In re Bradby

• Decision Date: 11 April 2011
• Docket Number: No. 10–34017–KRH.,10–34017–KRH.
• Citation: 455 B.R. 476
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re Robin Lorraine BRADBY, Debtor.

455 B.R. 476

In re Robin Lorraine BRADBY, Debtor.

No. 10–34017–KRH.

United States Bankruptcy Court, E.D. Virginia.Richmond Division.

April 11, 2011.

Sharon Choi Stuart, Boleman Law Firm, Richmond, VA, for Debtor.

MEMORANDUM OPINION

KEVIN R. HUENNEKENS, Bankruptcy Judge.

The Court has before it the objection of the Chapter 13 Trustee, Carl M. Bates, to an exemption claimed by the Debtor, Robin Lorraine Bradby (the “Debtor”), pursuant to Rule 4003(b) of the Federal Rules of Bankruptcy Procedure (the “Objection”). The Objection challenges the Debtor's right to claim as exempt certain real property in which the Debtor owned with her husband an interest as a tenant by the entirety. Hearing was conducted on February 2, 2011, at the conclusion of which the Court took the matter under advisement. Based upon the pleadings filed, the evidence presented and the arguments expounded, the Court holds that the Debtor is entitled to the claimed exemption. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.¹

Jurisdiction

The Court has subject-matter jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334 and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1409(a).

Facts

The Debtor commenced this bankruptcy case by filing a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on June 4, 2010 (the “Petition Date”).² Carl M. Bates was appointed as the Chapter 13 trustee in the Debtor's case, and he continues to serve in that capacity (the “Trustee”). On the Petition Date, the Debtor owned with her husband, as tenants by the entirety, a parcel of real property located at 8708 Little Elam Road in Charles City County, Virginia (the “Real Property”). The Debtor scheduled the value of the Real Property at $60,700. One lien encumbers the Real Property in the amount of $17,000, leaving the Debtor and her husband with an equity value in the Real Property of $43,700. The Debtor sought to protect this equity value by claiming the Real Property as exempt on her Schedule C.³ As the Debtor scheduled no joint unsecured creditors with her husband, she asserted that the Real Property was completely exempt under 11 U.S.C. § 522(b)(3)(B). It is undisputed that the Debtor claimed the exemption in a timely and appropriate manner.

The Debtor listed $39,210 in non-priority general unsecured debt on her Schedule F. All of the unsecured debt was scheduled in her individual capacity. The Debtor filed a plan as required by § 1321 of the Bankruptcy Code and Rule 3015 of the Federal Rules of Bankruptcy Procedure on June 7, 2010 (the “Chapter 13 Plan”). The Chapter 13 Plan proposes to pay $185 per month for 54 months to the Trustee. The Chapter 13 Plan payments are expected to yield a dividend of 5% to the Debtor's general unsecured creditors.

The meeting of creditors convened by the United States Trustee, pursuant to § 341 of the Bankruptcy Code, was conducted on July 22, 2010. Prior to the date of the meeting of creditors but after the Petition Date, the Debtor's husband passed away. On August 10, 2010, the Trustee filed an Objection to the Confirmation of the Chapter 13 Plan under § 1325(a)(4) of the Bankruptcy Code, contending that the amount proposed to be distributed under the Chapter 13 Plan was less than the amount the creditors would receive if the estate were liquidated under Chapter 7 of the Bankruptcy Code. On August 13, 2010, the Trustee timely filed his Objection to the Debtor's Claim of Exemption pursuant to 11 U.S.C. § 522( l ) and Rule 4003(b) of the Federal Rules of Bankruptcy Procedure.⁴ The Trustee contends that because “the [Debtor] is a widow ... the [Real Property] does not qualify for exemption under 11 U.S.C. § 522(b)(3)(B); Williams v. Peyton, 104 F.3d 688 [ (4th Cir.1997) ].” Trustee's Objection to Exemptions ¶ 5.

