In re Hampshire
| Decision Date | 27 February 2014 |
| Docket Number | No. 13–17965 ELF.,13–17965 ELF. |
| Parties | In re Bryan P. HAMPSHIRE, Mary D. Hampshire, Debtors. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
OPINION TEXT STARTS HERE
Joseph F. Claffy, Joseph F. Claffy & Associates, P.C., West Chester, PA, for Debtors.
Michael H. Kaliner, Michael H. Kaliner Trustee, Doylestown, PA, Trustee.
Presently before the court is the chapter 7 trustee's objection to the debtors' claim of exemptions. The issue presented is whether the husband-debtor has a present property interest, and may claim an exemption pursuant to 11 U.S.C. § 522(b), in the separately owned property of the wife-debtor. The debtors contend that the husband-debtor has such an exemptible property interest by virtue of § 2105 of the Pennsylvania Probate, Estates and Fiduciaries Code (“the PBEFC”), 20 Pa.C.S. § 2105. As explained below, I conclude that no such exemptible property interest exists and that the trustee's objection to the husband-debtor's claim of exemption in his wife's separate property should be sustained.
Debtors Bryan P. Hampshire and Mary D. Hampshire (collectively, “the Debtors,” individually “Mr. Hampshire” and “Mrs. Hampshire”) filed a voluntary petition under chapter 7 of the Bankruptcy Code on September 11, 2013. The Debtors filed their bankruptcy schedules on September 26, 2013. (Doc. # 15).
On October 11, 2013, the § 341 meeting of creditors was held, but not concluded, with the docket stating: On October 31, 2013, the Debtors filed, inter alia, Amended Schedules B and C. (Doc. # 20). In their Amended Schedule B, the Debtors disclosed an interest in “bequest from aunt's estate” with a value of $35,000.00 (“the Inheritance”). In Amended Schedule C, both Debtors claimed an exemption in pursuant to 11 U.S.C. § 522(d)(5) for a total exemption claim of $24,450.00.1
On December 11, 2013, the Trustee filed an Objection to the Debtor's Exemptions (“the Objection”). (Doc. # 23). In the Objection, the Trustee agreed that Mrs. Hampshire is entitled to exempt $12,725.00 of the value of the Inheritance, but disputed that Mr. Hampshire is entitled to claim any exemption in the Inheritance.
A hearing on the Objections was held and concluded on February 12, 2014.
At the hearing it was undisputed that:
(1) the interest in the Inheritance accrued prepetition;
(2) the Inheritance is property of the bankruptcy estate;
(3) the Inheritance is derived entirely from Mrs. Hampshire's rights as an heir under the will of her aunt; and
(4) the value of the Inheritance is $35,000.00.
The Debtors concede that Mr. Hampshire is not an heir under the will of Mrs. Hampshire's deceased aunt, and they do not suggest that by bequeathing property to Mrs. Hampshire, the decedent also somehow conveyed a property interest in the Inheritance to Mr. Hampshire. However, they argue that he nonetheless has an exemptible property interest in the Inheritance based on 20 Pa.C.S. § 2105.
20 Pa.C.S. § 2105, along with 20 Pa.C.S. § 2203, abolished the common law rights of dower and curtesy in Pennsylvania. See Bialczak v. Moniak, 373 Pa.Super. 251, 540 A.2d 962 (1988). Section 2105 provides: “The share of the estate to which a surviving husband is entitled under this title shall be in lieu and full satisfaction of his curtesy at common law.” Section 2103 gives a surviving spouse the right to an elective share of one-third of certain designated property of the deceased spouse. The Debtors contend that these provisions give Mr. Hampshire a contingent property interest in the Inheritance.
In support of their position, the Debtors cite In re Elswick, 2012 WL 2122170 (E.D.Ky. June 12, 2012). In Elswick, the district court held that a Kentucky statute, which similarly provided that a surviving spouse is entitled to a share of the deceased spouse's property, was a contingent interest in that property prior to the death of the spouse, making it property of the bankruptcy estate and subject to the debtor's exemption rights. Id. at *4. The result in Elswick is grounded in the principle that the concept of property of the bankruptcy estate is extremely broad and that “[a]n interest is not outside the reach of [11 U.S.C. § 541] because it is novel or contingent or enjoyment must be postponed.” Counties Contracting and Const. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1057 n. 3 (3d Cir.1988) (quoting Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966)) (internal quotations omitted); see also In re Downey Financial Corp., 499 B.R. 439, 453 (Bankr.D.Del.2013) () (citing H.R.Rep. No. 95–595, at 175–76, 1978 U.S.C.C.A.N. 5963, at 6136 (1977)).
