In re: Roman A. Kostenko

Opinion

FILED

JUL 09 2015

1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK

2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AZ-14-1381-JuKiPa )

6 ROMAN A. KOSTENKO, ) Bk. No. 2:12-bk-02741-DPC )

7 Debtor. )

______________________________)

8 )

MARTHA S. KOSTENKO, )

9 )

Appellant, )

10 )

v. ) M E M O R A N D U M* 11 )

ROMAN A. KOSTENKO; ERIC M. )

12 HALEY, Chapter 7 Trustee, )

)

13 Appellees. )

______________________________)

14 Submitted on June 19, 2015 15 at Phoenix, Arizona 16 Filed - July 9, 2015 17 Appeal from the United States Bankruptcy Court for the District of Arizona 18 Honorable Daniel P. Collins, Chief Bankruptcy Judge, Presiding 19 _________________________ 20 Appearances: Jody A. Corrales of DeConcini McDonald Yetwin & Lacy, P.C. argued for appellant Martha S.

21 Kostenko; Claudio E. Iannitelli of Cheifetz Iannitelli Marcolini PC argued for appellee Roman 22 A. Kostenko; Stuart Bradley Rodgers of Lane & Nach PC argued for appellee Eric M. Haley, 23 chapter 7 trustee.

_________________________

24 Before: JURY, KIRSCHER, and PAPPAS, Bankruptcy Judges.

25 26 * This disposition is not appropriate for publication.

27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1.

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1 Appellant Martha S. Kostenko (Ms. Kostenko) is the former 2 wife of chapter 71 debtor Roman A. Kostenko (Debtor). After 3 Debtor received his § 727 discharge, but before the bankruptcy 4 case was fully administered and closed, the state court 5 conducted a trial and entered a judgment/decree (Divorce Decree) 6 dissolving the parties’ marriage and dividing the community 7 property and debt.2 Located under the heading “Division of 8 Property and Debts,” and within a series of paragraphs 9 apportioning responsibility for various marital debt, was a hold 10 harmless provision. In dividing the property, the state court 11 determined that an unequal division of community property was 12 appropriate “to achieve equity.” As a result, the state court 13 ordered Debtor to reimburse Ms. Kostenko one-half of a 2011 tax 14 refund and pay her a portion of the proceeds from the 15 liquidation of rental properties (Rentals), both of which were 16 included in Debtor’s estate under § 541(a)(2). 17 After the state court issued the Divorce Decree, 18 Ms. Kostenko filed an amended proof of claim (Amended POC) in 19 the bankruptcy case asserting claims for her share of the 2011 20 tax refund and proceeds from the Rentals. Debtor objected to 21 the Amended POC and filed a motion to enforce the discharge 22 injunction (Enforcement Motion), claiming that the state court 23 imposed obligations on him for marital debt which was 24 1 Unless otherwise indicated, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 and 26 “Rule” references are to the Federal Rules of Bankruptcy Procedure. 27 2 The Divorce Decree also addressed support and other issues 28 not relevant to this appeal.

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1 discharged. 2 The bankruptcy court sustained Debtor’s objection to the 3 Amended POC and granted Debtor’s Enforcement Motion. The court 4 found that (1) the state court did not have jurisdiction to 5 divide the community property which was property of the estate; 6 (2) the division of community debt related to prepetition 7 liabilities that were discharged in the bankruptcy case; and 8 (3) Ms. Kostenko did not have a claim but only an equity 9 interest in the community property, which had become property of 10 Debtor’s estate. In the end, the court found that the 11 provisions in the Divorce Decree relating to the division of 12 property and debt were null and void. 13 Ms. Kostenko appeals from the orders sustaining Debtor’s 14 objection to her Amended POC and granting his Enforcement 15 Motion. For the reasons explained below, we AFFIRM the 16 bankruptcy court’s order on the Amended POC and AFFIRM in part 17 and VACATE in part the order granting Debtor’s Enforcement 18 Motion. 19 I. FACTS 20 On February 15, 2012, Debtor, a family law attorney, filed 21 a chapter 13 petition. At the time, Debtor and Ms. Kostenko 22 were parties to a divorce action (Divorce Proceeding). As of 23 the filing date, the state court had not divided the community 24 property or debt. 25 Community assets consisted of real and personal property 26 valued at approximately $455,000, with community secured and 27 unsecured liabilities of $580,000. The primary assets included 28 the marital residence and three single-family Rentals, all

