid the effects of a bankruptcy when his or her client is separating or divorcing in Virginia.  Two of the least effective, yet most common, approaches favored by divorce lawyers in the greater Richmond metropolitan area, including Chesterfield County, Hanover County, Henrico County, and the City of Richmond in separation agreements or property settlement agreements, are to declare all obligations to be support and/or to state that the agreement represents a bargained for exchange which creates support obligations.  These two approaches ignore three important aspects of bankruptcy law: (1) that labeling an obligation as a “domestic support obligation” does not make it a “domestic support obligation” as defined in the Bankruptcy Code; (2) that prepetition agreements, including an agreement that a debt be treated a certain way, may still be discharged in bankruptcy; and (3) that not every legal obligation under a separation agreement or divorce decree necessarily creates a matured, pre-petition “claim” dischargeable in bankruptcy.

Labeling an obligation as support may not be effective because Section 101(14A)(B) of Title 11 of the U.S. Code, the Bankruptcy Code, establishes that a “domestic support obligation” is “in the nature of alimony, maintenance, or support (including assistance provided by a government unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated…[emphasis mine]. A domestic support obligation is not a domestic support obligation because it is labeled as such; instead, it must include the four elements contained in the definition in 11 U.S.C. 101(14(A).

These common approaches also ignore a second fundamental aspect of bankruptcy – that it discharges certain agreements giving rise to a claim or debt.  If this were not the case, then every credit agreement would include a provision that the debt could not be discharged in bankruptcy.  Agreeing that a debt is nondischargeable does not make it nondischargeable.

Finally, these approaches may ignore the distinctly different types of divorce obligations in a separation agreement, and the impact of the timing of the bankruptcy itself.  For example, labeling the division of the spouses’ respective interests in jointly titled marital property as a “domestic support obligation” may be an unnecessary tradeoff in negotiations, as a breach of the obligation may not give rise to a dischargeable debt or “claim” under 11 U.S.C. 101(5), but instead simply reflect an interest in property.  Similarly, the debt or claim first must come into existence, through contract or equitable distribution, before it could possibly be discharged in the other spouse’s subsequent chapter 13 filing; if either spouse has already filed bankruptcy, inchoate rights or obligations may not be affected, and it may be a fruitless waste of bargaining position to discuss the dischargeability of debts in a separation agreement (particularly if relief from stay were not first obtained).

What are some effective techniques to employ?

• Create domestic support obligations as defined by the Bankruptcy Code. Instead of merely labeling an obligation as a domestic support obligation, make sure an obligation includes the four elements contained in the definition so that it will be, in fact, a domestic support obligation nondischargeable in any type of bankruptcy.

 

• Render your spouse ineligible for chapter 13 relief through debt allocation or division of liabilities. Since a chapter 13 bankruptcy may allow your spouse to discharge non-DSO family law debts defined in 11 U.S.C. 523(a)(15), you want to make your spouse unable to qualify for chapter 13 relief.  Here’s how you do it: there are limitations on the amount of debt, contained in 11 U.S.C. 109(e), (currently $383,175 in noncontingent, liquidated, unsecured debt and $1,149,525 in noncontingent, liquidated, secured debt) that an individual may have in order to qualify for chapter 13 relief.  By properly allocating an amount of either unsecured or secured, noncontingent, liquidated debt to your spouse in excess of the maximum amount allowed, you can render your spouse ineligible for the very type of bankruptcy that would allow your spouse to discharge non-DSO family law debts to you, at least for the time being.

 

• Make obligations payable to you and not to a third party. There is case law support for the notion that an obligation payable directly to a third party and not to the spouse does not fit within the definition of 11 U.S.C. 523(a)(15),  In re Forgette,  379 B.R. 621 (Bankr. W.D. Va., 2007), and is, therefore, not subject to the automatic stay, or nondischargeable in a chapter 13 case.  You may be better off requiring your spouse to pay you directly, instead of a third party, for certain obligations, particularly if you intend to remain in possession of property securing the payment of that obligation.

