Frederick County Nat. Bank v. Lazerow

• Decision Date: 27 January 1992
• Docket Number: Civ. No. B-90-2642.
• Parties: FREDERICK COUNTY NATIONAL BANK v. Arthur S. LAZEROW.
• Court: U.S. District Court — District of Maine

139 B.R. 802 (1992)

FREDERICK COUNTY NATIONAL BANK v. Arthur S. LAZEROW.

Civ. No. B-90-2642.

United States District Court, D. Maryland.

January 27, 1992.

Brook Schumm, III, Baltimore, Md., for Frederick County Nat. Bank.

Lawrence Ross Freedman, Roger Frankel, Emily B. Randall, Amy H. Kornbluth, Washington, D.C., for Lazerow.

Michael G. Gallerizzo, Paul J. Cohen, Baltimore, Md., for interested party — Riggs Nat. Bank of Maryland.

MEMORANDUM OPINION

WALTER E. BLACK, Jr., Chief Judge.

Presently pending before the Court is an appeal by Frederick County National Bank from a decision of the United States Bankruptcy Court for the District of Maryland. This case arises from appellant's motion in the Bankruptcy Court to lift the automatic stay to permit appellant to pursue certain non-estate assets consisting of tenancy by the entireties property exempted by the debtor and property owned by the debtor's wife. The Bankruptcy Court denied the motion, and appellant now takes this appeal. The Fourth Circuit has held that "an order denying relief from the automatic stay is a final appealable order." Grundy Nat'l Bank v. Tandem Mining Corp., 754 F.2d 1436, 1439 (4th Cir.1985). See also In re American Mariner Industries, Inc., 734 F.2d 426, 429 (9th Cir.1984); In re Leimer, 724 F.2d 744, 745 (8th Cir. 1984); In re Comer, 716 F.2d 168, 171-74 (3d Cir.1983); In re Regency Woods Apartments, Ltd., 686 F.2d 899, 902 (11th Cir. 1982); In re Taddeo, 685 F.2d 24, 26 n. 4 (2d Cir.1982). Thus, the Court has jurisdiction over this matter under 28 U.S.C. § 158(a) and Bankruptcy Rule 8001(a).

I

Appellant, Frederick County National Bank, hereinafter "the Bank," obtained judgments against the debtor-appellee, Arthur Lazerow (hereinafter "the debtor"), and his wife, Tina Lazerow, for $230,876.34 in early 1988. The debtor had obtained loans from the Bank and his wife guaranteed those loans; however, certain of the wife's premarital assets were excluded from coverage by the guarantee. The Bank recorded its judgments only in Frederick County. The debtor and his wife reside in Montgomery County.

On March 25, 1988, the debtor filed a voluntary bankruptcy petition under Chapter 11. Tina Lazerow did not file for bankruptcy. In the debtor's Statement of Financial Affairs at Schedule B-4, he claimed various property as exempt, including his personal residence owned by the debtor and his wife as tenants by the entirety, which is worth no more than $500,000. All parties agreed that five other creditors have perfected outstanding liens on the residence totalling 9.4 million dollars; consequently, the debtor has no equity in the property at this time. All other exempt property, which the debtor valued at approximately $7,400, is also owned by the debtor and his wife as tenants by the entirety.

On July 27, 1990, the Bank filed a Renewed Motion to Lift the Automatic Stay in the Bankruptcy Court. In that motion, the Bank moved the court to lift the stay pursuant to 11 U.S.C. § 362(d)(1) to permit it to record its judgments in Montgomery County and to get a lien on available tenancy by the entirety property, including the debtor's residence. The Bank is the debtor's only unsecured joint creditor.

At the hearing, the Bank argued that, under the facts of this case, if the court did not permit it to perfect a lien against the debtor's property and the debtor was discharged of his debts, a legal fraud would result, since the Bank would no longer be a joint creditor of the debtor and his wife and would never be able to satisfy its judgments against the debtor with the entireties property. The Bank asserted that the Fourth Circuit has recognized that cases such as this result in legal fraud to the creditor and, therefore, permits the creditor to have the automatic stay lifted in order to pursue its state law remedies against entireties property of the debtor. The Bank referred the bankruptcy court to a line of pertinent Fourth Circuit law including Sumy v. Schlossberg, 777 F.2d 921 (4th Cir.1985), Sovran Bank, N.A. v. Anderson, 743 F.2d 223 (4th Cir.1984), Chippenham Hospital Inc. v. Bondurant, 716 F.2d 1057 (4th Cir.1983), and Phillips v. Krakower, 46 F.2d 764 (4th Cir.1931). The Bank argued that these cases unequivocally stand for the proposition that a creditor in the position in which the Bank finds itself has the right to have the automatic stay lifted.

