Can a chapter 7 bankruptcy trustee sell the debtor’s right to a portion of her former spouse’s 401(k) plan?

Can a chapter 7 bankruptcy trustee sell the debtor’s right to a portion of her former spouse’s 401(k) plan?

Not in the case of In re Carlton, Case No: 300-40223, an unpublished case from U.S. Bankruptcy Court for the District of Oregon, where the judge held that the Debtor has no claim against her former husband, but instead has a right in his 401(k) plan and a right to obtain a Qualified Domestic Relations Order (“QDRO”).

In Carlton, the Debtor wife was divorced from her husband before filing chapter 7 bankruptcy.  In the divorce decree, the state court judge awarded the Debtor wife fifty percent (50%) of her husband’s 401 (k) plan and an equalizing judgment for a sum to compensate her for her share of the husband’s IRAs that he would retain.  The state divorce court retained jurisdiction to enter a QDROs transferring wife’s share of her husband’s retirement plan.  The wife did not obtain a QDRO before filing for chapter 7 bankruptcy to discharge her debts.  In her bankruptcy filing, the wife listed her interest in the 401(k) plan as a contingent, unliquidated claim against her ex-husband on her schedule B of personal property, but did not list it as exempt on her schedule C of exempt property. The chapter 7 trustee appointed in the Debtor’s bankruptcy case negotiated with the Debtor’s ex-husband to sell her interest in his 401(k) plan back to him for the sum of $5,000.  The Debtor wife objected to the trustee’s notice of intent to sell filed in the case to obtain the bankruptcy court judge’s approval of the sale.

The chapter 7 trustee in Carlton argued that the Debtor wife had no interest in her husband’s retirement plan until she obtained a QDRO, but instead had a claim against her ex-husband.  The Debtor wife argued that the divorce decree created an interest in her former husband’s 401(k) plan, which interest was not property of the estate due to the anti-alienation provisions of the Employee Retirement Income Security Act (“ERISA”), 29 U.S. Code Section 1056(d)(1).   ERISA is a federal law that regulates the creation of pension and retirement plans for employees and their beneficiaries, including spouses and children.  In general, interests in an ERISA plan may not be alienated, sold or transferred. This restriction on the alienation of ERISA benefits ensures that these plans are created exclusively to provide retirement benefits to participating employees and their beneficiaries.  Boggs v. Boggs, 520 U.S. 833, 845 (1997) .  One exception to this general rule against alienation was created for former spouses, who can obtain an interest in their spouse’s retirement plan from a divorce by a special order known as a Qualified Domestic Relations Order or QDRO,  29 U.S. Code Section 1056(d)(3)  .  (Spouses may also use a regular Domestic Relations Order in a divorce case to preserve the tax treatment of a transfer of a non-ERISA retirement plan, such as an Individual Retirement Plan or IRA.)

The bankruptcy court judge recognized that the state divorce decree awarding an interest in the husband’s 401(k) plan created the wife’s interest in the plan and limited the husband’s interest in the whole plan, citing Trustees of the Directors Guild of America-Producer Pension Benefits

Plans v. Tise, 234 F.3d 415 (9th Cir. 2000).   Instead of having a claim against her husband, the Debtor had a claim against the 401(k) plan.  The divorce decree gave the wife a right to obtain a QDRO in order to enforce her claim.  The bankruptcy judge ruled that the right was personal to the Debtor wife and could not be exercised by a chapter 7 trustee, who was not within the definition of alternate payee under ERISA, limited to a spouse, former spouse, child or other dependent of the employee participant.  29 U.S.C. 1056(d)(3)(K).  Since the chapter 7 trustee could not obtain a QDRO, he could not sell the interest in the retirement plan.

If you have any questions about a chapter 7 bankruptcy trustee’s rights in your or your former spouse’s retirement plan, call your Virginia bankruptcy and divorce law lawyer or Richmond Bankruptcy and Divorce Lawyer James H. Wilson, Jr.

Does Virginia’s heart balm statute prohibit an action to recover an engagement ring?

Does Virginia’s heart balm statute prohibit an action to recover an engagement ring?

Not in the case of McGrath v. Dockendorf, 793 S.E.2d 336 (2016), where the Supreme Court of Virginia ruled that a detinue action to recover a two carat diamond engagement ring worth $26,000 was not barred by Virginia’s heart balm statute, Virginia Code Section 8.01-220.  While the case does not directly concern bankruptcy, it does address property rights upon engagement.

