Can an individual Chapter 13 bankruptcy debtor strip off a second mortgage on nonresidential property owned by the debtor and his wife as tenants by the entireties?

Can an individual Chapter 13 bankruptcy debtor strip off a second mortgage on nonresidential property owned by the debtor and his wife as tenants by the entireties?

Not in the case of In re Hunter, 284 B.R. 806 (Bkrtcy.E.D.Va.,2002), where the United States Bankruptcy Court for the Eastern District of Virginia ruled that Chapter 13 debtor could not strip off a wholly unsecured, second-priority mortgage lien on non-residential real property owned by debtor and his nondebtor wife as tenants by the entireties.

In Hunter, the debtor filed an individual Chapter 13 petition in bankruptcy court and his wife did not join in the petition or file her own. Prior to confirmation of the plan, the debtor filed an adversary proceeding against creditor, seeking to avoid the second priority mortgage lien under 11 U.S.C. § 506(d) on real property in Pennsylvania that was not the marital residence.  The bankruptcy court judge addressed whether an individual debtor may avoid a lien, whether partially or wholly unsecured, on tenants by the entireties property, without his or her spouse. The court found no Fourth Circuit Court of Appeals precedent relating to either stripping off wholly unsecured mortgage liens in Chapter 13 or stripping off or stripping down undersecured mortgage liens on a debtor’s real property that is not the debtor’s primary residence.  The bankruptcy judge reviewed Pennsylvania’s law, where the subject real property was located, on tenancies by the entirety and found no basis for such relief.  Under Pennsylvania law, just as in Virginia, property held as tenants by the entireties is owned per tout et non per my, that is, each holds an undivided and indivisible interest in the entire property; neither spouse may unilaterally sever an estate held in the entireties.  A tenancy by the entireties is based on the legal fiction that a husband and wife are a single legal person.  As discussed in answer to the question, “Is my Virginia real estate vulnerable to creditors when I divorce?”, a tenancy by the entireties has a number of advantages over a tenancy in common for a married couple, including the right of survivorship, protection from creditors of one spouse alone, and the inability of either spouse to convey his or her interest without joinder of the other spouse.

In Hunter, the Bankruptcy Code provisions did not expressly support the debtor husband’s position, as noted by the Court:  “The only provision permitting the severance of an entireties estate or a unilateral action by one co-tenant is Bankruptcy Code Section 363(h). This provision expressly provides that the “trustee may sell both the estate’s interest” and the co-owner’s interest. There is no authority for the debtor to sell the property under § 363(h). See, Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A, 530 U.S. 1, 7, 120 S.Ct. 1942, 1947, 147 L.Ed.2d 1 (2000). Such a unilateral action is contrary to the essence of the tenants by the entireties estate and should not be permitted absent clear legislative authority.”

The court noted that the debtor sought to provide his spouse with the benefit of having filed bankruptcy without her having borne the burden of a bankruptcy filing.  The Debtor husband sought severance of a portion of the entireties estate when his wife’s interest was in the whole of the property, per tout et non per my, and Pennsylvania law envisioned neither such a division of a tenancy by the entireties estate nor the unilateral severance of any portion of the entireties estate.

You should consult with a Virginia bankruptcy attorney regarding how your interest in tenants by the entirety property will be treated in bankruptcy.

Can attorney’s fees be considered a domestic support obligation in bankruptcy?

Can attorney’s fees be considered a domestic support obligation in bankruptcy?

Yes, in the case of In re Uzaldin, 418 B.R. 166 (Bnkr. E.D.Va. 2009), where the United States Bankruptcy Court for the Eastern District of Virginia ruled that the prepetition final divorce decree’s award of attorneys fees to debtor’s former spouse was a domestic support obligation because the fees were awarded as part of the parties’ divorce litigation which included issues of child custody, spousal support, child support, and property settlement. See 11 U.S.C.A. § 101(14A) . This classification is important because domestic support obligations are entitled to priority status, are nondischargeable in every type of bankruptcy, and must be paid in full under a Chapter 13 plan. In contrast, property settlement and equitable distribution debts do not have priority, may be dischargeable in a Chapter 13 case (but not usually in a Chapter 7 case), and need not be paid in full in a Chapter 13 plan. See 11 U.S.C.A. § 507(a)(1) .

