Jeana Reinbold v. Belva Thorpe , 881 F.3d 536 ( 2018 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 17-1766
IN RE:
TIMOTHY H. THORPE,
Debtor.
JEANA K. REINBOLD, as Chapter 7 Trustee
of the Estate of Timothy H. Thorpe,
Plaintiff-Appellant,
v.
BELVA J. THORPE,
Defendant-Appellee.
____________________
Appeal from the United States District Court
for the Central District of Illinois.
No. 4:16-cv-04041-SLD — Sara Darrow, Judge.
____________________
ARGUED SEPTEMBER 18, 2017 — DECIDED JANUARY 31, 2018
____________________
Before BAUER, FLAUM, and SYKES, Circuit Judges.
SYKES, Circuit Judge. Timothy and Belva Thorpe married
in 1986 and bought a house together in Illinois in 1987. They
lived in that home until shortly after Belva filed for divorce
2 No. 17-1766
in October 2012. Timothy then filed for bankruptcy protec-
tion in June 2013. Finally, a month later, an Illinois divorce
court awarded Belva the marital home. Belva and the trustee
of Timothy’s bankruptcy estate now find themselves in a
years-long dispute about whether the divorce court’s award
should stand.
Rounds of litigation below have narrowed this appeal. It
is undisputed that at the moment Belva filed for divorce,
§ 503(e) of the Illinois Marriage and Dissolution of Marriage
Act, 750 ILL. COMP. STAT. 5/501–5/516, granted Timothy and
Belva contingent rights in the entire house. The parties
further agree that the estate acquired Timothy’s half-interest
in the marital home at the moment he declared bankruptcy.
The sole dispute here is whether the estate took Timothy’s
half-interest subject to Belva’s contingent interest. If it did,
the divorce court’s award divested the estate of any right to
the house. If it did not, the divorce court had no authority to
strip the estate of Timothy’s half-interest.
The trustee asks us to adopt the latter position. Her ar-
gument relies on the second sentence of § 503(e), which
provides that contingent interests in marital property “shall
not encumber that property so as to restrict its transfer,
assignment or conveyance.” Id. § 5/503(e). She claims that
Belva’s contingent interest must have disappeared when
Timothy declared bankruptcy because otherwise the contin-
gency would impermissibly restrict the transfer of the half-
interest to the estate.
This argument has yet to find any takers. The bankruptcy
judge did not address it because he found that § 503(e) did
not apply to jointly held property. The district judge disa-
greed and found that § 503(e) did apply, but she concluded
No. 17-1766 3
that Timothy’s estate took his half-interest subject to Belva’s
contingency without discussing the statutory text at any
length.
We affirm the district court, albeit with more meat on the
bones. The plain statutory text demonstrates that the bank-
ruptcy estate took Timothy’s half-interest in the marital
home subject to Belva’s contingent interest. Nothing in the
Illinois Dissolution of Marriage Act or federal law suggests a
contrary holding. Accordingly, the divorce court divested
the estate of all rights to the marital home when it awarded
the house to Belva.
I. Background
Timothy and Belva Thorpe married on December 6, 1986.
They purchased a house the following July by warranty
deed, which identified them as joint tenants. This meant
Timothy and Belva each owned a half-interest in the shared
home that either of them could convey without the consent
of the other. See Snyder v. Heidelberger, 953 N.E.2d 415, 420
(Ill. 2011).
On October 6, 2012, Belva filed for divorce. This was fol-
lowed by Timothy’s petition for bankruptcy protection
under Chapter 7 on June 21, 2013. The filing of the bankrupt-
cy petition caused an automatic stay to issue on the divorce
proceedings then pending against Timothy. See 11 U.S.C.
§ 362(a)(1). The Illinois divorce court continued to adjudicate
issues as they arose in the Thorpe divorce, but it could not
enter judgment while the stay was in effect.
On July 31, 2013, the divorce court issued a written order
finding that Belva had established grounds for divorce. The
court then awarded the marital home to Belva free and clear
4 No. 17-1766
of Timothy’s claims because he had dissipated $98,000 in
marital assets. Final judgment was entered on June 2, 2015,
after the bankruptcy court modified the automatic stay to
permit the divorce court to enter judgment on the 2013
order.
