The Interplay Between Bankruptcy and Divorce Law in Virginia

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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?

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?

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, (4^th 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?

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?

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?

Yes, in In re Lalchandani, 27 B.R. 880 (BAP 1^st Cir., 2002), where the Bankruptcy Appellate Panel for the 1^st 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 8^th 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.

Are qualified domestic relations orders or QDROs invalid because they do not specifically conform to the language of the final decree of the parties’ divorce?

No. According to Haney v. Haney, Record No. 1204-10-4 (Va. App. 2010), an unpublished case out of the Virginia Court of Appeals, in which the court summarily affirmed the decision of the Virginia Circuit that four qualified domestic relations orders (QDROs) entered by court were not invalid even though they included language concerning gains on wife’s portion of the marital share that did not appear the final decree of divorce.  A Qualified Domestic Relations Order (QDRO) is a special type of order that is entered after the final decree of divorce and is used to distribute funds in a pension, deferred compensation, or retirement plan qualified under ERISA – the Employee’s Retirement Income Security Act of 1974 and the Internal Revenue Code.  Although the Haney case does not directly involve a bankruptcy, retirement benefits, whether defined benefit plans like traditional pensions or defined contribution plans like the more typical 401(K) plans, are often one of the most valuable assets to be concerned about in bankruptcy and divorce cases.  (Pensions, deferred compensation, and retirement plans are usually not included in, or are exempt from, the bankruptcy estate.)

In Haney, the parties were married for 16 years, separated for a year, and divorced the following year.  In the final divorce decree, the Virginia Circuit Court equally divided the marital share of the husband’s retirement plans but did not expressly provide that wife would receive gains or losses on her share or award her interest in the plans as of a particular date. Following entry of the divorce decree, the wife’s divorce attorney prepared the QDROs to divide the retirement. The husband objected to entry of the QDROs prepared by wife’s divorce lawyer because they allowed passive gains and losses on the wife’s share of the retirement funds and transferred her share on a pro rata basis.   The Virginia Circuit Court divorce judge entered the QDROs over husband’s objections and husband appealed.

In response to the husband’s arguments, the Court of Appeals cited the language of Virginia Code §20-107.3(K)(4), which states, “A trial court shall have the continuing authority and jurisdiction to make any additional orders necessary to effectuate and enforce any order entered pursuant to this section, including the authority to . . . modify any order . . . intended to affect or divide any pension, profit-sharing or deferred compensation plan or retirement benefits.”   Normally, the Virginia Circuit Court loses jurisdiction over a final order or decree in a divorce case after twenty-one days after entry.  The courts have continuing jurisdiction by this statute to enter orders pertaining to the distribution of retirement plans, which often must be submitted to and approved by the plan administrator in a lengthy process before entry by the court.   In Haney, the Court of Appeals of Virginia held that since the final decree of divorce did not award the wife half of the marital share as of a particular date, then the interest that accrued on wife’s portion of the marital share belonged to wife. , citing Lewis v. Lewis, 53 Va. App. 528, 673 S.E.2d 888 (2009).

You should consult with your Virginia lawyer, or Glen Allen divorce lawyer James Wilson, concerning the equitable distribution of your pension, deferred compensation, or retirement benefits in a Virginia divorce case.

Does an increase in the value of a spouse’s separate property become marital property in equitable distribution in a Virginia divorce case?

It depends on whether the increase in value is considered a passive gain or the result of either spouses’s personal efforts during the marriage. In the unpublished opinion of  Tucker v. Wilmoth-Tucker, Record No. 2008-09-2 (Va. App. 2010), the Virginia Court of Appeals held that the Circuit Court of Hanover County, Virginia, erred by classifying the increase in the husband’s shares of stock in the family business due to his personal efforts after the parties separated was marital property.

In Tucker, the husband and wife were married for 19 years before separating. During the marriage, the husband worked for his family’s business, and the wife stayed at home as a homemaker, although she occasionally assisted her husband with his work. The parties owned two homes, one in Mechanicsville, Virginia, and the other, a second home in Gloucester, Virginia.   After separating, the husband occupied the Mechanicsville home and the wife occupied the Gloucester home.  While the husband and wife were married, the husband’s parents gave him a significant amount of shares in the family business.  At the equitable distribution hearing, the Court noted that the shares were the husband’s separate property, but it determined that the increase in value that occurred during the marriage was marital property. The husband appealed this decision to the Virginia Court of Appeals, arguing that the classification of the post-separation increase was contrary to the finding that the continued increase in value was due to his active effort.  Among other things, the husband also appealed a portion decision of the Hanover County Circuit Court ordering him to pay a monthly amount to the wife in addition to ordered spousal support for the wife’s health insurance, this additional amount being designated by the divorce court judge as not being in the nature of spousal support for tax purposes.

The Court of Appeals first noted that equitable distribution is a process: first the judge classifies the property as marital, separate, or as hybrid – part separate and part marital; then the court must assign a value to the property based on the evidence presented; and finally, the court distributes the property, taking the factors of Virginia Code §20-107.3(E) into consideration http://leg1.state.va.us/000/cod/20-107.3.HTM. Alphin v. Alphin, 15 Va. App. 395, 424 S.E.2d 572 (1992).  The Virginia Court of Appeals recognized that separate property is “that acquired ‘before the marriage,’ (2) ‘during the marriage by bequest, devise, descent, survivorship, or gift’ from someone other than the other spouse and (3) ‘during the marriage in exchange for or from the proceeds of sale of separate property’” Dietz v. Dietz, 17 Va. App. 203, 436 S.E.2d 463 (1993). Furthermore, according to Code §20-107.3(A)(3)(a), an increase in value of separate property occurring during the marriage “shall be marital property only to the extent that marital property or the personal efforts of either party have contributed to such increases.” Moreover, for the purpose of classifying property, the Court uses the date of the last separation not the date of the hearing. Dietz, 17 Va. App. At 209-10, 436 S.E.2d at 467. In this case it was undisputed that the shares were the husband’s separate property and the increases were due to his personal efforts; therefore, the Court held that any increase in the value of those shares that occurred due to the husband’s efforts is separate property and reversed the Circuit Court’s classification of those increases in equitable distribution.