In Uzaldin, the litigation arose out of the Debtor’s objection to the classification, but not amount, of the proof of claim filed by the Debtor’s ex-wife.   Notable in the divorce case had been the judge’s finding of marital waste by the Debtor through the transfer of assets to his mother and his voluntary underemployment.   The Debtor had allowed the marital residence to go to foreclosure with a loss of nearly $200,000 in equity.  The proof of claim consisted of $195,000 in equitable distribution for equity in the home, $30,000 in attorney’s fees and an offset of $5,500 for the wife’s share of a marital debt.  The judge ruled that the nature of attorney’s fees follows from the nature of the principal award.  There was no evidence that permitted the court to apportion the attorney’s fees between the custody, spousal support, and child support issues and the equitable distribution issues.    The bankruptcy judge ruled that where the Debtor presents no evidence on the nature of the attorney’s fees, then the former spouse’s proof of claim, executed and filed in accordance with the Federal Rules of Bankruptcy Procedure, constituted prima facie evidence of the validity and the amount of the claim under Bankruptcy Rule 3001(f), and controls.

Additionally, the Uzaldin court raised sua sponte whether this bankruptcy case had been filed in bad faith, in accordance with the court’s powers under 11 U.S.C. 105. A Chapter 13 bankruptcy petition may be dismissed and a Chapter 13 plan may be denied confirmation if filed in bad faith. See 11 U.S.C.A. §§ 1307(c).  Here, the Chapter 13 debtor’s objection to former spouse’s claim raised troubling questions about his good faith in both filing the petition and proposing the chapter 13 plan. The Uzaldin court restated the rule that it will not dismiss the bankruptcy petition for bad faith unless certain factors discussed in the Seventh Circuit’s Love decision were met including: the nature of the debt, whether the debt would be nondischargeable in a Chapter 7 proceeding, the timing of the petition, how the debt arose, the debtor’s motive in filing the petition, how the debtor’s actions affected creditors, the debtor’s treatment of creditors before and after the petition was filed, and whether the debtor has been forthcoming with the bankruptcy court and the creditors. In re Love, 957 F.2d 1350 (7thCir.1992).  Due to several of these factors being met, the court issued a notice to show cause why the case should not be dismissed for have been filed in bad faith.

You should consult with your Virginia bankruptcy lawyer regarding the dischargeability of attorney’s fees arising out of your family law matters.

Must wife’s divorce complaint based on husband’s desertion allege a marital domicile in Virginia to satisfy long-arm jurisdiction?

Must wife’s divorce complaint based on husband’s desertion allege a marital domicile in Virginia to satisfy long-arm jurisdiction?

Not necessarily, if the allegations support the requisite inferences for personal jurisdiction, the Court of Appeals of Virginia ruled in the case of Cabaniss v. Cabaniss, 46 Va.App. 595, 620 S.E.2d 559 (Va.App., 2005).

The wife filed a divorce in Virginia against the nonresident husband alleging willful desertion and abandonment and requesting divorce, spousal support and equitable distribution.  The husband was served in Canada after residing in the West Indies. Husband’s argued that the complaint did not sufficiently state that the parties had been maintaining a matrimonial domicile at the time they separated, as required by the long-arm statute, Virginia Code Section 8.01-328.1(A)(9), and therefore the court did not have personal jurisdiction over him.   He entered a special appearance objecting to the exercise of long-arm jurisdiction over him.  The Virginia divorce court judge overruled husband’s objection and husband did not participate further in the case, other than to note his objection to the order.  The wife obtained a divorce, equitable distribution of marital property, spousal support and her legal fees and costs.  Husband appealed.

In Cabaniss, the Virginia Court of Appeals held that personal jurisdiction could be exercised over the non-resident husband based on the allegations in wife’s complaint for divorce.  The court noted that a divorce could be entered based on in rem jurisdiction alone, but an order affecting a party’s property interest, such as support or equitable distribution, required in personam jurisdiction.  In this case, the divorce judge did not err in finding personal jurisdiction over husband pursuant to the long-arm statute based on allegations in wife’s complaint that  i) husband deserted her on specific date; ii) husband’s desertion had continued since that date without interruption and husband has not returned to the matrimonial domicile iii) wife was domiciled in and a bonafide resident of Virginia; iv) husband lived abroad; v) the parties last cohabitated in Lexington, Virginia; and v) husband, while abroad, called wife and informed her that marriage was over and he wanted a divorce.

