In re Trickett

• Decision Date: 10 September 1981
• Docket Number: Bankruptcy No. NK 80-02333,Adv. No. 80-0818.
• Citation: 14 BR 85
• Parties: In re Wilson L. TRICKETT, Debtor. MICHIGAN NATIONAL BANK — Michiana, Plaintiff, v. Joseph A. CHRYSTLER, Trustee, and Wilson L. Trickett and Verda Trickett, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Michigan

14 B.R. 85 (1981)

In re Wilson L. TRICKETT, Debtor MICHIGAN NATIONAL BANK — Michiana, Plaintiff, v. Joseph A. CHRYSTLER, Trustee, and Wilson L. Trickett and Verda Trickett, Defendants.

Bankruptcy No. NK 80-02333, Adv. No. 80-0818.

United States Bankruptcy Court, W.D. Michigan.

September 10, 1981.

Ryan, McQuillan, Vander Ploeg & Fette, Paul J. Kelley, St. Joseph, Mich., for plaintiff.

Richard C. Walsh, Kalamazoo, for defendants.

TENANTS BY THE ENTIRETIES — JOINT CLAIMS — DISCHARGE

DAVID E. NIMS, Jr., Bankruptcy Judge.

Michigan National Bank — Michiana, (Bank) a National Banking Association, authorized to conduct business in Michigan with its principal office in Cassopolis, filed its complaint against Joseph A. Chrystler, the trustee in this case, Wilson L. Trickett (Trickett) of Berrien Springs, the debtor, and his wife Verda Trickett (Verda) for a stay of discharge and relief from stay so as to enable it to proceed in a state court against Trickett and Verda for a joint judgment so as to reach real estate held by them as tenants by the entireties. Bank's claim is on an unsecured promisory note executed and delivered to the Bank by Trickett and Verda on April 10, 1980, in the principal sum of $40,000. The note was due July 10, 1980. Trickett and Verda had also guaranteed a debt due by the Berrien Springs Cooperative, Inc., to Bank for $65,000 on June 21, 1977.

Trickett filed a voluntary petition on August 4, 1980, claiming as exempt all property owned with Verda as tenants by the entireties. These properties have a scheduled value of $3,696,164.50. Liens are scheduled at $1,559,971.36 leaving an equity of $2,136,193.14. It is out of this property that the Bank desires to satisfy it's claim. Debtor's total assets are scheduled at $4,037,300.38 of which $3,701,314.50 is claimed to be exempt. Total debts are scheduled at $2,400,375.55.

Michigan is one of some fifteen states that still retains the common law estate of tenancy by the entirety. At common law, the individual creditors of neither the husband or wife could reach entireties property by judicial process nor could either spouse transfer any interest in the property. Albinak v. Kuhn, 149 F.2d 108 (6th Cir. 1945); Cole v. Cardoza, 441 F.2d 1337, 1343 (6th Cir. 1971); Farrell v. Paulus, 309 Mich. 441, 15 N.W.2d 700 (1944); American State Trust Co. of Detroit v. Rosenthal, 255 Mich. 157, 237 N.W. 534 (1931). For a full discussion see Bienenfeld, "Creditors v. Tenancies By The Entirety," 1 Wayne L.Rev. 105 (1955).

In 1917 Michigan enacted a statute which gave some relief to joint creditors. That statute as amended reads in part as follows:

"Hereafter the real estate of the husband and wife owned by them as tenants by entirety * * * shall be subject to writ of garnishment and all other process provided by law, in satisfaction of any judgment which has been recovered against persons who were at the time of the execution of such written instrument husband and wife jointly or the survivor upon any instrument signed by both. Mich.Comp.Laws Sec. 557.53 Mich.Stat. Ann. Sec. 26.183 (Callaghan, 1974)"

A year later, the Michigan Supreme Court went one step further and extended this right to reach entireties property to joint judgment holders. Sanford v. Bertrau, 204 Mich. 244, 169 N.W. 880 (1918).

Professor Bienenfeld in "Creditors v. Tenancies By The Entirety" 1 Wayne L.Rev. 105, 112 states:

"To sum up the results of the statutes and the decisions of the Michigan Court, in order to levy upon entireties property the claimant must obtain a joint judgment against husband and wife. To obtain such a judgment he must prove either:

(1) A special consideration running to the wife\'s separate estate; or

(2) A written instrument signed jointly by husband and wife"

Under the Bankruptcy Act of 1898, there was a substantial body of law concerning entireties property and joint debts where one spouse obtained a discharge in bankruptcy. The Michigan Courts have held that the bankruptcy discharge of one or both spouses under that Act would not affect the rights of joint creditors. Kolakowski v. Cyman, 285 Mich. 585, 281 N.W. 332 (1938); Wesorick v. Winans, 277 Mich. 589, 269 N.W. 609 (1936); McPherson v. Gregory, 271 Mich. 580, 260 N.W. 767 (1935); Edwards & Chamberlin Hardware Co. v. Pethick, 250 Mich. 315, 230 N.W. 186 (1930); Traverse City State Bank v. Conaway, 37 Mich.App. 647, 195 N.W.2d 288 (1972). Our neighbor state of Indiana has reached the same result. First National Bank of Goodland v. Pothuisje, 42 Am.B.R. (N.S.) 223 (Supr.Ct.Ind., 1940).

