In re Henderson

• Decision Date: 26 March 1990
• Docket Number: Adv. No. 89-0201.,Bankruptcy No. 89-22538-D
• Citation: 112 BR 231
• Parties: In re Paul Rayburn HENDERSON, Debtor. Paul Rayburn HENDERSON, and Barbara Henderson, Plaintiffs, v. WEST CASH AND CARRY BUILDING MATERIALS OF MEMPHIS, INC. and R.M.P. Short, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

112 B.R. 231 (1990)

In re Paul Rayburn HENDERSON, Debtor Paul Rayburn HENDERSON, and Barbara Henderson, Plaintiffs, v. WEST CASH AND CARRY BUILDING MATERIALS OF MEMPHIS, INC. and R.M.P. Short, Defendants.

Bankruptcy No. 89-22538-D, Adv. No. 89-0201.

United States Bankruptcy Court, W.D. Tennessee, W.D.

March 26, 1990.

Doug Alrutz, Memphis, Tenn., for debtor.

Joe Van Dyke, Sardis, Miss., for West Cash & Carry.

R.M.P. Short, Sardis, Miss., pro se.

MEMORANDUM OPINION AND ORDER ON COMPLAINT TO DETERMINE NATURE, EXTENT AND VALIDITY OF LIEN

BERNICE BOUIE DONALD, Bankruptcy Judge.

This core proceeding¹ came on for hearing on the adversary complaint² of Paul Rayburn Henderson and Barbara Henderson, ("Mr. Henderson" and "Mrs. Henderson") to determine the nature, extent and validity of a lien. The issue for judicial determination is whether the promissory note and deed of trust signed by debtor and his wife, in favor of West Cash and Carry Building Materials constitutes a valid lien on debtor's homestead? The following shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

FACTUAL SUMMARY

On April 6, 1989, the debtor filed a petition under chapter 7 of the Bankruptcy Code seeking a liquidation and a fresh start. On August 30, 1989, the debtor filed the instant complaint seeking to have the court determine the nature, priority and extent of a lien on the debtor's principal residence, located in Crenshaw, Panola County, Mississippi.

A default judgment was entered in the Circuit Court of Panola County, Mississippi ("Circuit Court") in favor of West Cash & Carry Building Materials ("West") against Mr. Henderson in the amount of thirty thousand seven hundred ninety dollars and twenty-three cents ($30,790.23), plus a ten thousand dollar ($10,000.00) attorney fee, along with court costs and judgment interest.³ Subsequently, on June 7, 1988, a "Suggestion for Writ of Execution" was filed by Mr. R.M.P. Short⁴ in Circuit Court which sought to have issued a Writ of Execution.⁵ On July 6, 1988, a "Writ of Execution" was filed.⁶ The parties introduced into evidence a copy of the Sheriff's Conveyance which purported to list the properties subject to foreclosure.⁷ However, the foreclosure sale was halted due to satisfaction of the judgment by debtor and his wife, by executing a note⁸ secured by a deed of trust⁹ on their personal residence, in favor of the judgment creditor, West. The residential property securing the note was jointly owned by the Hendersons as tenants by the entirety.¹⁰

Debtor allegedly learned of the proposed sale of his properties through the newspaper, and was coerced by Mr. Short into signing the deed of trust and promissory note in order to stop the sheriff's sale. The debtor argues fraud in the inducement because sixty thousand dollars ($60,000.00) equity in the marital property was protected by the Mississippi homestead exemption statute, and the debtor had only an expectancy interest in the property that could be realized by the proposed sale, due to his ownership as a tenant by the entirety. Further, the debtor alleges that the note and deed should be set aside for lack of consideration to Mrs. Henderson.

Contrarily, West argues that the sheriff's sale, which never took place, described five (5) tracts of land; the residence and four (4) other tracts on which the debtor conducted businesses. West argues that a desire to continue ongoing business operations motivated Mr. Henderson to execute the deed of trust and note giving West a lien on the residential real estate. In support of that allegation, West alleges that its agent explained the homestead exemption to debtor, that the transfer was voluntary and for valuable consideration, and further that debtor had the right to seek assistance of counsel, which he refused.

West argues that cancellation of the judgment against debtor and an eight thousand dollar ($8,000.00) discount on the note provides sufficient consideration for the transaction.

The primary issue before the court is whether the lien should be set aside based on fraud in the inducement and absence of consideration?

