In re Spears

• Decision Date: 19 August 2004
• Docket Number: Bankruptcy No. HT3-00738.,No. 1:04-CV-418.,1:04-CV-418.
• Citation: 313 B.R. 212
• Parties: In re Bonnie May SPEARS, Debtor. Bonnie May Spears, Appellant, v. James W. Boyd, Appellee.
• Court: U.S. District Court — Western District of Michigan

313 B.R. 212

In re Bonnie May SPEARS, Debtor.

Bonnie May Spears, Appellant, v. James W. Boyd, Appellee.

Bankruptcy No. HT3-00738.

No. 1:04-CV-418.

United States District Court, W.D. Michigan, Southern Division.

August 19, 2004.

Cody H. Knight, Steven L. Rayman, Rayman & Stone, Kalamazoo, MI, for Appellant.

James W. Boyd, Traverse City, MI, pro se.

Ronald A. Schuknecht, Lewis, Schuknecht & Keilitz, PC, Traverse City, MI, for Appellee.

OPINION

ENSLEN, District Judge.

This matter is before the Court to determine Appellant Bonnie May Spears' appeal of the United States Bankruptcy Court's Opinion and Order of April 26, 2004. The questions presented are ones of pure law and may be readily decided by this Court without further briefing or argument.

RECORD ON APPEAL AND PROCEDURAL HISTORY

An examination of the Bankruptcy Court's record and the procedural history of this appeal shows the following:

Debtor and Appellant filed her Petition under Chapter 7 of the United States Bankruptcy Code on January 21, 2003. The Petition disclosed real estate, a one-story residence valued at $70,000, owned by Debtor and her non-debtor spouse by the entireties. (Pet., at Schedule A.)

Debtor claimed an exemption in the real estate in her Petition pursuant to 11 U.S.C. § 522(b)(2) and the Western District of Michigan's decision of In re Trickett, Case No. K81-379 (W.D.Mich.1982). (Appellant's App., attach. 2.) Appellee then objected to the exemption and requested the Bankruptcy Court to "sever" the property interest from that of the non-debtor spouse and treat the exemption as limited to, at most, one-half the value of the property. (Trustee's Objection to Exemptions, at 2.)

After full briefing and oral argument, the United States Bankruptcy Judge issued an Opinion and Order on April 26, 2004. The Judge held that the filing of bankruptcy, by operation of federal statute, severed the tenancy by the entireties and limited the exemption to one-half of the property value less the value of any joint debts. (Op., at 60-61.) He also found that because the schedules did not specify whether debts were owed jointly or independently further proceedings were necessary to so determine. (Id. at 67.)

STANDARD FOR APPELLATE REVIEW

Pursuant to Bankruptcy Rule 8013, the district court's review of the bankruptcy court's legal conclusions is conducted de novo. In re Rembert, 141 F.3d 277, 280 (6th Cir.1998). When there are "mixed" questions of fact and law, the reviewing court "must break it down into its constituent parts and apply the appropriate standard of review for each part." In re Batie, 995 F.2d 85, 88 (6th Cir.1993) (citing In re Brown, 951 F.2d 564, 567 (3d Cir.1991)).

LEGAL ANALYSIS

What is immediately striking about the legal positions at stake is that there are not two, but three different legal positions competing for selection — those of the Appellant, the Bankruptcy Court, and the Trustee. Viewed as legal menu selections, the Appellant's dish is traditional Michigan faire — a serving of Sixth Circuit Court of Appeals' law, drizzled in precedent and the Michigan public policies which have led to the maintenance of the doctrine of tenancy by the entireties in Michigan. The Bankruptcy Court's dish is nouveau cuisine — a reinterpretation of Title 11 of the United States Code in light of recent Supreme Court precedent, which precedent has no direct application to bankruptcy law. The Trustee's position is best described as nouveau cuisine a' la Cuisinart. That is, it is a further qualification of the Bankruptcy Court's position in light of the precise wording of the Supreme Court precedent in a manner which the Supreme Court almost certainly did not intend, and which creates a legal formula which is but a stone's throw away from nonsense. A more detailed description of the faire now follows.

Appellant's position is best explained by the Sixth Circuit's decision of In re Grosslight, 757 F.2d 773, 775-77 (6th Cir.1985), which held that joint creditors alone could make a claim to bankruptcy estate property which was held by the entireties and which, by virtue of the election of state exemptions, had been exempted by the debtor. It explained its decision as follows:

Michigan is among the minority of states retaining the common law tenancy by the entirety. Tenants by the entirety, who must be husband and wife, hold under a single title with right of survivorship. Neither husband nor wife acting alone can alienate any interest in the property, nor can the creditors of one levy upon the property; but their joint creditors can reach entireties property. See Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880 (1918).

...

Under the Bankruptcy Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549 (codified as amended in 11 U.S.C. and scattered sections of 28 U.S.C.), all the debtor's property is brought into the bankruptcy estate by 11 U.S.C. § 541(a).... ...