 

• Include indemnification and hold harmless provisions on obligations payable to third parties, then incorporate the agreement as soon as possible into a court order or decree. By taking these steps, you can improve your chances of enforcement by creating an obligation to you that is not simply based on a contract, but can also be enforced through the Virginia Circuit Court judge’s contempt of court powers.

 

• Make contemporaneous exchanges for new value given to prevent preferential payments and structure transfers to avoid voluntary or fraudulent transfers. If you spouse files chapter 7 bankruptcy, the chapter 7 trustee may attempt to avoid and/or recover transfers of property to you as voluntary or fraudulent transfers, or as preferences under 11 U.S.C. 547, as was successfully done recently in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division, in the case of Terry v. Prunty, In re: Paschall, Chapter 7 Case no:  07-32048.You should be careful to structure any transfers of property to minimize your exposure to these risks.

 

• Record any deeds and the separation agreement as soon as possible. As demonstrated in the Paschall case, you and your spouse meet the bankruptcy definition of an “insider”,  and you may gain an advantage by recording your separation agreement and any deeds as soon as possible so the one year period for preferential payments to insiders begins to run.

 

• Consider that acquiring or becoming entitled to acquire any interest in property as a result of a property settlement agreement or an interlocutory or final divorce decree within 180 days after filing bankruptcy, can relate back to the filing date and become property of the bankruptcy estate under 11 U.S.C. 541(a)(5)(B).

 

• Seek relief from the automatic stay immediately if your spouse files bankruptcy to pursue your state court rights and remedies. You may also need a court order allowing employment of counsel for the debtor in state court and approving any separation agreement.  There is some concurrent jurisdiction over family law matters in state court and bankruptcy court.  In general, you should have your separation and divorce matters decided by the Virginia Circuit Court judge experienced in family-law matters, and your bankruptcy matters decided by the U.S. Bankruptcy judge experience in bankruptcy matters.  Actions taken in violation of the automatic stay of bankruptcy may be void, so it is important for you to obtain relief from the stay as early as possible, should your spouse file bankruptcy, to commence or continue divorce matters in most appropriate court.  Waiting to see what happens in your spouse’s bankruptcy case may work to your disadvantage if you later try to assert your state law rights in bankruptcy court.

You should consult with your Virginia family law lawyer or bankruptcy attorney to discuss the best way to structure your divorce matters in contemplation of a possible bankruptcy filing.

Will gifts from wife’s father be considered marital property subject to equitable distribution in a Virginia divorce?

It depends upon the circumstances and the donative intent of the gift giver.  It is not unusual for parents to give gifts to their married children.  In Virginia equitable distribution proceedings, the question then becomes whether the gifts were intended to be separate property of the married child, or joint marital property of the couple.  In Cummings v. Cummings, CL09-1260, the Henrico County Circuit Court held that sale profits for a gift of a real property were subject to equitable distribution as marital property, but the gift of a Toyota Sequoia automobile to wife while the parties were separating should be classified as her separate property.

Prior to the parties’ marriage, wife owned a home on Hanover Avenue in Richmond, Virginia, as well as an automobile without any outstanding liens.  The parties lived in the Hanover residence after their marriage, but they subsequently sold the property, using the proceeds from the sale and gifts from wife’s parents to purchase a home in Goochland County and later a home in Henrico County, Virginia. Throughout the marriage, the wife’s father contributed significant funds to the parties, including child support due by his son-in-law for two children from a prior marriage, income from investments of his investment company, and annual gifts, all claimed as gifts by father for estate planning purposes.

In June 2001, the husband and wife bought a condominium at the Wintergreen Resort in Virginia for $300,000, a property they owned as tenants by the entirety.  For the initial down payment, the parties jointly paid $50,000, and they borrowed the remaining $250,000 from the wife’s father.  In January 2002, the wife’s father drafted a check to her for $132,226.76, which was used to pay off the Hanover Avenue home (which the parties agreed was separate property), as well as a check for $237,713.26 with the memo stating “Unified Credit Payoff Wintergreen mortgage.” After her father wrote the checks, wife repaid the balance of the mortgage on the Hanover property and later paid the remaining balance on the Wintergreen property.  Six years after the purchase of the Wintergreen property, the parties sold it for $522,507.00, the sum of which was divided into three accounts.