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1 titled solely in Debtor’s name, and listed in Debtor’s 2 Schedule A. Most of the liabilities listed in Debtor’s 3 schedules were community liabilities with the exception of his 4 student loans in the amount of $14,590, two court reporting fees 5 totaling $1,361.95, and child support owed in the amount of 6 $700. Among the listed community debts, Debtor included a Citi 7 credit card and a Bank of America World Points (World Points) 8 credit card that were issued in Ms. Kostenko’s name. In 9 Schedule F, Debtor listed Ms. Kostenko as an unsecured creditor 10 with a claim in an unknown amount due to the pending divorce. 11 Debtor also listed the divorce proceeding as pending in his 12 Statement of Financial Affairs. 13 Debtor filed a chapter 13 plan which sought to retain 14 ownership of the Rentals. Ms. Kostenko objected to confirmation 15 of the plan, contending that the plan was not proposed in good 16 faith, but instead for the improper purpose of avoiding Debtor’s 17 priority domestic support obligations. 18 On May 11, 2012, the chapter 13 trustee issued an 19 Evaluation and Recommendation Report (Recommendation Report) 20 giving notice of the potential dismissal of Debtor’s case if 21 certain conditions were not satisfied. One such condition 22 required Debtor to turn over all tax refunds to the trustee for 23 2011 and subsequent years as supplemental plan payments. In 24 July 2012, Debtor turned over the 2011 tax refund to the 25 trustee. 26 In October 2012, Ms. Kostenko filed a motion for relief 27 from the automatic stay to allow the parties to proceed with the 28 dissolution of marriage. Debtor objected to the motion insofar

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1 as she sought relief from the stay for the division of community 2 property. 3 In December 2012, Ms. Kostenko filed an emergency motion to 4 dismiss Debtor’s case, arguing that his plan was not proposed in 5 good faith but for the improper purpose of avoiding Debtor’s 6 unsecured domestic support obligations. Ms. Kostenko also 7 complained that Debtor failed to disclose or divide the parties’ 8 2011 tax refund which Debtor had received. 9 The bankruptcy court heard Ms. Kostenko’s motion for relief 10 from the stay, her motion to dismiss, and Debtor’s plan 11 confirmation at the same time. The court subsequently entered 12 an order finding that Debtor had failed to comply with the 13 trustee’s Recommendation Report, failed to make timely plan 14 payments, and failed to remain current on his domestic support 15 orders. As a result, the bankruptcy court converted Debtor’s 16 case to chapter 7. The order further granted Ms. Kostenko 17 limited relief from stay to proceed with the dissolution, but 18 stated that the division of property and debts would remain 19 under the jurisdiction of the bankruptcy court. 20 Eric H. Haley was appointed the chapter 7 trustee 21 (Trustee). 22 In late January 2013, Ms. Kostenko filed a motion to compel 23 Trustee to abandon to her one-half of the 2011 tax refund. 24 Ms. Kostenko maintained for various reasons that her portion of 25 the income tax refund should not belong to Debtor’s bankruptcy 26 estate. Trustee objected, arguing that the full tax refund was 27 property of the estate under § 541 and that Debtor had a duty to 28 remit the refund to him under § 542. The bankruptcy court

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1 denied Ms. Kostenko’s motion. 2 In February 2013, Trustee filed a motion to sell the 3 Rentals free and clear of liens, which the bankruptcy court 4 granted. The properties were sold in July 2013, with net 5 proceeds exceeding $108,000. 6 In early March 2013, Ms. Kostenko filed another motion to 7 dismiss Debtor’s case, again arguing that he had filed the 8 bankruptcy case in bad faith. Ms. Kostenko asserted that Debtor 9 was using the bankruptcy system as a way to avoid an unfavorable 10 ruling by the state court regarding the division of the marital 11 property. Trustee argued in opposition that he expected a 12 substantial distribution to creditors and thus dismissal of the 13 case, which had been pending for over a year, would cause 14 prejudice to creditors who had filed claims and those who had 15 yet to file claims. Trustee also noted that Debtor had been 16 cooperative in the administration of the estate thus far. In 17 reply, Ms. Kostenko again asserted Debtor had filed the 18 bankruptcy case in bad faith and argued that she never consented 19 to the bankruptcy court retaining jurisdiction over the division 20 of assets. Ms. Kostenko requested dismissal of the case or, in 21 the alternative, requested the bankruptcy court to abstain 22 regarding the division of assets and debts and to remand those 23 issues to the state court to determine. 24 On April 11, 2013, Trustee filed a notice of trustee’s 25 intent to abandon all personal property listed on Debtor’s 26 schedules, but specified that the estate was retaining all 27 interests in the 2011 income tax refund, real property and 28 Debtor’s law practice.

