Van Der Heide v. LaBarge (In Re Van Der Heide)

219 B.R. 830, 1998 Bankr. LEXIS 438, 1998 WL 172765

• Court: United States Bankruptcy Appellate Panel for the Eighth Circuit
• Decided: April 15, 1998
• Docket: BAP 97-6090EM
• Status: Published

Opinions

KRESSEL, Bankruptcy Judge.

The debtor, Gerard Van Der Heide, appeals an order of the bankruptcy court¹ denying confirmation of his Chapter 13 plan . and dismissing his case. We affirm.

BACKGROUND

Van Der Heide filed his Chapter 13 ease on January 7, 1997. In his plan, Van Der Heide proposed to pay general unsecured creditors $2,858. The trustee objected to confirmation, claiming that Van Der Heide’s plan did not satisfy 11 U.S.C. § 1325(a)(4)’s “best interests of creditors” test since unsecured creditors were not receiving as much as they would under a Chapter 7 liquidation.²

The basis for the trustee’s objection — and the subject matter of this litigation — involves a parcel of real estate which Van Der Heide owns, along with his wife, as tenants by the entirety. In their submissions to the court, the parties agreed that a hypothetical sale of the property would yield $24,495.³ What the parties did not agree on is how the proceeds would be distributed in a Chapter 7 case. Van Der Heide contended that only one-half of the net proceeds — $12,248—was available for distribution to creditors, since his’wife owns a one-half interest in the entireties property. From this amount, Van Der Heide further argued that he was entitled to deduct $9,900 in exemptions, leaving $2,348 for unsecured creditors.⁴ Since his plan provided for an even larger distribution to unsecured creditors than the hypothetical liquidation, Van Der Heide argued that he had satisfied 11 U.S.C. § 1325(a)(4)’s “best interests of creditors” test.

The trustee, by contrast, argued that all of the sale proceeds were available for distribution, subject only to a deduction for Van Der Heide’s $9,900 exemption. ■ According to the trustee’s calculations, unsecured creditors were entitled to recover $14,595. Persuaded by this analysis, the bankruptcy court denied confirmation of the plan and directed Van Der Heide to file an amended plan meeting the trustee’s objections within 20 days or face dismissal. When Van Der Heide failed to file an amended plan, the court dismissed his case.

DISCUSSION

On appeal, Van Der Heide argues that the bankruptcy court erred in determining that his plan did not satisfy the best interests of creditors test. We review the bankruptcy court’s legal conclusions de novo. First Nat’l Bank of Olathe v. Pontow, 111 F.3d 604, 609 (8th Cir.1997); Chamberlain v. Kula (In re Kula), 213 B.R. 729, 735 (8th Cir. BAP 1997).

Van Der Heide makes three principal arguments on appeal. First, Van Der Heide argues that his residence, as tenancy by the entireties property, is not property of the estate. Second, Van Der Heide argues that the property is exempt from attachment by creditors. Finally, even if the court concludes that the residence is property of the estate subject to attachment, Van Der Heide maintains that he owns only a one-half interest in the property.

Property of the Estate

On appeal, Van Der Heide argues that his entireties property is not property of the. estate. 11 U.S.C. § 541(a)(1) defines property of the estate as “all legal or equitable interests of the debtor in property as of the commencement of the case.” In Garner v. Strauss (In re Garner), 952 F.2d 232 (8th Cir.1991), the Eighth Circuit was called upon to decide whether stock held in tenancy by the entirety came into the bankruptcy estate. The court concluded that “[sjection 541(a)(1) ‘is certainly broad enough to include an individual debtor’s interest in property held as a tenant by the entirety.’ ” Id. at 234 (quoting Napotnik v. Equibank & Parkvale Savs. Ass’n, 679 F.2d 316, 318 (3d Cir.1982)); see also In re Grosslight, 757 F.2d 773, 775 (6th Cir.1985).⁵ Van Der Heide’s residence is property of the estate.

Exempt Property

Van Der Heide also argues , that his residence is exempt from attachment by creditors. 11 U.S.C. § 522(b)(2)(B) allows a debt- or to exempt property held in tenancy by the entirety only if state nonbankruptcy law provides for an exemption: “[A]n individual debtor may exempt from property of the estate ... 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.” 11 U.S.C. § 522(b)(2)(B).

In Missouri, creditors may reach entireties property only if the obligations have been jointly incurred. See Garner, 952 F.2d at 235 (“[Ujnder Missouri law, for a creditor to reach tenancy by the entirety property, the spouses must have jointly acted to burden the property.”); Landmark Bank v. Charles (In re Charles), 123 B.R. 52, 55 (Bankr.E.D.Mo.1991) (“[Ujnder Missouri law, entireties property is not exempt from process to the extent of joint debts.”); Matter of Estate of Savage, 650 S.W.2d 346, 351 (Mo.Ct.App.1983) (holding that property held in tenancy by the entirety “is not subject to a lien or attachment for the debt of one tenant.”) (emphasis added). Since the parties stipulate that Van Der Heide’s debts were jointly incurred with his wife, the property is not exempt from attachment by joint creditors.

