In re Harris
| Decision Date | 04 June 1993 |
| Docket Number | Adv. No. 93-2006-T.,Bankruptcy No. 91-26283-T |
| Citation | 155 BR 948 |
| Parties | In re Charles H. HARRIS, Debtor. H.B. PRICE, III, Trustee of the Estate of Charles H. Harris, Plaintiff, v. Charles H. HARRIS, Elizabeth E. Harris, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
Steven L. Brown, Tolerton and Brown, P.C., Norfolk, VA, for the Trustee.
William F. Burnside, Virginia Beach, VA, for defendants.
H.B. Price, III, Virginia Beach, VA, Chapter 7 Trustee.
Trial was held in this adversary proceeding April 1, 1993, on the trustee's complaint to sell residential real property owned by the debtor and his nondebtor spouse as tenants by the entirety. The trustee's complaint seeks to sell the property to satisfy the claims of joint creditors pursuant to 11 U.S.C. § 363(h). The issue before the court concerns just one of the conditions necessary for the sale, i.e., whether the benefit to the chapter 7 estate of the trustee's sale outweighs the detriment to the nondebtor spouse.
For reasons stated in this opinion, the court will authorize the trustee to sell the property unless the debtor otherwise satisfies the joint debt by September 1, 1993.
The debtor filed a voluntary chapter 7 petition on November 7, 1991. On November 21, 1991, H.B. Price, III, was appointed chapter 7 trustee.
The debtor and his spouse own as tenants by the entirety a single family residence located at 4809 Haygood Road, Virginia Beach, Virginia. In the debtor's bankruptcy petition the fair market value of the property is listed as $80,000.00, and the property has been tax assessed at approximately $87,000.00. At trial the debtor's counsel represented that a recent appraisal indicated the value of the property was as high as $99,000.00.
In the debtor's schedules the property is listed as having a first mortgage of $32,000.00 bearing an interest rate of 11.5 percent per annum. However, the holder of the first mortgage filed a proof of claim for only $24,322.88.
Expert testimony at trial indicated that a current sale of the property would net $78,500.00 after commissions and costs. This would leave approximately $54,000.00 of proceeds to satisfy the claims of joint creditors. Expert testimony also established that it is impractical to partition or to sell a one-half interest in the property.
Unsecured creditors have filed proofs of claim totalling $23,571.99. Of this amount, $9,895.90 or 42 percent of the total unsecured claims are of joint creditors.
The debtor and his wife are retired, apparently live on a fixed income, and have some medical problems associated with their age. Moreover, the debtor testified that his wife cares for her elderly mother who also resides at the property with them.
TRUSTEE.
The trustee contends that pursuant to 11 U.S.C. § 363(h) he can sell the property owned by the debtor and his nondebtor spouse as tenants by the entirety to satisfy joint debt. He argues that the critical condition imposed by Bankruptcy Code § 363(h)(3) is satisfied because the substantial benefit to the estate outweighs the potential detriment to the nondebtor spouse.
DEBTOR.
The debtor argues that if the property is sold, the detriment to the nondebtor spouse exceeds any benefit which may accrue to the estate because of the emotional and psychological trauma that would be suffered by his elderly wife. Therefore, under § 363(h)(3) the trustee should not be permitted to sell the property.
Under Virginia law, property held as tenants by the entirety is subject to the claims of joint creditors of both spouses but is not subject to the individual creditors of either. In re Harry, 151 B.R. 735, 737 (Bankr.W.D.Va.1992) (citing Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599, 602 (1951)). Proceeds of sale of entireties property are also subject only to the claims of joint creditors. Oliver v. Givens, 204 Va. 123, 129 S.E.2d 661, 663 (1963); see also Ames v. Wickham (In re Wickham), 130 B.R. 35, 37 n. 3 (Bankr.E.D.Va.1991).