Ethan L. Dockendorf gave a two carat engagement ring worth $26,000 to Julia V. McGrath with his promise to marry her.  After an engagement of more than a year, Dockendorf called off the marriage and demanded the return of the engagement ring from McGrath.  Dockendorf sued McGrath in detinue under Virginia Code Section 8.01-114 in the Circuit Court of Fairfax County for the return of the ring or its value.  A detinue action is an action recognized in Virginia for the return of property unlawfully withheld from the plaintiff.  The Circuit Court ruled in Dockendorf’s favor on the theory that the engagement ring was a conditional gift.  McGrath was ordered to return the ring within 30 days or suffer a money judgment for $26,000.

McGrath appealed to the Supreme Court of Virginia, arguing that Virginia’s heart balm statute barred a recovery for an engagement ring.  At one time, a fiancé could sue his or her betrothed for improperly breaking a promise to marry, Grubb v. Suit, 32 Gratt. 203 (1879), and recover financial and emotional damages.  In 1968, Virginia enacted a heart balm statute, Section 8.01-220, abolishing actions for a wrongful breach of a promise to marry.  In addition, Virginia has recognized a right to recover an engagement ring, Pretlow v. Pretlow, 177 Va. 524, 14 S.E.2d 381 (1941), the subject of another blawg post here, if the donee terminates the engagement.  McGrath argued that an action for a return of the engagement ring is essentially an action for a breach of a promise to marry, the type of action abolished by Virginia’s heart balm statute.  In response, Dockendorf argued that the heart balm statute is limited to a nullification of the common-law action for breach of promise to marry and not for the return of the gift of a ring.

The Supreme Court of Virginia first recognized the standard of review, which was one of de novo statutory construction.  The court then distinguished an action in detinue for the return of specific personal property from an action for a breach of a promise to marry for the recovery of damages for the humiliation and loss of a broken engagement.  The court noted that a majority of other state courts have ruled that a heart balm statute does not prohibit an action for the return of an engagement ring. Finally, the court affirmed its assumption that the General Assembly of Virginia is aware of the court’s rulings when enacting legislation, and did not specifically abolish an action for the return of an engagement ring when enacting Virginia’s heart balm statute.

The Supreme Court of Virginia distinguished its decision in McDermott v. Reynolds, 260 Va. 98, 530 S.E.2d 902 (2000) on which McGrath relied, a civil action for alienation of affections barred by Virginia Code §8.01-220 as the same type of action for damages for a particular type of conduct, disguised an intentional infliction of emotional distress.  In an interested footnote #3, the court noted “The question of fault may (or may not) bear upon the viability of a detinue action, but it is not relevant to our construction of the heart balm statute”  Apparently, the fault of Dockendorf in breaking off the engagement was not an issue raised at trial or on appeal, which issue might have obtained a different outcome for McGrath.

You should discuss with your Virginia divorce lawyer, or Glen Allen divorce lawyer James H. Wilson, Jr., whether you may be entitled to the return of, or to retain, an engagement ring.

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.

When do stock options become marital property subject to equitable distribution in a Virginia divorce case?

When do stock options become marital property subject to equitable distribution in a Virginia divorce case?

According the Supreme Court of Virginia in the case of Schuman v. Schuman, 282 Va. 443, 717 S.E.2d 410 (2011) stock options become marital property when they are earned during the marriage and before the date of last separation, regardless of whether the options are vested or nonvested.  Although Schuman does not directly concern bankruptcy, it does concern how intangible property rights, options in stock arising from employment, are treated as deferred compensation under Virginia’s equitable distribution statute, §20-107.3, and how a spouse who is not on the legal title to such property, nevertheless gains an interest through marriage and divorce in Virginia.  In a bankruptcy case, normally title to property controls, and the spouse who is not a title owner of such options would not have an interest in them that could be considered property of the bankruptcy estate under 11 U.S.C. §541 by virtue of the marriage, unless that spouse acquires or becomes entitle to acquire those rights in the marital property before filing bankruptcy, or as a result of a property settlement agreement, or interlocutory or final divorce decree within 180 days after filing bankruptcy under 11 U.S.C. §541(a)(5)(B).

In the Schuman case, the parties were married for only about four years and had entered into a premarital agreement or antenuptial agreement prior to their marriage, as permitted under the Virginia Premarital Agreement Act, Sections 20-147 to 20-155 of the Code of Virginia.  The Wife worked as a Vice President and then a President for SAIC, a large government contractor in Virginia.  As part of her employment package, she received what were called “stock options”, but what were in fact vesting stock, according to footnote 2 of the Supreme Court’s opinion.  A stock option is a right to buy a particular stock at a particular price, known as the strike price, on a predetermined date in the future when the option can be exercised.  The option purchaser pays a premium for the right to purchase under those conditions, but is not obligated to buy the stock.  If the stock option is exercised, then the option holder would ordinarily have to pay the price to buy the stock.  The option itself, the right to buy the stock at the strike price, may become a valuable property right if the strike price is lower than the current trading value or price of the stock, because the purchaser could buy the stock and sell it at its higher fair market value for a profit.  The value of the option increases or decreases disproportionately greater than the differences in the value of the underlying stock.  With a true option, the option itself can be sold without ever buying the stock.  By giving the controlling officers options in the company’s stock, a company can create a strong incentive for the controlling officers to increase the values of the shares of stock.