DISCUSSION

As a basis for debtor's argument, he avers that the transfer should be set aside and cancelled because the transfer was executed under fraud and duress, and otherwise impairs the debtor's exemption. Debtor and his wife allege that Mr. Short represented to them that West could sell their residence to collect the judgment. In fact, the property was set for foreclosure sale. In order to prove fraud by clear and convincing evidence, debtor must establish the existence of nine elements under Mississippi law.¹¹

Initially, the debtor must show that West made a representation to him and his wife that was false. Short, on behalf of West, told debtor and his wife that their personal residence could be sold if they did not execute a note to satisfy the default judgment received by West against debtor. Debtor alleges that Short coerced them to sign the note when in fact the property could not be sold in its entirety, and they could not be divested of possession under applicable bankruptcy and Mississippi law. Therefore, debtor avers that since the property could not be sold, Short's representation was inaccurate. In order to ascertain whether Short could subject the property to foreclosure sale, the court must determine if it is exempt property.

11 U.S.C. § 522(b)(2)(A) & (B) (West 1990) states in relevant part:

§ 522 Exemptions.

(b) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection. Such property is-

(2)(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor\'s domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place; and

(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law. (emphasis added)

Mississippi opted out of the federal scheme as section 522(b)(2)(A) allows. Miss.Code Ann. § 85-3-1 (1988). Debtor in this case seeks to enforce the Mississippi homestead exemption statute¹² which states in pertinent part:

§ 85-3-21. Homestead exemption — land and buildings.

Every citizen of this state, male or female, being a householder shall be entitled to hold exempt from seizure or sale, under execution or attachment, the land and buildings owned and occupied as a residence by him, or her, but the quantity of land shall not exceed one hundred sixty (160) acres, nor the value thereof, inclusive of improvements, save as hereinafter provided, the sum of thirty thousand dollars ($30,000.00).

Miss.Code Ann. § 85-3-21 (Supp.1989)

The parties have agreed that the debtor holds the questioned property as a tenant by the entirety with a right of survivorship with his wife.¹³ Thus, the question remains, whether under section 522(b)(2)(B), the property is exempt from process under applicable nonbankruptcy law. If the property is not exempt from process under Mississippi law, the court must determine if it could be sold by West as Short alleged.

"Mississippi decisions have recognized tenancies by the entirety. Cuevas v. Cuevas, 191 So.2d 843 (Miss 1966). No reported decision in Mississippi has explicitly passed on the issue of whether such interest could be exempt from creditors' claims. Thus, the significance of section 522(b)(2)(B) under Mississippi law awaits future judicial clarification." 7 Collier on Bankruptcy 360 (15th ed. 1989).

If the property held by debtor as a tenant by the entirety is exempt from process under Mississippi law, then West, as a judgment creditor, cannot execute on the property and collect its debt, as it could impair debtor's exemption.¹⁴ Yet, if West has a valid lien on the property, it survives the discharge to the extent that it is allowed. In re Hermansen, 84 B.R. 729 (Bankr.D.Colo.1988).

As stated in Collier, the status of Mississippi law on the issue of whether debtor's property held in tenancy by the entirety is exempt from process, is unsettled. However, this court finds guidance in resolving the issues before it within Miss.Code Ann. § 13-3-131.

Miss.Code Ann. § 13-3-131 (1972) states in toto:

§ 13-3-131. Levy of writs of execution and attachments — on interest of partners or co-owners.

When a defendant in execution shall own or be entitled to an undivided interest in any property not exclusively in his own possession, such interest may be levied on and sold by the sheriff without taking the property into actual possession, and such sale shall vest in the purchaser all the interest of the defendant in such property.

Although the statute is not explicit in stating that it applies to individuals who hold property as tenants by the entirety, logically it so applies. Under the statute, a judgment creditor may levy on and sell the individual interest that a co-owner has in property. However, the creditor cannot deliver actual possession to the purchaser. debtor's interest is the equivalent of that of a co-owner. Thus, debtor's undivided one-half interest in the residence is subject to sale but only to the extent that there is equity beyond his exemption. In actuality, all that may be purchased is debtor's right to survivorship. Debtor's right to survivorship is his right to the whole of the property in the event that he lives longer than his spouse. On the other hand, if debtor dies before his wife, she is divested in the whole of the property and the...