Marital Interest in Husband’s Company Is Subject to Wife’s Claim Even If Divorce Decree was Not Entered Before Bankruptcy Filed.

In this case Husband filed for Chapter 7 bankruptcy, while the parties were in divorce proceedings. No final judgment existed nor was there a division of marital assets. Based on an estimate of her expected share of marital assets, Wife filed a timely proof of claim for one-half million dollars against Husband’s bankruptcy estate, apparently premised on her stake in a partnership that was legally titled in Husband’s name and, therefore, passed to his bankruptcy estate.  It would likely be distributed as shared marital property in a divorce decree.

The trustee sought to expunge the claim, arguing that Wife’s interest in equitably dividing marital property in Husband’s bankruptcy estate was not a “claim” under 11 U.S.C. 101(5), because the state court had not entered a final divorce decree before his bankruptcy filing. The bankruptcy judge found that the claim for equitable distribution arose prepetition and must be allowed.

On direct appeal, the Federal Court affirmed, indicating that although Wife did not have an equitable distribution decree in hand at the time Husband filed for bankruptcy, the focus should not be on when the claim accrues, but whether a claim exists. Given the Bankruptcy Code’s expansive definition of “claim,” a non-debtor spouse has an allowable pre-petition claim against the bankruptcy estate for equitable distribution of marital property when the parties are in divorce proceedings before the bankruptcy petition is filed.

Since the threat of a bankruptcy filing often is raised in a divorce case, this type of analysis proves very helpful if you are the spouse whose soon to be ex is threatening to file so that your chance of obtaining value is denied or severely limited.