$5 Million Domestic Support Debt and Offshore Trust

Posted by NCBRC - August 9, 2022

The bankruptcy court was not bound by the state court’s finding that the debtor’s ex-wife did not violate the stay when she had the debtor arrested for failure to pay domestic support out of an offshore trust he claimed no ownership interest in, but the court found the issues more appropriate for summary judgment and granted the debtor’s motion to vacate its earlier order of dismissal. Foufas v. Foufas, No. 20-22967, Adv. Proc. No. 22-1013 (Bankr. S.D. Fla. June 17, 2022).

Coincidental with his divorce, the debtor moved all his business assets into an offshore trust making himself and his new wife the beneficiaries with no right of withdrawal. He then defaulted on his domestic support obligations to his ex-wife. His ex-wife, Teddy, sought to collect the domestic support from the offshore trust and the Illinois state court found the creation of the trust to be fraudulent as to Teddy. After years of litigation the state court ordered the debtor to be incarcerated until he placed funds into escrow to address the domestic support debt.

The debtor filed for chapter 7 bankruptcy claiming as his only asset his residence and some personal property all of which he claimed as exempt. In his schedules he listed the domestic support obligation, which by that time topped $5 million.

The debtor was arrested and jailed pursuant to the pre-bankruptcy state court order. He responded by seeking an order from the Illinois state court that by having him arrested, his ex-wife violated the automatic stay. The state court found that Teddy did not violate the stay and denied the debtor’s motion for release from incarceration. That order was affirmed on appeal.

The debtor then filed an adversary complaint in the bankruptcy court presenting the identical action for violation of the automatic stay. Teddy moved to dismiss, and the court granted the motion without prejudice to the debtor’s right to amend his complaint and schedules.

The debtor then moved for reconsideration of the order of dismissal.

The court began with section 362(b)(2)(B) which provides that it is not a violation of the stay for a domestic support creditor to seek recovery from non-estate property. By claiming that Teddy’s efforts to collect from the offshore trust violated the stay, therefore, the debtor had to assert that the offshore account was property of the bankruptcy estate, in direct contradiction with his representations in his bankruptcy schedules.

In his motion for reconsideration the debtor argued that the court erred by deciding the motion to dismiss on the basis of judicial estoppel.

The Eleventh Circuit holds that judicial estoppel requires that a court find that “(1) the plaintiff took a position under oath that is inconsistent with pursuit of the action; and (2) the plaintiff did so with the intent to make a mockery of the judicial system.” The second element is a fact-based inquiry. For that reason, the court agreed with the debtor that the issue is more appropriately resolved on summary judgment rather than a motion to dismiss. It granted the debtor’s motion for reconsideration on that basis.

The court went on to address the issues raised in Teddy’s motion to dismiss beginning with her argument that the debtor’s arrest and incarceration were a product of the Illinois state court’s contempt powers. While the court agreed that a contempt ruling in a state court does not violate the automatic stay, it disagreed with Teddy’s depiction of the basis for the arrest. Rather, the court found the debtor was arrested and incarcerated not to enforce the state court’s contempt powers, but to coerce payment of the domestic support obligation. Thus, unless an exception applied, Teddy violated the stay.

Teddy next argued that the court was bound by the final judgment of the state court that there was no stay violation. The court noted that the majority of courts hold that a bankruptcy court is not bound by another’s court’s finding that the automatic stay does not apply in a given situation. Those courts generally hold that administration of a bankruptcy case, including application of the stay, is best centralized in the bankruptcy court. The minority view, however, finds that either the Rooker-Feldman doctrine, or collateral estoppel prohibit the bankruptcy court from re-adjudicating a finding by a state or federal court on the issue of applicability of the automatic stay.

The court found that it did not have to decide between the majority and minority views on the impact of another court’s ruling with respect to the applicability of the automatic stay. In fact, the case before it would ultimately be decided by a determination of whether the offshore trust was or was not estate property. The court noted that “[t]here is nothing more core to the bankruptcy process than the determination of what is, and what is not, included in the bankruptcy estate[,]” and found that it had exclusive jurisdiction over the issue. For that reason, the bankruptcy court held that it was not bound by the state court’s finding that the offshore trust was not estate property.

The court vacated the order of dismissal and treated the motion for reconsideration as a motion to file a First Amended Complaint which it granted. The debtor’s ex-wife filed a motion for summary judgment on July 22.

Foufas Bankr SD Fla June 2022





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