In re Roos, Case No. 3:17-bk-33815-SHB

• Decision Date: 14 September 2018
• Docket Number: Case No. 3:17-bk-33815-SHB
• Citation: 590 B.R. 803
• Parties: IN RE David Lee ROOS, Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

590 B.R. 803

IN RE David Lee ROOS, Debtor

Case No. 3:17-bk-33815-SHB

United States Bankruptcy Court, E.D. Tennessee.

Signed September 14, 2018

MOSTOLLER, STULBERG, WHITFIELD & ALLEN, Ann Mostoller, Esq., Tracey Vought Williams, Esq., 136 South Illinois Avenue, Suite 104, Oak Ridge, Tennessee 37830, Attorneys for Ann Mostoller, Chapter 7 Trustee

FRESH START LAW OFFICE, P.C., Kimberly Cambron, Esq., 1400 North 6th Avenue, Suite C3, Knoxville, Tennessee 37917, Attorney for Debtors

GWENDOLYN M. KERNEY, ESQ., Post Office Box 228, Knoxville, Tennessee 37901, Chapter 13 Trustee, On Amicus Curiae Brief

MEMORANDUM ON TRUSTEE'S OBJECTION TO EXEMPTIONS

SUZANNE H. BAUKNIGHT, UNITED STATES BANKRUPTCY JUDGE

This contested matter is before the Court on the Trustee's Objection to Debtor's Claim of Exemption Under T.C.A. § 26-2-301 ("Objection to Exemption") filed by Ann Mostoller, Chapter 7 Trustee ("Chapter 7 Trustee"), on February 27, 2018 [Doc. 17]. The Chapter 7 Trustee objects to Debtor's homestead exemption in the amount of $25,000.00. Debtor filed a reply on March 1, 2018 [Doc. 19]. Because there are no issues of fact and the question is solely a matter of law, the parties submitted the question on Stipulations, a Joint Statement of Issues, and briefs. [Docs. 26, 27, 29, 30.] The Chapter 13 Trustee sought permission to file an amicus curiae brief because the issue before the Court will affect debtors and creditors in Chapter 13 as well as Chapter 7 cases, and the Court granted permission for the amicus brief. [Docs. 28, 31.] The Chapter 13 Trustee filed her amicus brief on August 7, 2018 [Doc. 39], making this matter ripe for the Court's decision.

This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). This memorandum constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr. 7052, 9014(c).

I. FACTS AND THE PARTIES' POSITIONS

The Chapter 7 Trustee and Debtor stipulated the following facts. [Doc. 26.] Debtor filed the Voluntary Petition commencing this Chapter 7 case on December 27, 2017. In his Schedule B, Debtor listed an ownership interest in real property located at 1044 Lancewood Drive, Knoxville, Tennessee (the "Property"), which he valued at $145,000.00. Debtor and Pamela A. Goforth, who are unrelated by blood or marriage, own the Property "as tenants in common for life, with the remainder to the survivor in fee," as evidenced by the Warranty Deed executed on March 15, 2016, and recorded the next day with the Knox County Register of Deeds. [Doc. 26-1.] As reflected in his Schedule C, Debtor has claimed an exemption in the Property in the amount of $25,000.00, specifying Tennessee Code Annotated section 26-2-301 as the statutory basis. The Chapter 7 Trustee objects to the exemption, arguing that a homestead exemption is unavailable when the ownership interest of an individual debtor in property includes a right of survivorship.

The Chapter 7 Trustee and Debtor jointly defined the issues as: (1) whether Debtor's survivorship interest in the Property was severed by the filing of Debtor's Chapter 7 bankruptcy case and (2) whether Debtor is entitled to claim an exemption in any amount under Tennessee Code Annotated section 26-2-301 in property that he owns jointly as tenants in common for life with remainder to the survivor in fee. In support of her objection, the Chapter 7 Trustee primarily argues that when an individual debtor who holds an interest in property that includes a right of survivorship files for bankruptcy, only the survivorship interest becomes property of the bankruptcy estate. Conversely, Debtor argues that a survivorship interest in property that is not held as a tenancy by the entirety can be attached and executed on by creditors such that the Tennessee exemption applies to allow Debtor to exempt his tenancy property interest under 11 U.S.C. § 522(b)(3)(B), which authorizes an exemption "to the [same] extent that such interest as a ... joint tenant is exempt from process under applicable nonbankruptcy law."

Debtor alternatively argues that the filing of a bankruptcy petition severs the tenancy in common, which destroys the survivorship interest so that the property transferred to the bankruptcy estate does not include a survivorship interest. The Chapter 7 Trustee disagrees, arguing that the filing of a bankruptcy petition does not automatically sever the tenancy with a right of survivorship. The Chapter 7 Trustee concedes that if the Court determines that severance occurs by the filing of a bankruptcy petition or by any action of the Chapter 7 Trustee to administer jointly-owned property, then "Debtor would be entitled to a homestead exemption determined by a proper exemption." [Doc. 27, p. 8.]

