Garon Reeves v. IRSGaron Reeves v. IRS
Case Information
*1 Before SHEDD and WYNN, Circuit Judges, and HAMILTON, Senior Circuit Judge.
*2 Affirmed by unpublished per curiam opinion.
ARGUED: William Earl Brewer, Jr., THE BREWER LAW FIRM, Raleigh, North Carolina, for Appellants. Angus Scott McKellar, BATTLE, WINSLOW, SCOTT & WILEY, PA, Rocky Mount, North Carolina, for Appellees. ON BRIEF: Raymond M. DiGuiseppe, Tara Twomey, NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS, San Jose, California, for Amicus National Association of Consumer Bankruptcy Attorneys. Martin P. Sheehan, SHEEHAN & NUGENT, P.L.L.C., Wheeling, West Virginia, for Amicus The National Association of Bankruptcy Trustees.
Unpublished opinions are not binding precedent in this circuit. *3
PER CURIAM:
The Chapter 7 debtors in this case contend that because the value of their actual interest in their residence does not exceed the amount of aggregate interest in such residence they claim as exempt from the bankruptcy estate under North Carolina law, the bankruptcy court’s grant of their claimed exemption in the residence actually removed the entirety of the residence from the bankruptcy estate, such that the bankruptcy court lacked statutory authority to grant the bankruptcy trustee permission to sell the residence as part of his duties in administering the bankruptcy estate. For reasons that follow, we disagree and affirm the district court’s affirmance of the bankruptcy court’s grant of the trustee’s motion to sell the residence.
I.
On March 31, 2010, husband and wife Garon and Diane Reeves
(Debtors) filed a joint Chapter 7 bankruptcy petition in the
United States Bankruptcy Court for the Eastern District of North
Carolina.
Because North Carolina is as an opt-out state with respect
to the Bankruptcy Code’s uniform list of property for which a
debtor can seek to exempt from the bankruptcy estate, see
On Amended Schedule C, filed by Debtors as part of Debtors’ Chapter 7 petition, Debtors listed $60,000.00 as the “VALUE OF REAL ESTATE CLAIMED AS EXEMPT.” (J.A. 96). The form described such real estate as Debtors’ residence and listed 1425 Chelton Oaks Place, Raleigh, North Carolina as its address. Just below this information, Debtors listed the following information denoted by an asterisk:
Debtors exempt their entire interest in this property despite the lack of equity. The $60,000.00 amount is the value of the interest in the residence that debtors can exempt and without using up any wild card exemption under NCGS §1C-1601(a)(2). Should the trustee or any other party in interest contend that the[re] would be any funds available for distribution to creditors after paying the consensual lien, [and] the Federal Tax lien, . . . that party should file a timely objection to this claim of exemption.
(J.A. 96) (emphasis added).
The bankruptcy trustee assigned to Debtors’ bankruptcy (the Trustee) filed an objection to Debtors’ exemption claim with respect to Debtors’ Residence on the ground that Debtors had no equity in it. Debtors filed a response to the Trustee’s objection, taking the position that they have a right to exempt their interests in an asset in which they have no equity.
Following a hearing on the matter, the bankruptcy court entered an order denying the Trustee’s objection on the ground that, notwithstanding the Debtors’ lack of equity in Debtors’ Residence, Debtors “are entitled to assert and reserve their available exemptions in” Debtors’ Residence. (J.A. 111). Notably, the bankruptcy court stated in its order that its denial of the Trustee’s objection and its grant of the Debtors’ reservation of their exemption in Debtors’ Residence did not prevent the Trustee from filing a subsequent motion seeking authority to sell Debtors’ Residence “in order to generate funds for a recovery to unsecured creditors in the case upon a carve out assigned by the IRS or some other method.” Id. “Similarly,” the bankruptcy court stated, “the objections of the Debtors to such a motion are deemed reserved as well.” Id.
The Trustee subsequently moved for authority to sell Debtors’ Residence free and clear of liens with the transfer of any valid liens to attach to the net sale proceeds. In such *7 motion, the Trustee correctly stated that the IRS had agreed to carve out 30% of the net proceeds of the sale of Debtors’ Residence otherwise subject to the IRS’ tax lien for the payment of allowed administrative claims, with any balance to be paid on a pro rata basis to unsecured creditors. Debtors objected to the Trustee’s motion on the ground that the bankruptcy court’s order allowing them to reserve their claimed exemption with respect to Debtors’ Residence actually removed Debtors’ Residence from the bankruptcy estate, such that the Trustee lacked statutory authority to sell it.
