Paul Ruitenberg, III v.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 13-2175
________________
In re: PAUL RUITENBERG, III,
Debtor
THOMAS J. ORR, Chapter 7 Trustee
for Paul Ruitenberg,
Appellant
________________
Appeal from the United States Bankruptcy Court
for the District of New Jersey
(B.C. No. 10-48639)
Bankruptcy Judge: Honorable Raymond T. Lyons
________________
Argued November 20, 2013
Before: AMBRO, and SMITH, Circuit Judges
and O’CONNOR,* Associate Justice (Ret.)
*
Honorable Sandra Day O’Connor, Associate Justice (Ret.)
for the Supreme Court of the United States, sitting by
designation.
(Opinion filed March 13, 2014)
Graig P. Corveleyn, Esquire
Andrea Dobin, Esquire (Argued)
Trenk, DiPasquale, Della Fera & Sodono
427 Riverview Plaza
Trenton, NJ 08611
Counsel for Appellant
Erin J. Kennedy, Esquire (Argued)
Forman, Holt, Eliades & Youngman
80 Route 4 East, Suite 290
Paramus, NJ 07652
Counsel for Appellee
________________
OPINION OF THE COURT
________________
AMBRO, Circuit Judge
We decide whether Candace Ruitenberg’s interest in
an equitable share of marital property pending her divorce
from Paul Ruitenberg, III is a pre-petition “claim” against
Paul’s bankruptcy estate. The issue has divided Bankruptcy
Courts in our Circuit.
Paul filed for bankruptcy under Chapter 7 of the
Bankruptcy Code, and Thomas J. Orr was appointed as the
Trustee of the bankruptcy estate. Before that filing, Paul and
Candace were in divorce proceedings in New Jersey state
2
court. No final judgment of divorce existed when Paul filed
his bankruptcy petition nor was there a division of marital
assets. Based on an estimate of her expected share of marital
assets, Candace filed a timely proof of claim for $577,935
(the “Claim”) against Paul’s bankruptcy estate.1 (Candace
initially sought priority status for the Claim under 11 U.S.C.
§ 507(a)(1)(A) and (B), but later conceded that the Claim,
even if pre-petition, is not entitled to priority as a domestic
support obligation.)
Orr sought to expunge the Claim. He argued that
Candace’s interest in equitably dividing the marital property
in Paul’s bankruptcy estate was not a “claim” for purposes of
§ 101(5) of the Bankruptcy Code, 11 U.S.C. § 101(5),
because the New Jersey court had not entered a final divorce
decree before Paul filed for bankruptcy. Candace’s Chapter 7
Trustee, Barbara Edwards, opposed the motion to expunge.
She argued that Candace had a contingent claim for equitable
distribution of marital property, and that was a pre-petition
claim against Paul’s estate.
The parties’ briefs did not detail the marital property at
issue between Paul and Candace, nor why it mattered that the
Claim be classified as pre- or post-petition. In general, post-
petition claims for equitable distribution are not discharged.
In re Ruitenberg, 469 B.R. 203, 206 (Bankr. D.N.J. 2012)
(citations omitted). And, as acknowledged by the parties,
under the changes implemented by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005
(“BAPCPA”), Pub. L. No. 109-8, § 215(3), 119 Stat. 23
(2005), equitable distribution claims are nondischargeable in
Chapter 7. See 11 U.S.C. § 523(a)(15) (excepting from
1
Candace later filed her own Chapter 7 petition, and
disclosed the Claim as an asset of unknown value in her
estate.
3
discharge any liability on a claim “to a spouse [or] former
spouse . . . that is incurred by the debtor in the course of a
divorce or separation or in connection with a separation
agreement, divorce decree or other order of a court of
record”); see also Ruitenberg, 469 B.R. at 208; 4 Collier on
Bankruptcy (16th ed. Supp. 2013) ¶ 523.23 (“Section
523(a)(15) now provides, unqualifiedly, that a property
settlement obligation encompassed by section 523(a)(15) is
nondischargeable.”).