It is true that the long-arm statute requires the complaint to allege that Virginia was the matrimonial domicile at the time of separation “or other relevant time under the statute.” Although the wife’s complaint did not use precise wording, the Virginia Court of Appeals held that the husband could not mistake the true nature of the claim, which could be drawn from the requisite inferences of the allegations. The appellate court reasoned that when the allegations of the complaint are read together they add up to sufficient allegations that the parties were maintaining a Virginia domicile at both time of separation and time cause of action for desertion arose.   Because of his conduct and connections with the Commonwealth of Virginia, the husband could reasonably anticipate being subject to the jurisdiction of the court.

As an aside, the Court of Appeals noted that a demurrer is the more appropriate defensive pleading for a jurisdictional challenge that is limited to the face of the complaint. A demurrer reaches defects as appear on the face of the pleading demurred to, i.e. failure to state a cause of action. Since the Husband had failed to file a demurrer to the complaint for divorce, the court was charitable to even to consider his case.

You should consult with your Virginia divorce lawyer concerning whether the court can exercise long-arm jurisdiction over your non-resident spouse.

Will personal service on nonresident in Virginia support a divorce decree?

Will personal service on nonresident in Virginia support a divorce decree?

Yes, Court of Appeals of Virginia ruled in the case of Ragouzis v. Ragouzis, 10 Va.App. 312, 391 S.E.2d 607 (1990), provided the court has long-arm jurisdiction over the defendant.  While residing in another state, a husband and wife separated and wife filed a divorce action there. The wife then moved with her child to Pulaski County, Virginia.  Approximately five months later, the wife filed a second bill of complaint for a divorce in the City of Radford, Virginia, which she believed, in good faith, was her husband’s place of residence because he was occupying an apartment there. The caption of the bill of complaint contained the husband’s Radford address. The sheriff served the husband when he answered the door at his Radford apartment.

The City of Radford, Virginia, Circuit Court found that husband routinely visited Radford to conduct business but that he had retained his permanent residence and domicile in Ohio. Hence, the court found he was a resident of Ohio. Because husband was a non-resident and the wife was a resident of Pulaski County, Virginia, under Virginia Code § 20-96(B), then in effect, venue was proper in Pulaski County. Pursuant to the provisions of Code § 20-96(C), the Radford Circuit Court transferred the case to the Pulaski County Circuit Court, which is in the same judicial circuit as the City of Radford. By decree of the Pulaski County Circuit Court, the wife was granted a divorce.  The decree did not address child custody, visitation, child support, spousal support, or equitable distribution.

On appeal, the husband contended that the trial court lacked jurisdiction over him because the service on him, a nonresident did not conform to Virginia Code § 8.01-328.1, the long arm statute. Virginia has a long arm jurisdiction statute in Code Section 8.01-328.1 that allows Virginia to exercise jurisdiction over a person in another state when that person has certain connections to the Commonwealth of Virginia.  Particularly relevant to divorce cases, these connections include owning real estate in Virginia, executing a support agreement in Virginia, being ordered to pay spousal or child support by a court in Virginia that has personal jurisdiction, fathering or conceiving a child in Virginia, or having a marital domicile in Virginia prior to separation. Additionally, husband also claims that the Circuit Court of Pulaski County lacked subject jurisdiction under Code § 20-96 because the case was transferred to it by a court without jurisdiction.

The Virginia Court of Appeals ruled in favor of the wife. The court noted that the Virginia long arm statute provides additional methods of service on nonresident defendant, not exclusive methods of service, and does not supplant previously authorized methods of personal service provided by law. Virginia Code § 8.01-328.1. http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+8.01-328.1.  The Virginia Court of Appeals found that service through the Secretary of the Commonwealth was not the exclusive method for service of process under the Virginia long-arm statue and that, generally, personal service on a nonresident in Virginia is valid and will support a personal judgment against that nonresident.  Further, in regards to husbands’ second contention, the court ruled that the Radford Circuit Court had potential subject matter jurisdiction to hear the divorce case, and therefore, had jurisdiction to transfer case to a court which was the proper venue once the court acquired personal jurisdiction over husband by personal service upon him during routine business trip. See Temple v. City of Petersburg, 182 Va. 418, 29 S.E.2d 357 (1944).

