In re Parker

• Citation: 395 B.R. 12
• Decision Date: 16 September 2008
• Docket Number: Adversary No. 07-99019.,Bankruptcy No. HM 05-91271.
• Parties: In re Victoria J. PARKER, Debtor. Colleen M. Olson, Trustee, Plaintiff, v. Curtis D. Parker, Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

395 B.R. 12

In re Victoria J. PARKER, Debtor Colleen M. Olson, Trustee, Plaintiff, v. Curtis D. Parker, Defendant.

Bankruptcy No. HM 05-91271.

Adversary No. 07-99019.

United States Bankruptcy Court, W.D. Michigan.

September 16, 2008.

COPYRIGHT MATERIAL OMITTED

Michael O'Neal, Grand Rapids, MI, for Plaintiff/Trustee.

David E. Bulson, Sault Ste. Marie, MI, for Defendant.

OPINION RE: TRUSTEE'S APRIL 9, 2008 MOTION

JEFFREY R. HUGHES, Bankruptcy Judge.

Colleen M. Olson, the Chapter 7 trustee, ("Trustee") has filed a motion for summary judgment in this adversary proceeding. The motion is granted in part

STANDARD OF REVIEW

Summary judgment under Rule 7056(a)¹ is appropriate if there is no genuine issue of fact and the moving party is entitled to judgment as a matter of law. The court, in considering a motion for summary judgment, is to focus only upon material facts; that is, the court is to consider only those facts that are important vis-a-vis the applicable substantive law. Moreover, in determining whether there is a genuine dispute between the parties, the court is to draw all inferences from the record before it in the light most favorable to the non-moving party. However, if the pertinent record would not lead a rational trier of fact to find for the non-moving party even under such favorable circumstances, then summary judgment should be granted.

BACKGROUND²

Victoria Parker ("Debtor") commenced her bankruptcy case on October 14, 2005. At that time she owned a home in Sault Ste. Marie as a tenant by the entirety with her husband, Curtis Parker ("Defendant"). However, Debtor and Defendant had decided to end their marriage and, as a consequence, they appeared before the state family court to complete the dissolution shortly after she had filed her bankruptcy. During that hearing, which took place on December 12, 2005, Debtor delivered to Defendant a quitclaim deed for her share of the home. Defendant appears to have promised in return to hold Debtor harmless for whatever liability she might have with respect to the related mortgage.

Trustee has challenged the December 12, 2005 transaction. Trustee contends that the quitclaim deed Debtor delivered that day was an unauthorized post-petition transfer of the bankruptcy estate's property and, as such, is avoidable under Section 549 of the Bankruptcy Code.³ Trustee also contends that she is entitled under Section 550(a) to a money judgment as opposed to only the avoidance of the transfer itself.

DISCUSSION

A. Avoidance of Post-Petition Transfer.

Section 549 states that:

Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate —

(1) that occurs after the commencement of the case; and

(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or

(B) that is not authorized under this title or by the court.

11 U.S.C. § 549(a) (emphasis added).

Defendant contends, though, that the bankruptcy estate never included Debtor's interest in the residence as its property.

Defendant's argument stems from the peculiar nature of an entireties estate. Michigan is one of the few remaining jurisdictions that still recognizes this common law tenancy. Interestingly, the Supreme Court itself had occasion to describe Michigan's version of this estate in U.S. v. Craft, 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002). Justice O'Connor, who wrote the majority opinion, made these observations:

A tenancy by the entirety is a unique sort of concurrent ownership that can only exist between married persons.

* * *

Like joint tenants, tenants by the entirety enjoy the right of survivorship. Also like a joint tenancy, unilateral alienation of a spouse's interest in entireties property is typically not possible without severance. Unlike joint tenancies, however, tenancies by the entirety cannot easily be severed unilaterally. 4 Thompson § 33.08(b).

* * *

Each spouse — the wife as well as the husband — may also use the property, exclude third parties from it, and receive an equal share of the income produced by it. See § 557.71 (West 1988). Neither spouse may unilaterally alienate or encumber the property, Long v. Earle, supra, at 517, 269 N.W., at 581; Rogers v. Rogers, 136 Mich.App. 125, 134, 356 N.W.2d 288, 292 (1984), although this may be accomplished with mutual consent, Eadus v. Hunter, 249 Mich. 190, 228 N.W. 782 (1930). Divorce ends the tenancy by the entirety, generally giving each spouse an equal interest in the property as a tenant in common, unless the divorce decree specifies otherwise. Mich. Comp. Laws Ann. § 552.102 (West 1988).

