Possible implications of CFTC v. Walsh for divorced couples in bankruptcy

Here at Shenwick & Associates, clients with a variety of marital statuses seek our bankruptcy counsel–single, married, in the process of divorce, filing individually or jointly. Each variation requires the analysis and creativity of sophisticated bankruptcy counsel to avoid potential pitfalls in the process.

On June 23, 2011, in CFTC v. Walsh, the New York State Court of Appeals ruled that a woman could keep proceeds from a divorce agreement, even though those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband. In February 2009, federal authorities arrested Stephen Walsh and his business partner Paul Greenwood. According to an article on the case in the New York Times, they were charged with defrauding investors of more than $550 million in a 13 year Ponzi scheme. Although the government did not accuse Ms. Schaberg (the wife of Mr. Walsh) of participating in a crime, they still sought to recover the money she received from her husband in her divorce settlement agreement.

The Court of Appeals ruled that ex-spouses have a reasonable expectation that once their marriage has been dissolved and their property divided, they will be free to move on with their lives. Ms. Schaberg's lawyer argued that once the couple had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds.

Similar principles may also apply in personal bankruptcy and buttress the argument that marital property divided by a divorcing couple, pursuant to a divorce decree in New York State, would not be subject to fraudulent conveyance or other "clawback" actions by a Bankruptcy Trustee if a spouse filed for chapter 7 bankruptcy after the divorce proceeding.

Accordingly, let's assume that a couple with two young children were having marital problems, the husband has substantial debts, cash and stock and the couple owns a house that has appreciated in value. The couple decides that as part of their divorce, the husband will deed the house to his wife and transfer a substantial amount of the stock and cash to his wife pursuant to the divorce decree for support and maintenance. The husband then waits three months and files for Chapter 7 bankruptcy to liquidate his debts and obtain a discharge.

Following the Court of Appeals' holding in CFTC v. Walsh, a Bankruptcy Trustee should not be able to challenge the transfer of the house and assets to his ex-wife, thereby making those assets non-exempt or unreachable by the husband's creditors or the Bankruptcy Trustee. Clients with questions regarding bankruptcy and divorce should contact Jim Shenwick.