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1 Meanwhile, Ms. Kostenko filed a claim of homestead 2 exemption against the marital property. Trustee objected to the 3 homestead on the ground that Ms. Kostenko had no interest in the 4 property. 5 In late April 2013, Debtor filed a notice claiming a 6 homestead exemption in the marital residence and explaining that 7 he did not previously claim the exemption because he and his 8 counsel erroneously believed he was not eligible for the 9 exemption because as of the Petition Date he did not reside in 10 the marital residence. Debtor filed an amended Schedule C 11 listing the homestead exemption. Debtor also objected to 12 Ms. Kostenko’s claim of homestead exemption against the 13 property. Debtor asserted that she had no legal right to claim 14 the exemption because she had executed a disclaimer deed whereby 15 she disclaimed any interest in the property. 16 Ms. Kostenko responded by arguing Debtor was ineligible to 17 assert the homestead exemption because he did not occupy the 18 property on the petition date. As a result, Ms. Kostenko 19 asserted that only she could claim the exemption in the entire 20 property. Ms. Kostenko also noted that she and Trustee were 21 negotiating a settlement that would resolve her motion to 22 dismiss and Trustee’s objection to her claimed homestead. 23 Thereafter, Trustee filed a motion to continue the hearing 24 on Ms. Kostenko’s motion to dismiss and his objection to her 25 claimed homestead exemption since the settlement negotiations 26 were ongoing. Debtor opposed the continuance, arguing that 27 neither Trustee nor Ms. Kostenko had any right to enter into a 28 settlement regarding exempt property in which he asserted

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1 rights. 2 Trustee then filed an application seeking approval of his 3 settlement with Ms. Kostenko. Pursuant to the agreement, 4 Ms. Kostenko would withdraw her motion to dismiss with prejudice 5 and, in return, Trustee would deliver to her a trustee’s deed 6 transferring the estate’s interest in the marital residence 7 subject to all interests, liens and encumbrances. Debtor 8 opposed the settlement to the extent Trustee awarded any portion 9 of the homestead exemption to either Ms. Kostenko or Debtor. 10 In response, Trustee amended his application stating that 11 he did not take a position as to who was entitled to claim a 12 homestead exemption on the property and that the bankruptcy 13 court should determine that issue. Trustee also confirmed that 14 when she entered into the settlement agreement Ms. Kostenko was 15 under the impression that she would be taking the interest of 16 the estate in the marital residence free of Debtor’s claim of 17 homestead. 18 On August 8, 2013, the bankruptcy court entered an order 19 granting Trustee’s amended application to settle with 20 Ms. Kostenko pursuant to the following terms: her motion to 21 dismiss would be dismissed with prejudice; Trustee would 22 withdraw his objection to her notice of homestead; Trustee would 23 transfer the estate’s interest in the marital residence to 24 Ms. Kostenko subject to the parties’ interest in the applicable 25 statutory homestead exemption of $150,000; and Trustee would 26 abandon the estate’s interest in Debtor’s law practice. 27 Meanwhile, Ms. Kostenko filed a motion again requesting the 28 bankruptcy court to abstain from presiding over the division and

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1 disposition of the marital residence and also from making any 2 decisions about the homestead exemption. Debtor opposed, 3 arguing that the court had expressly retained exclusive 4 jurisdiction over the division of property without objection 5 from Ms. Kostenko and thus the court should determine which of 6 the parties was entitled to claim the exemption. In reply, 7 Ms. Kostenko asserted that by virtue of Trustee’s settlement 8 agreement with her, the marital residence was no longer property 9 of Debtor’s estate and Trustee had disclaimed any interest in 10 the parties’ competing claims to the homestead exemption. 11 Therefore, according to Ms. Kostenko, the determination of who 12 was entitled to the homestead exemption was moot since the 13 property was no longer property of the estate and thus no longer 14 subject to liquidation by Trustee. 15 On September 26, 2013, the bankruptcy court entered an 16 order on Ms. Kostenko’s abstention motion, finding that the 17 $150,000 homestead exemption relating to the marital property 18 belonged both to her and Debtor as a community property asset. 19 The order further stated: “The state court will determine how 20 to equalize the exemption with all other community property 21 assets and liabilities, pursuant to applicable community 22 property laws, for the reasons stated on the record.”3 Finally, 23 the court found that the equity in the marital residence over 24 and beyond the $150,000 homestead exemption belonged to 25 3 26 There is no transcript of this hearing in the record but this statement in the court’s order seems to indicate that the 27 bankruptcy court thought the state court would divide the property and debt by requiring Debtor to make some sort of 28 equalization payment.

