In re Felton
| Decision Date | 02 September 2015 |
| Docket Number | BANKRUPTCY NO. 15-10451 |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
| Parties | IN RE CAROLE M. FELTON DEBTOR(S) |
Apex Realty LLC has objected to the Debtor's Claim of Exemptions. The Debtor filed a Response to the Objection. A hearing on the matter was held on June 30, 2015. Following the hearing, the parties agreed to submit the matter on a stipulated record and the Court allowed the parties time to brief the issues. Upon receipt of the briefs, the Court took the matter under advisement. For the reasons which follow, the Objection will be dismissed.1
On Schedule A the Debtor has listed the ownership of real property at 110 Barley Mill Road in Wallingford, Pennsylvania. The property is her residence (the Residence). She owns it jointly with her husband. It is valued at $327,000. Suntrust holds a first mortgage on it and is owed $200,000.2
On Schedule C, the Debtor has claimed the Residence as exempt. The basis of the exemption is that she owns the property with her husband as tenants by the entireties.
Property held as a tenant by the entirety comes within the Bankruptcy Code's broad definition of property of the estate. See Napotnik v. Equibank & Parkvale Savings Ass'n, 679 F.2d 316, 318 (3d Cir.1982). Notwithstanding, the Code provides for exemption of entireties property:
11 U.S.C. § 522(b)(3)(B)(emphasis added); In re Holler, 2012 WL 3526466, at *2 (E.D.Pa. Aug. 4, 2012)
As a party in interest, Apex may object to a claim of exemption. B.R. 4003(b)(1). Apex asserts four reasons why the claim of exemption as to the Residence should be disallowed, as follows:
Objection, 4. The Debtor disputes the claim that her husband failed to list the Apex debt in his earlier individual bankruptcy; that Apex was ever a joint creditor entitled to proceed against entireties property in the first place; and that the marital entity was ever terminated. As the objecting party, Apex bears the burden of proof. B.R. 4003(c).
In lieu of trial the parties submitted a Stipulation of Facts. From the stipulation the following is established: the parties' relationship began in June 2005. Stip. ¶¶ 1, 13. At that time, Meridian Bank made a loan (the Investment Note) to the Debtor and her husband and granted a line of credit (LoC) to her husband's business. Id. ¶¶ 1, 13. The Investment Note was in the amount of $380,000 and the LoC was for $100,000. Id. As security, the Debtor and her husband gave the Bank a mortgage on an investment property in Media, Pennsylvania (the Media Property). Id. ¶¶ 4, 16. They also guaranteed the line of credit. Id. ¶ 22
In April 2011 the Debtor filed for divorce. Id. ¶ 30. In August 2012 the Debtor and her husband defaulted on both obligations to Meridian. Id. Ex. 1 Complaint, ¶ 11. In December 2012 the Debtor's husband filed an individual Chapter 7 bankruptcy case. Id. ¶ 33. In February 2013 Meridian obtained relief from the bankruptcy stay in order to file a foreclosure complaint against the husband. Id. ¶ 43. In May 2013 the husband received a bankruptcy discharge. Id. ¶ 44. That same month Meridian confessedjudgment against the Debtor in state court. Id. ¶ 24. In August 2013 the Bank filed a foreclosure action based on both loans. Id. ¶ 46. In March 2014 Meridian was granted summary judgment against the Debtor in the amount of $616,000. Id. ¶ 47. In May 2014 Meridian assigned its interests in the Investment Note and the LoC to Apex. Id. ¶¶ 48-49. In June 2014 the Media Property was sold at sheriff's sale to a third party. Id. ¶ 52. The sale price was $325,000. Id. In November 2014 Apex filed a Petition to Fix Fair Market Value of the Media Property. That petition was filed against the Debtor. Id. ¶ 53. On January 22, 2015 the Debtor commenced her Chapter 7 bankruptcy case. Id. ¶ 54.
