Michael Eugene SUMY, Appellee,
v.
Roger SCHLOSSBERG, Trustee, Appellant.
In re Michael Eugene Sumy t/a Michael E. Sumy Home
Improvement Co., Navco Window & Glass Company,
AAVCO Corporation, a/k/a Mike Sumy, Debtor.
No. 85-1231.
United States Court of Appeals,
Fourth Circuit.
Argued July 17, 1985.
Decided Nov. 21, 1985.
Gary R. Greenblatt (Schwarz & Greenblatt, Baltimore, Md., on brief) for appellant.
Paul F. Wattay, Hyattsville, Md., for appellee.
Before HARRISON L. WINTER, Chief Judge, and DONALD RUSSELL and WIDENER, Circuit Judges.
HARRISON L. WINTER, Chief Judge:
The main issue presented by this appeal is whether entireties property may be exempted under Sec. 522(b)(2)(B) of the Bankruptcy Code1 when an individual debtor schedules debts owed jointly with his or her spouse. We hold that in Maryland such property is not exempt to the extent of joint claims.
I.
The debtor, Michael Eugene Sumy, filed a voluntary individual petition under Chapter 7 of the Bankruptcy Code on March 14, 1984. His amended schedules listed $19,570.50 in unsecured claims, which included $1,474.78 in debts incurred jointly with his nonfiling wife. He listed the value of his residence, which he owned jointly with his wife, at $73,500. He claimed the approximate $20,000 equity over the amount owing to the holder of a first deed of trust as exempt entireties property under 11 U.S.C. Sec. 522(b)(2)(B).
The trustee objected to the claimed exemption, and after hearing and argument the bankruptcy court sustained the trustee's objection, relying on another Maryland bankruptcy opinion. See In re Seidel,
II.
The parties have not raised any question about our jurisdiction to hear this appeal, but we believe the issue merits brief sua sponte treatment. Subsection (a) of 28 U.S.C. Sec. 158 (as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333), grants the district courts "jurisdiction to hear appeals from final judgments, orders and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges." Subsection (d) grants the courts of appeals "jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsection (a)" of Sec. 158.
It is commonly acknowledged that "finality" under Sec. 158 or its predecessors must be interpreted in light of the special circumstances of bankruptcy cases, and that the decisions interpreting the similar language in 28 U.S.C. Sec. 1291 are often helpful but cannot be imported wholesale to bankruptcy jurisprudence. E.g., Four Seas Center, Ltd. v. Davres, Inc.,
The instant controversy began with the debtor's claimed exemption of his entireties property, and the trustee's objection to that exemption led to adversary proceedings. The bankruptcy court's order in this case denied a claimed exemption, and the district court's orders effectively granted that exemption. We have previously reviewed a grant of an entireties exemption and denial of that exemption without commenting on the appealability of the order,2 so we now state explicitly what has been implicit: Grant or denial of a claimed exemption is a final appealable order from a bankruptcy proceeding. See White v. White,
III.
A.
Several Code sections figure prominently in resolving the issues at bar. First, Sec. 541 defines what property of the debtor becomes property of the bankruptcy estate. It states in part that "[s]uch estate is comprised of all of the following property, wherever located: ... all legal or equitable interests of the debtor in property as of the commencement of the case." Section 522(b) then provides that "[n]otwithstanding section 541 of this title, an individual debtor may exempt from property of the estate" certain items specified under state or federal law. If a debtor's state has opted out of the federal bankruptcy exemptions,3 or if the debtor chooses to exercise his state exemptions, then the debtor may exclude from property of the estate those items exempted by state or local law and by federal nonbankruptcy law. Sec. 522(b)(2)(A). In addition, a debtor pursuing the state option, as Mr. Sumy did, may exempt from property of the estate:
any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.
11 U.S.C. Sec. 522(b)(2)(B).
For property that becomes part of the estate under Sec. 541 and that is not exempted under Sec. 522(b), the trustee has the general power, "after notice and a hearing, [to] use, sell, or lease, other than in the ordinary course of business, property of the estate." Sec. 363(b)(1). Section 363(f) grants the trustee the power to sell most types of estate property "free and clear of any interest in such property of an entity other than the estate" if the entity consents or under certain other conditions.4 Section 363(h) then excepts tenancies in common, joint tenancies, and tenancies by the entirety from subsection (f)'s general provisions, providing that the trustee may sell the co-owner's interest along with the estate's interest only in more limited circumstances.5 If property is to be sold under Sec. 363(h), the nonbankrupt spouse has a right of first refusal, Sec. 363(i), and if the spouse does not exercise that option, the trustee must of course distribute the proceeds of sale in proportion to the respective interests of the estate and the spouse. Sec. 363(j).
