CA1: Bankruptcy and divorce differentiate between claims and equitable interests

Ford v. Skorich, No. 06-2395 (3/30/07).  This is where divorce law collides with bankruptcy.  Under New Hampshire law, where a family court issues an order retraining the parties from disposing of property, both parties have an equitable interest in the property.  The divorcing couple had a property in Maine, and the husband nevertheless began to stake steps to sell the property.  The family could got wind of this and because “the debtor had ‘violated almost every order that this Court has made" and had ‘concealed assets and diverted assets, and taken title to assets in the names of third parties’…" it directed that the proceeds be placed in an escrow account controlled by the parties’ counsels.  It gets better?  Keep reading.

Then, the husband filed bankruptcy.  (I think that the First screws up the gendered pronouns.)   The Bankruptcy court granted an exception to the automatic stay to allow the debtor to obtain a divorce and allocate the assets – but not distribute them.  Upon objection of the bankruptcy trustee, the bankruptcy court held that the debtor (whom I am pretty sure is the husband), lost legal title, and now only had a contingent equitable interest in the funds.  The trustee then argued that transferring the legal title to escrow agents was a “transfer avoidable under section 547 of the Code, 11 U.S.C. § 547 (2000).”  The trustee figured that if this transfer were avoided, then legal title would go into the debtor’s estate, and the trustee (as a lien creditor) to cut off the equitable interest he had.  Got it?  The trustee lost at the bankruptcy court, because the “the transfer to the escrow agent had not been for [the former Mrs.?] Skorich's benefit as ‘a creditor’ nor was it on account of "an antecedent debt," two preconditions of section 547(b)”

So, the Trustee appeals.  The First agrees.  Finding that “her equitable interest in marital property is not a "claim" at all under section [11 U.S.C. §] 101(5), because it is neither a "right to payment" (subsection (A)) nor a "right to an equitable remedy for breach of performance" (subsection (B)).”  Essentially, equitable interests are not “rights to payment” within the meaning of the code, and because the divorce court could (but did not) award a monetary sum instead of an interest, there wasn’t a right to payment.   

Comments

[Vetrano & Vetrano]

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[Jrlaw Org]

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