Bankruptcy is no get-out-of-jail-free card for someone who has disobeyed matrimonial court orders, as shown in an opinion by Bankruptcy Judge David D. Cleary of Chicago.
The January 19 decision by Judge Cleary and the authority on which he principally relied, In re Thorpe, 881 F.3d 536 (7th Cir. 2018), are pointing toward the idea that a division of marital property leaves a debtor with nothing more than a legal interest in property that would not become estate property under Section 541(d) and would not be protected by the automatic stay.
The Marital Property Division
With seven children, the debtor and his wife began divorce proceedings in 2016. The state matrimonial court dissolved the marriage in 2022. The judgment of divorce also divided considerable marital property that was mostly in the debtor’s name.
The debtor did not comply with the judgment by his having failed to transfer property to the wife, who had him held in contempt “on several occasions” in state court, Judge Cleary said. Eventually, the state court scheduled a hearing on the wife’s motion to have him jailed. When he didn’t appear, the state judge had him arrested and jailed.
The state court judge scheduled another hearing where the debtor could purge his contempt charge and be released from jail. After the hearing, the judge sent the debtor back to jail because he had not paid overdue maintenance and child support, produced a life insurance policy that would pay the wife $2.5 million were he to die, executed documents to transfer property to his former wife and funded a $500,000 trust.
At the hearing, the debtor informed the state court judge that he had filed a chapter 7 petition earlier in the day. The state court judge decided that the automatic stay did not apply.
Soon after the hearing in state court, the debtor filed a motion in bankruptcy court asking Judge Cleary to order his release from jail. The debtor also wanted a citation of contempt, damages and attorneys’ fees for a willful stay violation under Section 362(k).
The wife cross moved for a declaration that the stay did not apply. She won.
The Section 362(b)(2) Exception to the Automatic Stay
Judge Cleary framed the question as whether there was an exception to the automatic stay. Section 362(b)(2)(B) makes the stay inapplicable to “the collection of a domestic support obligation from property that is not property of the estate.” There was no doubt that the wife was aiming to collect domestic support obligations, but the debtor contended that she was attempting to collect from estate property.
The debtor argued that the exception only applies to “collection,” while the wife was attempting to “enforce” the marital property division. Judge Cleary cited two treatises that, he said, “have raised the question [of] whether proceedings to enforce alimony or support orders may not be excepted from the automatic stay.” [Emphasis in original.]
Judge Cleary disagreed with the treatises, basing his decision in significant part on Pennsylvania Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552 (1990). He read Davenport to mean that “the Court considered ‘enforcement’ synonymous with ‘collection.’”
Conceding that some courts have ruled to the contrary, Judge Cleary held that “the better reading of § 362(b)(2) . . . includes enforcement of those domestic support obligations.” [Emphasis in original.] He said his decision was supported by legislative history. “If the statute were interpreted to allow collection but not enforcement of those obligations,” he said, “it would stymie the purpose of the statute.”
Collection from Estate Property?
Even if the wife’s enforcement actions fell within the exception, she still would be guilty of a stay violation if she were attempting to collect from estate property.
Judge Cleary surveyed the debtor’s schedules and found that he had listed interests in 25 corporate entities that were not themselves in bankruptcy. He noted that the debtor had membership interests in those entities but that the assets of the companies were not property of the debtor’s estate.
Of perhaps greater significance, Judge Cleary analyzed Thorpe. To read ABI’s report on Thorpe, click here.
Based on Illinois law, the Seventh Circuit said in Thorpe that both spouses have “contingent interests” in marital property on the commencement of a divorce action. Once the court divides marital property, the circuit said that the bankrupt “estate’s contingent interest in the [marital property] disappeared.”
From Thorpe, Judge Cleary concluded that the wife was “not pursuing estate property” because her “collection efforts seek only assets awarded to her in the [divorce judgment].”
Judge Cleary denied the debtor’s motion, held that the wife’s actions fell under the exception to the automatic stay, and said he would not require the wife to take action to release the debtor from jail.
Observations
Interpreting Illinois law, the Seventh Circuit in Thorpe held that the husband’s contingent interest in marital property evaporated when the division of marital property awarded the property to the nondebtor wife. In other words, the husband lost his property interest before bankruptcy.
The result could be the same even in states without a statute like Illinois has in view of Section 541(d), which says:
Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest . . . becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
Can it be said that in most states a spouse holds only legal title to property that has been awarded to the other spouse in a division of marital property? If that’s correct, then it would be universally true that collecting an award of marital property or enforcing an award would fall under the exception to the automatic stay in Section 362(b)(2)(B), assuming that collecting and enforcing have the same meaning.
If the matrimonial court has awarded specific property, there may be no stay violation. But what if the debtor would be required to liquidate or transfer property not specifically identified by the matrimonial court? Would there be a stay violation were the nondebtor spouse to attach property not specifically identified in the division of matrimonial property?
One more problem: Section 362(b)(2)(B) tells us that the debtor’s property includes the debtor’s legal interest. Would enforcing a matrimonial judgment entail interference with the debtor’s legal interest?
Bankruptcy is no get-out-of-jail-free card for someone who has disobeyed matrimonial court orders, as shown in an opinion by Bankruptcy Judge David D. Cleary of Chicago.
The January 19 decision by Judge Cleary and the authority on which he principally relied, In re Thorpe, 881 F.3d 536 (7th Cir. 2018), are pointing toward the idea that a division of marital property leaves a debtor with nothing more than a legal interest in property that would not become estate property under Section 541(d) and would not be protected by the automatic stay.