Ballard, In re
| Decision Date | 20 September 1995 |
| Docket Number | No. 94-2199,94-2199 |
| Parties | -6508, 64 USLW 2271, 95-2 USTC P 50,631, Bankr. L. Rep. P 76,641 In re Edgar and Beulah H. BALLARD, Debtors. Jeffrey FAIRFIELD, Trustee, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, Commonwealth of Virginia, Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Jeffrey John Fairfield, Jeffrey J. Fairfield, P.C., Herndon, VA, for appellant. Patricia McDonald Bowman, Tax Division, United States Department of Justice, Washington, DC, for appellee. ON BRIEF: Loretta C. Agrett, Assistant Attorney General, Gary R. Allen, Gary D. Gray, Helen F. Fahey, United States Attorneys, Tax Division, United States Department of Justice, Washington, DC, for appellee.
Before HALL and WILLIAMS, Circuit Judges, and PHILLIPS, Senior Circuit Judge.
Affirmed by published opinion. Judge WILLIAMS wrote the majority opinion, in which Senior Judge PHILLIPS joined. Judge HALL wrote a dissenting opinion.
In this appeal, we confront an admittedly arcane but interesting question of first impression in this circuit concerning the interaction between federal bankruptcy law and Virginia property law. More specifically, we consider the effect of the termination of the marital estate and resulting devolution of tenancy by the entireties property upon the death of a spouse following the commencement of the couple's joint bankruptcy case. Ruling on the motion of the United States for summary judgment, the bankruptcy court concluded that the proceeds derived from the sale of debtors' property, held by tenancy in the entireties, became the sole property of Edgar Ballard upon the death of his wife, Beulah Ballard. The court held that the proceeds from the sale of the Ballards' entireties property must be applied to pay the unsecured priority claims before a distribution may be made to unsecured general creditors regardless of the joint or individual character of the claim. Trustee, Jeffrey Fairfield, appeals the entry of summary judgment by the United States Bankruptcy Court and affirmance by the United States District Court for the Eastern District of Virginia. For the reasons discussed below, we affirm.
The parties do not dispute the underlying facts in this action. The debtors, Edgar and Beulah Ballard (the Ballards), filed a joint Chapter 11 petition on February 26, 1990. On the date of filing, the Ballards' principal asset consisted of residential real property located at 1841 Clachan Court, Vienna, Virginia. They owned this real property in fee simple as tenants by the entireties. On the List of Twenty Largest Creditors Holding Unsecured Claims, the Ballards included the following as undisputed, non-contingent debts: withholding taxes in the amount of $45,000 owed to the United States Internal Revenue Service and withholding taxes in the amount of $17,000 owed to the Commonwealth of Virginia, Department of Taxation.
On or about May 31, 1990, the IRS timely filed a proof of claim which was amended on February 13, 1992 when the IRS filed an amended proof of claim in the amount of $23,303.56, which consisted solely of a claim for a 100% penalty for the period ending December 31, 1989. 1 Upon conclusion of the investigation into the employment tax liabilities of Ballene Services, Inc., 2 the IRS determined that both Edgar and Beulah Ballard were responsible persons who failed to collect and pay over federal employment taxes withheld from the wages of the employees of Ballene Services, and that both should be held liable for the $23,303.56 penalty, pursuant to 26 U.S.C. Sec. 6672.
On December 28, 1990, the bankruptcy court entered an order authorizing the debtors to sell their residential real property. Also on that date, the court entered a separate order requiring that the proceeds derived from the sale of the Ballards' residential real property "be paid by the settlement attorney in the form of a check payable to Edgar Ballard, Beulah H. Ballard and [their attorney] James G. Smalley; [and] that the check ... be deposited in an interest bearing account requiring the signatures of the Debtors and their counsel to release the funds." (J.A. 49.) The Ballards sold their property, realizing approximately $43,000 from the sale.
On March 18, 1991, Leanne Njus and Associates, Inc. (Njus), an unsecured joint creditor represented by the later-appointed and now-current Trustee, Jeffrey Fairfield, objected to the proofs of claim filed by other claimants and moved to determine the extent of consolidation of the debtors' estates for disallowance of certain claims and for related relief. Specifically, Njus objected to the IRS proof of claim on the basis that Beulah Ballard "was not a responsible person [as defined in IRC Sec. 6672(b) ] required to collect, truthfully account for, and pay over trust fund payroll taxes." (J.A. 50.) Njus further requested that the court enter an order allocating "one-half of the net sales proceeds resulting from the sale of the debtors' residence to each of the respective estates of the joint petitioners;" directing "that the respective estates of the debtors be held separate and apart;" and disallowing "the proofs of claim including the proof of claim filed by the United States." (J.A. 50-51.) Following a May 14, 1991, hearing, the bankruptcy court determined that Njus lacked standing to contest the tax claims of the United States and the Commonwealth of Virginia and dismissed Njus's motion with prejudice.
