MEMORANDUM
Two motions are presently before me in this chapter 7 bankruptcy case — described by the trustee as a “twisted, sad case.” Trustee’s Memorandum, at l. 1 The first motion, filed on April 5, 2007, is the trustee’s request to sell the debtor’s residence at public auction, pursuant to 11 U.S.C. § 363(b) and (f). The second motion, filed on April 26, 2007, is the debtor’s motion to amend his exemption claims, so as to declare his residence exempt under Pennsylvania law. Previously, the debtor had elected the federal exemptions found in section 522(d), including its homestead exemption.
The trustee opposes the debtor’s request to amend his exemption claims, while the debtor opposes the trustee’s request to sell his residence. The only creditor who has filed a proof of claim in this case, Ms. Joanne Ardary, aligns with the trustee’s positions.
An evidentiary hearing was held on both contested matters, and the following facts were proven.
I.
The debtor, John Romano, and his wife, Mary Romano, live at 7411 Hill Road, Philadelphia Pennsylvania. They purchased this realty around 1968 and own it as tenants by the entireties. Presently, only the debtor and his spouse reside in the property. They are elderly and not in good health.
Ms. Joanne Ardary is the debtor’s niece. When her uncle, Mr. Samuel Romano, the debtor’s brother, died in 1998, the debtor obtained certain insurance proceeds arising from this death. Ms. Ardary claimed that she was the rightful beneficiary to a portion of those proceeds, and, after trial, the state court agreed. She obtained a judgment against the debtor in December 2004. See Ex. A-3.
On April 22, 2005, Mr. Romano filed a voluntary petition in bankruptcy under chapter 7. Terry P. Dershaw, Esquire, was appointed interim trustee under section 701 and, at the conclusion of the creditors’ meeting, became the permanent chapter 7 trustee. 11 U.S.C. § 702.
The debtor’s bankruptcy petition asserted that he had no non-exempt assets to distribute to creditors. 2 He filed his bank- *458 raptcy schedules at the same time as his chapter 7 petition in April 2005. His schedule of real property disclosed his ownership interest in the Hill Road residence, valued at $130,000 with a mortgage lien of only $37,400, as well as a Florida trailer-home valued at $15,000 with no secured claims against it. Both real properties were claimed to be held as tenants by the entireties. See Schedules A and D, Ex. A-17. On the debtor’s list of his personal property, he disclosed, inter alia, four Individual Retirement Accounts, totaling about $18,000. He also listed an automobile valued at $6,000. See Schedule B, Ex. A-17.
On the debtor’s Schedule C, the list of exemptions, he checked off the box located toward the top of the document, stating that he elected the exemptions available to him under 11 U.S.C. § 522(b)(1) and 522(d): the federal bankruptcy law exemptions. 3 And, consistent with this election, the debtor asserted that his automobile was exempt under 11 U.S.C. § 522(d)(2) and (d)(5). The debtor also claimed as exempt under 11 U.S.C. § 522(d)(10)(E) all four IRA accounts. Inconsistently, however, the debtor claimed his interests in his Philadelphia residence and Florida trailer as exempt under Pennsylvania entireties law. See Schedule C, Ex. A-17.
On June 13, 2005, the chapter 7 trustee commenced but did not conclude the meeting of creditors under 11 U.S.C. § 341. The docket entry (No. 7, Ex. A-2) reflects that the trustee did not conclude this meeting as he intended to investigate the debtor’s assets. Although there is no corresponding docket entry, it appears that this creditors’ meeting was resumed and concluded on September 12, 2005.
Ms. Ardary filed an unsecured proof of claim dated July 21, 2005, in the amount of $28,331.96, based upon her pre-petition state court judgment. Ex. A-l. On October 12, 2005 (within 30 days of the conclusion of the § 341 meeting,
see
Fed. R. Bankr.P. 4003(b)
4
) Ms. Ardary filed objections to the debtor’s exemption claims. Ms. Ardary objected to the debt- or’s attempt to claim the federal exemptions under section 522(b)(1) as to some property interests and the state law exemptions under section 522(b)(2) as to other property interests.
See In re Harless,
Notice of these objections was provided to the debtor and the chapter 7 trustee, with a hearing scheduled for November 16, 2005 and an answer deadline of November 1, 2005. The debtor did not file any response to Ms. Ardary’s objections; nor did he appear at the November 16th hearing.