In Schuman, the option was not a true option because the stock would simply become part of the highly compensated employee’s portfolio when vested, provided the employee continued to work for the company.  It was actually a grant of stock subject to a vesting schedule, what the Supreme Court of Virginia referred to as “vesting stock”.  Unlike a true stock option, such vesting stock does not have a strike price, and would not be exercised by anyone; it simply transfer’s from the company’s books to the employee’s book of stock.

The Schuman case was twice appealed, first from the Virginia Circuit Court where the divorce case was tried, to the Virginia Court of Appeals, and then from the Virginia Court of Appeals to the Supreme Court of Virginia.  At the trial court level, the judge who heard the equitable distribution portion of the divorce case decided that the entirety of the stock award were separate funds, because the wife purchased them with her separate property.  The Court of Appeals decided the stock awards were separate property for a different reason, because the vesting date was after the date of last separation of the parties, a critically important date under Virginia equitable distribution statute, particularly with respect to a married person’s interest in his or her spouse’s retirement plan, pension plan or deferred compensation plan.  The Supreme Court of Virginia reversed the Court of Appeals and remanded the case to the Court of Appeals for a further remand to the trial court for the appropriate factual determinations consistent with the appellate court’s legal decision.

In arriving at its decision, the Supreme Court of Virginia noted that the Court of Appeals had previously correctly decided, in Dietz v. Dietz 436 S.E.2d 463 (Va. App. 1993), that deferred compensation in the form of stock options were considered deferred compensation subject to equitable distribution under Virginia Code Section 20-107.3(G), which 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 nonvested, of an employee spouse to the nonemployee spouse. Citing Black’s Law Dictionary, the court found “deferred compensation” to be “[p]ayment for work performed, to be paid in the future or when some future event occurs.”  While the Virginia Court of Appeals implicitly held that the option was earned on the date of vesting, the Supreme Court of Virginia held that the marital share of a deferred compensation, whether vested or nonvested, should be calculated the same way as the marital share of a pension, profit-sharing or retirement plan, as illustrated in the case of Mann v. Mann, 22 Va. App. 459, 464-65, 470 S.E.2d 605, 607-08 (Va. Ct. Appeals, 1996).  Consequently, the case was remanded for further remand to the trial judge for new findings and a new decision.

You should consult with your Virginia divorce attorney or Richmond divorce lawyer James H. Wilson, Jr., concerning how to calculate the marital share of stock options in your Virginia divorce case.

Does a chapter 7 bankruptcy trustee’s strong-arm powers extend to include the I.R.S.’s right to sell property owned by a husband and wife as tenants by the entirety when the non-filing spouse does not owe delinquent taxes?

Does a chapter 7 bankruptcy trustee’s strong-arm powers extend to include the I.R.S.’s right to sell property owned by a husband and wife as tenants by the entirety when the non-filing spouse does not owe delinquent taxes?

No, as the Fourth Circuit Court of Appeals ruled in Schlossberg v. Barney, 380 F.3d 174 (4th Cir., 2004), a chapter 7 bankruptcy trustee does not have the power to sell property owned by a husband and wife as tenants by the entirety when only one spouse has filed bankruptcy and there is no joint liability for unpaid taxes.  Although the husband and wife were not separated or divorced at the time of the bankruptcy filing, the case does concern rights in property when only one spouse files bankruptcy and the nondebtor spouse does not owe delinquent taxes.

A husband and wife can own real property in Virginia as tenants by the entirety with the common-law right of survivorship.  This tenancy is based on the old common law concept of a husband and wife as a single legal person (the husband).  Consequently the tenancy could not be severed by either spouse acting alone, and a creditor of just one of the spouses could not attach the real property to satisfy a judgment.  Upon divorce, the survivorship was eliminated and the tenancy automatically converts to a tenancy in common. (This is why it is very important for spouses facing divorce to consider the timing of the entry of the final decree of divorce as a judgment lien may then attach to that spouse’s interest in real estate.)

When someone files chapter 7 bankruptcy, the chapter 7 trustee not only steps into the shoes of the debtor in a sense to administer property of the bankruptcy estate, the chapter 7 trustee also has certain powers to set aside or avoid prepetition transfers of property.  The chapter 7 trustee’s avoidance powers include the so-called strong-arm powers contained in 11 U.S.C. §544, which give the trustee the same rights as a hypothetical creditor who extends credit to the debtor at the time the case is filed and has a judgment lien or an attachment, or a hypothetical bona fide purchaser of real property from the debtor with a perfected transfer at the time the case is filed.

