In re Marriage of Walker Summary

 

In re Marriage of Walker Summary.  Opinion published on September 29, 2015

 

Factual Background

Husband and Wife dissolved their marriage in 2006.  Wife declared bankruptcy in late 2007.  Wife listed as an asset in her bankruptcy proceedings the family home which was worth $400,000 at the time, but her debts included State Farm and Washington Mutual’s $298,009 in total secured claims against it.  In 2008, the bankruptcy court discharged Wife’s debts under chapter 7.  The residence was not sold in the bankruptcy. 

 

The residence was sold years later in 2013 and both WaMu and State Farm were paid through escrow.  The property netted $176,580.  In a subsequent motion she filed, Wife argued she was no longer responsible for the debt owed to state farm due to the bankruptcy.  Had that debt not existed, the net proceeds would have actually been $272,313.  She claimed her argument entitled her to $47,866 of Husbands share.

 

Trial Court’s Decision

 

A hearing was held on Wife’s motion in 2014.  The court granted her motion.  Wife received $134,089 of the net proceeds while Husband received $42,490.  Husband appealed.  The Court of Appeal 4th Appellate District Division 3 reversed

 

Decision on Appeal

 

The focus on appeal was Wife’s bankruptcy and whether bankruptcy law prohibited equal distribution since it would, in essence, enforce State Farm’s debt against Wife after her discharge.  The Court went on to summarize applicable bankruptcy law to resolve the question.  Under most circumstances the property of the estate is distributed to creditors who may take a haircut.  The Court noted a subsequent discharge enjoins a collection action.  Here however, the residence was not sold and distributed to creditors.  The residence was instead exempt. 

 

The Court of Appeal focused on the fact the banks added liens against the residence were secured since they did not reach the residence’s full value.  Wife’s downfall, “ ‘It is well settled that valid, perfected liens and other secured interests pass through bankruptcy unaffected. . . .’ [Citation.]”  Furthermore, “The only effect of the discharge . . . . was to eliminate Sate Farm[‘s] right to pursue [Wife] for the amount owed ‘as a personal liability . . .’ “  Wife’s argument was  “formalistic (and wrong) to suggest that the payment of a secured debt through escrow is solely the in personam payment of a debt and not the extinguishment of a lien, whereas a foreclosure action in which the property is sold solely extinguishes the lien without paying off (at least in part) a debt.”  The court of appeal reversed the trial court’s order.