It should be noted that all circuit courts within the Commonwealth of Virginia have potential subject matter jurisdiction to try divorce cases.  Preferred venue in divorce, annulment, and affirmance cases is the county or city where the parties last resided, the county or city where the defendant resides, if a resident of Virginia, or when the defendant is served by order of publication, the city or county in which the plaintiff resides, under Section 8.01-261(19) of the Code of Virginia.

You should consult with your Virginia divorce lawyer to determine whether jurisdiction exists for a divorce proceeding and what would be the proper venue for your case.

Can a foreign divorce decree be challenged in Virginia?

Can a foreign divorce decree be challenged in Virginia?

Yes, the Supreme Court of the United States ruled in the case of Williams v. North Carolina, 325 U.S. 226, 65 S.Ct. 1092, 89 L.Ed. 1577 (1945). While the Williams case does not directly concern Virginia law or bankruptcy law, the case has had far reaching implications on the extent to which each state must respect the judgments of her sister states, including divorce decrees affecting spousal support or alimony, property division, equitable distribution, or the allocation of marital debts, when one spouse leaves Virginia and obtains a divorce in a different state.  The validity of a foreign divorce can impact bankruptcy by its effects on property transfers and financial obligations.

In Williams, a man and a woman, domiciled in North Carolina, left their spouses in North Carolina in order to obtain decrees of divorce in Nevada. The Nevada court granted the petitioners divorce decrees since it found that they had been residents in Nevada for more than six weeks immediately preceding the commencement of their divorce action, as required by Nevada law.

After obtaining their divorce decrees, petitioners were married in Nevada then returned to North Carolina to live. Subsequently, the petitioners were prosecuted in North Carolina for bigamous cohabitation.  Petitioners pleaded not guilty and offered copies of the Nevada proceedings, contending that the divorce decrees and the Nevada marriage were valid in North Carolina as well as in Nevada. The state contended that since neither of the defendants in the Nevada actions were served in Nevada nor entered an appearance there, the Nevada decrees would not be recognized as valid in North Carolina.  North Carolina further contended that petitioners went to Nevada not to establish a bona fide residence but solely for the purpose of taking advantage of the laws of that state to obtain a divorce thru fraud upon that court.

The United States Supreme Court held that, upon the record, the judgments of conviction were not invalid as denying the Nevada divorce decrees the full faith and credit required by Art. IV, § 1 of the Constitution. Under our system of law, judicial power or jurisdiction to grant a divorce must be founded upon domicileDomicile is defined as a person’s legal home or permanent residence.  Domicile implies a connection between a person and a place beyond mere physical presence, but also an intention to return there or an intention to stay for the indefinite future. Here, the petitioners were domiciled in North Carolina and the Nevada court lacked personal jurisdiction. See Haddock v. Haddock, 201 U.S. 562 (1906). Hence, A decree of divorce rendered in one State may be collaterally impeached in another by proof that the court which rendered the decree had no jurisdiction, even though the record of the proceedings in that court purports to show jurisdiction.

You should consult with your Virginia divorce lawyer concerning the validity of your foreign divorce.

Must the marital status of a husband and wife be recited on the face of a deed in Virginia in order to create a valid tenancy by the entirety?

Must the marital status of a husband and wife be recited on the face of a deed in Virginia in order to create a valid tenancy by the entirety?

Ideally, the creation of a tenancy by the entirety in Virginia includes three elements in the granting clause of the document creating or evidencing the transfer of title: (1) the marital status of the parties as husband and wife; (2) the language “as tenants by the entirety” or the term “tenancy by the entirety”; and (3) language of survivorship such as “with the common-law right of survivorship” or “with the right of survivorship as at common-law”.  (Apart from the language, the tenancy itself requires five unities of time, title, interest, marriage and possession, as discussed below).  Thus a typical clause might state the property is conveyed to John Doe and Mary Doe, husband and wife, as tenants by the entirety with the common-law right of survivorship.

What happens when one of these elements is missing?  Does a tenancy by the entirety exist, such that the property is protected from the creditors of either spouse alone, or is the property vulnerable because the husband and wife hold title as joint tenants or tenants in common?