The issue in this Henrico County, Virginia, divorce proceeding involved the distribution of the three accounts and the classification of the property as marital or separate for equitable distribution purposes. In evaluating the factors established by Virginia Code §20-107.3, the Henrico County Circuit Court judge examined the monetary and non-monetary contributions of both parties, the debts and liabilities of the spouses, and whether wife’s father’s payments and financial assistance qualified as gifts to both parties, or to wife alone.  Under Virginia law, a gift requires three key elements: intent, delivery and acceptance, which must be established by clear and convincing evidence. To determine this fact, the Henrico County divorce court judge considered the unpublished case of Beck v. Beck, (2000 Va.App.), where, in a similar factual situation, the Virginia Court of Appeals stated, “The mere fact that the property acquired was jointly titled and was intended to be used as their residence, was insufficient to establish a gift by clear and convincing evidence.”  Here, however, the Henrico County Circuit Court found that making the Wintergreen property a gift for tax purposes required it to be made to both parties in order to receive the maximum tax benefit.  Husband’s divorce attorney had wisely introduced into evidence wife’s father’s gift tax returns which showed the maximum amount claimed for a gift to both husband and wife.  Based on the statutory factors of Virginia Code Section 20-107.3(E), the divorce court judge determined that the wife should receive 60% of the marital assets while the husband should receive 40%.  Each party received 50% of the marital share of the retirement funds.  In regards to the automobile, however, the father had given the SUV to the wife knowing that the parties were considering separation.  As a result, only wife received that property as a gift, and, as wife’s separate property, it was not subject to equitable distribution.  Therefore, the circumstances surrounding the gifts were determinative in their classification as marital or separate property.

You should consult with your Virginia divorce lawyer concerning how gifts received during your marriage would likely be classified in equitable distribution proceedings in a Virginia divorce.

http://www.vsb.org/site/publications/divorce-in-virginia/

Is a wife who waived her rights in a separation agreement entitled to receive ex post facto equitable distribution of husband’s military retirement funds in Virginia?

Not in the case of Savedge v. Barbour, No. 2713-09-1, where the Court of Appeals of Virginia, in an unpublished summary affirmance (under Rule 5A:27 of the Rule of the Supreme Court of Virginia of the trial court’s denial of wife’s motion for equitable distribution of her ex-husband’s military pension.

The parties were married for eighteen years and separated for two years before divorcing. During the marriage, the husband served in the military for nearly eighteen years. At the time that the parties signed their separation agreement military retirements were considered a “personal entitlement” not subject to equitable distribution under the U.S. Supreme Court case of  McCarty v. McCarty, 453 U.S. 210, 226-27 (1981).  Accordingly, in the separation agreement wife waived spousal support, “all interest or dower and any and all claims which [wife] has or might have for alimony and for support and maintenance or otherwise,” and her interest or rights in her husband’s property.  The parties’ separation agreement was incorporated into a final decree of divorce.  Subsequently, however, the Virginia General Assembly enacted Virginia’s equitable distribution statute, Virginia Code §20-107.3, a statute which allowed individual states to classify military retirements as either marital or separate property, and this enactment was made retroactive through June 25, 1981, the day before the McCarty decision.

Twenty-seven years later, wife filed a motion seeking equitable distribution of her ex-husband’s military retirement pay, arguing that the language in the separation agreement did not constitute a specific waiver of her interest in his military retirement. The Virginia Circuit Court judge, relying on Himes v. Himes, 12 Va. App. at 968, 407 S.E.2d at 696 (1991), held that the release and waiver of property in the separation agreement was sufficient for a waiver of interest in the husband’s retirement.

