Edmonston v. Murphy

• Court: Court of Appeals for the First Circuit
• Decided: February 27, 1997
• Docket: 96-1840
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT



        No. 96-1840



                                        IN RE



                                 DAVID B. EDMONSTON,



                                        Debtor

                                                
                                      __________


DAVID B. EDMONSTON,



                                      Appellant,



                                          v.



                                  HAROLD B. MURPHY,



                                      Appellee.



                                                     
                                 ____________________


APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                   [Hon. Reginald C. Lindsay, U.S. District Judge]
                                              ___________________



                                                     
                                 ____________________



                                        Before



                            Cyr and Lynch, Circuit Judges,
                                           ______________



                         and McAuliffe,* U.S. District Judge,
                                         ___________________



                                                     
                                 ____________________


George R. Desmond for appellant. 
             _________________

             Andrew  G. Lizotte,  with whom  Hanify  & King  was on  brief for
             __________________              ______________

        appellee. 

                                                     
                                 ____________________



                                  February 26, 1997

                                                     
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             *Of the District of New Hampshire, sitting by designation.



CYR, Circuit  Judge.  Chapter 7  debtor David Edmonston
                    CYR, Circuit  Judge
                         ______________



          challenges a  bankruptcy court  ruling disallowing  his exemption



          claim to  entireties property     the primary residence  owned by



          him  and his nondebtor spouse since 1980.  Edmonston duly claimed



          the residence  exempt, see Bankruptcy Code    522(b)(2)(B); Mass.
                                 ___



          Gen. Laws  ch. 209,    1, estimated  its value  at $200,000,  and



          indicated that he and his nondebtor spouse were jointly obligated



          under  the  $59,000  real   estate  mortgage  and  for  unsecured
                                                                  _________



          indebtedness  totaling  at least  $10,000.    In due  course  the



          chapter 7  trustee objected to the exemption  claim and Edmonston



          responded  by contesting both the merits of the objection and the



          trustee's "standing"  to assert  it.  Ultimately,  the bankruptcy



          court  disallowed  the   exemption  claim,  the   district  court



          affirmed, and Edmonston appealed.  



                                          I.
                                          I.



                    As the facts  are not  in dispute, we  conduct de  novo
                                                                   __  ____



          review of the conclusions of law challenged on appeal.  See In re
                                                                  ___ _____



          Caron, 82  F.3d 7, 9 (1st  Cir. 1996).  First,  however, we chart
          _____



          the legal terrain underlying the contested conclusions of law.  



                    An interest in property held in tenancy by the entirety



          is exempt in bankruptcy "to the  extent . . . exempt from process



          under applicable nonbankruptcy law," 11 U.S.C.   522(b)(2)(B), in



          this instance  Massachusetts  law.   See Napotnik  v. Equibank  &
                                               ___ ________     ___________



          Parkvale  Sav. Assoc., 679 F.2d  316, 318 (3d  Cir. 1982) ("Since
          _____________________



          property law in general and the law of co-tenancies in particular



          are creatures of state law, the 'applicable nonbankruptcy law' is


2



the  applicable  [state]  law  of  tenancy  by  the  entirety.").



          Commonwealth law provides that "[t]he interest of a debtor spouse



          in property held as tenants by the entirety  shall not be subject



          to seizure  by a creditor of  such debtor spouse so  long as such



          property  is the  principal residence  of the  nondebtor spouse."
                                                         _________



          Mass. Gen. Laws  ch. 209,   1 (1987) (emphasis  added).1  Thus, a



          creditor  with  a  claim against  both  tenants  by the  entirety
                                            ____



          ("joint creditor")  may reach and apply  the entireties property.



          See Coraccio v. Lowell Five Cents Sav. Bank, 612 N.E.2d  650, 654
          ___ ________    ___________________________



          (Mass. 1993) ("Nor, by virtue of G.L. c. 209,   1, may a creditor



          of  either  seize  the   principal  residence  absent  the  joint



          signature  of the spouses."); In  re McConchie, 94  B.R. 245, 247
                                        ________________



          (Bankr. D. Mass.  1988) ("[T]he  property is free  from levy  and



          execution from [sic] the creditor of one spouse  if the debts are



          not  joint  or  for  necessaries.").   Accordingly,  the  present



          exemption claim is unsupported by Commonwealth  law to the extent



          Edmonston and his  nondebtor spouse were jointly indebted.   See,
                                                                       ___



          e.g., Sumy  v. Schlossberg, 777 F.2d 921, 928 (4th Cir. 1985) ("A
          ____  ____     ___________



          debtor does not  lose all  benefit of    522(b)(2)(B) when  joint



          creditors are present,  but he does  not benefit from  it to  the



                              
          ____________________



               1Originally, chapter 209,   1, did not apply to tenancies by
               1

          the entirety created prior to  its effective date, viz., February
                                                             ____

          11, 1980.  Turner v. Greenway, 459 N.E.2d 821, 823 (Mass.  1984).
                     ______    ________

          See also In re Robbins, 187 B.R. 400, 402 (Bankr.  D. Mass. 1995)
          ___ ____ _____________

          ("Tenancies by  the entirety created  prior to February  11, 1980

          are governed  by the common  law.").  Subsequently,  however, the

          Massachusetts legislature enabled married couples whose tenancies

          by the entirety were created prior to February 11, 1980, to elect

          to come within  chapter 209,   1.  See Mass. Gen. Laws ch. 209,  
                                             ___

          1 (1987); Mass. Gen. Laws ch. 209,   1A (West Supp. 1996).



