Schlossberg v. Barney

• Decision Date: 16 August 2004
• Docket Number: No. 03-2081.,03-2081.
• Citation: 380 F.3d 174
• Parties: Roger SCHLOSSBERG, Trustee-Appellant, v. Jean BARNEY, Debtor-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

380 F.3d 174

Roger SCHLOSSBERG, Trustee-Appellant, v. Jean BARNEY, Debtor-Appellee.

No. 03-2081.

United States Court of Appeals, Fourth Circuit.

Argued: June 3, 2004.

Decided: August 16, 2004.

Appeal from the United States District Court for the District of Maryland, Richard D. Bennett, J.

COPYRIGHT MATERIAL OMITTED

ARGUED:

Roger Schlossberg, Schlossberg & Digirolamo, Hagerstown, Maryland, for Appellant. Lawrence Francis Regan, Jr., Garza, Regan & Rose, P.C., Rockville, Maryland, for Appellee.

Before WIDENER and DUNCAN, Circuit Judges, and FLANAGAN, United States District Judge for the Eastern District of North Carolina, sitting by designation.

Affirmed by published opinion. Judge DUNCAN wrote the opinion, in which Judge WIDENER and Judge FLANAGAN joined.

OPINION

DUNCAN, Circuit Judge:

Appellant Roger Schlossberg, Chapter 7 Bankruptcy Trustee ("Appellant"), challenges the order of the district court affirming the bankruptcy court in overruling his objection to an exemption asserted by the debtor, appellee Jean Barney ("Appellee").¹ Appellant argues that the district court erred in not allowing him to assert the rights of the Internal Revenue Service ("IRS") as a hypothetical creditor in objecting to Appellee's claim of exemption from the bankruptcy estate of certain property owned with her non-debtor spouse as tenants by the entireties. For the reasons that follow, we affirm.

I.

The facts underlying this appeal are not in dispute. On September 10, 2000, Appellee filed a voluntary petition for individual bankruptcy under Chapter 7 of the United States Bankruptcy Code in the Bankruptcy Court for the District of Maryland. Appellant was appointed Chapter 7 Interim Trustee, and has continued to serve as Trustee in the bankruptcy case. As Trustee, he sought to recover approximately $83,385 of unsecured, nonpriority debt Appellee owed to various credit card companies.

At the time the petition was filed, Appellee owned a single-family home with her spouse in a tenancy by the entireties in Silver Spring, Maryland. According to the documents filed with the bankruptcy court, the home was valued at $266,650, and was subject to a lien in the amount of $56,000. Appellee and her spouse therefore owned approximately $210,000 in equity in the home. Along with her petition, Appellee filed a Schedule C — Property Claimed as Exempt, seeking to exempt the home from the property of the bankruptcy estate under § 522 of the Bankruptcy Code.²

Appellant objected to the attempted exemption of the entireties property, and sought to reach Appellee's interest in the home for the benefit of her individual creditors through § 544 of the Bankruptcy Code.³ This section, often referred to as the "strong arm clause," accords to a trustee the rights and powers of a hypothetical "creditor that extends credit to the debtor" on the date of the bankruptcy petition. 11 U.S.C. § 544(a).

In United States v. Craft, 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002), the Supreme Court held that where federal taxes are owed by one spouse, and the spouse has property owned as tenants by the entireties with a spouse who had no delinquent tax liabilities, the IRS may attach the entireties property to collect the tax debt under 26 U.S.C. § 6321. Appellant argued that § 544(a)(2) allows him to stand in the shoes of the IRS as a creditor for purposes of reaching entireties property despite the exemption created by § 522(b)(2).

The bankruptcy court overruled Appellant's objection to the exemption on several grounds. The bankruptcy court noted that § 544(a)(1) conveys the rights of a judicial lienholder, whereas the lien described in Craft is statutory. Further, the bankruptcy court concluded that "[t]here are voluntary creditors and involuntary creditors, and in this situation, the IRS cannot be said to have extended credit." J.A. 93. Finally, the bankruptcy court found that Appellant's argument would have the effect of reading the tenancy by the entireties exemption, which has long been recognized by the Supreme Court and this circuit, out of the Bankruptcy Code.

Appellant appealed the decision of the bankruptcy court to the district court. The district court affirmed, finding that "[a] plain reading of § 544(a)(2) clearly indicates that the IRS does not extend credit as contemplated by the strong arm clause." J.A. 159. The district court adopted the distinction relied on by the bankruptcy court that where the IRS is a creditor, it is an involuntary one. Further, the district court noted that § 544 gives Appellant the rights and powers a creditor would have under state law. Even if the IRS were a creditor within the meaning of § 544, Appellant would still not be invested with the power possessed by an agency of the federal government, "powers that are not conferred by state law." J.A. 162.