By order dated November 21, 2005, I entered an order sustaining Ms. Ardary’s objections to the debtor’s attempt to claim both federal bankruptcy and state law exemptions. Given that the debtor’s Schedule C checked off the box electing federal exemptions under section 522(b)(1), ^..disallowed the debtor’s exemption claims'under Pennsylvania law for both pieces of realty. In addition, as the debtor offered no evidence in support of his exemptions under section 522(d)(10)(E), I also disallowed his IRA exemptions. Ex. A-4. Ms. Ardary filed a certificate stating that a copy of the November 21st order was served by her attorney upon the debtor and his counsel. See Ex. A-2 (Docket # 19). 7
Based upon this ruling disallowing certain exemptions, Mr. Dershaw, the trustee, gave notice that he intended to administer non-exempt assets in this case, see Ex. A-2 (docket entry # 18), and engaged counsel to the trustee. See Ex. A-2 (docket entries ## 16, 20, 24, and 26). Once again, the court clerk docketed a certificate stating that notice of this order permitting the trustee to engage counsel was sent to the debtor and debtor’s counsel (among others). Ex. A-2 (docket entry # 27).
On April 12, 2006, the trustee’s counsel filed a complaint against Wachovia Corporation, seeking turnover of the four IRA accounts that had been declared non-exempt. Ex. A-6. Seven days later, he withdrew that lawsuit. But on May 24, 2007, he brought a similar lawsuit against Wa-chovia Bank, N.A. and Wachovia Securities LLC. Ex. A-2 (docket entry # 49); Ex. A-13. The trustee testified that, after commencement of this second lawsuit, he discovered that only one IRA account was titled in the debtor’s name. This account has a balance of $8,700, and the Wachovia defendants are awaiting the outcome of the debtor’s instant motion to amend exemptions before turning over the proceeds of this account to the trustee.
Insofar as the debtor’s Philadelphia realty is concerned, on May 23, 2006 the trustee filed an application to engage a real estate broker to sell the debtor’s residence on Hill Road. The application included a proposed listing agreement between the broker and the trustee, with an asking price of $260,000. Ex. A-6. On June 5, 2006, the application was granted as unopposed. Ex. A-7. A copy of the order approving the trustee’s engagement of a real estate broker was sent to the debtor *460 and the debtor’s counsel on June 8, 2006. Ex. A-2 (docket entry # 31).
The debtor conceded during his testimony in this contested matter that he removed the “for sale” signs posted by the broker on his property. He also testified that the real estate broker never attempted to enter the residence. (I do not find his testimony credible regarding the failure of the broker to seek access to the realty.) The trustee testified that he has had inquiries about the property but no offers. There was no evidence that any interested buyers had been permitted to inspect the property.
On July 6, 2006, the trustee filed a motion to compel the debtor to turn over to him title to the Florida trailer and all funds that the debtor had withdrawn from his IRA accounts. Ex. A-8. On July 26, 2006, the debtor responded in opposition to this turnover motion, asserting that the IRA accounts and the trailer were exempt property under Pennsylvania law.
At a hearing held on August 2, 2006, the trustee acknowledged that ^e had learned from Wachovia that there was only one IRA account titled in the debtor’s name held by Wachovia, and that the debtor had not withdrawn any funds from that account. Thus, he acknowledged that he could not properly seek turnover of its proceeds from the debtor. By order dated August 3, 2006, however, I did direct that the debtor surrender his certificate of title to the Florida trailer to the trustee, as that property had been determined as not exempt in November 2005. Ex. A-9. 8
Apparently, the debtor complied with this turnover directive, giving the trustee his certificate of title to the trailer. However, the trustee testified at the hearing on the instant motions that, due to liens assessed against the trailer by the owner of the location upon which the trailer sits, there was insufficient equity to justify selling the Florida trailer.
On March 5, 2007, the trustee filed an application to appoint an auctioneer to sell the Philadelphia realty owned by the debt- or and his wife at public auction. Ex. A10. The application to engage a professional was approved as unopposed on March 21, 2007. Ex.A-11.
As noted earlier, on April 5, 2007, the trustee filed a motion to sell the realty on 7411 Hill Road free and clear of all liens (with all valid liens attaching to the sale proceeds) at public auction under “[s]ec-tions 363(b), (f), and (m) and 105 of the Bankruptcy Code[.]” Motion, ¶ 14. The certificate of service attached to the motion stated that it was served “by regular mail upon all creditors and parties in interest.” The proposed order attached to the motion contains a service list that includes the debtor and his attorney. There is no evidence that Mrs. Romano was served with this motion to sell.
The sale motion itself contains no provision for a minimum bid at the auction. Nor does the motion provide for opportunity for matching bids by Mrs. Romano. Indeed, the motion itself does not expressly provide for the sale of Mrs. Romano’s interest in the realty. Instead, it requests only that the sale be free and clear of all liens, with the liens attaching to the proceeds of sale. Motion, ¶ 14.
