Summary:
Bankruptcy Court Characterization of Equitable Distribution Awards
Cheryl Jones brought motions against the Debtor, her ex-husband, Sean Jones, seeking relief from the stay and for determination of Domestic Support Obligation, with the primary question being whether the family court’s Equitable Distribution Order award of $116,182 from the debtor’s 401(k) plan and $63,736 from the debtor’s retirement account were in the nature of a domestic support obligation, pursuant to §§ 101(14A) and 523(a)(5), or, as argued by the debtor, were property distributions within the scope of §523(a)(15). If the former, the obligation would be nondischargeable, but the latter would be discharged in a Chapter 13 case, pursuant to § 1328(a).
Beginning by holding that the burden of characterizing the claim by a preponderance of the evidence fell on Ms. Jones, as the non-debtor, the bankruptcy court reviewed the treatment of the 401(k) and retirement account. As to the 401(k), relying on, among other cases, Bowen v. Bowen, 2010 WL 1855871 (Bankr. E.D.N.C. 2010), the bankruptcy court held that the equitable distribution order, by requiring neither regular payments nor alteration of amounts due based on remarriage or death, but instead a simple allocation to each party of their appropriate share of the 401(k), constituted a dischargeable property settlement.
In contrast, the award from Mr. Jones’ retirement was excepted from the equitable distribution of marital property. Further, the family court “took great pains” to account for the parties’ monthly budgets and anticipated future earnings, with nearly half of Ms. Jones’ expenses being paid from “anticipated, imputed income”, demonstrated that the award from retirement was intended to meet that necessity as a domestic support obligation.
Bankruptcy Court Denial of Motion to Confirm Stay Not in Effect
Subsequently, Ms. Jones sought confirmation that the automatic stay was not in effect as to Mr. Jones’ 401(k) arguing that§ 362(b)(2)(A)(iv) provides that the automatic stay does not apply to an action or proceeding “for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate.” The Ms. Jones argued that the 401(k) was not an asset of the estate* and thus the automatic stay did not apply. The bankruptcy court, however, held that this position inaccurately conflated the “equitable distribution” with “the dissolution of marriage”, which, under North Carolina law are not reliant upon each other and can be granted separately.
Ms. Jones further argued that if the automatic stay is, pursuant to § § 362(b)(2)(A)(iv), in effect for property of the estate, then the inverse, namely that there is no stay for assets that are not property of the estate. The bankruptcy court rejected this, holding that absent an unambiguous statement in the Code to the contrary, the automatic stay at § 362(a)(1) prohibited the recovery of pre-petition claims against property of the debtor, not merely property of the bankruptcy estate.**
District Court Denial of Relief from Stay for Equitable Distribution
On appeal from the order characterizing the equitable distribution claims, the district court affirmed the bankruptcy court.
Ms. Jones argued on appeal that the bankruptcy court erred in failing to conduct a balancing test under In re Robbins, 964 F .2d 342, 345 (4th Cir. 1992) as to whether the automatic stay should have been lifted. The district court held that Ms. Jones had failed to raise Robbins to the bankruptcy court and thus waived it on appeal. Even if it had been implicitly raised, the district court held that such determination was with the discretion of the bankruptcy court, which had adequately and implicitly considered:
(1) whether the issues in the pending litigation involve only state law ... ;
(2) whether modifying the stay will promote judicial economy ... ; and
(3) whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court." Robbins, 964 F.2d at 345.
Commentary:
* In several locations this opinion states that the 401(k) is exempt under 11 U.S.C. § 522(b)(3)(C). This, however, seems to ignore that § 541(c)(2), as understood by Patterson v. Shumate, 504 U.S. 753, 760, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992). excludes an ERISA qualified 401(k) from the estate. This may have been the point that Ms. Jones was attempting to make.
**This opinion is somewhat in contradiction with the opinion by the bankruptcy court in In re Eldridge, where relief from the automatic stay for collection of post-petition homeowner’s dues was held to be unnecessary, as the homeowner’s association was seeking to collect from assets of the debtor and not the property of the estate. (As confirmation in the E.D.N.C. vested all assets of the estate in the debtor, both in Eldridge and here, this includes all assets.) The primary distinction being that the homeowner’s dues being sought were for post-petition months, but nonetheless derived from a pre-petition set of Covenants, not dissimilar to a pre-petition Equitable Distribution.
For a copy of the opinion, please see:
Jones v. Jones- Bankruptcy Characterization of Equitable Distribution Awards
Jones v. Jones- Bankruptcy Denial of Motion to Confirm Stay Not in Effect
Jones v. Jones- District Court Denial of Relief from Stay for Equitable Distribution
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