In re Skorich

• Decision Date: 19 October 2005
• Docket Number: No. 04-12460-JMD.,04-12460-JMD.
• Citation: 332 B.R. 77
• Parties: In re J. Gregory SKORICH, Debtor.
• Court: U.S. Bankruptcy Court — District of New Hampshire

Page 77

332 B.R. 77

In re J. Gregory SKORICH, Debtor.

No. 04-12460-JMD.

United States Bankruptcy Court, D. New Hampshire.

October 19, 2005.

COPYRIGHT MATERIAL OMITTED

Edmond J. Ford, Esq., Ford, Weaver & McDonald, P.A., Portsmouth, Chapter 7 Trustee.

Eleanor Wm. Dahar, Esq., Victor W. Dahar, P.A., Manchester, for Donna Skorich.

MEMORANDUM OPINION

J. MICHAEL DEASY, Bankruptcy Judge.

I. INTRODUCTION

Donna Skorich, the Debtor's former spouse ("Skorich"), and Edmond Ford, the chapter 7 trustee (the "Trustee") disagree over the effect of a final divorce decree issued by the Portsmouth Family Court (the "Family Court") on the rights and interests of Skorich and the Trustee in and to various items of property. This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. BACKGROUND

This case involves the collision of the interests of a non-debtor ex-spouse and a chapter 7 trustee at the intersection of state marital law and federal bankruptcy law. Family courts and bankruptcy courts are both courts of equity. Bankruptcy courts must work within the boundaries of Congressional policy as expressed in the Bankruptcy Code¹ which emphasizes a fresh start for debtors and distribution of assets to creditors based upon their prepetition property rights. Family courts have broad discretion to apply equitable principles, guided by state policy considerations as expressed by the state legislature, to provide for an equitable, albeit not always equal, distribution between the two parties and for the ongoing support and maintenance of former spouses and minor children. Family court decisions may also be reviewed and adjusted from time to time to address changed circumstances after the entry of a final divorce decree. Despite the differences in discretion and policy constraints, the decisions of both courts have a significant impact on the lives and emotions of real people. Notwithstanding their status as courts of equity, bankruptcy and family court decisions must reflect the policy judgments and statutory language in applicable law, not simply the court's own view of what is fair and just.

A. Procedural Background

Shortly after the commencement of this bankruptcy case, Skorich sought and obtained limited relief from the automatic stay to continue a prepetition divorce action in state court. Skorich was granted relief for the purpose of obtaining a property division as part of a final divorce decree, but could not enforce any property division without returning to this Court. Shortly after the Family Court issued a final decree of divorce on March 29, 2005 (the "Final Decree"), Skorich filed a motion to enforce the Final Decree with this Court. The Trustee and other interested parties objected.

After a preliminary hearing, the Court ordered the parties to file an agreed statement of facts and a stipulation regarding the specific items or categories of property they agreed were property of the bankruptcy estate, not property of the bankruptcy estate and in dispute. The parties filed the required property stipulation, agreed statement of facts, and memoranda of law. The Court heard oral argument on June 13, 2005, and took the matter under advisement.

B. Factual Background

The issues in dispute have been submitted to the Court on a stipulated factual record. The parties agree on the following chronology of events in the divorce and bankruptcy cases:

May 14, 2003 Skorich filed a petition for divorce with the Family Court.

June 24, 2004 Jointly owned real estate in Rangeley, Maine (the "Rangeley Property") was sold and the proceeds were placed in an escrow account under the joint control of divorce counsel for Skorich and the Debtor.

July 9, 2004 The Debtor filed a bankruptcy petition under chapter 7.

September 8, 2004 The Court granted Skorich limited relief from the automatic stay to proceed with the divorce action in the Family Court for the limited purpose of determining, but not enforcing, a property division.²

December 23, 2004 Skorich Enterprises, Inc. filed a bankruptcy petition under chapter 7.

March 23, 2005 The Debtor voluntarily waived his discharge in bankruptcy.

March 29, 2005 The Family Court issued the Final Decree.

The parties also agree on their respective interests in the majority of items or categories of property as being property of the bankruptcy estate or not property of the bankruptcy estate. The remaining items or categories remaining in dispute are:

1. Proceeds from the sale of the Rangeley Property held in escrow by counsel for Skorich in the amount of $147,684.21 (the "Escrow Funds").

