Reinbold v. Thorpe (In re Thorpe)

• Decision Date: 11 February 2016
• Docket Number: Case No. 13–81262,Adv. No. 14–8072
• Parties: In re: Timothy H. Thorpe, Debtor. Jeana K. Reinbold, as Chapter 7 Trustee of the Estate of Timothy H. Thorpe, Plaintiff, v. Belva J. Thorpe, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Central District of Illinois

546 B.R. 172

In re: Timothy H. Thorpe, Debtor.Jeana K. Reinbold, as Chapter 7 Trustee of the Estate of Timothy H. Thorpe, Plaintiff,

v.Belva J. Thorpe, Defendant.

Case No. 13–81262

Adv. No. 14–8072

United States Bankruptcy Court, C.D. Illinois.

Signed February 11, 2016

Jeana K. Reinbold, Springfield, IL, pro se.

Dale G. Haake, Moline, IL, for Defendant.

OPINION

Thomas L. Perkins

, United States Bankruptcy Judge

This matter is before the Court on cross motions for summary judgment. The Plaintiff is the Chapter 7 Trustee (TRUSTEE) of the bankruptcy estate of the Debtor, Timothy H. Thorpe (DEBTOR). The Defendant, Belva J. Thorpe (BELVA), is the DEBTOR'S ex-wife. In her adversary complaint, the TRUSTEE seeks to avoid an alleged transfer to BELVA, effected when the divorce petition was filed, of the DEBTOR'S interest in the real estate that was the marital homestead. The TRUSTEE, in her complaint, also seeks authority to sell the homestead under section 363(h) of the Bankruptcy Code

.

FACTUAL and PROCEDURAL BACKGROUND

The material facts are undisputed. Following their marriage in 1986, BELVA and the DEBTOR purchased real estate commonly known as 1104—15th Street, Silvas, Illinois. They took title by Corporation Warranty Deed dated July 22, 1987, identifying the grantees as "Timothy H. Thorpe and Belva J. Thorpe, husband and wife, as joint tenants and not as tenants in common." The deed was recorded on July 23, 1987, in the Rock Island County Recorder's office. They occupied the real estate as their marital home until the DEBTOR moved out at some point between the filing of the divorce action on October 4, 2012 and early December, 2012. BELVA has continuously resided in the residence as her home.

The DEBTOR filed his petition for protection under Chapter 7 of the Bankruptcy Code on June 21, 2013. On July 16, 2013, the divorce court conducted an evidentiary hearing on the issues of grounds for dissolution, dissipation of certain assets by the DEBTOR, as well as the division of debts and marital property. On July 31, 2013, the judge set forth his findings in a written opinion determining that grounds for dissolution were established. The opinion states that the DEBTOR dissipated $98,000 in marital assets by liquidating two 401(k) accounts under his control, that the parties agreed that the marital residence, valued at $125,000, would be awarded to BELVA, and that the DEBTOR'S equity interest in the residence would be "offset" by the $98,000 in marital assets that he dissipated. The opinion further provides that BELVA is awarded the marital residence "free and clear of any claim of the respondent (DEBTOR)." The award to BELVA of the residence, with no corresponding obligation to pay any portion of its equity value to the DEBTOR, served to provide BELVA with the value of the marital assets that she would have received had the DEBTOR not dissipated his 401(k) accounts. Finally, the opinion directed BELVA'S attorney to prepare a judgment reflecting the findings of the opinion.

That judgment was not entered until two years later. In the interim, the DEBTOR'S case was converted on his motion to one under Chapter 13, only to be later converted back to Chapter 7. Eventually, by order entered April 14, 2015, this Court modified the automatic stay to permit the parties to return to the divorce court to obtain the judgment that would, among other things, finally determine BELVA'S claims against the marital property, including the residence, subject to resolution of the TRUSTEE'S claims against those assets to be thereafter determined by the Bankruptcy Court.

On June 2, 2015, the state court held another hearing and entered a Judgment for Dissolution of Marriage consistent with its 2013 opinion awarding the marital residence to BELVA "free and clear from any claims" of the DEBTOR, as a result of the DEBTOR'S dissipation of assets, subject to determination of the TRUSTEE'S rights by the Bankruptcy Court.

Count I of the TRUSTEE'S Complaint, asserting the strong-arm powers granted to trustees under section 544(a) of the Bankruptcy Code

, seeks to avoid the transfer to BELVA of the DEBTOR'S one-half interest in the marital residence that is alleged to have occurred upon commencement of the divorce proceeding by operation of 750 ILCS 5/503(e). The TRUSTEE also alleges that BELVA lost the opportunity to protect her contingent interest in the DEBTOR'S interest in the marital residence because she failed to record a lis pendens notice after the divorce action was filed.

