Opinion
Case No. 95-10073-AM
June 9, 1995
MEMORANDUM OPINION
This matter is before the court on the debtor's motion to compel the trustee to abandon certain real estate. A hearing was held on June 6, 1995, at the conclusion of which the court took the matter under advisement. This opinion constitutes the court's findings of fact and conclusions of law under F.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a).
Findings of Fact
The debtor, who is married but living apart from her husband, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on January 10, 1995. On her schedule of property claimed as exempt, she listed her interest, valued at $126,500, in a parcel of real estate described as 127 Plaza Street, NE, Leesburg, Virginia. The claimed basis of the exemption was 11 U.S.C. § 522(b)(2)(B). The schedules reflect that the property is owned by her as tenants by the entirety with her husband and is subject to two deeds of trust. The first, in favor of PNC Mortgage Corporation, secures an indebtedness of $57,923.99. The second, in favor of First Union National Bank, secures an indebtedness in the amount of $20,000.
Gordon P. Peyton was appointed interim trustee. The first meeting of creditors was held on February 16, 1995. No objection was filed to any of the debtor's claimed exemptions, but on April 5, 1995, the trustee filed a praecipe with the clerk of this court advising "that there may be assets in this bankruptcy case" and requesting the clerk to give notice to creditors of the need to file claims. The debtor asserts, and the trustee does not deny, that on April 4, 1995, he mailed a letter to the debtor "stating that he was taking constructive possession of the residence with the intent to sell the home and use the proceeds to pay unsecured creditors." In response, the debtor filed the present motion to compel the trustee to abandon the property on the basis, first, that the debtor's interest in the property had been effectively exempted and is no longer the trustee's to sell, and second, that because the debtor has reaffirmed all of her joint debts, there is no legal basis for the trustee to sell the property, as he can only sell it to pay the claims of joint creditors. In addition to the two deeds of trust against the real estate, the schedules list six unsecured creditors holding joint claims against the debtor and her husband in the aggregate amount of $14,445.29. Only one such debt (in the amount of $5,614.09) is the subject of a reaffirmation agreement filed with this court. The debtor received a discharge on May 11, 1995. The debtor asserts in argument that additional debts have or are being reaffirmed, and that the debtor's intent is to reaffirm all the joint debts, but no evidence was offered to support such assertion.
The schedules also list $19,443.52 in non-joint unsecured claims.
Conclusions of Law
This court has jurisdiction of this matter under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B).
Under § 541(a) of the Bankruptcy Code, the commencement of a bankruptcy case creates an estate comprised "of all of the following property, wherever located and by whomever held: (1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case." This includes a debtor's interest in property held as tenants by the entireties. Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981). Under § 554(a), the trustee, after notice and a hearing, may abandon property "that is burdensome to the estate or that is of inconsequential value." Additionally, under § 554(b),
On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.
The issues raised by the parties in this case are two-fold: first, whether a debtor can defeat a trustee's right under Sumy v. Schlossberg, 111 F.2d 921 (4th Cir. 1985) to administer real estate held as tenants by the entireties for the benefit of joint creditors of a debtor and a non-filing spouse simply by reaffirming the joint debts; and second, whether the trustee's right under Sumy to administer such property over a debtor's claim of exemption relieves the trustee from the duty under F.R.Bankr.P. 4003(b) and Taylor v. Freeland Kronz, — U.S. —, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), to file an objection to the claim of exemption within 30 days of the meeting of creditors.
I.
As to the first issue, the debtor argues that because Sumy, supra, was a response to the potential for the perpetration of a "legal fraud" on creditors holding joint claims against a husband and wife, the policy reasons underpinning the decision are inapplicable. Sumy addressed the situation where a husband and wife with joint debts own real estate as tenants by the entireties, but only one files for bankruptcy. Under Virginia law, real estate held as tenants by the entireties is not liable for the debts of either spouse alone but can only be reached for their joint debts. Vasilon v. Vasilon, 192 Va. 735, 66 S.E.2d 599 (1951). Under § 522(b)(2)(B) of the Bankruptcy Code, a debtor may exempt an interest in property held as tenants by the entirety to the extent such property may be exempted under state law. If only one spouse were to file for bankruptcy and receive a discharge, then the formerly-joint creditor would have a legally-enforceable claim only against the non-filing spouse, and would thereby be deprived of the right to reach the tenancy by the entireties property. To prevent such an abuse, which it characterized as a "legal fraud," the Fourth Circuit has long allowed a joint creditor, where only one spouse has filed, to seek relief from the automatic stay and a stay of the debtor's discharge in order to obtain a judgment that could be enforced against the tenancy by the entireties property. Phillips v. Krakauer, 46 F.2d 764 (4th Cir. 1931) (decided under former Bankruptcy Act); Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057 (4th Cir. 1983) (same result under Bankruptcy Code).
