Can husband’s transfers of real estate to wife under a separation agreement be set aside in a later bankruptcy?
Yes, in the case of In re Paschall, 408 B.R. 79 (E.D. Va., 2009), in the Eastern District of Virginia, Richmond Division, the U.S. District Court judge affirmed the bankruptcy court’s order holding that the Chapter 7 bankruptcy trustee established that the buyout of prior marital agreement with transfer of real estate was a preference under 11 U.S.C.A. § 547(b), and former spouse was an insider because estranged parties were still married when the transfer occurred.
After husband and wife were married, wife sold her separate real property and used the proceeds to purchase land in Virginia which was titled in the names of husband and wife, as tenants by the entirety with the common-law right of survivorship. Husband and wife took out a mortgage loan against the property and deposited the proceeds into a joint checking account, from which husband paid his premarital unsecured debts and marital unsecured debts. Later, the husband and wife bought residential real property in Midlothian, Virginia (a suburb of Richmond in Chesterfield County) from husband’s wife, using his separate property as a down payment and a joint mortgage loan. They took title again as tenants by the entirety with the common-law right of survivorship.
The next year, the parties entered into a marital agreement, valid under Virginia Code Section 20-155, and just as enforceable as a separation agreement or property settlement agreement, wherein husband agreed wife would become the sole owner of both real properties in return for a cash payment to husband. The husband agreed to transfer the properties by quit claim deeds to wife as trustee of a living trust in her name. After the husband become dissatisfied with the agreement, the parties negotiated a buyout agreement under which the properties would be transferred earlier in return for cash. Wife paid husband the cash, but husband did not transfer the title to the real property by deed until more than a year later. Although husband was not insolvent when he executed the marital agreement and the buyout agreement, he was insolvent when he transferred title to the two real properties. Wife had filed for a divorce from husband in a Virginia Circuit Court before the transfers and obtained a final decree of divorce after the transfers. The final decree of divorce was filed in the county clerk’s law and chancery order books nine months later, on the same day the ex-husband filed his chapter 7 bankruptcy case. Neither the marital agreement nor the decree were ever filed in land records.
The chapter 7 trustee filed an adversary proceeding, a lawsuit within the bankruptcy permitted by 28 U.S.C. 157, and governed by Bankruptcy Rule 7001, to avoid husband’s transfers of real estate to the wife as preferences or fraudulent or voluntary conveyances under the Bankruptcy Code or Virginia law. The bankruptcy court judge ruled against the trustee on the fraudulent or voluntary conveyance grounds, but ruled in favor of the trustee to avoid the transfers as preferences. The wife was a creditor and an insider, and the transfers were made to satisfy an antecedent debt owed by the debtor at the time the debtor was insolvent. Since the transfers were avoided, the property reverted the debtor and his ex-wife, who were now tenants in common by virtue of the entry of the decree of divorce, which severed the tenancy by the entirety under Virginia Code Section 20-111. Thus, the chapter 7 trustee could administer the husband debtor’s interest in the real properties. The wife and her trust appealed the bankruptcy court order, which was considered by the U.S. District Court as an appropriate interlocutory, or nonfinal, order for appeal under 28 U.S.C. 1292(b).
In Paschall, the District Court held that the former wife qualified as a creditor having a “claim” as defined in 11 U.S.C.A. § 101(5) because she could have obtained an equitable remedy if debtor did not fulfill his contractual obligations under the marital agreement to transfer his interest in properties. The judge also ruled that former wife had to be regarded as an “insider,” as defined in 11 U.S.C.A. § 101(31), because a final decree of divorce was entered three weeks following the quitclaim deeds to transfer the property; See also Miller v. Schuman, 81 B.R. 583, 585 (9th Cir. BAP 1987); and the challenged transfers enabled former wife to receive more than she would have received in a hypothetical Chapter 7 liquidation [where former wife was an unsecured, nonpriority creditor, and unsecured creditors of the estate would receive less than 100% payout on their claims, the required elements of a preference under 11 U.S.C.A § 547(B)(5).
The Paschall case illustrates the benefit of recording agreements concerning real property and deeds promptly in land records. One of the foundations for the judge’s decision was the fact that the agreement between the husband and wife had not been recorded, as required under Virginia Code Section 55-96, to become effective against purchasers for valuable consideration without notice, a statutory status the chapter 7 trustee enjoys under 11 U.S.C. 544(a)(3) to set aside or avoid transfers and recover property. The case also illustrates the risks in accepting transfers when the transferor spouse is insolvent and such a transfer may be considered an avoidable preference under 11 U.S.C. 547. Finally, the judge noted that the argument that the decree was entitled to full faith and credit had not been raised.
You should consult with your Virginia bankruptcy and family law lawyer to discuss how to best structure and execute your marital agreements.