It is now established law that this provision brings entireties property into the bankruptcy estate. See Chippenham Hospital v. Bondurant, 716 F.2d 1057, 1058 (4th Cir.1983); Napotnik v. Equibank & Parkvale Savings Association, 679 F.2d 316, 318 (3d Cir.1982); In re Trickett, 14 B.R. 85, 88-89 (Bankr.W.D.Mich.1981); In re Ford, 3 B.R. 559, 564-71 (Bankr.D.Md.1980) (en banc), aff'd on the opinion of the bankruptcy court sub nom. Greenblatt v. Ford, 638 F.2d 14 (4th Cir.1981).

The debtor may [nevertheless] ... exempt the entireties property under 11 U.S.C. § 522(b)....

Under Michigan law, ordinary creditors cannot reach interests in entireties property, and the entire interest will therefore be exempt if there are no joint creditors. Joint creditors, however, can reach entireties interests, subject only to the $3,500 homestead exemption in Mich. Const. art. 10, § 3.

The circuits have split on the question whether entireties property is exempt from joint creditors under 11 U.S.C. § 522(b)(2)(B). The Third Circuit has held that a creditor with a judgment on a joint debt may levy upon the property itself and thus on the interests of both spouses. The debtor's interest in that portion of entireties property reachable by joint creditors therefore is not exempt. Napotnik v. Equibank & Parkvale Savings Association, 679 F.2d 316, 320-22 (3d Cir.1982); accord In re Traurig, 34 B.R. 325 (Bankr.S.D.Fla.1983); In re Trickett, 14 B.R. 85, 89-90 (Bankr.W.D.Mich.1981).

The Fourth Circuit, on the other hand, has reasoned that a joint creditor cannot levy on a debtor's interest in entireties property, but only on the property itself, and therefore the whole interest is exempt under section 522(b)(2)(B). In re Ford, 3 B.R. 559, 576 (Bankr.D.Md.1980) (en banc), aff'd on the opinion of the bankruptcy court sub nom. Greenblatt v. Ford, 638 F.2d 14 (4th Cir.1981). To prevent injustice, the Fourth Circuit continues the prior practice of lifting the automatic stay and deferring discharge while joint creditors seek their remedy in state court. Sovran Bank v. Anderson, 743 F.2d 223, 224 (4th Cir.1984); Chippenham Hospital v. Bondurant, 716 F.2d 1057, 1059 (4th Cir.1983); accord D'Avignon v. Palmisano, 34 B.R. 796, 800 (D.Vt.1982).

The distinction between the two views is of theoretical and procedural rather than substantive significance. From that perspective, however, we believe that the better view is that expressed by the Third Circuit in Napotnik. ...

... The procedure we now approve, spelled out in more detail below, allows the creditor to protect his rights with a single filing in bankruptcy court. There is no question that the statute in effect at the time this case was filed, Bankruptcy Act of 1978, Pub.L. No. 95-598, sec. 241(a), § 1471, 92 Stat. 2549, 2668-69 (codified at 28 U.S.C. § 1471) (repealed 1984), gave the bankruptcy court jurisdiction over such claims by creditors.

In this case the debtor filed for bankruptcy on March 1, 1983, and presumably filed a schedule of exempted property listing his interest in entireties property with the petition. See Bankruptcy Rules 108(b), 403(a) (superseded 1983). The joint creditor, Liberty State Bank & Trust, filed this adversary proceeding in bankruptcy court twenty-four days later, on March 25, 1983. Liberty asked that the automatic stay be lifted to allow it to proceed with its case against the parties' joint assets in state court, as under prior law, or alternatively that the entireties property be sold for the benefit of joint creditors, as in In re Trickett, 14 B.R. 85 (Bankr.W.D.Mich.1981).

The proper procedure, of course, is to file an objection to the claim of exemptions. See Bankruptcy Rule 4003(b). This objection may be combined with a proof of claim under Bankruptcy Rule 3002. Although Liberty did not comply with the letter of that procedure, we are satisfied that its failure to do so resulted from an excusable uncertainty as to the proper procedure and that its filing did meet procedural concerns. We therefore treat this adversary proceeding as an objection to the claim of exemptions. Taken as such, it was not untimely. See In re Dembs, 757 F.2d 777 (6th Cir.1985).

It follows that Liberty is entitled to file a proof of claim on remand and attempt to show the validity of its claim. In appropriate cases, the court may lift the automatic stay to allow the creditor to proceed against the entireties property in state court. 11 U.S.C. § 362(d). We see no reason for such a procedure here, when judicial economy would be better served by a single proceeding in bankruptcy court.

Grosslight, 757 F.2d at 775-77.

Whatever else may be said for this entree, it is decidedly flavored in Michigan law.¹ The hoary doctrine of tenancy by the entirety is a minority position among the states. It represents, however, a political choice of the state legislature to maintain a system of property ownership which, at least arguably, contributes to family stability by ensuring that real property acquired during marriage may only be alienated, absent the dissolution...