Even when the contentions against a debtor-spouse sound in fraud, breach of fiduciary duty, or intentional tort, the claims of the debtor’s spouse survive a Chapter 7 discharge.
Despite the fact that those sorts of claims against anyone other than a spouse would require a timely filed adversary proceeding to escape discharge.
So held the 9th Cir. BAP in Cohen. Building on the unpublished Adam BAP case, the BAP found that claims that were or could be raised in a marital dissolution case were not subject to the timeline in 523(c).
Thus the non filing spouse could pursue her claims against the debtor in family court while the bankrutpcy case proceeded.
The stew of facts in Cohen
Let’s orient ourselves in the facts of Cohen. The marital dissolution proceeding was pending when Mr. Cohen filed Chapter 7.
Mrs. Cohen asserted that the debtor had breached his fiduciary duty to her; concealed assets; hidden asset transfers; and improperly used community assets after the dissolution was filed.
She let the time for filing (a)2, 4 or 6 adversaries pass without action. Instead she sought and obtained relief from stay to return to family court to litigate her claims against the debtor. Subsequent motions sought clarification of what the family court was empowered to do as a result and the appeal resulted.
The reasoning of Cohen
The BAP looked to the amendment of (a)(15) in 2005 as evidence that Congress intended to cast as wide a net as possible over non-support claims between spouses as possible. Further, it held that Section 523(a)(15) and Time-Limited Claims ((a) (2), (4), (6)) may overlap and are not mutually exclusive.
Since the same set of operative facts could support claims under (a)(2), (4),or (6) and claims under (a)(15), the Cohen panel reasoned that when Congress amended (a)(15) to remove the necessity for the filing of an adversary within the time limits of 523(c), it intended to include within (a)(15) as many marriage dissolution claims as possible.
As to the scope of claims covered by (a)(15), the court said:
[W}e see no statutory directive in § 523(a)(15) to limit the types of claims that a state court can adjudicate between two parties as part of a dissolution proceeding. Indeed, there is no language in § 523(a)(15) limiting the types of claims that may be adjudicated in “the course of a divorce or separation.” Therefore, § 523(a)(15) does not prevent a state family law court from considering evidence of a spouse’s alleged wrongful conduct when adjudicating the rights, duties, and entitlements in marital property
during a dissolution proceeding, regardless of whether similar claims would be time-barred in a bankruptcy case. Cohen at 13 [Emphasis added].Going back to Adam
The Cohen court grounded its decision in an earlier 9th Circuit BAP decision in Adam. There, in contrast to Cohen, the divorce was final and debtor’s former spouse had been awarded $300,000 in attorney’s fees in a separate fraud action that had been consolidated with the divorce action for trial.
The Adam court cited California family law as the basis for deeming the fraud action judgment as “incurred in the course of a divorce:
[W]hen a dissolution proceeding is pending in the Family Court division while a civil action involving a breach of spousal duty or otherwise raising issues that may impact division of assets is pending in the civil division of the same court, consolidation is appropriate. CAL. FAM. CODE § 1101(f) (“Any action may be brought under this section [claim for breach of fiduciary duty by a spouse] without filing an action for dissolution of marriage, legal separation, or nullity, or may be brought in conjunction with the action or upon the death of a spouse.”) (emphasis added). As the Family Court has the primary right to decide these issues, the consolidation must occur such that the Family Court decides the issues. Askew v. Askew, 22 Cal.App.4th 942, 961-62 (“After a family law court acquires jurisdiction to divide community property in a dissolution action, no other department of a superior court may make an order adversely affecting that division.”);
Adam v. Dobin (In re Adam), BAP No. CC-14-1416-PaKiTa, at *15-16 (B.A.P. 9th Cir. Apr. 6, 2015)
As to the scope of “debts incurred in the course of a divorce or separation….”, the Adam court held that its ambit extended to facts arising during the marriage and that were considered in connection with the overall disposition of the issues in the dissolution action, with the money obligation evidenced in the dissolution judgment” Adam at *14 n.9 (B.A.P. 9th Cir. Apr. 6, 2015).
Consequently, the combination of §§ 523(a)(5) and amended(a)(15) now exclude from discharge virtually all obligations between spouses and children, as long as the obligations were or could be addressed in the course of a divorce or separation or established in connection with a separation agreement, divorce decree, or other order of a court of record. Cohen at 11.What follows from Cohen
We’re left with a multitude of unanswered questions.
- Does Cohen apply to interspousal claims in Chapter 7 cases filed after BAPCPA?
- Is Heilman, holding that a divorce decree entered post discharge could not create a right of idemnity for a pre-bankrutpcy debt in favor of the non-filing spouse, still good law?
- Does wrongly transferred community property identified in family court become property of bankruptcy estate?
- All of the community property having flowed to the bankruptcy estate, does Ms. Cohen get a nondischargeable money judgment as an equalizing payment for the mismanaged community property?
- Must any bankruptcy distribution await resolution of the family law action?
Apparent consequences include:
- State law of fraud and breach of fiduciary duty applies to spouse’s claims rather than federal law
- Chapter 13, where (a)(15) claims are dischargeable becomes significantly more appealing
Although the Cohen decision does not cite any cases outside of the 9th cir. on its central holding, its reasoning is not tied to California’s community property scheme. Thus, Cohen may cause ripples far outside of the 9th circuit.