This litigation commenced on November 10, 2014, when
the trustee of Timothy’s bankruptcy estate filed an adversary
proceeding against Belva in the bankruptcy court. The
trustee sought to undo the divorce court’s award and exer-
cise her right to sell Timothy’s half-interest to settle the
estate’s debts. See 11 U.S.C. § 363(h). The parties each moved
for summary judgment after the final entry of the divorce
court’s order in 2015.
The bankruptcy court entered judgment for Belva. Ac-
cording to the court, § 503(e)’s legislative purpose “was to
enable divorce related property transfers of separately owned
property to be treated as nontaxable events by the IRS.” In re
Thorpe, 546 B.R. 172, 181 (Bankr. C.D. Ill. 2016) (emphasis
added). The bankruptcy judge reasoned that because the
asset at issue was a jointly held home, § 503(e) did not apply.
The judge then found for Belva on other grounds not rele-
vant here.
The district judge disagreed but affirmed nonetheless.
She noted that a joint tenant could convey his interest to a
third party and thereby trigger a taxable event. Section
503(e)’s purpose was thus implicated by the transfer of a
half-interest in a joint tenancy. The judge then concluded
without discussion that the transfer of Timothy’s half-
interest to the bankruptcy estate was encumbered by Belva’s
contingent interest. This ultimately meant that the divorce
No. 17-1766 5
court’s award divested the estate of any claim it had to the
marital home.
The trustee disagrees and brought this appeal. She con-
tends that the estate took Timothy’s half-interest in the
marital home free and clear of Belva’s contingent interest.
II. Discussion
The trustee argues that the bankruptcy and district judg-
es incorrectly interpreted § 503(e) of the Illinois Dissolution
of Marriage Act. This is a question of law that we review de
novo. See In re Kempff, 847 F.3d 444, 448 (7th Cir. 2017). Our
analysis rests on the plain statutory text. See In re Bronk,
775 F.3d 871, 876 (7th Cir. 2015) (“Venturing into legislative
history [is] unnecessary” when statutory text is clear.).
At bottom this case asks us to determine what Timothy’s
bankruptcy estate currently owns. Federal law provides that
a bankruptcy estate “is comprised of … all legal or equitable
interests of the debtor in property as of the commencement
of the [bankruptcy] case.” 11 U.S.C. § 541(a)(1). This means
that “a bankruptcy trustee succeeds only to the title and
rights in property that the debtor had at the time she filed
the bankruptcy petition.” In re Sanders, 969 F.2d 591, 593 (7th
Cir. 1992). These property rights “are created and defined by
state law,” not federal law. Butner v. United States, 440 U.S.
48, 55 (1979).
The parties rightly point us to the Dissolution of
Marriage Act as the relevant state law. Two sections control
this appeal. Section 503(a) describes marital property as “all
property … acquired by either spouse subsequent to the
marriage.” 750 ILL. COMP. STAT. 5/503(a). Section 503(e) then
explains that “[e]ach spouse has a species of common own-
6 No. 17-1766
ership in the marital property which vests at the time disso-
lution proceedings are commenced.” Id. § 5/503(e).
These provisions quickly resolve at least the threshold
question that puzzled the lower courts. The Thorpe home is
clearly marital property; it was acquired after Timothy and
Belva were married. Moreover, § 503(e) applies to marital
property by its plain terms. The Thorpe home thus falls
within § 503(e)’s reach.
What “species of common ownership” means is a more
esoteric question. Unlike community-property states, Illinois
law does not establish independent ownership interests in
marital property at the moment it is acquired. Nor does
Illinois wait to establish such interests until the divorce court
issues a final order. Instead, Illinois occupies a middle
ground. Divorcing spouses are vested with independent
contingent interests in all marital property at the moment a
divorce petition is filed. When the divorce court eventually
divides marital property, the obtaining spouse’s contingent
interest in that property ripens into a full ownership interest.