Elswick is not binding precedent in this court and, as explained below, I am not prepared to follow its holding. Rather, I conclude that Mr. Hampshire does not have a present property interest in the Inheritance that may be claimed as exempt under 11 U.S.C. § 522(b).
As the Debtors themselves point out, 20 Pa.C.S. § 2105 is analogous to provisions of the Pennsylvania Divorce Code, which: (a) provide that in a divorce case, the court shall equitably divide “marital property;” and (b) define marital property as including property acquired by either party during the marriage. 23 Pa.C.S. §§ 3501, 3502. Thus, in both probate and divorce proceedings, it is possible for a spouse to assert a statutorily created property interest in the other spouse's solely owned property. Under both statutes, this statutory right is contingent upon a future event—the death of the spouse under the PBEFC or the filing of a divorce complaint under the Divorce Code. Given these similarities, there is no reason to treat the two (2) types of contingent, statutory interests differently. The relevant question for present purposes is what property rights, if any, does the spouse have before the contingencies occur?
In the Divorce Code context, numerous cases in this Circuit have held that a spouse's equitable distribution rights in property solely owned by the other spouse do not vest and are not cognizable as property interests until a divorce complaint has been filed. E.g., In re Hadad, 2008 WL 2156354, at *7 (collecting cases); In re DelCorso, 382 B.R. 240, 256–57 (Bankr.E.D.Pa.2007). I acknowledge that neither Hadad,DelCorso, nor any of the cases from this Circuit or the Pennsylvania courts cited in those decisions, involved 11 U.S.C. § 541(a) or a claim of exemption rights based on a contingent property interest in marital property under the Divorce Code asserted prior to the filing of a divorce complaint. However, with the exception of Elswick, my research reveals that every bankruptcy court in other jurisdictions that has considered the question has held that, prior to the vesting of a spouse's equitable distribution rights, 2 a debtor has no present property interest in his or her spouse's separate property for purposes of claiming an exemption pursuant to 11 U.S.C. § 522(b). See In re Horstman, 276 B.R. 80, 83 (Bankr.E.D.N.C.2002) (); see also In re James, 496 B.R. 590, 593 (Bankr.W.D.Ark.2013); In re Evans, 2009 WL 3259427, at *2 n. 1 (Bankr.M.D.N.C. Oct. 8, 2009); In re Britt, 368 B.R. 471, 474 (Bankr.E.D.N.C.2007); In re Czerneski, 330 B.R. 240, 243–45 (Bankr.E.D.Wis.2005). Cf. In re Dzielak, 435 B.R. 538, 547–48 (Bankr.N.D.Ill.2010) ().
Another reported decision, In re Demolas, 2008 WL 5429672, at *2 (Bankr.E.D.Wis. Dec. 30, 2008), is even more on point. Demolas involved a claim of exemption asserted by a husband-debtor in the wife-debtor's separate inheritance property acquired during the marriage. The husband-debtor based his claim on statutory inheritance rights, but the court held that he had no property interest to be exempted in the wife-debtor's inherited funds.
Thus, a substantial number of courts have rejected the argument that one (1) debtor spouse has an exemptible property interest in the separate property of the other debtor spouse based on equitable distribution rights that could be asserted in unfiled divorce proceedings, or statutory inheritance rights that arise in probate proceedings only after the other spouse's death. Elswick appears to be only contrary reported decision.
The majority line of cases appears to be premised on the view that under applicable nonbankruptcy law, a spouse has no present property interest in the separate property of the other spouse unless and until the contingency occurs. The majority view also may be based on an implicit premise that a contingent interest in another person's property may be so remote and the property interest so negligible that bankruptcy law will not recognize its existence, despite the broad reach of 11 U.S.C. § 541.3 However, any argument that the scintilla of a property interest (based on the contingent statutory equitable distribution and inheritance rights) that a spouse may have is sufficient to warrant the application of the bankruptcy exemptions is belied by 11 U.S.C. § 541(a)(5)(A) and (B). This Code provision defines property of the estate as including property acquired within 180 days after the filing of the petition by “bequest, devise, or inheritance” or resulting from a marital “property settlement” or “divorce decree.” Thus, Congress has specifically addressed contingent equitable...
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...generally does not constitute property of a bankruptcy estate and is therefore not an exemptible interest. E.g., In re Hampshire, 505 B.R. 668 (Bankr. E.D. Pa. 2014) ("[P]rior to the vesting of a spouse's equitable distribution rights, a debtor has no present interest in his or her spouse's......