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DIVORCE AND BANKRUPTCY

 

Jurisdiction Issues and
ERISA Retirement Plans

This discussion of ERISA retirement plans is an excerpt from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners” by John McKindles

John McKindles

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Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

Mesa divorce and community property attorney John McKindlesD. Jurisdiction to Control and Dispose of Community and Separate Property Assets

The statutory authority for the state courts to assert jurisdiction over the control and dis­position of community and, to some extent, separate property assets is found in A.R.S. § 25-318. The statute has been amplified in recent years, mainly to cover the situation where creditors of the community are concerned.

Under this statute, as uniformly interpreted by Arizona case law, the distribution of community property requires a substantially equal (equitable) distribution of community assets unless there’s a compelling reason to do the converse. Please see Kelly v. Kelly (2000) 198 Ariz. 307. 9 P.3d 1046.

Further, the distribution of the community property does not need to be in kind or exactly equal but must result in essentially an equitable or nearly equal distribution. Miller v. Miller (App. Div. 1 1984) 140 Ariz. 520, 683 P.2d 319.

Where the disputes get interesting are typically in the realm of evaluation and other rea­sons for increase in value during the marriage of a spouse’s separate property. For example, the “book of business” value (renewal value of existing insurance policies procured by an agent) is considered a community asset, subject to division at dissolution. Payngburn v. Payngburn (App. Div. 2 1986) 152 Ariz, 227, 731 P.2d 122.

Also, in a 1947 case, the Arizona court ruled that where a husband owned a cleaning business at the time of the marriage and during the marriage purchased real estate from earnings generated by his work in the cleaning business, such property was community property and subject to a community claim by the wife. Anderson v. Anderson (1947) 65 Ariz. 184. 177 P.2d 227. In this vein, the burden is upon the spouse seeking to segregate the increased value of his sepa­rate asset during marriage as separate property, and this burden can only be met by clear and convincing evidence. Cockrill v. Cockrill (1979) 124 Ariz. 50, 601 P.2d 1334.

The underlying jurisdiction of the Superior Court to hear and decide matters relating to dissolution of marriage arises under A.R.S. § 25-311.

The Superior Court does not necessarily require personal jurisdiction over both parties since the dissolution action is an action in rem over the marriage status. Schilz v. Superior Court in and for Maricopa County (1985) 144 Ariz. 65, 685 P.2d 1103. Jurisdiction normally is based upon plaintiff s domicile. Leon v. Numkena (App. Div.1 1984) 142 Ariz. 307, 689 P.2d 566.

Once jurisdiction is acquired by the Superior Court in divorce proceedings it has the authority to determine all issues regarding the divorce, including property rights. Finnan v. Auman (1982) 134 Ariz. 40, 653 P.2d 688.

Notably, jurisdiction over a divorce does not necessarily imply jurisdiction over any other related proceedings. See Schilz.

In Schilz, the Arizona court discussed the jurisdictional right of a New Mexico court to enter Orders affirming the putative father’s paternity of a child. The putative father was not sub­ject to the personal jurisdiction of the New Mexico court and the Arizona court determined, upon the putative father’s challenge of the domestication of the New Mexico decree, that in personam jurisdiction is required for the determination of paternity whereas the other issues necessary to grant a decree of dissolution require only in rem jurisdiction.

Does the Superior Court have jurisdiction to enforce by contempt the responsible ex-spouse’s failure to pay allocated community debt after a discharge in bankruptcy? Arizona his­tory is checkered in this regard.

In the case of Perkins v. Superior Court in and for Maricopa County (Ariz. 1966) 100 Ariz. 186. 412 P.2d 476, the Supreme Court held that the trial court was without jurisdiction to order the husband to pay such community obligations to third parties and could not enforce such an order by contempt. This holding has been criticized by Srock v. Srock (Ariz. App. Div. 2 1970) 11 Ariz. App. 483, 466 P.2d 34. The Stuck case does not involve the obligated ex-spouse’s discharge in bank­ruptcy.

Many of these older cases are of dubious authority given the advent of and increase in popularity of the bankruptcy code’s title 11 U.S.C. § 523(A)(15), later discussed.

