In re Wheatley

• Decision Date: 29 July 2021
• Docket Number: No. 19 B 17777,19 B 17777
• Citation: 631 B.R. 326
• Parties: IN RE: Robert WHEATLEY, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

631 B.R. 326

IN RE: Robert WHEATLEY, Debtor.

No. 19 B 17777

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed July 29, 2021

Attorney for debtor Robert Wheatley: Kenneth E. Kaiser, Palatine, IL.

Attorneys for chapter 7 trustee Gregg Szilagyi: Ira Bodenstein, Christina M. Sanfelippo, Cozen O'Connor, Chicago, IL.

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge Chapter 7 debtor Robert Wheatley lives in Chicago but also owns a condominium in Michigan that he and his wife hold as tenants by the entirety. Wheatley has claimed an exemption in the Michigan property under section 522(b)(3)(B) of the Bankruptcy Code. Trustee Gregg Szilagyi objects to the exemption. According to Szilagyi, Wheatley is an Illinois resident and so is entitled under Illinois law to exempt only entireties property that serves as his homestead – which the Michigan condo does not. Szilagyi's objection raises a question on which courts in this district have differed: is the phrase "applicable nonbankruptcy law" in section 522(b)(3)(B) limited to the law of the debtor's domicile state?

The answer is no. Because the answer is no, the applicable nonbankruptcy law here is the law of Michigan, where the condo is located. Michigan does not limit its exemption for entireties property to homestead property. Szilagyi's objection will therefore be overruled.

1. Jurisdiction

The court has subject matter jurisdiction under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding. 28 U.S.C. § 157(B)(2)(B) ; In re Vazquez , 606 B.R. 432, 436 (Bankr. D. Kan. 2019).

2. Background

The facts come from the parties' papers, Wheatley's schedules, and the court's docket. No facts are in dispute.

Robert Wheatley owns a single-family home in Chicago. He and his wife also own a condominium in Buchanan, Michigan. Because the previous owners conveyed the condo to the Wheatleys jointly, under Michigan law they hold title as tenants by the entirety. See In re VanConett Estate , 262 Mich. App. 660, 667, 687 N.W.2d 167, 172 (2004) ("A deed or devise of real property to a husband and wife presumptively creates a tenancy by the entireties.").

In 2019, Wheatley filed a chapter 11 bankruptcy case. On his Schedule A/B, he disclosed both the Chicago and Michigan properties. (Dkt. No. 13). On his Schedule C, he claimed an exemption in the Chicago property under section 12-901 of the Illinois Code of Civil Procedure, 735 ILCS 5/12-901 (2018), the Illinois homestead exemption. (Id. ).

Wheatley's case was eventually converted to chapter 7, and Gregg Szilagyi was appointed interim trustee. Some months later, Wheatley amended his Schedule A/B to clarify that he owned the Michigan property with his wife as tenants by the entirety. (Dkt. No. 141). (His original Schedule A/B as well as several amended versions had incorrectly listed Wheatley as the sole interest holder.) He also amended his Schedule C to claim an exemption in the Michigan property under section 522(b)(3)(B) of the Code. (Id. ). Wheatley continued to claim the Illinois homestead exemption in the Chicago property. (Id. ).

Szilagyi now objects to Wheatley's claim of exemption in the Michigan property. Citing In re Giffune , 343 B.R. 883 (Bankr. N.D. Ill. 2006), and a host of other decisions, Szilagyi contends that "applicable nonbankruptcy law" in section 522(b)(3)(B) "refers to the law of the Debtor's domicile state as reflected in Section 522(b)(3)(A) – or in this case, the state of Illinois." (Obj. at 4). Because Illinois allows a tenancy by the entirety only in homestead property, see 765 ILCS 1005/1c (2018), and the Michigan property is not Wheatley's homestead, Szilagyi says the exemption must be disallowed. Wheatley disagrees.

3. Discussion

Szilagyi's objection will be overruled. The better reading of section 522(b)(3) is that "applicable nonbankruptcy law" has nothing to do with the debtor's domicile state – and although Szilagyi's papers suggest otherwise, most courts have taken that view. The applicable nonbankruptcy law here is the law where the property is located: Michigan.

The filing of a bankruptcy petition creates an estate consisting of the debtor's property. 11 U.S.C. § 541(a). The definition of estate property is "broad," United States v. Whiting Pools, Inc. , 462 U.S. 198, 205, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), encompassing "all legal or equitable interests of the debtor in property," 11 U.S.C. § 541(a). Despite its breadth, though, not all property is property of the estate. Some property is excluded. See 11 U.S.C. §§ 541(b), (c). And even when property is not excluded, the Code allows a debtor to exempt certain property from administration for the benefit of creditors. See 11 U.S.C. § 522(b) ; Taylor v. Freeland & Kronz , 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992).

