Conrad v. Schlossberg

555 B.R. 514

Maria E. Conrad, Appellant

v.Roger Schlossberg, Appellee.

Case No.: GJH-16-180

United States District Court, D. Maryland, Southern Division.

Signed August 10, 2016

Edward Gonzalez, Law Office of Edward Gonzalez, Washington, DC, for Appellant.

Frank J. Mastro, Schlossberg & Mastro, Hagerstown, MD, for Appellee.

Roger Schlossberg, Hagerstown, MD, pro se.

MEMORANDUM OPINION

GEORGE J. HAZEL, United States District Judge

Appellant Maria E. Conrad, the Debtor in the underlying bankruptcy case (the “Debtor”), appeals the January 4, 2016 order of the Bankruptcy Court, sustaining the objection to the Debtor's claim of exempt property filed by Roger Schlossberg, the Chapter 7 Trustee of the Debtor's bankruptcy estate (the “Trustee”). Oral argument is not necessary to resolve the present appeal. See Fed. R. Bankr. P. 8013(c) : see also Loc. R. 105.6 (D. Md.). For the reasons that follow, the Court affirms the Bankruptcy Court's order sustaining the Trustee's objection.

I. BACKGROUND

Prior to tiling for bankruptcy, on August 27, 2009, the Debtor entered a plea agreement acknowledging her guilt to conspiracy under 18 U.S.C. § 1349 for her involvement in a mortgage fraud scheme in Criminal Case No. 09–CR–374–GBL–1 in the United States District Court for the Eastern District of Virginia. See ECF No. 3-6. As part of her plea agreement, the Debtor agreed to the entry of a restitution judgment in the full amount of the losses sustained by the victims of the fraudulent scheme. Id. at 7.¹ On December 4, 2009, the Debtor was sentenced to pay, as restitution, the sum of $838,004.60 (the “Restitution Judgment”). ECF No. 3-7 at 1.

On June 24, 2015, the Debtor filed a Voluntary Petition under Chapter 7 of the Bankruptcy Code. See ECF No. 3-1. Among her debts, the Debtor listed the United States of America as an unsecured creditor holding an undisputed claim for $838,004.60—the full amount of the Restitution Judgment. Id. at 17. The Parties agree that the United States has recorded the Restitution Judgment in Charles County, Maryland. See ECF No. 7 at 6 n.2; ECF No. 12 at 6.

The Debtor listed among the assets of her bankruptcy estate certain real property located in Waldorf, Maryland (the “Property”) which she owns in a joint tenancy by the entirety with her non-debtor husband, Timothy W. Conrad. Id. at 6, 8. The Debtor listed the Property as having an unencumbered value of $227,447, id. at 8, but she claimed the Property as an exempt asset under U.S.C. § 522(b)(3)(B), id. at 12.

On August 25, 2015, the Trustee filed an objection to the Debtor's claim of exempt property, in which he argued that the Property was not exempt from administration by the Trustee to satisfy the Restitution Judgment entered against the Debtor. ECF No. 3-2. The Debtor filed an opposition to the Trustee's objection on September 22, 2015, as well as a supplemental memorandum on December 5, 2015. ECF Nos. 3–18, 3-20.

On December 21, 2015, the Bankruptcy Court held a hearing on the Trustee's objection. see ECF No. 3-28 at 3, and, on January 4, 2016, issued a memorandum opinion and order sustaining the Trustee's objection. ECF Nos. 3–25, 3–26; see also In re Conrad , 544 B.R. 568, 571 (Bankr.D.Md.2016). On January 19, 2016, the Debtor filed a Notice of Appeal from that Order in this Court. ECF No. 1.

II. STANDARD OF REVIEW

The Court hears this bankruptcy appeal under 28 U.S.C. § 158(a). Parties of bankruptcy cases can appeal orders that dispose of discrete disputes within the larger case. See Mor t R a nta v. Gorman , 721 F.3d 241, 246 (4th Cir.2013). In this case, the Property exemption issue is appealable as it was completely resolved by the Bankruptcy Court. Bankruptcy appeals “shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts.” 28 U.S.C. § 158(c)(2). On appeal from the Bankruptcy Court, this Court reviews the Bankruptcy Court's findings of fact for clear error and conclusions of law de novo. See In re Merry – Go – Round Enterprises, Inc., 400 F.3d 219, 224 (4th Cir.2005) ; In re Kielisch, 258 F.3d 315, 319 (4th Cir.2001).

