Comments on Bankruptcy and Equitable Distribution
August 8, 2017 § 3 Comments
Yesterday I posted about the Powell bankruptcy case and how it addressed the handling of equitable distribution in divorce when there is a pending bankruptcy proceeding. As promised, here are my thoughts:
- I have heard it said that Powell is a big change fraught with implications for family law practitioners, but I don’t see that. The language cited from Professor Bell clearly states what the law has been. Powell does not change that.
- Some may have misinterpreted the federal domestic relations exception barring federal courts from exercising jurisdiction over divorce to mean that all matters incidental to a divorce are included. The US Supreme Court, however, has made it clear that it is the granting of the divorce itself that is barred. Any matters pertaining to the property of the bankruptcy debtor are subject to bankruptcy jurisdiction.
- The only way that a chancellor may proceed in divorce after bankruptcy is filed is for you to lift the automatic stay. You have to petition the bankruptcy court to remand all of the issues, as Jessica Powell did, even knowing that some will not be remanded.
- Only problem is, per Heigle, cited in the Powell opinion, our supreme court has made it clear that the chancery court should stay all proceedings before it until the bankruptcy is concluded.
- Even without Heigle to stop you from going forward, it’s obvious that if the bankruptcy estate is taken away, equitable distribution is impossible. If equitable distribution is impossible, alimony is impossible, since you can’t get to alimony without going through equitable distribution. If most of the assets are in the bankruptcy estate, that may well limit or even eliminate child support.
- As I mentioned yesterday, I am no bankruptcy expert, but it appears that if you represent the other spouse (not the debtor), you had better file a claim for him or her in bankruptcy court right away to protect that client’s rights. You need to ask a bankruptcy expert about this.
The Better Chancery Practice Blog 
As usual the Judge is spot on. Thinking about the last observation in the list, Chancery lawyers may want to decide now whether they are willing to “follow” the case into the Bankruptcy Court at all. Most of our retainer agreements probably do not address this issue directly, so now is the time to make decisions and change forms. Filing anything in the Bankruptcy Court naturally carries with it a host of issues, not the least of which are how notice is served on the non-Debtor client thereafter, and how deadlines are treated in Bankruptcy. The Bankruptcy Court’s website provides a form proof of claim that is straightforward, but Chancery practitioners may want to consider how much liability they are willing to assume for getting the claim right while things are still fluid in Chancery. Moreover, clients may find it confusing to shift from assessing equitable interests in property as defined in Chancery, to title-based (perfected) interests that control in Bankruptcy, and confused clients rarely make for happy clients. There are also profound differences in filing claims in Chapter 7, 11, 12 and 13 proceedings, and clients need to know how each works to assess how to proceed once a bankruptcy is filed. Powell should nevertheless have a modest impact on the typical Chancery practice because the historical odds of a bankruptcy filing during a Chancery proceeding are low, but some wonder if Powell will lead to more simultaneous filings by spouses who would rather see anybody—including the most mean-spirited creditor—receive their assets rather seeing them go to a spouse. Just food for thought.
Judge, there’s another reason to consider staying the divorce pending the conclusion of the bankruptcy, though I realize that may cause its own problems. That reason is that all kinds of things can happen during a bankruptcy case. For example, a Chapter 13, 12 or even 11 plan can be commenced and later dismissed or converted to Chapter 7. If the bankruptcy case is dismissed, all property remains vested in the debtor spouse (at least that was vested, in whole or in part, in the debtor spouse before the filing of the bankruptcy. If the divorce was completed, then the question arises as to where, if anywhere, is there jurisdiction to litigate the equitable distribution and alimony issues between the parties. There are many other implications of this type too numerous to try to catalogue here, but you are absolutely correct that there is a lot to consider when bankruptcy intervenes.
Thanks for that clarification