Sometimes the State Court Gets it Right!

Instead of delving into the actual facts of In re Marriage of Walker, I will use similar facts as they will be easier to understand. You can find the actual case here.

House is worth $350,000 with a $150,000 1st priority lien. In a divorce proceeding, a judge will order the sale of the property with proceeds split evenly. Assuming no cost of sale, taxes, etc., this would mean husband is paid $100,000 and wife is paid $100,000.

The result should not be different if there was an intervening bankruptcy, or should it!?

Prior to the divorce, the wife had file for Chapter 7 bankruptcy and obtained a discharge. Her argument was that the discharge extinguished her personal liability for the first priority lien. Assuming the 1st lien could not be enforced against her, the proceeds would then need to be divided as follows:

Sale at $350,000. $175,000 to Wife, $175,000 to Husband and Husband obligated to pay 1st lienholder $150,000. So the division would be $175,000 to Wife and $25,000 to Husband!

She is right you know, she is not personally liable for the 1st mortgage. The state court judge agreed and she was awarded the $175,000. Part of the judge’s reasoning was that enforcement of the 1st lien against Wife could be a violation of the discharge injunction.

Fortunately for the Husband, there was a guru at the appellate court level who recognized that even though the Wife was no longer personally liable for the debt, the real property was! Enforcement of this obligation then, was not against wife but against Wife’s interest in the encumbered community property asset; an obligation not discharged by the bankruptcy.

The Court of Appeals reversed the trial court and all is as it should be.