In re Oberlies
| Decision Date | 21 December 1988 |
| Docket Number | Bankruptcy No. 88-09429. |
| Citation | 94 BR 916 |
| Parties | In re John A. OBERLIES, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Randall L. Frank, Bay City, Mich., Chapter 7 Trustee and for trustee.
Richard B. Learman, Bay City, Mich., for debtor.
The debtor is a principal stockholder and the president of Haddix Lumber and Supply Co., a Michigan firm which is the debtor in a Chapter 11 case pending in this Court. Mr. Oberlies and his wife accommodated Haddix Lumber by jointly guaranteeing the indebtedness owed by Haddix Lumber to Cotter & Co. ($79,930.61 according to its proof of claim); Caradco, a Kusan, Inc. company ($23,167.62 according to its proof of claim); and Lewis and Roberta Haddix ($502,090.81 according to their proof of claim). Mr. and Mrs. Oberlies own a home in Bay County worth, according to the debtor, approximately $100,000, which is encumbered by a mortgage with a balance of about $50,000. They also owned a home in Bay City, which they sold prior to Mr. Oberlies' bankruptcy, retaining a land contract vendors' interest therein for the balance due them. Shortly after the bankruptcy was filed, the vendee paid the balance; the trustee and the debtor hold this $27,000 jointly in escrow pending the resolution of this dispute. Under Michigan law, a homeowner may exempt only $3,500 of his/her homestead from execution. Mich.Comp.Laws § 600.6023(a)(8); Mich. Stat.Ann. § 27A.6023. However, real property owned in tenancy by the entireties is exempt from execution by a creditor of only one of the spouses. General Electric Co. v. Levine, 50 Mich.App. 733, 213 N.W. 2d 811 (1973).
Mr. Oberlies elected the state exemptions under 11 U.S.C. § 522(b)(2)(B), and claims that the two homes are exempt as properties held in tenancy by the entireties. The trustee timely objected to this claim of exemption, noting the three joint debts1 itemized above. He maintains that to the extent of the aggregate amount of these joint debts, ($605,189.04 per those creditors' proofs of claim) he can administer the joint assets. In re Grosslight, 757 F.2d 773 (6th Cir.1985); In re Trickett, 14 B.R. 85, 5 C.B.C.2d 85 (Bankr.W.D.Mich.1981). The debtor's response was that he had negotiated settlements with each of the joint creditors which resulted in releases by them of his wife's guarantees; therefore, there are no longer any joint claims upon which the trustee can rely to defeat the claim of exemption. The trustee argues that since the joint claims were in existence at the time the bankruptcy was filed, the post-petition releases by the joint creditors were ineffective to defeat his claim to administer the joint assets. We thank each counsel for presenting us with excellently argued briefs, well documented by appropriate authority. It is a pleasure to be so well assisted by able counsel.
The trustee's major arguments, the last two of which were garnered from Kalevitch, "Some Thoughts on Entireties in Bankruptcy", 60 Am.Bankr.L.J. 141 (Spring, 1986), may be categorized as follows:
(1) Since the estate is measured at the moment the order for relief is entered, post-petition occurrences may not detract from it, citing In re Sefren, 41 B.R. 747 (Bankr.D.Md.1984).
(2) Neither § 726 nor § 501 of the Bankruptcy Code distinguishes between joint and non-joint claims, so there is no statutory authority for the distribution to two separate classes of unsecured creditors.
(3) By analogy to the doctrine of Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931), under § 70(e) of the former Bankruptcy Act and to § 544(b) of the current Bankruptcy Code, it is entirely proper to allow the trustee to utilize a small joint claim as a lever to overturn an entireties exemption for the benefit of the general estate.
We will discuss these arguments seriatim and then take up the debtor's arguments.
Post-petition conduct cannot affect the estate because the value of the estate is determined upon entry of the order for relief
In In re Sefren, 41 B.R. 747 (Bankr. D.Md.1984), the debtor and his non-filing spouse owed the IRS $2,095 jointly for their 1982 federal income taxes. The trustee objected to the debtor's claim of exemption as to his $23,531 in entireties property. At the hearing, the debtor argued that there no longer was a joint claim because he paid the tax post-petition and so the trustee was powerless to administer joint assets. The court held as follows.
