On June 25, 2009, the Ninth Circuit Court of Appeals ruled that a Chapter 7 Bankruptcy Trustee could not undo a "highly unequal property distribution" arising from a dissolution proceeding where the dissolution judgment was entered in the State Court.
In the case of In re Bledsloe, the wife was involved in a divorce proceeding with her husband. Throughout the proceedings, she failed to comply with discovery and the Court eventually entered default against her. Further, the Court awarded $93,737.00 in assets to the husband and only $788.00 to the debtor wife.
When the wife filed for bankruptcy, the Trustee sued the husband for the inequitable distribution, relying upon 11 USC 544 and 11 USC 548. Nevertheless, the Bankruptcy Court ruled for the husband and against the Trustee. After appeal to the District Court, it affirmed. Then, the Ninth Circuit also affirmed, finding the distribution also proper.
The Ninth Circuit found that the $788 to the wife and $93,737 to the husband was proper since there was no "extrinsic fraud" and which made 544 not applicable. It likewise found that 548 was not applicable since it considered the state court judgment blessing the distribution as conclusively establishing "reasonably equivalent value" being exchanged.
The Bledsloe case may only be pertinent to the facts contained therein, the wife was punished by the Family Law court for her failure to comply with court orders. For now at least, unless a debtor is involved in a dissolution proceeding where judgment was clearly obtained by "extrinsic fraud," it will not be subject to being set aside by a bankruptcy trustee, despite the distribution being unequal.
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