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1 Ms. Kostenko as her sole and separate property. 2 In November 2013, the parties entered into a binding 3 settlement agreement to sell the marital residence and equally 4 divide the net proceeds of the sale. 5 On November 25, 2013, Debtor received his discharge. 6 The parties subsequently returned to the state court to 7 complete their dissolution proceedings. In connection with the 8 upcoming divorce trial, Debtor and Ms. Kostenko filed their 9 Joint Pretrial Statement on January 24, 2014. There, 10 Ms. Kostenko requested the state court to order Debtor to 11 reimburse her for one-half of the 2011 tax refund. Ms. Kostenko 12 also sought $33,500 from the proceeds obtained through the sale 13 of the Rentals. This amount was one-half of the proceeds that 14 remained after the secured community debts were paid on the 15 Rentals through Debtor’s bankruptcy case. Ms. Kostenko 16 maintained that this amount should come out of Debtor’s equity 17 in the marital residence. She also asserted that two community 18 debts remained - the Citi credit card with a balance $3,989.15 19 and the World Points credit card with a balance of $12,038.17. 20 Ms. Kostenko proposed that these balances be paid out of the 21 proceeds from the sale of the marital home.4 22 On January 30, 2014, the state court held a trial. 23 On March 12, 2014, the state court issued the Divorce 24 Decree dissolving the marriage and addressing, among other 25 things, the 2011 tax refund, the proceeds from the Rentals, and 26 27 4 The marital home was no longer property of the estate 28 pursuant to Ms. Kostenko’s settlement with Trustee.

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1 the allocation of liability for community debt. The state court 2 first found that under Arizona law, an unequal division of 3 community property was appropriate to achieve equity. 4 Accordingly, the state court ordered Debtor to reimburse 5 Ms. Kostenko for her one-half share of the 2011 tax refund. 6 Concerning the Rentals, the state court stated there was some 7 question whether the bankruptcy court had continuing 8 jurisdiction over the parties’ finances and therefore it ordered 9 the parties to file an update with the court no later than 10 April 1, 2014. However, the state court noted that Ms. Kostenko 11 was requesting payment for her interest in the Rentals after the 12 payment of secured community debt. 13 Under the heading “Debts,” the state court ordered that if 14 the Citi and World Points credit cards debt was not discharged 15 in Debtor’s bankruptcy, those debts should be divided equally. 16 In addition, the decree provided that “Father shall be solely 17 responsible for any credit card or debt in his name incurred 18 after service of the Complaint” and that “[a]ny community debts 19 that were not identified at the time of the trial shall be 20 divided equally between the parties.” Finally, the decree 21 stated: “Each party shall indemnify and hold harmless from any 22 and all debts designated as the responsibility of that party by 23 the terms set forth in this Decree.”5 24 On April 30, 2014, the marital property was sold. 25 26 5 While Ms. Kostenko asked the state court to make orders 27 that related to Debtor’s half of the exempt marital property, which was no longer property of his estate, that is not what the 28 state court did.

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1 On April 28, 2014, Ms. Kostenko filed an Amended POC. The 2 Amended POC asserted a claim for the sum of $63,907.70 which was 3 comprised of claims for $52,515.94 (50% community interest in 4 the equity from the Rentals), $3,211 (50% community interest in 5 the 2011 tax refund), and the prior claim for unpaid child 6 support in the amount of $8,180.76. Ms. Kostenko asserted that 7 the $8,180.76 amount was a claim based on a “domestic support 8 obligation” entitled to priority under § 507(a)(1)(A) or (B). 9 Attached to the Amended POC was the Third Circuit’s 10 decision in In re Ruitenberg, 745 F.3d 647 (3d Cir. 2014). 11 There, the Third Circuit held the chapter 7 Debtor’s estranged 12 wife had an allowed prepetition claim against the estate based 13 upon her interest in the equitable distribution of marital 14 assets in divorce proceedings that were pending when the Debtor 15 filed his bankruptcy petition, even though the final judgment of 16 divorce had not yet been entered. According to the Third 17 Circuit, the wife’s interest was unliquidated and contingent 18 upon a final decree apportioning the marital property and thus 19 “clearly” was a claim within the scope of § 101(5)(A). 20 Debtor filed an objection to and motion to expunge 21 Ms. Kostenko’s Amended POC. Debtor argued that the Amended POC 22 was yet another attempt by Ms. Kostenko to circumvent the 23 bankruptcy court’s reserved jurisdiction over division of 24 property and debt and to seize for herself any surplus equity 25 that Trustee may have left for distribution to Debtor, after all 26 of the creditors were paid. Debtor further asserted that the 27 bankruptcy estate held the full interest in the Rentals and 2011 28 tax refund under § 541(a)(2). Finally, Debtor maintained that