Nor, does it matter for purposes of evaluating the entireties exemptions that the joint, unsecured debt was satisfied after this case was filed. Satisfying the joint tax debt did not retroactively make the entireties property exempt from process immediately before this case was filed. Because the entireties property was not exempt from process under Maryland law, then, it cannot be subsequently exempted in this case after the joint debt has been satisfied. Section 522(b)(2)(B). The decisive moment is "immediately before the commencement of the case . . . "
41 B.R. at 748-749. If Sefren is correct on this point, the trustee must prevail on his objection to the debtor's claim of exemption.
The Code section which exempts entireties property, § 522, states:
(b) Notwithstanding § 541 of this title, an individual debtor may exempt from property of the estate . . . (2)(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.
The trustee argues that "immediately before the commencement of the case" Mr. Oberlies and his wife were jointly liable to the three creditors. Therefore, the extent of the entireties exemption is reduced by the amount of the joint debts outstanding when this case began. The debtor offers no principled response to avoid the apparently plain effect of this statutory language.
Another case, not cited by either party here, which seemingly agrees with Sefren on this point, is In re Sivley, 14 B.R. 905, 5 C.B.C.2d 565 (Bankr.E.D.Tenn.1981). There, the debtor was married and owned entireties property at the time she filed her bankruptcy. Three weeks later, however, and while the estate was still being administered by the Chapter 7 trustee, the debtor obtained her divorce from her husband. Of course, upon divorce, the tenancy by the entireties was transformed into a tenancy in common. The court noted that Sivley, 14 B.R. at 910. But since the debtor acquired an interest in the property, that is, a tenancy in common therein, within 180 days after the commencement of the case "as a result of a . . . final divorce decree," that particular post-petition occurrence caused the debtor to lose her right to exempt the property under § 522(b)(2)(B)'s entireties exemption provision. § 541(a)(5)(B). However, the debtor did not lose her right to claim the property as exempt under Tennessee's homestead exemption law even though she no longer resided at the premises and she no longer had a spouse who resided there because her homestead exemption was determined as of the date the case commenced. Concededly, on that date, she did have a spouse who resided there. There was no statute like § 541(a)(5) which would allow the court to look past the date of the commencement of the case in this context.
These cases are in line with the general rule that all rights are defined at the moment the bankruptcy is filed. In another context, we stated with respect to the words "The commencement of a case" in § 541 that "the clear import of this provision is to freeze all rights of the estate at the instant the case is filed, and so post-petition conduct of the various parties, with limited exceptions . . . is ineffective to alter the rights of the estate." Mason v. Kish, A.P. No. 86-7596 (unreported, September 23, 1987); also see Northern Acres, Inc. v. Hillman State Bank, 52 B.R. 641 (Bankr. E.D.Mich.1985). As the trustee here has cogently argued, accepting the debtor's reasoning would effectively write the words "immediately before the commencement of the case" out of § 522(b)(2)(B). Courts are required, if possible, to give effect to every word of a statute. Weinberger v. Hynson, Westscott & Dunning, Inc., 412 U.S. 609, 633, 93 S.Ct. 2469, 2485, 37 L.Ed.2d 207 (1973); In re Hall, 752 F.2d 582, 586 (11th Cir.1985); In re Co Petro Marketing Group, Inc., 680 F.2d 566 (9th Cir.1982). These words are easy to understand; there is nothing ambiguous or complex about them. They should therefore be interpreted according to their ordinary, contemporary, common meaning. Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 314, 62 L.Ed.2d 199 (1979); In re Noggle, 30 B.R. 303, 305 (Bankr.E.D.Mich. 1983). Even if there is a dearth of case law interpreting these words in § 522(b)(2)(B), substantially similar words appear in other portions of the Bankruptcy Code, e.g., § 541.2 The term "commencement of the case" uniformly refers to the date the petition for relief is filed when it is used in any other statutory context. In re Rhein, 73 B.R. 285, 288 (Bankr.E.D.Mich.1987); United States Department of Labor v. Goudy, 777 F.2d 1122, 1127 (6th Cir.1985). Accordingly, the trustee's objection to the debtor's claim of exemption with respect to these properties...
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