The debtor opposed this relief, arguing that Ms. Ardary’s judgment against only the debtor does not permit this creditor to execute against entireties property under *461 state law, 9 and that the trustee should not be permitted to proceed against the property to the detriment of the debtor and his wife.
Also mentioned above, on April 26, 2007, the debtor filed a motion for leave to “change his Schedule ‘C’ option to ‘State Exemptions’ and/or ordering that the real property situate [at] 7411 Hill Road, Philadelphia, PA and debtor’s Individual Retirement Accounts are exempt by virtue of the hardship presented.” Motion To Change Election of Exemptions, Wherefore Clause. The trustee and Ms. Ardary oppose such relief, for reasons to be discussed.
II.
Before addressing the legal issues posed by the two motions, I need mention one last circumstance, as it affects the parties’ positions in these contested matters.
A hearing was first held on both pending motions on June 20, 2007. At that hearing, the parties reported that the matter was settled. (A transcript of that hearing was offered in evidence as Ex. A-14.) The settlement was agreed to by all parties, including Ms. Ardary (through her counsel), the trustee (who was present and with counsel) and by Mr. and Mrs. Romano, who were also present in court with Mr. Romano’s attorney. The terms of the settlement placed upon the record were as follows.
Within two weeks of June 20th Mr. Romano would pay the trustee $20,000, of which $5,000 would be paid from the IRA funds held by Wachovia. From those funds, the trustee’s commission under sections 326 and 330, plus the trustee’s allowed counsel fees under section 330, would be paid. The balance of the funds would be distributed to Ms. Ardary, the sole creditor with an allowed claim in this case. In addition, at the same time as the debtor was tendering the agreed sum to the trustee, the debtor and his wife would also present a note in the amount of $15,000 in favor of Ms. Ardary, secured by a mortgage on their Philadelphia residence. This promissory note, however, would bear no interest, nor any specific maturity date. The note would be payable only from the proceeds of the sale of the Hill Road realty, or upon the death of both the debtor and Mrs. Romano. Thus, as long as either Mr. or Mrs. Romano resided in the Hill Road property, the note held by Ms. Ardary would not be payable and would not accrue interest: nor could she foreclose upon the realty.
Finally, and also relevant, the parties agreed that if the debtor failed to tender $20,000 to the trustee, or if he and his wife failed to present the note and mortgage to Ms. Ardary, the settlement agreement among them was null and void. Ex. A-14.
Mr. Romano paid timely $20,000 to the trustee, but he refused to sign the note and mortgage in favor of Ms. Ardary. He took the position that he never understood this aspect of the settlement and considered it unfair and unnecessary. As his rejection of this component nullified the settlement, the trustee then requested that his motion to sell and the debtor’s motion to amend his exemptions be relisted for hearing, which request was granted and a hearing was held on August 27, 2007. 10 Thereafter, the parties were afforded the *462 opportunity to submit post-hearing memo-randa.
III.
Since the trustee’s motion to sell is predicated upon the Philadelphia realty not being exempt, see,
e.g., In re Covington,
The trustee and Ms. Ardary raise two grounds for denying the debtor his current effort to elect Pennsylvania exemption laws to protect his interest in real and personal property from liquidation by the trustee. First, the objectors assert that the debtor cannot amend his exemption schedule because the exemption issue was previously litigated in November 2005, and principles of res judicata now govern. Alternatively, the trustee and Ms. Ardary assert that allowing the debtor to amend *463 his exemptions at this time is prejudicial to the trustee, who has proceeded to administer the assets based upon the debtor’s election of the federal exemptions, and to Ms. Ardary, who has engaged counsel to ensure a distribution from non-exempt property and who has incurred counsel fees in that effort. The debtor counters that given the length of time he has resided in the property, his ill-health, and the inability of Ms. Ardary to reach his realty prior to his bankruptcy filing, it would be unfair to deny him the opportunity to protect it and his retirement funds. The debtor also maintains that the trustee can retain the $20,000 paid to him to offset any expenses incurred by his counsel.
A.
Res judicata, or claim preclusion “applies to claims that “were or could have been raised’ in a prior action involving the ‘parties or their privies’ when the prior action had been resolved by ‘a final judgment on the merits.’ ”
In re Graham,
Although application of this preclusion principle in bankruptcy cases often concerns prepetition state court judgments,
see generally In re Genesys Data Technologies, Inc.,
In this contested matter, the trustee and Ms. Ardary are correct that the preclusive effect of res judicata has been deemed relevant to disputes involving objections to a debtor’s exemption claims.
