In re Anderson, Case No. 19-70011

603 B.R. 564

IN RE: Douglas Bennington ANDERSON, Debtor.

Case No. 19-70011

United States Bankruptcy Court, W.D. Virginia, Roanoke Division.

Signed June 10, 2019

H. David Cox, Cox Law Group, PLLC, Lynchburg, VA, for Debtor.

Scot Stewart Farthing, Attorney at Law, PC, Wytheville, VA, for Trustee.

MEMORANDUM OPINION

Paul M. Black, UNITED STATES BANKRUPTCY JUDGE

This matter comes before the Court on the Chapter 7 Trustee's Objection to the Debtor's claim of exemption (the "Trustee's Objection") (ECF No. 19), the Debtor's Motion to Compel Trustee to Abandon His Interest in Debtor's Residence (the "Debtor's Motion") (ECF No. 30), and responses related to both filings. The Debtor in this case filed a voluntary Chapter 7 petition on January 3, 2019 and filed his required schedules on January 24, 2019. On his Schedule C, the Debtor claimed an exemption in real property owned as tenants by the entireties ("TbE") to which the Chapter 7 Trustee (the "Trustee") has objected. In response to the Trustee's Objection, the Debtor seeks an Order compelling the Trustee to abandon the property as burdensome or of inconsequential value to the estate. The Court held a hearing on this matter on May 20, 2019 during which it heard oral argument from counsel and took the matter under advisement. Having reviewed and considered the record in this case, the Court makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

The facts of this case are largely undisputed. The Debtor claimed an exemption in real property owned as tenants by the entireties in the amount of $ 368,020 on his Schedule C pursuant to 11 U.S.C. § 522(b)(3)(B). (Stipulation, ECF No. 34, ¶ 10; Sched. C, ECF No. 15, at 13.) Although the parties have provided conflicting values for the property—the Debtor values the property at $ 575,000 (Stipulation, ECF No. 34, ¶ 4) while the Trustee notes that the tax-assessed value is only $ 558,300 (Id. ¶ 5)—the Debtor's exemption is large enough to exempt any equity in the property remaining after accounting for Suntrust Bank's first deed of trust in the amount of $ 206,979. (Sched. D, ECF No. 15, at 19.) Additionally, the parties agree that the property is subject to at least two IRS tax liens for the amounts of $ 88,237.32 and $ 723,761.25 owed by the Debtor only, and not his non-filing spouse. (Stipulation, ECF No. 34, ¶¶ 7–8.) Notably, the Debtor is not liable on any unsecured debts or tax claims jointly with his wife. (Id. ¶¶ 13–14.)

Citing United States v. Craft , 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002), in which the Supreme Court held that a tax lien against a single spouse may attach to that spouse's interest in property owned as TbE, the Trustee has objected to the Debtor's claimed exemption. (ECF No. 19.) At the hearing on this matter, it became clear that the Trustee seeks to sell the property for the benefit of the IRS. To do so under 11 U.S.C. § 363(h), however, he acknowledged that he would need to negotiate with the IRS to "carve out" a portion of sale proceeds for the benefit of the Debtor's unsecured creditors. The Trustee confirmed at oral argument that he has no such deal at the moment. In response, the Debtor argues that Craft did not involve a debtor in bankruptcy and that a trustee in bankruptcy may not use the "special collection powers of the IRS" to administer property held as tenants by the entireties. (Response, ECF No. 27, ¶ 18.) The Debtor further notes that even if the IRS agrees to a "carve-out," any sale will not benefit the Debtor's bankruptcy estate. Thus, he argues that the Court should not allow administration of the property and should instead compel the Trustee to abandon it under 11 U.S.C. § 554.

The Court must therefore determine (1) whether the Debtor may exempt property held as TbE under 11 U.S.C. § 522 where a tax lien has attached to the property for liabilities owed only by the individual debtor, and (2) whether the property at issue is burdensome or inconsequential to the estate even in light of the Trustee's proposed carve-out such that the Court should compel the Trustee to abandon it under 11 U.S.C. § 554.

JURISDICTION AND VENUE

This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on December 6, 1994, and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that this matter is a "core" bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (B), and (O).

