Reinbold v. Thorpe (In re Thorpe)

Overlay divorce and bankruptcy, and you’ve got a big mess.

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Case Type:
Case Status:
17-1766 (7th Circuit, Jan 31,2018) Published
Under the Illinois law, each spouse is vested with independent contingent interests in marital property when the divorce petition is filed. When one spouse files bankruptcy, a trustee succeeds only to the title and rights in property that debtor had on the petition date and when the divorce court award the marital property to the non-debtor spouse, the debtor’s contingent interest vanishes. A debtor’s rights against third parties is limited to what existed on the petition date and the estate’s property does not include things to which it lays claim until the matter is adjudicated or resolved.
Procedural context:
The chapter 7 trustee brought an adversary proceeding seeking a ruling that debtor’s half interest in the marital home was transferred to the estate free and clear of the wife’s contingent interest. The bankruptcy court found in favor of the non-debtor spouse and the district court affirmed. The 7th Circuit affirmed reviewing the lower court’s interpretation of Illinois law de novo.
The debtor and his wife were married and bought a house as joint tenants. The wife filed for divorce and approximately 8 months later, the debtor filed for chapter 7 bankruptcy protection. After the automatic stay was lifted, the divorce court awarded the marital home to the wife and the Trustee brought the adversary proceeding seeking to sell the debtor's half interest in the marital home. The Trustee contended that both the bankruptcy and district courts incorrectly interpreted Illinois law regarding marital property arguing, instead, that the debtor’s half interest in the house was free of the wife’s contingent interest. The 7th Circuit disagreed finding that when the wife filed for divorce, she and the debtor were each vested with contingent interests in the entire marital home and the debtor owned a half-interest subject to the wife’s contingent interest. This qualified half-interest is what the estate acquired when the debtor filed for bankruptcy less than a year later. Finally, once the divorce court awarded the wife the entire marital home, the estate’s contingent interest in the house disappeared leaving the estate without a claim.
Bauer, Flaum, Sykes (Sykes)

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