Restructuring

Contributed by Doron P. Kenter.
(The Department of Justice has recently announced that it will not challenge the validity of joint bankruptcy petitions filed by same-sex couples who are married under state law.  Although we do not typically discuss personal bankruptcy cases, this case raises interesting questions at the crossroads of bankruptcy and civil rights law.  Accordingly, Balas highlights some of the complexities of life, love, and law that make bankruptcy exciting.).
Last November, in light of a decision from Bankruptcy Appellate Panel for the Eighth Circuit Court of Appeals regarding “single economic units,” we noted  that bankruptcy courts “may not be a prime battleground for the next generation of civil rights cases,” but suggested that “bankruptcy courts are hardly immune from such issues, and may signal an entirely different understanding of what constitutes a ‘union,’ at least under federal bankruptcy law.”  A series of recent developments emerging from the United States Bankruptcy Court for the Central District of California shows that our comments may have been even more prescient than we had initially thought.
In In re Gene Douglas Balas and Carlos A. Morales, the debtors filed a joint chapter 13 bankruptcy petition in February 2011.  Messrs. Balas and Morales were married in California in August 2008 (while such unions were still recognized under state law, prior to passage of California Proposition 8 in November 2008).  Upon filing their joint chapter 13 petition, the United States Trustee filed a motion to dismiss the bankruptcy case “for cause” under section 1307(c) of the Bankruptcy Code on the basis that the federal Defense of Marriage Act (“DOMA”) defines “marriage” as a union between one man and one woman as husband and wife and that therefore the debtors’ petition was not actually filed by an individual and his “spouse.”
On June 13, in a landmark decision, Judge Thomas B. Donovan denied that motion to dismiss, holding that DOMA was unconstitutional as a violation of the Fifth Amendment.  He further noted that “no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple.”  Notably, nineteen other bankruptcy judges in California – the busiest state in the country for consumer bankruptcies – signed on to Judge Donovan’s opinion, endorsing his meaningful decision on DOMA and sending a clear message of support.
On June 27, the United States Trustee — expecting that the House Bipartisan Legal Advisory Group (“BLAG”) would seek to defend the enforceability and constitutionality of DOMA — filed a motion for leave to appeal from Judge Donovan’s decision, suggesting that Congress should be afforded “a full and fair opportunity to participate” in cases in which a challenge to DOMA may be presented.  The debtors elected not to oppose that motion and moved to certify the appeal directly to the Ninth Circuit Court of Appeals.  Shortly thereafter, on July 6, the United States Trustee moved to dismiss the appeal, noting that the BLAG did not intend to present arguments in support of section 3 of DOMA.  The debtors initially declined to stipulate to that dismissal without a representation that the dismissal was part of a larger policy decision not to challenge joint bankruptcy cases filed by legally married same-sex couples.  Last Friday, in agreeing to dismiss the appeal, the debtors represented that a spokesperson for the Department of Justice had indicated in a letter to Metro Weekly that “[t]he Department of Justice has informed bankruptcy courts that it will no longer seek dismissal of bankruptcy petitions filed jointly by same-sex debtors who are married under state law.”
These landmark declarations from the Department of Justice and from BLAG may signal one of the first real effects of the Obama administration’s declaration of its intent not to enforce section 3 of DOMA.  There are, of course, many remaining open questions.  First, it is still unclear whether same-sex couples who were validly married in one state will be entitled to file joint bankruptcy petitions in states that have never recognized the vailidity of that marriage.  Second, the statements made by the United States Trustee and the position taken by BLAG in connection with the debtors’ chapter 13 case were limited to the bankruptcy context.  It remains to be seen whether the government will take similar position in other forums.  Third, bankruptcy courts have yet to weigh in on DOMA where same-sex couples were not legally married as a result of a continued prohibition on such unions in their own states.  It is possible that bankruptcy courts will determine that couples who are precluded from entering into state-sanctioned unions are still entitled to file joint petitions, which would call DOMA into further question nationally and in each state.  Much remains to be seen, but we’ll be sure to keep you apprised of these and other developments that showcase the effects that bankruptcy and bankruptcy courts can have in unexpected arenas.