In re Clifton
| Decision Date | 19 July 2013 |
| Docket Number | CASE NO. 09-02379-8-RDD |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re: SUZANNE S. CLIFTON, DEBTOR |
Pending before the Court is the Report of Sale Proceeds and Trustee's Motion for Final Disbursement 208 Bordeaux Lane, Cary, NC and the accompanying Memorandum of Law filed by the Chapter 7 Trustee (the "Trustee") on April 23, 2013 ("Motion for Disbursement"), the Debtor's Objection to Report of Sale Proceeds and Trustee's Motion for Final Disbursement 208 Bordeaux Lane, Cary, NC filed by Suzanne S. Clifton (the "Debtor") on May 8, 2013, the Response in Opposition to Trustee's Motion for Final Disbursement filed by the Internal Revenue Service (the "IRS") on May 15, 2013, the Objection of PNC Bank, N.A. to Trustee's Report of Sale and Motion for Final Disbursement and Request for Hearing filed by PNC Bank, N.A. ("PNC") on May 16, 2013, and the Response and Memorandum of Law in Support of Trustee's Report of Sale and Motion for Final Disbursement 208 Bordeaux Lane, Cary, NC filed by Lawrence E. Clifton ("Mr. Clifton") onJune 16, 2013. The Court conducted a hearing on June 17, 2013, in Wilson, North Carolina to consider these matters.
The Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code on March 24, 2009. As of the petition date, the Debtor and her non-filing spouse owned as tenants by the entirety real property located at 208 Bordeaux Lane, Cary, North Carolina 27511 (the "Property"). On April 8, 2009, the Debtor filed her Schedule C and exempted "pursuant to 11 U.S.C. § 522 and the law of the State of North Carolina pertaining to tenants by the entirety" three pieces of real property, including the Property. The Debtor listed the market value of the Property as $750,000.00. The Debtor listed a lien against the Property in the amount of $340,000.00 held by Paragon Commercial Bank. On September 14, 2011, the Debtor's case was converted to a case under Chapter 7 of the Bankruptcy Code. Walter L. Hinson is duly appointed as the Chapter 7 Trustee (the "Trustee").
The IRS filed two proofs of claim. On April 1, 2009, the IRS filed Proof of Claim Number 1 as an unsecured priority claim in the amount of $15,993.00. On April 15, 2009, the IRS filed Proof of Claim Number 7 ("Claim 7") as an unsecured priority claim in the amount of $7,034,504.83 based on taxes or penalties owed to governmental units pursuant to 11 U.S.C. § 507(a)(8). On November 21, 2011, the IRS amended its Claim 7 and claimed the amount of $2,900,000.00 as entitled to priority as taxes or penalties owed to governmental units pursuant to 11 U.S.C. § 507(a)(8). Claim 7 is based on trust fund recovery penalties for the Debtor's failure to submit to the IRS employment taxes withheld from employees. The amended Claim 7 is the result of a Consent Order entered on September 14, 2011, that compromised the Debtor's tax liability to $2,900,000.00. The Debtor isindividually liable on the IRS's claims. Based on the representations made at the June 17, 2013 hearing, the IRS has not filed a public Notice of Federal Tax Lien.
PNC holds a joint claim against the Debtor and her non-filing spouse, Mr. Clifton, in excess of $600,000.00 based on an equity line of credit agreement originally secured by a second lien mortgage conveying real property owned by the Debtor and her husband in North Palm Beach, Florida. The Florida property was sold pursuant to an Order of this Court. The net sales proceeds were paid to the first lien holder on the Florida Property and PNC did not receive any of the proceeds. Accordingly, PNC is a joint unsecured creditor.
On January 30, 2012, the Court entered the Order Sustaining Objection of RBC Bank (USA) (PNC is the successor to RBC Bank (USA)) to Debtor's Claim of Exemption. The Order states:
In re Clifton, No. 09-2379-8-RDD (Bankr. E.D.N.C. Jan. 30, 2012) (emphasis added).
On March 8, 2012, the Debtor amended her Schedule C and did not claim any real property as exempt based on tenants by the entirety. On February 28, 2013, the Court entered the Order Allowing Relief from Stay in Part and Denying Relief from Stay in Part ordering the modification of the automatic stay to permit PNC to prosecute one or more civil actions against Mr. Clifton and obtain and transcribe judgments against him.
