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Judicial

Bankruptcy and Matrimonial Cases

It’s Not the End of the Road

By Jeffry H. Gallet

Matrimonial proceedings are an exception to the rule that the filing of a bankruptcy proceeding stops related state court litigation. Except for the distribution of marital property, virtually everything else continues. Family law jurisdiction remains with the states. If state court judges make specific findings of fact, either before or during the bankruptcy case, those findings bind the bankruptcy court.

The Automatic Stay. The automatic stay is a statutory, ex parte, temporary restraining order that automatically goes into effect the moment a debtor files a bankruptcy case. It has no substantive effect on state law cases. It neither extinguishes a debt nor creates rights in the debtor. It merely suspends proceedings until lifted by the bankruptcy court or until the bankruptcy case ends.

Exceptions to the Stay. The noneconomic aspects of the matrimonial action, such as the marital status itself, domestic violence, and the custody and visitation of children, are outside the ambit of the stay.

Among the areas excepted from the automatic stay by Congress are proceedings to establish or modify an order for support; collect support from property that is not part of a debtor’s estate; and establish paternity, which most states treat as the beginning of a support proceeding.

The support creditor’s ability to collect from nonestate property is important. The bankruptcy estate’s assets and liabilities are calculated as of the time the bankruptcy petition is filed. Commonly, postpetition earnings of Chapter 7 debtors are available to pay support while those of Chapters 11, 12, and 13 debtors, who are attempting to use those earnings to reorganize and pay creditors, are not. In addition, certain of the debtor’s property, such as pension and retirement accounts, may be exempt in the bankruptcy but available as a source from which to collect support and support arrears.

A proceeding to hold a debtor in civil contempt for failing to make support payments will be stayed as a device to collect money from the debtor, while one for criminal contempt will be outside the purview of the automatic stay.

State Courts May Decide If Actions Are Stayed. Whether the automatic stay has stayed an action or proceeding can be resolved either in the bankruptcy court or the state court where the case is pending. Appeals from a decision regarding the application of a stay go through the state appellate system. Once a state court holds that the stay applies, only the bankruptcy court may lift or modify it. However, an aggrieved party can move before the bankruptcy court for relief from the stay.

Support of Defendants. Congress has excepted from discharge in bankruptcy debts to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce or other order of a court of record.

Bankruptcy courts neither make support orders nor modify state court support orders. The circumstances of the parties after the entry of the state court support order are irrelevant to the bankruptcy court’s analysis; the bankruptcy court will not review the amount or reasonableness of the state court order. A support order, based on specific findings, will usually survive the bankruptcy, as will any arrears accrued pursuant to it. A state court’s factual findings has res judicata or collateral estoppel effect on the issue.

Applying federal law, bankruptcy courts decide what constitutes nondischargeable support and what is a dischargeable property settlement. They apply essentially the same support standards as state courts use in setting support orders in contested proceedings.

In determining the true nature of an obligation, bankruptcy courts consider the length of the marriage, whether the obligation is subject to such contingencies as death or remarriage, whether there are minor children, whether the obligation appears to balance disparate incomes, whether the obli-gation is payable periodically or in a lump sum, whether there is an actual need for support, whether the award is modifiable, and the section of the order or agreement where the award is found.

With an agreement, the analysis starts with the assumption that the contract is persuasive evidence of intent, and is usually dominated by three factors: the language and substance of the agreement in the context of surrounding circumstances; the financial positions of the parties at the time of the agreement; and whether the obligation tends to maintain such necessities as food, shelter, and transportation.

State Law. While it is not binding on the bankruptcy court, the divorce decree is entitled to considerable respect even when it is ambiguous.

The issue before the bankruptcy court is not whether a child or nondebtor spouse requires support currently, or did at the time of the state court order or separation agreement, but whether the agreement or order intended to provide support. The circumstances of the parties following the entry of the state court support order are irrelevant to the bankruptcy court’s analysis. The bankruptcy court will not retry the issues of need for, or adequacy of, a support order, or whether one should be modified. The federal courts may determine the nature of the debt, but it is for the state courts to decide its validity and amount.

Professional Fees. Because an award of legal fees may be essential to a spouse’s ability to sue or defend a matrimonial action, an award of such fees may constitute support.

To be nondischargeable, the fees must be in the nature of support but need not be incurred litigating support. All legal fees granted to a creditor spouse in a state court family law proceeding are not automatically nondischargable. The creditor spouse or professional bears the burden of proving that the fees are in the nature of support. A state court’s factual findings, that an award of legal fees is necessary for the creditor spouse’s support, have res judicata effect on the issue. To have res judicata effect, in making its findings the state court must consider the creditor’s ability to pay the fees and/or the effect payment would have on the creditor’s financial situation.

Among the fees found to be support are fees for a custodial parent’s attorney in a custody suit, a law guardian, and a court-appointed psychologist.

Fees awarded as part of a property distribution are dischargeable.

Representative Examples. The determinations are fact-specific. The same kind of obligation, measured against different backgrounds, can be found to be support in one case and a property settlement in another. Where they are necessary to preserve the nondebtor spouse’s lifestyle, courts have held the following obligations not dischargeable: indemnity agreements; mortgage payments; car payments and auto insurance premiums; credit card charges; medical, disability, and life insurance premiums; medical and dental expenses; and taxes due on a nondebtor spouse’s share of the debtor’s pension.

The sale of the marital home sometimes leads to confusion. Typically, a custodial parent is given the right to reside in the marital home until a particular date or event, such as the high school graduation of a child. Then the home is sold and the proceeds distributed between the spouses. The use of the house may be in the nature of support, but the proceeds of the sale are usually a property settlement.

Jeffrey H. Gallet is a U.S. Bankruptcy Judge for the Southern District of New York and a member of the Bankruptcy Appellate Panel of the Second Circuit.

- This article is an abridged and edited version of one that originally appeared on page 28 in The Judges’ Journal, Winter 1999 issue (38:1).

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