Bringing a Lamb to Slaughter: How Family Law Attorneys Unknowingly Lead Clients to Financial Disaster in the Negotiation of a Divorce Stipulation
Jennifer L. Bjurling
Fitzgerald v. Fitzgerald. May this case be branded on the mind of every family law attorney. The husband, Thomas, was the plaintiff, and in conformity with the typical situation, the debtor in bankruptcy. The wife, Sandra, was the defendant in the divorce complaint and creditor-spouse in bankruptcy. The parties negotiated a property settlement. The court incorporated the stipulation into a divorce decree. The stipulation required the husband to make an equalizing payment to the wife. He did not. Instead, only one month after the divorce decree, the husband filed for bankruptcy. Though she entered her appearance as a creditor in bankruptcy court, the wife chose to seek a remedy in Vermont state court. She did not object to the discharge of the husband’s debt to her in bankruptcy court. Rather, she filed a Rule 60(b) motion for fraud and misrepresentation with the family court. Prior to the Rule 60(b) hearing, the husband successfully attained a discharge of the equalizing payment to wife in the bankruptcy case. Sandra’s slaughter was complete.
The trial court dismissed the wife’s 60(b) motion as barred by the husband’s discharge in bankruptcy. On appeal, the Vermont Supreme Court held that Title 11 U.S.C. § 523(c) provides that a creditor must pursue an exception from discharge for a debt based on fraud or deceit in the bankruptcy forum. Given that the wife failed to do so, the discharge of the equalizing payment granted by the bankruptcy court was “an injunction against the commencement or continuation of an action, the employment of process, or any act, to collect, recover or offset any such debt as a personal liability of the debtor, or from property of the debtor, whether or not discharge of such debt is waived . . . .” The court stated that an attempt to distinguish the reopening of the underlying judgment, pursuant to Rule 60(b), from enforcement of the discharged debt was “illusory.” The Vermont Supreme Court further held that res judicata barred the wife from re-litigating the claim; “[f]inal orders of a bankruptcy court are res judicata as to all matters that were or could have been litigated before that court.”
Though Fitzgerald was litigated in 1984, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) continues to enable a similar outcome in Chapter 13 filings. This Article aims to provide family law attorneys with a basic understanding of bankruptcy law so they might successfully negotiate and craft divorce stipulations which are not vulnerable to discharge in bankruptcy. This Article further strives to enumerate specific strategies to achieve that end.
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