"(b) . . . a debtor may exempt from property of the estate . . . (2) . . . (B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law."
In Sumy, the Fourth Circuit held that while Krakauer and Bondurant remained viable remedies, "judicial economy would be better served by a single proceeding in bankruptcy court," and that "to the extent the debtor and the nonfiling spouse are indebted jointly, 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)." 777 F.2d at 932.
Section 363(h) allows a trustee, with court approval, to sell both the interest of the debtor and of a non-debtor co-owner if certain conditions are met. Under F.R.Bankr.P. 7001, such approval must be requested by filing an adversary proceeding.
Thus, where, as here, there is apparently substantial equity in the real estate sufficient to pay all joint claims, the trustee arguably has a duty to seek authority under § 363(h) to sell the interest both of the debtor and her husband and to pay the joint debts out of the proceeds. While the trustee might well have the discretion — particularly where joint debts are few or small in amount in relationship to the total indebtedness — not to seek such approval in an otherwise no-asset case where the debtor had reaffirmed all the joint debts, reaffirmation cannot defeat the trustee's rights. The trustee has a statutory duty under § 704 of the Bankruptcy Code to collect and reduce the property of the estate to money in order to pay the claims of creditors. A debtor's reaffirmation of a debt is nothing more than a promise of repayment and offers no guarantee to the creditor, even though, in the case of joint debts, it does preserve the creditor's right, in the event of a default in payment, to obtain a joint judgment that would then become a lien against the jointly-held real estate. As Judge Tice of this court has noted in another context, "The parties would no longer be under the jurisdiction of this court nor the Bankruptcy Code . . . [and] the creditors would lose the guarantee of repayment. In the absence of affirmative consent of the creditors, this lost guarantee constitutes plain legal prejudice." In re: Komyathy, 142 B.R. 755, 757 (Bankr.E.D.Va. 1992) (denying debtor's motion for voluntary dismissal of chapter 7 case after learning of inheritance where trustee objected and creditors did not affirmatively consent).
Moreover, as a purely factual matter, the debtor, who has the burden of proof as the moving party, has not shown that she has effected valid and binding reaffirmations of each of the joint debts listed on her schedules. Under § 523(c) of the Bankruptcy Code, which governs reaffirmation agreements, any such agreement must be entered into prior to the granting of a discharge; must be filed with the bankruptcy court; must contain a "clear and conspicuous" statement advising the debtor that the agreement may be rescinded any time prior to discharge or within 60 days of the date it was filed with the court, whichever occurs later; must contain a "clear and conspicuous" statement that the agreement is not required under bankruptcy or non-bankruptcy law; and, where the debtor is represented by counsel, must be accompanied by an affidavit that the agreement represents a fully informed and voluntary agreement by the debtor, that the agreement will not impose an undue hardship on the debtor or a dependent of the debtor, and that the attorney fully advised the debtor of the legal effect and consequences of the agreement. At the time of the hearing on the debtor's motion, the foregoing requirements had been met with respect only to one of the six joint debts, and the debtor has received her discharge. Consequently, even if reaffirmation were available as a defense to the trustee's attempted administration of tenancy by the entireties property, such defense has not been established in this case.
In the context of the present case, the court need not decide to what extent such reaffirmation would weigh in the delicate calculus under § 363(h)(3) of whether "the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners" if the trustee were seek approval to sell the interest both of the debtor and her husband. This opinion should not be read as holding that the filing spouse's reaffirmation of all the joint debts would not be relevant, only that it would not, standing by itself, be determinative of the issue.
II.
As noted above, the debtor listed her interest in the tenancy by the entireties real estate on the schedule of property claimed as exempt (Schedule C) filed in her case, thereby complying with the requirements of § 522(1) and F.R.Bankr.P. 4003(a). Section 522(1) provides, "Unless a party in interest objects, the property claimed as exempt on such list is exempt." Under F.R.Bankr.P. 4003(b) ("Objections to Claim of Exemptions"),
"The debtor shall file a list of property that the debtor claims as exempt . . ."
