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In re Thorpe

United States District Court, C.D. Illinois, Rock Island Division

March 16, 2017

IN RE TIMOTHY H. THORPE, Debtor.
v.
BELVA J. THORPE, Defendant-Appellee. JEANA K. REINBOLD, as Trustee of the Estate of Timothy H. Thorpe, Plaintiff-Appellant,

          ORDER

          SARA DARROW UNITED STATES DISTRICT JUDGE

         Before the Court is the bankruptcy trustee's (“the trustee”) appeal from the bankruptcy court's denial of summary judgment for the trustee as plaintiff in an adversary case related to the bankruptcy estate, and grant of summary judgment to Belva Thorpe, the defendant in that proceeding, ECF No. 1. For the following reasons, the Bankruptcy Judge's order is AFFIRMED as explained herein.

         BACKGROUND[1]

         Belva and Timothy Thorpe were married on December 6, 1986. They bought a house together, located at 1104 15th Street, Silvis, Illinois (“the house”), by a Corporation Warranty Deed, dated July 22, 1987, which identified the grantees as “Timothy H. Thorpe and Belva J. Thorpe, husband and wife, as joint tenants and not as tenants in common.” The deed was recorded on July 23, 1987 with the Rock Island County Recorder. They occupied the house together as the marital home.

         On October 4, 2012, Belva filed a petition to dissolve the marriage. Timothy then filed a petition for bankruptcy protection under Chapter 7 on June 21, 2013. A bankruptcy estate was created and a trustee appointed. The filing of the petition caused an automatic stay to issue on pending cases against Timothy, including the divorce proceedings. See 11 U.S.C. § 362(a). In his petition for bankruptcy, Timothy reported the house among his assets, and valued it at $145, 000, subject to no secured claims.

         On July 16, 2013, the divorce court held an evidentiary hearing on the grounds for dissolution of the marriage, and to determine the division of debts and marital property. On July 29, 2013, Belva filed a motion to lift the automatic stay in the bankruptcy court, arguing that the stay should be lifted so as to allow the divorce case to proceed. On July 31, 2013, back in the divorce court, the judge issued a written order based on the earlier hearing. He found that grounds for dissolution of the marriage were established, and that since Timothy had dissipated $98, 000 in marital assets, the house (which the divorce court valued at $125, 000) would be awarded to Belva “free and clear of any claim of [Timothy].” BR Op. 3.

         Judgment did not enter in the divorce case for two years, however. Initially, the bankruptcy court ordered that the stay remain in effect as to all property that had become property of the bankruptcy estate when the case was filed. Eventually, on April 14, 2015, the bankruptcy court modified the automatic stay to permit the divorce court to enter its judgment. This judgment entered on June 2, 2015, awarding the house to Belva as a result of Timothy's dissipation of assets, subject to the determination of the trustee's rights by the bankruptcy court.

         While the stay was still in full effect, on November 10, 2014, the trustee had filed an adversary proceeding against Belva in the bankruptcy court. The two-count complaint sought (I) to avoid any transfer of Timothy's one-half interest in the house by the divorce court that had occurred by the filing of the dissolution action, and (II) the right to sell that interest in order to settle the debts of the estate pursuant to 11 U.S.C. § 363(h).[2] Bankr. Compl. 3-5, BR 1. In late 2015, after the entry of the divorce court's judgment, the parties each moved for summary judgment on both counts. The Bankruptcy Judge granted judgment for Belva on both counts, precipitating the trustee's appeal.

         The Bankruptcy Judge reasoned, as to Count I, that no transfer of property from Timothy to Belva was effected by operation of the Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/101-5/802 (“the IMDMA”) upon institution of divorce proceedings, and that thus, there was no transfer for the trustee to avoid. BR Op. 7-12, 20-21. As to Count II, the Bankruptcy Judge held that the divorce court's judgment had deprived the bankruptcy estate of all interest in the house, that the estate was not entitled to avoid that transfer under 11 U.S.C. § 544, and that therefore, the house was not subject to sale by the estate under § 363(h). BR Op. 12-21. In so holding, the Bankruptcy Judge rejected the trustee's argument that Belva's failure to record a lis pendens notice prevented her from enforcing the divorce court's judgment. Id. at 12-20.

         DISCUSSION

         I. Legal Standard on Appeal from a Bankruptcy Court's Order

         Bankruptcy judges do not “enjoy the protections of Article III [of the United States Constitution]”; rather, their appointment is authorized by Congress to assist the Article III courts in their work. Wellness Int'l Network, Ltd. v. Sharif, 135 S.Ct. 1932, 1938 (2015). District courts therefore have jurisdiction to hear appeals from the final orders of bankruptcy courts. 28 U.S.C. § 158(a). District courts apply a dual standard of review to bankruptcy appeals: findings of fact are reviewed for clear error, and conclusions of law de novo. Stamat v. Neary, 635 F.3d 974, 979 (7th Cir.2011); Fed.R.Bankr.P. 8013. Under the clearly erroneous standard, “[i]f the bankruptcy court's account of the evidence is plausible in light of the record viewed in its entirety, we will not reverse its factual findings even if we would have weighed the evidence differently.” Stamat, 635 F.3d at 979 (quotation omitted).

         II. Legal Framework of Bankruptcy Estate's Claims on Debtor's Property

         When a debtor commences a bankruptcy case under Chapter 7, an estate is created consisting of, among other things, “all legal or equitable interests of the debtor in property.” 11 U.S.C. § 541(a)(1). A trustee for the estate is elected by the debtor's creditors; or, as commonly and as here, the interim trustee appointed by the bankruptcy court continues as trustee throughout the proceedings. See Id. §§ 701, 702. The trustee is charged with shepherding the estate through the pendency of the proceedings, and with “collect[ing] and reduc[ing] to money the property of the estate.” Id. § 704(a)(1). Although federal law determines whether the debtor's property becomes property of the estate, In re Marrs-Winn Co., Inc., 103 F.3d 584, 591 (7th Cir. 1996), the debtor's property interests themselves are determined in the first instance by local law, Butner v. U.S., 440 U.S. 48, 54-55 (1979).

         However, the bankruptcy code grants the estate something slightly different from the debtor's pre-petition property interests: “what the debtor could convey under local law rather than only what the debtor owned under local law.” Belisle v. Plunkett, 877 F.2d 512, 516 (7th Cir. 1989).

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any ...

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