Bankruptcy and Equitable Distribution

August 7, 2017 § 1 Comment

I am no bankruptcy expert, and my experience with its intersection with a divorce action is minimal. My impression, though, is that most lawyers think that if a bankruptcy action and divorce action occur at the same time, all one has to do is to file a motion to remand the case back to chancery under the “domestic relations exception” to federal jurisdiction, which bars federal courts from issuing divorce, alimony, and child custody decrees, and the bankruptcy court will fling the case back to chancery, where it belongs.

That isn’t quite accurate, however, as a recent case illustrates. The case is In Re: Zelius Welborn Powell, III, Debtor; Powell v. Powell, no. 16-51982-KMS, adv. no. 17-06008-KMS, rendered June 30, 2017, in the U.S. Bankruptcy Court for the Southern District of Mississippi. I’ve included as much citation information as possible because I can’t find an non-subscription electronic site for a link. The case is available behind a paywall on Pacer.

The case began when Jessica Powell filed for divorce against her husband, Zelius Welborn Powell, III (Trey). While the divorce was pending, Trey filed for bankruptcy. Trey had sold some stock, and the chancellor ordered that the proceeds be held in a restricted account and “frozen.” Later the funds were turned over to the Bankruptcy Trustee.

Trey removed the entire divorce proceeding to bankruptcy court under Bankruptcy Rule 9027, and Jessica countered with a motion to remand the case to chancery court. Following an adversarial hearing, U.S. Bankruptcy Judge Katharine M. Samson had this to say about chancery jurisdiction in these cases:

… The Supreme Court has held that “the domestic relations exception [to federal jurisdiction] … divests the federal courts of power to issue divorce, alimony, and child custody decrees.” Ankenbrandt v. Richards, 504 U.S. 689, 703 (1992) …

The domestic relations exception, however, does not divest this Court of all jurisdiction in this case. Federal courts “in which a case under [bankruptcy law] is commenced or pending shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate … .” 28 U.S.C. § 1334(e)(1) (2005). This exclusivity is not affected by a previously pending divorce action in Mississippi’s chancery courts.

When bankruptcy is filed after a divorce petition is filed but before the judgment of divorce, all assets titled in the name of the debtor spouse become a part of the bankruptcy estate. The state court action is stayed with respect to a property division. In Mississippi, a spouse has no property interest in marital assets titled in the other’s name until a judgment of divorce and equitable distribution. Under these circumstances, the nondebtor spouse becomes an unsecured creditor in the bankruptcy with regard to assets titled in the debtor’s name.

Deborah H. Bell, Bell on Miss. Family Law, § 21.06[2] (2d. ed.) (internal footnotes omitted).

. . .

To prevent confusion in this and future cases, the Court has gathered some Mississippi authorities concerning the jurisdiction and authority of a chancery court over property division when a bankruptcy case has been filed.

Family law and bankruptcy become most entangled when property division and bankruptcy coincide. A state court hearing a divorce action has the power to divide marital property equitably without regard to who holds title to the property. However, in Mississippi, a spouse has no interest in property owned by the other until a court judgment classifies the property as marital and orders a transfer of the property or a lump sum payment as part of equitable distribution … When bankruptcy and divorce occur simultaneously, marital property may include assets that are, or will become, property of the bankruptcy estate …

A state court may not classify and divide marital property without permission of the bankruptcy court. However, a spouse who files a divorce action seeking property division is asserting a claim against assets held by the debtor spouse and arguably at the moment of filing divorce becomes a creditor with an unliquidated claim against the estate. The spouse may file a claim in the bankruptcy and seek relief from the stay for the court to determine the she of assets to which he or she would be entitled outside of bankruptcy. Or, the state court may cho[o]se to proceed with the divorce and other aspects of the proceeding and reserve jurisdiction to divide the property after the bankruptcy has concluded.

Bell, supra, at § 21.03[3] (internal footnotes omitted.

The Mississippi Supreme Court has held that while a husband’s primary asset (a partnership) was in bankruptcy, the value of that asset was unknowable, and therefore the chancellor’s “decision to grant [the wife] a property settlement and/or lump sum alimony was premature … .” Heigle v. Heigle, 654 So.2d 895, 898 (Miss. 1995). The Mississippi Supreme Court has also held that other than the question of the divorce itself, which was undisputed, “all of the remaining issues should have remained in the trial court pending the conclusion of the bankruptcy proceedings.” Id; see also Dunaway v. Dunaway, 749 So.2d 1112, 1120-21 (Miss. Ct. App. 1999) (automatic stay of bankruptcy proceeding enjoins actions affecting bankruptcy assets).

The bankruptcy court granted Jessica’s motion in part, remanding the issues related to divorce, alimony, and child support to chancery, and denying it and retaining jurisdiction over issues involving assets of the bankruptcy estate.

That’s enough for now. I’ll comment tomorrow.

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§ One Response to Bankruptcy and Equitable Distribution

  • jamesmozingo says:

    Judge, the decision can be downloaded from the website for the United States Bankruptcy Court for the Southern District of Mississippi. Go to the “Opinions” tab. Go to “Judge Samson” tab. Under Judge Samson, Powell v. Powell appears without charge.

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