Does wife have a claim in husband’s chapter 7 bankruptcy case for an equitable share of the marital property before entry of the final decree of divorce?

Does wife have a claim in husband’s chapter 7 bankruptcy case for an equitable share of the marital property before entry of the final decree of divorce?

Yes, in the case of In re Ruitenberg, 745 F.3d 647 (3d Cir., 2014), where the U.S. Court of Appeals for the Third Circuit affirmed the decision of the U.S. Bankruptcy Court for the District of N.J. in In re Ruitenberg, 469 B.R. 203 (D.N.J., 2012), overruling the chapter 7 trustee’s objection to wife’s claim to an equitable interest in marital property in husband’s bankruptcy case during the pendency of the parties’ divorce case in state court.

In Ruitenberg, the husband filed a chapter 7 bankruptcy case while a divorce case was pending in state court.  No final decree of divorce had been entered in the state court divorce case in N.J., an equitable distribution state like Virginia.  The wife filed a proof of claim in the husband’s chapter 7 case for $577,935, representing her estimated interest in marital property subject to equitable distribution in the divorce case.  The chapter 7 trustee in the husband’s bankruptcy case objected to the claim as a claim that did arise prepetition and should be disallowed.  Almost a year after the husband filed bankruptcy, the wife filed her own chapter 7 bankruptcy case, thus allowing the chapter 7 trustee in her case to pursue her claim in the husband’s bankruptcy case.  The chapter 7 trustee in the wife’s bankruptcy case argued that wife’s claim should be allowed.

In deciding the matter in the lower court, the bankruptcy court judge first recognized that the court had jurisdiction over the validity of the case under 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a), and a local order of the U.S. District Court referring Title 11 cases to the bankruptcy court, and had jurisdiction over the validity of the claim as a core matter under 11 U.S.C. § 157(b)(2)(B).  The bankruptcy court judge then analyzed whether the wife’s right to equitable distribution constituted a “claim”, as defined in 11 U.S.C. §101(5), analyzing the different approaches of the courts to a pre-divorce claim for equitable distribution, or an equitable interest in marital property.  The court noting that some court allowed such a contingent claim as a prepetition debt and general unsecured claim subject to discharge, citing In re Schorr, 299 B.R. 97 (W.D. Pa., 1993), et al., while others courts have not allowed such a claim as not ripe and not subject to discharge, citing In re Scholl 234 B.R. 636 (E.D. Pa., 1999) , et al.  As the equitable claim in marital property can give rise to a monetary award under state law, the nondebtor spouse has been recognized by some courts as having a claim under 11 U.S.C. §101(5) against the debtor spouse’s property in bankruptcy.  In re Lawrence, 237 B.R. 61 (D. N.J., 1999).

The Ruitenberg bankruptcy court judge recognized that he had ruled otherwise in the case of In re Howell, 311 B.R. 173 (D. N.J., 2004), where the court followed In re Berlingeri, 246 B.R. 196 (D. N.J. 2000), in holding that a spouse did not need relief from the automatic stay to pursue equitable distribution because it concerned a post-petition interest of the non-debtor spouse [This issue should been made moot everywhere with the 2005 revisions to 11 U.S.C. §362(b)(2) .].  As the Third Circuit Court of Appeals had recently expanded the definition of “claim”, In re Grossman, 607 F.3d 114 (3d Cir., 2010) (claim arises when conduct giving rise to injury occurs) and In re Kane, 628 F.3d 631 (3d Cir., 2010) (spouse must list inchoate interest in equitable distribution as asset of the bankruptcy estate), the bankruptcy court judge was required to revisit the issue.  The reasons in favor of considering the nonfiling spouse’s interest in equitable distribution a claim included (1) the fairness of a parallel broad treatment of both property in 11 U.S.C. §541 and “claim” in 11 U.S.C. §101(5), (2) the precedent in a distinction drawn in Kane between interests in property (asset) and present rights to property (claim) should be limited to considering only what is property of the estate under 541, (3) the accrual of claims should be treated alike, whether they are product liability injuries or equitable distribution rights, and (4) the concerns about the dischargeability of pre-petition equitable distribution claims against spouses has been remedied by revisions to 11 U.S.C. §523(a)(5) and (15).

The bankruptcy court then reversed its previous reliance on Belingeri, as overruled by Grossman, and held the equitable distribution claim of the wife’s chapter 7 bankruptcy trustee should be allowed in the husband’s chapter 7 bankruptcy case.  The husband’s chapter 7 trustee appealed the bankruptcy court’s decision, and the U.S. District Court certified the case for direct appeal to the Circuit Court of Appeals.

On appeal, the Third Circuit Court of Appeals clarified the wife’s actual interest in equitable distribution to be a partnership interest held in the husband’s name alone, presumed to be marital property subject to equitable distribution in New Jersey, N.J. Stat. Ann. § 2A:34-23.1.  The court noted that if the claim were held to be a prepetition claim, wife could share in the distribution in the husband’s bankruptcy case, while wife would be left to merely the remains if the claim were a postpetition claim. [Although a Virginia divorce judge might still equitably divide marital property in light of such a consequence].  The court noted that the wife’s claim, even though unliquidated, contingent, and perhaps unmatured, was still literally a claim under 11 U.S.C. §101(5), as “…a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured..”.  The court recognized in its decision in Grossman that Congress and the Supreme Court had indicated that the defined term “claim” should be given the broadest application.  The appellate court rejected the trustee’s argument that Grossman should be limited to tort cases, and instead, held that the broader definition of claim was applicable to all types of cases.  Recognizing that the wife had a prepetition claim to equitable distribution also made sense in light of the court’s previous decision in Kane, that such an interest must be disclosed as an asset in a bankruptcy case.  The recognition of a prepetition claim in equitable distribution after a divorce case has been filed respects state property law, as N.J. recognizes the marital estate was in the custody of the law at that point.  Carr v. Carr, 576 A.2d 336 (1990) .  Consequently, the appellate court affirmed the bankruptcy court’s allowance of the prepetition claim for equitable distribution.

You should consult with your Virginia bankruptcy and divorce attorney, or Richmond divorce lawyer James H. Wilson, Jr., as to your rights in a spouse’s bankruptcy case pending a divorce.

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