Distribution of Property in a Flint Divorce during a Flint Bankruptcy? Call 235-1970

Recently I looked at an Alabama case called Dudley v Dudley that involved the issue of distributing marital property during a divorce. Since the issues are Federal the same result should occur in Michigan.

Call Flint Bankruptcy & Flint Divorce Attorney 235-1970. Lawyer Terry Bankert 810-235-1970

My office has several cases per year where a spouse has begun a bankruptcy before or after the filing but before the judgement of divorce is entered. Generaly we assume that no marital property can be divided unless the court gives us permission by lifting what is called the automatic stay. The automatic stay simply means it is a violation of federal law to attempt to collect debt or litigate against marital property while there is an active bankruptcy case involving the party. This stay is the principal tool to keep creditors away from debtors during bankruptcy as they seek their economic fresh start.

In Dudley the parties started a divorce in March of 2009 and entered a divorce judgement in October of 2010. The wife owned a Consignment shop and the commercial real estate the business was located in.

The wife has filed for chapter 13 Bankruptcy in December 2009 listing the property and business as an asset. The filing of the divorce if it asked for a distribution of property in itself was a violation of the automatic stay.

After the parties were divorced the property was sold and the assets were split. It was later learned that the Bankruptcy was dismissed shortly after the Judgement of Divorce was entered.

In the judgement of divorce the husband had been awarded $8,200 an amount equal to one half of the value of the consignment shop.

The wife in her pleading said the judge had been informed of the bankruptcy and the parties agreement that the assets should not be distributed until afyter the bankruptcy was dismissed. It had not been dismissed at that time. It is not clear but I will presume there was a trial and the judge proceeded to distribut all the marital asets.

The wife wants a resolution different from what the judge ordered. She challenged the courts ruling on several grounds I will look only at the Bankruptcy issue here. She plead that since the Trial Court had violated the automatic stay that part of the judgement should be set aside and re litigated. Should the court not do that she wanted a new trial.

When the wife’s objections had reach the trial court the bankruptcy had been dismissed. The bankruptcy remember had been active when the divorce judgement was entered.

Eventually the trial courts ruling were found to be in error. The automatic stay had been violated and the cure was not the eventual dismissal of the Bankruptcy case.

What is a bankruptcy stay? The rules are found in the Federal Bankruptcy Code.Section 362(a) which provides that, with exceptions not applicable here, the filing of a bankruptcy petition “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;
“(3) any act to obtain possession of property of the [bankruptcy] estate or of property from the estate or to exercise control over property of the estate.”

“ ‘[T]he filing of a bankruptcy petition stays the determination in a divorce case of the interests of the debtor in property of the estate, any exercise of control over such property, and any monetary claims against a debtor other than for alimony, maintenance and support. Other aspects of a divorce case, such as the dissolution of the marriage ․ are not stayed.

The most that the husband would have had when the property was awarded to him in a divorce judgement filed during a bankruptcy was the interest of the claim of an unsecured creditor. Here is an example Credit card s are unsecured debt.

“ ‘[I]t is within the exclusive province of the bankruptcy court to adjudicate the rights of creditors as against property of the debtor and property of the estate. To the extent that the state matrimonial court adjudicates an equitable distribution in favor of the non-debtor spouse, such award becomes a claim within the context of 11 U.S.C. § 101(9). The non-debtor spouse’s claim is an entitlement against the debtor’s estate, and thus [the non-debtor spouse] becomes one of the general unsecured creditors of the estate .’
“[In re Palmer,] 78 B.R. [402,] 406 [ (Bankr.E.D.N.Y.1987) ].”[1]Hunter, 706 So.2d at 754.[1]

The former husband argues that any issue concerning the trial court’s authority to divide the parties’ property is moot because the former wife’s bankruptcy petition was dismissed after the entry of the divorce judgment and before the entry of the trial court’s December 10, 2010, order denying the former wife’s post judgment motion.

The higher court disagreed stating “Violations of the automatic stay are void for all purposes. Their ineffectiveness is permanent, not temporary.” The Divorce judgement is void.

The dismissal of a bankruptcy case does not validate actions taken in violation of the stay. “The violations [of the automatic stay] remain ineffective even if the underlying bankruptcy case is dismissed.”Pursuant to 11 U.S.C. § 362(d), bankruptcy courts have the discretion to “lift the automatic stay retroactively and thereby validate actions which otherwise would be void.”

A state court’s action in a divorce proceeding taken in violation of the stay can be annulled and retroactively cured only by the bankruptcy court.

The trial court should have vacated the property division ordering a new trial.

The property-division provision of the divorce judgment had no “force and effect,” either at the time it was entered or later when the former wife’s bankruptcy petition was dismissed. The provision was at all times void as an action taken in violation of the automatic stay, and only the bankruptcy court could retroactively validate the trial court’s violation of the stay.

By dividing the parties’ property in its divorce judgment, the trial court violated the automatic stay that took effect upon the former wife’s filing a bankruptcy petition. The portion of the divorce judgment that purported to divide the parties’ property is void; further, the trial court erred in denying the former wife’s motion to vacate that portion of the divorce judgment. The trial court did not err in refusing to grant the former wife’s motion for a new trial as to the property-division issues.


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