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1 the Ruitenberg case was inapplicable because it applied 2 New Jersey law, a non-community property jurisdiction. Debtor 3 asserted that no case had applied § 541(a)(2), which brings the 4 community property interests into the bankruptcy estate, in a 5 non-community law jurisdiction. 6 Trustee joined in Debtor’s objection to Ms. Kostenko’s 7 Amended POC and her reliance on Ruitenberg. 8 In light of the state court’s rulings, Debtor also filed 9 the Enforcement Motion seeking to have the bankruptcy court 10 enforce the discharge injunction. Debtor maintained that the 11 hold harmless debt was a prepetition debt subject to his 12 discharge under the holding in Heilman v. Heilman 13 (In re Heilman), 430 B.R. 213 (9th Cir. BAP 2010). Debtor also 14 complained that the state court’s order requiring him to 15 reimburse Ms. Kostenko for one-half of the 2011 tax refund and 16 proceeds from the Rentals violated the discharge injunction. 17 In response to the motion, Ms. Kostenko argued that the 18 holding in Heilman was inapplicable because in that case the 19 Debtor filed for bankruptcy and obtained his discharge before 20 the divorce proceeding was initiated. In contrast, Debtor filed 21 the divorce proceeding prior to filing his petition and thus 22 Debtor cannot skirt his domestic support obligations to 23 Ms. Kostenko and hide behind his bankruptcy filing. 24 Ms. Kostenko further argued that the state court orders 25 allocating community property that was liquidated in the 26 bankruptcy court was not void and that the debts arising out of 27 the Divorce Decree were nondischargeable under § 523(a)(5) or 28 (15).

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1 The bankruptcy court heard the Enforcement Motion and 2 Debtor’s objection to and motion to expunge Ms. Kostenko’s 3 Amended POC on June 30, 2014. After hearing argument, the court 4 ruled: 5 I think that -- and I’m going to order that the motion of the Debtor is granted with respect to the credit 6 cards. The state court in the March 12, 2014[]

dissolution order says that the father shall be solely 7 responsible for any credit card or debt in his name incurred after the service of the complaint. That is 8 a time period prior to the bankruptcy. So if he incurs some debts post divorce proceeding but 9 pre-bankruptcy, I don't think the state court can hold him liable for that because he has a discharge for all 10 of those debts that he incurred post dissolution filing and pre-bankruptcy.

11 The [state] court goes on to say that any community 12 debts that were not identified at the time of the trial should be divided equally between the parties.

13 Again, to the extent that there are credit card debts like the Citi card and the WorldsPoint (sic) credit 14 card which were admittedly incurred pre-divorce, pre-bankruptcy, and as community obligations, albeit 15 incurred by Mrs. Kostenko, those obligations were discharged in the bankruptcy of Mr. Kostenko relative 16 to him and to the community, albeit not as to Mrs. Kostenko.

17 The [state] court goes on to say that the Debtor 18 should ensure that the mother's name is removed from all credit card accounts assigned to him and vice 19 versa. I don't think that there's bankruptcy stay implications relative to that.

20 And the [state] court goes on then to say that each 21 party shall indemnify and hold harmless from any and all debts designated as the responsibility of the 22 other party. I understand that’s standard domestic relations language. But it just simply can’t be the 23 case that to the extent Mrs. Kostenko gets stuck with liabilities that were discharged in the bankruptcy 24 that were community liabilities, I don't think that the state court can then hold Mr. Kostenko liable on 25 an indemnity for those obligations. He got a discharge and we can’t have the state court after the 26 fact -- after the fact of the discharge, that is, then start loading personal liability on him for such 27 things as this indemnity or hold harmless. 28 The tax refund I think everybody agrees is fully

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1 property of the estate. And the state court is not the party to decide -- or is not the jurisdiction to 2 decide where the tax refund goes. That’s property of the estate. The Trustee has control of that and is 3 going to be paying out those tax refunds according to what the Bankruptcy Court is calling for. Which, by 4 the way, there will be a priority claim for the Debtor for the amount -- I think it's an agreed-upon amount 5 of 5,485.57. That is the very first priority level.

