An upstate woman who repeatedly misled courts in an apparent effort to keep life insurance proceeds meant for her husband’s children was denied bankruptcy relief in a strongly worded ruling.

Northern District Bankruptcy Judge Margaret Cangilos-Ruiz (See Profile), who wrote the decision, also ordered the woman to pay pre- and post-petition legal fees totaling $23,354 to the plaintiffs’ attorney in Utica.

“This situation is not due to a calamity or the debtor’s oversight or error, but rather resulted from a course of conduct intentionally undertaken by the debtor through which she spent more than $80,000 that did not belong to her and then attempted to cover it up by her lies and dissembling,” Cangilos-Ruiz wrote in Henri v. Wheeler, 13-50017. “Bankruptcy was never intended to shield a debtor from the justifiable consequences of her own wrongful acts.”

The decision resulted from an adversary proceeding brought against debtor Linda Wheeler by her husband’s former spouse of 20 years and their two children.

Records show that the deceased husband had two life insurance policies worth about $233,000 and, as part of a divorce settlement, was supposed to maintain his children as beneficiaries. But the man changed the policies, naming Wheeler as beneficiary, and she got the proceeds when he died.

When the distribution was challenged, Wheeler promised to hold the money in escrow, but reneged, according to court records. According to Cangilos-Ruiz’s decision, Wheeler had, in violation of a state court order, “invaded the insurance proceeds,” giving some of the money to her daughter, buying a car and paying off various expenses.

Supreme Court Justice Bernadette Clark in Oneida County ordered Wheeler to return the money, expressing outrage that she had turned in “concocted” documents and a dishonest sworn affidavit, and held her in civil contempt.

Eventually, all but about $81,058 was returned to the plaintiffs, and Wheeler attempted to discharge that obligation in bankruptcy. But Cangilos-Ruiz said Wheeler’s “deceptive behavior continued throughout her bankruptcy case.”

The judge said Wheeler initially filed a Chapter 7 case in which she failed to disclose that she had filed a similar bankruptcy a few years earlier, then filed a Chapter 13 repayment plan proposing to pay 10-cents-on-the-dollar of her obligation and falsely testified under oath at a meeting of creditors that she had used some of the money to pay her husband’s funeral expenses.

Clifford Eisenhut of Kalil & Eisenhut in Utica, counsel for the plaintiffs, moved to deny the bankruptcy on several grounds, arguing that the life insurance proceeds amounted to a domestic support obligation that is not dischargeable, and that his claim for a judgment and legal fees was the equivalent of criminal restitution, which cannot be eliminated in bankruptcy.

Although Cangilos-Ruiz rejected those arguments, she said the bankruptcy petition was “one more attempt to deprive (the plaintiffs) of the life insurance proceeds and hinder their efforts to collect their judgment” and refused to allow Wheeler to evade her financial obligations. She also said Wheeler declined to testify, attend trial or introduce evidence that her petition was filed in good faith.

“The fact that debtor’s obstructionist and contumacious behavior continued in proceedings before this court after she filed bankruptcy is clear and convincing evidence of bad faith that infects her plan,” Cangilos-Ruiz wrote.

The judge said the $14,063 in attorney fees the plaintiffs accumulated in connection with the Supreme Court litigation is nondischargeable. In addition, she sanctioned Wheeler $9,292 in postpetition legal fees for filing a bad faith bankruptcy petition.

Eisenhut said a contempt proceeding before Clark that was stayed pending the bankruptcy will probably resume. He said the takeaway from the decision was: “Bankruptcy court is not a place that a debtor with terribly unclean hands can retreat to and expect a discharge of the debt.”

Wheeler’s attorney, David Gruenewald of Manlius, was not immediately available for comment. Lynn Harper Wilson of Syracuse appeared as counsel to the Chapter 13 trustee.