The record before the Bankruptcy Court and the
parties’ statements at oral argument shed some light on the
practical distinction between a pre- and a post- petition claim
in this case. Candace’s Claim was apparently premised on
her stake in a partnership that was legally titled in Paul’s
name and hence passed to his bankruptcy estate; it would
likely be distributed between Paul and Candace as shared
marital property in connection with any divorce decree. See
N.J. Stat. Ann. § 2A:34-23.1 (“It shall be a rebuttable
presumption that each party made a substantial financial or
nonfinancial contribution to the acquisition of income and
property [during the marriage].”). Thus, through the Claim
Candace sought her anticipated share of marital property that
was in the hands of Trustee Orr in Paul’s estate. If the Claim
is classified as pre-petition, Candace would share in any
distribution of the bankruptcy estate as a general unsecured
creditor. If, however, the Claim is deemed post-petition,
Candace will be left to collect on her interest outside of
bankruptcy with the fear that there will be less left after
Paul’s Chapter 7 liquidation for that Claim than if it shared in
his estate as a pre-petition claim.
Bankruptcy Judge Lyons denied Orr’s motion and
agreed with Edwards that, under more-current decisions of
our Court, “the pending claim for equitable distribution
against [Paul’s] bankruptcy estate arose prepetition and must
4
be allowed.” In re Ruitenberg, 469 B.R. at 204. Orr timely
appealed the Bankruptcy Court’s order, and the District Court
certified the case for direct appeal to our Court.
The Bankruptcy Court had jurisdiction under 28 U.S.C.
§ 157(b). We have jurisdiction over this direct appeal
pursuant to 28 U.S.C. § 158(d)(2)(A). We review the
Bankruptcy Court’s findings for clear error, and apply plenary
review to its conclusions of law. In re Handel, 570 F.3d 140,
141 (3d Cir. 2009). We note that Orr does not challenge any
of the factual findings of the Bankruptcy Court. Rather, the
parties agree that this appeal presents a pure question of law.
See Appellant’s Br. at 6; Appellee’s Br. at 1.
Deciding when an interest in the equitable distribution
of marital assets in a divorce proceeding becomes a claim
against the bankruptcy estate of one of the spouses begins
with what the Bankruptcy Code defines as a “claim.” It is in
relevant part a “right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured[.]” 11 U.S.C. § 101(5)(A).
Even if no final judgment of divorce existed for Candace and
Paul when he entered bankruptcy, her interest was, at the
least, unliquidated and contingent on a final decree
apportioning marital property, perhaps unmatured, and likely
disputed. But, no matter, it literally is a “claim” under
§ 101(5).2
2
A case cited by neither party—In re Skorich, 482 F.3d 21
(1st Cir. 2007)—deserves our recognition and comment. The
First Circuit Court held that a pre-petition order of a New
Hampshire Family Court transferring proceeds from the sale
of marital property to an escrow account was not a voidable
5
Our recent analysis of § 101(5) in JELD-WEN, Inc. v.
Van Brunt (In re Grossman’s), 607 F.3d 114 (3d Cir. 2010),
supports this view. There we dealt with whether an asbestos-
related tort action against a home improvement retailer arose
as a “claim” before the retailer’s bankruptcy filing. If so,
bankruptcy may discharge that claim even though the injury
arose (and thus the tort action accrued) after the bankruptcy
filing. Id. at 117. We noted that both Congress and the
Supreme Court have instructed that a “claim” under the
Bankruptcy Code be given the broadest possible definition.
Id. at 121 (citing H.R. Rep. No. 95-595, at 309 (1977) and
FCC v. NextWave Pers. Commc’ns Inc., 537 U.S 293, 302
(2003)). In the specific tort action at issue in Grossman’s, we
held that “a ‘claim’ arises when an individual is exposed pre-
preference under § 547 of the Bankruptcy Code with respect
to the bankruptcy estate of the husband. See id. at 27. In
reaching that result, the First Circuit concluded, among other
things, that the former wife did “not have a ‘claim’ against
the [former husband] as a ‘creditor’,” id. at 27, an element
needed to qualify as a preference. The rationale for that
statement was that the former wife’s “equitable interest in
marital property is not a ‘claim’ under [Code] section 101(5),
because it is neither a ‘right to payment’ (subsection (A)) nor
a ‘right to an equitable remedy for breach of performance’
(subsection (B)).” Id. at 25. Though a forceful argument
exists that a court granting to a spouse an equitable interest in
the cash proceeds of the sale of marital property is a right to
payment constituting a claim under § 101(5), Skorich dealt
with a state court placing marital property in escrow prior to
one spouse’s bankruptcy, and in any event the case concerned
whether that court-ordered transfer was a voidable preference.
Id. at 23-24. Our case involves neither an escrow nor a
preference claim.
