TO: The United States District Court.

I.    Introduction.

        This report and recommendation is prepared in accordance with Bankruptcy Rule 5011. Rule 5011 requires that a bankruptcy judge submit a report and recommendation to the district judge when a motion for abstention has been filed. A copy of Rule 5011 is annexed to this report. Effective December 1, 1990, further reports to the United States District Court are unnecessary. Parties may now appeal a bankruptcy court's decision to abstain but may not appeal the district court's determination. In this case, however, the motion effectively pre-dates the amendment and this report is necessary.

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        This report and recommendation consists of the following: (1) a discussion of the factual and procedural history of the abstention request; (2) an analysis of 28 U.S.C. § 1334(c)(1) and the law of abstention; and (3) a recommendation to abstain.

II.    Factual and Procedural History.

        A. State Court Proceedings.

        In 1976 Vida Hinchey filed for divorce from Ken Hinchey. Joseph Palmier represented Vida Hinchey in the proceeding. The case was heard by Victor Carlson, judge of the superior court and he remained the presiding judge in the case throughout its many proceedings.

        After trial in April of 1977, the court entered its findings and conclusions. Later, on July 14, 1977 Judge Carlson entered an order which imposed a trust on all major assets of Ken Hinchey from the sale of his business, Alagco, Inc. The primary asset was a receivable of approximately 1.8 million dollars. Ken Hinchey had transferred marital assets in contravention of court orders and concealed the transfers from the court during the trial. The trust was in the nature of a judgment to carry out the court's prior decree. Joseph Palmier was made trustee. The trust had substantial assets. Ken appealed the judgment. The Alaska Supreme Court affirmed Judge Carlson. Hinchey v. Hinchey, 625 P.2d 297 (Alaska 1981).

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        Palmier administered the trust as ordered by the court. In accordance with his duties as trustee, he submitted accountings to the court for approval. Ken received distributions from the trust for himself and his attorneys. Vida received funds to which she was entitled from the divorce decree.

        In December of 1984 Palmier submitted a final accounting. He suggested that funds be reserved for Vida's future support and for the future education of Clark Hinchey, the couple's retarded son, through payment of the present value of such obligations. He also sought termination of the trust on marital assets. Ken moved to terminate the maintenance obligations as well as the trust. A hearing was held before Judge Carlson on December 18, 1984. At that time Judge Carlson ordered Palmier to set up a segregated trust account with a corpus of $78,098.00 for the education of Clark.

        Ken appealed the order. The Alaska Supreme Court again affirmed Judge Carlson in a second opinion. The supreme court made some factual errors as to what had occurred in the case in terms of disbursements The supreme court also found that Ken did not have a duty to pay for Clark's continued education. Hinchey v. Hinchey, 722 P.2d 949 (Alaska 1986).

        Judge Carlson subsequently addressed the factual errors in the supreme court's decision, made a nunc pro tunc finding that the $78,000.00 fund reserved for Clark was for his support and         1 ABR 450  maintenance as opposed to his education and again approved the establishment of Clark's trust retroactive to 1984. Ken did not appeal this order.

        In June of 1990 Palmier moved to terminate this separate trust for Clark and transfer the corpus of the trust to Vida for Clark's benefit. The trustee opposed that motion in June of 1990. Notice of the automatic stay was also given to the state court Judge Carlson. Despite notice of the stay, Judge Carlson approved Palmier's proposed order terminating the trust.

        B. Bankruptcy Court Proceedings.

        Ken filed for bankruptcy in February of 1987. His sole creditor was the Internal Revenue Service. In July of 1990, Ken's bankruptcy trustee, Francis Avezac, initiated a turnover action under 11 U.S.C. § 543 to obtain $53,000.00 in funds held for Clark Hinchey's support and maintenance. Through stipulation of the parties, the funds were placed in the trust account of Joseph Palmier. They remain undisbursed pending an order from this court. As originally initiated, the trustee's complaint sought to obtain the trust funds set aside for the support of the debtor's retarded son.

