Exceptions to Discharge

Under Colorado law,  spouses in dissolution proceedings own marital property as co-owners. Therefore the debtor’s ex-wife had a vested equitable interest in an up-front sum plus 50% of the proceeds from the sale of their marital residence as ordered by the divorce court, and that interest did not enter the debtor’s chapter 13 estate. Williams v. Goodman (In re Williams), No. 22-1067 (10th Cir. Dec. 13, 2022) (non-precedential).

The debtor and his wife, Ms. Williams, lived with their children in a home titled only in the debtor’s name. When they divorced, they agreed to sell the home. Ms. Williams was to receive $24,800 from the proceeds and the remaining proceeds were to be divided evenly between the two of them. Instead of selling the home, though, the debtor filed for Chapter 13 bankruptcy.

The debtor’s confirmed plan listed general unsecured creditors as “class four,” with their payments to be made on a pro-rata basis after all prior classes of debts were fully paid. Beyond describing class four claims as allowed and timely filed, the plan did not address any individual unsecured claims.

Ms. Williams filed an adversary complaint seeking a ruling that her interest in the house did not become part of the bankruptcy estate under section 541(a) and seeking an order of nondischargeability of other claims under section 523(a). The debtor filed counterclaims including a request for attorney’s fees under section 523(d). The bankruptcy court ruled in favor of Ms. Williams on the section 541(a) claim and against her on the section 523 claims. The court ruled against the debtor on his counterclaims. It failed to address his claim under section 523.

The debtor moved for reconsideration based on the court’s failure to address the attorney’s fee claim, and at the same time, appealed the court’s decision in favor of Ms. Williams to the Tenth Circuit BAP. The bankruptcy court denied the motion for reconsideration, expressly rejecting his section 523 claim for attorney’s fees at that time. The debtor did not amend his BAP appeal to include the reconsideration order.

In the meantime, the trustee asked the court what she should do with the distributions earmarked for Ms. Williams. If Ms. William’s interest in the house was determined on appeal to be estate property she would be entitled to her pro rata share of the distributions representing only a fraction of the claim. But if it was outside the estate, she would be entitled to the entire amount as ordered by the divorce court. The bankruptcy court ordered the trustee to retain Ms. Williams’ share in a separate trust to await a ruling by the BAP as to the legal question. The debtor appealed that order to the BAP.

In two separate orders, the BAP affirmed the orders of the bankruptcy court. It did not consider the debtor’s arguments related to the bankruptcy court’s order denying reconsideration because the debtor failed to file a notice of appeal of that order.

The debtor appealed both decisions to the Tenth Circuit and that court consolidated the appeals.

The court began with the debtor’s argument that the bankruptcy court’s distribution order contravened the terms of the confirmed plan. The court disagreed, finding that the provision in the plan and the confirmation order concerning class four claims was general in its applicability. The court held that where neither the plan nor the confirmation order addressed the timing of distributions or whether specific claims like Ms. Williams’ were allowed, “the confirmation order did not have preclusive effect regarding the allowance of that claim or the timing of distributions based on that claim.” Therefore, the trustee was not required to adhere to the plan’s treatment of her claim in the event her interest in the house was determined not to be part of the bankruptcy estate. The court also rejected the debtor’s argument that the trustee’s motion for an order of distribution was merely an untimely appeal of the confirmation order.

The court next affirmed the BAP’s refusal to address the debtor’s motion for reconsideration. The court found that when a judgment or order under appeal is amended or added to while the appeal is pending, the appellant must file a new appeal or amend the pending appeal to encompass the new judgment or order. The debtor failed to do so.

The court then turned to the issue of whether Ms. Williams’ equitable interest in the house was not part of the bankruptcy estate under section 541. Section 541(d) states, “[p]roperty in which the debtor holds . . . only legal title and not an equitable interest, . . . becomes property of the estate . . . only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”

Looking to state law to determine the nature of Ms. Williams’ property interest, the court reasoned that at the time of the bankruptcy petition, Ms. Williams “had a vested interest in the house protected by ‘an encumbrance of record,’ created via ‘filing the lis pendens.’” Based on this finding, the circuit court agreed that Ms. Williams had an equitable interest in the property valued at 50% plus $24,800, that the debtor did not hold. Therefore, that interest did not become part of the debtor’s estate.

In answer to the debtor’s argument that Ms. Williams’ interest was not in the home itself, but in a sum of money representing a divorce settlement, the court turned again to state law. Colorado law states that upon filing a dissolution of marriage, marital property “the wife has an interest in the marital property like a co-owner, rather than as a mere creditor of her husband,” and that interest vests automatically.

The court concluded that Ms. Williams’ equitable interest in the property did not enter the debtor’s bankruptcy estate and affirmed the decisions of the BAP.

Williams 10th Cir Dec 2022