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.

Will a Virginia divorce court reopen an entire case after it was sent back on appeal for recalculation of child support payments?

Will a Virginia divorce court reopen an entire case after it was sent back on appeal for recalculation of child support payments?

Not in West v. West, CH03-938, where a Virginia Circuit Court issued a letter opinion stating that the Court of Appeals’ mandate only reopened the case for the limited issue of adjusting child support payments.

The parties were involved in a long process of litigation to settle the issues in the divorce, and the trial court ruled on the grounds for divorce, equitable distribution, custody and child and spousal support in a written opinion that was incorporated into the final divorce decree.   A few days prior to the final decree, the trial court established that the husband’s income was nearly double the amount previously stipulated and relied upon by the court in making the child support determination.  However, rather than recalculating the child support guidelines, the trial court adjusted payments by requiring the husband to pay 70% of the uninsured medical costs while the mother would cover the remaining 30%. Both parties appealed to the Court of Appeals, and in West v. West, 53 Va. App. 125 (2008), the Court of Appeals affirmed all of the lower court’s findings except for the child support determination, which the Court remanded “for recalculation [of child support] using the parties’ respective income at the time of the final decree.” The parties mistakenly treated the Court of Appeals’ mandate as having reopened the original divorce case and tried to re-litigate matters, even attempting discovery proceedings and issuing several subpoenas duces tecum.

As the Circuit Court asserted in its written opinion, Rule 1:1 of the Rules of the Supreme Court of Virginia confirms that a final judgment remains in control of the court for 21 days and no longer; following that date, the final order cannot be disturbed and the trial court’s decision becomes final.  The Court affirmed that while a divorce case may be reinstated on the court docket when full relief has not been obtained pursuant to §20-121.1, neither party in West asked to reinstate the case; instead it was closed and only reopened by the Virginia Court of Appeals for the limited specific purpose of recalculating child support using the evidence already obtained prior to the final divorce decree. By not complying with the plain order of the appellate court, the parties were in error, and nothing beyond the mandatory order of the Court of Appeals could be determined. See Hart v. Hart, 35 Va. App. 221 (2001).

The Circuit Court affirmed that any judgment or order entered by a court lacking jurisdiction is a nullity, because the trial court does not have authority to exceed the scope of the matters sent to the court for remand. See Hart v. Hart, 35 Va. App. 221 (2001). Therefore, any orders entered following the Court of Appeals remand were null and void, and “only to the extent that an order that is not in furtherance of an appellate court mandate in a closed court can be considered valid, the Court finds any such order to be interlocutory and subject to correction.

According to Freezer v. Miller, 163 Va. 180 (1934), “an interlocutory judgment or decree made in the progress of a cause is always under the control of the court until the final decision of the suit, and it may be modified or rescinded, upon sufficient grounds shown, at any time before final judgment.” Here, the judge’s recusal order remained in full force, and the trial court’s custody decision, because it was heard de novo, would not be treated as part of this case, and instead would be remanded to the Juvenile and Domestic Relations District Court. Therefore, the Circuit Court recalculated the parties’ income for support payments according to the Court of Appeals mandate, but refused to reopen the entire divorce case, because it was outside the scope of the remand jurisdiction.

You should consult with your Virginia divorce attorney or Glen Allen divorce lawyer James H. Wilson, Jr., concerning the scope of jurisdiction in your Virginia family law matter.

Will a Virginia court award attorney’s fees to a husband in a divorce case when the husband refused to make efforts to settle?

Will a Virginia court award attorney’s fees to a husband in a divorce case when the husband refused to make efforts to settle?

Not in Blackwell v. Blackwell, Record No. 1229-10-2,  (Va. App. 2010), where the Virginia Court of Appeals held that the husband’s appeal from the Circuit Court of Chesterfield County lacked merit because the wife’s motions and depositions were not frivolous, and the award of attorney’s fees was within the court’s reasonable discretion given that the husband had not attempted to settle the issues of the case.

The parties were married for four years before they separated for a year and subsequently divorced. The husband filed a complaint for a no-fault divorce in the Circuit Court of Chesterfield County. The wife filed an answer and counterclaim and submitted discovery requests to husband. At the final hearing, the Chesterfield County Circuit Court judge accepted the parties’ arrangement in awarding the marital home to the husband.  In addition, the Court equitably divided the parties’ retirement, ordered the parties to sell and split the profits of their joint timeshare, and awarded attorney’s fees to the wife.