                                          3



extent of joint claims.").



                    Nevertheless,  an exemption claim  becomes effective by



          operation of law absent a cognizable objection.   See 11 U.S.C.  
                                                            ___



          522(l) ("Unless a party in interest objects, the property claimed



          as exempt on  such list is exempt."); Fed. R.  Bankr. P. 4003(b);



          see also  Taylor v. Freeland  & Kronz, 503  U.S. 638,  643 (1992)
          ___ ____  ______    _________________



          (property  listed as exempt by  debtor is exempt  unless party in



          interest objects within 30 days); Mercer v. Monzack, 53 F.3d 1, 3
                                            ______    _______



          (1st  Cir. 1995)  (property listed  as exempt  becomes exempt  by



          operation of  law absent timely objection), cert.  denied, 116 S.
                                                      _____  ______



          Ct. 1317 (1996).  Since no joint creditor objected to Edmonston's



          exemption  claim within  the  allotted time,  the present  appeal



          cannot succeed unless the chapter 7 trustee qualifies as a "party



          in interest" within the meaning of Bankruptcy Code   522(l).  



                    We  think  it clear  that  Bankruptcy  Rule 4003(b)    



          itself "derived  from   522(l)  of the  Code," Fed. R.  Bankr. P.



          4003,  Advisory  Committee Note      authoritatively  defines the



          section 522(l)  term "party  in interest," by  explicitly stating



          that the "trustee or any creditor may file objections to the list
                            __



          of  property claimed  as  exempt."   Fed.  R. Bankr.  P.  4003(b)



          (emphasis added).2  Moreover, the position we make explicit today

                              
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               2The Bankruptcy  Rules "govern" procedure  in all bankruptcy
               2

          proceedings unless inconsistent with either title 11 or title 28,

          United States Code.



                    Section 247  of Public  Law 95-598, 92  Stat.

                    2549  amended  28 U.S.C.     2075. .  .  . to

                    require  that  procedural  rules  promulgated

                    pursuant to  28 U.S.C.    2075 be  consistent
                                                       __________

                    with the bankruptcy  statute, both titles  11
                    ____



                                          4



simply gives voice to  the longstanding, implicit acknowledgement



          that a  chapter 7  trustee is  a "party  in interest" within  the



          meaning of section 522(l).  See, e.g., Taylor, 503 S. Ct. at 642-
                                      ___  ____  ______



          43  (as trustee  waived right  to oppose  exemption claim  by not



          objecting  within  30-day  period  prescribed  by  Rule  4003(b),



          property  became  exempt  by operation  of     522(l));  Petit v.
                                                                   _____



          Fessenden, 80 F.3d  29, 32-33  (1st Cir. 1996)  (failure to  file
          _________



          timely schedules relieved trustee of duty to object, as there was



          no "list of  property claimed as  exempt" to be  opposed under   



          522(l) and Rule 4003(b)). 



                    As  "the representative  of  the estate,"  11 U.S.C.   
                         ___



          323(a) (emphasis added), the chapter 7 trustee is under a duty to



          "collect and reduce to money the property of the estate."   Id.  
                                                                      ___



          704(1).3  See First Nat'l Bank of Mobile v. Norris, 701 F.2d 902,
                    ___ __________________________    ______

                              
          ____________________



                    and 28  U.S.C.   Thus, .  . .  any procedural

                    matters contained  in title  11 or  28 U.S.C.

                    with respect to  cases filed under  11 U.S.C.

                    would control.   See 1 Collier, Bankruptcy   
                                     ___

                    3.04[2][c] (15th ed. 1980).



          Advisory Committee Note (1983) (emphasis added).



               Edmonston neither  contends nor intimates that  Rule 4003(b)

          is in any  respect inconsistent with either  title 11 (Bankruptcy

          Code)  or title 28 (Judiciary and Judicial Procedure).  Nor do we

          discern any pertinent inconsistency.  On the contrary,  given the

          mandate  in  Bankruptcy Code    704  ("The  trustee shall     (1)

          collect and reduce to money the property of the estate . . . ."),

          any  suggestion that  a chapter  7 trustee  is not  required, let

          alone permitted,  to oppose an unallowable  exemption claim would

          be  totally  at  odds  with  the  chapter  7  trustee's principal

          statutory responsibility, as "the representative  of the [chapter
                                        ___

          7] estate," id.   323(a) (emphasis added). 
                      ___



               3Edmonston  does not  dispute that  the entireties  property

          became  "property  of the  estate" by  operation  of law,  see 11
                                                                     ___

          U.S.C.   541(a)(2)(B) (including in estate all property of debtor



                                          5



904  (11th Cir. 1983); In re Brooks,  12 B.R. 22, 24 (Bankr. S.D.
                                 ____________



          Ohio 1981).   Thus,  the statutory  duty to  administer nonexempt



          property of the chapter 7 estate implicitly empowers  the trustee



          to screen and oppose exemption claims which may not be allowable.