On appeal, wife argued that her waiver was not effective because it was not specific and because she could not have waived her rights to the military retirement because it was not a divisible asset until after the enactment of the USFSPA. The Virginia Court of Appeals denied wife’s claims, citing Himes: “[T]he fact that the retirement pension payments, at the time the contract was executed, may not have been considered property under McCarty, and therefore within the contemplation of the contract, nonetheless, Mrs. Himes was not entitled to any portion of the retirement benefits when the USFSPA ‘transformed’ his ‘entitlement’ into property because the terms of the contract were sufficiently inclusive to release and surrender claims to personal property ‘hereafter acquired.’ “

While wife asserted that the Court should consider the case of Nicholson v. Nicholson, 21 Va. App. at 238, 463 S.E.2d at 339 (1995) ( rather than Himes, the Court disagreed, distinguishing Nicholson as a case involving the waiver of rights to an annuity under the Foreign Service Act, 22 U.S.C. 3901, et seq. The Nicholson case, the Court stated, involved interpreting and applying a different federal statute that required an express waiver by a spouse. Here, the Court held that Himes controlled the outcome of the motion, because the property rights became vested when the parties signed the separation agreement and incorporated them into the final decree of divorce.

You should consult with your Virginia divorce lawyer concerning your rights in your spouse’s federal employment pension, annuity, or retirement benefits upon divorce.

Can a mother use the Uniform Interstate Family Support Act (UIFSA) to modify a Virginia child support order in a foreign state that is her and the children’s residence, but not the father’s?

Not in the case of Cuevas v. Cuevas, Case No. CL-2007-6974, in which the Circuit Court of Fairfax County, Virginia, ruled that the foreign state had personal jurisdiction over the father from his general appearance there, which allowed it to register, but not to modify, a Virginia child support order.

At the time of the parties divorce on August 29, 2007, the Plaintiff husband and father was a resident of Virginia, while the Defendant wife and mother was a resident of Puerto Rico with the parties’ three minor children.  Under the final Virginia divorce decree, the father was obligated to pay child support payments to the mother in Puerto Rico.

After the divorce was entered, the father moved from Virginia to North Carolina. The mother subsequently filed for a modification of the child support in Puerto Rico. The father appeared in Puerto Rico at the hearing, and the Puerto Rico court modified the child support issued by the Virginia divorce court judge.  Further, the Puerto Rico court issued an income withholding order to the father’s Virginia employer, requiring a garnishment of father’s wages for the payment of child support.   The father filed a motion to dismiss this order raising questions of whether the Puerto Rico court had personal jurisdiction over him and whether the modification was proper under Virginia’s Uniform Interstate Family Support Act (UIFSA).

The divorce court judge dismissed the father’s argument that Puerto Rico violated the federal Full Faith and Credit Child Support Orders Act contained in 28 U.S.C. Section 1738B, by registering the divorce decree in Puerto Rico without personal jurisdiction over him there.  The federal Full Faith and Credit Child Support Orders Act provides as follows:

“If there is no individual contestant or child residing in the issuing State, the party or support enforcement agency seeking to modify . . . a child support order issued in another State shall register that order in a State with jurisdiction over the nonmovant for the purpose of modification.”

The Virginia divorce court judge found that the father had submitted to personal jurisdiction in Puerto Rico simply by entering a general appearance, by appearing at the hearing on the issue of the child support modification. [A party can enter a special appearance only for the purpose of contesting the jurisdiction of the court without entering a general appearance, but father had not limited his appearance in this case.]

In addition, the father challenged Puerto Rico’s authority to modify the child support obligation under UIFSA. The appropriate code section, Section 611, establishes three criteria necessary to modify the order: “the child, individual oblige[mother], and the obligor [father] do not reside in the issuing State [Virginia]; a petitioner [mother] who is a nonresident of this State [Puerto Rico] seeks modification; and the respondent [father] is subject to personal jurisdiction in the tribunal of this State [Puerto Rico].” ().  [While a support order may also be modified under Section 613 of the Act, all the parties must be residents of the same state, and the child must not be a resident of the issuing state.  See Virginia Code Section 20-88.77:1.   In this case, the mother could not satisfy the second requirement under Section 611 of the UIFSA, as she was a resident of Puerto Rico. The court held that, as in the case of Van Dyke v. Van Dyke, 50 Va. Cir. 604, 612 (1998), the mother could not use the Uniform Interstate Family Support Act to modify a support order from a different state to her benefit in her home state.  Consequently, the Virginia Circuit Court judge dismissed the income withholding order.

