Does a wife’s chapter 13 bankruptcy filing extinguish her ex-husband’s rights to Qualified Domestic Relations Orders (QDROs) arising from their divorce?
Not in the case of In re: Kim St. Clair, Case No: 08-27884 (12/29/2011) where the U.S. Bankruptcy Court for the District of New Jersey granted the husband’s motion for relief from stay to enforce the final decree of divorce in state court in order to obtain qualified domestic relations orders for his interest in his wife’s pension and 401K plan more than seven years after entry of the final decree of divorce.
In St. Clair, the husband and wife were divorced in 2004. The final decree of divorce incorporated a property settlement agreement in which husband was given a share of wife’s 401K plan and defined pension benefit plan pursuant to a Qualified Domestic Relations Order (QDRO). Neither party prepared the QDROs following the divorce. The wife filed a chapter 13 bankruptcy seven years after entry of the final decree of divorce. The husband filed a motion for relief from stay in the wife’s bankruptcy case under 11 U.S.C. §362, asking to be granted relief to enforce the terms of the divorce decree in state court, specifically to compel the production of the QDROS, to compel the wife to pay her share of the agreed joint responsibility for payment of their children’s college expenses, and to compel the wife to produce proof of life insurance coverage for their children.
The bankruptcy court judge noted that relief from the automatic stay on the grounds of cause is decided on a case by case basis. The court relied on three factors in determining whether a party has demonstrated cause for relief (1) prejudice to the debtor’s bankruptcy estate, (2) hardship to the moving party, and (3) the probability of success on the merits, citing In re: Nortel Networks Corp., 445 B.R. 370 (2011) . While the court recognized that a debtor can discharge equitable distribution debts under 11 U.S.C. §523(a)(15) in a chapter 13 bankruptcy case, the court disagreed with wife’s argument that husband interest in the retirement plans was a pre-petition claim for equitable distribution that fit within 11 U.S. C. §523(a) (15). Instead, the court found that the husband had a separate property interest in the 401K plan and pension plan. The bankruptcy court recognized that a majority of courts have held that a formers spouse’s interest in a pension plan becomes the sole and separate property of that spouse upon entry of the final decree of divorce, In re Potter, 159 B.R. 672, (Bankr. N.D.N.Y. 1993), as decided by state property law, In re Brown, 168 BR 331 (Bankr. N.D. Ill. 1994). Thus, in this case, there was no creditor-debtor relationship creating a claim that could be discharged, but instead the debtor held bare legal title in her ex-husband’s shares in her retirement plans.
Further, the court held that the debtor had to hold the husband’s shares in a constructive trust, despite the failure of either party to prepare a QDRO following the divorce, to prevent unjust enrichment. Thus, the husband’s interest was not property of the bankruptcy estate by virtue of 11 U.S.C. §541(d), and thus the debtor’s interest could not be a “claim” against the estate. In re Trout, No. 05-19591, 2006 WL 4452826, *3 (Bankr. D.N.J. Feb. 1, 2006), In re Allen, No.11-26579 (Bankr. D.N.J. Oct. 17, 2011).
In response to the debtor wife’s argument that she had full rights to the plans because an interest in the plans could only be transferred by a QDRO, which had not been done before the bankruptcy filing, the bankruptcy court judge ruled that the absence of a QDRO did not vitiate the husband’s interests in her plans, as the QDRO is merely a vehicle which enforces preexisting property rights in a pension. The filing of a bankruptcy case does not act to give the debtor greater property rights than the debtor would have under state law, and thus the non-debtor spouse’s interest in the pension plans was fixed as of the entry of the final decree of divorce. In re Gendreau, 122 F.3d 815 (9th Cir. 1997), In re Carbaugh, 278 B.R. 512 (10 Cir. B.A.P. 2002).
As the husband’s interest in the wife’s retirement plans was neither property of the estate nor property of the debtor, he could have pursued his interest in state court without first obtaining relief from the automatic stay. Nevertheless, the St. Clair court granted relief from the automatic stay to provide clarification to the state family court. The debtor wife’s equitable claim of laches, based on the husband’s delay in obtaining the QDROs, would be left to the experienced discretion of the state court judge.
You should consult with your Virginia bankruptcy and divorce law attorney or Richmond divorce lawyer James H. Wilson, Jr., to discuss the effects of a bankruptcy filing by your spouse or ex-spouse on your rights under a final decree of divorce.