III. DISCUSSION

Section 541 of the Bankruptcy Code defines the property of a debtor that becomes the property of the bankruptcy estate as including “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). A debtor may exempt certain property from the bankruptcy estate, however, in accordance with Section 522 of the Bankruptcy Code. Pursuant to that section, where a debtor's property is held as “an interest as a tenant by the entirety or joint tenant.” that property is exempt from process in a bankruptcy proceeding “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)(3)(B).

Under Maryland law, where the Debtor's property is located, a debtor's creditors cannot “levy upon nor sell a debtor's undivided interest in entireties property to satisfy debts owed solely by the debtor.” In re Bell-Bresli n , 283 B.R. 834, 837 (Bankr.D.Md.2002) ; see also Schlossberg v. B a rney, 380 F.3d 174, 178 (4th Cir.2004) (citing Bruce v. Dye, 309 Md. 421, 524 A.2d 777, 781 (1987) ) (“While both spouses are alive, a tenancy by the entireties may only be severed by divorce or joint action by both spouses.”). Thus, in an ordinary case applying Maryland law as “applicable nonbankruptcy law.” there is no question that entireties property may be exempted from the bankruptcy estate. See Barney , 380 F.3d at 178.

Here, however, the Trustee argues that because a restitution judgment was entered against the Debtor, making the United States a creditor of the bankruptcy estate, the Property is not exempt from process. See ECF No. 12 at 10-14. In support of his position, the Trustee relies principally on United States v. Craft , 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002), in which the United States Supreme Court held that, pursuant to 26 U.S.C. § 6321, a federal tax lien can attach to property held in a tenancy by the entirety to satisfy the debt of only one spouse. See ECF No. 12 at 11-16. Under § 6321. “[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” In Craft, the Court considered whether a husband's interest in entireties property constituted “property” or “rights to property” for purposes of § 6321. See Craft , 535 U.S. at 278, 122 S.Ct. 1414. The Court initially observed that § 6321 “itself creates no property rights but merely attaches consequences, federally defined, to rights created under state law.” Id. The Court accordingly began its analysis by considering what rights existed under the relevant state law—there, Michigan law—with respect to entireties property, and then turned to a determination of whether those rights qualified as “property” or “rights to property” for purposes of the federal tax lien statute. Id. at 278–89, 122 S.Ct. 1414.

Under Michigan law, the husband's right in entireties property included important rights in the so-called “bundle of sticks” of property ownership, including the right to use the property, the right to exclude third parties from it, and the right to a share of income produced from it.

Id. at 282, 122 S.Ct. 1414. Turning to the federal question respecting whether the rights granted under Michigan law constituted “property” or “rights to property” under § 6321, the Supreme Court noted that “[t]he statutory language authorizing the tax lien is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” Id. at 283, 122 S.Ct. 1414 (citation and internal quotation marks omitted). Indeed, “[s]tronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.” Id. (citation and internal quotation marks omitted). The court therefore concluded that the property rights associated with a tenancy by the entireties under Michigan law fell within the broad statutory language of “property” or “rights to property” under § 6321. Id. Thus, the husband's interest in entireties property was subject to attachment of the tax lien that arose from his sole unpaid tax obligation. Id. at 288, 122 S.Ct. 1414.

The Supreme Court also recognized in Craft that a different result would be reached under Michigan law insofar as state law creditors would be unable to attach entireties property to satisfy debts owed by only one spouse. Id. But the court concluded that state law did not dictate their decision: “The interpretation of 26 U.S.C. § 6321 is a federal question, and in answering that question we are in no way bound by state courts' answers to similar questions involving state law. As we elsewhere have held, ‘exempt status under state law does not bind the federal collector.’ ” Id. (quoting Drye v. United State, 528 U.S. 49, 59, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999) ); see also In re Hutchins, 306 B.R. 82, 90 (Bankr.D.Vt.2004) (“While federal courts had historically deferred to the special status of tenancies by the entirety under state law, the high court made clear [ in Craft ] that going forward federal courts should rely on federal law when construing the extent of liens created under federal law ....”).

Like the provision permitting the attachment of a tax lien under 6321, the enforcement scheme for restitution judgments provides that “[n]otwithstanding any other Federal law .... a judgment imposing a fine may be enforced against all property or rights to property of the person fined.” subject to certain exceptions not applicable here. 18 U.S.C. § 3613(a) (emphasis added). The statute further provides that an order of restitution “is a lien in favor of the United States on all property and rights to property of...