“The accepted procedure for allowing state courts to divide marital property when one spouse files bankruptcy is to modify the automatic stay and abstain from adjudicating the property settlement,” Bankruptcy Judge David T. Thuma said in an opinion on July 21.
Beyond “accepted procedure,” the facts in the case also pointed toward a division of marital property by the state divorce court.
The husband, a doctor, was in legal trouble for allegedly performing unnecessary medical procedures. Perhaps to protect their assets in a community property state, the doctor and his wife transferred marital property to an LLC. The membership interests in the LLC were divided 50/50 between the wife’s revocable trust and the husband’s revocable trust.
The LLC’s management agreement called for a two-thirds vote to approve major transactions. In other words, the couple had to agree, or there would be deadlock.
The wife filed a divorce action in New Mexico state court. While the divorce action was pending, the wife filed a chapter 13 petition in Santa Fe. By far, her husband had the largest claim, based on his claimed entitlement to marital assets.
The wife filed a chapter 13 plan to pay creditors in full, with proceeds from the sale of real property held by the jointly owned LLC. The husband contended that the debtor-wife could not sell the property without his consent. Moreover, the plan could not be confirmed unless the husband’s claim were eliminated entirely.
In short, the debtor-wife could not confirm her chapter 13 plan unless the marital assets were divided either by the bankruptcy court or the matrimonial court. In addition, Judge Thuma said that he could not rule on allowance of the husband’s claim until the marital assets were divided.
The husband filed a motion for a modification of the automatic stay to permit the state court to divide the marital assets.
Turning to the lift-stay motion, Judge Thuma said that the bankruptcy court may not enter divorce decrees but may apportion marital property. “Just because the Court can adjudicate a property settlement does not mean it should,” he said. Therefore, “most bankruptcy courts decline to wade into divorce property settlements, holding that the state divorce court is the more appropriate forum.”
After saying that the “accepted procedure” is for state courts to divide marital property, Judge Thuma observed “that marital property settlements are almost always better left to the state divorce courts” because they “are specialized tribunals.”
Judge Thuma said that “deference” to the matrimonial court was “warranted” because “the bankruptcy case was filed in the middle of a contentious divorce proceeding” and the timing of the filing, together with the primacy of the husband’s claim, gave “rise to the question [of] whether forum-shopping or some other improper purpose was involved in the decision to file bankruptcy.”
Inclined to modify the stay, Judge Thuma made several findings of fact to support his conclusion. Among other things, he found that (1) completing the divorce would “greatly simplify” the bankruptcy case; (2) the divorce court is a specialized tribunal; (3) dividing marital property is “complicated” and better left to a specialized tribunal; (4) the state court is better suited to divide marital property; (5) dividing property in state court would be more economical; and (6) whether the stay is lifted or not, creditors could not be paid until one court or the other divides the property.
Judge Thuma lifted the stay to permit apportionment of marital property in state court but noted that the husband did not need stay relief to dissolve the marriage. He said that the debtor-wife might not need bankruptcy relief once the state court divides the marital property.
“The accepted procedure for allowing state courts to divide marital property when one spouse files bankruptcy is to modify the automatic stay and abstain from adjudicating the property settlement,” Bankruptcy Judge David T. Thuma said in an opinion on July 21.
Beyond “accepted procedure,” the facts in the case also pointed toward a division of marital property by the state divorce court.