December 2, 2007
9th Circuit BAP rules on the "Community Property Discharge"
Rooz v. Kimmel (In re Kimmel) ---- B.R. ---- (9th Cir. BAP November, 2007)
Issue: Can a creditor seize a person’s interest in his spouse’s wages in California after the spouse has filed a bankruptcy petition and received a discharge?
Judge Dennis Montali
Dunn, Markell, Klein
Opinion by Dunn
Creditor Rooz sued the debtor and his wife in 1991. In 1993 wife filed chapter 7 and received a discharge. In 1995, creditor obtained a state court judgment against the husband. Immediately thereafter, husband and wife entered into an agreement making wife’s post-agreement wages her separate property. In 2005, with creditor still trying to collect the judgment against husband, husband filed his own chapter 7. Creditor filed a non-dischargeability complaint against debtor-husband. The Bankruptcy Court found that the debt was discharged. Creditor then tried to seize the husband’s interest in wife’s paycheck (note: this does not seem possible but that is what the opinion says). Creditor also attacked the post-nuptial agreement as a fraudulent conveyance in state court. Wife reopened her case and removed the new state court case to the Bankruptcy Court. The Bankruptcy Court dismissed the case saying that the “community property discharge” prevented creditor from proceeding against the wages even if the post-nuptial agreement could be avoided as a fraudulent conveyance.
The BAP affirmed. Section 524(a)(3) states:
A discharge in a case under this title – . . .
(3) operates as an injunction against [any] act, to collect or recover from, or offset against, [community] property of the debtor . . . acquired after the commencement of the case, on account of any allowable community claim, except a [non-dischargeable] community claim . . .
A “community claim” is defined in 101(7) as a claim:
that arose before the commencement of the case concerning the debtor for which [community] property . . . is liable, whether or not there is any such property at the time of the commencement of the case.
At the time of wife’s bankruptcy, the claim of creditor was a “community claim” because “it was enforceable against the property of the Kimmel community.” It was a debt for which community property could have been seized by the creditor. Under California Family Code Section 910(a), community property is liable for the debts of either spouse, even those existing at the time of the marriage (see Cal. Family Code Section 902). Therefore whether the wages are separate property per the post-nuptial agreement or are community property of a spouse acquired after the bankruptcy, the property cannot be seized to collect a community debt which existed at the time of the wife’s bankruptcy. The fact that husband and wife attempted a fraudulent conveyance (if it were found to be that) does not change the result because the code is clear.
The rationalization of this of course is that community property is property of the estate and is subject to sale by the trustee in the bankruptcy case of either spouse. If all existing community property is therefore applied to the debt, the discharge would lose some meaning if the creditor could continue to seize community property after the discharge, albeit, the non-filed spouse’s interest only.
The Bankruptcy Judge also ruled that the fraudulent conveyance action could not proceed because of the statute of limitations, i.e., the transfer was ten years earlier.
Note also that the case discusses the requirement that if the debtor believes that the claim against the non-filing spouse is non-dischargeable, a non-dischargeability complaint must be filed in the case of the filing spouse or the creditor cannot seize post-bankruptcy community property even to collect a non-dischargeable debt.
Final note, the BAP points out that if there is a subsequent divorce, the community property discharge will no longer protect property of a non-filing spouse.
TrackBack URL for this entry:
Listed below are links to weblogs that reference 9th Circuit BAP rules on the "Community Property Discharge" :