The debtor opposed the Bank's motion and argued that the Bank was merely attempting to improve its position, and presumably its treatment in the debtor's reorganization plan, with respect to other creditors. He argued that the Bank's current predicament is the result of its own failure to record its judgments in the debtor's county of residence and its failure to file a timely objection to the debtor's claim of exemption of his personal residence and other tenancy by the entirety property.

Furthermore, the debtor argued that Sumy v. Schlossberg does not support the Bank's position. On the contrary, the debtor contended that under Sumy, the tenancy by the entirety property should be included in the estate and administered by the trustee in bankruptcy for the benefit of joint creditors. The debtor argued that the property is not being administered in the bankruptcy estate because the Bank did not object to the exemptions of the residence and other tenancy by the entirety property. This result, the debtor maintained, is the Bank's own fault for sleeping on its rights and did not require the bankruptcy court to lift the automatic stay. The debtor also pointed out that there was no equity in the property and lifting the automatic stay would prejudice the debtor's prospects of successful reorganization. Finally, the debtor argued that this whole issue was appropriate for consideration at the confirmation hearing on debtor's reorganization plan and, therefore, lifting the automatic stay was unnecessary.

The bankruptcy court denied the Bank's motion. It found that the Bank had not shown that legal fraud would result from denial of the motion, and that the sole cause for the Bank's predicament was its own failure to object timely to the debtor's claimed exemptions. Finally, the bankruptcy court found that this issue was more appropriately raised at the confirmation hearing as no fraud could result in any case until the debtor was discharged of his debts. The Bank filed a timely appeal.

II

The first issue of dispute between the parties is the appropriate standard of review in this case. The Bank argues that the bankruptcy court's decision is subject to de novo review, whereas the debtor argues that an abuse of discretion standard applies. Bankruptcy Rule 8013 states,

on an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge\'s judgment, order, or decree or remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.

Therefore, when a bankruptcy judge's legal conclusions are challenged, the district court must make an independent determination of the applicable law. In re Tesmetges, 47 B.R. 385 (E.D.N.Y.1984). Otherwise, a bankruptcy court's decision will not be set aside unless it was plain error or an abuse of discretion. In re Ken Boatman, Inc., 359 F.Supp. 1062, 1063 (W.D.La. 1973).

Moreover, the law is well-settled that the bankruptcy court's determination of whether to lift the automatic stay will be overturned only upon a showing of abuse of discretion. In re Sonnax Industries, Inc., 907 F.2d 1280, 1288 (2d Cir.1990); Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275, 1285 n. 14 (5th Cir.1988); Pursifull v. Eakin, 814 F.2d 1501, 1504 (10th Cir.1987); Stephens Industries, Inc. v. McClung, 789 F.2d 386, 391 (6th Cir.1986); In re MacDonald, 755 F.2d 715, 716 (9th Cir.1985); In re Holtkamp, 669 F.2d 505, 507 (7th Cir.1982).

In this case, the determination of the standard of review is complicated by the fact that the Bank argues that Phillips, Bondurant, and Sumy stand for the proposition that the Bank has the absolute right to have the automatic stay lifted. It argues that these cases remove discretion from the bankruptcy court to deny the motion. Therefore, the question the Court must initially decide is whether Fourth Circuit case law requires the stay to be lifted upon motion by a creditor under the facts of this case.

III

The Court notes that the basis for the complexity of the case now before it is the nature of tenancy by the entirety property. In Maryland, as in most states that continue to retain the common law incidents of tenancy by the entirety, the co-owners must be husband and wife, and each spouse has an undivided interest in the whole property. Arbesman v. Winer, 298 Md. 282, 286-89, 468 A.2d 633 (1983). Neither spouse may alienate, encumber or dispose of the property without the consent of the other and the survivor takes the whole property. Id. As a consequence of this form of concurrent ownership, tenancy by the entirety property may not be taken to satisfy individual debts of either spouse, Diamond v. Diamond, 298 Md. 24, 29, 467 A.2d 510 (1983), but joint creditors of both may pursue the property to satisfy a joint debt. Arbesman, 298 Md. at 289, 468 A.2d 633.

Because tenancy by the entirety property is not subject to the individual debts of either spouse, the Bankruptcy Act of 1898 treated that property as not part of the bankruptcy estate when only one spouse filed for bankruptcy. Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057, 1058 (4th Cir.1983); Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1903). The property was not included in the bankruptcy estate and, therefore, was not administered for the benefit of joint creditors. However, once the debtor was discharged, the creditor was no longer a joint creditor but solely a creditor of the...