In re Brannon

• Decision Date: 07 February 2007
• Docket Number: No. 05-5060.,No. 05-4600.,05-4600.,05-5060.
• Citation: 476 F.3d 170
• Parties: In re Kenneth E. BRANNON, Kathy Fick Sippola, Appellants in 05-4600. In re Thomas Michael Lewis; et al., Debtors. Thomas Michael Lewis; Sherry Michelle Lewis, Appellants in 05-5060.
• Court: U.S. Court of Appeals — Third Circuit

476 F.3d 170

In re Kenneth E. BRANNON, Kathy Fick Sippola, Appellants in 05-4600 In re Thomas Michael Lewis; et al., Debtors Thomas Michael Lewis; Sherry Michelle Lewis, Appellants in 05-5060.

No. 05-4600.

No. 05-5060.

United States Court of Appeals, Third Circuit.

Argued October 26, 2006.

Filed February 7, 2007.

Paul W. Johnson, Esquire (Argued), New Castle, PA, Attorney for Appellants.

Tamera Ochs Rothschild, Esquire (Argued), Titusville, PA, Attorney for Appellee in 05-4600.

Charles O. Zebley, Jr., Trustee, Zebley, Mehalov & White, P.C., Of Counsel, Uniontown, PA, Attorneys for Appellee in 05-5060.

Before: SMITH, WEIS and NYGAARD, Circuit Judges.

OPINION

WEIS, Circuit Judge.

These two bankruptcy appeals ask us to determine the "aggregate interest," for purposes of claiming a bankruptcy exemption, that one spouse holds in property owned as a tenant by the entirety under Pennsylvania law. In both cases, the District Court concluded that a spouse is entitled to no more than 50% of the value of entireties property claims as an exemption. We conclude that the Bankruptcy Code neither compels nor allows such a severance of the undivided interest a spouse holds in the whole of entireties property, and accordingly we will reverse.¹

I. Brannon

Kenneth and Kathy Brannon filed a joint petition for Chapter 7 relief in the Bankruptcy Court for the Western District of Pennsylvania.² They listed in their bankruptcy schedule the real and personal assets they owned as tenants by the entireties at the time of filing. Among the entireties property listed was a stock portfolio valued at $15,796.00 that they sought to exempt. They also identified several other items they wished to exclude from the bankruptcy estate. The wife sought to exempt $10,200 of the portfolio and the husband $1,150. $4,446 remained in the account and available to the trustee.³ The trustee objected, asserting that the wife was merely a "co-owner" of the portfolio and thus only entitled to exempt one-half of its value.

The bankruptcy judge sustained the trustee's objection, reasoning that "[t]he presumption is that each spouse is a one-half owner of the tenancy by the entirety asset." He based this on the rationale that "[u]pon divorce of the parties, the asset is equally owned by the parties and the ownership becomes an ownership in common." Id. The judge seemingly assumed that the filing of a bankruptcy petition, like a divorce, transformed the spouses' entireties interests into an ownership in common. He further stated that "[n]o basis is stated why the [w]ife has been or should become owner of more than one half of the asset."

Lewis

The facts in the Lewis case are substantially similar. Thomas and Sherry Lewis also filed a joint Chapter 7 petition in the Bankruptcy Court for the Western District of Pennsylvania. They included in their schedule a 6.5 acre parcel of realty valued at $3,000 that they owned as tenants by the entireties. The wife sought to exempt the entire value of the parcel; her husband made no claim with respect to it. The wife also asserted an exemption for more than 50% of the value of certain items of personal property the debtors owned as tenants by the entireties.

It appears that the parties chose this arrangement because the husband wished to exhaust his exemptions by applying them to items that he owned individually, such as a car, truck, and checking account.⁴ The trustee objected to the unequal allocation, contending that exemptions for property held as tenants by the entireties should be divided equally between the debtors.

The bankruptcy judge, relying on the ruling in Brannon, decided two months earlier, held that each debtor could exempt only 50% of the parcel owned as a tenant by the entireties. Citing Pennsylvania law on tenancy by the entireties, he concluded that "[k]eeping these legal precepts in mind, we do not see how debtors may `allocate' all the value of entireties property to one spouse and none of the value to the other."

In both cases, the District Court affirmed and timely appeals followed.

II.

We have jurisdiction pursuant to 28 U.S.C. § 158(d) and exercise plenary review over an appropriate order issued by a district court in an appeal from a bankruptcy judge's ruling. In re Kaiser Aluminum Corp., 456 F.3d 328, 334 (3d Cir. 2006). We review a bankruptcy judge's conclusions of law de novo. Id.

III.