You should with a Virginia family law attorney concerning the applicability of the Uniform Interstate Family Support Act to your situation.

Do husband’s transfers of his separate property into jointly-titled property with his wife create marital property subject to equitable distribution by transmutation in Virginia?

Not in the case of  William E. Jones v. Donna M. Jones, Record No. 2428 (2009), where, in an unpublished opinion, the Court of Appeals of Virginia reversed the Circuit Court’s holding that the assets were gifts to the wife, ruling that the wife had not met her burden of proving donative intent by clear and convincing evidence.

The first step in equitable distribution in a Virginia divorce case is classifying all property of the husband and wife as separate, marital, or hybrid – part marital and part separate.  Under Virginia Code Section 20-107.3(A)(3)(f), a divorce court judge can find marital property by the process of transmutation: “When separate property is retitled in the joint names of the parties, the retitled property shall be deemed transmuted to marital property. However, to the extent the property is retraceable by a preponderance of the evidence and was not a gift, the retitled property shall retain its original classification.”

The husband in Jones alleged that the divorce court judge erred by finding that a jointly titled investment account and a parcel of Virginia real property titled as tenants by the entireties were gifts to his wife and, consequently, marital property subject to equitable division. Furthermore, the husband contended the court incorrectly concluded that an automobile titled in their joint names was marital property.

The husband and wife had a marriage of short duration with no children.  The husband was considerably wealthier than wife and developed severe health problems.  He testified during the equitable distribution portion of the divorce case that he put assets into the parties’ joint names for estate planning or insurance purposes.

In presenting his case, the husband argued he never intended to give either the bank account or the real property to his wife. He asserted he only wanted his wife to take care of his health issues by giving her access to the bank account, and he intended for his wife to sell the real property and distribute the funds to his children if he died. Furthermore, he testified that he bought the automobile so his wife could commute to her job in Washington D.C., but he did not give it to her because she failed to meet his condition of giving her vehicle to his son.

According to the Virginia Circuit Court judge, the wife established that the husband’s joint titling of the property signified valid inter vivos gifts to the wife. By assuring her, “This is your property” and “[this] would be ours,” the husband established a pattern of giving, which the lower court stated “was for the purpose of persuading her that she was his wife and he was going to share with her.” However, the Virginia Court of Appeals reversed this holding after reviewing the record of evidence on appeal.

As the Court of Appeals noted, the standard of review for reversal is high, and because a classification of property involves a determination of fact, the trial court’s determination could only be reversed if it was “plainly wrong or without evidence to support it”,  citing the unpublished case of Ranney v. Ranney, 45 Va. App. 17, 31-32, 608 S.E.2d 285, 492 (2005).  Here, the Court recognized that a gift requires a “voluntary transfer of property to another without compensation.” Black’s Law Dictionary 709 (8^th ed. 2004). Moreover, the Virginia Court of Appeals affirmed that retitling property, in and of itself, does not create the presumption of a gift. Utsch v. Utsch, 266 Va. 124, 128, 581 S.E.2d 507, 50 (2003).  Although wife’s testimony was consistent with joint ownership, that she had access and use of the assets, her testimony did not establish donative intent.  Therefore, the party trying to establish a gift must prove by clear and convincing evidence the following elements: 1) the intention on the part of the donor to make the gift; 2) delivery or transfer of the gift; and 3) acceptance of the gift by the donee. Robinson v. Robinson, 46 Va. App. 652, 665-66, 621 S.E.2d 147, 153 (2005).  In Jones, the Court of Appeals determined that the wife’s testimony only supported a finding of jointly held property, which does not lead to the finding of a gift. Therefore, the Court revered the trial court’s findings and remanded the case to determine an equitable distribution of the assets based on the record.