1. Estoppel. Can the doctrine of estoppel preclude a party from challenging a decree that may be jurisdictionally defective? The courts addressed this issue in the case of Unruh v. Industrial Commission (1956) 81 Ariz. 118, 301 P.2d 1029. In that case, a divorce decree that was entered without adequate jurisdictional elements, was challenged after the challenging party took advantage of the existence of the decree by remarrying. Factually, the wife obtained an improper di­vorce decree, had remarried and thereafter, learned of the death of the purported ex-spouse. She then sought workmen’s compensation benefits by contesting the validity of the divorce and argu­ing that she was still married to the deceased workman. The court applied the principal of quasi estoppel to preclude the woman from benefiting from her own unclean hands. Consequently, even though the decree of divorce was invalid, the courts sidestepped the issue of invalidity of the decree by finding that the woman essentially had no standing to raise the issue.

2. Death of Spouse. Another jurisdictional concern arises when one of the spouses dies during the dissolution action. Upon death of the spouse, the dissolution action in Arizona abates. Minnesota Mut. Life Ins. Co. v. Ensley, CA 9 (Cal.) 1999, 174 F.3d 977. Further, the court automatically loses jurisdiction to proceed with the dissolution action. Van Emmerick v. Colosi (App. Div. 1 1998) 193 Ariz. 398, 972 P.2d 1034.

E. Jurisdiction to Determine Separate Property Rights

In a dissolution proceeding, the trial court is without jurisdiction to grant a money judg­ment against a spouse for damages that spouse may have inflicted on the other spouse’s separate property. Weaver v. Weaver (1982) 131 Ariz. 586, 643 P.2d 499.

However, once the trial court has subject matter jurisdiction over a divorce proceeding and personal jurisdiction over both parties, it does have authority to decide all issues regarding dissolution, including property rights A.R.S. § 25-3 11, Martin v. Martin (Ariz. 1988) 156 Ariz. 452, 752 P.2d 1038; Airman v. Airman (Ariz. 1982) 653 P.2d 688.

F. Jurisdiction over Allocation and Disposition of Debt

The case of Cadwell v. Cadwell (Ariz. App. Div. 1. 1980) 126 Ariz. 460. 616 P.2d 920 enunciated the holding that although the statutes relating to dissolution of marriage do not contain an ex­plicit grant of authority to allocate debt payment obligations between the spouses, since the trial court is required to provide in the decree for disposition of the property of the couple, it necessar­ily has jurisdiction to make allocations of indebtedness in the decree as well. (Citing A.R.S. §§ 25-312, 25-315, 25-318 and 25-320.) This is despite the finding in Victor v. Victor (App. Div. 1 1993) 177 Ariz. 231, 866 P.2d 899, which found that the domestic relations court has no power to grant equitable relief outside of the statutory framework which gives the court its authority. See also Fenn v. Fenn (App. Div.1 1993) 174 Ariz. 84, 847 P.2d 129.

Since then, A.R.S. § 25-318 has been amended to incorporate various provisions regard­ing the allocation of and assignment of obligation to pay community debt. Please note Subpara­graph N of the statute.

G. ERISA Retirement Plans and the Bankruptcy Estate

Arizona’s exemption statute applicable to pension plans, A.R.S. § 33-1126(c), exempts, for the purpose of the Bankruptcy Court, District of Arizona, “Any money or other assets pay­able to a participant in or beneficiary of, or any interest of any participant or beneficiary in a re­tirement plan under section 401(A), 403(A), 403(B), 408, 408a or 409 or a deferred compensa­tion plan under 457 of the United States Internal Revenue Code of 1986, as amended.”

While the bankruptcy practitioner might reasonably presume that pension plans and re­tirement plans under which their clients operate would automatically fall within the Arizona Ex­emption Statute, creditors are becoming increasingly more challenging regarding such plans.

Heretofore regularly unchallenged, these plans are being scrutinized and challenged by attorneys for creditors, particularly where the plan has enough value to warrant the battle.

As a practice caveat, it would be wise to advise bankruptcy clients of the potential for this type of scrutiny and the likelihood of increased costs associated with what would otherwise ordi­narily be presumed a normal straightforward Chapter 7 filing.

The pleadings are routine for the type of objection raised.