Conversely, the spouse who is not awarded the property
sees his contingent interest vanish.
These basic principles of law apply neatly here. When
Belva filed for divorce, she and Timothy were each vested
with contingent interests in the entire marital home.
Timothy thus no longer owned a simple half-interest in the
house. Instead, after the divorce proceeding was initiated, he
owned a half-interest subject to Belva’s contingent interest.
This qualified half-interest is what the estate acquired when
Timothy filed for bankruptcy less than a year later. Finally,
once the divorce court awarded Belva the entire marital
No. 17-1766 7
home, the estate’s contingent interest in the house disap-
peared. That leaves the estate without a claim.
The trustee urges us not to adopt this reasoning or result.
She maintains that § 503(e) has more to say on the subject. In
the second sentence, § 503(e) provides: “Any [contingent]
interest in marital property shall not encumber that property
so as to restrict its transfer, assignment or conveyance.” The
trustee argues that Belva’s contingent interest is an imper-
missible encumbrance because it reduces the market value of
the half-interest, thereby making it more difficult to sell.
Accordingly, once Timothy’s half-interest was transferred to
the estate, it was freed from the shackles of Belva’s contin-
gent interest.
We cannot accept this construction. It requires us to dis-
regard plain statutory text. Under Illinois law an encum-
brance is any interest that “may subsist in a third party to
the diminution of the value of the estate.” Brown v. Lober,
389 N.E.2d 1188, 1191 (Ill. 1979). Belva’s interest certainly
encumbers Timothy’s half-interest under this definition. But
§ 503(e) does not disallow encumbrances per se. It provides
that contingent interests “shall not encumber [marital]
property so as to restrict its transfer.” § 5/503(e) (emphasis
added). In light of this, something more than reducing the
value of the half-interest is required. The contingent interest
must itself legally restrict the grantor’s ability to convey the
underlying property. No such restriction is alleged here.
Timothy was always free to transfer his qualified half-
interest, and he in fact did so when he declared bankruptcy.
The trustee’s argument also produces an absurd result.
All contingent interests, by their nature, diminish the value
of the underlying property rights to which they attach. They
8 No. 17-1766
are all encumbrances. So under the trustee’s reading,
§ 503(e)’s second sentence evaporates the contingent interest
produced by its first sentence. Any spouse could sell his
property and dissipate the funds, leaving the other spouse
high and dry. We simply do not read statutes to simultane-
ously grant rights and take them away. “It is an elementary
rule of construction that [an] act cannot be held to destroy
itself.” Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 20
(1995) (internal quotation marks omitted).
The trustee next argues that our reading renders other
statutory text superfluous. She first points to the final clause
of § 503(e), which empowers a divorce court to “specifically
enjoin[]” divorcing spouses from transferring their qualified
property interests. She also directs our attention to § 503(d),
which allows the divorce court to divide marital assets in
light of “the dissipation by each party of the marital proper-
ty.” 750 ILL. COMP. STAT. 5/503(d)(2). The trustee claims that
there is no reason to authorize the divorce court on either of
these grounds if contingent interests survive transfers to
third parties. An injunction would be unnecessary because
the court could divide the marital property irrespective of
where it ultimately ended up. And dissipation would be
similarly futile because the divorce court could always claw
back the dissipated asset.
The trustee is incorrect on both counts. The dissipation
and injunction remedies provide relief that the contingent
interest cannot. Suppose, for example, that Timothy were to
sell his half-interest to a bona fide purchaser and then
squander his earnings from the sale. Illinois law is clear that
there would be no remedy against the third-party buyer.
Our bona fide purchaser takes title “free of any interests of
No. 17-1766 9
third persons,” assuming that he had no notice of Timothy’s
shenanigans. Daniels v. Anderson, 642 N.E.2d 128, 133 (Ill.
1994). This would leave Belva out of luck. There is no way to
retrieve the property from wherever it might end up.
