In re Barton

• Docket Number: 23-41234-357
• Decision Date: 21 December 2023
• Parties: In re: JEFFREY R. BARTON, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Missouri

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In re: JEFFREY R. BARTON, Debtor.

No. 23-41234-357

United States Bankruptcy Court, E.D. Missouri, Eastern Division

December 21, 2023

Chapter 7

Related to Doc. 19

MEMORANDUM OPINION

Brian C. Walsh United States Bankruptcy Judge

Debtor Jeffrey R. Barton and his non-debtor wife, Jane, own Jeff Barton Trucking LLC (the "Company"). The Debtor claims that they hold their ownership interest in the Company as tenants by the entirety, and so he seeks to exempt the interest from his bankruptcy estate under 11 U.S.C. § 522(b)(3)(B).^[1] Tracy A. Brown, the Chapter 7 Trustee, filed an objection to the claim of exemption (the "Objection"). For the reasons stated below, I will sustain the Objection.

I. Factual and Procedural Background

The Debtor and Jane formed the Company on March 7, 2011.^[2] They executed an operating agreement on that date (the "Operating Agreement"). The Operating Agreement remains in effect and has not been amended.

Several provisions of the Operating Agreement are particularly relevant to this dispute. They include the following:

. The agreement defines each of the Debtor and Jane as a "Member."

. Each of the Debtor and Jane is to make an initial capital contribution of $1,000

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. Management of the Company is vested in the Members, each of whom is given a vote on any matter. At least 51% of the Members must be present at any meeting at which binding action is taken

. The profits and losses of the Company accrue to the Members in proportion to the balances of their capital accounts. Their capital accounts may change over time as a result of additional contributions by a Member withdrawal of capital by a Member, or a Member's election to roll over his or her share of profits for a particular year. Withdrawal of capital requires the unanimous consent of the other Members.

. A Member may voluntarily withdraw from the Company after the Company has been in existence for six months. A Member may be involuntarily withdrawn or expelled from the Company for a number of reasons, including death, incompetency, and wrongful conduct.

. Following a voluntary or involuntary withdrawal of a Member, the remaining Members have the right to purchase the interest of the withdrawn Member. The purchase price is based on the value of the assets and liabilities of the Company, the withdrawn Member's proportional interest in profits and losses, and any liabilities the withdrawn Member owes to the Company.

. Upon dissolution of the Company, its net assets are to be distributed to Members in proportion to their interests in profits and losses.

. The Company is intended to be treated as a corporation for purposes of federal and state income taxes.

At a hearing held on October 18, 2023, the Debtor testified that the Operating Agreement was a form document that he located on the Internet. He finalized the document without the assistance of an attorney, and he and Jane executed it. He stated that he did not understand the significance of the Operating Agreement and that the Company does not maintain capital accounts or drawing accounts for its members. The Debtor indicated that he established the Company for estate-planning purposes; in particular, he wanted Jane to be able to dissolve the Company on his death without involving the probate court.

The Debtor also offered into evidence copies of his and Jane's joint federal and state tax returns for 2022. The federal return includes a Schedule C, captioned "Profit or Loss from Business (Sole Proprietorship)." That schedule identifies the business as Jeff Barton Trucking LLC, with its employer identification number, and the proprietor of the business as Jeffrey R.

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Barton. The business suffered a net loss of $7,866 in 2022. The Missouri return does not separately identify the Company. However, the form requires a married couple filing jointly to divide their adjusted gross income between the two spouses. The Bartons allocated a loss of $7,866 to the Debtor and all of the couple's other income to Jane.

II. Analysis

The filing of a bankruptcy petition creates an estate comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). A debtor may then exempt certain property from the estate. See id. § 522. Missouri has opted out of the federal exemptions under Section 522(d). See § 513.427, RSMo. Exemptions under Section 522(b) remain, including one that permits a debtor to exempt any interest in property that is held in a tenancy by the entirety, to the extent that the interest is exempt from process under non-bankruptcy law. See 11 U.S.C. § 522(b)(3)(B).

If a debtor holds an asset as a tenant by the entirety, the trustee may administer the asset only to satisfy joint debts of the debtor and the non-debtor spouse. See In re Garner, 952 F.2d 232, 235 (8th Cir. 1991); In re Charles, 123 B.R. 52, 55 (Bankr. E.D. Mo. 1991). The asset is otherwise exempt; the trustee cannot use it to pay debts on which the spouse is not obligated. See Charles, 123 B.R. at 55. This result is consistent with the rights of creditors under state law: joint creditors may execute on entirety property, but creditors of only one spouse may not. See In re Van Der Heide, 164 F.3d 1183, 1184 (8th Cir. 1999); Otto F. Stifel's Union Brewing Co. v. Saxy, 201 S.W. 67, 71 (Mo. 1918).