Following entry of the final decree of divorce, the husband appealed, arguing that the Chesterfield County Circuit Court judge should not have awarded attorney’s fees to the wife for three reasons: 1) she filed a “frivolous” motion to compel then failed to appear in court; 2) she took “frivolous” de bene esse depositions; and 3) purposefully extending the court proceedings.

First, he asserted that the wife’s motion was “frivolous” because it did not comply with Rule 4:12 (a) and the wife did not appear at the hearing. The wife had not shown up at the hearing when she learned that the matter had not been put on the court’s docket; the husband was present, but the matter was not heard. On appeal, the Virginia Court of Appeals held the wife’s motion had not been frivolous, and the divorce court judge was not in error by awarding attorney’s fees to the wife.

Second, the husband challenged the court’s award because the wife took “frivolous” de bene esse depositions of himself and herself .  In reviewing the case, the court noted that the wife’s counsel only questioned the husband regarding the former martial residence and the timeshare. Because the Chesterfield County Circuit Court accepted evidence by deposition and the questions concerned equitable distribution, the Virginia Court of Appeals held that the depositions were not frivolous.

Finally, the husband argued that he should have received the award of the attorney’s fees because the wife had engaged in vexatious conduct. Upon review, however, the court found no evidence of vexatious conduct; rather, it noted that the wife had only objected to the husband’s entry of the final divorce decree because he had not resolved the equitable distribution issues. Furthermore, the court held that there were no unreasonable delays in the proceedings.

In reviewing the law and standard of review for appeals, the Virginia Court of Appeals noted that “As long as evidence in the record supports the trial court’s ruling and the trial court has not abused its discretion, its ruling must be affirmed on appeal.” Brown v. Brown, 30 Va. App. 532, 538, 518 S.E.2d 336, 338 (1999).   “[A]n award of attorney’s fees is a matter submitted to the trial court’s sound discretion and is reviewable on appeal only for an abuse of discretion.” Richardson v. Richardson, 30 Va. App. 341, 516 S.E.2d 726 (1999) .  Although the husband alleged that the trial court erred in its award, the Court reaffirmed the standard in McGinnis v. McGinnis, “The key to a proper award of counsel fees [is] reasonableness under all of the circumstances revealed by the record.” McGinnis v. McGinnis, 1 Va. App. 272, 277, 338 S.E.2d 159, 162 (1985).   Because the record and the evidence indicated that the award was reasonable based on the facts and circumstances of the case, the court found that the husband’s appeal lacked merit. Moreover, the Virginia Court of Appeals stated that because the husband filed his complaint for divorce without trying to settle the issues and then tried to obtain a divorce without resolving equitable distribution or otherwise settle the case, the trial court correctly awarded the attorney’s fees to the wife.

You should discuss whether you might be awarded attorney fees in your divorce case with your Virginia divorce attorney or Richmond divorce lawyer James H. Wilson, Jr.

 

 

Can a husband who prevents his foreign born wife from entering the U.S. obtain a divorce in Virginia?  

Can a husband who prevents his foreign born wife from entering the U.S. obtain a divorce in Virginia?

Not in the case of Subramanian v. Ravichandran, Case No. CL-2010-4118 (Va. App. 2012), where the Virginia Circuit Court judge denied a divorce to a husband who frustrated his wife’s re-entry into the United States, on the equitable grounds of unclean hands.

The parties were married in India and subsequently moved to Virginia, where the wife retained a H-4 Dependent Visa (meaning her visa for residence in Virginia and travel to and from the United States depended upon her husband). After approximately a year of marriage, the wife returned to India, and according to the husband, the parties intended the separation remain permanent. Two years later, the husband filed a complaint for divorce in Virginia, seeking a divorce on the grounds of desertion and/or mental cruelty, or alternatively, one year of separation, pursuant to Virginia Code §20-91(9). The wife filed a response to the complaint, and in her response she alleged that the husband was restricting her from entering the United States to contest the divorce. (Due to her H-4 visa, she could not return without the husband’s consent). The Circuit Court held a hearing where the husband presented evidence to obtain a divorce under Virginia Code §20-91(9), and during the hearing he admitted to refusing the wife’s re-entry into the country.