There appears to be a split of authority in case law between the courts in the Eastern and Western Districts of Virginia when the marital status is missing.  In Sampath, 314 B.R. 73 (Bankr. E.D.Va.,2004), a Chapter 7 bankruptcy debtor claimed as exempt as a tenancy by the entirety property, his interest in a condominium unit owned by him, his wife, and their child as joint tenants with the common-law right of survivorship. The Trustee objected on the ground that debtor’s marital status was not recited in the deed. The Sampath opinion centered heavily on the common law principle that property owned by husband and wife with right of survivorship was deemed to be held as a tenancy by the entirety. See 41 Am.Jur.2d, Husband and Wife, § 31 (2004). Under Virginia law, if husband and wife hold property in a tenancy by the entirety, the joint property is immune to the claims of a creditor of one spouse alone, as explained more fully in answer to the question, “Is my Virginia real estate vulnerable to creditors when I divorce?”. Only joint creditors may subject the property to a lien or judgment.

Sampath also relies on Allen v. Parkey, 154 Va. 739, 149 S.E. 615 (1929). In Allen, the court found that a conveyance to a husband and wife during marriage with language of survivorship created a tenancy by the entirety even though the exact language of “tenancy by the entirety” was never used in the deed. Sampath agreed with the Allen court and held that a parties’ marriage was sufficient to create a tenancy by the entirety without any reference to the marriage made in the document purporting to give title.

The holding in Sampath by the United States Bankruptcy Court for the Eastern District of Virginia contrasts with the U.S. District Court for the Western District Court of Virginia in Wolfe v. Sprouse, 183 B.R. 739 (W.D.Va.1995), an appeal of a bankruptcy court decisionIn Wolfe, the district court reversed the bankruptcy court judge and held that two promissory notes payable to the debtor and his spouse, “or the survivor” were not held as tenants by the entirety property because “the language of the [instrument] … lack[ed] even the hint of a marital relationship.”  The court noted that five unities must exist to create a tenancy by the entirety:  the unities of interest, title, time, marriage, and possession.  In this case, as distinguished from the Allen case, the language indicating the unity of marriage was wholly absent from the instrument.

You should consult with your Virginia bankruptcy lawyer to discuss whether property held by you and your spouse, husband or wife, may be exempt in bankruptcy.

Does the noncustodial father’s child support obligation extend to paying for orthodontic treatment or braces in Virginia?

Does the noncustodial father’s child support obligation extend to paying for orthodontic treatment or braces in Virginia?

In Barrett v. Kantz, Record No. 2506-09-1 (2010), the Court of Appeals of Virginia, ruled that child support can be modified to include orthodontic expenses if such expenses are reasonable and necessary.

In Barrett, the parties were divorced in Virginia after twelve years of marriage.   The father was awarded primary physical custody of the two children of the marriage for the first four years after the divorce, until the court ordered a change in primary physical custody to the mother due to visitation conflicts.  By an agreement of the parties, the mother would not receive child support for a year.  After three months, the mother filed a motion to amend or review child support in the Juvenile and Domestic Relations District Court, which was denied.  The mother then appealed to the Virginia Circuit Court for a de novo hearing, as provided by Virginia Code Section 16.1 – 296. The mother sought child support and the children’s orthodontic expenses.  Section 20-108.2(D) of the Code of Virginia provides that a child support order shall provide that the parents pay, in proportion to their gross incomes, for the reasonable and necessary unreimbursed medical and dental expenses in excess of $250 per calendar year for each child (the custodial parent being responsible for the first $250 as included in basic child support).  The divorce court judge received evidence documenting the need for orthodontic treatment or braces for both children. After considering the orthodontist recommendation, the Circuit Court judge found that the older child’s need for orthodontic work was “more urgent” than that of the younger child.  Additionally, the Virginia Circuit Court judge found that orthodontic treatment for the younger child was not “urgently needed or compelling at this time such as to justify an additional expenses at this time.” Since the mother failed to show that the younger child’s orthodontic expenses were reasonable and necessary as required under Virginia Code § 20-108.2(D), the trial court ordered the father to pay for only the older child’s orthodontic treatment and not for the younger child’s.  The mother appealed the Circuit Court order on the grounds that the judge did not award support retroactively, did not allow orthodontic expenses for the younger child, and did not calculate correctly the father’s share of the cost of braces for the older child.

