In re Posner
| Decision Date | 15 November 2019 |
| Docket Number | Bankr. 19-07338 |
| Citation | 610 B.R. 586 |
| Parties | IN RE Walter POSNER, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
The Law Firm of Weissberg and Associates, LTD, Ariel Weissberg, Weissberg & Associates, LTD, Chicago, IL, for Debtor.
AMENDED MEMORANDUM OPINION (DOCKET NO. 43)
Before the court for ruling in this chapter 11 case is a motion for relief from the automatic stay by Elisa Posner ("Elisa"). The court will grant the motion for the reasons provided below.
This court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334(a). This matter concerns the application of the automatic stay - a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). Venue is proper pursuant to 28 U.S.C. § 1409.
The facts are drawn from the parties' papers, Walter Posner's petition, schedules and plan as well as the court's docket. In re Brent , 458 B.R. 444, 455 n. 5 (Bankr. N.D. Ill. 2011) ().
Walter Posner ("Walter") and Elisa Posner ("Elisa") were married on January 18, 1986. (Mot. Ex. 1, p. 1, ¶ B). The Circuit Court of Lake County dissolved their marriage on May 25, 2018 through a Judgment for Dissolution of Marriage. (Walter Posner Ex. 14, p. 17). A Supplemental Judgment was entered on September 11, 2018 ("Supplemental Judgment"). (Mot. Ex. 1). The Supplemental Judgment delineates Elisa's non-marital property, Walter's non-marital property, marital real property, marital personal property as well as other issues. (Mot. Ex. 1). It divides their marital investments, bank accounts, retirement accounts, life insurance policies, personal property/collectibles, business interests and receivables on investments. Walter filed a Notice of Appeal of this judgment on September 18, 2018. (Walter Posner Trial Ex. 16).
On March 15, 2019, Walter filed this chapter 11 case. Elisa filed the instant motion on July 29, 2019 seeking a declaration confirming that the automatic stay was not in effect or a grant of relief from the automatic stay to allow her to continue enforcement of the divorce decree. She asserts that the property she received from the divorce decree is not property of the bankruptcy estate, that Walter does not have equity in it as he does not own the property awarded her and for that reason it is not necessary for an effective reorganization. According to her, the stay (if there is one), does not apply to her property. She also alleges that Walter filed the bankruptcy case in bad faith.
This court granted Elisa's request for relief, in part, and entered an order both parties agreed to on August 21, 2019, (Dkt. No. 57). It did not address personal property/collectibles, certain business interests (One Share in Orchard Casino) (Mot. Ex. 1, p. 13, ¶ K), interests in Jackson Landscaping (Mot. Ex. 1, p. 13, ¶ K), receivables on investments (Loan to Jordan Heller) (Mot. Ex. 1, p. 14, ¶ M) and Receivable from MKAWBP, LLC for $10,000 (Mot. Ex. 1, p. 14, ¶ M).
Walter contends that the court should not grant additional stay relief because the Circuit Court of Lake County erred in dividing the marital property. He argues that he has filed a meritorious appeal; he anticipates the reviewing court reducing Elisa's award and believes that she will not be harmed if the court does not grant stay relief because the August 21, 2019 order allows her to access funds in the financial accounts. Finally, Walter contends that the factors the Seventh Circuit used to evaluate stay relief in In re Fernstrom Storage & Van Co. , 938 F.2d 731 (7th Cir. 1991) do not favor lifting the stay.
Elisa replies that Walter is using bankruptcy to relitigate divorce issues and to avoid posting an appeal bond while appealing the divorce decree. She contends that the Fernstrom factors do not apply and if they apply, they support stay relief.
The automatic stay requires all entities to stop collection or recovery against a debtor and his bankruptcy estate when the debtor files bankruptcy. 11 U.S.C. § 362(a). An entity that wishes to resume collection or recovery can obtain stay relief in two ways. The first is where there is cause for relief pursuant to 11 U.S.C. § 362(d)(1). The Bankruptcy Code ("Code") does not define cause. In re Fernstrom Storage & Van Co. , 938 F.2d at 735. Courts determine whether it exists on a basis. Id. The Seventh Circuit has developed a balancing test (the Fernstrom factors) that courts use to determine if cause exists. Id. Stay relief is also available where a debtor has no equity in the property and the property is not necessary for an effective reorganization. 11 U.S.C. § 362(d)(2).
