In re Cox

• Decision Date: 22 February 2002
• Docket Number: No. 00-20427.,00-20427.
• Citation: In re Cox, 274 B.R. 13 (Bankr. Me. 2002)
• Parties: In re Thomas A. COX, Debtor. Laurie Davis, Movant, v. Thomas A. Cox, Debtor and William H. Howison, Trustee, Respondents.
• Court: U.S. Bankruptcy Court — District of Maine

274 B.R. 13

In re Thomas A. COX, DebtorLaurie Davis, Movant, v.Thomas A. Cox, Debtor and William H. Howison, Trustee, Respondents.

No. 00-20427.

United States Bankruptcy Court, D. Maine.

February 22, 2002.

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COPYRIGHT MATERIAL OMITTED

Michael J. Pearce, Law Offices of Michael J. Pearce, Portland, ME, for movant.

George J. Marcus, Marcus, Clegg & Mistretta, William H. Howison, Trustee, Portland, ME, for respondents.

MEMORANDUM OF DECISION

JAMES B. HAINES, JR., Chief Judge.

The matter pending before me on a stipulated record¹ requires harmonizing bankruptcy principles with state property rights, more particularly the property rights of divorcing spouses, insofar as possible.²

Introduction

While a hotly-contested divorce proceeding was pending between Thomas Cox("Cox") and Laura Davis("Davis"), Cox voluntarily initiated personal bankruptcy.I granted relief from stay so that Cox and Davis could litigate dissolution-related issues to judgment.In due course, the state divorce court entered its final decree.Per the terms of the order granting relief from stay, the Code's automatic stay remains in effect as to enforcement of that judgment's provisions addressing property division, property disposition, and responsibility for debts.

Davis now seeks relief from the stay to implement the property division components of the divorce decree.She also seeks an order "recognizing and giving full force and effect to," the state court judgment.Cox and the Chapter 7trustee, William Howison("Howison"), object.Today, I must address the import of the state court's judgment as it relates to the content of Cox's bankruptcy estate, Cox's exemption rights, Davis's entitlements, and the Code's distributional priorities.

Background

Cox was a successful commercial lawyer with considerable bankruptcy experience.He has suffered from mental illness since March 1997 and is now totally disabled.

After thirteen years of marriage, including a period of separation, Davis initiated divorce proceedings on November 4, 1998.Divorce litigation was protracted.Cox's first attorney, Pamela Lawrason, withdrew from the case in late 1999.Cox proceeded pro se for about two months, then hired new counsel, this time with bankruptcy expertise.After repeatedly threatening bankruptcy, Cox made good on those threats, filing for relief under Chapter 13 on April 5, 2000, the day set for the divorce trial.

On May 30, 2000, Davis obtained limited relief from stay, permitting her to prosecute the divorce action to conclusion in state court.Although the stay relief permitted litigation of all issues within the divorce court's purview, it did not extend to enforcement of contempt orders or orders relating to property division, asset transfers, debt payment, or debt allocation.³Pursuant to the order granting relief, the Chapter 13trustee entered his appearance in the divorce action to represent the interests of Cox's bankruptcy estate.The bankruptcy case converted to Chapter 7 on October 30, 2000.

On November 21, 2000, the divorce court entered its final decree.Among other things, the decree ordered an equitable distribution of marital property and, in several instances, ordered that certain joint obligations be paid from identified marital assets.⁴Divorce Judgment, Stip.Ex. W. Thereafter, Cox and Davis began litigating whether, and to what extent, further relief from stay should enter to permit execution of the state court judgment's terms.As noted above, the contest extended beyond garden variety relief from stay issues, bringing into question the extent and nature of Davis's rights in specific assets vis-a-vis Cox and the bankruptcy estate.⁵

Although issues regarding real estate have been resolved,⁶ there remain deep divides between and among Cox, Davis, and Howison regarding the impact of the post-petition divorce judgment on their rights in bankruptcy.Cox contends that this court cannot permit enforcement of the divorce decree's provisions distributing estate property to unsecured, non-priority creditors (a category which, he asserts, includes Davis) in derogation of his exemption rights and until administrative and priority creditors are satisfied.Davis asserts that the "thoughtful and holistic"(and unappealed) divorce decree, which "gave credit to Mr. Cox for marital assets titled in Ms. Davis's name and credited to [sic] Ms. Davis for marital assets in Mr. Cox's name" is a final determination of the former spouses' rights in identified personal property — and, thus, the content of Cox's bankruptcy estate.