In determining whether to grant the divorce, the Circuit Court examined the issue of whether the husband was entitled to a divorce when he had admitted to restricting his wife’s entry into the United States to contest the divorce. According to the husband, his petition was simply an ex parte divorce action, and given that he is a Virginia resident and has met the statutory requirements of Virginia Code §20-91(9), the Court must enter the divorce, regardless of his wife’s absence and the cause for her absence. The Court noted that under Virginia Code§20-91(9), either spouse may petition for a divorce if the parties have lived separate and without cohabitation for a period in excess of a year. In addition, the Court may grant an ex parte divorce when the defendant is absent or the Court lacks jurisdiction. See Cook v. Cook, 18 Va. App. 726, 446 S.E.2d 894 (Va. Ct. App. 1994).

Here, the Court disagreed with the husband’s position on the issue and affirmed that this case was not an ex parte divorce, because the wife had filed an answer in which the wife expressed a desire to contest the divorce. Furthermore, it could not be an ex parte matter, because by filing her answer, the wife consented to the Court’s jurisdiction. See Nixon v. Rowland, 192 Va. 47 (1951)(holding that a general appearance in a case grants the court jurisdiction over the person). In addition, the Court stated that the wife’s absence and the reason for her absence were significant in determining whether to grant the divorce. As the Court noted, under Virginia law, a party coming before a court of equity must have clean hands, and that party must refrain from an inequitable or wrongful conduct in the subject or case at issue. Richards v. Musselman, 221 Va. 181, 267 S.E.2d 164 (1980) (noting that the Court may deny equitable relief to any party who comes to court with unclean hands). Because a divorce case is an equitable proceeding, it falls under the purview of this doctrine. See Dritselis v. Dritselis, 2005 Va. App. 451 (Va. Ct. App. 2005). Therefore, the husband’s actions played a role in determining whether he possessed clean hands before the court.

Upon a review of the evidence, the Circuit Court held that the husband did not have clean hands and, thus, was not entitled to the relief sought by his divorce action. Because the husband affirmatively restricted his wife’s re-entry to contest the divorce, he clearly acted wrongfully, and the doctrine of unclean hands applied. In addition to those reasons for denial of the husband’s petition, the Court affirmed that entry of a final divorce decree would prevent the wife from seeking either spousal support or equitable distribution. See Toomey v. Toomey, 251 Va. 168, 465 S.E.2d 838 (1996) (holding that the trial court loses jurisdiction to decide support issues twenty-one days after the final decree has been entered). In this case, that decision would foreclose any option for the wife to litigate those issues, because she could not gain access to the Court. This inequity and the husband’s unclean hands, therefore, gave the Circuit Court the basis for its denial of the husband’s divorce request under Virginia Code §20-91(9).

You should contact your Virginia divorce lawyer or Richmond divorce lawyer James H. Wilson, Jr., to discuss how actions leading to the filing of the divorce case may affect the outcome.

Will a Virginia court reduce spousal support when the husband loses his job?

Will a Virginia court reduce spousal support when the husband loses his job?

Not always, according to the unpublished opinion of  Lewis v. Lewis, Record No. 1230-10-2 (Va. App. 2010), where the Court of Appeals of Virginia determined that the husband’s termination did not reflect a material change of circumstances bearing on his ability to pay the support amounts entered in the final divorce decree.

The parties were married for thirty-nine years prior to their separation, and the final divorce decree was entered two years later. In the final decree, the Circuit Court established the guidelines for the husband’s payment of spousal support. At the time of the divorce, the husband was employed and earning a fairly substantial income and the wife was unemployed.

Seven years later, the husband’s position was eliminated, and he was forced to pay for his own medical insurance benefits. Consequently, the husband filed a motion to reduce or terminate his spousal support. At that time, the wife was middle-aged and suffered from a serious degenerative disease. The husband, prior to the filing of his motion, however, had purchased a second residence with his fiancée. Thus, at the time of hearing, he owned two residences: his primary residence with no mortgage and a second home with mortgage payments and necessary repairs. At the hearing, the Virginia Circuit Court held that the husband did not prove a material change in circumstances, because “[w]hile there has been a slight reduction in [the husband’s] income due to his termination, [husband] continues to own substantial assets and has voluntarily taken on financial obligations.”

