In re Monzon

• Citation: 214 BR 38
• Decision Date: 21 October 1997
• Docket Number: Bankruptcy No. 96-15020-BKC-RAM.
• Parties: In re Felipe MONZON, a/k/a, Phil Monzon, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Florida

214 B.R. 38 (1997)

In re Felipe MONZON, a/k/a, Phil Monzon, Debtor.

Bankruptcy No. 96-15020-BKC-RAM.

United States Bankruptcy Court, S.D. Florida.

October 21, 1997.

Frank P. Terzo, Kluger, Peretz, Kaplan & Berlin, P.A., Miami, FL, for trustee.

Timothy S. Kingcade, Coral Gables, FL, for debtor.

MEMORANDUM OPINION AND ORDER GRANTING, IN PART, TRUSTEE'S RENEWED OBJECTIONS TO EXEMPTIONS

ROBERT A. MARK, Bankruptcy Judge.

In this Opinion, the Court addresses the following much debated and unresolved issues relating to the treatment in bankruptcy of property held by a debtor and his non-debtor spouse as tenants by the entirety:

1. What type of joint debt must exist to bring entireties property into the estate?

2. How much of the entireties property comes in?

3. Does entireties property get liquidated solely to pay joint creditors or do all creditors share?

Although the amount at issue in this case is small, the Debtor and Trustee have fully briefed and argued these issues which, because of their importance, justify a published, comprehensive opinion.

FACTUAL AND PROCEDURAL BACKGROUND

On August 13, 1996 (the "Filing Date"), Felipe Monzon (the "Debtor") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Joel L. Tabas was appointed trustee (the "Trustee"). The Debtor's schedules reflect unsecured debt in excess of $130,000 and no individual assets in excess of exemptions.

On the Filing Date, the Debtor and his wife, Melba, jointly owned a single family residence which they rented to a third party. The Debtor listed the property (the "TBE Property") as exempt on Schedule C of his bankruptcy schedules describing it as owned by the Debtor and his wife as tenants by the entireties. The Trustee stipulates that the TBE Property is owned as tenants by the entireties.

The Trustee initially objected to the claimed exemption based on the joint purchase money mortgage (the "Mortgage") on the TBE Property. After a hearing on January 28, 1997, the Court entered its Order Overruling Trustee's Objections to Debtor's Claimed Exemptions in Property Owned as Tenants by the Entirety (the "Initial Objection Order"). The Court held that entireties property does not get administered in a bankruptcy case if the only joint debt is the fully secured mortgage on the property.¹ The Order gave the Trustee leave to file a renewed objection if he discovered any additional joint obligations.

On April 15, 1997, the Trustee filed his Renewed Objections to Claimed Exemptions ("Renewed Objections") alleging that a joint unsecured debt existed on a Burdines department store charge account. The Debtor has stipulated that on the Filing Date, Burdines held a joint unsecured claim in the amount of $378. Neither the Mortgage nor the Burdines debt were in default at the time of the filing.

The Court conducted a hearing on the Renewed Objections on July 14, 1997. For the reasons that follow, the Renewed Objections are sustained in part. The Trustee is entitled to administer $378 worth of entireties property, but the proceeds must be distributed solely to Burdines, the only joint unsecured creditor.

DISCUSSION

I. SUMMARY OF ARGUMENTS AND ISSUES PRESENTED

The Trustee argues that since the Debtor and his wife incurred a joint prepetition credit card debt, he is entitled to sell the TBE Property pursuant to 11 U.S.C. § 363(h)² and to retain an amount equal to the joint credit card debt in the estate for distribution pro rata to all creditors of the Debtor. The Debtor argues that the Trustee cannot administer the TBE Property because neither the Mortgage holder nor Burdines obtained an in personam judgment against the Monzons before the Filing Date. The Debtor argues alternatively that if the TBE Property is not exempt to the extent of the Burdines debt, the non-exempt funds should only be administered for the benefit of Burdines and not for individual creditors.

Thus, the Renewed Objections raise the following issues: (1) Must a creditor with a joint debt have a judgment before entireties property loses its exempt status?; (2) Assuming the requisite joint debt exists to trigger administration, is the exemption lost for all of the entireties property or only for that portion necessary to satisfy the joint debts?; and (3) If any entireties property is liquidated by the Trustee, should the proceeds be distributed only to joint creditors or must they be distributed pro rata to joint creditors and creditors holding claims only against the individual debtor?

