Can a Non-Filing Spouse of a Spouse that Filed Bankruptcy Buy a Community Property Asset From the Bankruptcy Estate?

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The short answer is yes, a non-filing spouse of a spouse that filed bankruptcy can buy a community property asset from the bankruptcy estate. See 11 U.S.C. §363(i) and In re Lewis; BAP No. CC-13-1367. For some this question alone might be confusing. When a couple is married either spouse may file for bankruptcy protection without the other spouse. All of the separate property of the filing spouse and community property of the filing spouse must be listed in the petition. In California, community property consists of: all property, real or personal, wherever situated, acquired by a married person during marriage while domiciled in California is community property. Cal. Fam. Code §760. In the Lewis case the community property at issue is an employment law lawsuit filed, but not resolved, prior to the bankruptcy case being filed. The cause of action is therefore an asset of the filing spouse’s bankruptcy case. See Vick v. DaCorsi, 110 Cal. App. 4th 206, 212 n.35 (2003).

A twist in the Lewis case was that the bankruptcy trustee sold the bankruptcy estate’s interest in the lawsuit to a company named Kallman & Company, LLP for $40,000 pursuant to 11 U.S.C. §363(b). Section 363(b) allows the trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate . . . . . . The Chapter 7 trustee’s bankruptcy lawyer filed, served and correctly provided notice of the motion for approval to sell the cause of action to Kallman & Company, LLP. A hearing was held and the bankruptcy court approved the sale to Kallman & Company, LLP. According to the terms of the sale Kallman did not have to pay the $40,000 until 30 days after the closing date of the sale, and the closing date occurred only when the order approving the sale became final and not appealable. Given the delay in closing the sale the non-filing spouse had time to act and her bankruptcy attorney and her did indeed act.

The non-filing spouse informed the Chapter 7 Trustee and counsel that she intended to exercise her rights pursuant to 11 U.S.C. §363(i). 11 U.S.C. §363(i) provides: before the consummation of a sale of . . . . . . property of the estate that was community property of the debtor and the debtor’s spouse immediately before the commencement of the case, the debtor’s spouse, or a co-owner of such property, as the case may be, may purchase such property at the price at which such sale is to be consummated. So the Chapter 7 trustee then filed a motion under 11 U.S.C. §363(i) under the grounds that the lawsuit claim is community property and the sale to Kallman & Company, LLC was not consummated yet. Kallman & Company, LLC of course opposed the sale to the non-filing spouse. The bankruptcy court granted the motion to sell the lawsuit claim to the non-filing spouse and held that the lawsuit claim was community property and the sale to Kallman & Company, LLC was not consummated. After various legal wrangling the order approving the sale to the non-filing spouse was appealed to the 9th Circuit Bankruptcy Appellate Panel. The 9th Circuit BAP found the act of the non-filing spouse asserting her claim to the lawsuit asset and obtaining an order from the court granting the sale was an intervening event that prevented the consummation of the sale to Kallman & Company, LLC. The 9th Circuit Bankruptcy Appellate Panel went further to say that Kallman & Company, LLC have no one but themselves to blame. Kallman could have consummated the sale immediately by tendering the purchase amount to the Chapter 7 Trustee and Kallman could have asked to have the stay pursuant to Federal Rule of Bankruptcy Procedure 6004(h) to be waived. FRBP 6004(h) provides that an order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise. The 9th Cir. BAP further said that Kallman instead provided the non-filing spouse with sufficient time to assert her §363(i) right and to prove that she had the ability to make good on her offer to purchase the lawsuit claim from the bankruptcy estate. What is there to take away from this case? If you are a purchaser of assets under 363 of the Bankruptcy Code and you really want the assets you are purchasing consummate the sale as soon as possible if there is a non-filing spouse.