In his appeal, the husband argued that the Circuit Court erred by comparing his income and expense statement at the time of the divorce with his income and expense statement at the time of the hearing. At the hearing, the Circuit Court concluded that the financial reports reflected a decrease of only a few hundred dollars. In addition, the fact that the husband “voluntarily obligated himself on a mortgage for the second house” and had substantial assets (including the houses and funds in a bank account and 401(K) plan) supported a finding of no material change in circumstances. Furthermore, the Court found that the husband’s expenses were “inflated” because they included his fiancée’s expenses as well as his own. Therefore, the Circuit Court ruled that there had been no material change.

In reviewing the husband’s appeal, the Court of Appeals noted Virginia Code §20-109, which states, “Upon petition of either party the court may increase, decrease, or terminate the amount or duration of any spousal support and maintenance . . . as the circumstances may make proper.”  Moreover, the Court recognized that the party moving for a modification of support bears the burden of proving both a material change in circumstances and that the change warrants a modification of support. Schoenwetter v. Schoenwetter, 8 Va. App. 601, 383 S.E.2d 28 (1989). That material change in circumstances “must bear upon the financial needs of the dependent spouse or the ability of the supporting spouse to pay.” Hollowell v. Hollowell, 6 Va. App. 417, 369 S.E.2d 451 (1988). In this case, the Court of Appeals found that the evidence supported the Circuit Court’s decision and affirmed that there had been no material change in circumstances warranting a reduction or elimination of the husband’s spousal support obligations.

You should consult with your Virginia divorce lawyer, or Richmond divorce lawyer James H. Wilson, Jr., Attorney & Counsellor at Law, to discuss your propects for a modification of spousal support.

Will Virginia’s long arm statute confer jurisdiction for child support over a father of a child conceived in a foreign country?

Will Virginia’s long arm statute confer jurisdiction for child support over a father of a child conceived in a foreign country?

In Bergaust v. Flaherty, Record No. 0650-10-4 (Va. App. 2011), the Court of Appeals of Virginia determined that it did not have personal jurisdiction over the father because the child was fathered and conceived in a foreign country, even though the child was born in Virginia, the father admitted paternity, the father visited the mother and child in Virginia, and the mother and child lived in Virginia.   Jurisdiction is the power of a court to decide a given matter involving certain parties.  Due process requires that a person have some kind of connection to the state before that person can be brought into court to answer a claim.  Like all the states in the U.S., Virginia has a “long arm” statute that describes the type of connection necessary to make a person answer a case in Virginia.  If a person disputes the necessary connection with the Commonwealth of Virginia, that person can make a special appearance to contest the right of the state to exercise power over that particular individual.

In the Bergaust case, the father and mother met in France and continued a long-distance phone relationship while the mother lived in Virginia. Nearly two years later, the mother returned to France to visit, and during that period, she conceived a child. Upon discovery, the father continued contact with the mother for approximately a year, until he broke off communication. Twelve years later, the mother found the father’s contact information and she filed a petition in the appropriate Virginia county’s Juvenile and Domestic Relations District Court (J&DRC) to establish paternity and set child support. The father filed a motion to dismiss based upon a lack of personal jurisdiction, and the Juvenile and Domestic Relations District  Court judge dismissed the cases.  The mother appealed to the same Virginia county’s Circuit Court.  The circuit court judge determined that Virginia could not exercise personal jurisdiction over the father. On appeal to the Court of Appeals, the mother challenged that ruling that Virginia could not exercise personal jurisdiction over the father under Virginia’s long arm statute.