II. RELEVANT BANKRUPTCY CODE SECTIONS AND APPLICABLE STATE LAW

Under § 541(a)(1) of the Bankruptcy Code a debtor's bankruptcy estate includes "all legal and equitable interests of the debtor in property as of the commencement of the case." Section 541 has been widely interpreted to include a debtor's interest in entireties property. See e.g. Chippenham Hospital, Inc. v. Bondurant (In re Bondurant), 716 F.2d 1057, 1058 (4th Cir.1983) ("Section 541 has been construed logically to include the debtor's interest in entireties property."); Napotnik v. Equibank and Parkvale Savings Association, 679 F.2d 316, 318 (3d Cir.1982) (stating that § 541 is "certainly broad enough to include an individual debtor's interest in property held as a tenant by the entirety")

Section 522(b) of the Code allows the debtor to exempt certain property that would otherwise be subject to administration by a trustee. At issue here is the scope and interpretation of § 522(b)(2)(B), which allows the debtor to exempt entireties property under certain conditions. That subsection states, in pertinent part, as follows:

Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate . . . 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).

Under Florida law, entireties property is exempt from process to satisfy debts owed to individual creditors of either spouse. Neu v. Andrews, 528 So.2d 1278, 1279 (Fla. 4th DCA 1988). Entireties property is not exempt from process to satisfy joint debts of both spouses. See Stanley v. Powers, 123 Fla. 359, 166 So. 843, 846 (1936) (holding that a judgment debt against both spouses can be satisfied by selling entireties property).

Courts have generally recognized that § 522(b)(2)(B), read in conjunction with applicable Florida law, precludes the debtor from exempting a portion of his entireties property where joint creditors of both spouses exist at the time of filing. See e.g. Pepenella v. Life Ins. Co. of Georgia (In re Pepenella), 103 B.R. 299, 301 (M.D.Fla.1988) (explaining that under Florida law, entireties property is exempt from process of single creditors of one tenant, but joint creditor of both tenants may attach the entireties property); In re Planas, 199 B.R. 211, 217 (Bankr.S.D.Fla.1996) ("Where there are joint creditors of both spouses who under Florida law could have levied on properties held by the Debtor and non-debtor spouse as tenants by the entireties, the trustee is entitled to liquidate the debtor's interest in the properties."); In re Cochrane, 178 B.R. 1011, 1020 (Bankr.D.Minn.1995) (holding, in accordance with Florida law, that "the nature of tenancy by the entirety does not shield the entireties asset against the claims of creditors to whom both spouses are jointly liable").

Thus, without serious question, an individual bankruptcy may require administration of some property held by the entireties if joint creditors exist. The dispute in the case law involves: a) the type of debt that precludes a debtor from claiming entireties property as exempt; b) the extent of the exemption once the requisite debt exists; and c) which creditors receive the non-exempt entireties property administered by a trustee.

III. WHAT TYPES OF JOINT DEBTS TRIGGER ADMINISTRATION BY A TRUSTEE?

A. A Trustee Should not Administer TBE Property if the Only Joint Creditor is Fully Secured by the Property

Prior to the Trustee's discovery of the Burdines joint debt, the Debtor and the Trustee had stipulated that only one joint debt existed, a current purchase money mortgage on the TBE property. Where only one oversecured joint debt exists there is no basis or at least, no reason, for the Trustee to administer entireties property.

If the entireties property has a value greater than the joint secured debt on that property and unsecured joint creditors exist, the value in excess of the joint secured debt is exempt from process under Florida law. Therefore, that surplus equity would also be exempt in bankruptcy under § 522(b)(2)(B). Since the surplus equity in entireties property is exempt from the trustee's reach, the only property subject to administration would be that portion of the property equal to the amount of the joint secured debt. Under § 522(b)(2)(B), the Trustee could argue that this portion of the TBE property is not exempt but, as a practical matter, it makes no sense for the property to be administered.

What would happen if the trustee successfully objected to the exemption based on a single secured debt? In theory, the trustee could sell the TBE property and satisfy the joint secured debt, but any excess funds (again, assuming no other unsecured joint debt) would be exempt and returned to the debtor and his or her spouse. This sale would provide no benefit to the estate and may, in fact, be unnecessary and unwanted by the creditor who may have no interest in forcing a sale of the TBE property and early payment of the secured debt. That would be particularly true in a case like this one where the oversecured joint debt is not in default.

Recapping the statutory analysis, the value of the TBE property up to the amount of the joint secured debt is not "exempt from...