See, e.g., In re Cogliano,
Whenever a debtor has claimed certain property as exempt, the bankruptcy trustee has objected to that exemption claim, and there has been a final, non-appealed ruling sustaining the trustee’s objection, all of the elements of claim preclusion have been established, and so the debtor cannot later amend her exemptions to relitigate that issue:
Bankruptcy courts should disallow an amended claim of exemption where the purpose and/or the effect of the amendment is to allow the debtor to relitigate an exemption claim which has already been determined by the court.
In re Daniels,
Two reported decisions from the Bankruptcy Court for the District of Minnesota have applied claim preclusion to deny a chapter 7 debtor’s motion to amend exemptions by changing exemption elections under section 522(b), when such amendment has been sought after an adverse ruling on exemptions. In
In re Walls,
The application of res judicata, however, will not preclude a debtor from filing amended exemptions under Rule 1009(a), unless a final order denying an exemption claim for the same asset has previously been entered.
See generally In re Magallanes.
Nor is the debtor precluded subsequently from arguing that the challenged property is not property of the bankruptcy estate, rather than exempt.
See In re Cogliano,
As one court has observed, the obligation of a debtor to carefully review and modify his exemption claims when challenged by the bankruptcy trustee, or be precluded from later amendment, mirrors the trustee’s duty to analyze timely the debtor’s exemption claims or be barred from any later challenge, as held in
Taylor v. Freeland & Kronz,
They promote the expeditious resolution of exemption claims and the efficient administration of the bankruptcy estate. The inverse implication of Taylor’s holding that the trustee is precluded from asserting a valid objection to a debtor’s claimed objection, where he has failed to *465 object within the time limits established by the procedural rules, is that the debt- or may not assert a valid claim of exemption, where he has failed to appropriately defend that claim when attacked by the trustee’s objection.
In re Daniels,
In this dispute, the record is clear that Ms. Ardary objected to the debtor’s exemption claims in October 2005, and these objections as to the debtor’s realty (and IRA accounts) were sustained by a final order dated November 21, 2005. Based upon the debtor’s Schedule C election, he was allowed the federal bankruptcy exemptions under section 522(d). He was not allowed to exempt the four IRA accounts under section 522(d)(10)(E), for lack of evidence. This order was entered without any response from the debtor.
The debtor, who was served with this order, as was his counsel, did not file a notice of appeal from this adjudication, nor did he seek reconsideration under Fed. R. Bankr.P. 9023 or relief from that order by virtue of Fed. R. Bankr.P. 9024. Accordingly, his motion to amend schedule C (based upon procedural bankruptcy rule 1009(a)), filed approximately 18 months later, to exempt the same property by utilizing a different legal theory, is now precluded:
Rule 1009(a) does not assist debtors. First, the right to amend schedules to add exemptions “is not the same as the right to the exemption.” In re Andermahr,30 B.R. 532 , 534 (9th Cir. BAP 1983). The issue before the bankruptcy court was an objection to the exemption. Even if debtors could amend their schedules to claim the exemption, the mere fact that they can claim the exemption does not necessarily mean that they are entitled it.
In re Wolfberg,
B.
The recent decision by the Eight Circuit Court of Appeals in
In re Ladd,
In Ladd, the chapter 7 debtors elected the federal bankruptcy exemptions and under them claimed their farm realty as exempt, as well as claiming exempt other miscellaneous personal property that would not have been exempt under state law. The bankruptcy trustee objected to the realty exemption claim on the basis that the value of the farm property exceeded the homestead exemption ceiling under section 522(d)(1), and so this excess value was non-exempt. The debtors did not respond to the trustee’s objection, the Eighth Circuit concluded, because to do so would not have been cost effective:
Once the Trustee objected to the homestead exemption, questioning the value of the Ladds’ homestead interest, it became too costly to proceed with the federal exemptions because the Ladds would have had to obtain expert testimony and expend attorney fees for litigation regarding the value of their homestead. Since the value of the miscellaneous personal property was so low, it was not worth the expense of litigation over the valuation of their homestead. So rather than litigate the federal homestead issue, and assuming that they could amend their schedules at any time before the close of the bankruptcy case pursuant to Rule 1009, the Ladds chose not to fight the objection and al *466 lowed a default judgment on the federal exemption to be entered against them.