The Internal Revenue Service (IRS) has rights greater than ordinary creditors, including ordinary judgment lien creditors, by virtue of its position as the agency of the U.S. Government charged with levying and collecting taxes.  The IRS can sever a tenancy by the entirety with the common-law right of survivorship so a federal tax lien can attach to the interest of a spouse who owes taxes, as established by the Supreme Court in United States v. Craft, 535 U.S. 274, 152 L.Ed.2d 437 (2002).

In Schlossberg, a husband and wife owned real property as tenants by the entirety, which had significant equity above the amount owed on the mortgage.  The husband alone filed chapter 7 bankruptcy and the husband alone owed unpaid taxes to the IRS.   The chapter 7 trustee wanted to sell the property and use the equity to pay the husband’s unsecured creditors.  The chapter 7 trustee contended in Schlossberg that his strong arm powers under 11 U.S.C. §544 as a hypothetical creditor to extend to include the rights of the IRS as a creditor, thus severing the tenancy by the entirety.  The U.S. Bankruptcy Court disagreed, overruling the trustee’s objection to the husband’s claimed exemption under 11 U.S.C. §522(b)(3)(B), which specifically protects a tenancy by the entirety if the tenancy is exempt from process under applicable nonbankruptcy law.   The U.S. District Court upheld the ruling of the bankruptcy court.  The Fourth Circuit Court of Appeals, which includes the federal district in Virginia, agreed with the bankruptcy court and the district court.

On appeal, the court ruled that the IRS is not a creditor who extends credit and thus does not fall within the ambit of 11 U.S.C. §544.  The court recognized the plain meaning of the bankruptcy code section at issue which concerns a voluntary creditor, not an involuntary creditor like the I.R.S., despite the IRS’s ability to enter into forbearance agreements for the repayment of a tax debt in installment payments under 26 U.S.C. §6159(c).  Further, the appeals court held that Congress did not intend that a chapter 7 trustee would wield the extraordinary powers of the federal government, which is based on the sovereign prerogative grounded in the mandate to lay and collect taxes.  If the court adopted the trustee’s reasoning, then the protection afforded entireties property under 11 U.S.C. §522(b)(2)(B) would be nullified, along with the protection to a nondebtor spouse under 11 U.S.C. §363(h), which allows administration of tenants by the entireties property if there are joint debts under certain circumstances.  Additionally, adopting the trustee’s position would mean no state law exemptions would exist, as the IRS’s power is limited only by the exemptions in 26 U.S.C. §6334(a).

You should consult with your bankruptcy and family law lawyer or Richmond divorce lawyer James H. Wilson, Jr.,  to discuss your property rights when your spouse files bankruptcy.

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.

 

Will a Virginia court reduce spousal support payments due to a downturn in the real estate business?

Will a Virginia court reduce spousal support payments due to a downturn in the real estate business?

It depends upon the circumstances and the factual findings regarding the reductions. In Hardy v. Hardy, File No. 02-83, the Circuit Court for the City of Charlottesville determined the husband had sustained losses of income constituting a material change in circumstances justifying a reduction in spousal support payments.

At the time of the final divorce and spousal support order, the Court found that the husband’s before-tax monthly income was substantial, around $33,000 a month, and set the spousal support payments accordingly at $18,000 a month. In his motion to modify spousal support, the husband alleged that his monthly before-tax income in the previous three years had significantly decreased. Although he had pursued the same occupation in the same field, he asserted that because of events outside of his control, namely the collapse of the “high-end” real estate market, he could not continue to make the same support payments in light of his income.

This case resembles the factual situation in Trump v. Trump, Record No. 2475-09-4 (Va. App. 2010), where the Court of Appeals of Virginia found that despite husband’s ability to save money consistently, the husband’s income losses represented a material change in circumstances warranting a reduction in spousal support. Similarly, in Hardy, the totality of the facts and the income losses led to the Circuit Court’s conclusion that it should reduce the husband’s spousal support payments.

Although the Circuit Court in Hardy did not elaborate on the legal precedent for modifying spousal support, that further discussion can be found in Wright v. Wright, CL-4587-01, previously discussed in this blawg. Under Va. Code. Ann. §20-109(A), the Court may increase, decrease, or terminate the amount or duration of support obligations it has set upon motion by either spouse. The decision to modify support rests solely in the discretion of the court upon a finding of a material change of circumstances. Barrs v. Barrs, 45 Va. App. 500, 612 S.E.2d 227(2005).  Using the factors provided in Va. Code. Ann. §20-107.1, the Court will determine whether a modification is warranted based upon the facts presented by the moving party.