Beulah Ballard died after the May 14, 1991, hearing but before the bankruptcy case was converted to a Chapter 7 proceeding. Thereafter, by order entered April 6, 1993, Mr. Fairfield was confirmed as Chapter 7 trustee. On or about July 27, 1993, the Trustee, in his new capacity, renewed the motions and objections he had presented to the court on behalf of the Njus creditors in March of 1991. The United States, in turn, moved for summary judgment requesting dismissal of the Trustee's motion to segregate the debtors' estates and to overrule the Trustee's objection to the IRS's proof of claim. The United States argued that in light of Mrs. Ballard's death, whether she was personally liable for the Sec. 6672 penalty was a moot question.
In its entry of oral findings from the bench, the bankruptcy court granted summary judgment to the United States, finding that upon Mrs. Ballard's death, Mr. Ballard's estate acquired the entire amount of the proceeds from the sale of their home, based on the Ballards' tenancy by the entireties interest in the proceeds. Thus, the court reasoned, whether Mrs. Ballard was also liable for the IRS tax claim was moot because, after her death, all the proceeds from the sale must be allocated to Mr. Ballard's estate. In its brief written order granting summary judgment to the United States, the bankruptcy court stated:
... the proceeds derived from the sale of the debtors' tenants by the entireties property was held by the debtors as tenants by the entireties, that such proceeds became the sole property of Edgar Ballard upon the death of Beulah Ballard, that such proceeds must first be applied to pay the unsecured priority claims before a distribution may be made to unsecured general creditors regardless of whether such creditors hold joint or non-joint claims and that the United States of America's motion for summary judgment should be granted.
(J.A. 15-16.) The Trustee appealed and the district court, in an oral ruling from the bench, affirmed the judgment of the bankruptcy court. The Trustee now appeals, articulating two arguments in support of reversal: (1) only joint creditors are entitled to distribution from the bankruptcy estates; and (2) that the sale of the Ballards' house under Sec. 363 of the Bankruptcy Code terminated their tenancy by the entireties and mandated an allocation of the sale proceeds between the two bankruptcy estates.
We review de novo the bankruptcy court's grant of summary judgment and the district court's affirmance thereof. Savers Fed. Sav. & Loan Ass'n v. McCarthy Constr. Co. (In re Knightsbridge Dev. Co.), 884 F.2d 145, 147 n.3 (4th Cir.1989).
The Trustee's first contention need not detain us long. In support of his claim, the Trustee asserts that the sale of the Ballards' house under Sec. 363 of the Bankruptcy Code terminated their tenancy by the entireties and mandates an allocation of the sale proceeds between the two bankruptcy estates. 3 The record reflects that upon authorization of the bankruptcy court, the Ballards sold the property which they held as tenants by the entireties. The $43,000 proceeds from the sale were placed in an interest bearing account requiring the signatures of the Ballards and their counsel to release the funds.
Like the bankruptcy court, we discern no intent by Mr. and Mrs. Ballard to terminate their tenancy by the entireties upon the sale of their home. Again, looking to Virginia law, absent "an agreement or understanding to the contrary, the proceeds derived from a voluntary sale of real estate held by the entireties are likewise held by the entireties." Oliver v. Givens, 204 Va. 123, 129 S.E.2d 661, 663 (1963). The Trustee cannot point to any evidence in the record of this appeal which reflects an intent by the Ballards to sever their entireties interest in the proceeds from the sale of their home. Indeed, the manner in which the proceeds were paid and retained by order of the bankruptcy court preserved the tenancy by the entireties. Given the absence of any agreement or other indicia of the Ballards' intent to sever the entireties tenancy upon the sale of the real estate, we affirm the determination of the bankruptcy court that the entireties interest continued in the proceeds.
The Trustee next contends that the bankruptcy court erred in concluding as a matter of law that the proceeds from the sale of the Ballards' residence, held as tenants...
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