You should consult with a Virginia divorce lawyer to discuss whether your property might be considered separate property, marital property, or hybrid property in equitable distribution.

Can wife claim a homestead exemption in bankruptcy in property titled solely in husband’s name because it might be considered marital property under Virginia’s equitable distribution statute?

Not in the case of In re Wilkinson, 100 B.R. 315 (Bankr.W.D.Va. 1989), where the United States Bankruptcy Court for the Western District of Virginia held that the wife could not exempt an interest in assets titled in husband’s name because the property might be considered marital property subject to equitable distribution under Virginia Code §20.107.3.

In Wilkinson, the trustee filed an objection to the debtors’ claimed exemptions, arguing that wife had no exemptable interest in the property.  Under Virginia’s Homestead Exemption, Va.Code. Ann. §34-4, both parties must have an interest in the property in order for each to claim an exempt interest. (See Boswell v. Lipscomb, 177 Va. 309, 314, 14 S.E.2d 305, 307 (1941).  The bankruptcy court judge in Wilkinson examined whether the parties considered the property in which wife claimed an interest as joint or separate.  Husband testified although he owned the assets prior to the marriage, he and Wife both treated it as joint “money in the bank,” selling the property when appropriate to obtain cash for their marital needs.

The debtors argued Va. Code §20.107.3 applies in this context, and they claim by filing the homestead deed, they made a statement that they considered the property as marital property. Moreover, the husband and wife contended the principles of equitable distribution in a divorce proceeding would establish the property as joint marital assets because if Wife could obtain an award of equitable distribution under §20.107.3, then they should be allowed to claim the exemption under §34-4.

While the court recognized joint property requires an express agreement to transmute it into separate property, it held the same principle did not apply to the reverse: separate property can be transmuted into joint assets without express assent. (See Wagner v. Wagner, 4 Va.App. 397, 404, 358 S.E.2d 407, 410 (1987).  Therefore, as established by the Supreme Court of Virginia in Smoot v. Smoot, 233 Va. 435, 442, 357 S.E.2d 728, 731 (1987), parties can transform property into marital property by agreement or through affirmative acts. (See also Westbrook v. Westbrook, 5 Va.App. 446, 453, 364 S.E.2d 523, 528 (1988).

In determining whether the exemption applied, however, the bankruptcy court judge recognized the language of the code section required examining the legal title, granting rights and interests only after establishing the proper titleholder.  (See Brinkley v. Brinkley, 5 Va.App. 132, 136, 361 S.E.2d 139, 140 (1987).  Although the Wilkinsons alleged the code would permit Wife to obtain property interests if they divorced, the court rejected that argument, holding that the code section established the court’s power only to divide or transfer jointly titled property.  The court noted that Virginia Code Section 20-107.3(B) did not alter legal title to property subject to equitable distribution:

“For the purposes of this section only, both parties shall be deemed to have rights and interests in the marital property. However, such interests and rights shall not attach to the legal title of such property and are only to be used as a consideration in determining a monetary award, if any, as provided in this section.”

The bankruptcy judge noted that Virgina Code Section 20-107.3 (C) similarly did not empower the divorce court judge to alter the legal title to property, but instead make a monetary award:

“…the court shall have no authority to order the division or transfer of separate property or marital property which is not jointly owned. The court may, based upon the factors listed in subsection E, divide or transfer or order the division or transfer, or both, of jointly owned marital property, or any part thereof…As a means of dividing or transferring the jointly owned marital property, the court may transfer or order the transfer of real or personal property or any interest therein to one of the parties, permit either party to purchase the interest of the other and direct the allocation of the proceeds, provided the party purchasing the interest of the other agrees to assume any indebtedness secured by the property, or order its sale by private sale by the parties, through such agent as the court shall direct, or by public sale as the court shall direct without the necessity for partition.”

Because wife did not share title and have joint interest in the property with husband, the wife could not claim the property as exempt under §34-4.  Therefore, the court sustained the trustee’s objection and held the property could be subject to creditors’ interests.

You should consult with your Virginia bankruptcy lawyer concerning your rightful exemptions in bankruptcy.