With respect to the amount payable for wife’s health insurance, the Virginia Court of Appeals compared the case to the case of Stacy v. Stacy, 53 Va. App. 38, 669 S.E.2d 348 (2008), where the parties waived spousal support in the separation agreement, but husband agreed to pay a mortgage on wife’s house and the mortgage payment was designated as being in the nature of spousal support.  The husband later sought to terminate his obligation to make the mortgage payments since wife was living with another man in a relationship analogous to marriage for more than a year, a ground for terminating spousal support in Virginia by virtue of Virginia Code Section 20-109(A).  In Stacy, the Virginia Court of Appeals upheld the denial of husband’s request to terminate the mortgage payments on the grounds that the designation of the mortgage payments as being in the nature of spousal support was made to prevent the husband from discharging his obligation in bankruptcy (as a Domestic Support Obligation nondischargeable under 11 U.S.C. §523(a)(5) , in any type of bankruptcy).  Similarly, in Tucker-Wilmouth, the Virginia Court of Appeals held that the judge’s description of the additional amounts payable for wife’s health insurance as not being in the nature of spousal support was merely for tax purposes, and did not mean that the Hanover County Circuit Court was without jurisdiction to order the payment as not being spousal support, child support, or a monetary judgment from equitable distribution.

You should consult with your Virginia lawyer or Richmond divorce lawyer Jim Wilson to discuss the proper classification of your property as separate, marital or hybrid in equitable distribution.

Will the ex-husband’s chapter 13 plan paying less than a quarter of a lump sum equitable distribution award to ex-wife from a divorce case pass the good faith test for confirmation in Virginia?

Not in the case of In re: Edward Trae Green III, Case Number 09-17646-SSM, from the U.S. Bankruptcy Court for the Eastern District of Virginia, illustrates.  While it is possible to discharge a divorce-related debt, other than a Domestic Support Obligation as defined in 11 U.S.C. 101(14A), in chapter 13 under 11 U.S.C. § 1328, still the chapter 13 case must be filed in good faith and the chapter 13 plan must be proposed in good faith in order for the plan to be confirmed.

In the In re: Edward Green case, the Debtor and his wife had a contested divorce case in Virginia, with the divorce court judge dividing the marital property in equitable distribution, in accordance with Virginia Code Section 20-107.3, 60% to the Debtor husband and 40% to the Debtor’s wife.  The primary marital asset was the marital residence, which the Virginia Circuit Court judge found to have a value of $370,000 at the time of the equitable distribution hearing in the divorce case.  After subtracting a first deed of trust in the amount of $178,851 and a $75,041, the marital residence had equity of approximately $116, 108.  Husband was awarded the marital residence and had to pay wife a lump sum equitable distribution award of more than $45,737 within a year.  The husband did not pay the lump sum equitable distribution award and the wife filed a show cause summons to have the husband held in contempt of court by the Virginia divorce court judge.  The husband filed chapter 13 bankruptcy three days before the show cause hearing in the Virginia Circuit Court.

At the time of the chapter 13 bankruptcy, the Debtor claimed the fair market value of the marital residence had decreased to $335,000, the balance on the first mortgage had decreased to $170,000, and the balance on the home equity line of credit had increased to $139,000, such that after subtracting the costs of sale, there was no net equity which could not be protected under the Debtor’s Virginia Homestead Exemption.  The Debtor filed a chapter 13 plan which proposed only a 21% payout to unsecured creditors, including the wife’s equitable distribution lump sum award.  Interestingly, the Debtor’s ex-wife did not claim that the equitable distribution award created a secured debt against the home.  Instead, the ex-wife filed an objection to confirmation of the chapter 13 plan on the grounds of lack of good faith in the filing of the case and the proposing of the plan.

The U.S. Bankruptcy Court judge for the Eastern District Court of Virginia agreed with the ex-wife and denied confirmation of the plan.  The court noted that good faith was determined by a number of factors under the 4^th Circuit Court case of Deans v. O’Donnell.  In this particular case, the bankruptcy court judge recognized that the Debtor was attempting to discharge a debt that would not be dischargeable in a chapter 7 case, the lump sum equitable distribution award that would be nondischargeable under 11 U.S.C. 523(a)(15) in a chapter 7 case.  While that was not dispositive, it was a factor that could be considered.  What was most troubling in the good faith analysis, was the Debtor’s unexplained increase in the balance of the home equity line of credit, in an amount sufficient to pay off the ex-wife’s lump sum equitable distribution award in full.  Consequently, the judge denied confirmation.

A different outcome might have been obtained had the Debtor been able to explain satisfactorily why the balance on the home equity line of credit increased from approximately $75,000 at the time of the equitable distribution hearing to $139,000 at the time of the filing of the chapter 13 case.  In addition, had the wife claimed her equitable distribution award was a judgment lien against the former marital residence supported by some equity such that it could not be stripped down, then the Debtor would have had to pay the secured debt in full.

You should discuss with your Virginia bankruptcy and divorce lawyer or Richmond bankruptcy and divorce lawyer James H. Wilson, Jr., whether a particular divorce related debt may be discharged in bankruptcy.