No spousal equality in bankruptcy, SJC finds

By Milton J. Valencia
Globe Staff / March 8, 2011

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Kirk and Janice Hundley, husband and wife, were equal in everything — home life, responsibilities.

Everything except their tax refund when it came to bankruptcy court, according to the state Supreme Judicial Court.

The state’s highest court ruled yesterday that spouses do not share the equality they would see in other proceedings, such as divorce, when one of them has a matter before a bankruptcy court.

That means Janice Hundley, who was the family homemaker in Southborough, taking care of their two children, would get only a fraction of the $93,362 refund the couple received in an amendment of their 2002 tax return, even though they filed jointly, according to the ruling. That is because, when it comes to bankruptcy, the decision draws a line between the economics of running a family and a spouse’s own property rights.

“I think the Supreme Judicial Court has denigrated the homemaker’s contribution to the family unit,’’ said Todd Gordon, a lawyer for Janice Hundley. “She made noneconomic contributions.’’

The case touches on technical legal questions such as spouses’ personal property rights, in divorce and other proceedings and in bankruptcy and tax issues.

But the SJC, settling a question for a federal Appeals Court that is currently considering the case, said unanimously yesterday that spouses keep their personal property as their own in proceedings before a bankruptcy court, and that the personal property is subject to the bankruptcy proceedings.

“In this Commonwealth, spouses who are not divorcing are not entitled to share in each other’s property solely by virtue of the fact that the parties happen to be married and are cooperating to raise a family,’’ the court said in a decision written by Justice Judith A. Cowin.

The decision was based on a case playing out in US Bankruptcy Court. Kirk Hundley, who ran a data analysis business, filed for bankruptcy in 2006 under his own name, separate from his wife. Around the same time, the couple filed for an amendment to their 2002 tax return, to carry back financial losses from years earlier.

But Janice Marsh, the trustee appointed by the bankruptcy court, had the Internal Revenue Service forward the $93,362 refund to her, arguing that the taxable income belonged to the husband alone, and so the refund should be considered as part of the bankruptcy proceedings.

Janice Hundley argued that at least half the refund belonged to her, based on the equal property share assumed under their marriage, but also because they filed a joint return. She wanted the money because if it all goes to her husband, it could be lost in his bankruptcy.

The US Court of Appeals for the First Circuit agreed to hear the case, but asked the SJC — because property interests are defined by state law — to settle a question: Does Janice Hundley have a property interest in the tax refund, and if so, what factors should determine the extent of her interest.

The court rejected Janice Hundley’s arguments that the split should be equal, saying the split of spouses’ personal interests is triggered by divorce proceedings, not bankruptcy proceedings.

With proceedings still before the federal courts, Janice Hundley can still try to prove she is owed some of the $93,362 refund, the court determined. Though she did not contribute any taxable income, she could still claim several tax credits the couple received, such as for the children. But she would get far below the equitable split she had demanded.

Milton Valencia can be reached at