In Hardy, the Circuit Court examined the decreased income of the husband as well as noting the decreased financial needs of the wife. Moreover, the Court determined that the wife had the ability to increase her own income by renting out two properties and reduce her personal expenditures. Furthermore, despite the husband’s ability to continue to reduce his business and personal expenses in light of his decreased income, the Circuit Court held that the economic downtown and its effect on the husband’s income substantiated a material change of circumstances and subsequently reduced his spousal support obligations from $18,000 a month to $12,500 a month.

You should consult your Virginia divorce lawyer or Richmond divorce lawyer James H. Wilson, Jr., to discuss whether a change in your financial situation might result in a modification of spousal support.

Is a debt arising from an indemnification agreement with a former spouse dischargeable in bankruptcy? 

Is a debt arising from an indemnification agreement with a former spouse dischargeable in bankruptcy?

In some circumstances, such an obligation might be dischargeable. In bankruptcy, a debtor may discharge some debts owed to various types of creditors; however, some debts are specifically excluded from the discharge by the Bankruptcy Code. These include payments to former spouses that are considered to be domestic support obligations, as defined in 11 U.S.C. §101(14A), such as alimony, maintenance and support, under 11 U.S.C. §523(a)(5). In addition to these domestic support obligations, a chapter 7 debtor cannot discharge other debts owed to a spouse, former spouse, or child of the debtor which arise from a divorce decree or separation agreement under 11 U.S.C. §523(a)(15).  However, in a Chapter 13 bankruptcy case, these non-domestic support, family law obligations may be dischargeable.   A Chapter 13 debtor, who makes all payments required by the Chapter 13 plan, including any required domestic support obligations, may receive a discharge 11 U.S.C. §1328(a) (straight discharge, not a hardship discharge) of certain debts owed to former spouses which are not considered to be domestic support obligations.

Because of this exception in Chapter 13 cases, bankruptcy courts may be called on to determine whether a payment owed by a debtor to a former spouse is a domestic support obligation or some other type of debt arising out of a divorce, equitable distribution, a property settlement agreement, or a separation agreement. In Pagels v. Pagels (In re Pagels) Ch. 13 Case No. 10-71138-SCS, Adv. No. 10-07070-SCS (Bankr. E.D.Va. Feb. 9, 2011) the U.S. Bankruptcy Court for the Eastern District of Virginia had to determine whether an obligation, agreed to by the Debtor Defendant, to indemnify her former spouse, the Plaintiff, for payments made on a vehicle, was in the “nature of alimony, maintenance or support.”

At issue in this adversary proceeding in this chapter 13 bankruptcy case was a clause in a Marital Stipulation and Property Settlement Agreement, which contemplated the future ownership of the vehicles possessed by the Plaintiff and the Defendant. In the agreement, the Defendant was to take complete ownership and possession of a van, and indemnify the Plaintiff for any costs he incurred regarding the vehicle. In the end, however, the Defendant either loaned or gave the vehicle to the Plaintiff and ceased making payments. Under the agreement, the Defendant was obligated to indemnify the Plaintiff for these expenses. The Plaintiff claimed that the debt owed to him under this obligation was not dischargeable in the Defendant’s Chapter 13 bankruptcy case. The Defendant Debtor argued that it was not a domestic support obligation, and was thus, subject to the discharge provisions of §1328(a).

In Pagels, where the indemnification obligation arose from a “voluntarily executed marital settlement agreement”, the court had to determine whether the parties mutually intended to create a support obligation at the time of the divorce or separation.  In Pagels, the bankruptcy court applied a four-part test that had been applied previously by that court and by other courts in the Fourth Circuit to determine the intention of the parties.

First, the court examined the language and substance of the agreement itself.  In doing so, the court took various things into account, such as the context of the agreement, the form of the payments and the language of the labels used in the structure of the agreement. In a previous case, Brunson v. Austin (In re Austin), 271 B.R. 97 (Bankr. E.D. Va. 2001), the court noted that, while labels used to describe the obligation may be persuasive, a label is not the only factor a court is going to rely on to determine whether the obligation was in the nature of maintenance or support. See. In Pagels, the court found that the obligation to indemnify the former spouse for the van payments made by him was in the form of an “unconditional and permanent exchange of rights and duties . . . . without explicit regard to the support or maintenance of the parties or their children.” The court considered it to be a straight forward exchange of the property right to own and possess the vehicle, for the right to avoid payments or costs associated with the vehicle. Additionally, there was no language that suggested that the obligation to make payments on the vehicle loan, or indemnify the other party for such payments, would terminate upon the remarriage or death of the other party. Finally, the Plaintiff specifically waived any present or future payment of spousal support by the Defendant.

Second, the court examined the circumstances of the agreement to determine whether any overbearing influence existed which might put into question the intent of either of the parties involved.  In this case, the Defendant has made no allegations of overbearing, and, although the Defendant was unrepresented in the drafting of the agreement, she did successfully enforce the agreement in state court, an event which, according to the court, closed the door on questions of overreaching.