 

On appeal, the Virginia Court of Appeals restated the mother’s burden on appeal of proving the trial court’s factual findings were plainly wrong or without evidence to support them, citing Jennings v. Jennings, 12 Va. App. 1187, 1189, 409 S.E.2d 8, 10 (1991) and Virginia Code Section 8.01-680.   The mother had the burden of proving to the trial judge that the unreimbursed medical expenses were reasonable and necessary. The Virginia Court of Appeals also recognized that the trial court had the discretion as to whether to make a modification of child support effective while a petition is pending. The Virginia Court of Appeals ruled that in Barrett that the trial court did not err in construing the orthodontist’s recommendation. The orthodontist noted that because of the older child’s age, treatment should begin “relatively soon.” While treatment for the younger child was “recommended,” there was no indication that it was “necessary.” Relying on the orthodontist report, the trial court made a factual determination that the younger child’s treatment was not necessary. The Virginia Court of Appeals held that the trial court did not err as a matter of law in making such a determination.  The court did rule that the father’s share of the cost of orthodontic treatment had been miscalculated by the Circuit Court judge, and therefore reversed and remanded the case for a new calculation.

 

You should consult with your Virginia divorce lawyer to discuss whether orthodontic expenses or braces for your child qualify as necessary and reasonable medical expenses payable as child support.

Is husband entitled to claim a share in the former marital residence in Virginia after his interest in the property was sold to the wife by the husband’s chapter 7 bankruptcy trustee?

Is husband entitled to claim a share in the former marital residence in Virginia after his interest in the property was sold to the wife by the husband’s chapter 7 bankruptcy trustee?

Yes, in the Virginia Circuit Court case of Peck v. Brenner, Civil Docket No.: CL08-4637, husband and wife owned the marital residence together for twenty-four years at the time of their separation, and for almost twenty-five years at the time husband filed his chapter 7 bankruptcy case. During their lengthy marriage, both husband and wife had contributed equally to the well being of their family and to the care and maintenance of the marital home.

In Peck, husband alone filed a voluntary Chapter 7 petition in bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia. Husband listed all of his personal and marital debts, as required by law, and listed all his assets, including the parties’ marital home. Instead of holding title to the property as tenants by the entirety with the common-law right of survivorship, the parties held title as tenants in common. In administering husband’s assets under Section 363 of the Bankruptcy Code, the chapter 7 trustee sold the husband’s interest in the former marital residence to the wife for $29,250, which wife paid to the trustee from her separate assets. This allowed the wife and children to continue to reside in the former marital residence. The wife continued to make the mortgage payments due on the property following the sale.

In spite of the trustee’s administration of husband’s interest in the property, the husband subsequently claimed in the equitable distribution portion of the parties’ Virginia divorce, that he was entitled to half of the net equity of the parties’ former marital residence, at such time as it is sold, as a result of the parties’ twenty-four year marriage.

The wife’s argument that the husband no longer had any interest in the former marital residence was based on the case of Colucci v. Colucci, 596 A.2d 1099 (N.J. Superior Court 1991), where the New Jersey Superior Court held that former husband could not compel a sale of the former marital residence and share in the proceeds of sale, where the husband’s chapter 7 trustee had sold the husband’s interest in the marital residence to the wife. In Colucci, however, the former husband had also subsequently executed a separate deed to former wife conveying all of his remaining “right, title and interest” in the marital residence to wife. In Peck, there was no such similar separate deed conveying husband’s property interest to wife.

The Virginia divorce judge in Peck held that the husband was estopped from claiming any interest in that portion of the former marital residence that was acquired by wife from the Trustee. Hence, husband was not entitled to 50% of all of the equity in the former marital residence. However, the divorce court judge further ruled that the other 50% of the marital residence derived from wife’s original tenancy in common interest, was marital property subject to equitable distribution upon divorce. Since there was no separate deed from husband conveying to wife his remaining right, title and interest in the property as in the Colucci case, the Virginia Circuit Court judge held that husband did have an interest in wife’s original one half tenancy in common interest in the property, which was not a part of husband’s bankruptcy estate. Thus, the marital residence had become hybrid property under Virginia Code Section 20-107.3, part wife’s separate property – husband’s tenants in common share purchased by wife from the chapter 7 bankruptcy trustee with wife’s separate funds, and part marital property – the wife’s tenants in common share. The divorce court judge awarded to the husband the sum of forty-two thousand seven hundred twenty-five dollars ($42,725), representing twenty-five percent of the net equity, or one-half of wife’s tenants in common interest, upon the sale of the property.

You should consult with your Virginia bankruptcy and divorce lawyer to discuss how you and your spouse’s bankruptcy transactions might have affected your property interests upon divorce.