In re Ladd,
The Eighth Circuit Court of Appeals then held that the debtors were not precluded from amending their exemption election- — from those provided by federal bankruptcy law under section 522(d) to those provided by state law, which amendment would protect their farm property regardless of its value- — -because they had no financial incentive to litigate the objection to exemption file by the trustee:
Under these circumstances, we find that the cause of action is not the same for res judicata purposes. The key operative facts of the federal exemption litigation would have been whether the Ladds’ interest in the homestead was greater than the maximum allowed by federal bankruptcy law — $34,850. The key facts in a proceeding under the Minnesota exemption would be whether their homestead interest exceeded 160 acres or the $500,000 limit. The substance of what the debtors would have to prove in each action is substantially different. Under federal law, a debtor’s focus would be on value, and under Minnesota law, it would be on acreage. Since the Ladds had so little equity in their home, it made sense for them to initially proceed under the federal scheme and try to exempt other personal property pursuant to the wildcard statute. But there was “little motivation” and “little incentive” for the Ladds to engage in costly litigation defending the federal homestead exemption in order to exempt $1,600 worth of personal property.
Id., at 754-55.
Having decided that res judicata did not prevent the debtors from amending their exemption claims, the Eighth Circuit then considered whether the amendment should be barred due to “bad faith” or “prejudice” to creditors. Id., at 755. It held that there was no evidence offered to bar the amendment on those grounds:
Because there have been no allegations of bad faith by the debtors or prejudice to the creditors, we hold that the bankruptcy court abused its discretion in not allowing the Ladds to amend their schedules to claim the Minnesota homestead exemption.
Id., at 755.
The
Ladd
court thus concluded, in upholding the debtors’ right to amend their exemption claims, that the earlier adverse ruling had been entered by default, that the debtors’ inaction was excused by a lack of financial incentive to challenge the exemption objection, and that other interested parties would not be prejudiced by a subsequent amendment. Insofar as the appellate court was concluding that res judicata did not apply in those circumstances, I respectfully disagree. It has long been held that “[a] judgment of a court having jurisdiction of the parties and of the subject matter operates as res judi-cata, in the absence of fraud or collusion, even if obtained upon a default.”
Riehle v. Margolies,
Although I find unpersuasive the Ladd court’s analysis concerning claim preclusion, there is a well-recognized connection *467 between the enforcement of a default judgment and the issue of prejudice to parties. Federal Rule of Civil Procedure 55(c) (incorporated by Fed. R. Bankr.P. 7055) provides:
For good cause shown the court may set aside the entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b).
Where, as in this contested matter, a judgment or final order has been entered by default, three factors are typically considered in determining whether to grant a party relief from that judgment or order: “1) whether the plaintiff will be prejudiced if the default is lifted; 2) whether the defendant has a meritorious defense; and 3) whether the default was the result of the defendant’s culpable misconduct.”
Hritz v. Woma Corp.,
Thus, in essence, the Eighth Circuit determined in Ladd that it was an abuse of discretion for the bankruptcy court not to grant the debtors relief from the default order regarding their farm realty exemption claim, based essentially upon finding that all three elements for relief from a default judgment were proven. Similarly, Ms. Ardary’s objection to Mr. Romano’s exemption election in November 2005 was entered by default. However, unlike the Ladd decision, both she and the chapter 7 trustee expressly argue that they would be prejudiced if Mr. Romano were granted relief from the November 2005 order restricting his exemption claims to those permitted by section 522(d). They raise the issue of prejudice, though, in the context of application of Fed. R. Bankr.P. 1009(a), rather than in the context of Rule 7055.
C.
Although Rule 1009(a) affords a debtor the opportunity to amend his bankruptcy schedules, including his schedule of exemptions, at any time prior to the closing of the case,
see, e.g., Matter of Yonikus,
As I previously noted in
In re Cudeyro,
Since amendments to schedules are generally permitted as a matter of course, it is incumbent upon the party objecting to the proffered amendment to demonstrate that prejudice or bad faith warrant denial of the right to amend a debtor’s exemption claims.
Tignor v. Parkinson,
Thus, prejudice may arise, for example, where a trustee has incurred considerable expense in efforts to sell certain property, which efforts he or she might have foregone had the debtor initially claimed such property as exempt. That is, in those instances the trustee may be understood to have acted in reliance upon the debtor’s initial schedules, and having taken such actions may be prejudiced if the amendments were allowed.
See, e.g., Matter of Eldridge,
Another instance of prejudice may arise when debtors attempt to amend their exemptions “after they have sought relief relating to the originally claimed exemption.”
In re Gonzalez,
To allow a debtor to amend his claim of exemptions at this late date would clearly be inequitable and would hinder the diligent administration of the bankruptcy estate by the Trustee. Because to allow the Debtor to amend his claim of exemptions at this late date would have an adverse impact on creditors whose rights have attached to the assets of the bankruptcy estate and because a late amendment to the Debtor’s claim of exemptions would hinder the diligent administration of the bankruptcy estate by the Trustee, the amendment is not seasonable and, therefore, not allowed.