        Trustee Palmier has filed a motion to dismiss for lack of jurisdiction. He submitted extensive documentation in support of his claim. Although his original motion was framed solely in terms of dismissal for lack of jurisdiction, page ten of his July 20,         1 ABR 451  1990 memorandum in support of motion to dismiss, at footnote six states:

Alternatively, if the Bankruptcy Court determines that it possesses jurisdiction to entertain this action, defendants believe that this case is appropriate for mandatory or discretionary abstention under 28 U.S.C. § 1334(c).

It is this footnote that gives rise to this court's treatment of the motion to dismiss for lack of jurisdiction as a motion for abstention.

        The plaintiff Francis L. Avezac submitted a rambling forty-eight page memorandum in opposition to the motion to dismiss submitted by Palmier as well as in support of his own motion for summary judgment. He now argues that the transfers made by trustee Joseph Palmier subsequent to the second Hinchey appeal were contrary to the orders of the state's highest court. The trustee wants possession of the Clark Hinchey trust funds and a return of funds paid to Vida Hinchey. The trustee now alleges that the state district court committed error in that it failed to comply with the Alaska Supreme Court directives on remand, particularly with reference to the Internal Revenue Service's priority over Vida's claims. The superior court's nunc pro tunc order creating the Clark Hinchey trust is also challenged by the trustee on state law grounds.

        The trustee further argues that under Alaska state law, Vida is required to return all funds transferred to her since         1 ABR 452  December of 1984. In addition to alleging that state law requires a return of trust transfers, the bankruptcy trustee argues that the transfers were preferential under 11 U.S.C. § 547. The trustee seeks to avoid the transfers since December 18, 1984 pursuant to the trustee's avoiding power under 11 U.S.C. § 548 for fraudulent transfers.

        At oral argument counsel for Palmier conceded this court has jurisdiction to determine the validity of the original turnover complaint but urged the court not to exercise that jurisdiction. Looking through form to substance, this court will treat defendant Palmier's July 20, 1990 motion and memorandum as a motion for permissive abstention pursuant to 28 U.S.C. § 1334(c)(1).

III.       Abstention.

        28 U.S.C. § 1334 provides:

        (a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.

        (b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

        (c)(1) Nothing is this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under         1 ABR 453  title 11 or arising in or related to a case under title 11.

        (2) Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceedings if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction. Any decision to abstain made under this subsection is not reviewable by appeal or otherwise. This subsection shall not be construed to limit the applicability of the stay provided for by section 362 of title 11, United States Code, as such section applies to an action affecting the property of the estate in bankruptcy.

        (d) The district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all of the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.

        The purpose behind the voluntary abstention statute was noted in Macon Prestressed Concrete Co. v. Duke, 46 B.R. 727, 731 (Bankr. D.C.M.D. Ga. 1985):

        Voluntary abstention should be considered where the debtor's estate acquires the right to prosecute an unliquidated claim based upon a transaction totally unrelated to the debtor's financial affairs, such as a claim arising from personal injury, wrongful death, or a division of marital property upon divorce. Such claims ordinarily would be tried in a state court, but, because of the fortuitous circumstance of a pending bankruptcy action, are swept into the         1 ABR 454  jurisdiction of an article I bankruptcy court because of the expansive definition of "property of the estate" as set forth in 11 U.S.C.A. § 541 (West 1979). It was these types of claims which obviously contributed to the Supreme Court's concern in Northern Pipeline Construction Co. v. Marathon Pipe Line Co, 458 U.S. 50, 102 s.ct. 2858, 73 L.Ed.2d 598 (1982).

        Other courts have indicated a consistent desire to avoid domestic relations matters either through abstention or relief from the stay. For instance, in In re MacDonald, 755 F.2d 715 (9th Cir. 1985), the Ninth Circuit stated:

It is appropriate for bankruptcy courts to avoid incursions into family law matters "out of consideration of court economy, judicial restraint, and deference to our state court brethren and their established expertise in such matters" (citations omitted).

In re MacDonald, 755 F.2d at 717. The Ninth Circuit affirmed a bankruptcy court's determination which granted relief from stay to a wife of a debtor so that she could proceed in state court with modification of a final judgment entered in divorce.