B.
The debtor in this case admits that his entireties property became part of the estate under Sec. 541, but he seeks to exempt it under Sec. 522(b)(2)(B). The trustee objects to the claimed exemption and seeks to administer the property under Sec. 363(h) for the benefit of the joint creditors. Because Sec. 522(b)(2)(B) only excludes entireties property that is exempt from process under "applicable nonbankruptcy law," we must examine Maryland law to determine the extent of any available exemption. We then interpret the Code in light of that law.
In Maryland, as in the typical entireties state,6 creditors of only one spouse may not reach the entireties property for satisfaction of their claims. State v. Friedman,
One consequence of such entireties law under the Bankruptcy Act of 1898 was that if both spouses filed for bankruptcy, "courts would consolidate the cases and consider the tenants by entirety property as an asset of their joint estates and permit liquidation of that property for the benefit of their joint creditors." In re Martin,
In contrast to a joint filing, if only one spouse filed for bankruptcy under the 1898 Act, entireties property was treated as exempt and thus never became part of the individual bankrupt's estate. E.g., Lockwood v. Exchange Bank,
In order to protect its rights under the 1898 Act, it was necessary for a joint creditor to obtain a lifting of the automatic stay and a withholding of the discharge. The creditor could then proceed to judgment and execution against the entireties property in state court. See, e.g., Phillips, supra; Maryland Hotel Supply Co. v. Seats,
C.
The result in Bondurant was foreshadowed in dicta in In re Ford,
Ford did contain language that is applicable to this case, but the facts there reveal that the language was dicta.10 The statement from Ford that guided the district court's decision was that "[s]ince the debtor's interest in entireties property is exempt from process by both his individual and joint creditors under Maryland law, the debtor's interest in property which he holds as a tenant by the entirety may be exempted from the estate by Mr. Ford under Sec. 522(b)(2)(B)."
We begin our analysis of this issue with Ragsdale v. Genesco, Inc.,
The phrase "to the extent that such interest ... is exempt from process under applicable nonbankruptcy law" is of decisive importance. If the Ragsdales' residential real property could be reached to satisfy a state court judgment in Virginia, it could not be successfully claimed as exempt under Section 522(b)(2)(B).
The residential real property is held by the Ragsdales as tenants by the entirety. The judgment of Genesco was obtained jointly and severally against both. It is fundamental that a creditor holding a judgment against two or more persons jointly and severally may execute against real property owned by those same persons jointly, or held by them as tenants by the entirety.
Our next decision, Bondurant, held that an unsecured joint creditor could have the automatic stay lifted in order to reduce its claim to judgment in state court and to enforce that judgment against property owned as tenants by the entireties by the debtor and his nonfiling wife. The creditor in that case specifically requested lifting of the stay, and our affirmance of that relief says nothing about what other avenues of relief may be available for joint creditors to satisfy their claims.
In this case, the trustee seeks to administer the entireties property within the context of the bankruptcy proceedings, and neither Bondurant nor any other decision of this court has specifically rejected that relief. In fact, the debtor's only argument against the relief requested in Bondurant was "that the property, which he and his wife own as tenants by the entireties, is exempt under the provisions of ... Sec. 522, and is, therefore, not reachable by joint creditors."
Our fourth recent decision in this area, Sovran Bank v. Anderson,
D.
Applying the above precedents from this circuit and from Maryland, we cannot accept the debtor's argument that entireties property is exempt even from joint creditors' claims. The debtor's argument fails to comprehend fully the extent of the changes made by the several relevant sections of the new Code,12 and he thus urges us to adopt an internally inconsistent position: The entireties property would only be exempt in bankruptcy if it is immune from process under state law, but we have already held that joint creditors may have the stay lifted and proceed against the property in state court. The fact that joint creditors can reach the property in state court flatly contradicts the immediately preceding premise that the property is immune from process under state law.13 The proper interpretation of Sec. 522(b)(2)(B) as it applies in Maryland is that "to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law" means "to the extent that there are only individual claims," because entireties property is not exempt from process to satisfy joint claims in Maryland. A debtor does not lose all benefit of Sec. 522(b)(2)(B) when joint creditors are present, but he does not benefit from it to the extent of joint claims.14
We implicitly rejected arguments similar to the debtor's here in Ragsdale,
E.
