Insights

A recent bankruptcy court decision out of the Southern District of New York has taken on the controversial “Defense of Marriage Act,” signed in 1996 by President Bill Clinton, which limits the operation of the Full Faith and Credit Clause of the U.S. Constitution and strips away innumerable federal claims from same-sex couples. Now, it seems that a door has opened up for some same-sex couples with regard to bankruptcy petitions.

In In Re Somers, a lesbian couple who married legally in Vermont filed a joint Chapter 7 bankruptcy petition in New York, listing numerous joint assets. The trustee in the bankruptcy case notified the couple that he would oppose the joint filing, and the couple filed a motion to sever. However, the couple subsequently withdrew their motion to sever after U.S. Attorney General Eric Holder announced to the country that the U.S. Justice Department would stop defending DOMA, as the Obama administration had questions about the act’s constitutionality. The trustee then filed a motion to dismiss, claiming that DOMA required dismissal.

The Full Faith and Credit Clause provides that, “[f]ull Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.” DOMA limits the Full Faith and Credit Clause by providing that, “[n]o State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.”

DOMA further provides that “[i]n determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” Thus, in all federal statutes, where one reads “spouse” or “marriage,” it only means “marriage by opposite sex persons.”

In considering the trustee’s motion to dismiss, the United States Bankruptcy Court for the Southern District of New York noted that the court may dismiss a bankruptcy petition only for three stated reasons: (1) cause, which includes unreasonable delay by the debtor that prejudices creditors, (2) nonpayment of required fees or charges, or (3) the failure of the debtors to file required information. The court observed that the trustee’s motion to dismiss the Debtors’ petition here did not invoke any of these reasons. Rather, the trustee argued that the Debtors filing of an “improper joint petition” is cause enough for dismissal. The trustee noted correctly that for purposes of federal law, DOMA defines “spouse” as a person of the opposite sex who is a husband or a wife.

In a decision that no doubt will garner attention from forces both for and against marriage equality, the court noted that case law and the plain language of the Bankruptcy Code make clear that the Debtors in Somers would qualify to file a joint petition but for the existence of DOMA. The court then noted that at least two cases in district courts in the Second Circuit have questioned the constitutionality of DOMA and indicated that courts should apply heightened scrutiny to classifications based on sexual orientation.

Declining to engage in a constitutional analysis of DOMA, U.S. Bankruptcy Judge, Cecelia Morris, instead looked to the Bankruptcy Code itself in denying the trustee’s motion. Noting that the trustee failed to demonstrate evidence that would allow the court to dismiss the case based on the reasons enumerated in the Code, the court looked to Second Circuit case law, which requires a case-by-case analysis to determine whether dismissal would be in the best interests of all parties in interest. Here, the court noted that if it granted the motion, the Debtors would lose the benefit of the fresh start and would incur greater administrative costs if they had to file a new case. Additionally, none of the creditors demanded that the Debtors sever. In fact, the Debtors jointly reaffirmed the debt of two of their largest creditors, indicating the Debtors’ willingness to work with creditors in good faith as a couple. Finally, even the trustee himself would be prejudiced by dismissal, as he had progressed fully in his investigation of the Debtors’ assets. The court thus declined to dismiss the lawsuit.

What does this mean for creditors going forward? Nationally, six jurisdictions allow same-sex couples to marry, including Connecticut, the District of Columbia, Iowa, Massachusetts, New Hampshire, and Vermont. Other states, including New York, New Jersey, Maryland, and Rhode Island, do not authorize same-sex marriages performed in-state, but do recognize same-sex marriages performed in other jurisdictions. Additionally, several states, including Illinois, New Jersey and Oregon, offer civil unions or domestic partnerships, granting all or part of the state-level rights and responsibilities of marriage.

Given the strong statement of support of joint petitions by lawfully married same-sex couples in Somers, creditors should be on the lookout for similar lawsuits in other states. And although there is no doubt that the U.S. Supreme Court will ultimately rule on the constitutionality of DOMA and same-sex marriages, creditors will need to monitor their proofs of claim to ensure that they fully protect themselves in all bankruptcy filings. Indeed, for creditors, it may in fact be easier for these matters to proceed in a joint petition.

In Re Somers, 2011 Bankr. Lexis 1654 (Bank. S.D.N.Y. May 4, 2011)

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com.