"A debtor shall list the property claimed as exempt under § 522 of the Code on the schedule of assets required to be filed by Rule 1007."
The trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a) or the filing of any amendment to the list or supplemental schedules unless, within such period, further time is granted by the court.
In Taylor v. Freeland Kronz, — U.S. —, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), the Supreme Court held that the rule means precisely what it says, and that where a chapter 7 trustee had failed to file a timely objection to the debtor's claimed exemption in the proceeds of a pending lawsuit, the trustee lost any claim to such proceeds "whether or not [the debtor] had a colorable statutory basis for claiming it." 112 S.Ct. at 1648. Taylor could hardly be clearer and controls this case. Indeed, while Sumy pre-dates Taylor, nothing in Sumy even hints that the court intended to relieve a trustee from the duty to object to a claimed exemption in tenancy by the entireties property where there were joint debts and the trustee wished to administer the property for the benefit of the joint creditors. Indeed, the issue in Sumy arose precisely because the trustee had objected to the debtor's claimed exemption in tenancy by the entireties property. 777 F.2d at 922. Consequently, the court is constrained to hold that the trustee in this case, not having filed a timely objection to the debtor's claimed exemption of her interest in the real estate, cannot now administer such interest as property of the bankruptcy estate.
Since the debtor claimed her entire interest in the property as exempt, and since, because no objection was timely filed, the property is no longer property of the estate, there is nothing for the trustee to administer. It could be argued, possibly, that abandonment is not technically the appropriate remedy, since logically a trustee cannot abandon something he or she does not own. But where, as here, a trustee actively asserts a right to administer such property, the debtor is entitled to have the issue resolved. It is clear that property which has been fully exempted by the debtor is "of inconsequential value and benefit to the estate." § 544(b). Accordingly, the court concludes that the trustee should be required to abandon the property in order to eliminate what would otherwise be a cloud on the debtor's title.
III.
There remains the issue of attorneys fees which the debtor has sought against the trustee for the cost of bringing the motion to compel abandonment. No authority is cited for the award of such fees, but the court construes the request as one for sanctions under F.R.Bankr.P. 9011. For two reasons, the court finds sanctions inappropriate and declines to award them. First, the trustee has not filed any pleadings affirmatively seeking to administer the debtor's interest in the real estate. His only action was a letter to the debtor asserting "constructive possession" of the property and a request to the clerk of court to send a notice to creditors of possible assets and the need to file proofs of claim. The debtor's motion to compel abandonment is in effect a pre-emptive strike. Second, and more to the point, although the holding of Taylor v. Freeland Kronz is clear and authoritative as it relates to the necessity for the trustee to file a timely objection to the debtor's claimed exemptions, the outer perimeters of the rule are far from clear. Within this District, for example, Taylor has been distinguished where the debtor has assigned only a nominal (typically, $1.00 or $10.00) value to an asset claimed as exempt, and the trustee, without having to file an objection to the exemption, has been allowed to administer the asset to the extent its value is determined to exceed the nominal valuation. In re: Grablowsky, 149 B.R. 402 (Bankr.E.D.Va. 1993), aff'd sub. nom. Addison v. Reavis, 158 B.R. 53 (E.D.Va. 1993). The precise question raised by the trustee — whether Sumy's holding that an exemption cannot be claimed under § 522(b)(2)(B) in tenancy by the entireties property to the extent of joint debts permits the trustee to administer such property free from the requirement to object to the claimed exemption — has not been ruled upon in any published opinion in this District. A chapter 7 trustee, as representative of the debtor's estate, has a fiduciary duty to the creditors to realize what he or she can for their benefit, and the court would be loath to possibly intimidate trustees from good faith efforts to fulfil that duty by imposing sanctions simply because an untested theory did not carry the day. Even though the court has ruled against the trustee on the dispositive issue, it has ruled in the trustee's favor on the debtor's alternate position, and the court is unable to conclude that the trustee's position was frivolous or wholly without justification. Accordingly, sanctions in the form of attorneys fees for the cost of bringing the motion to compel will not be awarded.
An appropriate order will be entered consistent with this opinion.