Is a wife’s interest in her former husband’s government pension arising from a divorce decree an interest in property or a debt dischargeable in bankruptcy?

Is a wife’s interest in her former husband’s government pension arising from a divorce decree an interest in property or a debt dischargeable in bankruptcy?

The Sixth Circuit Court of Appeals held in the case of In re: McCafferty, 96 F.3d 192 (6th Cir., 1996), that the wife’s interest in her husband’s pension was not a dischargeable debt, but was instead an interest in property excluded from property of the estate under 11 U.S.C. 541(d).  In McCafferty, the appellate court recognized a constructive trust in the government pension under which the former husband held bare legal title for the benefit of his former wife.  While the McCafferty court noted that the wife might have benefitted from the addition of 11 U.S.C. 523(a)(15) shortly after the case was filed, which addition creates an exception to discharge for debts arising from divorce, separation, a separation agreement, a divorce decree, or other court order, the case was really decided on the distinction between an interest in property and a debt.

The husband and wife had been married for approximately twenty-three years before the husband filed for a divorce in the state of Ohio.  Ohio, just like Virginia, has equitable distribution, which allows the divorce court judge to divide up the parties marital property and marital debt.  Just as in Virginia, equitable distribution allows the divorce court judge to award a spouse an interest in the marital share of the other spouse’s retirement plan or pension. Specifically, in Virginia, Virginia Code Section 20-107.3(G), allows the divorce court judge to direct payment of a certain percentage, up to 50%, of the marital share of a pension, profit-sharing or deferred compensation plan, or retirement benefits, vested or unvested.  In McCafferty, the judge awarded to the wife, one-half of the value of the pension on the date of the divorce.  The judge entered a money judgment in favor of the wife for $100,250.21, and ordered the husband to satisfy the judgment by paying to his wife the sum of $1,500 a month starting six years after the divorce decree was entered.

Seven months after he was divorced, the husband filed a chapter 7 bankruptcy case, and an adversary proceeding in the case to declare the debt to his former wife to be nondischargeable.  The wife’s first argument was that the interest in the husband’s retirement plan was nondischargeable as being in the nature of support.  Upon the wife’s request, the bankruptcy judge granted relief from the automatic stay to allow the state court divorce judge to clarify the nature of the judgment.  The state court judge ruled that the judgment was not support, but was instead a distribution of property.  The wife than argued that the court should impress a constructive trust upon her interest in husband’s pension, such that it would not be property of the estate and was nondischargeable in the husband’s bankruptcy.  The bankruptcy court judge ruled that the interest in the pension plan was a dischargeable debt.  The U.S. District Court affirmed the bankruptcy judge’s decision and the wife appealed to the Court of Appeals.  Both the bankruptcy court and the district court held that the wife’s constructive trust theory was foreclosed by the decision in In re: Calhoun, 715 F.2d 1103 (6th Cir., 1983), which recognized that the first step in determining whether the assumption of joint obligations payable to third party creditors in a separation agreement with a hold harmless provision was nondischargeable support was a determination of whether the court or the parties intended to create an obligation to provide support by assuming the debts.  As the state court judge in McCafferty held that the wife’s interest in husband’s retirement plan was a distribution of property and not support, the debt could not be nondischargeable support.

In the Court of Appeals, the husband relied on the broad definition of a debt in the bankruptcy code (now 11 U.S.C. 101(12) “debt” and 101(5) “claim”) and the case of In re Omegas Group, 16 F.3d 1443 (6th Cir., 1994), where the appellate court upheld the bankruptcy court’s refusal to apply a constructive trust in property at the expense of the creditors in bankruptcy without an underlying judgment or decision from a separate prepetition proceeding.  The appellate court in McCafferty distinguished the Omegas case, finding that the divorce decree satisfied the separate prepetition proceeding requirement to imposing a constructive trust in a bankruptcy case.  While the Court of Appeals agreed with the U.S. District court that the wife’s interest was not a nondischargeable support debt under 11 U.S.C. 523(a)(5), the Court of Appeals ruled that the support issue was irrelevant if wife’s interest in her husband’s retirement plan was not property of the bankruptcy estate under 11 U.S.C. 541(d).  As the divorce decree awarded the wife a separate interest in her husband’s pension, the husband retained only bare legal title, regardless of the fact that the decree did not specifically refer to a “constructive trust”.  As wife’s equitable ownership interest was outside the bankruptcy estate, the bankruptcy court was without jurisdiction over her separate interest.  A discharge of husband’s obligation to pay wife directly could not affect her separate interest in the pension itself.  Consequently, the wife’s award of pension benefits was not a dischargeable debt in bankruptcy.

You should consult with your Virginia divorce and bankruptcy attorney, or Richmond Bankruptcy and Divorce Lawyer James H. Wilson, Jr., concerning whether obligations arising from your Virginia divorce case may be discharged in bankruptcy.

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