Will the bankruptcy court allow an adversary proceeding by children against the parents for breach of fiduciary duty after the equitable distribution of the subject property in a Virginia divorce case?

In Spreadbury v. Spreadbury AP No: 09-1254 (Bkr. EDVA, 2010), the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, allowed a claim for breach of fiduciary duty to proceed by denying a motion to dismiss and a motion for summary judgment by the children’s father, holding that the children’s claim stated a genuine issue of material fact, the relevant standard under Fed.R.Civ.P 56(c) and Fed.R.Bankr.P.7056.

In Spreadbury, the initial action began on July 21, 2008, when the wife filed a voluntary Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Eastern District of Virginia, Alexandria Division.  The children filed proofs of claim for five million dollars in her bankruptcy case.  The debtor wife  listed her most significant asset as a house and 100-acre real estate parcel at 1749 Atoka Road, Middleburg, Virginia, an asset referred to as “Westbury Farm”.  According to her bankruptcy petition, the debtor valued the property at $4,655,900 subject to a deed of trust for $1,027,023.  Concurrently, the debtor wife and her husband had a divorce action pending for approximately four years in a Virginia Circuit Court.  After the bankruptcy court judge lifted the automatic stay to allow equitable distribution to proceed in the state court, a final order of divorce was entered and the husband and wife’s separate interests in the marital estate were calculated at 65% for the husband and 35% for the debtor wife, respectively.  Equitable distribution by the Virginia Circuit court was made subject to review by the bankruptcy court and the order permitting relief from the automatic stay.

During the pendency of the divorce, the four children of the debtor wife and husband sought to intervene in their divorce case, but were rebuffed by the divorce court judge on the grounds that they needed to file a separate action. Three days prior to the debtor wife’s bankruptcy filing, the children filed suit against the debtor mother and their father seeking over $5 million dollars in damages for breach of fiduciary duty. Furthermore, the children filed probate court proceedings in Connecticut, where both the trust was created and where their father resided. The Fauquier Circuit Court stayed the action by the children in Virginia to allow the case in Connecticut to proceed.   The children filed proofs of claim and an adversary proceeding for breach of fiduciary duty in the wife’s Virginia bankruptcy case.  All of the parties agreed that the Virginia Bankruptcy Court was the most appropriate forum for resolving their dispute.

The case concerned the creation of the three trusts, a family trust, the children’s trust and the parents’ trust, and how the parents as trustees managed the assets of the children’s trust.  On September 21, 1990, the parents created an irrevocable family trust, referred to as the “children’s trust,” which named the debtor wife, the husband, and the four children as donors.  At that time, the husband, the debtor and two other persons were designated as trustees and only these trustees’ signatures appear on the trust instrument, not the donors’. The parties did not dispute that each of the children contributed $42,328 to the purchase of Westbury Farm.  Under the terms of the family trust, the parents would receive an income interest for the shorter of their joint lifetimes or twenty-two years, with the remainder interest vesting in the living children and the issue of any deceased children in September 2012.  However, before their interests expired, the parents had the responsibility to bear “all of the expenses, taxes, and costs attributable to the joint and survivor outcome interests.”

The actual title to Westbury Farm was held by a second trust created by the husband/father, naming the husband/father as the sole trustee and the children’s trust as the beneficiary.  Eight years after the institution of these two trusts, the realty trust with the consent of the debtor wife and husband, entered a lease and purchase option for Westbury Farm with a third trust—the parents’ trust, a trust naming the husband and wife as sole beneficiaries during their joint lifetimes. The lease on the parents’ trust named a term of 99 years at $1.00 per year, providing an option to purchase the property for $1,750,000 at any time.  In August 1999, the parents’ trust exercised the purchase option and executed to the children’s trust a $340,000 promissory note bearing interest at 7% payable in annual interest installments, with the principal due in 30 years. Although the note states it was to be secured by a deed of trust, no such instrument was recorded, and it was not determined how the amount of $340,000 was calculated.  With the consent of the husband and the debtor wife as trustees, the beneficiary of the children’s trust changed to the parents’ trust, and on November 19, 2003, the husband executed a deed conveying the property into the name of the parents’ trust. According to the children in the complaint, they had no knowledge of the lease, the purchase option, or the beneficiary change, and they had not provided consent.

