In re Gifford

Decision Date12 November 2021
Docket NumberCase No. 20-50617
Citation634 B.R. 909
Parties IN RE: Christopher Lee GIFFORD, Debtor.
CourtU.S. Bankruptcy Court — Middle District of North Carolina

Brian Richard Anderson, Fox Rothschild LLP, Greensboro, NC, Trustee Pro Se.

Joshua H. Bennett, Elizabeth Fowlkes Lawson, Erik Mosby Harvey, Bennett Guthrie PLLC, Winston-Salem, NC, for Debtor.

Findings of Fact and Conclusions of Law Denying Motion to Compel Abandonment

BENJAMIN A. KAHN, UNITED STATES BANKRUPTCY JUDGE

This case is before the Court on the Debtor's Motion to Deem Property not Property of the Estate under 11 U.S.C. § 541, or in the alternative, Abandon Property under § 544(b). ECF No. 125 ("Motion"). For the reasons stated below, the Court will deny the Motion.

I. Findings of Fact

On December 31, 2006, Debtor Christopher Lee Gifford and Shana Gifford ("S. Gifford") married. ECF No. 125 at ¶ 2. Prepetition, they owned a residence located at 4568 Frye Bridge Road, Clemmons, North Carolina (the "Property") as tenants by the entireties. Id. at ¶ 3. On April 1, 2019, Debtor and S. Gifford separated, and Debtor filed a complaint for equitable distribution action in Forsyth County District Court (the "Equitable Distribution Action") on January 31, 2020. Id. at ¶ 4 and Exhibit A. The state court has not entered a judgment in that action. Id. at ¶ 4.

Debtor filed a chapter 7 petition on August 7, 2020. In his schedules, Debtor claimed the Property exempt under 11 U.S.C. § 522(b)(3)(B)1 and North Carolina law as property held by Debtor and his spouse as tenants by the entirety. Debtor did not assert any other exemption with respect to the Property and did not assert any exemption in the pending equitable distribution claim.

The original deadline to object to exemptions under Rule 4003(b)2 was October 18, 2020. ECF No. 131. On October 15, 2020, Brian Anderson, the chapter 7 trustee ("Trustee"), requested an additional sixty days through December 17, 2020 to object to Debtor's exemptions, which the Court granted. ECF Nos. 32 and 36. On December 1, 2020, S. Gifford filed a motion for relief from the automatic stay to continue with the Equitable Distribution Action. ECF No. 46. On December 17, 2020, Trustee filed a second motion to extend time to object to exemptions for an additional sixty days through February 15, 2021, which the Court granted. ECF Nos. 53 and 64.

On December 23, 2020, the Court entered an order granting in part and denying in part S. Gifford's motion for relief from stay. ECF No. 58. The Court lifted the automatic stay solely for the purpose of allowing S. Gifford to liquidate any equitable distribution in the Equitable Distribution Action, with the automatic stay to remain in place with respect to the enforcement of any judgment or the transfer of any property of the estate. That same day, S. Gifford filed a proof of claim. See Claim No. 29. In the proof of claim, S. Gifford asserts a "claim against [Debtor] for equitable distribution of marital property in an unliquidated amount arising from and in connection with her marriage to Gifford which will also be determined in the State Court Litigation." Id. at 29-1 Part 2.

On February 15, 2021, Trustee filed the third and final motion to extend time to object to exemptions for an additional sixty days through April 16, 2021. ECF No. 78. After Debtor objected to Trustee's third motion to extend time, [ECF No. 84], the Court held a hearing on March 9, 2021. ECF No. 100. At the hearing, the Court partially granted Trustee's motion and extended the time to object to Debtor's exemptions one last time through April 7, 2021. ECF No. 101. Trustee did not file an objection to Debtor's exemptions.

On April 14, 2021, the Court granted the motion to approve the settlement in adversary proceeding 20-6191 between Trustee and S. Gifford. ECF No. 26. With respect to the Property, the motion to approve the settlement agreement provided as follows:

(f) S. Gifford consents to the sale of real property located at 4568 Frye Bridge Road, Clemmons, NC (the "Frye Property") by the Trustee, pursuant to 11 U.S.C. § 363(h), by any reasonable means, with the approval of such sale pursuant to further order of the Bankruptcy Court. S. Gifford and the Trustee agree that after payment of costs of sale, including, but not limited to, closing costs, outstanding ad valorem taxes, and broker commissions, the proceeds of sale shall be applied to joint debts of the Debtor and S. Gifford.