6
petition to a product or other conduct giving rise to an injury,
which underlies a ‘right to payment’ under [§ 101(5)].” Id. at
125. In other words, a lawsuit based on conduct (or
exposure) that occurred before the bankruptcy filing yields a
pre-petition claim even though the cause of action did not
accrue until the injury manifested sometime after the
bankruptcy filing.
In Grossman’s we overruled an earlier test—known as
the “accrual test”—set out in Avellino & Bienes v. M.
Frenville Co. (In re Frenville), 744 F.2d 332 (3d Cir. 1984).
Under that test, a claim would not exist until a right to
payment arose (or accrued) under state law. Grossman’s, 607
F.3d at 119. After weighing criticisms of the test by our sister
circuits and commentators, we concluded that the accrual test
interpreted § 101(5)’s definition too narrowly because “a
‘claim’ can exist under the Code before a right to payment
exists under state law.” Id at 121. Specifically, the accrual
test “fail[ed] to give sufficient weight to the words modifying
[the ‘right to payment’]: ‘contingent,’ ‘unmatured,’ and
‘unliquidated.’” Id. Thus our holding in Grossman’s
expanded our Court’s interpretation of the definition of a
“claim” under § 101(5) of the Bankruptcy Code. Candace’s
interest in marital property falls well within this expanded
definition.
Orr argues that Grossman’s expansion of the definition
of a “claim” should be read narrowly to apply only to tort-
related claims and that we should continue to apply Frenville
and the accrual test in our case. He asserts that, per the
accrual test, Candace has a post-petition claim because under
New Jersey law “a spouse’s right to share in marital property
by virtue of equitable distribution arises when ‘a judgment of
divorce . . . is entered.’” Carr v. Carr, 576 A.2d 872, 875
(N.J. 1990) (quoting N.J. Stat. Ann. § 2A:34-23). Orr also
relies on two pre-Grossman’s bankruptcy cases that held that
7
claims based on equitable distribution in New Jersey do not
exist until a judgment of divorce is entered—In re Howell,
311 B.R. 173 (Bankr. D.N.J. 2004) (a case decided by Judge
Lyons), and In re Berlingeri, 246 B.R. 196 (Bankr. D.N.J.
2000). But contrary to Orr’s contention, both cases relied on
Frenville’s accrual test. See Howell, 311 B.R. at 176;
Berlingeri, 246 B.R. at 199. As explained by Judge Lyons,
Ruitenberg, 469 B.R. at 206-07, and as we explain below, the
accrual test was abandoned by Grossman’s even in this
context.
Although our Court’s formulation of the test in
Grossman’s was tailored to claims rooted in a common law
tort action, when we overruled Frenville we spoke more
broadly of the problems with the accrual test. As mentioned
above, Grossman’s points out that Congress sought to adopt
the “broadest possible definition” of the term “claim” in
§ 101(5), and we recognized that Frenville “impose[d] too
narrow an interpretation of a ‘claim’ under the Bankruptcy
Code.” 607 F.3d at 121 (emphasis in original). Ultimately,
we acknowledged in Grossman’s that the accrual test was not
consistent with the language of § 101(5), which includes even
a right to payment that is “contingent,” “unmatured,” or
“unliquidated.” Id. Thus, though the test in Grossman’s does
not directly apply to claims like Candace’s for equitable
distribution (because there is no obvious pre-petition product
or specific conduct at issue), the underlying rationale of the
case and the language of § 101(5) favor a broader rejection of
the Frenville accrual test.
Allowing Candace a pre-petition claim here also
comports with a related but distinct issue we recently decided:
whether a debtor who is pursuing equitable distribution of
marital property in a divorce proceeding must disclose that
interest in his or her own bankruptcy filing if a final judgment
of divorce is not yet entered. See In re Kane, 628 F.3d 631,
8
641 (3d Cir. 2010). We observed that the debtor, Ms. Kane,
“had an interest in an equitable distribution of marital
property—namely, by virtue of being married to Mr. Kane,
and by virtue of having initiated a divorce action in which she
was seeking equitable distribution . . . .” Id. (emphasis
omitted). Therefore, under the literal words of § 541(a)(1) of
the Bankruptcy Code (“[p]roperty of the estate” includes “all
legal or equitable interests of the debtor in property as of the
commencement of the case”), “Ms. Kane’s bankruptcy estate
included as an ‘equitable interest in property[]’ the possibility
that the [domestic relations court] would, at some point in the
future, award her equitable distribution of marital assets, or
that she and Mr. Kane would arrive at a property settlement
that transferred the legal title of marital assets to her.” Kane,
628 F.3d at 641 (emphases omitted). Thus we held that Ms.
Kane was required to disclose that interest in her bankruptcy
filing. Our result in the case before us, when combined with
the result in Kane, creates a symmetry under the Code that is
sensible: a debtor who has already begun divorce proceedings
must disclose any expected share of his or her marital
property as an asset of the estate under § 541, and,
conversely, a non-debtor spouse may file a pre-petition claim
against the estate based on his or her expected equitable share
of the marital property even if no final judgment of divorce
existed at the time of the bankruptcy filing.
