Davis v. Cox

• Decision Date: 15 January 2004
• Docket Number: No. 02-1963.,No. 02-1962.,02-1962.,02-1963.
• Citation: 356 F.3d 76
• Parties: Laurie DAVIS a/k/a Laurie Davis Cox, Appellant, Cross-Appellee, v. Thomas COX, Debtor-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — First Circuit

356 F.3d 76

Laurie DAVIS a/k/a Laurie Davis Cox, Appellant, Cross-Appellee, v. Thomas COX, Debtor-Appellee, Cross-Appellant.

No. 02-1962.

No. 02-1963.

United States Court of Appeals, First Circuit.

Heard March 5, 2003.

Decided January 15, 2004.

Appeal from the Bankruptcy Court, James B. Haines, Jr., Chief Judge.

COPYRIGHT MATERIAL OMITTED

Michael J. Pearce with whom Joshua R. Dow and Michael J. Pearce & Associates, LLC were on brief for appellant, cross-appellee.

George J. Marcus and Regan M. Hornney with whom Jennie L. Clegg and Marcus, Clegg & Mistretta, P.A. were on brief for cross-appellant, debtor-appellee.

Before HOWARD, Circuit Judge, CAMPBELL and CYR, Senior Circuit Judges.

LEVIN H. CAMPBELL, Senior Circuit Judge.

These appeals challenge the bankruptcy court's resolution of an issue at the intersection of federal bankruptcy and Maine family law.

Sometime after his wife, appellant Laurie Davis, had sued him for divorce in the Maine state district court, Thomas Cox, the cross-appellant, filed for bankruptcy in the United States Bankruptcy Court for the District of Maine. Subsequently the state court allowed the divorce and divided the couple's marital property. As one part of the property disposition, the court awarded to Davis most of an Individual Retirement Account ("the Advest IRA") owned by Cox. The court also directed that sums being held in escrow pursuant to its prior order be used to pay the couple's taxes and other debts.

Davis then sought permission from the bankruptcy court to execute the divorce court's division of the marital property. The bankruptcy court, however, refused to let Davis recover against the Advest IRA. It ruled that because the Advest IRA was in Cox's name when Cox petitioned for bankruptcy, it became the property of his bankruptcy estate, hence was not subject to the later judgment of the divorce court. Instead, the divorce court's disposition relative to the IRA gave Davis merely a general unsecured claim for the relevant amount against the bankruptcy estate. Regarding the sums held in escrow, the bankruptcy court ruled that these could be disbursed according to the divorce judgment. The bankruptcy court concluded that the state court's order placing the funds in escrow had acted as a lien, effective at the time of bankruptcy, against those funds.

Davis and Cox both appeal from these orders of the bankruptcy court. While we affirm the bankruptcy court's decision on the escrow property, we reverse the court's decision as to the Advest IRA and remand for further proceedings consistent with this opinion.

I. BACKGROUND

Laurie Davis and Thomas Cox were married on August 17, 1985. They have two minor children, ages 14 and 12. After the marriage, Davis was a homemaker and, for sometime, Cox was a successful commercial attorney. Since 1997, however, Cox has been classified as totally disabled with bipolar disorder.

On November 4, 1998, Davis filed for divorce in Maine's state district court. Upon commencement of the divorce action, the court was required by Maine law to issue, and did issue, a preliminary injunction enjoining either spouse from "transferring, encumbering, concealing, selling or otherwise disposing of property of either or both of the parties, except in the usual course of business or for the necessities of life." Me.Rev.Stat. Ann. tit. 19-A, § 903(1)(B)(1)(2000). The preliminary injunction was meant to keep intact, until ultimate division by the court, the divorcing couple's "marital property," a term Maine law describes as including (with certain exceptions) all property acquired by either party subsequent to the marriage — property that, upon divorce, is equitably divided by the court between the divorcing pair irrespective of in whose name it was held. Id. at § 953(3). Davis also filed a notice of lis pendens in the Cumberland County Registry of Deeds giving notice of the pending divorce relative to any real estate transactions. Id. at § 953(6). In addition, Davis sent a letter to Advest, the entity maintaining an individual retirement account held in Cox's name, advising it of the pending divorce and the preliminary injunction.¹ The Advest IRA, valued at approximately $65,000 at the commencement of the divorce proceeding,² was titled in Cox's name only.

