In re Henricks

• Decision Date: 12 July 2021
• Docket Number: Case Number: 14-12042-7
• Citation: 632 B.R. 744
• Parties: IN RE: Catherine A. HENRICKS, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

632 B.R. 744

IN RE: Catherine A. HENRICKS, Debtor.

Case Number: 14-12042-7

United States Bankruptcy Court, W.D. Wisconsin.

Signed July 12, 2021

George B. Goyke, Goyke & Tillisch LLP, Wausau, WI, for Debtor.

Mark J. Wittman, Marshfield, WI, Trustee, Pro Se.

MEMORANDUM DECISION

Catherine J. Furay, U.S. Bankruptcy Judge

This matter involves issues of property of the estate, exemption rights, Wisconsin marital property law,¹ the discharge injunction, and claims against a non-debtor spouse for criminal restitution. Catherine A. Henricks ("Catherine") filed a voluntary chapter 7 petition in 2014.² Her husband did not join in the bankruptcy filing.

The United States of America (the "Government") took action in district court for contempt against Catherine's husband, John Henricks ("John"). It sought to collect from sequestered property, tax refunds, and Catherine's pension. These actions led to the filing of an adversary proceeding for declaratory judgment related to the automatic stay. Following decisions in the district court and the discovery of a judgment lien against her homestead, Catherine returned to this Court seeking contempt remedies for violations of the automatic stay and discharge injunction.

BACKGROUND

Catherine and John married in 1994. In June 2013, John was charged with crimes, including mail fraud. In August 2013, John entered a guilty plea to mail fraud. In September 2013, Catherine and her father obtained a loan to purchase a home in Portage County at 411 Oak View Meadow, Amherst, Wisconsin ("Amherst Property"). The loan was secured by a mortgage on the Amherst Property.³ Catherine and her father were the only names on the title.⁴

John was sentenced to prison and ordered to pay restitution of $1,306,608.72. A judgment in the criminal case was entered against him in January 2014.

Within two weeks, Catherine filed for divorce. About two weeks after, the Government docketed the criminal case judgment against John in Portage County.⁵

Catherine then filed her bankruptcy. The Government admits it learned of the bankruptcy the next day.⁶ Catherine filed her schedules.⁷ She exempted $9,592.32 of the 2013 tax refund,⁸ the full amount of her "BMO Retirement Services – 401K,"⁹ and $11,500.00 in the Amherst Property.¹⁰ There were no objections to her exemptions.¹¹ No nondischargeability actions were filed. Catherine received a discharge. A discharge order was entered.¹² The discharge injunction was modified "to permit the parties to seek a determination ... of whether or not any property in which Debtor claims an interest" (regardless of whether or not it was secured or sequestered ...) is individual or community property of the estate.¹³

The Government filed a motion and brief for determination of property interests in John's criminal proceeding. Catherine filed a motion and brief in response. A week later, Catherine filed a motion for contempt in this Court alleging the Government had violated the discharge injunction.

While not disputing Catherine's exemptions in this Court, the Government, as part of its motion in district court to find John in default of his restitution obligation, sought 100% of both the income tax refund and the retirement account. The Government contended that Catherine did not have a legitimate marital interest in any of her retirement or in the tax refund. Instead, it argued the entire amounts should be recovered as part of the restitution order. Alternatively, they argued that she had been unjustly enriched and therefore the Government should be able to recover the entire tax refund and pension. It asserted that the discharge injunction "does not apply" to such assets. ECF No. 139-26, ¶4.

After receiving her discharge Catherine filed an adversary proceeding against the Government for violating the automatic stay. She also sought to prevent continued action which would violate the discharge injunction, for declaratory judgment on lien rights, and to require release of Catherine's property.

The Court modified the automatic stay.¹⁴ Upon reconsideration, the Court entered an amended order clarifying the stay modification to permit the district court to determine Catherine's interest in non-sequestered property as well. If sequestered property was individual or marital, Catherine was entitled to return to this Court for a determination of damages, costs, and fees. If none of the sequestered property was so classified, the Government was entitled to return to seek an order and judgment that no stay or discharge injunction violation occurred.¹⁵ The order did not address whether action by the Government to collect from non-sequestered property in which Catherine had an interest may be a violation.

The district court decided the classification of the sequestered property, the tax refund, and the pension. Following various appeals, a final decision was issued by the district court. The decision found:

• The sequestered property was not community property and was available for payment of John's restitution.

• John was entitled to one-half of the federal tax refund attributable to Catherine's earnings ($2,708.46) and to one-half of the child tax credit ($500.00) as his community property interest. The balance of those amounts are Catherine's one-half interest in community property.

• Catherine was entitled to one-half of her retirement fund "which was funded entirely by contributions she made to the fund from her earnings (together with earnings on those contributions)."¹⁶

On top of the above actions is the position of the Government related to the Amherst Property. The Government filed a Notice of Lien in the Portage County Register of Deeds Office. It asserted a lien in the amount of $1,306,608.72. This filing affected title to the Amherst Property.

After the final determination of the United States' Motion to Determine Catherine Henrick's Property Interest in Assets and to Determine the Amount of the Restitution the United States Can Recover from Those Assets, Catherine Henricks sought to refinance the loan on the Amherst Property. The house is co-owned with her father. Most of the down payment was made by Catherine's father. The mortgage was in the original amount of $149,600.00.¹⁷ This amount was unchanged when Catherine's bankruptcy was filed and when Catherine and John were granted a divorce.¹⁸

Attempting refinancing, Catherine learned the title company believed the restitution lien arising from the judgment against John impaired the title to Catherine's home. She asked that the United States execute a partial release of her home from the judgment lien. It refused to do so. So its position appears to be that it has a right to maintain a lien. It also appears it believes all of Catherine's interest in the property is marital (community) property and that property is available for its lien despite the fact she has no personal liability for the judgment against John.

The record suggests the value of the Amherst Property is $153,600.00.¹⁹ If correct, less the mortgage, there would be gross equity of $4,000.00. Putting aside consideration of possible adjustments to the equity for the source of payment, that would mean Catherine's interest in the Amherst Property is no more than $2,000.00. If the Government is entitled to any portion of the equity, it would be limited to one-half of Catherine's interest—$1,000.00 plus any possible appreciation to the date of the divorce. Further, if for this calculation Catherine's interest were limited to her contribution to the down payment, the one-half interest attributable to community property would be reduced to $1,000.00, thus reducing John's interest to $500.00. It does not appear, however, that these amounts changed because the values identified in connection with the divorce confirm the same calculation.

I. APPLICABLE STATUTES

11 U.S.C. § 362 (a), (c)

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and

(8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.

(c) Except as provided in subsections (d), (e), (f), and (h) of this section—

(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;

(2) the stay of any other act under subsection (a) of this section

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