In re Raynard

• Decision Date: 15 July 2005
• Docket Number: No. HM 05-90027.,HM 05-90027.
• Citation: 327 B.R. 623
• Parties: In re Alan Wayne RAYNARD and Karen Elizabeth Raynard, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Michigan

Page 623

327 B.R. 623

In re Alan Wayne RAYNARD and Karen Elizabeth Raynard, Debtors.

No. HM 05-90027.

United States Bankruptcy Court, W.D. Michigan.

July 15, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

David E. Bulson, Sault St. Marie, MI, for Debtors.

Brett N. Rodgers, Grand Rapids, MI, Chapter 13 Trustee.

OPINION RE: REQUESTED CONFIRMATION OF DEBTORS' AMENDED CHAPTER 13 PLAN

JEFFREY R. HUGHES, Bankruptcy Judge.

Alan and Elizabeth Raynard seek confirmation of their Chapter 13 plan. That plan discriminates between their joint creditors and their individual creditors by offering a 100% dividend to their joint creditors instead of the much smaller dividend offered to their individual creditors. Confirmation of their plan is denied for the reasons stated in this opinion.

I. PROCEDURAL BACKGROUND

The Raynards filed their Chapter 13 petition on January 13, 2005. I first considered confirmation of their plan on March 8, 2005. The hearing has been adjourned twice in order to give the Raynards the opportunity to address my concerns about the proposed treatment of joint creditors under their plan. The Raynards briefed the issue and I heard further argument at the June 7, 2005 hearing. The confirmation hearing was then adjourned again to July 19, 2005.

II. FACTUAL BACKGROUND

The Raynards are dairy farmers. Both their residence and their farm are located on contiguous parcels of real property in Pickford Township, Michigan. The Raynards own both parcels of property as tenants by the entirety.

The Raynards' schedules set the value of their farm at $240,000 and the value of their residence at $130,000. Their schedules also indicate that their farm is subject to a mortgage lien in the amount of $129,715 and that their residence is subject to two other mortgage liens that total $112,874. Consequently, their schedules establish that there is at least $86,285 equity in their farm and at least $4,126 equity in their residence.¹

The Raynards claim both their farm and their residence as exempt.² The Raynards' cite 11 U.S.C. § 522(b)(2)(B)³ and MICH. COMP. LAWS § 600.6018 as authority for the exemption claimed. The Chapter 13 Trustee filed a timely objection to Debtors' claim exemption of the two parcels. The court acknowledged the Chapter 13 Trustee's objection by issuing a scheduling order whereby either party could set the Chapter 13 Trustee's objection for hearing upon request. Neither party has requested such a hearing as of this date.

The Raynards filed their Chapter 13 plan at the same time they filed their schedules. Their original plan proposed paying nothing to unsecured creditors although their Schedule F discloses unsecured, non-priority debt of $88,101 as being owed either individually by one of them or jointly by both of them.⁴ However, the Raynards thereafter filed a preconfirmation amendment to their plan on February 17, 2005.⁵ That amendment divided the Raynards' unsecured, non-priority creditors into two classes, with one class being comprised of those creditors with joint claims against both Mr. and Mrs. Raynard and the other class being comprised of creditors with claims against only Mr. Raynard or against only Mrs. Raynard. The amendment proposed to pay a base amount of $29,443 to the joint creditors but a base amount of only $1,000 to the other creditors.⁶

The Raynards filed a second pre-confirmation plan amendment on April 25, 2005. The second amendment identifies nine creditors as joint unsecured creditors. It further provides that each of these creditors is to "be paid 100 percent through the debt plan." The April 25, 2005 amendment leaves unchanged the $1,000 base amount proposed to be paid to the Raynards' other unsecured creditors.

There are no other amendments filed with respect to the Raynards' proposed Chapter 13 plan. Therefore, the plan presented for confirmation at the June 7, 2005 hearing was the Raynards' plan as amended on February 17, 2005 and then again on April 25, 2005. 11 U.S.C. § 1323. This plan shall be hereinafter referred to as the "April 25 amended plan."

III. DISCUSSION

A. Discrimination Between Classes of Unsecured Creditors.

A Chapter 13 plan may not be confirmed unless it complies with the provisions

of both Chapter 13 and other applicable provisions of the Bankruptcy Code, 11 U.S.C. § 1325(a)(1). The issue presented in this case is whether the discriminatory treatment proposed by the Raynards in their April 25 amended plan conforms with this requirement.