CONCLUSIONS OF LAW

I. Trustee's Objection to the Debtor's TbE Exemption

Once a debtor files bankruptcy, 11 U.S.C. § 541 defines what becomes property of the bankruptcy estate, including "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). As the Fourth Circuit has noted, this language sweeps broadly enough to include TbE property, even where only one spouse has filed bankruptcy. See Sumy v. Schlossberg , 777 F.2d 921, 925 (4th Cir. 1985) ("[ Section] 541 now includes the debtor's interest in entireties property as part of the estate."). Nonetheless, a debtor may exempt property from the estate pursuant to 11 U.S.C. § 522. Specifically, § 522(b)(3)(B) allows a debtor to claim as exempt, "any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety ... to the extent that such interest ... is exempt from process under applicable nonbankruptcy law."

Like other states that recognize TbE ownership, Virginia law generally protects property owned as TbE from creditor process in satisfaction of a debt owed individually by one spouse. See In re Bunker , 312 F.3d 145, 151 (4th Cir. 2002) ("[Under Virginia law property held by the entireties is not subject in any manner to individual claims of creditors of one spouse ...." (quoting Reid v. Richardson , 304 F.2d 351, 353 (4th Cir. 1962) ); Sumy , 777 F.2d at 924–25 ("[I]n the typical entireties state, creditors of only one spouse may not reach the entireties property for satisfaction of their claims."). However, where only one spouse files bankruptcy but is jointly liable to a creditor with his spouse, "property owned as a tenant by the entireties may not be exempted from an individual debtor's bankruptcy estate under § 522(b)(2)(B) and the trustee may administer such property for the benefit of the joint creditors under § 363(h)." Sumy , 777 F.2d at 932. Additionally, although state laws generally create and define TbE property rights, Section 522(b)'s use of a more inclusive reference to "nonbankruptcy law" indicates that the TbE exemption is constrained by the boundaries of both state and federal law. See Patterson v. Shumate , 504 U.S. 753, 758, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (acknowledging that reading "applicable nonbankruptcy law" to include federal law accords with similar references throughout the Bankruptcy Code). The Trustee relies on this inclusive language to argue that the Debtor's property is not exempt because the Supreme Court's holding in Craft is "applicable nonbankruptcy law" limiting the availability of TbE exemptions under § 522(b)(2)(B). He further suggests that he may sell the property under §§ 363 and 724 for the benefit of the IRS and, by way of a carve-out agreement with the IRS, unsecured creditors.

In Craft , the Supreme Court sought to determine "whether a tenant by the entirety possesses ‘property’ or ‘rights to property’ to which a federal tax lien may attach." 535 U.S. at 276, 122 S.Ct. 1414. There, the IRS sought payment of half the proceeds from the sale of property held as TbE in satisfaction of unpaid tax liabilities owed only by the husband.¹ The IRS reasoned that because 26 U.S.C. § 6321 creates a lien against "all property and rights to property" belonging to any delinquent taxpayer who refuses to pay their tax liabilities, the IRS held a lien on Mr. Craft's rights to the TbE property. This is true, it suggested, despite the legal fiction that TbE ownership does not create individual rights to property.

After an examination of each metaphorical "stick" in a property owner's bundle of rights, the Court acknowledged 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 (quoting United States v. Nat'l Bank of Commerce , 472 U.S. 713, 719–20, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985) ).

According to Michigan law, respondent's husband had, among other rights, the following rights with respect to the entireties property: the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the respondent's consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the respondent's consent, and the right to block respondent from selling or encumbering the property unilaterally.

Id. at 282, 122 S.Ct. 1414. Accordingly, the Court concluded that Mr. Craft's interest in the couple's TbE property constituted "property" or "rights to property" for the purposes of § 6321 such that a tax lien could attach. See id. at 285, 122 S.Ct. 1414 ("[I]f the conclusion were otherwise, the entireties property would belong to no one for the purposes of § 6321.").

After Craft , courts within the Fourth Circuit have attempted to define the application of the Supreme Court's holding to bankruptcy proceedings. For example, the Fourth Circuit declined to apply the Supreme Court's holding to expand a trustee's strong-arm powers under 11 U.S.C. § 544. Schlossberg v. Barney , 380 F.3d 174 (4th Cir. 2004). In that case,...