We reject the argument that Maryland entireties property is exempt in bankruptcy even from joint creditors by interpreting Sec. 522(b)(2)(B) in light of state law. But we note that we could not accept the thesis that such property is exempt in bankruptcy from joint creditors without creating additional difficult theoretical and practical problems under the Code. The most important difficulties concern the consequences of exempting the property for a joint creditor's attempts to obtain satisfaction of his claim. If we were to adopt Sumy's interpretation of the entireties exemption, and if Sumy were to make full use of the Code's broad powers and protections for debtors, he might be able to commit the very "legal fraud" that we have repeatedly condemned.
The basic debtor protections on discharge include elimination of personal liability and an injunction against attempts to collect past debts from the debtor.19 The effect of these protections or weapons may be blunted by withholding or conditioning the discharge until the joint creditor obtains satisfaction in state court,20 but similar protections relating to exempt property are not so obviously avoidable. If the debtor's interest in entireties property is exempt under Sec. 522(b)(2)(B), then most pre-petition judicial liens on that property would impair that exemption and be avoidable at the debtor's option under Sec. 522(f)(1).21 Moreover, merely withholding the discharge while a joint creditor pursues his remedies in state court may not suffice, because the debtor may be able to use Sec. 522(f)(1) to avoid post-petition liens as well.22
Section Sec. 522(c) complements subsections (b) and (f) by protecting the property itself. It provides that "property exempted under this section is not liable during or after the case for any debt of the debtor that arose ... before the commencement of the case." Even assuming that the joint creditors act quickly enough to stay the discharge and preserve personal liability, they cannot collect on their claims without proceeding against the property, but that is what Sec. 522(c) proscribes.23 Thus, the Code's exemption and avoidance powers, coupled with the debtor's erroneous interpretation of the entireties exemption, seem to give the debtor the power to reach what is clearly an improper result.24 On the other hand, if the debtor's interest in the property is not exempt under Sec. 522(b)(2)(B), the debtor cannot lay claim to such powers, and the property itself may be administered by the trustee under Sec. 363.25
Joint creditors often may choose among different methods to obtain satisfaction, but we note several practical concerns that support our result and the availability of Sec. 363(h).26 For example, bankruptcy law's longstanding principle of equal treatment of similarly situated creditors may be violated, and joint creditors who race to have the stay lifted and to state court may obtain an undeserved advantage. Each joint creditor may have to move separately for an order lifting the stay, and each may incur additional and largely duplicative expenses proceeding against the debtors and the property in state court. Some joint creditors, such as the four in this case whose claims total less than $1500, may not have a sufficient individual incentive to pursue their claims at all outside of the bankruptcy arena. Once the parties are freed of the stay, priorities will be determined in state court largely according to state law, and the bankruptcy court will relinquish control over collection of the claims.27 If joint creditors do not act quickly enough to preserve their rights in state court, the debtor may secure a discharge and thus accomplish the "legal fraud" condemned in Phillips.
Another practical problem is that the discharge of the debtor must be withheld during the pendency of the underlying lawsuit and execution and foreclosure action in state court, which hinders the debtor in obtaining a prompt fresh start from bankruptcy. This same lengthy delay may also postpone distribution of the assets to creditors of the estate, because a joint creditor, even if secured, may emerge from the state proceedings with its claim less than wholly satisfied and thus be due some share from the estate. Thus, we agree with the Sixth Circuit, that "[i]n appropriate cases, the court may lift the automatic stay to allow the creditor to proceed against the entireties property in state court," but that, especially where the trustee does not request that relief, "[w]e see no reason for such a procedure here, when judicial economy would be better served by a single proceeding in bankruptcy court." Grosslight,
IV.