On March 22, 2013, the Court entered the Order Allowing Private Sale of the Property. The order authorized the Trustee and Mr. Clifton to sell the entire fee simple ownership interest in the Property at a private sale for the sum of $600,000.00. On March 22, 2013, the Court also entered the Order as Terms of Closing and Distribution of Funds from Private Sale. This Order acknowledged that after the sale of the Property there would likely be a balance of adjusted gross proceeds left for the Trustee to disburse. The Court directed that within thirty days of the entry of the Order Allowing Private Sale of Property, the Trustee was to submit a motion for disbursement of proceeds and file a memorandum of law setting forth what he believes to be the appropriate disbursement of the proceeds.
On April 24, 2013, the Trustee filed the Report of Sale Proceeds and Trustee's Motion for Final Disbursement 208 Bordeaux Lane, Cary, NC and the accompanying memorandum of law setting forth his proposed distribution of the proceeds. The Debtor, the IRS, PNC, and Mr. Clifton filed responses.
The issue before the Court is the proper disbursement of sale proceeds of tenants by the entirety property. The net funds, after deduction of closing costs and Court approved payments to both the Debtor and Mr. Clifton are $191,016.03 (the "Net Proceeds") as detailed in the Motion for Disbursement1 . The Trustee proposes to distribute one-half of the Net Proceeds to Mr. Clifton in theamount of $95,508.12. The Trustee then proposes to distribute $53,758.02 to PNC, the only joint creditor of the Debtor and Mr. Clifton. This amount represents the Debtor's one-half of the Net Proceeds, less payment of $13,500.00 to the Debtor based on her allowed homestead exemption and administrative expenses.
The Debtor and the IRS both object to the Trustee's proposed distribution and argue that the Debtor's one-half portion of the Net Proceeds should be disbursed to the IRS as an unsecured priority creditor. The Debtor and the IRS do not raise any objection to the Trustee's proposed distribution of $95,508.01 to Mr. Clifton.
The Debtor contends that joint, unsecured claims should only be paid outside the priority scheme of 11 U.S.C. § 507 if the Debtor has claimed the liquidated Property as exempt based on tenants by the entirety. It is the Debtor's contention that if the Debtor has not claimed real property as exempt pursuant to tenancy by the entirety then a joint claim should not enjoy status above creditors where only the debtor spouse is liable. According to the Debtor, tenancy by the entirety must be claimed and is not automatic.
The IRS asserts that under North Carolina law, the surplus sale proceeds of tenants by the entireties property become tenants in common personal property after a voluntary sale, and the Debtor's one-half interest in the remaining proceeds should be disbursed to the IRS under the priorities of the Bankruptcy Code, which directs the proceeds be disbursed as property of the estate to the IRS. In the alternative, the IRS contends even if the proceeds were not brought into the estate as tenants in common proceeds, the IRS has the ability to collect against the Debtor's one-half interest in any tenants by entireties property absent bankruptcy.
Mr. Clifton agrees with the Trustee's proposed distribution and iterates that his one-half interest in the net sale proceeds is not property of the estate and should be distributed to him as required by the plain language of 11 U.S.C. § 363(j).
PNC objects to the Trustee's proposed disbursement and contends it should receive all of the Net Proceeds after deducting trustee compensation, the residential exemption, and the cash payout forwasher/dryer/refrigerator. PNC cites to two Fourth Circuit Court of Appeals decisions Chippenham Hosp., Inc. v. Bondurant, 716 F.2d 1057 (4th Cir. 1983) and Sumy v. Schlossberg, 777 F.2d 921 (4th Cir. 1985) that recognize a joint creditor holding a claim against tenants by the entirety property holds a special status and the proceeds of the sale of entireties property may be distributed to joint creditors.
The commencement of a bankruptcy case creates an estate. 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." 11 U.S.C. § 541(a)(1). "Section 541 has been construed logically to include the debtor's interest in entireties property." Chippenham Hosp., Inc. v. Bondurant, 716 F.2d 1057, 1058 (4th Cir. 1983) (citation omitted). Although pursuant to §541(a) of the Bankruptcy Code entireties property becomes property of the bankruptcy estate, the "filing of a bankruptcy petition by one spouse does not sever the tenancy by the entirety or otherwise change the nature of either spouse's interest in the property." In re Payne, No. 04-52124C-7W, 2004 WL 2757907, at * 2 (Bankr. M.D.N.C. Nov. 15, 2004) (citing Greenblatt v. Ford, 638 F.2d 14, 15 (4th Cir. 1981)).
Pursuant to 11 U.S.C. § 522(b) a...
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