And so the Debtor -- or I should say the Debtor's 6 ex-wife will get that straight off the top after administrative claims are covered for the 7 administration of this case. 8 So then with respect to the rental properties, I really think that what we have is described in the 9 Petersen[, 437 B.R. 858 (D. Ariz. 2010)] case. And that while Mrs. Kostenko may have an interest in these 10 properties as properties of the community, all community property comes into this bankruptcy. All 11 community liabilities and allowed claims against this estate get paid from that before Mrs. Kostenko ever 12 would see anything from this bankruptcy estate. And if it's going to be a shortfall -- and it certainly 13 sounds like everybody believes there will be a shortfall -- she's not going to have an equity 14 position. And that's all she ever had in these rental properties is an equity position. It didn't exist 15 prepetition and doesn't exist now. And so to the extent that the state court was calling for 16 Mr. Kostenko to pay an equalization or in some other way have an obligation to Mrs. Kostenko relative to 17 these rental properties, I think the state court has overstepped the bounds there.

18 . . . .

19 So with that -- and I guess I should also say that I 20 really don't believe I'm bound by the Third Circuit decision. It comes from New Jersey where we don't 21 have community property laws in effect there. I think it's just a completely different animal. And again, I 22 think the tieback to this case -- yes, Mrs. Kostenko has an interest in community assets which belong to 23 this bankruptcy estate. But that interest is really an equity position, not off the top before creditors 24 get their share of what they're entitled to in this matter.

25 26 On July 17, 2014, the bankruptcy court entered the order 27 granting Debtor’s Enforcement Motion. On the same date, the 28 bankruptcy court entered the order sustaining Debtor’s objection

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1 to and motion to expunge Ms. Kostenko’s Amended POC. 2 On July 31, 2014, Ms. Kostenko filed a timely notice of 3 appeal from both orders. On September 26, 2014, a one-judge 4 order was issued permitting Ms. Kostenko to appeal both the 5 orders in a single appeal. On October 7, 2014, a one-judge 6 order authorized Trustee to be added as an appellee by 7 stipulation of the parties. 8 II. JURISDICTION 9 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 10 §§ 1334 and 157(b)(2)(A) and (B). We have jurisdiction under 11 28 U.S.C. § 158. 12 III. ISSUES 13 A. Whether the bankruptcy court erred by sustaining 14 Debtor’s objection to Ms. Kostenko’s Amended POC and by 15 expunging it; and 16 B. Whether the bankruptcy court erred by finding that the 17 discharge injunction applied to the obligations imposed on 18 Debtor under the division of property provisions in the Divorce 19 Decree. 20 IV. STANDARDS OF REVIEW 21 We review a bankruptcy court’s legal conclusions, including 22 its interpretation of the Bankruptcy Code and state law, de 23 novo. In re Heilman, 430 B.R. at 216. 24 We review the bankruptcy court’s order expunging 25 Ms. Kostenko’s Amended POC de novo. Cont’l Ins. Co. v. Thorpe 26 Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 27 1020 (9th Cir. 2012). 28 The bankruptcy court’s finding that a violation of the

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1 § 524 discharge injunction has occurred is reviewed for clear 2 error. Sciarrino v. Mendoza, 201 B.R. 541, 543 (E.D. Cal 1996). 3 A finding is clearly erroneous if it is illogical, implausible, 4 or without support in the record. United States v. Hinkson, 5 585 F.3d 1247, 1262 (9th Cir. 2009)(en banc). 6 V. DISCUSSION 7 Ms. Kostenko concedes that under § 541(a)(2)6, all 8 community property not yet divided by the state court at the 9 time of Debtor’s bankruptcy filing is property of his estate, 10 subject to administration by the trustee and payment to 11 creditors. See Birdsell v. Petersen (In re Petersen), 437 B.R. 12 858, 867 (D. Ariz. 2010) (analyzing Arizona statutory law and 13 finding that none of the statutes took the community property 14 outside the ambit of the bankruptcy estate under § 541(a)(2)). 15 It follows that proceeds from the sale of the community property 16 during the bankruptcy case are also considered property of the 17 18 6 Section 541(a) provides in part:

19 The commencement of a case under . . . this title 20 creates an estate. Such estate is comprised of all of the following property, wherever located:

21 (2) All interests of the debtor and the debtor's spouse 22 in community property as of the commencement of the 23 case that is —

24 (A) under the sole, equal or joint management and control of the debtor; or 25 26 (B) liable for an allowable claim against the debtor, or for both an allowable claim 27 against the debtor and an allowable claim against the debtor's spouse, to the extent 28 that such interest is so liable.