The Code allows some debtors to choose the exemptions they can claim. They can claim the exemptions either in section 522(b)(2) or in section 522(b)(3). Other debtors, though, have no choice. They can claim the exemptions in section 522(b)(2) (often called the "federal" exemptions, see, e.g., In re Stinnett , 465 F.3d 309, 314 n.3 (7th Cir. 2006) ) – "unless the State law that is applicable to the debtor ... does not so authorize," 11 U.S.C. § 522(b)(2). If state law prohibits using those exemptions, the debtor can claim only the exemptions in section 522(b)(3). See 11 U.S.C. § 522(b)(2). Illinois has "opted out" of the federal exemptions, see 735 ILCS 5/12–1201 (2018), so Illinois debtors are limited to the exemptions in section 522(b)(3), In re Lantz , 446 B.R. 850, 853 n.2 (Bankr. N.D. Ill. 2011).¹

Section 522(b)(3) offers three exemptions, only two of which are relevant here. Section 522(b)(3)(A) allows a debtor like Wheatley to exempt any property that is "exempt under ... State or local law that is applicable on the date of the filing of the petition to the place in which the debtor's domicile has been located [in the 730 days prepetition]." 11 U.S.C. § 522(b)(3)(A). Section 522(b)(3)(A), in other words, allows a debtor in an opt-out state to claim the state law exemptions. Section 522(b)(3)(B), in contrast, is specialized and limited. It allows a debtor to exempt "any interest in property in which the debtor had ... an interest as a tenant by the entirety or joint tenant to the extent that such interest ... is exempt from process under applicable nonbankruptcy law." 11 U.S.C. § 522(b)(3)(B).

Szilagyi's position – that "applicable nonbankruptcy law" in section 522(b)(3)(B) is limited to the law of the debtor's domicile state – would read the provision out of the Code. Section 522(b)(3)(B) nowhere mentions the debtor's domicile state. Domicile only limits the exemptions a debtor can claim under section 522(b)(3)(A). Because a debtor claiming exemptions under section 522(b)(3)(A) can exempt property "exempt under State or local law," 11 U.S.C. § 522(b)(3)(A), a debtor in a state that exempts entireties property can already claim that exemption under section 522(b)(3)(A) without resorting to section 522(b)(3)(B). Under Szilagyi's reading, section 522(b)(3)(B) would be superfluous. A statute should not be read in a way that makes any part of it superfluous. Milwaukee Police Ass'n v. Flynn , 863 F.3d 636, 644 (7th Cir. 2017) ; In re Willett , 544 F.3d 787, 792 (7th Cir. 2008). Whatever "applicable nonbankruptcy law" means, then, it cannot mean the law of the debtor's domicile state.

The district court reached this conclusion in In re Holland , 366 B.R. 825 (N.D. Ill. 2007), on nearly identical facts. In Holland , an Illinois debtor claimed the section 522(b)(3)(B) exemption in Florida entireties property that was not her homestead. The trustee objected, arguing that Illinois law applied and so the debtor could exempt only homestead entireties property. The court disagreed. "[I]f the debtor's domicile state has an exemption for property interests held in joint tenancy," the court said, "she can claim that exemption pursuant paragraph (b)(3)(A)." Id. at 828. If the trustee's interpretation were correct, and " ‘applicable nonbankruptcy law’ " meant "the exemption law of the debtor's domicile state," section 522(b)(3)(B) would simply "echo" section 522(b)(3)(A). Id. at 828-29. The provision would be "meaningless, a violation of one of the basic tenets of statutory construction." Id. at 829.

Nearly all courts agree with Holland 's conclusion. See, e.g. , In re McNeilly , 249 B.R. 576, 580-81 (B.A.P. 1st Cir. 2000) ; In re McCallan , ––– B.R. ––––, ––––, 2021 WL 1845337, at *13 (Bankr. M.D. Ala. May 7, 2021) ; In re DiStefano , 610 B.R. 419, 426 (Bankr. N.D.N.Y. 2019), aff'd , 620 B.R. 687 (N.D.N.Y. 2020) ; In re Capelli , 518 B.R. 873, 878-79 (Bankr. N.D. W. Va. 2014) ; In re Zolnierowicz , 380 B.R. 84, 87 (Bankr. M.D. Fla. 2007) ; In re Garrett , 435 B.R. 434, 455 (Bankr. S.D. Tex. 2010) ; In re Nelms , No. 04-53521, 2005 WL 318802, at *3 (Bankr. E.D. Mich. Feb. 4, 2005) ; In re Weza , 248 B.R. 470, 473-74 (Bankr. D.N.H. 2000) (" Section 522(b)(2)(B) does not limit ‘applicable nonbankruptcy law’ to the law of the debtor's domicile"); In re Cochrane , 178 B.R. 1011, 1019-20 (Bankr. D. Minn. 1995).² So do secondary sources. See, e.g. , 4 Collier on Bankruptcy , supra , ¶ 522.10[3] at 522-94; 3 William L. Norton III, Norton Bankruptcy Law & Practice 3d § 56:5 at 56-20 to 21 n.27 (3d ed. 2021).

To support his contrary position, Szilagyi relies on Giffune . Giffune conceded that under "a plain reading" of section 522(b)(3), section 522(b)(3)(A) ties a debtor's exemptions to his domicile, and section 522(b)(3)(B) does not. Giffune , 343 B.R. at 895. Nonetheless, Giffune said, section 522(b)(3) cannot be read "in a vacuum" but must be construed and applied "in harmony with the Illinois exemption statute."

Id. at 895-96. Although section 522(b)(3)(B) does not mention the debtor's domicile state, the exemption in that provision is still "decidedly...