Upon examination, the Court of Appeals noted Cabaniss v. Cabiniss, 46 Va. App. 595, 620 S.E.2d 559 (2005), and affirmed that in obtaining the necessary personal jurisdiction over an out-of-state defendant in a child support claim, the evidence must establish “at a minimum, a connection to Virginia that is recognized by Virginia’s long-arm statute.”  As Danville Plywood Corp. v. Plain & Fancy Kitchens, Inc., 218 Va. 533, 238 S.E.2d 800 (1977) establishes, the long-arm statute exists “to assert jurisdiction, to the extent permissible under the Due Process Clause of the Constitution of the United States, over nonresidents who engage in some purposeful activity in Virginia.” Under the terms of Virginia’s long-arm statute, found in the Virginia Code §8.01-328.1(A)(8), “A court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a cause of action arising from the person’s . . . having (iii) shown by personal conduct in this Commonwealth, as alleged by affidavit, that the person conceived or fathered a child in this Commonwealth.” By law, once the Court has accepted that the long-arm statute is satisfied, the inquiry is only “whether the defendant has sufficient ‘minimum contacts with [the forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. Young v. New Haven Advocate, 315 F.3d 256, (4th Cir. 2002) (quoting Int’l Shoe v. Washington, 326 U.S. 310, 316 (1945).

In this case, the question of personal jurisdiction rested on the determination of the words “conceived or fathered” a child in the Commonwealth. The father asserted that according to the Code, the plain language of the statute should apply, and only the act of procreated or the mother’s becoming pregnant fell within the statute. The mother argued, however, the statute should be read more broadly to encompass the word “fathered” as meaning acknowledging paternity.

The Court noted that Hubbard v. Henrico Ltd. P’shp, 255 Va. 335, 497 S.E.2d 335 (1998) applied, meaning that when “a statute contains no express definition of a term  . . . [we] infer the legislature’s intent from the plain meaning of the language used. Thus, by applying the plain and ordinary meaning found in Webster’s Third New International Dictionary, the Court of Appeals determined that “conceive” means “to become pregnant with” or “to beget,” while “fathered” means “to make oneself the father of: beget.” Thus, because both the mother and the father agreed that the conception of the child occurred in France, the child was not “conceived or fathered” in the Commonwealth for the purposes of the long-arm statute. As a result, the Court of Appeals held that it did not have personal jurisdiction and affirmed the previous judgment.

You should consult with your Virginia family law lawyer or Richmond divorce lawyer James H. Wilson, Jr., concerning whether a nonresident has sufficient contacts with the Commonwealth of Virginia to fall within Virginia’s long arm jurisdiction and be forced to defend a given case in Virginia.

What is the proper measure of the value of a business solely in wife’s name in a Virginia divorce case?

What is the proper measure of the value of a business solely in wife’s name in a Virginia divorce case?

In Newman v. Newman, CL08-342, a Virginia circuit court judge held that a business solely in wife’s name should be classified primarily as her separate property with a majority of its value being personal goodwill and a minority of its value being marital property in the form of commercial goodwill.  The challenge for Virginia divorce courts in business valuation cases was well stated by the Virginia Court of Appeals in the case of Bosserman v. Bosserman, “[t]rial courts valuing marital property for the purpose of making a monetary award must determine from the evidence that value which represents the property’s intrinsic worth to the parties upon dissolution of the marriage.”  Bosserman v. Bosserman, 384 S.E.2d 104 (Va. Ct. Appeals, 1989).  No particular valuation method is required in Virginia, but the valuation method should be appropriate to the type of business, and based on the best information available to one’s expert witness, or as the Newman case teaches us, at least better information than is available to the other spouse’s expert witness.

In Newman, the Court entered the final decree of divorce for the parties in January 2010. Prior to the hearing for equal distribution, the parties had disagreed about the value of a closely held corporation, an LLC that was opened during the course of the marriage and titled solely in the wife’s name. The business was begun to facilitate the wife’s occupation, but the parties differed about the value of the business and how it should be divided. Both parties had the business valued, and each side presented its figure. The husband’s expert argued that the totality of the business was commercial goodwill, and, thus, subject to equitable distribution as marital property. The wife’s expert, however, placed the value lower and attributed a substantial portion of its value to personal goodwill, with the book value being a much lower figure.

