McNeilly v. Geremia (In Re McNeilly)McNeilly v. Geremia (In Re McNeilly)
Chapter 7 debtor Warren McNeilly, Jr., appeals the bankruptcy court’s order sustaining Trustee Louis Geremia’s objection to his claim of exemption in tenancy by the entirety property, namely a Vermont bank account holding $29,991.55. For the reasons set forth below, we reverse.
Background
McNeilly filed a voluntary Chapter 7 petition on August 17, 1999. In his amended schedules he claimed exemptions under Bankruptcy Code § 522(b)(2). 1 Among the items he claimed as exempt was his undivided interest in a Vermont bank account ostensibly held as a tenant by the entirety with his wife. The trustee objected to this exemption, asserting that “the debtor’s claimed exemption in a bank account with a value of $29,991.55 pursuant to 11 U.S.C. [§ ]522(2)(B) ... is not properly exempt under Rhode Island state law exemptions.” 2
The issue proceeded to hearing. No evidence whatsoever was adduced. The parties simply argued their positions. The following facts were not disputed:
1. On July 20, 1998, McNeilly and his wife sold Rhode Island business/investment property held as tenants by the entirety, receiving net proceeds of approximately $62,000.00.
2. After applying a substantial portion of the net proceeds to pay down their residential mortgage, the McNeillys placed “approximately $30,000.00” in a “household account” at the Bank of Newport, where they were commingled (to an undetermined extent) with other funds.
3. In 1999, on advice of counsel, the McNeillys withdrew $29,991.55 from the Bank of Newport account and deposited this sum in a Vermont bank.
3
The Ver
At the hearing, the trastee shifted gears. Rather than arguing that the Code precludes a Rhode Island debtor who has elected state exemptions pursuant to § 522(b) from claiming an exemption in Vermont entirety property, he contended that such a claim was unsupportable because the funds had been commingled and the debtor could not trace them to entirety property sales proceeds. His counsel argued:
It is the trustee’s position that the proceeds were in the debtor’s control from July 1998 until April of 1999. Originally those proceeds were deposited in a Bank of Newport account, which was the debtor’s household account, that those proceeds have been commingled with household funds for over nine months until such time as they were deposited in that Vermont state account.
I think it would be very difficult, or I think it is the debtor’s burden to prove that those proceeds are the same proceeds that were netted from the sale of that tenants-by-the-entirety property in July of ’98. I don’t think that there is any way to trace the funds, and I think it would be the debtor’s burden to prove that that [$]30,000 was the same [$]30,-000 that he received from the net proceeds from the sale of that land; therefore, the trustee objects to the debtor’s exemption. 5
In response, the debtor asserted he had no duty to trace the funds. He suggested that he could have placed more than the remaining sales proceeds in an entirety account and claim all of it exempt under § 522(b)(2)(B) since,
the tenants-by-the-entirety account is exempt because of its status as a tenants-by-the-entirety account. If this were not a case where we were being— if this were a case where we were extremely conservative in pre-bankruptcy planning, I think arguably we could have moved all of the liquid funds into [a] tenants-by-the-entirety account pre-bankruptcy and defended that, but we did not do that. We simply took out the $30,000 which had been put in there from the sale of the tenants-by-the-entirety real estate. We didn’t even take out any of the interest. I mean it had been in there for a year. We were so conservative we simply took out the $30,000 we put in when we sold the real estate and segregated it in another account so that our legal argument would be clear with respect to those funds. 6
Ruling from the bench, gleaning the facts from such undisputed representations of counsel as there were, the bankruptcy judge sustained the trustee’s objection, adopting the trustee’s articulated rationale. McNeilly moved for a stay pending appeal, which was granted without opposition, and appealed. 7
I. Four Petit Preliminaries: Finality, Jurisdiction, Standard of Review, and Burden of Proof
The bankruptcy court’s order sustaining the trustee’s objection to the debtor’s exemption is a final order.
See Howe v. Richardson (In re Howe),
Our scope of review is
de novo.
The bankruptcy court determined the dispute regarding the exempt status of the Vermont account based on the undisputed facts. McNeilly challenges only the court’s legal conclusions.
See Edmonston v. Murphy (In re Edmonston),
With regard to proof and persuasion, an exemption claim is
prima facie
valid absent a timely objection.
