Will relief from the automatic stay in a chapter 7 bankruptcy case to complete equitable distribution in a Virginia divorce case divest the bankruptcy court of property of the estate?

Will relief from the automatic stay in a chapter 7 bankruptcy case to complete equitable distribution in a Virginia divorce case divest the bankruptcy court of property of the estate?

Not in the case of In re: Alan Secrest, Case No: 11-11158-RGM (Bankr. EDVA 2011) in U.S. Bankruptcy Court for the Eastern District of Virginia, where the wife’s motion for relief from the stay was granted so she could complete equitable distribution in the parties’ divorce case so long as no property of the estate would directed to be transferred to the debtor’s wife or out of the bankruptcy estate.

In Secrest, the husband filed a chapter 7 bankruptcy case several days before the scheduled equitable distribution hearing in the parties’ divorce case.  One of the benefits of filing bankruptcy is the protection provided by the automatic stay, which goes into effect “automatically” when a bankruptcy case is filed, and protects the debtor, his property and property of the estate from the creditors attempt to collect a prepetition claim from the debtor or the property.  In a divorce case, a bankruptcy filing will stop the continuation of equitable distribution and the prudent divorce lawyer should seek relief from the automatic stay before proceeding further.  (A prudent Virginia divorce lawyer should likewise consider whether relief from the automatic stay is appropriate for his client to enter into a separation agreement or property settlement agreement while either spouse is in bankruptcy as actions taken in violation of the stay can be void.)  Accordingly, in Secrest, the Virginia divorce court postponed the trial for a month, at which time it would award pendente lite relief on spousal support and child support.  The primary asset of the Secrests was the former marital residence of the parties, valued in excess of a million dollars and subject to a mortgage lien of less than half a million.  The wife filed a motion for relief from the automatic stay in the bankruptcy case to pursue equitable distribution of property of the bankruptcy estate in the Virginia divorce case.  Both the debtor and the chapter 7 trustee opposed the wife’s motion for relief from stay.

In deciding the matter, the bankruptcy court judge noted that the various revisions to the bankruptcy code, culminating with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, have clarified exactly what portion of the divorce case is now stayed by a bankruptcy filing – only equitable distribution proceedings concerning property of the estate.  The determination and enforcement of spousal and child support matters, child custody and visitation matters, and establishing paternity are all excluded from the reach of the automatic stay by virtue of the exceptions found in 11 U.S.C. § 362(b)(2).    The exceptions found in Bankruptcy Code Section 362(b)(2) are now comprehensive as to family law matters.  (For this reason, among others, the bankruptcy court judge discounted the wife’s reliance on the case of Roberge v. Roberge 188 B.R. 366 (EDVA 1996), as standing for the proposition that the bankruptcy court must allow relief from the stay for equitable distribution in divorce cases).

The ground for relief from the automatic stay to pursue equitable distribution set forth in 11 U.S.C. §362(d) is “for cause”, which the bankruptcy judge decides in his or her discretion.  In Secrest the court relied on the standards enunciated in the landmark divorce bankruptcy case of In re Robbins, 964 F.2d 342, (4th Cir. 1992) decided by the Fourth Circuit Court of Appeals in 1992.  “In deciding whether cause for relief from the stay exists, a bankruptcy court judge must balance potential prejudice to the bankruptcy debtor’s estate against the hardships that will be incurred by the person seeking relief from the automatic stay if relief is denied. See In re Peterson, 116 B.R. 247, 249 (D.Colo.1990) .”  Robbins at 345.   The  judge should consider three principal factors while performing the balancing test  –  “(1) whether the issues in the pending litigation involve only state law, so the expertise of the bankruptcy court is unnecessary; (2) whether modifying the stay will promote judicial economy and whether there would be greater interference with the bankruptcy case if the stay were not lifted because matters would have to be litigated in bankruptcy court; and (3) whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court. See In re Mac Donald, 755 F.2d at 717 (9th Cir. 1985); In re Holtkamp, 669 F.2d 505, 508-09 (7th Cir.1982); In re Revco D.S., Inc., 99 B.R. 768, 776-77 (N.D.Ohio 1989); In re Pro Football Weekly, Inc., 60 B.R. 824, 826-27 (N.D.Ill.1986); Broadhurst v. Steamtronics Corp., 48 B.R. 801, 802-03 (D.Conn. 1985).

In Secrest, the bankruptcy court judge distinguished the circumstances of the Robbins case, where the wife’s prepetition claim had been fully litigated and liquidated in the Florida divorce proceeding and was awaiting only a final decision by the state court judge, from the circumstances of the instant case, where the parties had not yet started equitable distribution.  It was particularly important to note that the wife’s claim in Robbins was a monetary judgment rather than a distribution or transfer of property from property of the estate, so it could not have affected property of the bankruptcy estate.

With respect to the first factor, while the bankruptcy court judge recognized the expertise of the state court judge in deciding equitable distribution matters, but he was not willing to cede control over property of the estate to the Virginia court, and allow the state court to administer the estate piecemeal for the benefit of a single creditor – the wife.  The second factor also favored administration by the bankruptcy trustee because he could sell the house quickly, free and clear of certain liens, while the wife’s interests were fully protected because she could either buy out her husband or wait and receive her one half of the proceeds.  Finally, under the third factor, the bankruptcy estate would be protected by a sale under the supervision of the bankruptcy court.  Consequently, in Secrest, the judge held that the balancing test and three factors of the Robbins case weighed in favor of limiting the modification of the automatic stay to allow the wife to pursue equitable distribution provided it did not involve a transfer of property of the estate.

What the Secrest opinion and several other Virginia bankruptcy court opinions on this subject seem to overlook is the “equitable” in equitable distribution, assuming that the spouses would each be entitled to 50% of the net proceeds from the sale of real property in equitable distribution.  In fact, the Virginia Circuit Court judge may award some percentage other than 50-50, based on the equities of the case, after reviewing the factors found in Virginia Code Section 20-107.3(E).  While the Virginia divorce court judge could adjust the amount after the bankruptcy court administration through a monetary award in equitable distribution, in fact, the bankruptcy filing would more likely influence equitable distribution toward a 50-50 split.  Thus, as a tactical matter, a party who anticipates receiving less than 50% in equitable distribution and who needs to file bankruptcy at some point in the near future might fare better through a sale and distribution of the marital property first in a chapter 7 bankruptcy proceeding, instead of in state court first through equitable distribution, all other things being equal.

You should consult your Virginia bankruptcy and divorce lawyer or Richmond divorce lawyer James H. Wilson, Jr., to discuss the applicability of the automatic stay in bankruptcy to your Virginia divorce case.


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