Erran F. Persley

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
ERRAN F. PERSLEY,
Debtor.
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Case No. 07-00407
(Chapter 13)
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND ORDER RE MOTION OF DEBTOR’S
WIFE FOR RELIEF FROM THE AUTOMATIC STAY TO PURSUE
EQUITABLE DISTRIBUTION PROCEEDING REGARDING MARITAL PROPERTY
The debtor acquired an interest in shares of Chemonics stock
through an Employee Stock Option Plan (“ESOP”), acquiring some
part of that interest before he married his wife, and part
afterwards. 	He has not exempted that property in this case under
11 U.S.C. § 522. 	He and his wife are engaged in a divorce
proceeding in the Superior Court for the District of Columbia
that was commenced prior to the commencement of this bankruptcy
case, and that has not yet resulted in a divorce decree. 	The
debtor’s wife has filed a motion seeking relief from the
automatic stay to permit the Superior Court to enter a
distribution decree under D.C. Code § 16-910(b) relating to the
The Memorandum and Decision below is hereby signed.
Dated: January 25, 2008.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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1 	She has agreed that she will not seek an equitable
distribution to her of any other property in which the debtor has
an interest. 	The court’s order will make clear that the husband
is free to pursue an equitable distribution to him of any
property addressed by § 16-910(b).
2 	This decision supplants the court’s earlier oral
decision.
2
Chemonics stock. 1 	The court will grant that motion, but provide
that the distribution decree, if it alters the debtor’s
individual ownership of the Chemonics stock, shall not affect the
rights a trustee might have to liquidate the stock for the
benefit of creditors had the distribution decree not been
entered. 2
Section 16-910(b) directs that as part of any final decree
of divorce issued in that proceeding, the court, with exceptions
of no relevance here, shall:
distribute . . . property . . . accumulated during the
marriage . . ., regardless of whether title is held
individually [or otherwise], in a manner that is
equitable, just, and reasonable, after considering all
relevant factors . . . .
[Emphasis added.] 	A decree under § 16-910(b), therefore, could
result in termination of the husband’s individual ownership of
the Chemonics stock via an award of the property to his wife.
Nevertheless, if such a decree were entered, it is likely
that the debtor’s loss of ownership would have no adverse impact
on the creditors in this case. 	That is because the debtor’s case
is pending as a chapter 13 case, not as a liquidation case under
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chapter 7. 	The debtor does not contend that retention of the
Chemonics stock is necessary in order for him successfully
complete his confirmed chapter 13 plan. 	He has not contended
that he intends to liquidate the interest in order to fund his
plan. 	(In opposing the motion, his attorney noted at the hearing
on the motion that the interest is in the nature of a future
interest because it is pursuant to an ESOP, and that the
Chemonics stock could not be sold at this time because of its
future interest character.) 	Moreover, as demonstrated by his
schedules I and J and the trustee’s recommendation regarding
confirmation of his plan, his projected monthly disposable income
vastly exceeds the monthly payment called for by his confirmed
plan. 	Accordingly, the plan likely will be completed without the
necessity of liquidating the debtor’s interest in the Chemonics
stock.
Moreover, the debtor’s interest in the stock came into the
bankruptcy case subject to whatever potential interest his wife
might have in the property under D.C. Code § 16-910(b). 	The
intervention of bankruptcy stayed, but did not destroy the
debtor’s wife’s right to seek a distribution to her of the
property under § 16-910(b). 	Moreover, it is clear that the
Superior Court, and not this court, would be the appropriate
court to adjudicate what is the appropriate distribution to the
debtor’s wife under § 16-910(b) incident to any final divorce
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3 	For example, one of the factors to be taken into account
in making such a distribution is, as listed in § 16-910(b)(4),
“whether the distribution is in lieu of or in addition to
alimony.” 	Plainly the Superior Court is the court that can
adjust alimony downwards by increasing the amount of a
distribution to a spouse under § 16-910(b).