See
§ 522(l) (“Unless a party in interest objects, the property claimed as exempt ... is exempt.”);
Taylor v. Freeland & Kronz, 508
U.S. 638, 642,
As the objecting party, it was the trustee’s burden to prove McNeilly was not entitled to exempt the account at issue. The Federal Rules of Bankruptcy Procedure are crystal clear:
Burden of Proof. In any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed. After hearing on notice, the court shall determine the issues presented by the objections.
Fed. R. Bank. P. 4003(c).
See also Enterprise Fin. Corp. v. Winn (In re Wincorp, Inc.),
The trustee had fair opportunity to frame the issue and persuade the court. The evidentiary foundation for this contest is feeble. The trustee rested entirely on
This is not a review of a summary judgment order, for which unresolved, material issues of fact would warrant remand.
See
Fed. R. Bankr.P. 7056;
Barbour v. Dynamics Research Corp.,
II. Identifying Applicable Nonbankrupt-cy Law
Under § 522(b) a Rhode Island debtor may exempt property from the bankruptcy estate under one of two alternative exemptions schemes. See § 522(b). 10 McNeilly claimed his exemption under subparagraph (2) which affords for exemptions in:
(A) any property that is exempt under Federal law, other than [the alternative federal exemptions delineated in the Code], or State or local law that is applicable on the date of the filing of the petition at the place in which the debt- or’s domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place; and
(B) 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.
§ 522(b)(2)(emphasis added). He is entitled to any claimable exemptions under subsection (B), as well as those under subsection (A).
See In re Cochrane,
Thus, the precise question is whether the trustee proved that immediately before the commencement of his bankruptcy case McNeilly did not have an interest in the Vermont account as a tenant by the entirety that was “exempt from process under applicable nonbankruptcy law.”
Absent some federal interest requiring a variant result, state law is the compass by which we ascertain the nature and scope of a debtor’s property interests in a bankruptcy.
See Butner v. United States,
Unlike the state law governing exemption entitlements under subsection (A), the state law at play in § 522(b)(2)(B) is
A. Inapplicable law: scotching In re Scott
Before taking one step forward — into Green Mountain State law — we must take a step back to Virginia’s Blue Ridge Mountains. This is because the trustee con-' vinced the bankruptcy court that it could harvest principles pertinent to its decision from Virginia case law. Unhappily, the trustee miscalculated the need for such a trek and, in any event, misapprehended the substance of Virginia law.
1. The Trustee’s Argument
The trustee convinced the bankruptcy court that generic principles of tenancy by the entirety jurisprudence, supposedly represented by Virginia case law, controlled the dispute before it. He argued that, having commingled proceeds from the sale of the Rhode Island entirety real estate in a non-entirety account, McNeilly had destroyed his ability to claim a § 522(b)(2)(B) exemption in the subsequent Vermont entirety account.
The trustee asserted that
In re Scott,
specifically tailored that exemption in a tenants-by-the-entirety account to say that the proceeds that are deposited must be the direct proceeds from the sale or liquidation of property held by the debtor as tenants-by-the-entireties. I think that — and the case said that there can be no tainting of other funds. The fact that the debtor sold the property in ’98 and then held onto the property in an account which was commingled with other household funds and they were not deposited until April of ’99, I think it is now the debtor’s burden to prove that that [$]30,000 is the same [$]30,000 that resulted from the sale of that property. 12
The bankruptcy court questioned whether the debtor could create a tenancy by the entirety interest in a Vermont account from a “totally different [$]30,000 that came from the lottery or something.” 13 On the heals of an asseveration by the trustee that “all the cases” relied on by the debtor required a “direct link” or “nexus” between entirety real estate and the funds in an entirety account, the court articulated its ruling:
I believe I’m going to follow the tracing theory and requirement and adopt the Trustee’s argument without repeating it and without trying to reanalyze it, but for the reasons argued by the Trustee, the objection to the [exemption in the] $29,000 account ... is sustained. 14
Here the court went astray. The Virginia law analyzed in
In re Scott
could, at best, be of marginal assistance in deciding this dispute (absent jurisprudential commingling of the law on entireties tenancies
To begin, even if Virginia law were pertinent or helpful, the trustee’s take on it lays a false trail. He gave too much credence to In re Scott, failed to examine its limitations, and ignored a subsequent Virginia case which directly undermines his position.