Discussion

By agreement, the first issue for decision is the respective rights of Cox (and his estate) and Davis in "specific assets, taking into account the status of those rights on the date of bankruptcy and, thereafter, under the final divorce judgment...."⁷The extent of Cox's exemption rights will be addressed later, if necessary.⁸

The essential legal issue is this: What recognition is accorded as-yet-undeclared marital rights in specific assets when, while a divorce action is pending, one spouse files for bankruptcy relief?The answer is a function of federal law defining the bankruptcy estate's content and of state law limning the character of marital property rights.

At the outset, however, it is necessary to examine the divorce decree provisions that trouble Cox and Howison to ascertain whether they have standing to pursue their arguments.

I.Challenged Provisions of the Divorce Decree

A. Cox's contentions

Cox challenges implementation of those divorce decree provisions that order distribution or allocation of property insofar as they do not comply with the Bankruptcy Code's express priorities.More specifically, he asserts that the decree improperly allocates or orders disposition of all or part of two individual retirement accounts, a partnership interest, and funds in two escrow accounts held by divorce counsel.Howison objects to the decree's implementation in other respects.Their concerns are detailed below:

1.Advest IRA

The Advest individual retirement account is worth approximately $65,000.00.At bankruptcy, it was held in Cox's name alone.During the course of the divorce proceeding, Cox made several withdrawals from the account, some authorized by the state court, some not.Two withdrawals were made after Cox filed bankruptcy.The divorce court deemed the Advest IRA marital property, and awarded Davis $65,250.00 from it, styling its award as a "sanction" for Cox's violation of divorce court orders (i.e., for repeated transgression of orders prohibiting him from disposing of property without authorization) and because it was "equitable" under the circumstances in light of the value of assets he had wrongfully sold or spent.As a matter of property division, the sanction made Davis whole, as though Cox had not appropriated the assets to his own use in violation of court orders.⁹Cox objects to paying the award out of the account, which he claims as entirely exempt.Cox also objects to the decree's requirement that an outstanding bill for guardian ad litem services, in the amount of $10,179.00, be paid from the account (ahead of Davis's $65,250.00 award).

2.Fleet IRA

The Fleet individual retirement account, worth approximately $1,500.00 and also held in Cox's sole name at the time of the bankruptcy filing, was awarded to him without an express finding whether it was marital or separate property.Cox asserts it is entirely exempt and objects to enforcement of so much of the divorce judgment that requires devotion of funds from the Fleet IRA to satisfy the $65,250.00 award in the event that the Advest IRA is insufficient to do so.

3.Amcor Partnership Interest

This asset, held in Cox's name alone, was deemed of negligible value and awarded to him.The court made no finding whether it was marital property or Cox's separate property.Cox objects to enforcement of the divorce judgment insofar as it requires that the partnership interest be sold and applied to the $65,250.00 award if the Advest and Fleet IRA's are insufficient to satisfy it.

4.Lawrason Escrow Account

During the divorce litigation, but prior to the bankruptcy filing, the state court ordered that approximately $36,000.00 ($21,000.00 earlier withdrawn from the Advest IRA and $15,000.00 from a lump sum Social Security Disability Income payment) be held by Attorney Lawrason in escrow, principally to assure that tax obligations arising from IRA withdrawals would be paid.Estimating that $10,850.00 was owed to the Internal Revenue Service on account of such withdrawals, the court awarded that sum to Cox for the limited purpose of paying that liability.It ordered that remaining funds from the account be applied to Cox's and Davis's joint federal and state tax obligations for 1985 and 1986(approximately $10,210.00).And it ordered that any remaining balance be paid to Key Bank on account of the couple's joint mortgage (deficiency) obligation on a vacation home.Cox objects to that portion of the order requiring payment of the Key Bank claim, asserting that it is a general, unsecured claim against his estate and cannot be paid "out of priority."

5.Beagle & Ridge Escrow Account

Another escrow account, established by court order and held by Davis's divorce counsel, consisted of an SSDI lump sum payment for the benefit of the couple's minor children ($6,600.00) and proceeds of the sale of real estate ($1,800.00).The court determined that the former component would remain dedicated to child support and that the latter would be paid toward the couple's joint Key Bank obligation.Cox argues, again, that the state court could not order that Key Bank be paid at variance with the bankruptcy priorities.

B.Trustee Howison's Contentions

Howison characterizes the $65,250.00 sanction award as, effectively, a property division determination.He does not oppose its implementation.Neither does he contest any...