In re Snow,
Phrased somewhat differently, “[a]t some point, the debtor’s election of either the state or federal exemptions must become irrevocable so as to avoid any unfair prejudice to the trustee and unsecured creditors.”
In re Brewer,
In this contested matter, the trustee and Ms. Ardary have demonstrated that prejudice would arise by permitting the debtor now to switch his exemption election from federal to state law. The debtor knew or should have known about Ms. Ardary’s desire for the trustee to administer the Philadelphia realty, as well as the IRA accounts, as early as October 2005, when her objection to his exemptions was first filed. He was aware in November 2005 that her challenge was sustained and his realty exemptions under state law *469 and IRA exemptions under federal bankruptcy law were disallowed. He further learned of the trustee’s efforts to administer those assets not later than April and May 2006, when the trustee sought turnover of the IRA accounts from Wachovia and engaged a real estate broker to sell the Philadelphia realty. He was also aware of the trustee’s attempts to have a real estate broker sell his residence, and also of the trustee’s demand for him to turn over funds in his possession stemming from the IRA accounts by July 2006.
All of these activities involved the expenditure of time and effort by the trustee and by those professionals engaged by him and, to a lesser extent by Ms. Ardary. Moreover, Ms. Ardary has not filed any complaint under 11 U.S.C. § 523(a) to have her debt declared non-dischargeable. She can no longer do so under Fed. R. Bankr.P. 4007(c). Her inaction conceivably could have been based upon the debt- or’s initial exemption election and the creditor’s belief that she would be paid in this bankruptcy case from non-exempt property. The debtor offered no explanation for his lengthy delay in waiting until April 2007 to amend his exemptions. (Indeed, according to my notes, his counsel acknowledged the need to take some action at a hearing held in August 2006.)
Whether efforts by a bankruptcy trustee to sell entireties real estate for the benefit of an individual creditor, such as occurred here, would by themselves preclude a chapter 7 debtor from utilizing Rule 1009(a) to amend his exemption election to state law so long as he compensated the trustee and his professionals, I need not now decide.
Compare In re Henry-Chandler,
The debtor’s initial failure to respond to Ms. Ardary’s objections despite notice, his 18 month delay in seeking amendment of his exemptions, and the reliance efforts expended by the trustee and Ms. Ardary, support precluding relief from the November 2005 order.
See generally Nationwide Mut. Ins. Co. v. Starlight Ballroom Dance Club, Inc.,
An order will be entered to that effect, but it also will direct the trustee to return to Mr. Romano the $20,000 tender as part of the unconsummated settlement.
IV.
Having determined that Mr. Romano cannot at this late date exempt his interest in this Hill Road residence, I must now consider the trustee’s motion to sell the residence pursuant to 11 U.S.C. § 363(b), (f) and (m) via public auction.
Section 363(b) authorizes a trustee to sell property of the bankruptcy estate out of the ordinary course of business. Section 363(f) permits a trustee to sell property of the estate free and clear of liens, if one of five circumstances apply.
14
Here,
*470
however, only Mr. Romano has filed a bankruptcy petition. His interest in the Hill Road property is property of the bankruptcy estate under section 541(a), even though the property is held as tenants by the entireties.
Napotnik v. Equibank & Parkvale Savings Ass’n,
Although not expressly stated in the trustee’s motion, it is apparent that the trustee is proposing to auction the entire Hill Road realty, not just the debtor’s interest in it. “In those cases where entire-ties property is not exempt ... the trustee may obtain authority to sell the property, including a nondebtor spouse’s interest, pursuant to section 363(h).” 4 Collier on Bankruptcy, ¶ 522.10[3], at 522-78.2 (15th ed. rev.2007) (footnote omitted).
Section 363(h) provides:
Notwithstanding subsection (f) of this section, the trustee may sell both the estate’s interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety, only if—
(1)partition in kind of such property among the estate and such co-owners is impracticable;
(2) sale of the estate’s undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners;
(3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners; and
(4) such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.
If a sale is approved under subsection (h), then the following subsections of § 363 also apply to protect the rights of the non-debtor:
(i) Before the consummation of a sale of property to which subsection (g) or (h) of this section applies, or of property of the estate that was community property of the debtor and the debtor’s spouse immediately before the commencement of the case, the debtor’s spouse, or a co-owner of such property, as the case may be, may purchase such property at the price at which such sale is to be consummated.
(j) After a sale of property to which subsection (g) or (h) of this section applies, the trustee shall distribute to the debtor’s spouse or the co-owners of such property, as the case may be, and to the estate, the proceeds of such sale, less the costs and expenses, not including any compensation of the trustee, of such sale, according to the interests of such spouse or co-owners, and of the estate.