Third, the court examined the financial circumstances of the parties at the time of the agreement. In doing so, the court looked for whether the claimant showed an obvious need for support at the time the agreement was made. Further, the party with the weaker financial circumstances is considered less likely to have taken on a domestic support obligation. In this case, the Plaintiff earned more than the Defendant, specifically waived spousal and child support, and, in fact, had agreed to pay the Defendant $2,400 per month for five years.

Fourth, the court questioned the function of the obligation at the time of the agreement. Under this part of the test, a court will look to determine whether the function of the obligation was to provide some sort of daily necessity such as food or transportation. In some cases, an agreement to indemnify can be found to be an obligation of support, where the underlying obligation to make payments was determined to be an obligation for support. The court referred to In re: Johnson, 397 B.R. 298 (Bankr. M.D.N.C. 2008), where the debtor spouse had agreed to indemnify a former spouse for payments on a marital property which were necessary to allow the former spouse and a child to maintain their residency on the property.

Here, however, the court found that the agreement to indemnify was not an agreement to provide support, considering the fact that the agreement contemplated that the Defendant would be able make all of these payments herself. There was some question as to whether possession of the van was for the purpose of providing transportation for the children, considering the fact that the van was given to the Plaintiff when the Defendant asked the Plaintiff to take custody of their two children. The court found, however, that the benefit to the children of the use of the van was incidental, and that it was the intention of the parties that the Defendant would retain possession of the van. Regardless, the court noted in Pagels, events following the agreement “do not change the function of the obligation or the parties’ shared intention at the time of the [a]greement.”

Taking these observations into consideration, along with the fact that the Plaintiff himself said that he was not seeking spousal support, the court concluded that the obligation to indemnify the Plaintiff for payments made for the van was not a domestic support obligation pursuant to §101(14A) of the Bankruptcy Code, and was, therefore, dischargeable under §1328(a).

You should consult with your Virginia bankruptcy law lawyer and divorce lawyer, or Richmond bankruptcy law and divorce attorney James H. Wilson, Jr., regarding whether you may be able to discharge, or prevent the discharge by your spouse or former spouse of, a particular family law debt in bankruptcy.

What are the debtor’s duties to disclose fully payments from a divorce in a subsequent bankruptcy case?

What are the debtor’s duties to disclose fully payments from a divorce in a subsequent bankruptcy case?

In bankruptcy, the debtor has a duty to disclose information with his lawyer, the Trustee and his creditors.  In return for the benefit of receiving a bankruptcy discharge, a debtor must disclose all of his assets, liabilities and financial affairs.  This obligation extends to the debtor’s conduct regarding payments received under divorce settlements with former spouses. The United States Court of Appeals for the First Circuit affirmed the U.S. District Court affirming a bankruptcy court’s order revoking the discharge of Bruce E. Thunberg in his Chapter 7 bankruptcy case in Thunberg v. Wallick (In re Thunberg) 641 F.3d 559 (1st Cir. 2011).

In that case, the debtor was involved in a divorce settlement with his former wife prior to the filing of his bankruptcy petition. The debtor’s treatment of the payments he received under that settlement became an issue in his subsequent bankruptcy proceeding.  Although he was granted a discharge administratively, the Trustee filed a complaint requesting that the bankruptcy court revoke his discharge on the grounds that it had been obtained fraudulently. See 11 U.S.C. § 727(d)(2) (which provides that upon request of a trustee, the court shall revoke a discharge if, “the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee . . . .”).

Pursuant to the 1997 divorce agreement, the debtor’s former spouse agreed to make annual payments of $30,000 to the debtor. Each $30,000 payment included $16,666 in alimony, and the remaining $13,333 was in the form of a property settlement. The debtor’s questionable conduct began in November of 2000, when he received one of these $30,000 payments from his former spouse and deposited the entire amount in a business account. See Wallick v. Thunberg (In re Thunberg), 413 B.R. 20, 22 (Bankr. D.R.I. 2009).

The debtor and the Trustee provided differing accounts of which portions of the payments were to be paid to secured creditors. The debtor claimed that he believed he could keep the alimony portion of the payment. The Trustee, meanwhile, argued that he was led to believe, by information provided at the 341 meeting and by the contents of a letter from the debtor’s attorney, that the entire payment was subject to the liens of secured creditors. Although the debtor claims the letter only refers to the property settlement portion of the payment, the bankruptcy court found that the record, including the letter, suggested that the entire payment from the ex-spouse was subject to security interests. Wallick v. Thunberg (In re Thunberg), 413 B.R. at 23 (Bankr. D.R.I. 2009).