This is where the Act’s additional statutory remedies
come in. If other marital assets were still around, the divorce
court could order an equitable division to make up for
Timothy’s dissipation. If no other marital assets existed, an
injunction could hold Timothy personally liable. Belva could
then attach Timothy’s nonmarital assets to make up for the
deficiency in the marital estate. Perhaps this is not worth
much if Timothy is bankrupt, but it certainly makes Belva
better off than having no recourse at all.
Having nothing more to say about the statute itself, the
trustee turns to caselaw. She claims that our reading of
§ 503(e) runs afoul of Kujawinski v. Kujawinski, 376 N.E.2d
1382 (Ill. 1978). In that case, the plaintiff argued that § 503(b)
of the Dissolution of Marriage Act violated the contract
clauses of the U.S. and Illinois Constitutions. His specific
concern was that a spouse and a third party might jointly
hold property that a court could later distribute to the other
spouse upon divorce. The Illinois Supreme Court found this
worry to be misplaced. The court noted that § 503(b) did not
divide property at all but instead helped answer the prior
question about which property was subject to division. It
thus could not impair a contract on its own. The court then
concluded, as an aside, that it did not see an inevitable
constitutional conflict because divorce courts would pre-
sumably divide marital property “so as to avoid the im-
pairment of any contractual obligations owed to third par-
ties.” Id. at 1387.
10 No. 17-1766
The trustee now seeks to transform this single line of dic-
tum into a broad proposition that divorce awards should not
interfere with the interests of bankruptcy estates. That takes
Kujawinski far beyond its scope. If anything, the opinion cuts
the other way. The court specifically noted that a hypothet-
ical third party did not need to rely on a divorce court to
protect his contractual rights. Instead, he could bring a suit
for damages against the nonobtaining spouse or seek to void
the divorce award pursuant to “those limitations set by laws
governing transfers, assignments and conveyances of such
property.” Id. The onus thus lies on third parties to assert
their legal rights when challenging a divorce court’s division
of marital property.
A bankruptcy trustee has a robust tool in this regard—its
“strong-arm” power under 11 U.S.C. § 544. This allows the
estate to take the debtor’s property free from any encum-
brance if it establishes that a hypothetical buyer without
actual notice would have been a bona fide purchaser under
state law. See Belisle v. Plunkett, 877 F.2d 512, 516 (7th Cir.
1989). The trustee in this case is obviously aware of this
federal provision; she argued about it extensively before
both the bankruptcy and district courts. In this appeal,
however, she has explicitly waived any argument as to her
strong-arm power. This is a tactical decision that we will not
question or accommodate.
Finally, the trustee warns that our reading of § 503(e)
subverts the priorities and policies underlying the bankrupt-
cy code. The precise contours of her challenge are unclear,
but the central worry seems to be that bankruptcy trustees
will no longer be free to challenge divorce awards. This
concern is overblown. As the trustee herself notes, fraudu-
No. 17-1766 11
lent transfer laws remain a viable tool to protect the estate’s
assets. Moreover, a trustee is always free to demonstrate
why she should be able to exercise her strong-arm power
under § 544. These legal remedies, and others, adequately
protect federal interests.
Ultimately it is the trustee’s reading of § 503(e) that up-
sets the priorities and policies underlying the bankruptcy
code. We have repeatedly held that bankruptcy protection
“is not intended to expand the debtor’s rights against others
more than they exist at the commencement of the [bankrupt-
cy] case.” Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th
Cir. 1984) (quotation marks omitted). We have also explained
that “[t]he estate’s property does not include the thing to
which it lays claim until the matter is adjudicated or re-
solved by the parties.” In re Carousel Int’l Corp., 89 F.3d 359,
362 (7th Cir. 1996). The trustee’s proposed reading of
§ 503(e) commits both of these sins. It expands the estate’s
rights and frustrates state-court adjudication simply because
a bankruptcy has been filed. This creates “a windfall merely
by reason of the happenstance of bankruptcy.” Lewis v. Mfrs.
Nat’l Bank of Detroit, 364 U.S. 603, 609 (1961). The Supreme
Court has firmly rejected such outcomes. We do the same
here.
AFFIRMED.