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decree. 3
However, on the date of the commencement of this bankruptcy
case, the debtor’s interest in the Chemonics stock became
property of the bankruptcy estate, 11 U.S.C. § 541, and pursuant
to powers that the bankruptcy trustee enjoys as of the
commencement of the case, the trustee might be able to defeat the
wife’s contingent interest in the property arising from her right
to seek an equitable distribution under § 16-910(b). 	Under 11
U.S.C. § 544(a), the trustee has
as of the commencement of the case, . . . the rights
and powers of . . .
(1) a creditor that extends credit to the
debtor at the time of the commencement of the
case, and that obtains, at such time and with
respect to such credit, a judicial line on all
property on which a creditor on a simple contract
could have obtained such a judicial lien, whether
or not such a creditor exists; [or]
(2) a creditor that extends credit to the
debtor at the time of the commencement of the
case, and obtains, at such time and with respect
to such credit, an execution against the debtor
that is returned unsatisfied at such time, whether
or not such a creditor exists.
Whether the wife’s potential right to a distribution to her of
part or all of the debtor’s interest in Chemonics stock would be
trumped under § 544(a) by a hypothetical judgment lien creditor
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4 	See also In re Thomas, 331 B.R. 798, 801 (Bankr. W.D.
Ark. 2005), citing In re Cole, 202 B.R. 356, 360 (Bankr. S.D.N.Y.
1996)), aff'd, 227 B.R. 222 (S.D.N.Y. 1998); In re Abma, 215 B.R.
148, 152 (Bankr. N.D. Ill. 1997); In re Cole, 202 B.R. at 360; In
re Palmer, 78 B.R. 402, 406 (Bankr. E.D.N.Y. 1987); In re Vann,
113 B.R. 704, 706 (Bankr. D. Colo. 1990); In re Tucker, 95 B.R.
796 (Bankr. D. Colo. 1989); Polliard v. Polliard (In re
Polliard), 152 B.R. 51, 54 (Bankr. W.D. Pa. 1993); Perlow v.
Perlow, 128 B.R. 412 (E.D.N.C.1991); In re Greenwald, 134 B.R.
729, 731 (Bankr. S.D.N.Y. 1991); In re Hilsen, 100 B.R. 708, 711
(Bankr. S.D.N.Y. 1989), rev'd on other grounds, 119 B.R. 435
(S.D.N.Y. 1990).
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or by a hypothetical execution creditor is an issue that 	need
not be decided at this juncture, and it makes sense not to waste
judicial resources prematurely addressing that issue. 	The
outcome of that issue depends on whether, prior to entry of a
divorce decree, the wife’s rights under D.C. Code § 16-910 in
property titled in the name of the debtor do not affect the
rights of the debtor’s creditors, and I only need note that it is
possible (and perhaps even probable) that the trustee would
prevail on that issue. 	See Schachter v. Lefrak (In re Lefrak),
223 B.R. 431, 439 (Bankr. S.D.N.Y. 1998) (under New York law, a
wife’s right in a pending divorce proceeding to seek an equitable
distribution of “marital property” titled in the name of the
husband does not affect the rights of the husband’s creditors);
In re Becker, 136 B.R. 113, 	118 (Bankr. D.N.J. 1992) (a
bankruptcy filing is "the equivalent of a levy by the trustee
upon all the debtor's property as of the petition date."). 4 	But
when a trustee invokes § 544 powers, a debtor’s spouse may have
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valid arguments to defeat that invocation depending on state law
and what provision of § 544 was invoked. 	See In re Ebel, 144
B.R. 510 (Bankr. D. Colo. 1992) (trustee’s invocation under §
544(a)(3) of the rights of a hypothetical purchaser of real
property that was the subject of a pending equitable distribution
proceeding were defeated because the property was in custodia
legis such as to put the hypothetical purchaser on notice of the
proceeding).
