In re Smith

• Decision Date: 27 March 2000
• Docket Number: Bankruptcy No. 99-45814-RRG.
• Parties: In re Vergil Jeremy SMITH, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

246 B.R. 540 (2000)

In re Vergil Jeremy SMITH, Debtor.

Bankruptcy No. 99-45814-RRG.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

March 27, 2000.

246 BR 541

Thomas J. Budzynski, P.C., Clinton Twp., MI, for debtor.

Timothy J. Miller, Detroit, MI, for trustee.

OPINION APPROVING ENTRY OF ORDER SUSTAINING IN PART TRUSTEE'S OBJECTION TO DEBTOR'S EXEMPTIONS

RAY REYNOLDS GRAVES, Bankruptcy Judge.

After a hearing on the Trustee's objections to Debtor's exemptions, the Trustee submitted to the Court for entry a proposed order ("order") sustaining in part his objections, and permitting him to administer property owned by Debtor and Debtor's spouse as tenants by the entireties to satisfy their joint debt of approximately $3,400 to Bank of America. Debtor objected to entry of the order on the basis that the amount owed to Bank of America in the order is overstated. After considering Debtor's objection and the arguments raised at a hearing on the matter, and reviewing the briefs subsequently filed and the entire record, the Court concludes that entry of the order should be approved.

I. Facts

Debtor filed a Chapter 7 petition and schedules on April 8, 1999 and subsequently amended Schedules B and C.¹ In both the original and amended Schedule C, Debtor sought to exempt real property owned with his spouse as tenants by the entireties from the bankruptcy estate by electing the Michigan exemption scheme pursuant to 11 U.S.C. § 522(b)(2)(A).² In Schedule F of his petition, Debtor listed Bank of America and Comerica Bank as

246 BR 542

creditors holding unsecured nonpriority claims in unknown amounts but failed to indicate that his spouse was jointly liable with him on these debts.³ However, during his examination pursuant to Fed. R.Bankr.P.2004, Debtor apparently admitted that he was jointly responsible with his wife for a $3,400 obligation to Bank of America. In addition, a Consent Order Extending Time to File Objections To Claim of Exemption Pursuant to Bankruptcy Rule 4003(b) was entered on June 1, 1999 in which Debtor and Comerica Bank recognized that Debtor and his non-filing spouse were "jointly and severally indebted to Comerica Bank." On July 8, 1999, Comerica Bank filed objections to Debtor's exemptions due to the joint and several liability of the Debtor and his non-filing spouse on the debt owed to it. Based on the existence of joint debt, the Trustee timely objected to Debtor's entireties exemptions in both the original and amended Schedule C to the extent of this debt, respectively on June 3, 1999 and on July 27, 1999.⁴ In a memorandum in support of his objections filed later on September 30, 1999, the Trustee specifically identified the joint debt to Comerica Bank and Bank of America as the justification for the Court allowing him to administer the entireties property. At a hearing on the Trustee's objections to Debtor's exemptions, the Court sustained the Trustee's objection to the entireties exemptions based on the Bank of America debt and ruled that the Trustee could administer the entireties property to satisfy this debt

Consistent with the Court's ruling at the hearing, the Trustee submitted a proposed order to the Court for entry. Debtor filed an objection to entry of the order solely on the ground that the "approximate" amount stated in the order as owed to Bank of America was excessive. However, at a hearing on entry of the order, Debtor objected to entry of the order, for the first time on the ground that no joint creditor had filed a proof of claim. The Court took the matter under advisement and ordered the parties to brief the issue of whether the joint creditors' failure to timely file proofs of claims precluded the Trustee from administering the entireties property to satisfy the joint debt to Bank of America. Debtor argues that the Court cannot authorize the Trustee to administer the entireties property for the benefit of joint creditors because to date, no joint creditor has filed a proof of claim and the Court is without authority to extend the claim deadline. Thus, any claim thereafter filed would be untimely and must be disallowed. The Trustee argues that the failure of the joint creditors to file proofs of claims does not prevent the Court from ordering the Trustee to administer the entireties property to satisfy the Bank of America debt.

II. Discussion

A. The Trustee's Right to Administer the Entireties Property

It is well settled that upon the filing of a bankruptcy petition, property held by a debtor with his non-filing spouse as tenants by the entirety becomes part of the bankruptcy estate under § 541(a).⁵

246 BR 543

See Liberty State Bank & Trust v. Grosslight (In re Grosslight), 757 F.2d 773, 775 (6th Cir.1985); Michigan National Bank v. Chrystler (In re Trickett), 14 B.R. 85, 88-89 (Bankr.W.D.Mich.1981). However, a debtor may be able to exempt such property under § 522. Section 522(b) provides in relevant part: "Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (1) or, in the alternative, paragraph (2) of this subsection." 11 U.S.C. § 522(b). Paragraph (2) of § 522, in turn, allows a debtor to exempt

(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor\'s domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place; and

(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)(A)-(B) (emphasis added). Debtor elected to exempt his entireties property to the extent permitted under Michigan law pursuant to § 522(b)(2)(B). Under Michigan law, the entireties property is wholly exempt from the reach creditors holding claims solely against Debtor. However, with the exception of a $3,500 homestead exemption, such property is not exempt from claims of joint creditors of Debtor and his nonfiling spouse that existed at the time the petition was filed. See Grosslight, 757 F.2d at 776; Trickett, 14 B.R. at 88-89; In re Oberlies, 94 B.R. 916, 919 (E.D.Mich.1988). Therefore, because the joint debts to Bank of America and Comerica Bank existed on the petition date, as is reflected in Debtor's schedules, his later admissions, and the documents filed by the Trustee and Comerica Bank, the Trustee is entitled to administer the entireties property to satisfy this debt to these two creditors. Contrary to Debtor's assertion, this right is not dependent on the joint creditors having filed proofs of claims. Rather, whether the joint creditors have filed proofs of claims is relevant only to the Trustee's power to make distributions out of the estate which is separate and distinct from his right to administer the estate. The right to administer the entireties property is dependent on the existence of joint debt at the commencement of the case, while the power to make distributions from that property to a joint creditor requires that creditor to have an allowed claim.

B. The Trustee's Power to Make Distributions Out of the Entireties Property

As a general rule under the Bankruptcy Code, a prerequisite to an unsecured creditor's right to share in the distribution of assets of a chapter 7 bankruptcy estate, is that the creditor file a proof of claim and that the claim be allowed. See 11 U.S.C. § 726; Fed. R.Bankr.P. 3002(a); In re Bargdill, 238 B.R. 711, 716 (Bankr.N.D.Ohio 1999); In re Dow Corning Corp., 211 B.R. 545, 560 (Bankr.E.D.Mich.1997). Chapter 5 governs...