          See  Fed. R. Bankr.  P. 4003(b); see  also In re  Atlas, 183 B.R.
          ___                              ___  ____ ____________



          978, 980 (Bankr. S.D. Fla. 1995) (citing 11 U.S.C.   704; Fed. R.



          Bankr. P. 4003(b)).



                    We accordingly hold that the trustee, as the designated



          representative of the chapter 7 estate, 11 U.S.C.   323(a), whose



          duties include  the collection  and liquidation of  the nonexempt



          property  of  the  estate, see  id.     704(1),  is  a "party  in
                                     ___  ___



          interest" entitled  to oppose exemption  claims under  Bankruptcy



          Code   522(1).  See also In re Van Rye, 179 B.R. 375, 378 (Bankr.
                          ___ ____ _____________



          D. Mass. 1995)  (holding that  "the Trustee, in  his capacity  as



          representative  of  the  estate,   has  standing  to  object"  to



          exemption claims), aff'd, 96 F.3d 1430 (1st Cir. 1996) (Table).  
                             _____



                                         II.
                                         II.



                    Edmonston  further  contends  that  since  a chapter  7



          discharge can only relieve indebtedness of the chapter 7  debtor,



          joint creditors may still proceed directly against the entireties



          property itself because their claims against the nondebtor spouse


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          and  spouse which is "liable  for an allowable  claim against the

          debtor,  or  for an  allowable claim  against  the debtor  and an

          allowable  claim against the debtor's spouse,  to the extent that

          such  interest  is  so  liable"),  and  thus  became  subject  to

          administration under chapter 7 unless exempt.



                                          6



would be  unaffected by Edmonston's chapter 7  proceeding.4  This



          claim impermissibly assumes that the chapter 7 debtor is entitled



          to  have  the entireties  property set  apart  as exempt,  on the



          theory that joint creditors  would retain their respective rights



          to proceed against the entireties property under Commonwealth law



          in  any event.    As all  relevant  reported cases  make  clear,5



          assuming  a proper objection by a party in interest an entireties



          exemption  claim is  invalid ab  initio to  the extent  there are
                                       __  ______



          joint creditors.  Thereupon, as nonexempt property of the chapter



          7   estate   the   entireties   property   becomes   subject   to



          administration.     



                                         III.
                                         III.



                    For the foregoing reasons,  the district court order is

                              
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               4In assailing the Fourth Circuit's holding in Sumy, 777 F.2d
                                                             ____

          at  929-32    that the  entireties property was  not exempt under

          Bankruptcy  Code    522(b)(2)(B)     Edmonston  misapprehends the

          court's rationale.  The holding was  not based on a "legal fraud"

          rationale,  as  Edmonston  suggests,  but on  Bankruptcy  Code   

          522(b)(2)(B) and applicable  state law.   Sumy, 777  F.2d at  929
                                                    ____

          (rejecting   entireties  exemption   claim  "by   interpreting   

          522(b)(2)(B) in light of state law"). 



               5Other courts of appeals which have weighed in on the matter

          are in accord,  see Sumy, 777 F.2d at 932;  In re Grosslight, 757
                          ___ ____                    ________________

          F.2d  773,  776-77  (6th  Cir.  1985);  Napotnik  v.  Equibank  &
                                                  ________      ___________

          Parkvale Sav. Assoc., 679  F.2d 316, 321 (3d Cir.  1982); compare
          ____________________                                      _______

          Paeplow v. Foley, 972 F.2d 730, 737 (7th Cir. 1992) (by virtue of
          _______    _____

          Indiana Code   34-2-28-1(a)(5),  entireties property is exempt in

          bankruptcy, regardless of presence of joint creditors, as long as

          only  one  spouse files  bankruptcy  petition);  so too  are  the

          bankruptcy  courts (except in  Indiana) which have  done so, see,
                                                                       ___

          e.g., In re Duncan, 201 B.R. 889, 898 (Bankr. W.D.  Pa. 1996); In
          ____  ____________                                             __

          re  Harry,  151 B.R.  735, 737  (Bankr.  W.D. Vir.  1992);  In re
          _________                                                   _____

          Wickham, 130 B.R. 35, 38 (Bankr.  E.D. Vir. 1991); In re Cerreta,
          _______                                            _____________

          116  B.R. 402, 405-06 (Bankr.  D.Vt. 1990); In  re Geoghegan, 101
                                                      ________________

          B.R. 329,  330-31 (Bankr. M.D. Fla. 1989);  In re Sefren, 41 B.R.
                                                      ____________

          747, 748 (Bankr. D.Md. 1984); see also Sumy, 777 F.2d at 929 n.16
                                        ___ ____ ____

          (collecting cases).



                                          7



affirmed, with costs to appellee, and the case is remanded to the



          bankruptcy  court for  further proceedings  consistent with  this



          opinion.



                    SO ORDERED.
                    SO ORDERED
                    __ _______


8