The Trustee has the burden of proof to show that the Debtor did not properly claim the entirety exemption. Fed.R.Bankr.P. 4003(c); In re Shields, 586 B.R. 315, 318 (Bankr. W.D. Mo. 2018).

A. Tenancy by the Entirety in Missouri

"Tenancy by the entirety is a form of ownership in property created by marriage in which each spouse owns the entire property, rather than a share or divisible part." Rinehart v. Anderson, 985 S.W.2d 363, 367 (Mo.Ct.App. 1998). A tenancy by the entirety is created when spouses acquire property and the four unities are present: interest, title, time, and possession. See Ronollo v. Jacobs, 775 S.W.2d 121, 123 (Mo. 1989).

The unity of interest requires spouses to take "one and the same interest." Green Hills Production Credit Association v. Blessing, 844 S.W.2d 5, 7 (Mo.Ct.App. 1992). Accordingly, each spouse must be "seized of the whole or entirety and not a share, moiety or divisible part." Ronollo, 775 S.W.2d at 123. Any requirement that the spouses "share equally" in an asset

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destroys the unity of interest. Green Hills, 844 S.W.2d at 7; see also Keller v. Keller, 92 S.W.2d 157, 162 (Mo. 1936) ("share and share alike" in a will creates tenancy in common, not tenancy by the entirety).

As in a joint tenancy with a right of survivorship, ownership of an asset held by the entirety continues in the surviving spouse. See 2 Tiffany Real Property § 430 (3d ed. 2023). When one spouse dies, "the surviving spouse continues to hold title to the property." Rinehart, 985 S.W.2d at 367; see also Baker v. Lamar, 140 S.W.2d 31, 35 (Mo. 1940). Indeed, no new title is passed from the deceased to the surviving spouse, because each of them originally owned the whole all along. See Nelson v. Hotchkiss, 601 S.W.2d 14, 20 (Mo. 1980).

Property owned jointly by spouses is presumed to be held in a tenancy by the entirety. See Feinberg v. Feinberg, 924 S.W.2d 328, 331 (Mo.Ct.App. 1996); In re Story, 536 B.R. 279, 283 (Bankr. E.D. Mo. 2015). This presumption has been applied to interests in a partnership, see Feinberg, 924 S.W.2d at 331, assets of an unincorporated business, see Capital Bank v. Barnes, 277 S.W.3d 781, 782 (Mo.Ct.App. 2009), real property conveyed to spouses, see Ronollo, 775 S.W.2d at 123, and brokerage accounts, see In re Haines, 528 B.R. 912, 924 (Bankr. W.D. Mo. 2015).

In light of these precedents, it seems likely that the Missouri courts would apply the entirety presumption to an LLC membership interest that is jointly owned by spouses. But the Debtor has not presented any authority for the proposition that spouses who individually own items of property that are merely related-such as adjacent parcels of farmland or condominium units in the same building-are presumed to own that property jointly, much less as tenants by the entirety.

This dispute ultimately turns on that distinction. Because the record demonstrates that the Debtor and Jane have separate, not joint, membership interests in the Company, the presumption does not come into play. The Bartons do not hold their interests in the Company as tenants by the entirety.

B. The Operating Agreement Demonstrates That the Bartons Do Not Have a Tenancy by the Entirety.

When an interest in property is established by a valid written agreement, its terms determine the nature of the interest. See Commerce Trust Co. v. Watts, 231 S.W.2d 817, 822 (Mo. 1950) (reviewing deposit agreement to determine whether bank account was held in joint tenancy); Keller, 92 S.W.2d at 162 (interpreting will to determine whether property was conveyed to tenants by the entirety); In re Catalano, No. 17-45162, 2021 WL 1017382, at *3 (Bankr. E.D. Mo. Mar. 16, 2021) (reviewing deed and sale contract to determine whether real

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estate was conveyed to one spouse or both). The dispute in this case concerns a form of personal property: a membership interest in a limited-liability company. See § 347.115, RSMo. Because the relationship among the Company, the Debtor, and Jane was established by and continues to be governed by the Operating Agreement, see id. § 347.081, its contents guide my analysis.

The agreement plainly establishes that the Debtor does not hold his interest in the Company in a tenancy by the entirety with Jane. As an initial matter, there is no unity of interest. The agreement establishes separate and distinct equity interests in the Company, some owned by the Debtor and some owned by Jane. The Debtor and his spouse are listed as separate members in the Operating...