In re Bunker

• Decision Date: 21 November 2002
• Docket Number: No. 01-2074.,No. 01-2071.,01-2071.,01-2074.
• Citation: 312 F.3d 145
• Parties: In re Peter A. BUNKER; In re Michelina P. Bonanno, Debtors. Peter A. BUNKER; Michelina P. Bonanno, Plaintiffs-Appellees, v. Gordon P. PEYTON, Trustee, Defendant-Appellant. In re Joseph Michael Thomas; In re Myrtle Anne Thomas, Debtors. Joseph Michael Thomas; Myrtle Anne Thomas, Plaintiffs-Appellees, v. Gordon P. Peyton, Trustee, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

312 F.3d 145

In re Peter A. BUNKER; In re Michelina P. Bonanno, Debtors.

Peter A. BUNKER; Michelina P. Bonanno, Plaintiffs-Appellees, v. Gordon P. PEYTON, Trustee, Defendant-Appellant.

In re Joseph Michael Thomas; In re Myrtle Anne Thomas, Debtors.

Joseph Michael Thomas; Myrtle Anne Thomas, Plaintiffs-Appellees, v. Gordon P. Peyton, Trustee, Defendant-Appellant.

No. 01-2071.

No. 01-2074.

United States Court of Appeals, Fourth Circuit.

Argued April 4, 2002.

Decided November 21, 2002.

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ARGUED: H. Bradley Evans, Jr., Redmon, Peyton & Braswell, L.L.P., Alexandria, Virginia, for Appellant. Robert Ross Weed, Robert Weed Law Offices, Alexandria, Virginia, for Appellees. ON BRIEF: Klinette H. Kindred, Robert Weed Law Offices, Alexandria, Virginia, for Appellees.

Before MICHAEL and MOTZ, Circuit Judges, and STAPLETON, Senior Circuit Judge of the United States Court of Appeals for the Third Circuit, sitting by designation.

Affirmed by published opinion. Judge MICHAEL wrote the opinion, in which Judge DIANA GRIBBON MOTZ and Senior Judge STAPLETON joined.

OPINION

MICHAEL, Circuit Judge.

Today we take up one aspect of the bedeviling issue in bankruptcy law of how to deal with property held by debtors as tenants by the entirety. We hold that when a husband and wife in Virginia file a joint Chapter 7 bankruptcy petition, and they have — apart from their mortgage lender — only individual creditors, the two spouses may exempt a home they own as tenants by the entirety to the extent of their equity. See 11 U.S.C. § 522(b)(2)(B). The spouses may take the exemption not-withstanding the joint administration or substantive consolidation of their individual bankruptcy estates.

I.

We have before us consolidated appeals that arise from two bankruptcy cases. In the first case Peter A. Bunker and Michelina P. Bonanno, who are husband and wife, filed a joint, voluntary petition under Chapter 7 of the Bankruptcy Code in the Eastern District of Virginia. The Bunker-Bonannos list fifteen unsecured creditors with claims totaling $48,896. Each claim is listed against either the husband or the wife; none is identified as a joint claim against both. In Schedule A (Real Property) the Bunker-Bonannos list as an asset their home in Falls Church, Virginia, noting that they own it as tenants by the entirety. According to the schedule, the home has a current market value of $215,300 and is subject to mortgage liens, representing the only joint debt, totaling $134,212. When the Bunker-Bonannos filed their joint petition, only Mr. Bunker claimed the home as exempt on Schedule C, valuing the exemption at roughly the equity, $75,000. He asserted the exemption under § 522(b)(2)(B) of the Bankruptcy Code, which governs a debtor's exemption of property held as a tenant by the entirety. The bankruptcy trustee filed an objection to Mr. Bunker's claim of exemption.

In the second case Joseph M. Thomas and Myrtle A. Thomas, also husband and wife, voluntarily filed a joint Chapter 7 petition in the Eastern District of Virginia. Except for their mortgage debt, the Thomases had no joint debts at the time of filing. Together, the Thomases list twenty-one unsecured creditors with claims totaling $80,296. Each unsecured creditor is owed by only one of the debtor spouses, either Mr. Thomas or Mrs. Thomas. The Thomases list as an asset the home they own in Reston, Virginia, as tenants by the entirety. According to the schedules, the home has a current market value of $227,000 and is subject to a mortgage lien of $7,600. Because the home is held as entireties property, each Thomas spouse claimed it as exempt (valuing the exemption at $219,400) under § 522(b)(2)(B). The trustee objected to the claims of exemption.

The filing of a joint bankruptcy petition by a husband and wife does not consolidate the separate bankruptcy estates of the two spouses. In the Thomas case the estates of the two spouses were substantively consolidated by order of the bankruptcy court. Consolidation has not been ordered in the Bunker-Bonanno case. There, the estates of the two spouses are being jointly administered pursuant to local rule. See E.D. Va. Loc. Bankr.R. 1015-1. The two cases, the Bunker-Bonanno case and the Thomas case, are assigned to the same bankruptcy judge, and Gordon P. Peyton serves as trustee in both. The bankruptcy court used one proceeding to consider the central issue in both cases, whether to allow the exemption for the home owned by the debtors as tenants by the entirety.