The Court addresses Apex's fourth argument first, because it challenges the essential premise of the exemption; to wit: that the Debtor is married and is therefore entitled to exempt property owned by her and her spouse. See Frederick v. Southwick, 165 Pa. Super. 78, 83 (Pa.Super.1949) (). To dispute that premise, Apex relies on the Stipulation of Facts which states that on September 9, 2013 a divorce decree was entered. Stip. ¶ 31, Divorce Case docket, Ex. 3. Thereafter, contends Apex, the entireties entity was terminated. In re Davis, 356 B.R. 385, 387 (Bankr.W.D.Pa. 2006) () The Debtor's filing of her bankruptcy case after that date, says Apex, means that she may not exempt property as being owned by the entireties. See Napotnik, supra, at 319.
This premise, however, is flatly contradicted by the next paragraph in the Stipulation. Paragraph 32 states that four days after the divorce decree was entered, itwas vacated. Stip. ¶ 32. There is no evidence before the Court as to why this occurred. The Stipulation, in particular, sheds no light. What evidence there is shows that after the decree was vacated the case continued and remained pending as of the petition date. Stip. Ex. 3. The effect of the order vacating the divorce decree rendered it a nullity. It was, in other words, as if the divorce decree was never entered. See Legory v. Finch, 424 F.2d 406, 409-410 (3d Cir. 1970) (); see also Rosen v. Rosen, 549 A.2d 561, 562 (1998) (). The Court accordingly holds that that the Debtor was married on the date she filed this bankruptcy and that the Residence continued to be owned by her and her husband by the entireties. Exemption of the residence by the Debtor on that basis is therefore valid.
Having disposed of this threshold challenge, the Court turns next to the argument that to "permit such an exemption would enable the Debtor to perpetrate a legal fraud upon the Creditor and upon the Court." The term "legal fraud" is synonymous with "constructive fraud," which has been so defined:
Constructive fraud is defined as an act done or omitted which amounts to positive fraud, or is construed as a fraud by the court because of its detrimental effect upon public interests and public or private confidence, even though the act is not done or omitted with an actual design to perpetrate positive fraud or injury upon other persons. Constructive fraud, sometimes called legal fraud, is nevertheless fraud, although it rests upon presumption and rests less upon furtive intent than does moral or actual fraud. It is presumed from the relation of the parties to a transaction or from thecircumstances under which it takes place (footnotes omitted).
In re Butler, 86 B.R. 829, 832 (Bankr.E.D.Pa. 1988) quoting 37 Am.Jur.2d 23 (1968) (emphasis added). See In re Bowen, 151 F.2d 690, 691-92 (3d Cir.1945); Carr-Consolidated Biscuit Co. v. Moore, 125 F.Supp. 423, 433 n. 28 (M.D.Pa.1954); and LaCourse v. Kiesel, 366 Pa. 385, 390, 77 A.2d 877, 880 (1951).
In using the term legal fraud Apex appears to imply that allowing the Debtor to exempt the Residence under these circumstances works an unfairness upon Apex. The perceived prejudice Apex alludes to is the collateral effect that the husband's prior bankruptcy discharge has on certain creditors in his wife's bankruptcy case. Specifically, the husband's prior discharge converted creditors holding joint claims against husband and wife to individual creditors of the wife alone. In turn, real property formerly attachable by joint creditors can be claimed as exempt by the wife under the above described provisions of the Bankruptcy Code.
This is indeed prejudicial. It might be actionable had Meridian been without an available remedy to protect its interests. But that is not the case. The fact is that Meridian had ample opportunity to protect its interests in the Residence but inexplicably failed to act. Meridian could have preserved its rights against entireties property, such as the Residence, in at least two ways. In In re Cotterman, 67 B.R. 788 (Bankr.W.D.Pa. 1986), for example, a joint creditor as to a debtor and her spouse sought relief from the bankruptcy stay to continue a lawsuit against the debtor spouse. The bankruptcy court granted that request. The Cotterman Court's cogent analysis is worth quoting at length:
This case illustrates a...
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