A trustee in bankruptcy may administer entireties property for the benefit of joint creditors pursuant to the conditions set forth in § 363(h). Sumy v. Schlossberg, 777 F.2d 921, 932 (4th Cir.1985); In re Wickham, 127 B.R. 9 (Bankr.E.D.Va. 1990).
In summary, the statute imposes the following conditions to the trustee's sale of the co-owned property:
See 11 U.S.C. § 363(h) (emphasis added).
The issue here is whether the trustee has satisfied § 363(h)(3) by establishing that the benefit to the estate of a sale of the property outweighs the detriment to the nondebtor spouse.
The determination under 363(h)(3) is fact intensive, and courts generally have considered non-economic, emotional or psychological detriment in addition to any economic detriment that may be suffered by the co-owner. Community Nat'l Bank & Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15, 20-21 (2d Cir.1989); Armstrong v. Trout (In re Trout), 146 B.R. 823, 829 (Bankr.D.N.D.1992); Bakst v. Griffin (In re Griffin), 123 B.R. 933, 936 (Bankr.S.D.Fla.1991); Hunter v. Levesque (In re McCoy), 92 B.R. 750, 752 (Bankr. N.D.Ohio 1988); Whittington v. Gibralter Sav. & Loan Ass'n (In re Spain), 85 B.R. 874, 878 (Bankr.N.D.Ala.), rev'd on other grounds, 103 B.R. 286, 297 (N.D.Ala.1988).
Although many of the cases considering psychological and emotional detriment rule in favor of the nondebtor co-owner, this court believes these cases are readily distinguishable from the present case.
For example, in In re Trout the court ruled that § 363(h)(3) was not satisfied despite the substantial equity available in the property to satisfy joint debt. In summary, In re Trout involved the following facts:
In re Trout, 146 B.R. at 829-30. The court ruled under these facts that, the detriment to the co-owner outweighed the benefit to the estate despite the substantial equity in the property. I do not disagree with that result; however, In re Trout is distinguishable from the present case and does not compel a similar holding.
Also, in In re McCoy, the subject property had minimal value in excess of secured debt, and the trustee was unable to show that any benefit to the estate would result from sale. In re McCoy, 92 B.R. at 752. The courts in In re Griffin and In re Spain reached similar results on facts comparable to In re McCoy. See In re Griffin, 123 B.R. at 936; In re Spain, 85 B.R. at 877-78.
In the present case, however, substantial equity exists in the property, and all of the joint debt can be paid upon sale. This will amount to 42 percent of the total unsecured debt scheduled in the petition and 100 percent of the secured debt. The remaining proceeds would remain exempt entireties property of the debtor and his spouse. Oliver v. Givens, 204 Va. 123, 129 S.E.2d 661, 663 (1963); see also Ames v. Wickham (In re Wickham), 130 B.R. 35, 37 n. 3 (Bankr.E.D.Va.1991).
Moreover, in the instant case, the fact that the property is the only source of funds to pay creditors, weighs in the trustee's favor. See Maiona v. Vassilowitch (In re Vassilowitch), 72 B.R. 803 (Bankr. D.Mass.1987).2 The trustee here will have no assets to pay any unsecured creditors unless the property is sold. A 100 percent payout to joint unsecured creditors is a substantial benefit which in the court's view outweighs the potential detriment to the nondebtor spouse.
In this case it is not disputed that selling the property may impose some detriment on the nondebtor spouse. The possibility of displacement exists, and it may be assumed from this circumstance that Mrs. Harris would suffer emotionally and psychologically. However, little specific evidence on this point has been presented. Thus, the evidence actually establishes only possible detriment to Mrs. Harris.
The debtor and his spouse may have several other viable alternatives.3 For example, due to the substantial equity in their residence the debtor and his wife may qualify for a home equity loan to pay off the joint creditors, or they may consider refinancing the property at an interest rate lower than their current 11.5 percent rate. In fact, it may be possible for the debtor and his spouse to remain in their home, fully satisfy the claims of their joint creditors, and be left with a mortgage payment equal to or less than their...
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