The children argued in their complaint that the parents breached their fiduciary duty and engaged in self-dealing by consenting to the 99-year lease and purchase option for the parents’ trust, exercising the purchase option and proving an unsecured $340,000 promissory note (on which no payment have been made); changing the beneficiary of the realty trust; accepting the $340,000 note as adequate compensation; and conveying title of the property to the parents’ trust. After discussion, the Court held that the children’s cause of action was valid and should not be dismissed; therefore, the parents could be liable for their mismanagement of the children’s trust.

You should consult with your Virginia bankruptcy and divorce lawyer concerning competing interests in property subject to equitable distribution and bankruptcy.

Can wife’s student loan be considered marital debt in a Virginia divorce?

Yes, according to Dyne v. Dyne, decided by the Roanoke County Circuit Court in the Commonwealth of Virginia, a student loan incurred during the marriage and before the separation for the benefit of both parties can be considered joint marital debt for purposes of the allocation of debt in equitable distribution.  In addition, the Virginia divorce court judge held that wife’s payments of the mortgage for the marital residence until it could be sold would be equally distributed along with the small profit from the sale of the home, husband’s share in the form of a small credit against his large debt to wife.  Had wife allowed the house to go to a foreclosure auction resulting in a large deficiency, the parties may have been left with few options other than bankruptcy to discharge the debt.

In Dyne, the wife argued her educational loans of $12,117.11 to become qualified to teach school in Virginia should be considered marital debts to be split with the husband.  She claimed she incurred theses loans after the parties agreed that her future income as a teacher would provide a stable income and retirement benefits for the family.

Relying on the standards enunciated by the Supreme Court of Virginia in Gilliam v. McGrady, Record No. 090958 (April 15, 2010), discussed herein in answer to the question, “Is debt incurred during the marriage presumed to be marital debt?”, the divorce court judge found that the wife, as the party seeking distribution of the debt, had met her burden to prove the debts incurred in her individual name were in fact hybrid debts.  In this case, the Court determined the educational debts were part marital and part separate debt: the wife had borrowed a portion of the money ($2,815.46) following the parties’ separation, but the remainder of the debt ($9,301.65) had been incurred during the marriage with the consent of both parties.  Thus, the Court ruled that the debt acquired prior to the separation was considered marital debt to be split between the husband and wife.

In addition to the educational loan distribution, the Virginia Circuit Court ruled on the debts related to the marital residence.  While married, the husband had been abusive to his wife, making repeated threats to kill himself or his wife and child.  As his behavior continued to escalate, the wife sought divorce and obtained an injunction requiring her husband to vacate the marital residence.  The husband blatantly defied the order, changed the door locks, and placed all of the furniture in storage, making it uninhabitable for the wife and child. Because the wife and child could not live in the martial residence, they resided for two years in a furnished apartment.  While living in the apartment, the wife alone continued to make payments on the marital home without any contribution from the husband, borrowing $23, 679.16 to remain current on the mortgage, utilities, and repairs.  Later, the house sold for a profit of only $929.47, which was held in escrow.

The husband alleged he should not have to share these expenses and claimed that the wife and child could have lived in the premises.  Furthermore, he contended that he should be paid one-half the rental value of the house while it remained vacant.  The divorce court judge refused to consider these arguments.  The wife argued that the debts should be shared, because the husband knew that he had forced the property to become uninhabitable, and her payments for the continued upkeep of the house allowed it to sell at a profit.

Considering the factors of Virginia Code §20-107.3(E), the Court held that the sale proceeds and the marital debts should be divided equally.  The Court also held that all of the real estate proceeds should be paid to the wife, and the husband would be granted a credit of $464.73 against the debt, leaving the balance to be paid to the wife at $15,936.05.

You should consult with your Virginia divorce lawyer to discuss how your debts may be treated in equitable distribution.