Before addressing the bankruptcy issues presented in this case, it will be helpful to have a brief sketch of relevant tenancy by the entireties principles. In Pennsylvania, a tenancy by the entireties is a form of co-ownership of real or personal property by husband and wife. It is a venerable common law doctrine of ancient vintage, based on the legal fiction that husband and wife are one person. The essential characteristic is that "each spouse is seised per tout et non per my, i.e., of the whole or the entirety and not of a share, moiety or divisible part." In re Gallagher's Estate, 352 Pa. 476, 43 A.2d 132, 133 (1945) (citations omitted). As the author of a respected treatise explains,

"[H]usband and wife are looked upon, together, as a single entity, like a corporation. The single entity is the owner of the whole estate. When the husband or wife dies, the entity continues, although it is now composed of only one natural person rather than two."

Ladner on Conveyancing in Pennsylvania, § 1.08 at 16 (John Makdisi, ed., rev. 4th ed.1979). Further, "neither tenant by the entirety owns any undivided share at all; both together, as a single entity, own the whole, or entire, estate." Id.

Entireties property may not be accessed by the creditors of only one spouse. As the Pennsylvania Supreme Court explained in Madden v. Gosztonyi Savings & Trust Co., 331 Pa. 476, 200 A. 624 (1938), with respect to property owned by the entireties, neither spouse "has any individual portion which can be alienated or separated, or which can be reached by the creditors of either spouse." Id. at 627-628; see also Patwardhan v. Brabant, 294 Pa.Super. 129, 439 A.2d 784, 785 (1982).

It is presumed that each tenant by the entirety may, without specific consent, act individually on behalf of both. Madden recognized that "either spouse presumptively has the power to act for both, so long as the marriage subsists, in matters of entireties, without any specific authorization, provided the fruits or proceeds of such action inures to the benefit of both and the estate is not terminated." Madden, 200 A. at 630-31. In that case, the Pennsylvania Supreme Court held that a spouse could consent to the reorganization of a bank that held an account he owned by the entireties. Id. at 626, 631.

A spouse may act on behalf of both spouses with respect to entireties property as long as the tenancy remains intact. The only established ways in which it may be severed, other than by the death of one of the spouses, are "a joint conveyance of the estate, divorce, or mutual agreement, either express or implied." Clingerman v. Sadowski, 513 Pa. 179, 519 A.2d 378, 381 (1986) (internal citations omitted).

Pennsylvania courts have found an implied agreement to sever a tenancy where a spouse wrongfully appropriated entireties properties for individual benefit or excluded the other spouse from enjoyment of the asset. See Id. at 381-82 (1986). For example, in Stemniski v. Stemniski, 403 Pa. 38, 169 A.2d 51 (1961), the court reasoned:

"A violation of the rules by one spouse's appropriating the property to his own use works a revocation of the estate [by the entireties] by the fiction of appropriation's being an offer of an agreement to destroy the estate and an acceptance of that offer when the other spouse starts suit; the property is then fit for accounting and division."

Id. at 53.

In Johnson v. Johnson, 908 A.2d 290 (Pa.Super.Ct.2006), the Pennsylvania Superior Court noted that the presumption that one may act on behalf of the whole remains only "so long as both spouses share the proceeds, and neither spouse may appropriate property for his or her own use, to the exclusion of the other spouse, without the consent of the other spouse." Id. at 295 (citations omitted).

Thus, the "presumption may be rebutted by evidence that the spouse acting was not in fact authorized by the other spouse." Kennedy v. Erkman, 389 Pa. 651, 133 A.2d 550, 553 (1957). Absent the other's consent, a spouse may not unilaterally convey property to another party nor appropriate property for his or her own use, to the exclusion of the other. Shapiro v. Shapiro, 424 Pa. 120, 224 A.2d 164, 172 (1966).

Having examined the law surrounding tenancies by the entireties in Pennsylvania, we may now discuss the effect that filing for bankruptcy has on the interest a spouse has in entireties holdings. Under 11 U.S.C. § 541(a)(1), "all legal and equitable interests that a debtor holds in property at the commencement of a bankruptcy case" are included in the bankruptcy estate.

We have held that § 541(a) is "certainly broad enough to include an individual debtor's interest in property held as a tenant by the entirety." Napotnik v. Equibank & Parkvale Savings Ass'n, 679 F.2d 316, 318 (3d Cir.1982).

Although entireties property may be initially included in a bankruptcy estate, the process does not end there because a debtor may exempt certain holdings pursuant to § 522.

The Bankruptcy Code provides two alternative plans of exemption. Under § 522(b)(2)⁵, a debtor may elect the specific federal exemptions listed in § 522(d) ("federal exemptions") or, under § 522(b)(3), may choose the exemptions permitted, inter alia, under state law and general (nonbankruptcy) federal law ("general exemptions").

Debtors may select either alternative, unless a state has "opted out" of the federal exemptions category. Pennsylvania has not done so and thus debtors are entitled to claim exemptions under either the general or federal methods.

A debtor who chooses to use the general exemptions may...