11 U.S.C. § 363(i) and (j).
Accordingly, upon certain conditions, a bankruptcy trustee can sell property co-owned by the debtor,
see In re
*471
Kahan,
Section 363(h) was enacted by Congress to “remedy a problem that arose under the Bankruptcy Act of 1898 (the ‘Act’) in cases involving individual debtors who owned undivided interests in property.”
In re Sturman,
Under the Act, the trustee in bankruptcy could only sell that portion of the individual debtor’s property in which the trustee acquired title. See, Former Bankruptcy Act § 70. Since the trustee only acquired title to the debtor’s undivided interest in property, that interest was all that could be sold in a partition sale. This restriction often resulted in two sales, each at a depressed value since bidders at each sale were not willing to pay full value for cotenancy. The drafters of what was to become Code § 363(h) sought to permit the trustee to sell both the debtor’s and non-debtor’s interest in a single sale under the premise that bidders purchasing the entire interest will pay a higher price that reflects the full market value.
Generally § 363(h) sales have occurred “where property, usually the homestead, is owned as tenants by the entirety or as joint tenants between a husband and wife (or between a man and woman who were formerly married), only one of whom is a debtor.” Id., at 708.
Had the trustee properly sought relief under section 363(h), the primary issue would be posed by section 363(h)(3): whether the benefit to the bankruptcy estate from the sale would outweigh the detriment to the co-owner, Mrs. Romano.
See id.
If not, the sale of her interest could not occur.
See generally In re Persky,
Under the procedural rules applicable to disputes under the former Bankruptcy Act, Fed. R. Bankr.P. 7001(3) provided that authority for a trustee sale of estate property free and clear of liens should be sought via adversary proceeding:
i.e.,
complaint served with a summons.
See
13
Collier on Bankruptcy,
¶ 701.06 (14th ed.1977). Current Fed. R. Bankr.P. 6004(c) permits such relief under section 363(f) to be requested by motion.
See In re Trans World Airlines, Inc.,
The added formalism of requiring a complaint and summons whenever a trustee seeks to sell property owned by a debtor and co-owner under section 363(h) may be a reflection upon the consequences for non-debtors and the issues posed by the statute. As one commentator observed:
Since the interests of co-owners might be adversely affected by such a sale and satisfaction of the first three listed requirements is likely to raise sharply disputed issues of fact, Rule 7001, clause 3, requires an adversary proceeding in which the co-owners are defendants to obtain court approval of such a sale.
10 Collier on Bankruptcy, ¶ 7001.04, at 7001-14 (15th ed. rev.2007).
Clearly, the trustee in this dispute did not file a complaint under section 363(h), nor serve that complaint upon Mrs. Romano with a summons to respond. I appreciate though that in certain instances courts have overlooked this procedural defect or considered the error waived.
See, e.g., In re Cannonsburg Environmental Associates, Ltd.,
In this instance, however, it would not be appropriate to overlook this procedural defect nor consider the issue waived by Mrs. Romano, who is a non-debtor acting
pro se.
As mentioned above, the trustee’s sale motion does not request relief under section 363(h). Nor was the motion itself served upon Mrs. Romano under Rule 7004. She knew of the scheduled hearing on the motion (probably learning of it from her husband) and attended that hearing, but did so without benefit
of
counsel. Furthermore, from observing her at the hearing, I conclude that she is not a sophisticated individual who would have
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any understanding of the procedural issue or of her rights under sections 363(h), (i) and (j). Thus, her failure to raise the procedural and service problems should not be considered a waiver.
See Matter of Haber Oil Co., Inc.,
Therefore, the trustee is not entitled to relief under section 363(h) because of his failure to seek it by adversary proceeding properly served upon the co-owner.
See In re Lyons.
And if I consider the motion solely one under section 363(f) involving the debtor’s interest in the Hill Road realty, no evidence demonstrated that selling the debtor’s interest in that property, by itself, at public auction free and clear of liens (with the liens attaching to the proceeds) would benefit the estate.
See generally In re Golf, L.L.C.,
Accordingly, the trustee’s motion to sell under section 363(f) shall be denied, albeit without prejudice. An appropriate order shall be entered.
ORDER
AND NOW, this 11th day of October 2007, for the reasons stated in the accompanying memorandum, it is hereby ordered as follows:
1. The debtor’s motion for leave to “change his Schedule ‘C’ option to ‘State Exemptions’ and/or ordering that the real property situate [at] 7411 Hill Road, Philadelphia, PA and debtor’s Individual Retirement Accounts are exempt by virtue of the hardship presented” is denied;
2. The trustee’s motion to sell the realty on 7411 Hill Road free and clear of all liens (with all valid liens attaching to the sale proceeds) at public auction under “[sections 363(b), (f), and (m) and 105 of the Bankruptcy Code” is denied without prejudice; and
3. The trustee shall return to the debt- or forthwith all funds tendered by the debtor, pursuant to the terms of the settlement announced in open court on June 20, 2007, as that settlement is null and void by its own provisions.