The bankruptcy court granted the Trustee’s motion for authority to sell Debtors’ Residence. The bankruptcy court specifically rejected Debtors’ argument in opposition to the motion as follows:
All property of the debtors became property of the
estate at the time of the filing of the petition in
this case. After the property came into the estate,
the debtors were entitled to exempt it under
Debtors appealed the bankruptcy court’s order granting the Trustee permission to sell Debtors’ Residence to the district court. On appeal, the district court affirmed on the reasoning of the bankruptcy court. Debtors filed a timely appeal of the district court’s order to our court as the second layer of appellate review in bankruptcy proceedings. The Trustee and the IRS are appellees in the present appeal.
II.
In the present appeal, Debtors acknowledge that, upon
filing their Chapter 7 petition on March 31, 2010, their legal
interest in Debtors’ Residence became property of the bankruptcy
estate pursuant to
Debtors’ position is without merit. The fatal flaw in Debtors’ position is that it ignores the distinction between exempting an asset itself from the bankruptcy estate and exempting an interest in such asset from the bankruptcy estate. The Supreme Court made the point crystal clear in its Schwab decision, 130 S. Ct. at 2661-63. In that case, the debtor claimed certain restaurant equipment as exempt and placed a value within the allowed exemption range. Id. at 2657-58. A later appraisal valued the equipment at an amount that substantially exceeded the statutorily allowed exemption amount. Id. at 2658. Because the equipment appraised at a higher value than the debtor’s claimed exemption, the Schwab trustee moved the bankruptcy court for permission to sell the equipment, with the proceeds first distributed to the debtor in the amount equal to her claimed exemption and the balance distributed to her creditors. Id.
The debtor opposed the sale. Id. In so opposing, the debtor did not dispute the validity of the higher appraisal. Id. Rather, she opposed the motion to sell on the ground that because the monetary value in the equipment that she claimed as exempt in Schedule C of her bankruptcy petition equaled the monetary value that she listed in Schedule C as the equipment’s fair market value, the trustee was obliged to object to her claim of exemption if he wanted to preserve the estate’s right to retain any value in the equipment above the monetary value that she claimed to be exempt. Id. In this regard, the debtor reasoned that her equating of the two values put the trustee on sufficient notice that she intended to exempt the full value of the equipment. Id.
Agreeing with the debtor, the bankruptcy court in Schwab
denied the trustee’s motion to sell the equipment. Id. at 2659.
The district court affirmed the bankruptcy court, and the Third
Circuit affirmed the district court. Id. In affirming the
district court, the Third Circuit relied upon Taylor v. Freeland
& Kronz, 503 U.S. 638 (1992), which decision the Third Circuit
interpreted as having the unstated premise that a debtor who
exempts the entire estimated value of an asset reported on
Schedule C is claiming the full amount of such asset, whatever
the actual value turns out to be. In re Reilly, 534 F.3d 173
(3d Cir. 2008). “Relying on this ‘unstated premise,’ the [Third
*11
Circuit] held that [the trustee’s] failure to object to [the
debtor’s] claimed exemptions entitled [the debtor] to the
equivalent of an in-kind interest in her business equipment,
even though the value of that exemption exceeded the amount that
[she] declared on Schedule C and the amount that the Code
allowed her to withdraw from the bankruptcy estate.” Schwab,
The majority opinion in Schwab ruled against the debtor, holding that the Third Circuit’s approach failed to account for the text of the relevant provisions of the Bankruptcy Code and misinterpreted Taylor. Id. In setting up the opposing arguments, the Court noted that the debtor asserted that the “‘property claimed as exempt’” under the Bankruptcy Code by the debtor is defined by reference to all the information on Schedule C, including the estimated market value of each asset in which the debtor claims an exempt interest. Id. at 2660. The Court then noted that the
Schwab [trustee] and the United States as amicus curiae argue[d] that the [Bankruptcy] Code specifically defines the “property claimed as exempt” as an interest, the value of which may not exceed a certain dollar amount, in a particular asset, not as the asset itself. Accordingly, they argue that the value of the property claimed exempt, i.e. , the value of the debtor’s exempt interest in the asset should be judged on the value the debtor assigns the interest, not on the value the debtor assigns the asset. Id.
