Bankruptcy, Divorce and Community Property – In re Marriage of Rynda

The State of California operates under a community property regime in which assets and debts derived from the efforts or actions of either spouse during the course of a marriage are considered joint property to be divided equally between the spouses in the event of divorce. In In re Marriage of Rynda, the California Court of Appeals for the First District explains what happens to community property when one of the divorcing spouses also files for bankruptcy.Carolina and David were married in January 1996. The couple worked together as owners of a small insurance company until Carolina filed for divorce more than eight years later. A superior court dissolved the marriage in May 2005 and ordered that all community property – including the business – be divided equally among the former spouses. When Carolina filed for bankruptcy in 2009, however, the court ordered that all valuations of the couple’s assets for the purpose of dividing it between them be halted until the bankruptcy proceedings were completed. A bankruptcy court-appointed trustee later sold much of the property. That included Carolina’s stock in the company, which the trustee sold to David.

Back in the superior court, Carolina filed a motion claiming that she was entitled to a 50 percent ownership interest in the business and to be compensated for the community debts that were extinguished during the bankruptcy process. She also argued that there remained community property from the marriage for the superior court to divide. The court disagreed. “[T]he bankruptcy court has superior jurisdiction to the superior court,” the judge said. “And if the bankruptcy court divided your businesses or sold them, then they’re done with them. I can’t do anything about that.”

The First District affirmed the decision on appeal. “In states such as California, where each spouse has management and control of community property . . . the bankruptcy estate includes all community property as of the commencement of the case, of both the debtor and the non-debtor-spouse,” the appeals court explained, citing the Ninth Circuit’s 1990 decision in McCoy v. Bank of America. Since community property includes both assets and all debts acquired by one or both spouses during the course of the marriage, when one spouse files for bankruptcy, the bankruptcy court acquires jurisdiction of the community assets and may use them to satisfy the debt.

Sometimes, the decision to file for divorce is sometimes accompanied by a second decision to file for bankruptcy. And although divorce and bankruptcy matters involve separate proceedings in different courts, they involve the same assets and debts and are intertwined, in that decisions in one proceeding may have a profound effect on the other. It is vital that parties in these cases seek experienced legal counsel to ensure that their rights and interests are protected and advanced.

With offices throughout the Bay Area, California divorce lawyer Lorna Jaynes provides innovative legal tools to resolve family law disputes without the bitterness and acrimony engendered by the adversarial process.

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