Klass v. Klass

In Klass v. Klass, 377 Md. 13, 22, 831 A.2d 1067 (2003), a wife filed a complaint for limited divorce in April 1999, her husband filed a complaint for absolute divorce in September 2000, and a merits trial was set to commence on January 3, 2001. One week before trial, the husband filed a bankruptcy petition. The circuit court was notified of the bankruptcy petition and the trial was postponed. Nevertheless, the divorce case remained active. The parties attended status conferences, a guardian ad litem appointed for the children petitioned for attorneys' fees, discovery requests were propounded, and a new trial date was set. On April 9, 2001, the husband was granted a discharge by the Bankruptcy Court and the automatic stay was terminated. The merits trial commenced less than a month later. The husband did not attend. On June 29, 2001, the circuit court entered its divorce judgment resolving issues of custody, visitation, alimony, support, property distribution, and fees. The husband appealed, arguing, inter alia, that the circuit court had erred by "continuing the divorce litigation after the filing of his bankruptcy petition" and that this error had rendered the divorce judgment void. Id. at 18. In an unreported opinion, the Court disagreed, and affirmed the divorce judgment. The Court of Appeals granted a writ of certiorari and affirmed in part and reversed in part. As a threshold matter, the Court held that it has concurrent jurisdiction with the bankruptcy court to "determine the effect of the stay" on a case pending in a Maryland state court. Id. at 20. It opined that a "Maryland court has, and, indeed, must have, jurisdiction to determine, at least in the first instance, whether and how a matter properly pending before it is affected by a 362 stay." Id. Turning to the merits of the appeal, the Court explained that the divorce case was commenced before the stay took effect and the divorce judgment was entered after the stay had been terminated. That did not "resolve the issue, however, because the stay precludes the 'continuation' of a judicial proceeding against the debtor that was commenced prior to the filing of the petition." Id. at 21. The Court considered whether the continuation of the divorce case when the stay was in effect rendered the relief granted in the divorce judgment void. It pointed out that actions to establish or modify child support or alimony are explicitly excepted from the automatic stay, see section 362(b), and held that it would adopt the prevailing view among bankruptcy courts that the automatic stay does not bar a state court from proceeding to dissolve a marriage. See, e.g., In re Becker, 136 B.R. 113 (Bankr. D. N.J. 1992) (dissolution of a marriage may proceed during automatic stay). It thus determined that the aspects of the divorce judgment "fixing alimony and child support," awarding attorneys' fees to the wife and the guardian ad litem, dissolving the marriage, and establishing custody and visitation were not subject to attack because of any prior stay violation. Klass, 377 Md. at 24. The Court further held that the "remaining aspects of the judgment --the grant of a monetary award . . . the reduction of that award to judgment, the entry of a Qualified Domestic Relations Order directing a lump sum distribution to the wife from the husband's profit sharing plan . . . and the grant to the wife of use and possession of a jointly titled vehicle" -- were "subject to the stay." Id. at 29. The Court observed that there is "some debate as to whether actions taken in contravention of an automatic stay under 362(a) are absolutely void or merely voidable," but that the "prevailing sentiment among the Federal courts and Bankruptcy Courts is that such actions . . . are void ab initio." Id. It explained that those courts espousing the minority view, see, e.g., Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir.1989) (actions taken in violation of the automatic stay merely are voidable), reason that, because the bankruptcy court has the authority, under section 362(d) and (f), "to annul a stay retroactively, thereby effectively validating actions taken in violation of a stay," Congress must have intended that acts taken in violation of the stay be merely voidable. Klass, 377 Md. at 29-30. The Court emphasized, however, that leading authorities suggest that "the better approach is to view the annulment option 'as a means of avoiding the effect of the stay, rather than as an indication that acts taken in violation are voidable.'" Id. The Court declined to "weigh in" on the debate because the stay in the case before it had been terminated, not annulled. Id. at 30. It determined that a request for admission of facts propounded by the wife during the stay had been an "impermissible continuation of the proceeding" and, consequently, "deemed admissions" arising from the husband's failure to respond were void. Id. at 32. It followed that the trial court had erred in admitting the deemed admissions of fact into evidence at the divorce trial. Id. at 33. On this basis, the Court reversed "all aspects of the judgment" except the divorce, custody, visitation, alimony, child support and fee awards. Id. The Court of Appeals considered the scope of the automatic stay exceptions then in effect (in 2003) that pertained to family law proceedings. The husband had filed a Chapter 7 bankruptcy petition while his divorce case was pending in a Maryland state court. The court granted the parties an absolute divorce, ordered the husband to pay the fees of the children's attorney, and also ordered him to pay the wife's attorney's fees. The court entered judgments for the fee awards. The husband challenged those judgments on appeal on the ground that they were void because they were entered in violation of the automatic stay. The Court of Appeals prefaced its analysis by explaining that a state court has concurrent jurisdiction with the federal courts to determine whether and how a matter before the state court may be affected by the automatic stay provision in section 362(a). Under federal bankruptcy law, the "judgment entered in favor of the [children's lawyer] did no more than establish that component of child support; it was not subject to the stay." Klass, supra, 377 Md. at 27. In so concluding, the Court relied upon some federal cases interpreting section 362(b) and others interpreting section 523(a)(5)(A), which makes non-dischargeable a debt designated as alimony, maintenance, or support that is actually "in the nature of" alimony, maintenance, or support. The Court observed that it is the prevailing view among federal courts and bankruptcy courts that, under section 523, "judgments against a debtor for fees payable to a [lawyer for a minor child] in a divorce, custody, or child support case are in the nature of child support and are therefore not dischargeable[,]" but that the federal caselaw on the issue in the context of the section 362 automatic stay was "scant." 377 Md. at 25. The Court reasoned, however, that it makes sense to read the sections coterminously, so that when judgments are not dischargeable under section 523, because they are in the nature of child support, the proceedings that produce the judgments likewise are not precluded by the automatic stay, under section 362. "[T]he provisions in each [section] relating to child support rest on the same stated policy of not allowing debtors to use bankruptcy petitions to avoid legitimate marital and child support obligations." 377 Md. at 26. In addition, the Court observed, the language of section 362 is broader than that in section 523: section 362 covers proceedings for "alimony, maintenance, and support," while section 523 covers debts designated as alimony, maintenance, or support, so long as they are in fact in the nature of alimony, maintenance, and support. "Thus, if an order that is not precisely in the form of direct periodic monetary support for a child is regarded nonetheless as child support for purposes of 523, there is little reason not to regard it likewise for purposes of 362(b)." 377 Md. at 26.