Chapter 7 Bankruptcy Petitions and Their Impact on the Dissolution of Domestic Partnerships

By: Allyson Rivard

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

            Under section 548 of title 11 of the United States Code (the “Bankruptcy Code”), a transfer may be avoided if the debtor was insolvent, or rendered insolvent by the transfer and the debtor received “less than a reasonably equivalent value.”[1]  Property transferred in connection with a marital separation agreement may be subject to avoidance.  The United States Bankruptcy Court for the Middle District of Tennessee, Nashville Division, in In re Scarbrough concluded that property transferred pursuant to an agreement to terminate a domestic partnership could be subject to avoidance under section 548.  

            In April 2014, the debtor and her partner ended their romantic relationship; a relationship, which contained merged assets.[2] Pursuant to a dissolution agreement, the debtor retained three vehicles, and her partner retained two properties, three vehicles and all artwork acquired during the ten-year partnership.[3] Thereafter, the debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code and listed liabilities of over one million dollars, and assets of slightly over fifty thousand dollars.[4] The Chapter 7 trustee sued the debtor’s former partner to recover the assets the non-debtor received under the dissolution agreement.[5] The bankruptcy court held that the transfer of property to the defendant could be avoided under constructive fraud, and recovered by the trustee.[6]

            The court explained that to avoid transfer under constructive fraud, the trustee must first show that transfer occurred within two years of filing for bankruptcy.[7] This was an undisputed fact in this case.[8] Second, the debtor must not have received reasonably equivalent value for the property.[9] The defendant failed to show that the debtor received equivalent value for the property she transferred.[10] The court followed other decisions by courts in the Sixth Circuit, in that the term “value” holds a different meaning in fraudulent conveyance cases than in divorce proceedings, and only considers monetary value of the property transferred.[11] Therefore, the court found that the debtor did not receive equivalent value for transferring both properties and the artwork, which amounted to over eighty thousand dollars.[12] Third, the debtor must have been insolvent on the date of transfer or been made insolvent due to the transfer.[13] The court explained that at the time of the property distribution, the debtor’s liabilities exceeded her assets, thus deeming her insolvent under the balance sheet test.[14]

            The In re Scarbrough decision demonstrates that there is a risk taken when entering into a dissolution agreement upon terminating a partnership. The risk is that one’s liability for a prior partner can extend past the length of the partnership itself. Regardless of whether partners acquired assets jointly and equitable distribution occurred pursuant to a dissolution agreement, transfer can be avoided based on the financial circumstances of one party.