In re Basch

• Decision Date: 12 April 2006
• Docket Number: No. 05-10937.,05-10937.
• Citation: 341 B.R. 615
• Parties: In re Gary D. BASCH, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

Page 615

341 B.R. 615

In re Gary D. BASCH, Debtor.

No. 05-10937.

United States Bankruptcy Court, W.D. Michigan.

April 12, 2006.

Ronald A. Schuknecht, Esq., Traverse City, for James W. Boyd, Chapter 7 Trustee.

Wallace H. Tuttle, Esq., Traverse City, for Gary D. Basch, Debtor.

OPINION REGARDING THE RECENTLY ADOPTED MICHIGAN TENANCY BY THE ENTIRETY STATUTES

JAMES D. GREGG, Bankruptcy Judge.

I. ISSUE

Recently, the State of Michigan codified the exempt status of property held as a tenancy by the entirety. MICH. COMP. LAWS § 600.5451(1)(o). A reported decision by another bankruptcy judge in this district has declared this new statutory entireties exemption unconstitutional. The issue to be addressed is very narrow. Need this court decide now whether the Michigan statute is unconstitutional?

II. FACTS AND PROCEDURAL BACKGROUND

On August 8, 2005, Gary D. Basch, "Debtor," filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code.¹ James W. Boyd, "Trustee," was appointed as the chapter 7 trustee to administer the bankruptcy estate.

After obtaining an extension from the court, the Debtor timely filed his schedules. On Schedule A, Real Property, four separate parcels of property in the Traverse City, Michigan area are listed. Each parcel is owned as a tenancy by the entirety by the Debtor and his non-debtor wife. On Schedule C, Property Claimed As Exempt, each of the four separate parcels is claimed as exempt under MICH. COMP. LAWS § 600.5451(1)(o).

The Trustee timely objected to the Debtor's claimed exemptions.² The Trustee's objection is straightforward: "The statute and/or section of the statute relied upon by Debtor to request an exemption in the parcels of real property has been declared unconstitutional in In re Raynard, 327 B.R. 623 (Bankr.W.D.Mich.2005) ...." Trustee's Objection to Exemptions, ¶ 4b.

After the Debtor filed a written response to the objection, this court issued a Scheduling Order which required that legal memoranda on the constitutionality of the exemption statute be filed. Before the deadline for filing the required legal memoranda, counsel jointly requested a status conference which subsequently took place on the record in open court. Both the Debtor's attorney and the Trustee's attorney informed the court that their respective preliminary research revealed that in the same Public Act, effective on the same day, the State of Michigan enacted a second statute codifying the same entireties exemption as the statute assertedly declared unconstitutional by the Raynard dicta. Based upon this information, the court decided to restrict the issue to whether it must determine the constitutionality of the exemption statute addressed in Raynard. The Debtor and Trustee, through counsel, subsequently submitted a supplemental joint letter brief requesting the court to first consider the affect, if any, of the second entireties property exemption, MICH. COMP. LAWS § 600.6023a.

III. DISCUSSION

A. Tenancies By The Entirety: Michigan Common Law And Federal Bankruptcy Law.

As explained by the Supreme Court:

Michigan's version of the estate is typical of the modern tenancy by the entirety. Following Blackstone, Michigan characterizes its tenancy by the entirety as creating no individual rights whatsoever: "It is well settled under the law of this State that one tenant by the entirety has no interest separable from that of the other ... Each is vested with an entire title." Long v. Earle, 277 Mich. 505, 517, 269 N.W. 577, 581 (1936). And yet, in Michigan, each tenant by the entirety possesses the right of survivorship. Mich. Comp. Laws Ann. § 554.872(g) (West Supp.1997), recodified at § 700.2901(2)(g) (West Supp. Pamphlet 2001). Each spouse-the wife as well as the husband-may also use the property, exclude third parties from it, and receive an equal share of the income produced by it. See § 557.71 (West 1988). Neither spouse may unilaterally alienate or encumber the property, Long v. Earle, supra at 517, 269 N.W., at 581; Rogers v. Rogers, 136 Mich.App. 125, 134, 356 N.W.2d 288, 292 (1984), although this may be accomplished with mutual consent, Eadus v. Hunter, 249 Mich. 190, 228 N.W. 782 (1930). Divorce ends the tenancy by the entirety, generally giving each spouse an equal interest in the property as a tenant in common, unless the divorce decree specifies otherwise. Mich. Comp. Laws Ann. § 552.102 (West 1988).

United States v. Craft, 535 U.S. 274, 282, 122 S.Ct. 1414, 1422, 152 L.Ed.2d 437 (2002).

