In re Brown
| Decision Date | 30 April 1999 |
| Docket Number | Bankruptcy No. 97-61897. |
| Parties | In re John Edward BROWN and Phyllis Joann Brown, Debtors. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri |
COPYRIGHT MATERIAL OMITTED
Fred Charles Moon, Springfield, MO, for Trustee.
Michael D. Textor, Springfield, MO, for Marshfield Mills.
David Schroeder, Springfield, MO, for Debtor/Movants.
Debtors John Edward Brown and Phyllis JoAnn Brown (the Browns) filed a motion to disburse exempt funds held by the Chapter 7 trustee (the trustee) following the sale of real estate that the Browns owned as tenants by the entirety. The trustee and creditor Marshfield Mills, Inc. (Marshfield) objected to this motion. The Browns objected to payment of the judgment debt of Marshfield from proceeds of the sale because the judgment is against Mr. Brown individually, and not against Ms. Brown. The Browns also objected to the deficiency claims of joint creditors Associates Commercial Corporation (Associates) and Ozark Financial Services, Inc. (Ozark) on the grounds that failure to send notice to the trustee prevented the sales of repossessed collateral from being commercially reasonable. The trustee objects to the exemption of the proceeds from the sale of tenants by the entirety property. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B) over which the Court has jurisdiction pursuant to 28 U.S.C. § 1334(b), 157(a), and 157(b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
(1) The Browns own real estate as tenants by the entirety. The Bankruptcy Code (the Code) provides that property held as tenancy by the entirety is exempt if such property is exempt from process under applicable nonbankruptcy law. Under Missouri law property held as tenancy by the entirety is exempt from the claims of individual creditors. When the Browns filed this Chapter 11 bankruptcy petition they did not claim the property as exempt. The bankruptcy schedules also list some individual debts as joint debts. After the case converted to Chapter 7, and the real estate was sold by the trustee, the Browns wished to exempt the proceeds of the sale from the claims of their individual creditors. Does the failure to disclose that real estate is held as tenants by the entirety on the bankruptcy schedules waive the exemption? And did the Browns consent to severance of the entirety when they listed individual debts as joint debts on their bankruptcy schedules?
(2) The Browns returned collateral in which Associates and Ozark held security interests. Associates and Ozark then scheduled public auctions of the collateral and sent notice to the Browns directly or through their attorney. The Uniform Commercial Code (the UCC) provides that, as to this collateral, written notice of the time and place of any public sale must be sent to the debtor. The day after notice was sent, the Court converted the Chapter 11 case to Chapter 7, and a trustee was appointed. Were Associates and Ozark required to notify the trustee of the time and place of the public sale in order to claim a deficiency? Ozark sent notice to the Browns' attorney, but not to their home address. Did Ozark have to send notice to debtor's home address, as stated in the security agreement?
Tenants by the entirety cannot impliedly waive the exemption of tenancy by the entireties or consent to the claims of individual creditors by listing individual debts as joint debts on bankruptcy schedules. No evidence was presented to prove that Mr. Brown was Ms. Brown's agent or that Ms. Brown was Mr. Brown's agent such as would make each other liable on individual debts. Nor was any evidence presented to prove Ms. Brown was involved in running the business. Therefore, I will overrule the objection of the trustee and Marshfield to disbursement of the proceeds of the sale of the property held as tenants by the entireties, first to the joint creditors of Mr. and Mrs. Brown, with any remaining funds to be distributed to Mr. and Mrs. Brown.
Associates and Ozark both sent written notice to the Browns, as the debtor in possession in the Chapter 11 case, on July 8, 1998, of the public sales of collateral that the Browns had returned. In that regard, they complied with the requirements of section 400.9-504(c)(3) of Missouri's Revised Statutes. The case was then converted to Chapter 7 by Order of this Court on July 9, 1998. The debtor in possession is required to turn over to the trustee all records and property of the estate in the possession or control of the debtor in possession after a case has been converted from Chapter 11 to Chapter 7. Any duty to notify the trustee of the sale, therefore, belonged to Brown, not to Associates and Ozark. The sales of collateral were, thus, commercially reasonable, and Associates and Ozark are entitled to their deficiency claims. Brown's objections to those claims will be overruled.
