Filing a divorce action creates a vested but inchoate property interest in Colorado that could increase the value of the bankruptcy estate of a divorcing spouse. Dismissal of the divorce proceeding after bankruptcy eliminates the property interest but does not result in an avoidable, unauthorized post-petition transfer under Section 549(a), for reasons explained by the Tenth Circuit Bankruptcy Appellate Panel.
The husband owned property in his own name that he had purchased before marriage. After marriage, the property had appreciated in value.
The husband initiated a divorce proceeding. Later, the wife filed a chapter 7 petition. The chapter 7 trustee moved to intervene in the divorce action, likely to assert an interest in the husband’s separate property that became marital property as a result of divorce.
While the wife’s chapter 7 case was pending, the couple reconciled and dismissed the divorce action.
The trustee filed an adversary proceeding against the husband and wife, contending that dismissal of the divorce action effected an unauthorized, post-petition transfer of property of the wife’s bankruptcy estate. Bankruptcy Judge Michael E. Romero of Denver denied the trustee’s motion for partial summary judgment.
Given leave for an interlocutory appeal, the trustee appealed but fared no better in the nonprecedential, December 5 opinion for the BAP written by Bankruptcy Judge William T. Thurman.
In Colorado, separate property acquired by a spouse before marriage is considered marital property “to the extent that its present value exceeds its value at the time of the marriage.” The wife’s interest in her husband’s appreciated property would thus appear to be property of her bankruptcy estate.
The wife’s property interest in the husband’s separate property was extinguished on dismissal of the divorce action, implicating Section 549(a). The section permits a trustee to avoid a transfer after filing that was “not authorized under this title or by the court.” Thus, the trustee’s theory had superficial appeal, but there is more to Colorado law.
Judge Thurman explained that the wife’s interest was a vested, equitable interest under Colorado law that “remains inchoate unless and until the divorce court issues a divorce decree or divides the marital estate.” He thus recognized that the wife had an equitable interest in the marital estate that included appreciation in the separate property that the husband owned in his own name.
However, Judge Thurman said that “the Trustee cannot have a greater interest in the Property than the Debtor,” meaning that “the Trustee also had a vested, but inchoate, equitable right of undetermined value in the Property at the commencement of the Bankruptcy Case.”
Judge Thurman went on to say that the wife’s “undefined, inchoate interest does not survive dismissal of the related divorce action.” As a result, he said that “both the Debtor’s and Trustee’s interest in the Property vanished when the Divorce Case was dismissed.”
Denial of the trustee’s motion for partial summary judgment not only aligned with Colorado law but also properly reflected the state’s public policy as stated in the statute itself. Judge Thurman quoted the statute, which says it “is the declared public policy of this state . . . to promote and foster the marriage relationship and reconciliation of estranged spouses.”
“Aligning with the Trustee,” Judge Thurman said, “would run counter to Colorado public policy and have a chilling effect on reconciliations and the institution of marriage.”
The BAP upheld denial of the trustee’s motion for partial summary judgment.
Filing a divorce action creates a vested but inchoate property interest in Colorado that could increase the value of the bankruptcy estate of a divorcing spouse. Dismissal of the divorce proceeding after bankruptcy eliminates the property interest but does not result in an avoidable, unauthorized post-petition transfer under Section 549(a), for reasons explained by the Tenth Circuit Bankruptcy Appellate Panel.
The husband owned property in his own name that he had purchased before marriage. After marriage, the property had appreciated in value.
The husband initiated a divorce proceeding. Later, the wife filed a chapter 7 petition. The chapter 7 trustee moved to intervene in the divorce action, likely to assert an interest in the husband’s separate property that became marital property as a result of divorce.
While the wife’s chapter 7 case was pending, the couple reconciled and dismissed the divorce action.