Appellant filed a timely appeal, arguing that the district court erred in finding that he was not entitled to assert the rights and powers of the IRS in reaching property owned as tenants by the entireties by a debtor and a non-debtor spouse. The issue before us is whether § 544(a)(2) vests a trustee with the rights and powers of the IRS as a hypothetical creditor to penetrate the entireties exemption for the benefit of the individual creditors of the debtor. That the IRS is not a "creditor that extends credit" is dispositive of the issue, and we affirm on that reasoning.

II.

When reviewing a decision by a district court sitting as an appellate court in bankruptcy matters, we apply the same standard of review as did the district court. Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel Props. Ltd.), 99 F.3d 151, 154 (4th Cir.1996). Accordingly, legal conclusions are reviewed de novo, but findings of fact will only be set aside if clearly erroneous. In re Bulldog Trucking, Inc., 147 F.3d 347, 351 (4th Cir.1998). Here, the bankruptcy court made no findings of fact; the district court reviewed only its legal conclusions. Therefore, we review the decision of the district court de novo.

III.

Section 541 of the Bankruptcy Code defines the property of the debtor that becomes the property of the bankruptcy estate. It includes "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Notwithstanding this provision, a debtor may exempt certain property from the bankruptcy estate pursuant to § 522. Section 522 includes a list of allowed exemptions, see § 522(d), and also gives states the right to opt out of this exemption scheme, as Maryland has done. See § 522(b)(1); Md.Code Ann., Courts and Judicial Proceedings § 11-504(g). When a debtor's state elects to opt out, or the debtor chooses to exercise his exemptions under state law, the debtor may exclude from the property of the estate those items exempted by state or local law and by federal nonbankruptcy law. § 522(b)(2)(A). Under § 522(b)(2)(B), the debtor in an opt-out state may also exempt property owned as a tenancy by the entireties.

As the bankruptcy court noted, Maryland has long recognized the particular protections to be accorded tenancies by the entireties. See, e.g., Diamond v. Diamond, 298 Md. 24, 467 A.2d 510, 513 (1983) (citing Lake v. Callis, 202 Md. 581, 97 A.2d 316 (1953); Hertz v. Mills, 166 Md. 492, 171 A. 709 (1934); McCubbin v. Stanford, 85 Md. 378, 37 A. 214 (1897)). A tenancy by the entireties is essentially a joint tenancy with rights of survivorship between the husband and wife rendered individually indissoluble by the common law theory that the husband and wife are one person. Bruce v. Dyer, 309 Md. 421, 524 A.2d 777, 780 (1987). While both spouses are alive, a tenancy by the entireties may only be severed by divorce or joint action by both spouses. Id. at 781. Thus, under Maryland law, such property is exempt from process by creditors of an individual spouse. Id. at 781 n. 2; Beall v. Beall, 291 Md. 224, 434 A.2d 1015, 1021 (1981).

The instant case is not Appellant's first attempt to overcome a tenancy by the entireties exemption under Maryland law. In Sumy v. Schlossberg (In re Sumy), 777 F.2d 921 (4th Cir.1985), an individual Chapter 7 debtor claimed an exemption of entireties property owned with his non-debtor spouse. Unlike the property here, the Sumys' property was subject to claims by joint creditors of the debtor and the spouse. On those facts, we determined that the property was not immune from process under state law. We specifically noted that in Maryland, as is true in most states recognizing the entireties tenancy, creditors of only one spouse may not reach entireties property for the satisfaction of their claims. Id. at 925-26 (citations omitted). We pointed out, however, that "[t]he opposite is true for creditors to whom both spouses are obligated: `[A] judgement obtained against both husband and wife arising out of a joint obligation may be satisfied by execution upon property held by the entireties.'" Id. (footnote and citations omitted).

Appellant here seeks to circumvent the well-recognized distinction between the rights of individual and joint creditors to reach entireties property on the basis of a novel interpretation of the Supreme Court's decision in United States v. Craft. Relying on, among other factors, the breadth of the federal tax code and the public policy favoring the collection of taxes, the Court in that case allowed the IRS to attach a federal tax lien to entireties property owned by an individual tax-payer having delinquent tax liabilities with a spouse who had no such tax liabilities. Craft, 535 U.S. at 288, 122 S.Ct. 1414. Appellant extrapolates from Craft that if the IRS can reach entireties property owned by a debtor with a non-debtor spouse for the benefit of individual creditors, so can he as Trustee. He relies for his argument on the authority of the IRS to enter into forbearance agreements with taxpayers for the extended payment of tax liabilities under certain...