The Court of Appeals for the Sixth Circuit also recognizes that Michigan retains "the common law tenancy by the entirety." Liberty State Bank & Trust v. Grosslight (In re Grosslight), 757 F.2d 773, 775 (6th Cir.1985). This type of tenancy is succinctly described by the Sixth Circuit:

Tenants by the entirety, who must be husband and wife, hold under a single title with right of survivorship. Neither husband nor wife acting alone can alienate any interest in the property, nor can the creditors of one levy upon the property; but their joint creditors can reach entireties property. See Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880 (1918).

Id. at 775.

"It is now established law that [§ 541(a)] brings entireties property in the bankruptcy estate." Id. Filing a bankruptcy petition does not sever a tenancy by entirety. Spears v. Boyd (In re Spears), 313 B.R. 212, 217 (W.D.Mich.2004) ("[T]here is no practical reason for altering the longstanding practice of this and other entireties jurisdictions of treating the entireties estate as a single, undivided, but exemptible, part of the bankruptcy estate...."). However, if a debtor's interest in the entireties property is "not specifically exempted, the debtor's interest in the entireties property may be sold pursuant to 11 U.S.C. § 363(h) — (j)." Grosslight, 757 F.2d at 776. If the statutory conditions are met and the entireties property is sold, severance occurs upon sale, and the proceeds of sale are distributed, in accordance with the statute, to the bankruptcy estate and the co-owners. 11 U.S.C. § 363(j).

Also, if the entireties property is exempted by a debtor, and joint creditors exist, an objection to the entireties exemption may be timely filed. FED. R. BANK. P. 4003(b); Grosslight, 757 F.2d at 777. If a valid joint claim exists, the entireties property is liable to pay the joint claim and "the entireties property [may] be sold for the benefit of joint creditors." Id. (citing Mich. Nat'l Bank v. Chrystler (In re Trickett), 14 B.R. 85 (Bankr. W.D.Mich.1981)).³ Again, when the Trickett sale occurs, the tenancy by the entirety is severed.

As of January 2, 2005, this was the interplay between the Michigan common law entireties exemption and federal bankruptcy law. On January 3, 2005, two new Michigan statutes which addressed entireties property and its exempt status became effective.

B. The "Bankruptcy Specific" Entirety Exemption.

In Public Act 2004, No. 575, immediately effective on January 3, 2005, the State of Michigan adopted a new exemption statute. MICH. COMP. LAWS § 600.5451(1)(o) states in pertinent part:

Sec. 5451. (1) A debtor in bankruptcy under the bankruptcy code, 11 USC 101 to 1330, may exempt from property of the estate property that is exempt under federal law or, under 11 USC 522(b)(2), the following property:. . .

(o) ... real property, held jointly by a husband and wife as a tenancy by the entirety, except that this exemption does not apply with regard to a claim based on a joint debt of the husband and wife.

Based upon the preamble which limits the exemption to a "debtor in a bankruptcy under the Bankruptcy Code, 11 USC 101 to 1330," this is a bankruptcy specific exemption. Because it is not available outside of bankruptcy, this exemption provision is constitutionally suspect. Matter of Cross, 255 B.R. 25, 34 (Bankr.N.D.Ind. 2000) (when an exemption conflicts with federal bankruptcy law or frustrates the "full effectiveness" of bankruptcy law, it is unconstitutional; "states may not create exemptions that apply only in bankruptcy proceedings") (emphasis in original).

One judge in this district has determined the bankruptcy specific entireties exemption, MICH. COMP. LAWS § 600.5451(1)(o), is unconstitutional. In re Raynard, 327 B.R. 623, 642 (Bankr. W.D.Mich.2005). That judge states:

The only logical interpretation of [the bankruptcy specific entireties exemption] is that it exempts all interests in property owned by the debtor as entireties property regardless of whether the debtor files for bankruptcy relief individually or jointly with his or her spouse but that the interest, once exempted, remains subject to execution by a prepetition creditor if that creditor has a joint claim against both spouses.

Id. at 642-43 (emphasis added).

But is this conclusory statement the only "logical interpretation"? Might it be properly interpreted that the entireties property, which does not apply to claims based upon joint debts, remains available as property of the estate to be used for distribution to creditors? Might the Michigan legislature have intended to restate established common law and the prior relationship between tenancies by the entirety and federal bankruptcy law? In Trickett, Judge Nims said:

[Under] state law, [the debtor's] interest in property held in the entirety is not subject to the claims of his individual creditors, but the property is subject to process by certain joint creditors. Therefore, there is no exemption of entireties property as to joint creditors under 11 U.S.C. Sec. 522(b)(2)(B).

Trickett, 14 B.R. at 89 (emphasis supplied). Is it not possible that the Michigan legislature intended to echo (however inartfully) the view expressed by Judge Nims in Trickett?

Is it not also a logical interpretation that the bankruptcy specific entireties exemption was drafted in a fashion to attempt to avoid unconstitutionality based upon the State of Indiana's experience? In Cross, the effect of the...