To summarize, we hold that, to the extent the debtor and the nonfiling spouse are indebted jointly, property owned as a tenant by the entireties may not be exempted from an individual debtor's bankruptcy estate under Sec. 522(b)(2)(B) and the trustee may administer such property for the benefit of the joint creditors under Sec. 363(h). Accordingly, the judgment of the district court is reversed, and the case is remanded for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
Notes
All further references to the Bankruptcy Code and to individual section numbers refer to Title 11 of the United States Code
See Greenblatt v. Ford,
Section 522(d) lists federal bankruptcy exemptions, and Sec. 522(b)(1) allows a debtor to choose those exemptions "unless the State law that is applicable to the debtor under paragraph (2)(A) of this subsection specifically does not so authorize." All of the states in this circuit and most states nationwide have opted out of the federal bankruptcy exemptions. See 7 Collier on Bankruptcy 1 n. 6 (15th ed. 1985)
Section 363(f) provides in full:
(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if--
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interests;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
Section 363(h) provides:
(h) 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.
For examples of application of this section to entireties property, see In re Hamilton,
E.g., Ray v. Dawson,
"In all states where property may be held by the entireties, a joint creditor is permitted to execute on entireties assets." Comment, 28 U.Pitt.L.Rev. 267, 286 (1966). See, e.g., In re Crouch,
E.g., Bondurant, supra at 1058; Seats, supra at 1178; Davison, supra at 1222; Reid v. Richardson,
One court stated:
Under the old Act it was necessary to follow the somewhat clumsy procedure of granting to those joint creditors who filed complaints relief from stay and a stay of discharge so that action could be taken in state courts. In my opinion, such an inadequate device is no longer necessary.
In re Trickett,
The bankruptcy court in this case obviously did not feel constrained by Ford, and other writers have recognized that much of what was said in Ford was dicta. See In re McQuaige,
Depending on the circumstances, this procedure for realization on collateral securing joint debts may involve many of the same practical problems mentioned later in text, but it does not have the key defect of the avoidability of the creditor's interest under Sec. 522(f)(1). That section only applies to judicial liens, not to voluntarily created security interests. Section 522(f)(2 ) does apply to security interests, but it does not cover real estate, which was the type of property involved in Anderson and which is at issue here and in most other Sec. 522(b)(2)(B) cases. Similarly, the protections of sections 522(c) and 524(a) do not bar the enforcement of valid and unavoided security interests. See Sec. 522(c)(2) and Pub.L. No. 98-353, Sec. 308(a), 98 Stat. 333, 354 (1984) (deleting the words "or from property of the debtor" from Sec. 524(a)(2))
For example, one important fragment of legislative history demonstrates the interrelationships among the several sections and the changes from prior law. The passage deals directly with what property becomes part of the estate under Sec. 541, but it also obviously refers to Sec. 363(h) and is important in construing the scope of the Sec. 522(b)(2)(B) exemption:
The bill also changes the rules with respect to marital interests in property. Interests in the nature of dower and curtesy will not prevent the property involved from becoming property of the estate, nor will it prevent sale of the property by the trustee. With respect to other co-ownership interest[s], such as tenancies by the entirety, joint tenancies, and tenancies in common, the bill does not invalidate the rights, but provides a method by which the estate may realize on the value of the debtor's interest in the property while protecting the other rights. The trustee is permitted to realize on the value of the property by being permitted to sell it without obtaining the consent or a waiver of rights by the spouse of the debtor or the co-owner, as may be required for a complete sale under applicable State law. The other interest is protected under H.R. 8200 by giving the spouse a right of first refusal at a sale of the property, and by requiring the trustee to pay over to the spouse the value of the spouse's interest in the property if the trustee sells the property to someone other than the spouse.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 177 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6137-38 (emphasis added; footnotes omitted).
As the Sixth Circuit recently observed,
because each spouse owns the whole estate and each spouse is liable for the whole debt, it is a false distinction to declare that a joint creditor cannot reach a spouse's individual undivided interest in entireties property. A joint creditor would inevitably seek the joint interests to satisfy a joint and several liability, and under state law he could do so.
Liberty State Bank & Trust v. Grosslight,
For examples of proper application of the exemption as it relates to joint and individual creditors, see In re Sefren,
One could reconcile Ragsdale's holding with the debtor's argument based on Ford that the interests of both spouses must be joined in a single proceeding or case, but a more steadfast adherence to this detailed parsing of interests might conclude, contrary to Ragsdale, that the sum of two exempt individual interests is still exempt. See In re Blum,
See In re Riley,
See Kosto v. Lausch,
In Virginia, as in many other states, the interest of one spouse in entireties property is not subject to execution by the creditors of that spouse only. This is obviously what Congress intended to exempt, and ... [t]herefore, the entireties interests of the Debtors in the instant case are exempt under Sec. 522(b)(2)(B).
