In re Duncan

• Decision Date: 29 May 2003
• Docket Number: No. 02-8010.,02-8010.
• Citation: 329 F.3d 1195
• Parties: In re Glenn Allen DUNCAN, Debtor. Tracy Lynne Zubrod, Trustee Appellant, v. Glenn Allen Duncan, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

329 F.3d 1195

In re Glenn Allen DUNCAN, Debtor Tracy Lynne Zubrod, Trustee Appellant, v. Glenn Allen Duncan, Appellee.

No. 02-8010.

United States Court of Appeals, Tenth Circuit.

May 29, 2003.

James R. Belcher of Holland & Hart, LLP, Cheyenne, WY, for Appellant.

The Appellee did not appear or file a brief.

Before KELLY and O'BRIEN, Circuit Judges, and EAGAN,^* District Judge.

EAGAN, District Judge.

Glenn Allen Duncan ("Debtor") declared bankruptcy after transferring his fee interest in property he used for a home and office ("Property") to himself and to his wife so as to create a tenancy by the entirety.¹ Debtor claimed a homestead exemption, and no objections to his claim were filed. Tracy Lynne Zubrod ("Trustee") then recovered the Property for the bankruptcy estate by avoiding the transfer as fraudulent. When Trustee put the Property up for sale, Debtor moved for turnover of his homestead exemption proceeds at the conclusion of the sale.

The United States Bankruptcy Court for the District of Wyoming and the Bankruptcy Appellate Panel ("BAP") for the Tenth Circuit ruled in favor of Debtor, reasoning that Trustee actually recovered only that portion of the Property owned by Debtor's wife. Trustee appeals, claiming that Debtor is not entitled to the exemption proceeds because he voluntarily transferred the Property. Our jurisdiction arises under 28 U.S.C. § 158(d) and Fed. R.App. P. 6(b). For the following reasons, we reverse and remand.

I

Debtor is a Wyoming attorney. In 1992, he began representing Michael Gallegos, the personal representative of the Estate of Castulo Gallegos, deceased, to prosecute a wrongful death action. In 1993, he purchased the Property and took title solely in his own name, although he paid part of the purchase price by borrowing funds with his fiancee based on her credit rating. After their marriage, the couple resided in the Property, and Debtor used the Property as his law office as well.

Debtor filed the wrongful death action on behalf of the Gallegos family in 1994. The defendant moved to dismiss, arguing that the complaint was barred by the applicable statute of limitations. The court set a hearing on the motion, but before the date of the hearing, Debtor transferred title to the Property to himself and his wife as tenants by the entirety. The transfer rendered Debtor insolvent. The court dismissed the wrongful death action a few months later based on the defendant's argument that it was time-barred.

In 1996, Michael Gallegos sued Debtor for professional negligence. The judge entered summary judgment for the Gallegos estate and submitted the question of damages to a jury. A jury awarded damages in the amount of $172,000 on March 7, 1998. Debtor filed a voluntary petition for Chapter 7 relief on March 12, 1998, prior to the entry of a final judgment in the legal malpractice action. He listed the worth of the Property as $200,000, with a $95,117.94 mortgage against it, leaving approximately $105,000 equity in the Property. He claimed that the Property was completely exempt under 11 U.S.C. § 522(b)(2)(B)² because he and his wife held title as tenants by the entirety; he also claimed a $10,000 homestead exemption under Wyoming law.³ No objection was filed within the statutory 30-day period for filing objections, and Debtor was discharged on June 16, 1998.

Trustee filed an adversary proceeding on July 6, 1998, seeking to avoid the transfer as fraudulent and recover the Property for the benefit of the estate. The Bankruptcy Court granted summary judgment in Trustee's favor on June 16, 1999. When Trustee filed a notice of intent to sell the Property and sought the court's approval for the sale, Debtor objected because the notice did not include reference to Debtor's $10,000 homestead exemption, and he moved for turnover of the exemption proceeds at the time of the sale. Debtor argued that Trustee's failure to object to his claim for the homestead exemption within the 30-day period prescribed by law entitled him to the exemption proceeds after sale of the Property. Trustee argued that the Debtor's claim to a homestead exemption was invalid under 11 U.S.C. § 522(g) because he voluntarily transferred the recovered Property.

The Property ultimately sold pursuant to an order of the Bankruptcy Court, but the parties agreed to hold approximately $45,000 in proceeds from the sale pending a decision on Debtor's motion for turnover. On June 4, 2001, the Bankruptcy Court ruled that Debtor was not prevented by 11 U.S.C. § 522(g)(1) from claiming his homestead exemption. The Bankruptcy Court reasoned:

[Debtor's] ownership and other rights in the property, including the right to possession and occupancy, were rights which were never transferred. Those interests became property of the estate at filing. Construing the exemption laws in the debtor's favor, the court concludes the transfer avoided by the trustee did not include the rights of ownership and possession to which the homestead exemption attaches, interests in property [Debtor] enjoyed on the date he filed the bankruptcy petition. The homestead exemption is valid on those rights.