The debtor also defended his retention of the payment by arguing that his attorney at one point advised him that he may keep the alimony portion of the payment. The bankruptcy court noted that his arguments regarding the alimony portion of the payment did not explain his actions in retaining the non-alimony portion. Id. The District Court noted, on appeal, that the debtor tried to explain his retention of the funds by testifying that he was paying funds to the creditors according to a separate schedule. Thunberg v. Wallick (In re Thunberg), No. 09-419 S (D.R.I. May 4, 2010). The court, in its decision affirming the bankruptcy court’s ruling, stated that there was nothing to corroborate the debtor’s claims. Id.

Additionally, to the debtor’s discredit, the debtor made a side agreement with his former spouse to accelerate several of the payments, without informing the Trustee or his own lawyer. When he received these funds, he deposited them in various personal and business accounts, before eventually paying some of the funds to the banks. Although the debtor claimed he told his lawyer about the agreement prior to receiving the payments, the bankruptcy court accepted the testimony of the debtor’s attorney who testified that he had not received any notice of the agreement until after the fact, and that he wouldn’t have approved of such an agreement. Finally, the trustee discovered that the liens in question had not been perfected, and thus, no portion of the payment was subject to any security interest. These circumstances only further clouded the credibility of the debtor.

The bankruptcy court found that Thunberg violated his duty to be “straightforward” in three ways: by remaining silent while his lawyer “mistakenly and incorrectly” informed the Trustee that the payments the Debtor received from his former spouse would be paid to secured creditors, by engaging in “secret negotiations” with his former spouse over funds that were property of the estate, and finally, by “hurriedly dispersing” the payments made under the unauthorized agreement with his former spouse without informing his lawyer. The bankruptcy court, convinced that these violations fell within the category of deceptive behavior that is prohibited by 11 U.S.C. § 727(d)(2), revoked the debtor’s discharge.

Ultimately on appeal to the U.S. Court of Appeals for the First Circuit, Thunberg argued that his actions “were at worst honest mistakes.” Thunberg v. Wallick (In re Thunberg) 641 F.3d 559 (1st Cir. 2011). However, the appellate court noted that while Thunberg “largely avoided explicit false statements,” his fraudulent intent could be inferred from a “pattern of evasion and silence in the face of culpable knowledge.” Id.  Importantly, the court notes that although he eventually turned over payments to the estate before trial, it was not enough to undo his earlier actions and avoid the revoking of his discharge. Id.

In this case, the bankruptcy court relied on the reasoning in Boroff v. Tully (In re Tully), 818 F. 2d 106 (1st Cir. 1987), which provided a standard for litigation under §727 of the Bankruptcy Code. See. Although Tully involved litigation concerning the denial of a discharge pursuant to § 727(a)(4)(A), and not a revocation of a discharge pursuant to § 727(d)(2), the bankruptcy court found that the analysis and discussion in Tully was relevant in addressing the facts of Thunberg’s case. Similarly, the District Court for the Eastern District of Virginia, in a case involving an objection to discharge under § 727(a), has cited Tully’s language, stating that a debtor may not “play fast and loose with their assets” and still receive a discharge under § 727.  Hatton v. Spencer (In re Hatton), 204 B.R. 477, 482 ( E.D. Va. 1997).  In determining whether a debtor’s actions were carried out with requisite fraudulent intent, the District Court has found proof of fraudulent intent where the pattern of conduct of the debtor suggests a “reckless indifference for the truth.” See Dean v. McDow, 299 B.R. 133, 140 (E.D. Va. 2003).  In handling the proceeds of a divorce settlement, a debtor in the Eastern District of Virginia may similarly find themselves in peril of losing the benefit of a discharge in bankruptcy if they fail to fully disclose the circumstances of their receipt of payments from an former spouse.

You should consult with your Virginia bankruptcy law lawyer and divorce lawyer, or Richmond bankruptcy law and divorce attorney James H. Wilson, Jr., concerning how your divorce settlement should be handled when filing a bankruptcy petition.

Can a chapter 7 bankruptcy debtor avoid a judicial lien securing a divorce debt to his former spouse using his homestead exemption?

Can a chapter 7 bankruptcy debtor avoid a judicial lien securing a divorce debt to his former spouse using his homestead exemption?

Not in Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825 (1991), where the United States Supreme Court held that the debtor’s interest in the property had not been created prior to the fixing of the judicial loan upon the property, and, thus, the debtor could not avoid the lien, because the interest and the lien were simultaneously created.

Although the Farrey case was decided in part under the laws of Wisconsin, a community property state where a divorce court equally divides the marital assets of the parties starting with a 50-50 division, in contrast to the Commonwealth of Virginia, an equitable distribution state where a divorce court equitably distributes the marital property according to a number of factors, the interplay between bankruptcy and divorce law in the case may still be relevant to Virginia divorce and bankruptcy cases.

