In re Ruitenberg

• Citation: 745 F.3d 647
• Decision Date: 13 March 2014
• Docket Number: No. 13–2175.,13–2175.
• Parties: In re Paul RUITENBERG, III, Debtor Thomas J. Orr, Chapter 7 Trustee for Paul Ruitenberg, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

745 F.3d 647

In re Paul RUITENBERG, III, Debtor

Thomas J. Orr, Chapter 7 Trustee for Paul Ruitenberg, Appellant.

No. 13–2175.

United States Court of Appeals,

Third Circuit.

Argued Nov. 20, 2013.

March 13, 2014.

Graig P. Corveleyn, Esquire, Andrea Dobin, Esquire (Argued), Trenk, DiPasquale, Della Fera & Sodono, Trenton, NJ, for Appellant.

Erin J. Kennedy, Esquire (Argued), Forman, Holt, Eliades & Youngman, Paramus, NJ, for Appellee.

Before: AMBRO, and SMITH, Circuit

Judges and O'CONNOR, ^* Associate Justice (Ret.).

OPINION OF THE COURT

AMBRO, Circuit Judge.

We decide whether Candace Ruitenberg's interest in an equitable share of marital property pending her divorce from Paul Ruitenberg, III is a pre-petition “claim” against Paul's bankruptcy estate. The issue has divided Bankruptcy Courts in our Circuit.

Paul filed for bankruptcy under Chapter 7 of the Bankruptcy Code, and Thomas J. Orr was appointed as the Trustee of the bankruptcy estate. Before that filing, Paul and Candace were in divorce proceedings in New Jersey state court. No final judgment of divorce existed when Paul filed his bankruptcy petition nor was there a division of marital assets. Based on an estimate of her expected share of marital assets, Candace filed a timely proof of claim for $577,935 (the “Claim”) against Paul's bankruptcy estate.¹ (Candace initially sought priority status for the Claim under 11 U.S.C. § 507(a)(1)(A) and (B), but later conceded that the Claim, even if pre-petition, is not entitled to priority as a domestic support obligation.)

Orr sought to expunge the Claim. He argued that Candace's interest in equitably dividing the marital property in Paul's bankruptcy estate was not a “claim” for purposes of § 101(5) of the Bankruptcy Code, 11 U.S.C. § 101(5), because the New Jersey court had not entered a final divorce decree before Paul filed for bankruptcy. Candace's Chapter 7 Trustee, Barbara Edwards, opposed the motion to expunge. She argued that Candace had a contingent claim for equitable distribution of marital property, and that was a pre-petition claim against Paul's estate.

The parties' briefs did not detail the marital property at issue between Paul and Candace, nor why it mattered that the Claim be classified as pre- or post-petition. In general, post-petition claims for equitable distribution are not discharged. In re Ruitenberg, 469 B.R. 203, 206 (Bankr.D.N.J.2012) (citations omitted). And, as acknowledged by the parties, under the changes implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub.L. No. 109–8, § 215(3), 119 Stat. 23 (2005), equitable distribution claims are nondischargeable in Chapter 7. See11 U.S.C. § 523(a)(15) (excepting from discharge any liability on a claim “to a spouse [or] former spouse ... that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record”); see also Ruitenberg, 469 B.R. at 208; 4 Collier on Bankruptcy (16th ed. Supp.2013) ¶ 523.23 (“Section 523(a)(15) now provides, unqualifiedly, that a property settlement obligation encompassed by section 523(a)(15) is nondischargeable.”).

The record before the Bankruptcy Court and the parties' statements at oral argument shed some light on the practical distinction between a pre- and a post-petition claim in this case. Candace's Claim was apparently premised on her stake in a partnership that was legally titled in Paul's name and hence passed to his bankruptcy estate; it would likely be distributed between Paul and Candace as shared marital property in connection with any divorce decree. SeeN.J. Stat. Ann. § 2A:34–23.1 (“It shall be a rebuttable presumption that each party made a substantial financial or nonfinancial contribution to the acquisition of income and property [during the marriage].”). Thus, through the Claim Candace sought her anticipated share of marital property that was in the hands of Trustee Orr in Paul's estate. If the Claim is classified as pre-petition, Candace would share in any distribution of the bankruptcy estate as a general unsecured creditor. If, however, the Claim is deemed post-petition, Candace will be left to collect on her interest outside of bankruptcy with the fear that there will be less left after Paul's Chapter 7 liquidation for that Claim than if it shared in his estate as a pre-petition claim.

Bankruptcy Judge Lyons denied Orr's motion and agreed with Edwards that, under more-current decisions of our Court, “the pending claim for equitable distribution against [Paul's] bankruptcy estate arose prepetition and must be allowed.” In re Ruitenberg, 469 B.R. at 204. Orr timely appealed the Bankruptcy Court's order, and the District Court certified the case for direct appeal to our Court.

