Costin, v. Costin et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
MARK JOSEPH COSTIN
DEBTOR
CASE NO.
04-04404-5-ATS
BARBARA COSTIN
Plaintiff
v.
MARK JOSEPH COSTIN AND
JOSEPH N. CALLAWAY, TRUSTEE
Defendants.
ADVERSARY PROCEEDING NO.
S-05-00087-5-AP
ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT
The matters before the court are the cross-motions for summary
judgment filed by the plaintiff, Barbara Costin, and the defendant,
Joseph N. Callaway, chapter 7 trustee. A hearing took place in
Raleigh, North Carolina on May 30, 2006.
Mark Joseph Costin filed a petition for relief under chapter 7 of
the Bankruptcy Code on December 8, 2004, and Joseph N. Callaway was
SO ORDERED.
SIGNED this 30 day of June, 2006.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
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appointed chapter 7 trustee. On May 6, 2005, Barbara Costin filed this
adversary proceeding pursuant to 11 U.S.C. §§ 523(a)(5) and (a)(15)
seeking a determination that certain debts incurred by Mr. Costin in
the course of separation and divorce are excepted from discharge. On
September 13, 2005, Ms. Costin filed an amended complaint, adding Mr.
Callaway as a defendant and asserting that to the extent Ms. Costin is
entitled to a distribution of assets of the debtor or to a distributive
award from the debtor, that entitlement is free and clear of any
interest of the bankruptcy estate. Ms. Costin also added a third claim
for relief contending that she holds an interest in other assets in
which the debtor and the estate claim an interest, independent of her
equitable distribution rights.
The trial of this matter, including the equitable distribution
itself, was scheduled for May 30, 2006. The parties agreed, however,
that the legal issues between the plaintiff and the trustee could be
resolved as a matter of law, and that the court should consider the
cross-motions for summary judgment prior to trying the equitable
distribution action.
"[S]ummary judgment is proper 'if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a
matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.
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Ct. 2548, 2552 (1986). In making this determination, conflicts are
resolved by viewing all facts and inferences to be drawn from the facts
in the light most favorable to the non-moving party. United States v.
Diebold, Inc., 369 U.S. 654, 82 S. Ct. 993 (1962). Summary judgment
should not be granted unless the moving party establishes his right to
judgment "with such clarity as to leave no room for controversy."
Portis v. Folk Constr. Co. Inc., 694 F.2d 520, 522 (8th Cir. 1982).
The parties agree that Barbara Costin and Mark Costin were married
on February 14, 1981, and separated on June 21, 2003. A divorce
proceeding was filed in the North Carolina District Court for Wake
County, and an order allowing the divorce was entered prior to Mr.
Costin's bankruptcy filing. The parties reserved the equitable
distribution claims. The legal question before the court is whether
Ms. Costin is limited to a general unsecured claim in the bankruptcy
estate for any equitable distribution interest she may have in the
debtor's assets, or whether the nature of her interest in certain
assets of the debtor is such that it remains outside and separate from
the debtor's bankruptcy estate.
The law on this issue was established in 1991 with the case of
Perlow v. Perlow, 128 B.R. 412 (E.D.N.C. 1991). In Perlow, the debtor
and his former spouse were divorced prior to the filing of the
bankruptcy petition, and the equitable distribution claims were
retained for a later date. The debtor filed his petition while the
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equitable distribution claims were pending, and he listed his former
spouse as an unsecured, nonpriority creditor. Mrs. Perlow contended
that her right to equitable distribution was a preexisting property
right in the marital property, but the court disagreed. Though the
statutory right for equitable distribution
is a "species of common ownership . . . vesting at the time
of the parties' separation[,]" . . . [t]his vested right,
however, does not . . . create a property right in the
marital property. (citation omitted). Nor does the fact of
separation create a lien on specific marital property in
favor of the spouse. (citation omitted). Rather, it only
creates "a right to an equitable distribution of that
property, whatever a court should determine that property
is."
Perlow, 128 B.R. at 415 (citations omitted). The court concluded that
the "right to equitable distribution is a general unsecured claim[.]"