Despite the preliminary injunction, Cox withdrew funds from the Advest IRA and disposed of other marital assets in violation of the restrictions contained in the injunction. When Davis brought Cox's conduct to the divorce court's attention, it entered an interim order on May 24, 1999, providing among other things that "neither party may draw down funds from the IRA's or from other liquid or semi-liquid assets, whether or not characterized as for the necessities of life, without either prior written approval from the other party or order of the court." Cox ignored this order also and continued to make withdrawals from the IRA without Davis's prior approval or the court's order.

To avoid further dissipation of the marital assets, the Maine district court also ordered the parties' attorneys, Martin Ridge and Pamela Lawrason, to hold in escrow with their respective firms certain funds belonging to Cox and Davis. Those funds were not to be moved, used, or transferred absent a court order. Ms. Lawrason placed the funds in a separate interest bearing account ("Lawrason Account") and Mr. Ridge held the funds in his firm's trust account ("Ridge Account").

After several unsuccessful attempts at an agreed settlement, the parties requested the Maine district court to divide the marital property. Id. at § 953(4). Pursuant to Maine statute, the court is empowered to "set apart to each spouse the spouse's property and shall divide the marital property in proportions the court considers just after considering all relevant factors." Id. at § 953(1).

The divorce action was initially set for trial on February 28, 2000, but trial was postponed when Cox informed the court that he was filing a bankruptcy petition later that day. When the bankruptcy petition was not filed, the Maine district court rescheduled the trial for April 5, 2000. The trial was delayed again, however, when, on that date, Cox filed with United States Bankruptcy Court for the District of Maine a petition for bankruptcy under Chapter 13 of the Bankruptcy Code. 11 U.S.C. § 301 (2000). A stay under 11 U.S.C. § 362 automatically went into effect at this time preventing the state court from proceeding with the trial. But on June 1, 2000, the bankruptcy court in response to Davis's motion, relieved her from the automatic stay to the extent necessary for her to continue with the divorce in state court. In its order, the bankruptcy court noted that the state court divorce action was virtually ready to be tried, that it involved state law issues as to which the state court has special and everyday expertise not requiring the expertise of the bankruptcy court, and that the estate and creditors were protected by Trustee Fessenden's appearance in the divorce action. The court further stated that relief from stay was not granted to implement any property settlement issues absent its further order.

Fessenden, the trustee for the bankruptcy estate, filed a memorandum in the divorce proceeding setting forth "the trustee's position on the bankruptcy issues in the pending divorce." The trustee's position was not unlike that now asserted by Davis, that the Maine district court would determine the ownership rights of the marital property pursuant to state law and the state court's disposition of the property would establish what is "property of the debtor" and define the bankruptcy estate. The trustee recognized, however, that Maine law was unsettled "whether the eventual divorce judgment creates property rights or declares those rights which arose as of the filing of the divorce." (Emphasis in the original). As a result, the trustee urged the state court "to take this opportunity to address the fundamental issues of when divorcing parties' property rights arise as a matter of state law" and encouraged the court, if it needed guidance, to certify the question to the Supreme Judicial Court of Maine. The court held a four-day trial largely dealing with what disposition to make of marital assets and debt. After the trial, but before the court's judgment was issued, Cox, on October 30, 2000, converted his Chapter 13 petition to a Chapter 7 liquidation.

On November 21, 2000, the Maine district court entered its judgment. It granted the divorce, awarded parental rights to Davis, and made detailed orders concerning care of the children. Regarding disposition of the couple's property, the court inter alia found that the Advest IRA account, by then valued at $90,000, was a part of the couple's marital property. The court ordered that $10,500 of the Advest IRA be paid for guardian ad litem fees amassed during the divorce proceedings. It found it equitable to award $65,250 from the Advest IRA account to Davis, holding that Cox "was in contempt for violation of the preliminary injunction" and that $65,250 was a proper "sanction" for the contempt. The court stated that that sum "restores Plaintiff to the position she would have enjoyed had Defendant not put these funds to his own use." In making that and the other property dispositions in the divorce judgment, the court recited that it had considered the factors set forth in title 19-A, § 953 of the Maine Revised Statutes and found the dispositions to be equitable.³

The court also ordered that the Lawrason Account, valued at approximately $36,000, be used to pay various tax debts. From the $36,000 balance, $10,850 was earmarked to pay the taxes on Cox's Advest IRA withdrawals, $10,210 was to pay for the couple's federal and state income tax debt from 1985 and 1986, and the balance was to be applied to a joint debt of the parties to Key Bank. The Ridge Account balance was approximately $8,400, $6,600 of which was to be...