Notes
. The trustee's bleak description is based upon the failure of the debtor to consummate a settlement agreement, as will be detailed below.
. While a bankruptcy court may take judicial notice, under Fed.R.Evid. 201 (incorporated into bankruptcy cases by Fed. R. Bankr.P. 9017), of the docket entries, bankruptcy petition and bankruptcy schedules filed by the debtor in this case,
see Maritime Elec. Co., Inc. v. United Jersey Bank,
.By virtue of section 522(b)(1), individual debtors can elect between the federal exemptions found in section 522(d) and state law exemptions, unless state law precludes an election of the federal exemptions. Pennsylvania has not opted out of the federal exemptions.
See Kaplan v. First Options of Chicago, Inc.,
. Mr. Romano's bankruptcy case was commenced prior to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and prior to the adoption of Interim Bankruptcy Rules associated with this legislation.
. While a debtor in Pennsylvania may elect either the federal bankruptcy exemptions or the state exemptions by virtue of section 522(b), she "cannot elect the most favorable
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exemptions in each scheme: [s]he must weigh the advantages of each scheme and then choose one or the other.”
Matter of Dyke,
. The objection misstated the challenged exemption as § 522(d)(1)(E).
. The court clerk also docketed service of this order on November 24, 2005, upon the debt- or, debtor’s counsel, the chapter 7 trustee, counsel to Ms. Ardary, and the United States trustee. See Ex. A-2 (Docket entry # 17).
. My notes of the August 2, 2006 hearing reflect that the debtor, through counsel, stated that he might seek either to vacate the November 21, 2005 order sustaining Ms. Ar-dary's objections to his exemption claims or move to amend the exemptions.
.
See, e.g., Napotnik v. Equibank and Parkvale Sav. Assn,
. The debtor’s failure to consummate the settlement, whose terms were stated in his presence in open court on June 20th, and whose terms he acknowledged and agreed to at that time, appear to have embarrassed his attorney and troubled his spouse. (Indeed, *462 counsel later sought to withdraw from this case, which request was denied for reasons stated in open court.) Attempts to revive the settlement prior to presentation of evidence on August 27th, by explaining to the debtor that neither he nor his wife need repay the note and mortgage during their lifetimes, and that they could remain in their residence as long as they wished, were unavailing.
Mr. Romano is convinced that the trustee and Ms. Ardary should be satisfied with the $20,000 tendered, plus title to the trailer, and are entitled to no more. Neither the trustee nor Ms. Ardary are so agreeable, partly because they have incurred considerable counsel fees. The trustee estimated that his counsel fees were about $12,000 as at the conclusion of the June 20th hearing, and have since increased by the debtor's refusal to consummate the settlement and the need for an additional hearing. Ms. Ardary’s counsel had also incurred additional fees. See Ex. A-16.
.
Section 522(b)(2)(B) [the statutory citation in effect when the debtor filed his bankruptcy petition,
see, e.g., In re Peterson,
Thus, when one spouse only files for bankruptcy and there are only joint creditors, en-tireties properly cannot be claimed as exempt.
See Napotnik.
Conversely, when only one spouse files a bankruptcy petition and there are no joint creditors, the debtor's interest in entireties property has been held as exempt under section 522(b)(2)(B).
See, e.g., In re Knapp,
Here, the debtor argues and I accept that Ms. Ardary is not a joint creditor. The mortgagee is a joint creditor, but it has not filed any proof of claim. Thus, if the Philadelphia realty were exempt by virtue of Pennsylvania entireties law, the trustee could not administer that property for the benefit of Ms. Ardary, the only creditor with an allowed claim.
. Rule 7054(a) incorporates Fed.R.Civ.P. 54(a). The latter defines a judgment as including "any order from which an appeal lies.” And Fed. R. Bankr.P. 9014(c) incorporates Rule 7054 into contested matters, such as objections to exemption claims.
See In re Daniels,
. As noted recently by the District Court:
[Although some older Third Circuit opinions include a fourth factor, the effectiveness of alternative sanctions ... the balance of authority adopts the three-factor approach.
Stone v. Brennan,
. Section 363(m) concerns issues of good faith and the effect of an appeal upon an *470 order approving a sale under section 363.
. The trustee's sale proposal does not address this issue, which can affect an auction sale. See generally 3 Collier on Bankruptcy, ¶ 363.08[8] (15th ed. rev.2007).