Craft, 535 U.S. at 280-82, 122 S.Ct. at 1421-22.⁴

Whether the spouse's debt is jointly owned or not is important in considering whether the entireties property can be attached. The distinction is due to each spouse's inability to convey his or her interest in the entireties property without the consent of the other. Long v. Earle, 277 Mich. 505, 517, 269 N.W. 577 (1936). If a spouse is unable to make a unilateral conveyance voluntarily, then it follows that the spouse cannot do so involuntarily by exposing the property to the claims of his or her separate creditors. MICH. COMP. LAWS 600.6023a. It stands to equal reason, though, that property held by the entireties may be subject to execution if the creditor's claim is against both spouses.

Defendant seizes upon the immunity of entireties property from all but joint claims to make his case. What Defendant contends is that the commencement of Debtor's bankruptcy proceeding was of no consequence to the entireties estate she then owned with him because she had no creditors who were also his creditors. However, Defendant is not correct.

An "estate" is created each time a bankruptcy case is commenced. 11 U.S.C. § 541(a). Like a corporation or a trust, a bankruptcy estate is a distinct legal entity. Farmer v. Crocker National Bank (In re Swift Aire Lines, Inc.), 30 B.R. 490, 495 (9th Cir. BAP 1983); In re Dow Corning Corp., 270 B.R. 393, 398-99 (Bankr. E.D.Mich.2001); In re Roy Stanley, Inc., 217 B.R. 23, 25 (Bankr.N.D.N.Y.1997); In re SeaEscape Cruises, Ltd., 201 B.R. 321 323 (Bankr.S.D.Fla.1996). The bankruptcy estate exists apart from the debtor. It acts through its legal representative, the bankruptcy trustee. 11 U.S.C. § 323(a).

Under the former Bankruptcy Act, exempt properly, which in Michigan could include tenancies held by the entirety, did not even become property of the estate. 11 U.S.C. § 110(a) (repealed). See also, Liberty State Bank v. Grosslight (In re Grosslight), 757 F.2d 773, 775 (6th Cir. 1985). The Bankruptcy Code, though, radically changed the law by transferring into the estate all of the debtor's property, including property that he might claim as exempt.

Property that is properly exempted under § 522 is (with some exceptions) immunized against liability for prebankruptcy debts. § 522(c). No property can be exempted (and thereby immunized), however, unless it first falls within the bankruptcy.

Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991) (emphasis added).

As for tenancies by the entirety, "[i]t is now well established that this provision [Section 541(a)] brings entireties properly into the bankruptcy estate." Grosslight, Id.

However, it is important to also recognize that the Bankruptcy Code distinguishes between the property itself and what constitutes the debtor's interest in that property for purposes of defining "property of the estate."

(a) The commencement of a case ... creates an estate. Such estate is comprised of all the following property ...:

(1) [A]ll ... interests of the debtor in property as of the commencement of the case[.]

11 U.S.C. § 541(a)(1) (emphasis added).

For example, all of Blackacre will become the estate's property if the debtor had owned it in fee and without encumbrance at the outset of his case. If, though, the debtor had owned it as a tenant in common with B, then only the debtor's undivided interest in Blackacre will become property of the estate and it is only that undivided interest that will be administered for the benefit of the estate's creditors. See, e.g., 11 U.S.C. § 726(a). As for B, his undivided interest in Blackacre will continue to remain "outside of estate," if you will.⁵

It is well established that while applicable state law will continue to generally govern whatever property interests the bankruptcy estate may acquire, the Bankruptcy Code itself can preempt that law. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). The extent of that preemption, though, will vary. For example, in the case of a tenancy in common, the bankruptcy trustee's authority under Section 363(b) to sell the undivided interest in that tenancy would mirror the right that the debtor also had under state law to dispose of it.

On the other hand, the commencement of a bankruptcy case will have a profound effect upon a tenancy by the entirety. Indeed, the immediate transfer of the debtor's interest in the entireties property to the newly created estate upon the commencement of a voluntary case is itself in contravention of the strict prohibition under Michigan law against either spouse unilaterally conveying his or her interest without the consent of the other. Nor will the non-filing spouse fare any better thereafter, for the bankruptcy trustee would then have the authority under Section 363(b) to sell the acquired interest to whomever he chooses, again in contravention of Michigan's entireties law.⁶ And it is ironic that the debtor spouse's election to exempt or not the undivided interest, which would be yet another unilateral decision by that spouse, might be the only way the non-filing spouse could be spared from having to share the former entireties property with a stranger and perhaps from losing the property altogether.⁷

Therefore, there is no question that the bankruptcy estate in this...