Non-Debtor Spouse Transfers Interest to Debtor Post-Discharge

Posted by NCBRC - January 5, 2023

The debtor’s adversary complaint stated a claim under sections 522 and 524 against a creditor who pursued state court action to avoid the transfer of community property from the non-debtor spouse to the debtor after the debtor had obtained discharge of the creditor’s claim. Rhodes v. Pecanland Village Shopping Center, LLC., No. 19-31559, Adv. Proc. No. 22-3010 (Bankr. W.D. La. Dec. 14, 2022).

The debtor filed for chapter 7 bankruptcy and claimed an exemption for her home which she owned as community property with her non-debtor spouse. The debtor listed Pecanland Village Shopping Center as a creditor in her schedules, and her discharge included Pecanland’s claim. After her bankruptcy case was closed, Pecanland obtained a state court judgment against the non-debtor spouse for a pre-petition community claim based on breach of a shopping mall lease. Just before the state court judgment was issued, the non-debtor spouse transferred his one-half ownership interest in their home to the debtor. Pecanland filed a revocatory action in the state court to avoid the transfer. The debtor reopened her bankruptcy to file an adversary complaint under section 524(a)(3), seeking to enjoin the creditor from pursuing the state court avoidance action. The complaint also sought an award of attorney’s fees and dismissal of the state court case. Pecanland moved to dismiss under Federal Rule 12(b)(6).

The court began with the composition of the debtor’s bankruptcy estate under section 541(a)(2), finding that it included “all interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is under sole, equal, or joint management control of the debtor.” Pursuant to this provision, the debtor’s home was community property which entered the estate and which was subject to exemption under section 522(a). The court found that “[d]ue to the home’s protected status, [Pecanland] has no right to contest the transfer of the fully exempted property from one spouse to the other.”

The property interests of the non-debtor spouse were further protected by section 524(a)(3), which provides that a discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541(a)(2) of this title [community property of the estate] that is acquired after the commencement of the case, on account of any allowable community claim.”

Pecanland argued that section 524(a)(3) was inapplicable because it refers to after-acquired property and, in this case, the debtor and her husband owned the property before the bankruptcy. The court disagreed, finding that an increase in value of pre-petition property, such as through increase in market value or paying down of the mortgage, is considered after-acquired community property.

Based on the combination of the section 522 exemption and section 524’s protection of after-acquired property, the court found the debtor’s complaint survived the motion to dismiss.

Finally, the court found that it lacked jurisdiction to enjoin the state court avoidance action.

The court, therefore, granted Pecanland’s motion to dismiss with respect to that claim and denied it with respect to the remaining claims.

Rhodes Bankr WD La Dec 2022


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