Goodwill is the value of a business beyond its physical assets. In terms of equitable distribution, personal goodwill, also known as professional goodwill or individual goodwill, is traced to an individual and qualifies as separate property in a divorce proceeding. Commercial goodwill, also known as practice goodwill or business goodwill, can be traced to a business entity and is regarded as marital property. See Howell v. Howell, 31 Va. App. 332, 344 (2000).   Goodwill would normally be proven in a divorce case through the use of expert witnesses, business valuation experts, or forensic accountants who can examine the appropriate information sources and develop a supportable opinion of value.  Each party might hire his or her own expert witness to come up with a value, based on the information that party could obtain through personal records, public records, the discovery process to obtain financial records such as the corporate books and records, income statements, balance sheets, financial disclosures, loan applications, tax returns, personal property returns, business license applications, and other means.  The Newman case became just such a battle of the expert witnesses, and the proper foundation for their opinion of value became the deciding factor.  Under the husband’s theory, because his expert valued the entire business as commercial goodwill, the entire value of the business should be divided equally.  Husband’s expert witness was not able to meet with the business owner wife, and relied on husband’s financial records and a website for the company that did not reveal much.  Wife’s expert witness had the opportunity to meet with wife on several occasions, and examined financial records of the corporation prepared by a CPA.  Consequently, the court accepted wife’s expert’s opinion and attributed the majority of value to personal goodwill rather than commercial goodwill.  As such, the majority of the value of wife’s closely held corporation was her separate property, not marital property subject to equitable distribution.

You should consult with your Virginia divorce lawyer, or Richmond divorce lawyer James Wilson, to discuss the sources of information and expert witnesses you may need to determine the value of a business in a Virginia divorce case.

 

What is bankruptcy? What is divorce? What is the relationship between bankruptcy and divorce in Virginia?

What is bankruptcy?  What is divorce? What is the relationship between bankruptcy and divorce in Virginia?

A bankruptcy is a case or legal proceeding in federal court in which a debtor seeks protection from his or her creditors and an adjustment or discharge of his or her debts.  A debtor may initiate a voluntary bankruptcy case or the creditors of a debtor may initiate an involuntary bankruptcy case.  Often, a debtor initiates a bankruptcy case when he or she is insolvent, unable to pay his or her bills as they become due, or has lost control of property, through a garnishment, attachment or judgment lien, or is about to lose property to a repossession or foreclosure sale or trustee’s sale.  In a straight bankruptcy or chapter 7 proceeding, the debtor agrees to give up his or her nonexempt property for sale by an appointed trustee in return for a discharge of his or her dischargeable debts.  In a plan bankruptcy under chapter 11, chapter 12, or chapter 13, the debtor pays part or all of his or her debts through a plan confirmed by the bankruptcy court.  The most common plan bankruptcy is chapter 13, also known as a wage earner plan or the adjustment of the debts of an individual with regular income, which is available to individuals with regular income and a limited amount of unsecured debt and secured debt.  The chapter 13 plan lasts from three to five years.  After completing the plan, the chapter 13 debtor received a discharge of his or her debts.  It is often filed by a homeowner who is facing foreclosure and wishes to keep his or her home and pay back the arrearage amount over a three to five year period.

A divorce is a case or legal proceeding in state court terminating the legal relationship of marriage and resolving the legal incidents and consequences of marriage, which may include liability for spousal support, rights to inheritance, interests in marital property, and liabilities for marital debts.  A divorce may also address the custody, visitation, and support of children born or adopted of the marriage.  In Virginia, a man and a woman, or a same sex couple, can enter into contracts, before marriage or during the marriage or separation, governing their legal responsibilities and liabilities arising from the marriage.  The agreements, which are variously known as premarital agreements, antenuptial agreements, marital agreements, separation agreements, property settlement agreements, or marital stipulations, can be enforceable just like any other contract if certain legal requirements are met.  Although a man and a woman, or a same sex couple, can enter into a contract governing the incidents their relationship as husband and wife, the parents of a child cannot ultimately bind a court to a contract controlling the custody, visitation and support of a child, because Virginia has an interest in the well-being and best interests of children within its jurisdiction.  Virginia has two types of divorces: a divorce from bed and board and a divorce from the bond of matrimony.  A divorce from bed and board – a divorce a mensa et thoro – is literally a divorce from bed and table.  It recognizes that the parties are now legally separated, but does not allow the parties to remarry.  A divorce from the bond of matrimony – a divorce a vinculo matrimonii – is a full and final divorce from the bond of matrimony allowing the parties to remarry.  A divorce from bed and board may be granted only on fault grounds, while a divorce from the bond of matrimony may be granted for fault or no fault grounds, usually a one year separation, or a six month separation, if there are no minor children and the parties have entered into a written separation agreement.