On November 13, 1997, the Browns filed this Chapter 11 case. On November 25, 1997, this Court entered an Order authorizing the employment of David E. Schroeder to represent the debtor-in-possession in all proceedings under Chapter 11 and all related matters.1 According to their bankruptcy schedules filed on December 5, 1997, Mr. Brown was self-employed, running an over-the-road trucking operation, and Ms. Brown was a "highway contracted mail route carrier" for the United States Postal Service. The Browns listed two parcels of real estate as exempt property on their schedule C. One parcel was described as farm land consisting of approximately 661.47 acres with a value of $150,000 (the farm land). The value exempt pursuant to Missouri's Revised Statutes is listed as zero.
The Browns were unable to propose a confirmable plan. On July 8, 1998, at a scheduled confirmation hearing on the First Amended Plan of Reorganization, counsel for the Browns filed a motion with the Court seeking to withdraw the First Amended Plan of Reorganization and asking for leave to file a Plan for Liquidation. Former bankruptcy judge Karen M. See denied that motion and granted creditor Truck Parts & Supply Co., Inc.'s motion to Convert the case to Chapter 7.2 The Order of conversion was entered on July 9, 1998, and contained the following provision: "Debtor(s) immediately turn over to the Chapter 7 Trustee all records and property of the estate under debtor(s)' custody and control, as required by Bankruptcy Rule 1019(5)sic."3 The Browns were also ordered to file conversion schedules within 15 days of the Order of Conversion. The conversion schedules were filed on August 17, 1998.4 Schedule C of the conversion schedules again listed the farm land as exempt. This time the value of the farm land is listed as $300,000, and the value exempt is listed as zero.
On July 29, 1998, this Court entered an Order approving the trustee's motion to sell the farm land at a private sale, with net proceeds of $300,000 being paid to the trustee.5 The Browns now ask the Court to order the trustee to pay their valid joint obligations from the sales proceeds, and to distribute the remainder to them. They acknowledge valid joint debts in the amount of $72,288.28.6
The Browns have objected to the deficiency claims of Associates and Ozark. Associates filed a proof of claim for a deficiency in the amount of $74,984. Ozark filed a proof of claim for a deficiency in the amount of $37,405. The Browns argue that the public auctions for the collateral were held after the case was converted to Chapter 7, therefore, Associates and Ozarks were required to send notice to the trustee in order to preserve their deficiency claims. Since Associates and Ozarks extended credit to both of the Browns, the proceeds of the sale of the farm land is not exempt from the deficiency claims of Associates and Ozarks, if the claims are allowed. Otherwise, the proceeds will be paid to the Browns.
A hearing was held on all these matters on April 14, 1999. At the hearing, the Court took judicial notice of the schedules, Plans of Reorganization (the Plans), and Disclosure Statements filed during the course of this case.
In his objection to the Browns' motion to distribute sale proceeds, the trustee argues that the Browns scheduled their interest in the farm land as "joint" on their bankruptcy schedules. He also claims that the Browns indicated in their proposed plans and disclosure statements that they intended the sale proceeds to be available to fund a plan and pay both joint and separate debts. He further claims that the farm land was sold on August 31, 1998, and the Browns did not claim an exemption as to the proceeds at that time. Nor did the Browns claim an exemption in the proceeds pursuant to section 522 of the Code on their conversion schedules. In fact, the trustee points out that the Browns did not claim an exemption in the sales proceeds until 8 months after conversion and 7 months after the sale. Finally, the trustee claims that it would be inequitable for the Browns to retain part of the proceeds while discharging the debts of their individual creditors.
Marshfield holds a claim against Mr. Brown only in the amount of $50,538.00. Marshfield argues that tenancy by the entirety property is included in the bankruptcy estate, and that the Browns waived their claim to the sale proceeds of the property by not amending their bankruptcy schedules to claim the farm land as exempt in a timely manner. And Marshfield objects to the Browns' motion on the grounds that a distribution to the debtors after payment of joint creditors would be prejudicial and unfair. I will first address the exemption issue.
"Tenancy by the entirety is a form of ownership in property created by marriage in which each...
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