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1 estate under §§ 541(a)(2) and (6). Non-exempt community 2 property is available to pay community debts according to the 3 priority scheme set forth in § 726(c)(2). 4 The bankruptcy court has exclusive jurisdiction over 5 property of the estate, including community property. 28 U.S.C. 6 § 1334(e)(1); § 541(a)(2). This exclusively is so even when 7 there is a concurrent dissolution proceeding in state court. 8 See Teel v. Teel (In re Teel), 34 B.R. 762, 763–64 (9th Cir. BAP 9 1983). Here, the bankruptcy court indisputably retained control 10 over the estate community property and its disbursement to 11 creditors under both its order granting Ms. Kostenko limited 12 relief from the stay to proceed with the dissolution proceeding 13 in the state court without a division of property and debt and 14 the supremacy clause, Aticle VI, Clause 2, of the U.S. 15 Constitution. See Id. at 764. The state court was thus 16 precluded from dividing the non-exempt community property and 17 debt before Debtor’s case was closed. Accordingly, the 18 bankruptcy court properly found the property division provisions 19 under the Divorce Decree were null and void and ineffective. 20 Because Ms. Kostenko’s claims in the Amended POC were based 21 solely on the property division provisions, the bankruptcy court 22 did not err in sustaining Debtor’s objection to Ms. Kostenko’s 23 Amended POC.7 24 25 7 There is no dispute that Ms. Kostenko’s priority claim 26 asserted in the Amended POC was proper. Under § 727(c)(2)(B), if State law allows for community property to be liable for separate 27 debts, then community property would be available in bankruptcy for those same debts. In re Merlino, 62 B.R. 836, 840 (Bankr. 28 (continued...)

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1 Debtor’s Enforcement Motion called into question the scope 2 of Debtor’s discharge with respect to the state court’s division 3 of community debt. The discharge under § 727(a) discharges the 4 Debtor from all debts that arise prior to the commencement of 5 the case. The discharge “voids any judgment at any time 6 obtained, to the extent that such judgment is a determination of 7 the personal liability of the Debtor with respect to any debt 8 discharged under section 727. . . .” § 524(a)(1). The 9 discharge also “operates as an injunction against the 10 commencement or continuation of an action, . . . to collect 11 . . . any such debt as a personal liability of the Debtor 12 . . . .” § 524(a)(2). 13 The bankruptcy court’s order granting the Enforcement 14 Motion provides: 15 1. The Debtor’s Motion for (1) Enforcement of Discharge Injunction –and- (2) To Declare Null and 16 Void Portions of Superior Court Order in Violation of Discharge Injunction is hereby GRANTED.

17 2. The orders of the State Court referenced above as 18 paragraphs (a) through (e) are hereby declared null and void and of no effect.8 19 20 7 (...continued)

21 W.D. Wash. 1986). Under Arizona law, community property is not 22 liable for either spouse’s separate debts, except in those situations involving the value of one spouse's contribution to 23 the community property. See Ariz. Rev. Stat. § 25-215(B).

Therefore, community property is not available to pay 24 Ms. Kostenko’s support claims. 25 8 These provisions stated:

26 (a) that Ms. Kostenko’s community debts (Citi Card 27 ($2,860.50) and World Points Credit Card ($8,900.00))

shall be divided equally between Ms. Kostenko and the 28 (continued...)