Bankruptcy and divorce are related to each other because they are both primarily concerned with finances, assets, property, liabilities, and debts.  The marital relationship gives rise to interests in property and liabilities for support and contribution for debts.  A marriage creates certain efficiencies in financial arrangements which are disrupted or destroyed by a separation of the spouses.  Maintaining two households is usually considerably more costly than maintaining one household. In Virginia, marriage is viewed as an economic partnership in which the parties are entitled to share in their joint efforts and support.   A husband or wife may make financial sacrifices in reliance on the continued existence of that marital partnership.  Consequently, a spouse may be financially vulnerable if and when the marriage dissolves.

Bankruptcy and divorce are not strangers in Virginia.  Unfortunately, financial difficulties often lead to marital difficulties, and marital difficulties often lead to financial difficulties. A bankruptcy can result in a divorce, and a divorce can result in a bankruptcy.

You should consult with your Virginia bankruptcy and divorce lawyer, or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr., to discuss the relationship between a potential or ongoing bankruptcy or divorce in Virginia.

Is a debtor’s undistributed interest in an ERISA pension plan arising from a QDRO excluded from property of the estate in a bankruptcy case?

Is a debtor’s undistributed interest in an ERISA pension plan arising from a QDRO excluded from property of the estate in a bankruptcy case?

Yes, in In re Lalchandani, 27 B.R. 880 (BAP 1st Cir., 2002), where the Bankruptcy Appellate Panel for the 1st Circuit Court of Appeals affirmed the Bankruptcy Court’s holding that the debtor’s interest in her former husband’s Employee Retirement Income Security Act (“ERISA”) qualified pension plan arising from a Qualified Domestic Relations Order (“QDRO”) was excluded from property of the estate.

In Lalchandani, before filing bankruptcy, the Debtor wife and her husband had entered into a separation agreement under which the husband agreed to transfer the sum of $25,000 to the Debtor wife as an alternate payee of her husband’s ERISA pension plan.  As required under ERISA, the transfer would be made by a QDRO, a special order issued in divorce cases to meet the requirements of ERISA and allow the plan administrator of the retirement plan to transfer an interest in the employee’s account.  The Debtor wife then filed a chapter 7 bankruptcy case and did not identify her interest in her husband’s retirement plan on Schedules B and C.  Five days later, the Massachusetts probate and family court granted the parties a provisional divorce, known as a divorce nisi, and issued the QDRO.

The chapter 7 bankruptcy trustee, who was appointed to administer nonexempt property in the Debtor wife’s case, filed a motion with the bankruptcy court judge to declare the wife’s interest in the pension plan to be property of the estate under 11 U.S.C. § 541(a)(5)(B) and to compel the wife to turnover such interest to him.  The Debtor wife contested the matter, arguing that her interest in the plan was excluded under 11 U.S.C. 541(c)(2), which states as follows:

A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

The bankruptcy court judge denied the trustee’s motion.  Relying on the language of the separation agreement, the bankruptcy court judge found the transfer was one from one ERISA pension plan to another ERISA pension plan, both excludable from the property of the estate.  The chapter 7 trustee appealed the decision.

On appeal, the Bankruptcy Appellate Panel first recognized that an interest in an ERISA plan was excluded from the property of the bankruptcy estate under 11 U.S.C. § 541(c)(2) and the U.S. Supreme Court’s holding in the case of Patterson v. Shumate, 504 U.S. 753 (1992), due to the anti-alienation clause in the ERISA statute, 29 U.S.C. §1056(d)(1).  The Bankruptcy Appellate Panel adopted the reasoning of the 8th Circuit Bankruptcy Appellate Panel in the case of In re Nelson, 274 B.R. 789 (2002), recognizing that the protections of ERISA extends not only to the employee, but also to the spouse, former spouse, or dependent children, who may also be beneficiaries under the retirement plan.  Finding that he Debtor wife in Lalchandani was a beneficiary of her former husband’s plan, the Bankruptcy Appellate panel held that Patterson v. Shumate was applicable, and her interest in the ERISA plan under the QDRO was properly excluded from property of the estate.

If you have questions about whether property received under equitable distribution in Virginia, a divorce decree, separation agreement, or property settlement agreement is subject to administration in you or your spouse’s bankruptcy case, contact your Virginia bankruptcy and divorce lawyer or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr.