In re Mickens

• Decision Date: 20 October 2017
• Docket Number: Case No. BT 15–01872
• Citation: 575 B.R. 797
• Parties: IN RE: Douglas & Jeanette MICKENS, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Michigan

575 B.R. 797

IN RE: Douglas & Jeanette MICKENS, Debtors.

Case No. BT 15–01872

United States Bankruptcy Court, W.D. Michigan.

Signed October 20, 2017

Kevin M. Smith, Esq., Rochester Hills, Michigan, attorney for Kelly M. Hagan, Chapter 7 Trustee.

Gerald G. Green, Esq., Cadillac, Michigan, attorney for Douglas and Jeanette Mickens.

OPINION OVERRULING TRUSTEE'S OBJECTION TO DEBTORS' AMENDED EXEMPTIONS

James W. Boyd, United States Bankruptcy Judge

I. INTRODUCTION AND ISSUE PRESENTED.

Douglas and Jeanette Mickens (the "Debtors") were seventy-three and eighty-four years old, respectively,¹ when they filed their voluntary petition under chapter 7 of the Bankruptcy Code² in March of 2015. They have owned their home on E. 32 Road in Wexford County, Michigan (the "Property") since December 10, 1993.

Three days prior to filing their chapter 7 case, on the advice of their bankruptcy counsel, the Debtors executed and recorded a quit claim deed transferring the Property, which they owned as joint tenants with rights of survivorship, to themselves as tenants by the entireties. Kelly M. Hagan, the Chapter 7 Trustee (the "Trustee") in the Debtors' bankruptcy case, analyzed the transfer of the Property and asserted that it defrauded their creditors. As a result, the Trustee objected to the Debtors claiming the Property as exempt under the Michigan entireties exemption, Mich. Comp. Laws § 600.5451(1)(n). The Trustee also filed an adversary proceeding seeking to avoid the transfer as a fraudulent transfer under § 548(a)(1) and § 544(b)(1) and the Michigan Uniform Fraudulent Transfer Act (the "UFTA"), Mich. Comp. Laws §§ 566.31 et seq. ³ The court agreed with the Trustee and granted her motion for summary judgment as to her constructive fraudulent transfer claim under § 544(b)(1) and the Michigan UFTA, § 566.35(1). As a result of the avoidance of the transfer, the court also disallowed the Debtors' claimed Michigan tenancy by the entireties exemption.

The Debtors have now amended their bankruptcy schedules to claim the Property as exempt, not under the Michigan entireties exemption, but under Michigan's bankruptcy-specific homestead exemption, Mich. Comp. Laws § 600.5451(1)(m). The Trustee has objected, arguing that § 522(g) bars the Debtors from claiming any exemption in the Property. For the reasons set forth below, the court disagrees, overrules the Trustee's objection, and determines that the Debtors' claimed homestead exemptions in the Property are allowed in the total amount of $56,650.

II. JURISDICTION.

The court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) ; L. Civ. R. 83.2(a) (W.D. Mich.). The Trustee's objection to the Debtors' amended claim of exemptions is a statutory core proceeding. 28 U.S.C. § 157(b)(2)(B). This court has constitutional authority to enter a final order in this contested matter.

III. FACTS AND PROCEDURAL BACKGROUND.

The Debtors filed a joint, voluntary chapter 7 petition on March 30, 2015. The schedules filed with the chapter 7 petition show that, as of the filing date, the Debtors had assets totaling $88,786.00 and liabilities totaling $58,820.29. (Dkt. No. 1.) These totals include the value of the Property, which the Debtors placed at $81,000, and the $19,186.54 secured claim on the Property which was held by Mercantile Bank. (Id. ) On Schedule C, each Debtor claimed an exemption of $30,906.73 in the Property under Mich. Comp. Laws. § 600.5451(1)(n), Michigan's bankruptcy-specific exemption for property held as tenants by the entireties.

The Trustee filed a timely objection to the Debtors' original claim of exemptions in the Property on June 17, 2015. (Dkt. No. 22.) That same day, the Trustee also filed an adversary proceeding against the Debtors, seeking to avoid the prepetition transfer of the Property from the Debtors as joint tenants with rights of survivorship to themselves as tenants by the entireties as an actual and constructive fraudulent transfer under the Bankruptcy Code and the Michigan UFTA. (AP Dkt. No. 1.)

A hearing on the Trustee's objection to the Debtors' exemptions was held in the base case on August 3, 2015. At the hearing, the court characterized the Trustee's objection as essentially seeking "conditional relief" in the event that the Trustee was successful in avoiding the transfer and recovering the Property in the adversary proceeding. (Transcript of August 3, 2015 Hearing on Trustee's Objection to Debtors' Exemptions, Dkt. No. 38, at 4.) Counsel for the Trustee agreed with this characterization. (Id. ) Accordingly, on August 13, 2015, the court entered an Order Granting Trustee's Objection to [Debtors'] Claimed Exemption in Real Property. The order provided, in pertinent part, that:

[T]he Debtors' claimed exemption in the Real Property is denied to the extent it impairs the ability of the Trustee to recover the full value of the avoided Transfer or to the extent that it attempts to exempt the Real Property that has been recovered and preserved by the Bankruptcy Estate by the avoided Transfer, pursuant to 11 U.S.C. § 522g.

(Dkt. No. 31.)

On December 21, 2015, the Trustee filed a motion for partial summary judgment on the constructive fraud counts of her adversary complaint. (AP Dkt. No. 26.) After hearing argument on the motion, as well as the Debtors' cross motion summary judgment, the court gave an oral bench opinion holding that the prepetition transfer of the Property was constructively fraudulent under § 544(b) and the Michigan UFTA. (See Transcript of Telephonic Bench Opinion on Motions for Summary Disposition, August 17, 2016, AP Dkt. No. 42) (herein "SJ Bench Opinion Tr. at __.") Accordingly, the court entered an order granting summary judgment for the Trustee on Count II of her complaint.⁴ (AP Dkt. No. 40.)

Thereafter, the court held two telephonic status conferences regarding the effect of the avoidance of the transfer on the remaining issues in the adversary proceeding and underlying chapter 7 case. With the agreement of the parties, the court entered an order referring the adversary proceeding to the court's Alternative Dispute Resolution Program. (AP Dkt. No. 47.) Mediation was conducted on November 10, 2016, but did not result in a settlement. (AP Dkt. No. 57.)

On March 9, 2017, the court held a hearing to determine the effect of the avoidance of the transfer on the Debtors' claim of exemptions in the base case. The court subsequently entered an order on March 17, 2017, denying the Debtors' claim of exemptions in the Property under the Michigan entireties provision, Mich. Comp. Laws § 600.5451(1)(n), permitting the Debtors to amend their claim of exemptions pursuant to Bankruptcy Rule 1009(a), and granting other relief.⁵ (Dkt. No. 46; AP Dkt. No. 67.)

On March 28, 2017, the Debtors filed amended Schedules A, B, and C. (Dkt. No. 49.) On their amended Schedule C, each Debtor claimed a $28,325 exemption in the Property under Michigan's bankruptcy-specific homestead exemption, Mich. Comp. Laws § 600.5451(1)(m), for a total exemption amount of $56,650.⁶ (Id. ) The Trustee filed a timely objection to the Debtors' amended exemptions on April 24, 2017. (Dkt. No. 52.) In her objection, the Trustee argues that after the transfer of the Property was avoided in the adversary proceeding, it was automatically preserved for the benefit of the estate under § 551. As a result, the Trustee asserts that § 522(g) prohibits the Debtors from now claiming homestead exemptions in the Property.

On June 1, 2017, the court conducted a hearing on the Trustee's objection. At the conclusion of the hearing, the court took the matter under advisement.

IV. DISCUSSION.

To begin, the court notes that several aspects of the Debtors' amended claim of exemption are not in dispute. First, there is no question that the prepetition transfer changed the Debtors' respective rights and interests in the Property. That is, to the extent property can be described as a "bundle of sticks" comprised of various individual rights, the joint tenancy bundle held by each Debtor prior to the transfer was different than the tenancy by the entirety bundle that existed after the transfer. United States v. Craft, 535 U.S. 274, 282, 122 S.Ct. 1414, 1422, 152 L.Ed.2d 437 (2002) (utilizing the "common idiom ... ‘bundle of sticks' " to describe property rights). Unlike joint tenants, tenants by the entirety, who must be husband and wife, hold a single title with right of survivorship. Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880, 882 (1918). Of particular importance in this case, the creditors of one only spouse cannot levy on the entireties property, but joint creditors may reach the entireties property. Id. However, despite the difference in the two property interests, there is no question that each Debtor's interest in the entireties property became property of the estate as of the petition date.⁷ See Liberty State Bank & Trust v. Grosslight (In re Grosslight), 757 F.2d 773, 775 (6th Cir. 1985) ; In re Spears, 313 B.R. 212, 217 (W.D. Mich. 2004) (explaining that, upon the filing of a bankruptcy case, a trustee "obtains and retains custody of the debtor's undivided interest [in entireties property] consisting of the same unities, intact and unaltered, as they existed immediately prior to the filing of the petition" until such time as that interest is properly exempted) (citation omitted).

It is also undisputed that the Property was the Debtors' homestead prior to the filing date, at the time of the filing, and remains so today. The Trustee's objection to the amended exemptions does not challenge the characterization of the Property as the Debtors' homestead. Finally, Bankruptcy Rule 1009(a) provides that debtors may amend their bankruptcy schedules, including their claimed exemptions, "as a matter of course at any time before the case is closed." Fed. R. Bankr. P. 1009(a). The Sixth Circuit Court of Appeals...