2. The Rise and Fall of In re Scott
One of several contested exemptions claimed by the debtor Scott was a $300 bank account, allegedly exempt under § 522(b)(2)(B) because held as a tenant by the entirety with her spouse.
See
Later, the same bankruptcy judge revisited the issues.
See In re Massey,
In its “fresh review” of the question, the court stated that its two earlier discussions of entirety interests in personal property not derived from entirety real estate could be characterized as “dicta.”
Id.
at 891-92. After reviewing the common law of spousal property interests; the impact of the Married Women’s Property Act on tenancy by entirety doctrine; the teachings of
Oliver, supra,
and
Pitts v. United States,
Thus, even if principles of Virginia law might have informed the lower court in assaying the content of Vermont tenancy by entirety law, In re Scott is an unreliable gauge. What is more, In re Scott — even without its subsequent defrocking — does not address the impact of commingling or any requirement for tracing.
B. Applicable Nonbankruptcy Law: Tenancy-by-Entirety in Vermont
Although the trustee’s argument below failed to illuminate the content of Vermont law, we could affirm the bankruptcy court’s ruling if the factual record, such as it is, demonstrates that McNeilly’s exemption claim must fail under that state’s prerequisites for establishing a tenancy by the entirety in a bank account. As a result, we set foot in Vermont long enough to ascertain whether its law bars such a claim as McNeilly has made.
McNeilly cites
George v. Dutton’s Estate,
And no good reason is apparent why such an estate may not exist in other personal property. We think it can. Although there is some difference injudicial opinion on the question in other jurisdictions, we think the better view is as here stated....
Later cases from the Vermont Supreme Court reaffirm
George’s
determination. Addressing entireties interests in a horse, a number of heifers, and additional un-described personal property,
Swanton Savings Bank & Trust Co. v. Tremblay
reiterated the conclusion that just as “[a] husband and wife may hold estates in entirety in personal property growing out of real estate so owned by them[,] [t]hey may also hold such an estate in other personal property.”
Federal courts applying Vermont law in § 552(b)(2)(B) disputes have followed the clearly visible guide posts erected by Vermont’s courts.
See General Motors Acceptance Corp. v. Lefevre,
In light of the Vermont authorities, the trustee’s argument that McNeilly’s claim must fail because the funds at issue were impermissibly commingled and untraced (or untraceable) is to no avail.
Finally, we observe that Vermont tenancy by the entirety property interests are “exempt from process” by the creditor of one of the tenants.
See, e.g., Lowell v. Lowell,
The clear complexion of Vermont law reveals we cannot affirm the bankruptcy court’s ruling. With respect to the requisites for creating an entirety interest under Vermont law, the trustee proffered no evidence to undermine McNeilly’s claim and has demonstrated no legitimate legal flaw in it. 18
Conclusion
Misapprehending governing Vermont law precepts, the trustee failed to demonstrate that McNeilly did not have a tenant by the entirety interest in the Vermont account, “exempt from process under ap-
For these reasons, the order sustaining the trustee’s objection to the debtor’s exemption claim is REVERSED.
Notes
. Unless otherwise designated, all citations to statutory sections are to the Bankruptcy Reform Act of 1978 ("Bankruptcy Code” or “Code”), as amended, 11 U.S.C. § 101 et seq.
. Trustee’s Objection to Debtor’s Exemption in a Bank Account Pursuant to 11 U.S.C. § 522(b)(2)(B), Appellant’s Appendix (hereafter "App.”) at 38.
.During the hearing, trustee’s counsel once asserted the Vermont account was opened in January 1999. However, she twice stated that is was opened in April 1999, which ac
.McNeilly asserts that $29,991.55 represented all remaining proceeds from the sale of the Rhode Island entirety property (with no interest). Although he concedes that the sale proceeds may have been commingled, he asserts that the balance in the Bank of Newport account never fell below $29,991.55 after the proceeds were deposited in it. Neither party introduced evidence on either point.
At oral argument, McNeilly’s counsel also explained that the account was opened in a Vermont bank because banks there open tenancy by the entirety accounts as a matter of course, whereas Rhode Island banks do not. The record is devoid of evidence on the point.
