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Property DivisionEquitable Distribution Award Trumped By Bankruptcy Filing?

November 9, 2006

A wife, who was awarded all the marital assets in a divorce, lost her bid to take immediate possession of the assets because her husband filed for bankruptcy.   

The Second Circuit Court of Appeals in the case Musso v. Ostashko, ruled that even though the divorce trial court awarded the wife all of the marital assets, because the judgment of divorce was not entered until after the husband filed for bankruptcy, the assets were the property of the husband’s bankrupt estate. The wife would become an unsecured creditor of the husband’s bankrupt estate.

On October 23, 2003, the  trial court in the parties’ divorce  granted the wife equitable distribution and awarded her all of the parties’ property.  In December, the husband filed for bankruptcy. Sometime later, the judgment of divorce was docketed.

The Court found that it was the judgment of divorce which gave the wife the right to take possession of the marital property, not the decision after trial. Since  the judgment was not entered until after husband’s bankruptcy filing, the wife did not have an immediate right to the husband’s property. Therefore, the Wife’s claims would have to be resolved in the bankruptcy proceeding.

The Court signaled that the wife may have suffered only a temporary set-back.  It properly recognized that the husband abused the bankruptcy process and pointed out the t Bankruptcy Court, on remand, had the power to address any inequities resulting from this decision  “to see to it  that no injustice or unfairness is done. . ..”

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