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Award of Property Sale Proceeds Under the Divorce Decree is not Avoidable Because There Was No Transfer of Interest of the Debtor’s Property

West v. Christensen (In re Christensen), Nos. 11-30743, 13-02248, 2016 Bankr. LEXIS 3921 (U.S. Bankr. D. Utah Nov. 4, 2016)

Debtor Louis Christensen and the Defendant Marlese Christensen, the Debtor’s former wife, together purchased a martial home and spent money on landscaping and remodeling it. A few months later, the Debtor acquired title to the marital home and fraudulently got the documents signed from the Defendant. The Debtor misrepresented that the signatures would give the Defendant a right to ownership of the marital home. Additionally, the Debtor also fraudulently got other deeds signed from the Defendant which allowed the Debtor to get a line of credit from a bank for up to $120,000, using the Defendant’s other home as collateral. The Defendant learned about all these six months later and filed for divorce. The divorce court awarded each party one-half of its marital assets. The Defendant put the marital home up for sale and sold it for $290,000. The Defendant used his partial share of $120,000 to pay off the Debtor’s loan with a bank that encumbered her other home. The Debtor filed for bankruptcy and the Trustee filed a complaint against the Defendant to recover the transfer of $120,000 which she received after the sale of the marital home. The Trustee argued that the award of property sale proceeds under a divorce decree was an avoidable preference under §547 because the Defendant did not own the asset that was sold. The Defendant’s right to a share of the property settlement in the divorce was merely the claim of a creditor and not an award of property in which she had an ownership interest.
The Court concluded that the Trustee’s claims were barred by issue preclusion because the issue of ownership of the proceeds was decided by the state divorce court, which constituted a final judgment on the merits. The Court determined that the divorce court‘s property division found the marital home to be marital property, with each spouse owning a one-half interest. Thus, when the Defendant received her share of the proceeds from the sale of the marital home, there was no transfer of an interest of the debtor in property under §547(b) because the Defendant received her property. Thus, the threshold issue of a preferential transfer was not met and hence the alleged transfer was not avoidable. The Court held for the Defendant.