There is no question that a debtor's Chapter 13 plan may designate two or more classes of unsecured claims and that the plan may then discriminate between the designated classes. 11 U.S.C. § 1322(b)(1). Indeed, Section 1322 itself provides two examples of permissible discrimination. First, Section 1322(a)(2) requires a debtor to prefer unsecured priority creditors by classifying them separately and then paying them 100% of their claims within the terms of the plan. Second, Section 1322(b)(1) permits a debtor to prefer creditors with joint claims against both the debtor and another individual on account of a consumer debt.⁷

Other permissible discrimination under Section 1322(b)(1) is subject to two requirements. First, each claim within a designated class must be substantially similar to the other claims within the same class. Second, the difference in treatment between one class of unsecured creditors and the other class or classes of creditors cannot be unfair.⁸ Whether the proposed discriminatory classification is fair or not is based upon the merits of the particular case. Factors to be considered are: (1) whether there is a reasonable basis for the classification; (2) whether the debtor is able to perform a plan without the proposed classification; (3) whether the classification is in good faith; and (4) whether the class subject to the unfavorable discrimination is receiving at least a meaningful payment. In re Kovich, 4 B.R. 403 (Bankr.W.D.Mich.1980).

In the instant case, the Raynards have designated nine of their unsecured creditors to receive distributions under their plan equal to 100% of the amount of those creditors' allowed claims. In contrast, their other creditors, who total sixteen in number and $53,606 in amount, are to share only $1,000.

The Raynards' desire to prefer their joint creditors over their other creditors stems from various courts' interpretations of Section 522(b)(2)(B). A bankruptcy estate is created whenever a bankruptcy proceeding is commenced and virtually every property interest of the debtor immediately and automatically becomes property of that estate. 11 U.S.C. § 541(a).⁹ Section 522 then permits an individual debtor to remove from this estate (i.e., exempt) certain items of property in order to facilitate the debtor's "fresh start."¹⁰ A debtor may choose between two sets of exemptions. One set, which is commonly referred to as the federal exemptions, is delineated in Section 522 itself. 11 U.S.C. § 522(b)(1) and (d). The other set is commonly referred to as the "state exemptions." These exemptions consist of whatever property is exempt under applicable state and local law and under non-bankruptcy federal law. 11 U.S.C. § 522(b)(2)(A). In addition, the "state exemptions" include:

(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.

11 U.S.C. § 522(b)(2)(B).

It is black letter law in Michigan as well as most other states that recognize tenancies by the entireties that only creditors of both the husband and wife can levy against property owned by the entireties. Michigan National Bank v. Chrystler (In re Trickett), 14 B.R. 85, 86-87 (Bankr.W.D.Mich.1981); see, also, e.g., Napotnik v. Equibank and Parkvale Savings Assn., 679 F.2d 316, 321 (3rd Cir.1982); In re Monzon, 214 B.R. 38 (Bankr.S.D.Fla. 1997); Van Der Heide v. LaBarge (In re Van Der Heide), 164 F.3d 1183, 1184 (8th Cir.1999). Consequently, courts have interpreted Section 522(b)(2)(B) as being circumscribed by the amount of joint debt the debtor owes. In other words, the Section 522(b)(2)(B) exemption is not only a function of the value of the bankruptcy estate's equity in the entireties property claimed as exempt but also a function of the amount of enforceable claims held by creditors against both the debtor and his spouse. The debtor's allowed exemption is the value of the equity¹¹ in the undivided interest minus whatever debts are owed by the debtor jointly with his spouse. See, e.g., In re Oberlies, 94 B.R. 916, 918-19 (Bankr.E.D.Mich.1988).

Most, but not all courts, have also held that the portion of the entireties interest that cannot be exempted because of joint claims must be administered exclusively for the benefit of the joint claimants. In re Oberlies, 94 B.R. at 920-23; In re McRae, 308 B.R. 572, 576-79 (N.D.Fla. 2003); In re Cerreta, 116 B.R. 402, 405-6 (Bankr.D.Vt.1990); In re Rentfro, 234 B.R. 97, 99-100 (Bankr.W.D.Mo.1999); In re Zella, 196 B.R. 752, n. 4 (Bankr.E.D.Va. 1996); In re Ginn, 186 B.R. 898, 903 (Bankr.D.Md.1995); In re Chandler, 148 B.R. 13, 15 (Bankr.E.D.N.C.1992); but see, In re Fishman, 241 B.R. 568, n. 2 (Bankr. N.D.Ill.1999); In re Wenande, 107 B.R. 770, 774-75 (Bankr.D.Wyo.1989). These courts in effect create a separate bankruptcy estate to administer the entireties property in which the debtor has claimed a Section 522(b)(2)(A) exemption. Unless an accommodation can be reached with the debtor, the trustee administers this second estate by disposing of the entireties property pursuant to Section 363(b) and (h) and then distributing the proceeds to the two spouses' joint creditors based upon a procedure that parallels that which a trustee would normally follow when distributing other proceeds to a debtor's individual...