B.R. at 595. See also Vogler, Bankruptcy Code: Effect on property held as a tenant by the entirety, 56 Fla.B.J. 795, 796 (1982) (emphasizing the importance of the distinction between individual and joint creditors); Comment, supra note 10, at 664-65 ("Because the creditor of only one spouse has different rights from those of a joint creditor against entireties property, the cases have turned almost exclusively on whether the debtor was liable on a joint debt. Where the objection to the exemption of entireties property is filed by a creditor of only one spouse, the courts usually grant the debtor's exemption.... A different situation is presented when a joint creditor of both husband and wife objects to the debtor's exemption of entireties property.") (original emphasis; footnotes omitted)
See In re Phillos,
Section 524(a) provides:
A discharge in a case under this title--
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, or 1328 of this title, whether or not discharge of such debt is waived;
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or any act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
Of course, this assumes that the creditor is aware of its rights and acts promptly to protect them. One creditor who acted promptly but did not have its motions decided until after the debtor's discharge managed to have the discharge injunction of Sec. 524 modified, so that it could "pursue its claim against the debtor in the state court to the extent of obtaining a judgment lien against the tenancy by the entirety property, provided that [the creditor] may not obtain a personal judgment against the debtor or a lien against the after acquired property of the debtor." In re Snow,
Section 522(f) provides:
Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is--(1) a judicial lien....
Other decisions have noted this potential problem. See In re Jeffers,
We have held that a debtor may reopen a closed case to file a post-discharge complaint under Sec. 522(f) to avoid a prepetition lien. Hawkins v. Landmark Finance Co.,
One commentator noted the potential mischief that Sec. 522(c) might work and suggested that courts effectively read the statute to provide that "property exempted under this section [except under subsection (b)(2)(B) ] is not liable during or after the case for any debt of the debtor." Ackerly, supra note 5, at 721-29. Some courts have also noted this potential problem and have avoided it by construing Sec. 522(c) to protect "only the Debtor's undivided interest in this entireties property," In re Martin,
This possibility of "legal fraud" remains a reality. See Munoz v. Dembs,
The debtor in In re Trickett,
Trickett claims that joint creditors may not reach the entireties property because it would be necessary for such creditors to obtain a joint judgment against him and his wife and file a levy on such property. At this time a judicial lien would exist which Trickett asserts would be avoidable under 11 U.S.C. Sec. 522(f)(1) since it would impair the exemption to which he was entitled under Subsection (b).
B.R. at 89. The court recognized that the argument was backwards, and that the proper way out of the trap was to conclude that "[a]s to joint claimants, this property is not exempt from process under applicable nonbankruptcy law. Thus, there can be no impairment of the exemption." Id
Section 363 gives the trustee the right to sell the property free and clear of the spouse's interest, subject to the spouse's right of first refusal, but the same net result could be achieved by the spouse paying the joint debts from outside funds or (if the creditors will agree) by the debtor reaffirming the joint debts, and the condition in Sec. 363(h)(1) implies that if partition is practicable, that option also may be available. At least one court has also held that the trustee may short-cut the Phillips procedure and may himself administer property that is not even part of the estate under Sec. 544. In re Jeffers,
Under Section 544(a)(1), the trustee is clothed with the rights of a creditor who could have obtained a judicial lien against the property of both debtors. In a practical sense, the trustee is the agent of joint creditors of the debtors. Under Indiana law, a joint creditor may levy upon and sell entireties property.... Therefore, under Section 544(a)(1) the trustee is in the position of a joint creditor of the debtors and should be able to administer and sell their entireties real estate and distribute the proceeds of the sale, after payment of all creditors holding liens, to the joint creditors of the debtors.
Id. at 57; see also In re Blum,
There may well be other circumstances in which Sec. 363(h) applies, see Ford,
One court noted:
[T]he creditors' successful pursuit of the remedy will be that the creditor holding a joint obligation of the debtor and his spouse who is first to obtain judgment and a writ of execution will thereby gain the rights against all the entirety property. Thus, in all likelihood, one or two of the creditors of the [debtors] will obtain the property held in tenancy by the entirety to the exclusion of the other creditors. Whereas, if the property were distributed according to the rules governing bankruptcy distribution, it would be parcelled out among the creditors of the debtor pro rata and thus, presumably, more equitably.
In re Anderson,