As noted already, it is likely that the equitable
distribution decree that the Superior Court enters will have no
impact on the administration of this case. 	Nevertheless, there
is the possibility that the case could be converted to chapter 7
should the debtor’s financial circumstances worsen (for example,
through loss of employment). 	In such a chapter 7 case, the
chapter 7 trustee would want to be able to liquidate the debtor’s
interest in the Chemonics stock for the benefit of creditors. 	If
there had been no alteration of the debtor’s ownership of the
Chemonics stock, the chapter 7 trustee would likely attempt to
protect the interest of creditors by invoking under § 544(a) the
powers, as of the commencement of the case, of a hypothetical
judgment lien or execution creditor under § 544(a), and attempt
to demonstrate that such a creditor’s rights in the debtor’s
Chemonics stock interest trumped the contingent rights of the
debtor’s wife, as of the commencement of the case, in such
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5 	This is not a case like Roberge v. Roberge (In re
Roberge), 188 B.R. 366 (E.D. Va. 1995), aff’d sub nom. Roberge v.
Buis, 95 F.3d 42 (4th Cir. 1996) (unpublished opinion), which did
not raise such a concern because it involved not individually
owned property of the debtor, but instead tenants by the
entireties property. 	There was no danger in Roberge that
individually-owned property of the estate that may have been
subject to execution by creditors prepetition, and that had
become property of the estate on the petition date, would lose
that character via an equitable distribution decree. 	Without an
equitable distribution decree, the debtor in In re Roberge had no
interest in that property that creditors holding claims against
him (but not against the non-debtor spouse) could execute. 	Under
state law, the divorce decree was to terminate the entireties
estate and, as part and parcel of the divorce, the state court
was required to make an equitable distribution of the property
between the spouses. 	An equitable distribution being necessary
in order to determine what was available to creditors, the only
question was whether the bankruptcy court should decide the
equitable distribution, and plainly that was a matter of domestic
relations law that should be decided by the state court instead.
That the equitable distribution might be 100% to the non-debtor
spouse would not make creditors worse off than before the
divorce.
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property pursuant to D.C. Code § 16-910(b).
The chapter 13 trustee accordingly has a legitimate concern
that allowing a distribution decree regarding the Chemonics stock
to be entered in favor of the debtor’s wife in the divorce
proceeding would end the debtor’s ownership interest in the
Chemonics stock, thereby terminating the estate’s interest in the
property with the consequence that the powers of a trustee under
§ 544(a) would no longer be available because the property is no
longer property in which the estate has an interest. 	See
Meininger v. Harp (In re Stoops), 209 B.R. 1 (Bankr. M.D. Fla.
1997). 5 	The chapter 13 trustee could intervene in the Superior
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Court proceeding to assert that she has a superior interest in
the debtor’s individual property by virtue of § 544(a) that
should be decreed to trump the debtor’s wife contingent
distribution rights, and thereby assure that any distribution
decree would not diminish the rights of the trustee under §
544(a) should it ever be necessary to liquidate the Chemonics
stock in order to pay the creditors in this case. 	See Ford v.
Skorich, 2006 WL 2482694 (D.N.H. 2006) (trustee intervened in
divorce proceeding, and thus had opportunity to protect interests
of bankruptcy estate); In re Becker, 136 B.R. 113, 119 (Bankr.
D.N.J. 1992) (“If a New Jersey divorce court simply applies
principles of equitable distribution as if the bankruptcy trustee
were not equivalent to a creditor with a perfected lien on the
debtor spouse's property interests, it will err as a matter of
law in these situations.”). 	But that would impose upon her
limited time available to handle the many chapter 13 cases she
administers in this court.