Analysis

“A voluntary case under [Chapter 13 of Title 11] is commenced by the filing with the bankruptcy court of a petition under such chapter.” 11 U.S.C. § 301(a). A bankruptcy estate is created upon the commencement of a bankruptcy case. 11 U.S.C. § 541(a). The bankruptcy estate is very broadly defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” § 541(a)(1). The general rule of inclusion of property in the bankruptcy estate applies to property held as a tenant by the entirety. Chippenham Hosp., Inc. v. Bondurant (In re Bondurant), 716 F.2d 1057, 1058 (4th Cir.1983); Napotnik v. Equibank and Parkvale Sav. Assoc., 679 F.2d 316, 318 (3d Cir.1982) (construing § 541 to include the debtor's interest in entireties property). State law determines the particular features of this property interest. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

Accordingly, the Debtor's entirety interest in the Real Property became property of her bankruptcy estate on the Petition Date. The Trustee, as representative of the bankruptcy estate, succeeded to the Debtor's interest in the Real Property and had the authority (but not the duty) to use or sell it in order to return money to creditors. 11 U.S.C. § 363(b). A Chapter 13 trustee, unlike a Chapter 7 trustee, is not charged with the duty under § 704(a)(1) of the Bankruptcy Code to collect and reduce to money property of the estate for which the trustee serves. See 11 U.S.C. § 1302. Rather, a Chapter 13 trustee distributes payments made by a debtor under a plan confirmed pursuant to § 1325 of the Bankruptcy Code. 11 U.S.C. § 1326(a)(2). The value of the property that a Chapter 13 trustee distributes in this fashion cannot be less than the amount that a Chapter 7 trustee would distribute if the estate were to be liquidated. 11 U.S.C. § 1325(a)(4). Thus, the Trustee in this case is required to assure that the value of the entirety property is properly accounted for in the payment stream the Debtor proposes to establish under her Chapter 13 Plan.

The Trustee objected to the Debtor's Chapter 13 Plan because it proposed to pay less than $9,990 in nominal dollars to the Debtor's unsecured creditors over the life of the plan. The Trustee contends that if the estate were to be liquidated under Chapter 7 of the Bankruptcy Code as of the effective date of the plan, then the hypothetical Chapter 7 Trustee would be able to distribute the equity value of the Debtor's fee simple interest in the Real Property. Including the equity value of the Real Property in the calculus would require the Debtor to distribute a minimum of $43,700 in order for her plan to be confirmed. As the proposed distribution is substantially less than the required minimum amount, the Trustee argues that the Debtor's Chapter 13 Plan fails the liquidation test for plan confirmation.

The Debtor, on the other hand, argues that she is entitled to claim the Real Property as exempt; and, therefore, the equity value of her interest in the Real Property should not be included in the Chapter 13 liquidation analysis. Individual debtors are allowed to reclaim certain property from property of the bankruptcy estate by claiming the property as exempt under 11 U.S.C. § 522. See, e.g., BancOhio Nat'l Bank v. Walters, 724 F.2d 1081, 1082 (4th Cir.1984). Section 522(b) of the Bankruptcy Code provides that “[n]otwithstanding section 541 of [title 11], an individual debtor may exempt from property of the estate” certain items specified under state or federal law. Section 522(d) of the Bankruptcy Code specifies the items a debtor may claim as exempt under federal bankruptcy law. Section 522(b)(2) of the Bankruptcy Code allows a debtor to choose those federal bankruptcy exemptions in lieu of any state exemptions “unless the State law that is applicable to the debtor under paragraph (3)(A) of [subsection 522(b)(1) ] specifically does not so authorize.” As the Debtor had been domiciled in Virginia for the 730 days immediately preceding the Petition Date, Virginia law is the state law applicable to the Debtor in this case. 11 U.S.C. § 522(b)(3)(A). Virginia has elected not to authorize debtors to avail themselves of the federal bankruptcy exemptions. Va.Code Ann. § 34–3.1.

Accordingly, the Debtor was relegated to the state exemption option. She was entitled to exclude from property of the estate only those items exempted by Virginia state law and by federal non-bankruptcy law. 11 U.S.C. § 522(b)(2)(A). A debtor pursuing the state exemption option is also permitted to exempt from property of the estate:

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)(3)(B). As the Debtor held her interest in the Real Property immediately before this case was commenced as a tenant by the entirety with her spouse, she claimed the Real Property as exempt under § 522(b)(3)(B) of the Bankruptcy Code.

Under Virginia law, a tenancy by the entirety is a concurrent form of ownership of property. It comprises “four essential characteristics, that is, unity of time, unity of title, unity of interest, and unity of possession.” Pitts v. United States, 242 Va. 254, 408 S.E.2d 901, 903 (1991). Neither spouse holding an interest in entireties property can effectuate a severance of the tenancy by his or her sole act. Id.; Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599, 602 (1951). This restriction on alienation stems from the common-law recognition of the husband and wife as a “juristic person separate and distinct from the spouses themselves.” Pitts, 408 S.E.2d at 903....