2. Furniture located at the marital home.³

3. Non-corporate funds paid to or received by the Debtor after October 1, 2004.

4. The stock of Skorich Enterprises, Inc. and "Cool Foodservice."⁴

5. Cash on hand.⁵

6. Jewelry.⁶

C. Legal Arguments

Skorich maintains that the Final Decree controls the distribution of all of the disputed property pursuant to the holding in Davis v. Cox, 356 F.3d 76 (1st Cir.2004), because the Trustee appeared in the Family Court as a party to the divorce proceeding. She also contends that any attempt by the Trustee to set aside the terms of the Final Decree is barred by the Rooker-Feldman doctrine. Finally, she asserts that the Escrow Funds are not subject to the Trustee's avoidance powers under section 547 of the Bankruptcy Code. The Trustee argues that the sole issue before the Court is the effect of the Final Decree on the distribution of the bankruptcy estate in light of the Trustee's status as a hypothetical lien creditor under section 544(a) of the Bankruptcy Code and applicable state law.

III. RELEVANT LAW

A. The Holdings of Davis v. Cox

The First Circuit's decision in Davis v. Cox dealt with the impact of a final divorce decree on the distribution of property in a chapter 7 bankruptcy proceeding. Like this case, the chronology of events in Davis was the filing of a divorce petition, the filing of a bankruptcy petition, and the issuance a final divorce decree after the entry of a bankruptcy court order granting relief from the automatic stay for the limited purpose of resolving the equitable distribution of property under state law. Also similar to this case, on the date of filing of the bankruptcy petition, the divorce counsel for the parties were holding funds in escrow pursuant to the direction of the divorce court. The decision in Davis involved two questions with striking similarities to the facts of this case.

The first issue in Davis involved an IRA account which the debtor elected under section 522(b) to claim as exempt under applicable state law. Davis, 356 F.3d at 81 n. 4. In Davis the divorce court awarded a majority of the funds in the IRA account, which was solely in the name of the debtor spouse, to the non-debtor spouse⁷ to pay guardian ad litem fees and as a sanction for the contempt of the debtor spouse who transferred moneys out of the IRA in violation of an injunction issued by the divorce court. The bankruptcy court held that the debtor's spouses's interest in the IRA was property of the bankruptcy estate as of the date of the bankruptcy petition and, therefore, the postpetition divorce decree did not create rights in that account in favor of the non-debtor spouse, but rather the decree simply provided her with an unsecured claim in the awarded amount. The circuit court noted that the debtor had claimed all of the IRA as exempt and, therefore, no portion of the IRA would be paid to the debtor's creditors or the non-debtor spouse. The circuit court held that, under Maine law, the non-debtor spouse had a sufficient equitable interest in the IRA on the bankruptcy petition date to render it subject to a constructive trust, thereby preventing it from becoming property of the estate under section 541(d) of the Bankruptcy Code.⁸ The holding in Davis was expressly limited:

In reaching this result, we proceed narrowly on the remedial theory of constructive trust. We need not decide, and indeed think it inappropriate for a federal court to decide without first seeking more specific guidance from Maine's Supreme Judicial Court, whether Maine law, broadly applied, gives to non-owner spouses in ordinary circumstances after commencement of a divorce case, but before entry of judgment, an inchoate equitable interest in marital assets owned by the owner spouse. Such a holding would have profound implications for Maine's law of creditors' rights in a variety of factual situations different from the present. As the issue is one of first impression in Maine, Maine's highest court rather than a federal court should be the first to plough such new territory.

Davis, 356 F.3d at 84 (emphasis added). However, after stating its reluctance to "plough such new territory" with a broad brush, the court went on to state that "the special equities favoring [the non-debtor spouse] on the facts of this particular case are, however, compelling." Id.

The Davis court also specifically declined to rule on the issue of whether a trustee's powers as a hypothetical lien creditor under section 544 of the Bankruptcy Code could cut off a non-debtor spouse's equitable interest in property because the trustee did not raise the issue and supported the award of the IRA to the non-debtor spouse. Id. at 92. Therefore, the holding in Davis was expressly limited to the specific facts and equities of that case, as applied to the IRA, which property was not otherwise available to the debtor's creditors or his trustee because of its exempt status. If the case were to have broad application to creditors' rights, the Davis court either would have broadly applied state law or sought an advisory opinion...