A Spouse's Bankruptcy Trumps Divorce

Tanya and Vladimir Ostashko's five-year marriage began to dissolve in 1997 when the couple, who moved from Russia to Staten Island in 1994, officially separated. The couple was involved in a series of legal battles in state and federal court over nine years. After they separated, Mr. Ostashko entered into a credit agreement with Moscow-based Informtechnika Bank. The bank provided Ostashko with an unsecured credit line of 5.9 million rubles (equivalent to approximately $900,000 in January 1998). In April 1998, Mr. Ostashko drew down on the credit line by 5.5 million rubles.

Mr. Ostashko defaulted on the loan payments, and Informtechnika sued in New York State Supreme Court to collect on the debt. The parties reached a settlement in March 1999, in which Informtechnika was given a consent judgment for $800,000, plus $10,000 in legal fees. The bank then assigned this judgment to Zuritta-Teks, another Russian company.

Ms. Ostashko had filed for divorce in March 1998. One year later, she brought an action seeking to enjoin Informtechnika, and later Zuritta-Teks, from enforcing the consent judgment, arguing that the judgment was a fraudulent conveyance. She argued that her husband knew that he would have to divide the marital property and intended to use the loan as a means of liquidating the couple's marital assets in the United States.

In 2002, Eastern District Judge Allyne R. Ross, in Ostashko v. Ostashko, 00-cv-7162, agreed that the consent judgment was a constructively fraudulent conveyance. Noting that Mr. Ostashko was one of Informtechnika's founders and served on its board of directors throughout most of the 1990s, Judge Ross said that, while direct evidence of the bank's knowledge was lacking, 'circumstantial evidence indicate[ed] that the bank was aware of Vladmir's intentions.'

Ms. Ostashko's matrimonial action was put on hold until the fraudulent conveyance claim was decided in federal court. On July 1, 2003, an inquest was held in the trial court on the merits of the divorce, and on Oct. 23, 2003, the state court awarded her all the marital assets. On Dec. 18, 2003, Zuritta-Teks filed an involuntary Chapter 7 bankruptcy petition against Mr. Ostashko. At that time, the final judgment of divorce was neither signed nor entered. At a hearing on April 20, 2004, the bankruptcy court modified the automatic stay to allow Ms. Ostashko to seek entry of a final judgment in the matrimonial action, with that relief to become effective after the appointment of a trustee. Before the bankruptcy court entered its order modifying the automatic stay, the state court judgment was signed and entered. The bankruptcy court then modified the automatic stay nunc pro tunc.

Bankruptcy Court

In May 2004, Robert J. Musso, the bankruptcy trustee, started an adversary proceeding in bankruptcy court. He sought control of Mr. Ostashko's property and avoidance of any interest by Ms. Ostashko in that property. Ms. Ostashko made cross- and counterclaims against her ex-husband and the trustee, seeking a declaration that the marital assets were not part of Mr. Ostashko's estate. In December 2004, she filed a motion for summary judgment, asking the court to allow her to take title to the marital assets, but Eastern District Bankruptcy Judge Elizabeth S. Stong denied the motion.

Judge Sifton, in reversing this decision, held that Ms. Ostashko's rights to that property vested when the state court awarded her the marital assets, and as a result, the property should be excluded from the bankruptcy estate.

In vacating Judge Sifton's decision, the Second Circuit said the district court incorrectly relied upon a line of matrimonial cases suggesting that the granting, rather than the entry, of a divorce judgment is the moment at which the divorce becomes final and the equitable rights of the now former spouse in the marital property are established.

It may be the case that, as between spouses, actual entry of the divorce judgment is immaterial so long as divorce has in fact been granted,' the court said. 'But as between a spouse and a third party (such as a judgment lien creditor), entry of the judgment is critical, under New York law, to cementing the spouse's interest in the property. In dicta, the court said it was possible to conclude that Mr. Ostashko had 'abused the bankruptcy process in his dealings with his spouse,' but said the bankruptcy court has the 'means to address any inequities that might arise as a consequence of acknowledging the Trustee's status as judgment lien creditor.'

The Family Law Perspective

One family law attorney not involved in the case opined that the Second Circuit made the correct decision based on past precedent. Although the decision was difficult, it was most likely correct. She did, however, wonder why the state court waited so long to enter its divorce judgment. Bruce Weiner, a partner at Rosenberg, Musso & Weiner who represented the trustee, called the decision favorable, and one which the bankruptcy court should have originally reached.

Beth Bar is a reporter for the New York Law Journal, a sister publication of this newsletter. She can be reached at [email protected].

An ex-wife who was awarded all of the martial assets in a bitter divorce was nevertheless unable to take possession of those assets because they were part of the ex-husband's bankruptcy estate.