        The Sixth Circuit, in In re White, 851 F.2d 170 (6th Cir. 1988), affirmed a decision of the bankruptcy court granting relief from stay to permit divorce proceedings to continue in state court, so that the state court could determine the spouses' interests in the marital assets. The bankruptcy court had lifted the stay solely to permit the state court to determine the substantive rights of the parties in the property, stating it had "exclusive         1 ABR 455  jurisdiction over the property of the Debtor . . . when the state court defines what is the property of the Debtor." Id. at 174.

        In In re Erickson, 26 B.R. 973 (Bankr. C.D.Ca. 1983), a woman who had lived with debtor filed a motion with the bankruptcy court asking the court to abstain from exercising jurisdiction over a property division dispute resulting from a "palimony" action in state court. She also asked the court to excuse a custodian from the turnover requirements contained in § 543 of the Bankruptcy Code. The woman had sued the debtor in state court on account of her 15 year non-marital relationship with him, and the state court had entered an interlocutory judgment dividing the real and personal property of the parties in April, 1982. A referee had been appointed to try to sell some of the assets in May, 1982, and either had sold or was trying to sell these assets when debtor filed Chapter 7 in October, 1982. Although debtor had filed a notice of appeal with respect to the interlocutory judgment, he had failed to post a bond, so that execution of the judgment was not stayed.

        The court noted that, although movant had not directly requested it to abstain from exercising jurisdiction over the state court civil action, if it had been asked it would have done so under principles of comity, "particularly since that case had been tried and [a judgment] entered." Id., at 976. With respect to the motion under § 543, the court excused the referee from the         1 ABR 456  requirements of that section to permit the property to be sold, but indicated that the net proceeds to which debtor would be entitled, as determined by the state court, should be turned over to the bankruptcy court after the property was liquidated.

        In In re Heslar, 16 B.R. 329 (Bankr. W.D. Mich. 1981), the bankruptcy court abstained from determining the rights of a debtor and his spouse in proceeds from the sale of real property owned by them as tenants by the entirety, in spite of the fact that the bankruptcy trustee had sold the property. The court deferred to the state court handling the divorce for this determination, stating "[i]n no other field does abstention better serve the interest of the parties and other interested persons than in that of domestic relations law." Id. at 333. The court indicated that it would enter orders appropriate to implement the state court orders, once the property rights had been determined. A similar result was reached by the bankruptcy court in Matter of Hursa, 87 B.R. 313 (Bankr. D.N.J. 1988), where the court decided to abstain, under § 1334(c) (2), from determining the parties rights in marital property. The court noted that "the adjudication in state court will thus define what property is owned by the debtor-spouse and passes to the trustee as property of the estate." Id., at 324.

        As in the prior cases, nothing in this proceeding indicates that the interests of justice or the interests of comity with state courts or respect for state law will be served by this         1 ABR 457  court's assertion of jurisdiction. The Hinchey cases have been through the state court judicial process over and over again. For this court to adjudicate marital claims nearly thirteen years after entry of the divorce decree would create a schism between federal bankruptcy courts and state courts. It would degrade respect from state law. It would not promote the interests of justice. It would promote endless divorce litigation and allow the trustee to inflict substantial hardship upon an ex-wife and the debtor's retarded son. There is no substantive reason for this court to enter this controversy.

        Additionally, this court has reviewed the recent decision of the Ninth Circuit in In re Tuscon Estates. Inc., 912 F.2d 1162 (9th Cir. 1990) which adopted the criteria of In re Republic Reader's Service. Inc., 81 B.R. 422, (Bankr. S.D. Tex. 1987) regarding abstention. A review of those criteria and the previously cited case law leads me to recommend abstention.

IV.    Conclusion

        In the interests of comity with state courts and respect for state law, as well as in the interests of justice, I recommend that this court abstain from hearing the present controversy. A proposed order approving abstention is attached hereto.





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        Respectfully submitted this 2nd day of April, 1991.




DONALD MacDONALD IV
Bankruptcy Judge




Serve:	H. Gazaway, Esq.
	H. Wade, Esq.
	D. Gorman, Esq.
	Vida Hinchey and Clark Hinchey, 1555 Nelchina St., Apt. 3, Anchorage, AK 99502