Bankruptcy Judge Bypasses DOMA to Allow Joint Bankruptcy Filing by Same-sex Spouses

Deciding that serving the aims of bankruptcy law was more important than applying a possibly unconstitutional statutory limitation, U.S. Bankruptcy Judge Cecelia G. Morris has rejected the United States Trustee's motion to dismiss a joint bankruptcy filing by a New York same-sex couple who were married in Vermont shortly before filing their petition.  The ruling in In re Theresa L. Somers and Rosemary Caggiano, Debtors, 10-38296, was decided on May 4 but first reported in the New York Law Journal on May 13, 2011.

The debtors, long-time partners whose significant assets are held jointly, were married in a civil ceremony in Vermont on October 9, 2010.  After returning home to New York, they filed their joint bankruptcy petition in the Southern District of New York on October 29, 2010.  According to their petition, they own their residence as joint property, and they also jointly own two cars, two motorcycles, maintain two joint checking accounts, and have a jointly-owned 401(k) account, as well as jointly owned shares in two businesses.  They are jointly liable on the debt of these businesses, and of the secured debt listed on their Schedule D, almost all of it is listed as joint debt.  Similarly, the unsecured debt listed on their Schedule F is joint debt, consisting mostly of credit card and business debt.

After filing their bankruptcy petition, they co-signed agreements reaffirming debt to the financier of their motorcycles and the holder of their home mortgage.  When the US Trustee indicated to the debtors that it would object to their joint filing on the ground that the US government does not recognize same-sex marriages, they filed a motion to sever their joint case, to which the Trustee filed a statement of no opposition (including no opposition to their request to waive additional filing fees that would be associated with refiling separate petitions). 

But then, the day after the Trustee's statement of no opposition was filed, the Justice Department announced that it had concluded that Section 3 of DOMA is unconstitutional, and Attorney General Holder wrote to House Speaker Boehner that DOJ would no longer defend Section 3 of DOMA in pending litigation.  (Section 3 is the provision barring the federal government from recognizing same-sex couples as married or recognizing them as being spouses of each other, regardless of their status under state law.)  Reacting to these developments, the debtors moved on February 24 to withdraw their motion to sever "because President Obama has ordered the Justice Department to stop defending the Defense of Marriage Act."  The US Trustee responded by filing a motion to dismiss pursuant to Section 707(a), which states the grounds for dismissal of bankruptcy petitions.  The Trustee took the position that the court could not accept a joint filing from same-sex spouses due to DOMA.

In terms of prior authority as to this, the Trustee relies on the only prior ruling on point, In re Kandu, 315 B.R. 123 (Bankr. W.D. Wash. 2004), in which the court rejected a joint filing by a same-sex couple who were married in Canada, relying on DOMA, and incidentally rejected the claim that DOMA was unconstitutional under the equal protection requirement of the 5th Amendment.

Judge Morris found that it is "clear from the case law and the plain language of Section 302 of the Bankruptcy Code that the Debtors, as a legally married couple, would qualify to file a joint petition if not for the existence of DOMA."  She cited a pre-DOMA case, In re Favre, 186 B.R. 769 (Bankr. N.D. Ga. 1995), in which the court rejected a joint filing from a same-sex couple, pointing out that only married couples can file jointly, and stating, in dicta, that a legally married same-sex couple recognized as such under state law "would qualify for relief under Section 302."  This is because traditionally the Bankruptcy Code has been construed to determine eligibility for joint married status based on whether people were legally married under the law of a state, since there is no federal marriage law.

Noting recent cases challenging DOMA, including two filed late in 2010 within the 2nd Circuit, and the recent determination by the Justice Department that Section 3 of DOMA is not defensible under constitutional attack, Morris said, "The Court will not conduct its own constitutional analysis of the Act since the issue is not before the Court and has not been briefed by the parties."  Nevertheless, she pointed out, the court has "substantial discretion in ruling on a motion to dismiss under section 707(a), and in exercising that discretion must consider any extenuating circumstances, as well as the interests of the various parties."  Judge Morris found that the DOJ's announcement and decision to stop defending DOMA was such an extenuating circumstance.

"In this case," wrote Morris, "the United States Trustee, who is appointed by the Attorney General pursuant to 28 U.S.C. sec. 581, appears to defend the law and yet has offered nothing more than a restatement of the language of DOMA.  The mere existence of DOMA is not sufficient to remove the duty imposed on this Court by sec. 707(a) to find 'cause' prior to dismissing the case."  The reasons for dismissal listed in that section do not apply, and the 2nd Circuit has found that if the Trustee is moving to dismiss for other reasons, the Bankruptcy Court is to do a "case-by-case analysis to determine whether dismissal would be in the best interest of all parties in interest."

In this case, that comes down to the question whether it makes sense to allow a joint filing given all the facts, and, as a purely practical matter, it certainly does, since almost all the assets and all the debt is jointly held or assumed.  Requiring severance would impose "greater administrative costs" on the Debtors, whose case has "substantially progressed" as "they reaffirmed mortgage and vehicle debt and appeared at the meeting of creditors."  "Dismissing or severing the case at this stage," wrote the judge, " would duplicate work and costs for the Debtors, the creditors, the Trustee, and the court."  She also pointed out that the chapter 7 trustee's investigation of the assets was already under way, that a meeting of creditors was scheduled to take place, and that dismissal would put things off and "would prevent the potential for recovery of assets and for distribution of proceeds to creditors."  Indeed, creditors would be inconvenienced by having to appear in two separate cases, and the trustee's work would be complicated by having to "liquidate a single pool of assets for a single pool of creditors over two cases.  This would be cumbersome and lead to increased costs for the chapter 7 trustee and to the creditors."

The bottom line was that everybody involved in the case, including creditors and the trustee, would benefit from proceeding jointly and would be inconvenienced or worse by having to start over with two separate cases instead of one joint case.  "The Debtors and the creditors alike benefit from the joint administration of this case," concluded Judge Morris.

The court thus found "insufficient cause to dismiss this petition," and denied the motion. 

This case dramatically illustrates the carelessness — indeed, thoughtlessness — with which Congress passed DOMA in 1996 and President Clinton signed it into law.  Incredibly, the statute adopts a sweeping rule of non-recognition, in the absence of any serious study by Congress as to whether such a rule made sense in the context of any particular federal statutory scheme, such as the Bankruptcy Code, the Tax Code, the Immigration Law, the Social Security Law, and on and on.  At the time, of course, no jurisdiction in the world authorized same-sex marriages, so Congress treated this as a "going on record" statute entirely devoted to pandering to voters and anti-gay interest groups and did not devote to it any of the serious consideration that usually precedes the adoption of new substantive law.  The committee hearings were devoted to pandering and politics, not substance.  It was only after the law was passed that some Congressional opponents asked the Congressional Research Service to do a study, which turned up more than a thousand places in the U.S. Code that might be affected by DOMA – a potential impact of which Congress was officially ignorant when it passed the law.  That helps to explain why it is indefensible now, in the opinion of DOJ.  It was passed without any serious consideration of its practical consequences.

In the context of Bankruptcy, Judge Morris has rendered an eminently common-sense ruling, in which the government should acquiesce.

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