The Federal Courts in this circuit have come out differently on this question. In Fetter v. United States, 269 F.2d 467 (6th Cir. 1959), the United States became the owner of notes executed by husband and wife. The husband had been discharged in bankruptcy before the suit on the notes. Joint judgment for the United States was reversed because of the discharge.

A similar result was reached in Harris v. Manufacturers National Bank of Detroit, 457 F.2d 631 (6th Cir. 1972) cert. denied 409 U.S. 885, 93 S.Ct. 118, 34 L.Ed.2d 142 (1972). Harris and his wife obtained a business loan from defendant bank. After defaulting on the joint note, Harris filed his voluntary petition. Before discharge was entered, the bank brought suit in a state court. The case was not tried until after discharge was granted. Harris raised the defense of his discharge in bankruptcy, but the state court granted a joint judgment. Harris filed an application with the United States District Court for an injunction against execution by the bank. The district court held that state law controlled and denied the injunction. On appeal the Court of Appeals reversed with instructions to grant the injunction as prayed for. The court reached several conclusions in arriving at its decision:

1. The court has jurisdiction to consider a supplemental and ancillary bill in equity in aid of and to effectuate the adjudication and order made by the same court. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934).

2. Under Michigan law, the bank would prevail.

3. Michigan law does not apply where jurisdiction is based on the bankruptcy power.

4. Michigan law is in direct conflict with the relief afforded the discharged bankrupt under Section 17 of the Act.

5. Under Michigan entireties law, neither spouse can transfer an interest or subject his interest to his individual liabilities.

6. Michigan law conflicts with the overriding purpose of the Bankruptcy Act to grant debtor "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."

7. The fact that entireties property does not pass to the trustee does not preclude determination that a joint judgment is barred by the husband's discharge.

8. Since Congress was aware of the impact of tenancy by the entireties as evidenced by the Section 70(a) provision for entireties property vesting within six months of filing, the courts should not enlarge the relief available where Congress did not expressly act.

9. The federal courts cooperated with joint creditors, however, by adopting the old device used in Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1903), whereby the bankruptcy court would stay the granting of a discharge and allow relief from stay in order to allow joint creditors to obtain a joint judgment against the spouses and satisfy their claims out of entireties property. In re Seats, 537 F.2d 1176 (4th Cir. 1976); Davison v. Virginia National Bank, 493 F.2d 1220 (4th Cir. 1974); Reid v. Richardson, 304 F.2d 351 (4th Cir. 1962); Phillips v. Krakower, 46 F.2d 764 (4th Cir. 1931); In re Magee, 415 F.Supp. 521 (W.D.Mo.1976); In re Saunders, 365 F.Supp. 1351 (W.D.Va.1973); In re Chitwood, 1 B.R. 415 (Bkrtcy.W.D.Va.1979). This court has taken this approach where, unlike in Harris, the discharge has not been granted. In re Rafferty, No. NG 78-00147 B1 (W.D.Mich.1978); In re Houdeshell, No. HK 77-00291 B4 (W.D.Mich.1977); In re Black, 14 C.B.C. 481 (W.D.Mich.1977).

This case was filed after October 1, 1979, and is, therefore, subject to the Bankruptcy Reform Act of 1978. The holdings in Harris and Fetter, as well as, the need of providing a stay of discharge as relief to joint creditors must be reconsidered in light of the new treatment of property of the estate under the Code. Under the Bankruptcy Act of 1898, title would vest in the trustee only of property of the debtor which "prior to the filing of the petition he could by any means have transferred or which might have been levied on and sold under judicial process against him, or otherwise seized, impounded, or sequestered." Bankruptcy Act of 1898, Sec. 70(a)(5) (repealed 1979). Because property of the debtor held in the entireties cannot be transferred or levied upon by individual creditors, title did not vest in the trustee under the Act.

Under the Bankruptcy Code, 11 U.S.C. § 541(a)(1), the estate of a case "is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case."

"Paragraph (1) has the effect of overruling Lockwood v. Exchange Bank, 190 U.S. 294, 23 S.Ct. 751, 47 L.Ed. 1061 (1903), because it includes as property of the estate all property of the debtor, even that needed for a fresh start. After the property comes into the estate, then the debtor is permitted to exempt it under proposed 11 U.S.C. Section 522, and the court will have jurisdiction to determine what property may be exempted and what remains as property of the estate. The broad jurisdictional grant in proposed 28 U.S.C. 1471(b) would have the effect of overruling Lockwood independently of the change made by this provisions." H.R.Rep.No.95-595, 95th Cong., 1st Sess. 368 (1977). S.Rep.No.95-989, 95th Cong., 2d Sess. 82 (1978), U.S.Code Cong. & Admin.News 1978, 5787, 6324.

If there could be any question on whether a debtor has a legal...