ECF No. 11. The order granting the motion to approve the settlement agreement provided the following:

1. The Motion hereby is GRANTED.
2. This Order does not affect, reserves, and is without prejudice to any rights the Debtor and Trustee have or may have concerning or regarding the real property located at 4568 Frye Bridge Road, Clemmons, North Carolina ("the Property"), including but not limited to any potential future sale of the Property and proceeds of the same. To the extent the Trustee desires that the Property be sold, the Trustee shall file the appropriate motions with this Court.
3. The Settlement Agreement, attached as Exhibit A to the Motion, is otherwise approved.

ECF No. 26.

S. Gifford sought an absolute divorce on April 1, 2021. ECF No. 125 at ¶ 5. On June 28, 2021, 325 days after the petition date, the state court granted S. Gifford a judgment of absolute divorce. Id. at n. 1.

On June 29, 2021, Debtor filed the Motion. ECF No. 125. Debtor requests that the Court find the Property is not part of the estate, or in the alternative, order Trustee to abandon the Property. First, Debtor argues that by not objecting to Debtor's exemption, Trustee waived any argument that the Property is not exempt and constitutes property of the estate. Second, Debtor contends that his interest in the Property is currently only a contingent, unliquidated, unsecured claim or right to ask for the Property in the Equitable Distribution Action. Therefore, the bankruptcy estate has no interest in the Property itself. Last, because the Debtor received an absolute divorce more than 180 days after the filing of the petition, thereby severing the tenancy by the entirety into a tenancy in common, Debtor's interest in the Property as a tenant in common did not become estate property under § 541(a)(5)(B).

Trustee filed an objection to the Motion. ECF No. 129 ("Objection"). Trustee contends that on the petition date, Debtor possessed a vested right to equitable distribution of the Property because he and S. Gifford were separated prior to the petition date. As a result of the absolute divorce decree, Debtor's interest in the Property converted to a tenancy in common and the entireties exemption lapsed, bringing the Property into the estate. Regardless whether Debtor's interest as a tenant in common became estate property upon Debtor's divorce, Trustee argues that the 180-day deadline is wholly inapplicable to the estate's interest in any equitable distribution of an interest in the Property to Debtor. Trustee argues that any interest in the Property awarded to Debtor by the state court will be property of the estate under either § 541(a)(1), (6), and (7) as proceeds or products of the estate's interest in Debtor's equitable distribution.3

On July 26, 2021, Debtor filed a response. ECF No. 131 ("Response"). Debtor reiterates that Trustee is time-barred from objecting to Debtor's claimed exemptions, and that, even if the Court were to consider the Trustee's Objection, Debtor does not have a substantive right to marital property in the Equitable Distribution Action.

On July 27, 2021, the Court held a hearing on the Motion, heard oral argument from both parties, and took the matter under advisement. ECF No. 133.

II. Conclusions of Law

A. As of the petition date, Debtor's entireties interest in the Property became property of the estate.

Under § 541,4 the bankruptcy 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) ; see Schwab v. Reilly, 560 U.S. 770, 785, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). "This definition is meant to be very broad and includes practically every conceivable interest that a debtor may have in property." In re Greer, 242 B.R. 389, 393 (Bankr. N.D. Ohio 1999) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 203–04, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) ; In re Labrum & Doak, LLP, 227 B.R. 391, 410 (Bankr. E.D. Pa. 1998) ).

"Even though section 541 provides the framework for determining the scope of the debtor's estate and what property will be included in the estate, it does not provide any rules for determining whether the debtor has an interest in property in the first place." 5 Collier on Bankruptcy ¶ 541.03 (16th ed. 2021). State law fills that gap and defines the nature and scope of the debtor's property interest. Barnhill v. Johnson, 503 U.S. 393, 398, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) ("In the absence of any controlling federal law, ‘property’ and ‘interest[s] in property’ are creatures of state law.") (citing McKenzie v. Irving Tr. Co., 323 U.S. 365, 369-70, 65 S.Ct. 405, 89 L.Ed. 305 (1945) and Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ("Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law")).

North Carolina recognizes the common law doctrine of tenancy by the entirety. In re Banks, 22 B.R. 891, 892 (Bankr. W.D.N.C. 1982). Tenancy by the entirety is a form of ownership available between a husband and wife. In re Knapp, 285 B.R. 176, 179 (Bankr. M.D.N.C. 2002) (citing Combs v. Combs, 273 N.C. 462, 160 S.E.2d 308 (1968) ). "[T]he individual creditors of the husband or wife cannot reach entireties property in order to satisfy a judgment against only one of the spouses." In re Glover, Case No. 08-10505C-7G, 2010 WL 3603470, at *1 (Bankr. M.D.N.C. Aug. 30, 2010) (J. Stocks) (citing In re Crouch, 33 B.R. 271, 273 (Bankr. E.D.N.C. 1983) ); Banks, 22 B.R. at 892 ; In re...

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