ANALYSIS

A. The Effect of Divorce on Property of the Estate.

It is significant that the divorce proceeding preceded the DEBTOR'S bankruptcy filing. The question of whether a debtor's interest in property is property of the bankruptcy estate is a federal question to be decided as a matter of federal law. In re Marrs–Winn Co., Inc., 103 F.3d 584, 591 (7th Cir.1996)

. Absent a countervailing federal interest, the nature and extent of a debtor's property interests are determined by state law. Butner v. U.S., 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). A trustee takes no greater rights than the debtor held on the petition date. Section 541 does not expand the debtor's rights against others more than they exist at the commencement of the case. Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.1984).

To the extent a property interest is subject to a contingency existing on the petition date, the property interest is equally limited as property of the estate. Matter of Sanders, 969 F.2d 591, 593 (7th Cir.1992)

. If a contingency is subsequently determined under state law to divest the debtor of the property interest, the estate's interest is also subject to divestment. In re Greer, 242 B.R. 389, 397 (Bankr.N.D.Ohio 1999) ; In re Coffey, 348 B.R. 775 (Bankr.E.D.Tenn.2006) ; In re Brown, 168 B.R. 331 (Bankr.N.D.Ill.1994). This principle has been recognized as especially important when a bankruptcy case is filed while a divorce proceeding and equitable property division are pending, so that bankruptcy is not used to preempt what the debtor-spouse perceives may be an unfavorable property division. See In re White, 851 F.2d 170, 174 (6th Cir.1988) (affirming a grant of stay relief to allow divorce court to proceed with property division, expressing concern that bankruptcy "could otherwise be used as a weapon in a marital dispute"); In re Roberge, 188 B.R. 366, 370–71 (E.D.Va.1995)

(noting bankruptcy policy of protecting families and preserving the marital residence, and the "federal interest" in not having bankruptcy used as a weapon in divorce proceedings).

The principle cuts both ways. When a divorce proceeding is commenced before bankruptcy and where state law provides that a spouse's right to seek equitable distribution arises at the beginning of the divorce proceeding, the debtor's contingent interests in marital property are property of her bankruptcy estate.¹ Brown v. Brown, 2013 WL 2338233 (E.D.Ky.)

; In re Radinick, 419 B.R. 291 (Bankr.W.D.Pa.2009) ; In re Fritch, 2011 WL 2181661 (Bankr.S.D.Ind.). Whatever assets the debtor is ultimately awarded on account of that interest become property of the estate.

Under Illinois law, a divorce court is responsible for determining what property is or is not "marital property" and, once that categorization is made, "shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors." 750 ILCS 5/503(d)

. When a divorce case is filed, the property owned by either spouse that fits within the definition of "marital property" in section 503 of the IMDMA, becomes subject to the equitable property division that the divorce court is required to adjudicate once the marriage is dissolved. That contingency arises with respect to all assets that become marital property, both jointly owned assets and individually owned assets. Other bankruptcy courts applying Illinois law recognize that where a divorce petition is filed before bankruptcy, and marital property has not yet been divided, the bankruptcy estate holds only the debtor-spouse's contingent interest in marital assets. In re Zachmann, 2013 WL 1316647 (Bankr.N.D.Ill.2013) ; In re Dzielak, 435 B.R. 538,547 (Bankr.N.D.Ill.2010).² The contingency is determined by the divorce court, as a matter of state law, when it divides the marital property. What had been an interest subject to a contingency ripens into a full ownership interest. Assets awarded to the debtor-spouse are property of the estate, while assets awarded to the non-debtor-spouse are not property of the estate. Zachmann (citing In re Skorich, 482 F.3d 21 (1st Cir.2007) ).

The divorce court is the appropriate forum to equitably allocate marital property. Thus, bankruptcy courts are correct to modify the automatic stay for that purpose, even though property of the estate may be involved. White, 851 F.2d at 173

; Roberge v. Buis, 95 F.3d 42 (4th Cir.1996). Until the state court equitably divides the marital property, what is property of the bankruptcy estate is unclear. In re Hohenberg, 143 B.R. 480, 485 (Bankr.W.D.Tenn.1992). When equitably dividing marital property, Illinois courts protect the rights of creditors who obtain lien rights against such property prior to the time the dissolution proceeding is commenced.

First Merit Bank, N.A. v. McEnery, 2014 IL App (3d) 130231–U, 2014 WL 5483039

(where a creditor obtained a charging order against husband's interests in LLCs prior to divorce proceeding where wife claimed half interest as her share of marital property, trial court correctly found that wife's marital interest in LLCs was subordinate to creditor's preexisting lien). Where the divorce proceeding is commenced before any such lien rights are obtained by a creditor, it is this Court's view that Illinois courts have the authority to accord primacy to the spouse's marital property interest, except as to assets that were already encumbered, pre-divorce, by a mortgage, security...