There is cause in this case to grant stay relief under 11 U.S.C. § 362(d)(1) because the property is not part of the bankruptcy estate and Walter's bankruptcy filing lacks good faith. The Fernstrom factors do not apply in this instance. However, balancing those factors favors lifting the stay. The court will grant stay relief pursuant to both 11 U.S.C. §§ 362(d)(1) and (d)(2). Elisa has shown cause under § 362(d)(1). Stay relief is warranted under § 362(d)(2) because Walter does not have equity in the property, based on his lack of ownership. His lack of equity makes it unnecessary for the court to determine whether the property in issue is necessary for an effective reorganization.
1. Cause Exists Because the Property is not Part of the Bankruptcy Estate
There is cause to grant stay relief under 11 U.S.C. § 362(d)(1) because the property Elisa received through the divorce decrees is not part of the bankruptcy estate. Elisa obtained ownership of the property in 2018 when the court issued the divorce decrees. This occurred before Walter filed for bankruptcy in 2019. Under 11 U.S.C. § 541(a)(1) the bankruptcy estate consists of a debtor's legal and equitable interests in property as "of the commencement of the case." Federal courts analyze property interests in accordance with applicable state law unless a federal interest requires a different result. Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). This is because state law creates and defines property interests. Id.
Under Illinois law, Elisa received ownership of the property in question when the court issued the divorce decrees. Illinois law provides that each spouse has a "species of common ownership" in marital property which vests when either spouse files for divorce. 750 Ill. Comp. Stat. Ann. 5/503(e). This interest ripens into a full ownership interest for any property the divorce court distributes to a spouse when the court enters an order of distribution or final judgment. In re Dzielak , 435 B.R. 538, 547 (Bankr. N.D. Ill. 2010). Therefore, assets the court awards to the debtor spouse are property of the estate, while assets that go to the non-debtor spouse are not property of the estate. In re Thorpe , 546 B.R. 172, 177 (Bankr. C.D. Ill. 2016), aff'd, 569 B.R. 310 (C.D. Ill. 2017), aff'd, 881 F.3d 536 (7th Cir. 2018). In other words:
It is generally acknowledged that once the divorce decree becomes final the property interests awarded are vested pursuant to the decree. As long as the property awarded existed at the time of the decree, even if it was cash, a prebankruptcy court order divesting the debtor spouse of an interest in the property will normally keep that property out of the debtor spouse's bankruptcy estate.
1 COLLIER FAMILY LAW AND THE BANKRUPTCY CODE ¶ 2.01 [5] (2019).
In this case, Walter's bankruptcy estate consists of his legal and equitable interests in property as of the date he filed the bankruptcy petition. The divorce court issued the dissolution of marriage judgment and the supplemental judgment for dissolution of marriage in 2018 - well before Walter filed this bankruptcy case. These decrees divided the marital property and determined Walter's property as well as Elisa's property. When Walter filed his case on March 15, 2019, his estate did not include the property that the divorce court awarded Elisa.
2. Cause Exists because of a Lack of Good Faith in Walter's Filing
In addition, cause exists to grant stay relief under 11 U.S.C. § 362(d)(1) because Walter lacked good faith in filing bankruptcy. A lack of good faith in filing a petition constitutes cause for relief from the stay under 11 U.S.C. § 362(d)(1). In re Foster , 283 B.R. 917, 919 (Bankr. E.D. Wis. 2002) (): In re Laguna Assoc. , 30 F.3d 734, 737 (6th Cir.1994). The good faith standard should be assessed objectively rather than subjectively. In re Royalty Prop. , 604 B.R. 742, 750 (Bankr. N.D. Ill. 2019) (citing In re Schlangen, 91 B.R. 834, 837 (Bankr. N.D. Ill. 1988) ). This court's inquiry will focus on the presence or absence of objective factors rather than the debtor's subjective intent.
Filing bankruptcy to circumvent pending litigation is an indication of bad faith. Another indication of bad faith is using the automatic stay as a litigation tactic in a two-party dispute. In re American Telecom , 304 B.R. 867, 873-75 (Bankr. N.D. Ill. 2004) (). It is also bad faith to use bankruptcy as a litigation tactic to postpone enforcement of divorce judgments. In re Garzon , 2018 WL 6287986, *5 (Bankr. N.D. Ill. Dec. 3, 2018) ().
This court has weighed the totality of the circumstances objectively...
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