In Farrey, the parties were married in Wisconsin and had three children prior to filing for divorce after twenty years of marriage.  In the final decree of divorce, the divorce court judge awarded the husband and the wife one-half of the marital estate, following the state statutory presumption of equal division of the parties. The divorce decree granted the husband sole title to all of the real estate, subject to a mortgage, and a majority of the parties’ personal property. The wife received the other portion of the personal property and the proceeds from an auction of the home’s furniture. The Court also equally distributed the liabilities of the parties and ordered the husband to pay the wife one-half of the difference between their net assets. As security for this payment, the divorce court judge awarded to wife a lien against the real property awarded to the husband for the sums he owed wife. The husband failed to make the payments ordered by the divorce court judge; instead, the husband filed a Chapter 7 bankruptcy petition. In his petition, he listed the marital home and real estate as exempt homestead property. He filed a motion to avoid the wife’s lien, citing 11 U.S.C. §522(f)(1), arguing that the wife had a judicial lien against his property that impaired his homestead exemption.  In response, the wife argued that §522(f)(1) could not divest her of her interest in the marital home. The Bankruptcy Court in In re Sanderfoot, 83 B.R. 564 (Bankr. E.D. Wis.1988), denied the husband’s motion, and held that the lien could not be avoided.  The U.S. District Court reversed, in In re Sanderfoot, 92 B.R. 802 (U.S. E.D. Wis. 1988) holding that the lien had been fixed on an interest of the debtor in the property. Following that decision, a divided panel for the U.S. Circuit Court of Appeals affirmed, Sanderfoot v. Sanderfoot, 899 F.2d 598 (7th Cir.1990), and the U.S. Supreme Court granted certiorari to resolve the issue.

The statute in dispute in this case, 11 U.S.C. §522(f)(1), states, “Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, is such lien is—(1) a judicial lien.”  Neither party disputed that the lien at issue was a judicial loan; instead, the question involved whether the language of the statute permitted the husband to avoid the fixing of the wife’s lien on the interest obtained by the divorce decree.

In this case, the entire case revolved around the language and interpretation of 11 U.S.C. §522(f)(1). The husband argued the language meant a lien could be avoided if it were currently attached to the debtor’s interest.  In contrast, the wife asserted the text only allowed a debtor to avoid a lien if the lien attached after the debtor had obtained an interest in the property.  Applying the plain meaning of the statute, the Supreme Court held that the gerund “fixing” refers to the fastening of liability upon a pre-existing object; hence, unless the debtor had the interest before the lien attached, he cannot avoid the fixing of the lien.  To support this decision, the Supreme Court examined the provision’s purpose and history.  According to the court, Congress intended this statute to counter the problem of creditors filing claims against a debtor prior to a bankruptcy petition and, thus, defeating his exemption claims. Therefore, in this case, the question was whether the husband possessed his interest prior to the attaching of the judicial lien. The wife claims that prior to the final divorce decree, she and her husband held title in the property as joint tenant, each with an undivided one-half interest; therefore, the divorce decree extinguished these interests and created new interests (giving the husband fee simple in the home and real estate and various assets and the lien to the wife). After hearing both sides, the U.S. Supreme Court held that the decree transferred the wife’s interest to the husband while simultaneously granting the wife a lien. Using this application, the Court determined that the husband could not have had a pre-existing interest in the property prior to the attachment of the lien. Furthermore, given the legislative history of the statute, the Supreme Court stated that §522(f)(1) was not enacted to avoid this type of situation. As a result, the Supreme Court held that §522(f)(1) of the Bankruptcy Code “requires a debtor to have possessed an interest to which a lien attached, before it attached, to avoid the fixing of the lien on that interest…”  Farrey v. Sanderfoot, 500 U.S. 291 (1991), and the Court reversed the Court of Appeals’ decision by holding that the husband could not avoid the lien payment under the statute.

Interestingly, in a concurring opinion, while agreeing with the outcome, Justices Kennedy and Souter noted that the reasoning was better suited to a jurisdiction (like Virginia) that recognized the tenancy by the entirety with the common-law right of survivorship, where a single interest owned by the married couple because the estate dissolves when the marriage ends.  Thus, the husband would not have had any individual interest prior to the divorce, whereas under the joint tenancy under Wisconsin law, he had at least an undivided half-interest to which the lien might attach.  Fortunately for the wife in Farrey, the husband had conceded that the property rights under the joint tenancy were wholly extinguished and new rights were put in place.

You should consult with your Virginia bankruptcy law and divorce law lawyers, or Richmond bankruptcy law and divorce attorney James H. Wilson, Jr., concerning how your or your spouse’s bankruptcy filing might affect the results of your divorce case.