The trustee sought to block the exemptions so that he could administer the entireties properties to benefit the individual creditors, who are unsecured. In each case the trustee would sell the home, pay off the mortgage debt, and use the balance to satisfy the claims of the individual creditors. The bankruptcy court, in sustaining the trustee's objections to the claims of exemption in both cases, issued a single opinion, In re Thomas, 261 B.R. 848 (Bankr.E.D.Va.2001). The court held that while the § 522(b)(2)(B) exemption shields property held in a tenancy by the entirety from the claims of individual creditors when only one spouse files for bankruptcy it is not available when spouses file jointly. When spouses file jointly, the court said, the trustee "possess[es] in the two estates the entire ownership of the property and may, just as the spouses could before bankruptcy, unite the two interests in the execution of a single deed and thereby convey the property to a third party." Thomas, 261 B.R. at 854-55 (Bankr. E.D.Va.2001). In the Thomas case the bankruptcy court held in the alternative that the substantive consolidation of the spouses' estates allows the trustee to administer the entireties property for the benefit of all creditors, joint and individual. Id. at 862. The bankruptcy court disallowed the claim of exemption for the entireties property (the home) in both cases.

The Bunker-Bonannos and the Thomases appealed the bankruptcy court's decision to the district court. In the meantime, after the bankruptcy court had rendered its decision, the Bunker-Bonannos amended their Schedule C to reflect Ms. Bonanno's claim of the entireties exemption with respect to the home. See Fed. R. Bankr.P. 1009(a) (providing that a schedule "may be amended by the debtor as a matter of course at any time before the case is closed"). In reviewing the bankruptcy court's decision, the district court assumed that the bankruptcy court would have also denied the exemption to Ms. Bonanno. Thomas v. Peyton, 274 B.R. 450, 452 n. 1 (E.D.Va.2001). The district court reversed, concluding that the debtors should have been allowed to claim their homes as exempt entireties property under § 522(b)(2)(B). The district court emphasized that "the statutory exemption applies to any pre-bankruptcy entireties property interest held by the debtor to the extent that the interest `is exempt from process under applicable nonbankruptcy law.'" Id. at 455 (quoting 11 U.S.C. § 522(b)(2)(B)). Section 522(b)(2)(B) pointed the court to Virginia's "strong common law rule protecting entireties property from the claims of individual creditors." Id. In allowing the exemption for each of the four debtor spouses, the district court held that the trustee could not administer the entireties property in either case for the benefit of individual creditors.

The trustee has appealed the district court's order reversing the bankruptcy court and allowing the exemptions. An order allowing or disallowing a bankruptcy exemption is a final, appealable order. Sumy v. Schlossberg, 777 F.2d 921, 923 (4th Cir.1985). We apply the same standard of review that the district court applied to the bankruptcy court's decision. Because only legal conclusions are challenged, the review is de novo. In re Southeast Hotel Props. Ltd. P'ship, 99 F.3d 151, 154 (4th Cir.1996).

II.

Before analyzing the specific exemption question presented in this case, we review some basic principles about the creation of a bankruptcy estate, the Bankruptcy Code's exemption scheme, and the nature of the tenancy by the entirety in Virginia.

The filing of a Chapter 7 petition creates a bankruptcy estate to be administered by the bankruptcy trustee. 11 U.S.C. § 541(a). The "estate is comprised of ... all legal or equitable interests of the debtor in property as of the commencement of the case." Id. Thus, a debtor's interest in entireties property becomes part of the bankruptcy estate. See Sumy, 777 F.2d at 924; Greenblatt v. Ford, 638 F.2d 14 (4th Cir.1981), aff'g In re Ford, 3 B.R. 559 (Bankr.D.Md.1980). Parenthetically, we note that when spouses file a joint Chapter 7 petition, separate bankruptcy estates are created. After an estate is created, the debtor may exempt eligible property. 11 U.S.C. § 522(b). Exempted property is not available to satisfy the debtor's obligations. Id. § 522(c).

The Bankruptcy Code provides two alternative schemes of exemption. Under § 522(b)(1) a debtor may elect the specific federal exemptions listed in § 522(d). Or, under § 522(b)(2) a debtor may choose the exemptions permitted under (i) state law, (ii) general (nonbankruptcy) federal law, and (iii) § 522(b)(2)(B), covering interests held as a tenant by the entirety or as a joint tenant. Section 522(b)(1) allows a debtor to choose the first alternative (the federal list) unless applicable state law restricts the debtor to the exemptions that are available under § 522(b)(2), the second alternative. Virginia, like most states, has opted out of the federal exemption scheme, restricting its debtor citizens to the second alternative. See Va.Code Ann. § 34-3.1 (Michie 1996). A debtor in Virginia thus has available the Commonwealth's list of exemptions, federal nonbankruptcy exemptions, and § 522(b)(2)(B)'s entireties and joint tenancy exemption. Under § 522(b)(2)(B) a debtor may exempt "any interest in property in which the debtor had, immediately...