Perlow, 128 B.R. at 415.
Ms. Costin contends that the Perlow opinion relied on North
Carolina case law, specifically Wilson v. Wilson, 73 N.C. App. 96, 325
S.E. 2d 668 (1985), to reach its conclusion, and that the North
Carolina Court of Appeals' opinion in Painter v. Painter, 163 N.C. App.
527, 594 S.E.2d 217 (2004), necessarily changes the result. In
Painter, the former husband passed away while the equitable
distribution action was pending, and the husband's estate was
substituted as plaintiff. The court ordered the plaintiff estate to
pay a distributive award to the defendant wife, but when the wife
attempted to enforce the order, the estate contended that the claim was
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like any other claim against the estate and had to be paid in
accordance with the priority scheme set forth in the probate statutes.
The appellate court considered the probate statutes, North
Carolina General Statutes Chapter 28A, in conjunction with the
equitable distribution statute, North Carolina General Statutes § 50-
20, and noted that a decedent's estate is comprised of "decedent's
assets, including all decedent's real and personal property. N.C. Gen.
Stat. § 28A-15-1(a). Although decedent's assets include those he
acquired from the equitable distribution order, his assets do not
include those marital assets awarded to his former spouse." Painter,
163 N.C. App. at 531. After reviewing the "essence" of equitable
distribution, "which provides for division of the marital estate
between the parties, and generally does not concern itself with title
or possession," the court concluded that
[w]here payment is due from a decedent to a former spouse to
account for the former spouse's portion of the marital
estate, that payment must be made first. Only after the
marital estate is separated from decedent's estate can the
administrator determine decedent's assets and proceed to pay
the creditors and distribute the assets of the estate
pursuant to Chapter 28A.
Painter, 163 N.C. App. at 532-3.
Ms. Costin contends that because administration of bankruptcy
estates and probate administration are so similar, the reasoning of
Painter should be extended to the bankruptcy context. Accordingly, she
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concludes, the equitable distribution action should proceed, and the
trustee should turn over the appropriate percentage of the marital
assets to her prior to any distribution of the bankruptcy estate.
There are three problems with Ms. Costin's argument. First, the
Painter court was fully aware of the Perlow opinion when it issued its
order, and the Painter court made no attempt to apply its reasoning
beyond the context of probate administration. Second, there is no
trustee with strong-arm powers in probate cases. Perlow relied in part
on the existence of the trustee's hypothetical lienholder status,
noting that because the wife failed to file a notice of lis pendens or
otherwise record her vested right in any real property, a judgment lien
creditor or a bona fide purchaser would have taken title to property
free and clear of the wife's interest. Perlow, 128 B.R. at 415.
Because Ms. Costin similarly did not file a notice of lis pendens or
otherwise put the world on notice of her claims, the chapter 7
trustee's powers under § 544 of the Bankruptcy Code bar her claim to
specific marital property.
Finally, Painter itself acknowledged that both the equitable
distribution statute and the probate statutes have been amended to
provide that the priority scheme for paying claims under Section 19 of
Chapter 28A is applicable to equitable distribution claims against an
estate of a deceased spouse. Painter, 163 N.C. App. at 533; N.C. Gen.
Stat. § 50-20(l) (2003). Thus, the holding in Painter is applicable
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only to cases that were pending prior to the enactment of the 2003
amendments.
Accordingly, the Painter decision does not change the result in
the context of a bankruptcy case; that is, Ms. Costin's right to
equitable distribution is a general unsecured claim. The trustee is
entitled to summary judgment on the issue of whether Ms. Costin's
interest in assets is separate from the bankruptcy estate.T h e
trustee also seeks summary judgment with respect to whether Ms. Costin
has any ownership interest in any of Mr. Costin's companies under North
Carolina law. There is a genuine issue of disputed fact on this
matter, and summary judgment is not appropriate.
Based on the foregoing, the trustee's motion for partial summary
judgment is ALLOWED; Ms. Costin has only a general unsecured claim
against the estate as a matter of law. The remaining motion and cross-
motions for summary judgment are DENIED.
SO ORDERED.
END OF DOCUMENT
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