. Transcript of November 23, 1999, hearing (hereafter "Tr.”) at 6, App. at 52.
. Tr. At 8, App. at 55.
. Revolution Portfolio LLC appeared at the hearing below and participated in this appeal as a co-appellee. Its arguments are similar to the trustee's and will not be treated separately in this opinion.
. The trustee’s suggestion that we apply the standard of review applicable to fee allowances, abuse of discretion, is off-the-mark.
. Because the trustee’s objection turned on a legal rather than a factual dispute, this is not a case in which we need inquire whether the objecting party proved-up sufficient facts to shift the burden of production back to the debtor.
See In re Cole,
. The Vermont bank account comes into the bankruptcy estate until McNeilly successfully claims it as exempt.
See
§ 541(a) (property of the estate);
id.
(b) (exclusions from property of the estate);
Napotnik v. Equibank and Parkvale Sav. Ass’n,
. We note that Congress omitted the 180 day domicile circumscription from exemptions claimed under subsection (B).
. Tr: at 9-10, App. at 56-57.
. The court's inquiry was apparently in response to the debtor’s assertion that a valid entirety account could be created out of whole cloth, so long as the funds derived from joint assets and state law recognized entireties interests in bank accounts.
.Tr. at 11; App. at 58.
. This key case by the State’s high court on entireties issues warrants greater weight than the In re Scott court’s second hand interpretation. Oliver provided:
There is a conflict of authority as to whether an estate by the entirety can exist in personal property. Some courts take the view that such an estate is peculiar to and exists only in real property and cannot exist in personal property. However, according to the decided weight of authority, such an estate may exist in personal property as well as in realty ....
According to the majority view, 'there is nothing in the character of personal property which precludes ownership of it by the entirety under the modern law, sjnce the foundation of such ownership lies in the fact that in law a husband and wife are, or may be considered to be one person.’ When they are deemed to be one person, a conveyance of personalty to, or its acquisition by, them in their joint names 'logically vests the entirety in that one, as in the case of a conveyance of land.'
While the question has not been previously presented to this court, we agree with the reasoning of the majority view and hold that in this State personal property as well as realty may be held by a husband and wife as tenants by the entireties.
Oliver,
Notably,
Owen
goes on to describe the relevance of the personalty's relations to the proceeds of real estate as demonstrating
a presumption
of an intent to so hold the personalty derived therefrom. See
id. See also In re Wincorp, Inc.,
. The description of this as "a ruling” is an overstatement, as the same court recognized in In re Massey, 225 B.R. 887 (Bankr.E.D.Va.1998)(Mitchell, J.), discussed infra.
In In re Zella Judge Mitchell first concluded that the account was exemptible as a § 522(b)(2)(B) tenancy by the entirety property interest because the sums in the account were indisputably proceeds from tenancy by the entirety real estate. See196 B.R. at 757 . He then, rather gratuitously, addressed the alternative contention by the debtor that the account was "independently protected by § 522(b)(2)(B)" as entirety property whatever the source of the funds. Id. The court stated that because all the reported cases in the jurisdiction recognized entirety accounts only in entirety real estate proceeds, it would not conclude "that a tenancy by entirety may be created in Virginia in personal property other than the proceeds of tenancy by the entirety real estate” "absent an authoritative ruling by the Supreme Court of Virginia, or an action by the Virginia General Assembly.” Id.
. For this proposition
George
cites
Citizens' Savings Bank & Trust Co. v. Jenkins,
estates by entirety may exist in personal property growing out of real estate as well as in real estate strictly, and the cutting of timber by mutual consent effected in equity only a transmutation of property from real to personal, but did not change the character of the estate in the timber cut.
. Our inquiry has led us to authorities suggesting a multi-factor delimiting test for bank account entireties interests in Vermont,
see Beacon Milling Co., Inc.,
In passing we also crossed cases describing the common law origins and operation of Vermont’s tenancies by the entireties ownership that may be relevant to a properly challenged exemption
claim in Vermont
entireties interests.
See, e.g., In re Cerreta,
. Since the points were not pursued below, we express no opinion whether McNeilly’s admittedly premeditated, pre-bankruptcy shifting of assets to the Vermont account could be vulnerable as a fraudulent transfer,
see, e.g., In re Hendricks,