The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(b). We have jurisdiction over this direct appeal pursuant to 28 U.S.C. § 158(d)(2)(A). We review the Bankruptcy Court's findings for clear error, and apply plenary review to its conclusions of law. In re Handel, 570 F.3d 140, 141 (3d Cir.2009). We note that Orr does not challenge any of the factual findings of the Bankruptcy Court. Rather, the parties agree that this appeal presents a pure question of law. See Appellant's Br. at 6; Appellee's Br. at 1.

Deciding when an interest in the equitable distribution of marital assets in a divorce proceeding becomes a claim against the bankruptcy estate of one of the spouses begins with what the Bankruptcy Code defines as a “claim.” It is in relevant part a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured [.]” 11 U.S.C. § 101(5)(A). Even if no final judgment of divorce existed for Candace and Paul when he entered bankruptcy, her interest was, at the least, unliquidated and contingent on a final decree apportioning marital property, perhaps unmatured, and likely disputed. But, no matter, it literally is a “claim” under § 101(5).²

Our recent analysis of § 101(5) in JELD–WEN, Inc. v. Van Brunt (In re Grossman's), 607 F.3d 114 (3d Cir.2010), supports this view. There we dealt with whether an asbestos-related tort action against a home improvement retailer arose as a “claim” before the retailer's bankruptcy filing. If so, bankruptcy may discharge that claim even though the injury arose (and thus the tort action accrued) after the bankruptcy filing. Id. at 117. We noted that both Congress and the Supreme Court have instructed that a “claim” under the Bankruptcy Code be given the broadest possible definition. Id. at 121 (citing H.R.Rep. No. 95–595, at 309 (1977), 1978 U.S.C.C.A.N. 5963 and FCC v. NextWave Pers. Commc'ns Inc., 537 U.S 293, 302, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003)). In the specific tort action at issue in Grossman's, we held that “a ‘claim’ arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a ‘right to payment’ under [§ 101(5) ].” Id. at 125. In other words, a lawsuit based on conduct (or exposure) that occurred before the bankruptcy filing yields a pre-petition claim even though the cause of action did not accrue until the injury manifested sometime after the bankruptcy filing.

In Grossman's we overruled an earlier test—known as the “accrual test”—set out in Avellino & Bienes v. M. Frenville Co. (In re Frenville), 744 F.2d 332 (3d Cir.1984). Under that test, a claim would not exist until a right to payment arose (or accrued) under state law. Grossman's, 607 F.3d at 119. After weighing criticisms of the test by our sister circuits and commentators, we concluded that the accrual test interpreted § 101(5)'s definition too narrowly because “a ‘claim’ can exist under the Code before a right to payment exists under state law.” Id. at 121. Specifically, the accrual test “fail [ed] to give sufficient weight to the words modifying [the ‘right to payment’]: ‘contingent,’ ‘unmatured,’ and ‘unliquidated.’ ” Id. Thus our holding in Grossman's expanded our Court's interpretation of the definition of a “claim” under § 101(5) of the Bankruptcy Code. Candace's interest in marital property falls well within this expanded definition.

Orr argues that Grossman's expansion of the definition of a “claim” should be read narrowly to apply only to tort-related claims and that we should continue to apply Frenville and the accrual test in our case. He asserts that, per the accrual test, Candace has a post-petition claim because under New Jersey law “a spouse's right to share in marital property by virtue of equitable distribution arises when ‘a judgment of divorce ... is entered.’ ” Carr v. Carr, 120 N.J. 336, 576 A.2d 872, 875 (1990) (quoting N.J. Stat. Ann. § 2A:34–23). Orr also relies on two pre-Grossman's bankruptcy cases that held that claims based on equitable distribution in New Jersey do not exist until a judgment of divorce is entered—In re Howell, 311 B.R. 173 (Bankr.D.N.J.2004) (a case decided by Judge Lyons), and In re Berlingeri, 246 B.R. 196 (Bankr.D.N.J.2000). But contrary to Orr's contention, both cases relied on Frenville 's accrual test. See Howell, 311 B.R. at 176;Berlingeri, 246 B.R. at 199. As explained by Judge Lyons, Ruitenberg, 469 B.R. at 206–07, and as we explain below, the accrual test was abandoned by Grossman's even in this context.

Although our Court's formulation of the test in Grossman's was tailored to claims rooted in a common law tort action, when we overruled Frenville we spoke more broadly of the problems with the accrual test. As mentioned above, Grossman's points out that Congress sought to adopt the “ broadest possible definition ” of the term “claim” in § 101(5), and we recognized that Frenville “impose[d] too narrow an interpretation of a ‘claim’ under the Bankruptcy Code.” 607 F.3d at 121 (emphasis in original). Ultimately, ...