A federal appeals panel so held, reasoning that because the matrimonial judgment was docketed after the filing of the Chapter 7 petition, the marital assets remained part of the bankruptcy estate subject to distribution by the bankruptcy court. Musso v. Ostashko, 05-6395-bk., 468 F.3d 99 (2d Cir. Nov. 6, 2006). Judges Barrington D. Parker, Richard C. Wesley and Peter W. Hall reversed the decision of Eastern District Judge Charles P. Sifton, in which he held that Tanya Ostashko's interest in marital property vested upon the granting of the court's judgment of divorce ( Ostashko v. Ostashko, 333 B.R. 625).

The Case

Tanya and Vladimir Ostashko's five-year marriage began to dissolve in 1997 when the couple, who moved from Russia to Staten Island in 1994, officially separated. The couple was involved in a series of legal battles in state and federal court over nine years. After they separated, Mr. Ostashko entered into a credit agreement with Moscow-based Informtechnika Bank. The bank provided Ostashko with an unsecured credit line of 5.9 million rubles (equivalent to approximately $900,000 in January 1998). In April 1998, Mr. Ostashko drew down on the credit line by 5.5 million rubles.

Mr. Ostashko defaulted on the loan payments, and Informtechnika sued in New York State Supreme Court to collect on the debt. The parties reached a settlement in March 1999, in which Informtechnika was given a consent judgment for $800,000, plus $10,000 in legal fees. The bank then assigned this judgment to Zuritta-Teks, another Russian company.

Ms. Ostashko had filed for divorce in March 1998. One year later, she brought an action seeking to enjoin Informtechnika, and later Zuritta-Teks, from enforcing the consent judgment, arguing that the judgment was a fraudulent conveyance. She argued that her husband knew that he would have to divide the marital property and intended to use the loan as a means of liquidating the couple's marital assets in the United States.

In 2002, Eastern District Judge Allyne R. Ross, in Ostashko v. Ostashko, 00-cv-7162, agreed that the consent judgment was a constructively fraudulent conveyance. Noting that Mr. Ostashko was one of Informtechnika's founders and served on its board of directors throughout most of the 1990s, Judge Ross said that, while direct evidence of the bank's knowledge was lacking, 'circumstantial evidence indicate[ed] that the bank was aware of Vladmir's intentions.'

Ms. Ostashko's matrimonial action was put on hold until the fraudulent conveyance claim was decided in federal court. On July 1, 2003, an inquest was held in the trial court on the merits of the divorce, and on Oct. 23, 2003, the state court awarded her all the marital assets. On Dec. 18, 2003, Zuritta-Teks filed an involuntary Chapter 7 bankruptcy petition against Mr. Ostashko. At that time, the final judgment of divorce was neither signed nor entered. At a hearing on April 20, 2004, the bankruptcy court modified the automatic stay to allow Ms. Ostashko to seek entry of a final judgment in the matrimonial action, with that relief to become effective after the appointment of a trustee. Before the bankruptcy court entered its order modifying the automatic stay, the state court judgment was signed and entered. The bankruptcy court then modified the automatic stay nunc pro tunc.

Bankruptcy Court

In May 2004, Robert J. Musso, the bankruptcy trustee, started an adversary proceeding in bankruptcy court. He sought control of Mr. Ostashko's property and avoidance of any interest by Ms. Ostashko in that property. Ms. Ostashko made cross- and counterclaims against her ex-husband and the trustee, seeking a declaration that the marital assets were not part of Mr. Ostashko's estate. In December 2004, she filed a motion for summary judgment, asking the court to allow her to take title to the marital assets, but Eastern District Bankruptcy Judge Elizabeth S. Stong denied the motion.

Judge Sifton, in reversing this decision, held that Ms. Ostashko's rights to that property vested when the state court awarded her the marital assets, and as a result, the property should be excluded from the bankruptcy estate.

In vacating Judge Sifton's decision, the Second Circuit said the district court incorrectly relied upon a line of matrimonial cases suggesting that the granting, rather than the entry, of a divorce judgment is the moment at which the divorce becomes final and the equitable rights of the now former spouse in the marital property are established.

It may be the case that, as between spouses, actual entry of the divorce judgment is immaterial so long as divorce has in fact been granted,' the court said. 'But as between a spouse and a third party (such as a judgment lien creditor), entry of the judgment is critical, under New York law, to cementing the spouse's interest in the property. In dicta, the court said it was possible to conclude that Mr. Ostashko had 'abused the bankruptcy process in his dealings with his spouse,' but said the bankruptcy court has the 'means to address any inequities that might arise as a consequence of acknowledging the Trustee's status as judgment lien creditor.'

The Family Law Perspective

One family law attorney not involved in the case opined that the Second Circuit made the correct decision based on past precedent. Although the decision was difficult, it was most likely correct. She did, however, wonder why the state court waited so long to enter its divorce judgment. Bruce Weiner, a partner at Rosenberg, Musso & Weiner who represented the trustee, called the decision favorable, and one which the bankruptcy court should have originally reached.

Beth Bar is a reporter for the New York Law Journal, a sister publication of this newsletter. She can be reached at [email protected].