Appellant's Appendix ("Aplt.App.") at 67. The Bankruptcy Court also mentioned Trustee's failure to object to the exemption claim under Fed. R. Bankr.P. 4003(b) as a possible alternative basis for its ruling. The order required Trustee to disburse the homestead exemption proceeds in the amount of $10,000 to Debtor.

Trustee timely appealed to the BAP, and the BAP affirmed on January 3, 2002. Zubrod v. Duncan (In re Duncan), 271 B.R. 196 (10th Cir. BAP 2002). The BAP's rationale for its decision was that Debtor and his wife each held a separate, undivided interest in the Property, and Debtor's interest passed to the estate when he filed for bankruptcy protection under Chapter 7. According to the BAP, the judgment avoiding the transfer resulted in a recovery of property from Debtor's wife — not from Debtor. Thus, section 522(g)(1) was not applicable to the exemption claimed by Debtor. Trustee timely appealed to this Court.

II

We review the BAP's decision de novo because "[t]here are no factual disputes and the issues on appeal pertain to the proper application of bankruptcy statutes and interpretation of case law...." In re Albrecht, 233 F.3d 1258, 1260 (10th Cir.2000); see also In re Annis, 232 F.3d 749, 751 (10th Cir.2000). In this review, we independently review the Bankruptcy Court's decision. In re Albrecht, 233 F.3d at 1260. Further, "[s]ince there is no federal law of property, it is necessary to look to state law to determine the nature, extent, and effect of the debtor's interest in a tenancy by the entirety...." In re Anselmi, 52 B.R. 479, 484 (Bankr.D.Wyo.1985) (citations omitted). In particular, "bankruptcy courts must resort to state law for interpretation of state exemption rights in homesteads." In re Barnhart, 47 B.R. 277, 279 (Bankr.N.D.Tex.1985)

The parties initially framed the issue in terms of whether the Debtor's claim to a homestead exemption was invalid notwithstanding the Trustee's failure to object within the statutory period of Fed. R. Bankr.P. 4003(b). First the Bankruptcy Court, and then the BAP, rephrased the issue in terms of whether the homestead exemption was valid notwithstanding the avoided transfer. In so doing, the Bankruptcy Court and the BAP shifted the focus of the inquiry to the character of the Property transferred.

The statutory provision at the center of this controversy is section 522(g)(1) of the Bankruptcy Code, which provides as follows:

(g) Notwithstanding sections 550 and 551 of this title the debtor may exempt under subsection (b) of this section property that the trustee recovers under sections 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if —

(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and

(B) the debtor did not conceal such property....

11 U.S.C. § 522(g)(1).

The plain language of section 522(g)(1) provides that a debtor cannot assert any exemption in property a trustee recovers after the debtor's voluntary transfer of the property. Redmond v. Tuttle, 698 F.2d 414, 417-18 (10th Cir.1983). The term "transfer" is broadly defined. Id. at 417 n. 8. To avoid the import of Redmond, the Bankruptcy Court and BAP focused on the term "recovers." In their analysis of what the Trustee recovered, however, they semantically negated the effect of the Debtor's transfer.

In particular, the BAP's emphasis on the phrase "property that the trustee recovers" in section 522(g)(1) led to its ultimate conclusion that the section was inapplicable. The BAP reasoned that the Trustee recovered only the interest in the Property held by the Debtor's wife because the Debtor's undivided interest in the Property passed to the estate when he filed for bankruptcy, and his wife continued to hold a "separate, undivided interest" in the Property. The BAP's repeated use of the oxymoronic phrase "separate, undivided interest" is unfortunate because, while each tenant by the entirety may have separate rights in entirety property, it is clear that, under Wyoming law, they do not have separate interests in the property. See Talbot v. United States, 850 F.Supp. 969, 972-73 (D.Wyo.1994); Peters v. Dona, 49 Wyo. 306, 54 P.2d 817, 820 (1936). This distinction is critical to the Debtor's right to claim an exemption.

Relying on In re Ford, 3 B.R. 559, 570 (Bankr.D.Md.1980), for the general proposition that a debtor's interest in property as a tenant by the entirety is property of the estate, the BAP disregarded the Ford court's specific remarks explaining that the "time-honored unities of time, title, identity of interest, and possession necessary to preserve the estate by the entireties," was not severed when the debtor's interest passed to the...