For her part, the Chapter 13 Trustee argues that "a debtor with an interest in jointly owned property with a right of survivorship is entitled unilaterally to sever the survivorship and sell the debtor's interest in the property under Tennessee law" so that a trustee in either Chapter 7 or Chapter 13 may sell the debtor's complete interest in the jointly owned property. [Doc. 39, p. 1.] Such a sale by a trustee would effect a severance of the survivorship right so that the property to be sold would be a mere joint tenancy or tenancy in common without a right of survivorship. Thus, the Chapter 13 Trustee asserts that Debtor is entitled to whatever exemption is available to him under Tennessee law as to his whole interest in the jointly owned property.

II. ANALYSIS

A debtor's bankruptcy estate, consisting of all property and property interests owned at the petition date, is created at the commencement of the case. 11 U.S.C. § 541(a). Notwithstanding that "[t]he scope of the definition of ‘property of the estate’ under § 541(a) is intended to be broad[,]" In re Rush , 582 B.R. 729, 731 (Bankr. E.D. Tenn. 2018), to ensure that debtors retain sufficient property for a fresh start, § 522 authorizes exemption of certain property interests that are "subtracted from the bankruptcy estate and not distributed to creditors." In re Arwood , 289 B.R. 889, 892 (Bankr. E.D. Tenn. 2003) (citations omitted). In order to claim property as exempt, a debtor must file a statement listing the property and its value, the statutory basis for the exemption, and the amount of the claimed exemption. See Fed. R. Bankr. P. 4003(a).

Exemptions " ‘are determined as of the date upon which the bankruptcy case is commenced, are construed liberally in favor of debtors, and should be construed in light of the purpose for which they are created.’ " In re Rush , 582 B.R. at 731 (quoting In re Kennedy , 552 B.R. 183, 189 (Bankr. E.D. Tenn. 2016) ). "[W]hen it is possible to construe an exemption statute in ways that are both favorable and unfavorable to a debtor, then the favorable method should be chosen." In re Chapman , 424 B.R. 823, 826 (Bankr. E.D. Tenn. 2010) (citations omitted).

Debtor, who has custody of a minor child, claims a $25,000.00 exemption in the Property under Tennessee's homestead exemption statute.¹ The Chapter 7 Trustee does not dispute that if Debtor is entitled to claim an exemption in the Property, he is entitled to the $25,000.00 exemption provided by this statute. Nevertheless, she argues that Debtor's ownership as a tenant in common with right of survivorship and his exemption are governed by the following holding of this Court in Arwood :

In summary, the only interests presently enjoyed by the Debtor in the Real Property owned jointly with his non-filing spouse as tenants by the entireties are a right of survivorship and a right of possession. By virtue of § [522(b)(3)(B) ], the only interest that became property of the Debtor's bankruptcy estate is his right of survivorship in the Real Property. The Debtor does not have a vested homestead exemption in his survivorship interest in the Real Property. He does, however, have a contingent exemption in the Real Property that may only be realized if he survives his spouse and becomes fully vested in the Real Property.

In re Arwood , 289 B.R. at 897.

As acknowledged by the Chapter 7 Trustee, however, Debtor owns the Property with Ms. Goforth as tenants in common with a right of survivorship, not as tenants by the entirety, as was the case in Arwood . Tenancy by the entirety is a property interest reserved solely for married persons wherein "each spouse is seized of the whole or the entirety and not a share, moiety, or divisible part’ and ownership of the property, as a whole, fully vests in the surviving spouse upon the death of the other spouse." In re Arwood , 289 B.R. at 893 (quoting Grahl v. Davis , 971 S.W.2d 373, 378 (Tenn. 1998) (quoting Sloan v. Jones , 192 Tenn. 400, 241 S.W.2d 506, 507 (Tenn. 1951) ) ); see also Bryant v. Bryant , 522 S.W.3d 392, 399 n.3 (Tenn. 2017) ("Absent ... language [granting a joint tenancy or tenancy in common], ... a conveyance to married persons ‘prima facie means that they are to hold by the entireties.’ "). Notwithstanding these different property interests, the Chapter 7 Trustee argues that the Arwood holding applies to all property interests involving a right of survivorship, regardless of whether the property is owned as a tenancy by the entirety, a joint tenancy, or a tenancy in common.

Debtor responds by relying on the Tennessee Supreme Court's recent Bryant decision. There, the court held that "a joint tenancy with an express right of survivorship may be severed by the unilateral action of one of the joint tenants and ... doing so converts the estate into a tenancy in common and destroys the survivorship interests of the original joint tenants." Bryant , 522 S.W.3d at 413-14. Debtor also relies on In re McKain , 455 B.R. 674, 677 (Bankr. E.D. Tenn. 2011), in which Chief Bankruptcy Judge Parsons, interpreting Virginia law, held that "a joint tenant's interest in property, even if held with the right of survivorship, is generally subject to the claims of his individual creditors[, t]he jointly held property...