The Schwab Court agreed with this argument by the trustee
and the United States as amicus curiae. Id. at 2661-63. Of
relevance to the present appeal, in so agreeing, the Schwab
Court explained the process under the Bankruptcy Code for
property coming into the bankruptcy estate to be later reclaimed
by the debtor through the exemption process. Id. at 2663-65.
The Court explained that first, most of a debtor’s assets become
property of the estate upon commencement of the bankruptcy case.
Id. at 2663. The Schwab Court then explained that “exemptions
represent the debtor’s attempt to reclaim those assets or, more
often, certain interests in those assets, to the creditors’
detriment.” Id. at 2663-64. Notably, the Court opined that the
Third Circuit’s decision not only fails to account for the
Bankruptcy Code’s definition of the “‘property claimed as
exempt,’” id. at 2662-63 (quoting
Another part of the Schwab opinion relevant to the present appeal before us is the Court’s response to the debtors’ contention that the Court’s approach creates perverse incentives for trustees and creditors to sleep on their rights:
Where a debtor intends to exempt nothing more than an
interest worth a specified dollar amount in an asset
that is not subject to an unlimited or in-kind
*13
exemption under the [Bankruptcy] Code,
our approach
will ensure clear and efficient resolution of
competing claims to the asset’s value. If an
interested party does not object to the claimed
interest by the time the Rule 4003 period expires,
title to the asset will remain with the estate
pursuant to
Id. at 2667-68 (emphasis added).
Applying the teachings of Schwab to the present appeal
compels us to affirm the district court. Debtors concede that,
at the commencement of their bankruptcy case, their legal
interest in Debtors’ Residence became part of the bankruptcy
estate. There is also no dispute that, pursuant to applicable
North Carolina law, Debtors sought to exempt an aggregate
interest in Debtors’ Residence in the amount of $60,000. The
Trustee objected on the ground that Debtors had no equity in
Debtors’ Residence. Following a hearing on the matter, the
bankruptcy court entered an order denying the Trustee’s
objection on the ground that, notwithstanding the Debtors’ lack
of equity in Debtors’ Residence, Debtors “are entitled to assert
and reserve their available exemptions in” Debtors’ Residence.
(J.A. 111). Under the clear teachings of Schwab, because
Debtors’ Residence is not subject to an unlimited or in-kind
exemption, title to Debtors’ Residence remained with the
*14
bankruptcy estate pursuant to
Notably, the fact that the IRS agreed to allocate part of
its tax lien as a carve-out for unsecured creditors has no
adverse consequences for Debtors because the Trustee confirmed
before the bankruptcy court that Debtors will receive full
credit with respect to the IRS lien for any amount paid to
unsecured creditors from the sale proceeds as part of the
carve-out. Also notable is the fact that the carve-out takes
this case out of the “now almost universally recognized [rule]
that where the [bankruptcy] estate has no equity in the
property, abandonment is virtually always appropriate because no
unsecured creditor could benefit from the administration.” In
re: Feinstein Family Partnership, 247 B.R. at 507. Here, the
carve-out operates to assign equity in Debtors’ Residence for
the benefit of the bankruptcy estate (i.e., unsecured
creditors), thus justifying the Trustee’s action in selling
*15
Debtors’ Residence as opposed to abandoning it. See In re
Rambo, 297 B.R. 418, 433-34 (Bankr. E.D. Pa. 2003) (trustee may
sell debtor’s property under
III. To summarize, Debtors’ Residence remained property of the bankruptcy estate despite the bankruptcy court allowing Debtors to reserve an exemption of $60,000 as their aggregate interest in Debtors’ Residence subordinate to the first mortgage lien and the federal tax lien. Therefore, Debtors’ argument that the Trustee lacks the statutory authority to sell Debtors’ Residence because such asset is no longer property of the bankruptcy estate is without merit. Accordingly, we affirm the district court’s affirmance of the bankruptcy court’s order granting the Trustee permission to sell Debtors’ Residence.
AFFIRMED