Resort by a trustee to § 544(a) powers in order to protect
creditors is unlikely to ever be necessary. 	Accordingly, it
makes little sense to put the trustee to the burden of
intervening in the Superior Court proceeding to invoke her §
544(a) power in that proceeding in order to preserve any superior
interest the estate may have in the property under § 544(a) that
would trump a potential distribution award to the debtor’s wife
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under D.C. Code § 16-910(b). 	Accordingly, I would have
discretion not to permit the equitable distribution proceeding to
go forward until the bankruptcy case is concluded. 	See In re
Bamman, 239 B.R. 560 (Bankr. W.D. Mo. 1999). 	On the other hand,
however, it makes little sense to delay the Superior Court
distribution proceeding to determine what part of the Chemonics
stock the debtor’s wife is entitled to receive should, as seems
likely, resort to the § 544(a) power prove to be unnecessary to
protect creditors. 	Keeping the automatic stay in place would
delay resolution of the Superior Court divorce proceeding which
is ready to be tried next month. 	The solution that protects the
interests of both the estate and the debtor’s wife is to permit
the Superior Court to decree what the debtor’s wife is entitled
to receive should the § 544(a) power never be invoked to trump
her rights, but to make clear that the lifting of the automatic
stay does not permit the distribution decree entered by the
Superior Court to diminish whatever rights a trustee in this case
would have to pursue liquidation of the Chemonics stock (under §
544(a) or otherwise) if the equitable distribution decree had not
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6 	I recognize that one factor the Superior Court is
supposed to address is whether the Chemonics stock should be
awarded to the debtor’s wife based on the amount of alimony
awarded in the case. 	Stated another way, but for this bankruptcy
case, the Superior Court might decide to award the debtor’s wife
a relatively small alimony amount if it awarded her the Chemonics
stock. 	The possibility that the Chemonics stock might eventually
be liquidated in the bankruptcy case and distributed to the
debtor’s creditors may make it difficult to fix the amount of
alimony that is appropriate upon decreeing that, as between the
two spouses, the wife is entitled to the Chemonics stock.
However, the Superior Court likely will be able to condition the
amount of the alimony on the eventual treatment of the Chemonics
stock in the bankruptcy case: if it is never liquidated in the
bankruptcy case, the alimony could remain unchanged, but
otherwise the decree could provide for an increase in the
alimony. 	Alternatively, it could leave the award of alimony
subject to adjustment if that proved necessary based on events in
the bankruptcy case.
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been entered. 6
It is accordingly
ORDERED that relief from the automatic stay is granted for
the purpose of allowing the Superior Court of the District of
Columbia to enter a decree pursuant to D.C. Code § 19-610 in the
divorce proceeding of the debtor and his wife, except that:
(1) the debtor’s wife shall not seek a distribution to
her pursuant to § 19-610(b) of any property titled in the
debtor’s name (or jointly in the debtor’s and the wife’s
name) other than that part of his interest in Chemonics
stock through his Employee Stock Option Plan that was
acquired by the debtor after the parties’ marriage (with the
Superior Court to adjudicate what part was acquired before
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11	O:\Judge Temp Docs\Persley (Erran) Order re MFRS re Distribn of Marital Property.wpd
the marriage, and thus is assignable to the debtor under
D.C. Code § 19-610(a), and what part was acquired after the
marriage); and
(2) if the decree under § 19-610 makes an award to the
debtor’s wife of part or all of the Chemonics stock, the
decree shall expressly provide that the award does not
diminish and is subject to whatever rights a trustee in this
bankruptcy case would have to pursue liquidation of the
Chemonics stock (under 11 U.S.C. § 544(a) or otherwise) if
the decree had not been entered, and the decree shall be
void with respect to such rights of the trustee if the
decree fails to include such a provision.
It is further
ORDERED that the debtor’s wife may not enforce any award to
her of the Chemonics stock so long as the automatic stay applies
in this case, but she may file a further motion to permit
enforcement of such an award based on further developments in the
bankruptcy case.
[Signed and dated above.]
Copies to: Debtor; Scott D. Arnopol, Esq. [Debtor’s attorney];
Cynthia A. Niklas, Chapter 13 Trustee; Nakia Waggoner, Esq.
[Counsel for Debtor’s Wife]; Burth Lopez, Esq. [Counsel for
Debtor’s Wife].
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