Can husband’s transfers of real estate to wife under a separation agreement be set aside in a later bankruptcy?

Can husband’s transfers of real estate to wife under a separation agreement be set aside in a later bankruptcy?

Yes, in the case of  In re Paschall, 408 B.R. 79 (E.D. Va., 2009), in the Eastern District of Virginia, Richmond Division, the U.S. District Court judge affirmed the bankruptcy court’s  order holding that the Chapter 7 bankruptcy trustee established that the buyout of prior marital agreement with transfer of real estate was a preference under 11 U.S.C.A. § 547(b), and former spouse was an insider because estranged parties were still married when the transfer occurred.

After husband and wife were married, wife sold her separate real property and used the proceeds to purchase land in Virginia which was titled in the names of husband and wife, as tenants by the entirety with the common-law right of survivorship.  Husband and wife took out a mortgage loan against the property and deposited the proceeds into a joint checking account, from which husband paid his premarital unsecured debts and marital unsecured debts.  Later, the husband and wife bought residential real property in Midlothian, Virginia (a suburb of Richmond in Chesterfield County) from husband’s wife, using his separate property as a down payment and a joint mortgage loan.  They took title again as tenants by the entirety with the common-law right of survivorship.

The next year, the parties entered into a marital agreement, valid under Virginia Code Section 20-155,  and just as enforceable as a separation agreement or property settlement agreement, wherein husband agreed wife would become the sole owner of both real properties in return for a cash payment to husband.  The husband agreed to transfer the properties by quit claim deeds to wife as trustee of a living trust in her name.  After the husband become dissatisfied with the agreement, the parties negotiated a buyout agreement under which the properties would be transferred earlier in return for cash.  Wife paid husband the cash, but husband did not transfer the title to the real property by deed until more than a year later.  Although husband was not insolvent when he executed the marital agreement and the buyout agreement, he was insolvent when he transferred title to the two real properties.  Wife had filed for a divorce from husband in a Virginia Circuit Court before the transfers and obtained a final decree of divorce after the transfers.  The final decree of divorce was filed in the county clerk’s law and chancery order books nine months later, on the same day the ex-husband filed his chapter 7 bankruptcy case.  Neither the marital agreement nor the decree were ever filed in land records.

The chapter 7 trustee filed an adversary proceeding, a lawsuit within the bankruptcy permitted by 28 U.S.C. 157, and governed by Bankruptcy Rule 7001, to avoid husband’s transfers of real estate to the wife as preferences or fraudulent or voluntary conveyances under the Bankruptcy Code or Virginia law.  The bankruptcy court judge ruled against the trustee on the fraudulent or voluntary conveyance grounds, but ruled in favor of the trustee to avoid the transfers as preferences.  The wife was a creditor and an insider, and the transfers were made to satisfy an antecedent debt owed by the debtor at the time the debtor was insolvent.  Since the transfers were avoided, the property reverted the debtor and his ex-wife, who were now tenants in common by virtue of the entry of the decree of divorce, which severed the tenancy by the entirety under Virginia Code Section 20-111.  Thus, the chapter 7 trustee could administer the husband debtor’s interest in the real properties.  The wife and her trust appealed the bankruptcy court order, which was considered by the U.S. District Court as an appropriate interlocutory, or nonfinal, order for appeal under 28 U.S.C. 1292(b).

In Paschall, the District Court held that the former wife qualified as a creditor having a “claim” as defined in 11 U.S.C.A. § 101(5) because she could have obtained an equitable remedy if debtor did not fulfill his contractual obligations under the marital agreement to transfer his interest in properties.  The judge also ruled that former wife had to be regarded as an “insider,” as defined in 11 U.S.C.A. § 101(31), because a final decree of divorce was entered three weeks following the quitclaim deeds to transfer the property; See also Miller v. Schuman, 81 B.R. 583, 585 (9th Cir. BAP 1987); and the challenged transfers enabled former wife to receive more than she would have received in a hypothetical Chapter 7 liquidation [where former wife was an unsecured, nonpriority creditor, and unsecured creditors of the estate would receive less than 100% payout on their claims, the required elements of a preference under  11 U.S.C.A § 547(B)(5).