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1 3. The State Court has no jurisdiction to impose personal liability on the Debtor for discharged debts 2 following the Debtor’s discharge. 3 It is undisputed that Debtor obtained his chapter 7 4 discharge and that this discharge enjoins collection of 5 prepetition claims against him, as noted above. Therefore, the 6 state court did not have jurisdiction to divide the property and 7 debt and the related provisions in the Divorce Decree are null 8 and void. Thus, the bankruptcy court’s order under paragraphs 9 one and two was correct. 10 The third paragraph in the enforcement order is in the 11 nature of prospective declaratory relief. Generally, 12 “[d]eterminations regarding the scope of the discharge require a 13 declaratory judgment obtained in an adversary proceeding.” 14 In re Munoz, 287 B.R. 546, 551 (9th Cir. BAP 2002) (citing 15 Rule 7001(9)). In Munoz, the Panel found that “[i]t is error to 16 circumvent the requirement of an adversary proceeding by using a 17 ‘contested matter’ motion under [Rule] 9014.” Id. Accordingly, 18

8

19 (...continued)

Debtor;

20 (b) that any community debts that were not identified 21 at the time of the trial shall be divided equally between Ms. Kostenko and the Debtor;

22 23 (c) that each party shall indemnify and hold harmless from any and all debts designated as the responsibility 24 of that party by the terms set forth in this Decree; 25 (d) that the Debtor shall reimburse Ms. Kostenko for 26 one half share of the parties’ 2011 tax refund;

27 (e) that the Debtor shall reimburse Ms. Kostenko for one half share of equity of the parties’ rental 28 properties that is part of the bankruptcy estate.

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1 while we affirm the bankruptcy court’s decision that the debt 2 division provisions in the Divorce Decree are null and void, we 3 vacate paragraph three which provides prospective declaratory 4 relief to Debtor on the scope of the discharge injunction. 5 To be clear, our conclusions on appeal do not “terminate 6 the matter of division and distribution of property as between 7 the divorcing spouses. Jurisdiction over the division and 8 distribution of the parties’ property as between themselves 9 pursuant to the divorce returns to the state court” once the 10 bankruptcy case is closed. Shulkin Hutton Inc. v. Treiger 11 (In re Owens), 2007 WL 7540999, at *6 (9th Cir. BAP June 25, 12 2007) (J. Klein concurring) (citing In re Teel, 34 B.R. at 764); 13 see also In re Herter, 457 B.R. 455 (Bankr. D. Idaho 2011), 14 aff’d, 2013 WL 588145, at *3 (D. Idaho Feb. 13, 2013) (noting 15 that it was not until the Debtor’s bankruptcy case was closed 16 that the state court gained the ability to effectively transmute 17 community property to the separate property of the spouses). 18 It is possible that Ms. Kostenko may hold a 19 nondischargeable equitable claim which may be determined by the 20 state court after the case is closed. Ariz. Rev. Stat. § 25-318 21 authorizes the state court to allocate community liabilities 22 between the parties in effecting an equitable division of all 23 community property. Spector v. Spector, 17 Ariz. App. 221, 225, 24 496 P.2d 864, 867 (Ariz. Ct. App. 1972). The statute requires 25 that the division of property must be equitable, “though not 26 necessarily in kind.” The Arizona Supreme Court had noted: 27 Obviously, the trial court may make adjustments to accommodate the necessities of the situation. Where 28 physical assets are not readily divisible or

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1 available, . . . the statute contemplates that the court could compensate a spouse for his or her 2 interest in the assets, and, of necessity, that would be by an award of money.

3 4 Martin v. Martin, 156 Ariz. 452, 458, 752 P.2d 1038, 1044 (Ariz. 5 1988). “‘Equitable’ means just that—it is a concept of fairness 6 dependent upon the facts of particular cases.” Toth v. Toth, 7 190 Ariz. 218, 221, 946 P.2d 900, 903 (Ariz. 1997). 8 The liquidation of Ms. Kostenko’s prepetition divorce 9 related claims after Debtor’s case is closed would not violate 10 the discharge injunction. Further, while the expungement of 11 Ms. Kostenko’s Amended POC may affect her right to distribution 12 from bankruptcy estate property, it does not prevent her from 13 pursuing collection of a prepetition debt even if Debtor 14 received his discharge because debts for property division in 15 divorce decrees are nondischargeable under § 523(a)(15). Short 16 v. Short (In re Short), 232 F.3d 1018, 1022–23 (9th Cir. 2000) 17 (holding that a property division claim comes within purview of 18 § 523(a)(15). 19 VI. CONCLUSION 20 In sum, we AFFIRM the bankruptcy court’s order on the 21 Amended POC. We AFFIRM in part and VACATE in part the 22 bankruptcy court’s order granting Debtor’s Enforcement Motion. 23 We AFFIRM the bankruptcy court’s order in paragraphs one and 24 two. We VACATE paragraph three of the order, which grants 25 Debtor prospective declaratory relief as to the dischargeability 26 of the division of property and debt claims because such relief 27 was procedurally improper.