In attempting to distinguish Kane, Orr places undue
weight on the particular language we used in characterizing
Ms. Kane as having an “interest” in the couple’s marital
property, but not a “right” to it. See Appellant’s Br. at 18
(citing Kane, 628 F.3d at 642). But, as noted, in Kane we
analyzed an entirely distinct section of the Code—“[p]roperty
of the estate” under § 541—that bears little similarity in
language or structure to the definition of a “claim” under
§ 101(5). Kane applies to Candace’s own bankruptcy—her
right to equitable distribution of marital assets is property of
9
her bankruptcy estate—and not to whether she has a claim to
marital property in the custody of Orr as Paul’s bankruptcy
Trustee.
We also reject Orr’s contention that allowing a pre-
petition claim in this case conflicts with New Jersey law and
thereby disregards the rule of Butner v. United States, 440
U.S. 48, 55 (1979). Even though a state court in New Jersey
may not order equitable distribution until a judgment of
divorce has been entered, see Carr, 576 A.2d at 875, courts in
the State recognize that certain rights to the marital property
arise even before an order is entered. See, e.g., id. at 878
(“[C]ognizable rights of spouses in marital property . . . arise
from the marital relationship in which, presumptively, both
parties contribute in varied ways to the creation, acquisition
and preservation of their familial property and, thereby,
secure a protectable interest to share, possess, and enjoy that
property.”); Vander Weert v. Vander Weert, 700 A.2d 894,
899 (N.J. App. Ct. 1997) (“[O]nce the divorce complaint is
filed, the marital estate is, not technically but in a practical
sense, in custodia legis . . . [and] significant equities in the
then-distributable marital estate are thereby created . . . .”).
Thus allowing a pre-petition claim follows New Jersey law
that Candace holds “a protectable interest to share” in the
couple’s marital property. Carr, 576 A.2d at 878. That
interest simply remains unliquidated and contingent until the
domestic relations court enters a final decree of divorce and
accompanying order for equitable distribution.
Finally, we note that, as a practical matter, allowing
Candace a pre-petition claim does not raise the type of due
process issue that concerned us in Grossman’s. See
Grossman’s, 607 F.3d at 126 (“Th[e] issue [of inadequate
notice] has arisen starkly in the situation presented by persons
with asbestos injuries that are not manifested until years or
even decades after exposure.”). At the time Paul filed for
10
Chapter 7 bankruptcy in December 2010, both he and
Candace were well aware that under New Jersey law Candace
would be entitled to some share of the marital property titled
in Paul’s name. Hence we have even less reason here to
withhold a pre-petition claim from Candace for any alleged
doubt of due process. Nor are we persuaded, as Orr contends,
that our holding will be “unwieldy” to apply. Filing for
divorce is the logical time when there should exist under the
Bankruptcy Code a “claim” based on equitable distribution of
marital property.
* * * * *
Although Candace did not have for her marital assets
an equitable distribution decree in hand at the time Paul filed
for bankruptcy, under Grossman’s “our focus should not be
on when the claim accrues . . . but whether a claim exists.” In
re Rodriguez, 629 F.3d 136, 142 (3d Cir. 2010) (citing
Grossman’s, 607 F.3d at 121). Given the Bankruptcy Code’s
expansive definition of a “claim,” we hold that a non-debtor
spouse has an allowable pre-petition claim against the
debtor’s bankruptcy estate for equitable distribution of marital
property when the parties are in divorce proceedings before
the bankruptcy petition is filed. “[T]he contingent nature of
the right to payment does not change the fact that the right to
payment exists . . . and thereby constitutes a ‘claim’ for
purposes of § 101(5).” Rodriguez, 629 F.3d at 142.
Accordingly, we affirm the well-reasoned decision of
Bankruptcy Judge Lyons overruling Orr’s objection and
allowing Candace’s Claim.
11