 

The Paschall case illustrates the benefit of recording agreements concerning real property and deeds promptly in land records.  One of the foundations for the judge’s decision was the fact that the agreement between the husband and wife had not been recorded, as required under Virginia Code Section 55-96, to become effective against purchasers for valuable consideration without notice, a statutory status the chapter 7 trustee enjoys under 11 U.S.C. 544(a)(3) to set aside or avoid transfers and recover property.  The case also illustrates the risks in accepting transfers when the transferor spouse is insolvent and such a transfer may be considered an avoidable preference under 11 U.S.C. 547.  Finally, the judge noted that the argument that the decree was entitled to full faith and credit had not been raised.

You should consult with your Virginia bankruptcy and family law lawyer to discuss how to best structure and execute your marital agreements.

 

 

 

Can a wife collect mortgage and house insurance payments from the husband without violating the automatic stay in a Chapter 7 bankruptcy proceeding?

Can a wife collect mortgage and house insurance payments from the husband without violating the automatic stay in a Chapter 7 bankruptcy proceeding?

Not necessarily  in the U.S. Bankruptcy Court for the district of Kansas, according to In re: Craig Michael Ullrich, Case No. 10-40329 (June 2, 2010).  The reasoning of the Ullrich case may also apply to a bankruptcy case pending in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division. In Ullrich, the ex-wife obtained a court order requiring the ex-huband, a debtor in a chapter 7 bankruptcy case, to appear in state divorce court to answer allegations that he had not fulfilled his financial obligations agreed to in the parties’ divorce.  In response, the debtor husband filed a Motion for an Order to Show Cause in his bankruptcy case, alleging that his ex-wife had violated the automatic stay imposed by § 362 of the Bankruptcy Code.

The bankruptcy judge in Ullrich requested a copy of the underlying divorce documents to determine whether the issuance of a rule to show cause was appropriate.  Husband and wife had prepared their own separation agreement or property settlement agreement, without benefit of counsel.   A review of the documents showed that the debtor husband had agreed to pay $1700 a month for mortgage and house payments. The bankruptcy court judge tried to determine if the payments were intended to be construed as child support or a property settlement agreement. The U.S. Bankruptcy Court judge restated the rule that: “Section 362(b)(2)(B) specifically states that the filing of the bankruptcy petition does not operate as a stay “of the collection of a domestic support obligation from property that is not property of the estate.” The definition of a domestic support obligation includes anything that is “in the nature of alimony, maintenance, or support . . . without regard to whether such debt is expressly so designated.” 11 U.S.C. § 101(14A).

In this case, it was difficult for the court to ascertain if the $1700 a month for mortgage and house payments were child support. There were some indications that the payments were intended to be child support and not a property settlement agreement: 1) there was no marital property to be divided, no marital debts or spousal support; 2) The language in the Separation Agreement suggested that Debtor would support his children by paying the mortgage.  However, there were also indications that the payments could be part of a property settlement agreement: 1) sworn Affidavit signed by Debtor stating that he has no child support obligation, but only a property settlement obligation arising out of divorce. 2) Debtor has custody of the parties’ third child.  The debtor husband had responded to the controversy by filing a motion to convert his chapter 7 case to a chapter 13 case, in order to discharge non-domestic support obligation family law debts under 11 U.S.C. 523(a)(15).

The Court stressed that if ex-wife were indeed attempting to enforce a property settlement debt rather than a domestic support obligation, she will have violated “the automatic stay imposed by the Bankruptcy Code and could be liable for damages, including actual damages, attorney fees, and potentially punitive damages.” However, the Court denied the debtor’s Motion for an Order to Show cause, because the bankruptcy court judge could not definitively determine whether the husband’s obligation were “in the nature of” child support. In part, the Court had difficulty deciding the nature of the obligation since the ex-wife did not appear at the scheduled hearing.

Although the Court denied the debtor’s Motion for an Order to Show cause, the court used its equitable powers under Section 105 of the Bankruptcy Code, to stay the ex-wife’s motion and any similar proceeding, pending further order from the Court.

The Ullrich case illustrates the inherent risks in structuring particular obligations as support or property settlement obligations.   Although the bankruptcy court judge will look beyond the labeling of the obligation to determine if it is truly in the nature of support, structuring an obligation as support in a separation agreement, without the benefit of counsel, may have unintended consequences in a later bankruptcy case.

You should consult with your Virginia bankruptcy and family attorney concerning the applicability of the automatic stay in a bankruptcy proceeding to any family law obligations.