Monday, December 28, 2009

Automatic Stay Lifted to Allow Parties to Litigate in Divorce Court

Here is an interesting article about the scope of the automatic stay and the criteria for lifting the automatic stay in a pending bankruptcy court case when the debtor is simultaneously a party in a pending divorce action.

In re Taub, 413 B.R. 55 (Bankr. E.D.N.Y. 2009). A debtor/wife filed a chapter 11 bankruptcy while she was a party to a pending divorce case in state court. The debtor's estranged husband filed a bankruptcy motion for relief from the automatic stay pursuant to Section 362(d)(1). The estranged husband sought the bankruptcy court order terminating the automatic stay to allow the husband and debtor/wife to procced to conclusion with the divorce action, including the entry of a judgment by the divorce court, with enforcement thereof in the bankruptcy court.

Not surprisingly, the debtor/wife opposed the motion to lift the automatic stay and argued that the bankruptcy court was the proper forum to resolve the comlex matrimonial issues.

The bankruptcy court noted that the filing of the bankruptcy petition triggered a stay of any action to commence or continue a judicial, administrative, or other court action to recover a prepetition claim against the debtor/wife and stayed any act to exercise control over property of the bankruptcy estate. The Taub court further noted that the automatic stay was effective immediately upon the filing of the bankruptcy petition without any further action.

The bankruptcy court stated that the automatic stay does not prevent a debtor/spouse and estranged husband from seeking a dissolution of their marriage. See Section 362(b)(2)(A)(iv). But, the automatic stay in the Taub case did prohibit the estranged husband from proceeding in the divorce court against property of the debtor/wife's estate without first obtaining a bankruptcy court order lifting the automatic stay.

The bankruptcy court entertained 12 factors prior to ruling that the estranged husband had demonstrated sufficient "cause" supporting the motion to lift the automatic stay. The bankruptcy court granted the motion to lift the automatic stay and held as follows:

*permitting the divorce court to determine issues including rights of parties in separate or marital property would resolve significant open issues and assist in plan confirmation, so that factor favored finding cause for relief from stay;

*state court had significant expertise in domestic relations matters and was well qualified to determine property entitlements and obligations, so that factor weighed in favor of finding cause for relief from stay; and

*creditors' rights could be protected by granting limited relief from stay to permit divorce action to proceed only up to entry of judgment, and so that factor weighted in favor of finding cause for relief from stay.

Warmest Regards,

Bob Schaller

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By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm
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