Debtor’s Interest in Entireties Property

Since the property in question is homestead property incapable of partition, a Chapter 7 trustee would be entitled to sell both the debtor’s and his wife’s interest in the property. 11 U.S.C. § 363(h). After such a sale, the trustee would be obligated to distribute the net proceeds to the debtor’s wife, according to her interest and the interest of the estate. 11 U.S.C. § 363(j); Garner, 952 F.2d at 236 n. 5. Van.Der Heide argues that a Chapter 7 trustee would distribute one-half of the sale proceeds to his wife since she owns a one-half interest in the property. However, Missouri courts have routinely concluded that each tenant by the entirety owns an indivisible interest in the whole estate. See Ronollo v. Jacobs, 775 S.W.2d 121, 123 (Mo.1989) (en banc) (“Each spouse is seized of the whole or entirety and not a share, moiety or divisible part. Thus, neither spouse owns an undivided half interest in entirety property; the whole entirety estate is vested and held in each spouse....”); Nelson v. Hotchkiss, 601 S.W.2d 14, 20 (Mo.1980) (en banc) (“In an estate of the entirety the husband and the wife ... each owns, not a part, or a separate or a separable interest, but the whole____”) (quoting Wilson v. Frost, 186 Mo. 311, 85 5.W. 375, 377 (1905)); In re Estate of Morton, 822 S.W.2d 456, 459 (Mo.Ct.App.1991) (“In a tenancy by the entirety, husband and wife each own the whole property.”); see also Grant v. Himmelstein (In re Himmelstein), 203 B.R. 1009, 1016 (Bankr.M.D.Fla.1996 ) (“This court does not find that an interest in tenancy by the entireties is equivalent to one half of the equity in the property, but rather finds that the tenant’s interest comprises an inseverable interest in the whole. Therefore, if a joint judgment creditor exists, all of the equity in the entireties property comes into the estate and is distributed to all joint judgment creditors and the remaining equity is exempt.”). In keeping with Missouri case-law, we conclude that Van Der Heide possesses an indivisible interest in the whole residence. As such, one hundred percent of the property is property of the estate, and the trastee is entitled to distribute all of the proceeds to joint creditors.⁶

In reaching our decision, we note that the majority of circuits have allowed joint creditors to reach the non-filing spouse’s interest in tenancy by the entireties property. See Edmonston v. Murphy (In re Edmonston), 107 F.3d 74, 75 (1st Cir.1997) (holding that a joint creditor “may reach and apply the en-tireties property.”); Liberty State Bank & Trust v. Grosslight (In re Grosslight), 757 F.2d 773, 776 (6th Cir.1985) (holding that joint' creditors could reach entireties property “because each spouse owns the whole estate .... ”); Napotnik v. Equibank & Parkvale Sav. Ass’n, 679 F.2d 316, 321 (3d Cir.1982) (“[W]e hold that a creditor with a joint judgment on a joint debt may levy upon the property itself and thus upon the interests of both spouses.”); see also In re Smith, 200 B.R. 213, 215 (Bankr.E.D.Mo.1996) (holding that debtors’ joint creditors “could access the entirety equity under Missouri non-bankruptcy law.”); In re Mayes, 141 B.R. 669, 671 (Bankr.E.D.Mo.1992) (directing - trustee to distribute proceeds from liquidation of debtors’ entireties property to joint creditors only).

In his dissent, the Chief Judge does not disagree with our analysis, but would conclude that the Eighth Circuit has held otherwise. Obviously, if the Eighth Circuit had held that a debtor owns only a one-half interest in tenancy by the entirety property, we would be bound to follow such a holding. However, we disagree that it has. In fact, we think it held exactly the opposite in Garner in the process of determining that tenancy by the entirety property is property of the estate. The Chief Judge relies on dicta at the end of the Garner opinion: “[I]n order to comply’with the intent of the Code, we order that one-half of the cash received for the stock be returned to [the debtor’s wife].” Garnr, 952 F.2d at 236. Although we recognize that this statement may suggest a contrary result from the one we reach today, we do not find this directive necessary or even germane to the Eighth Circuit’s holding. The Gamer court was not called upon to determine the respective interests of tenants by the entirety, but to decide whether entireties property becomes property of the estate when only one spouse files for bankruptcy. We also note that the court itself remarked that its ruling “leaves open the question of the trustee’s disposition of the stock.” Garner, 952 F.2d at 235. Therefore, we respectfully treat the passage awarding the non-filing spouse one-half of the proceeds as dicta, intended only to resolve the disposition of the stock in that case.⁷

The dissent also suggests that Bankruptcy Code provisions providing for partition or distribution of the proceeds to the estate and the debtor’s spouse according to their interests requires the division of the property or its proceeds as appropriate into two equal halves, one for the estate and one for the debtor’s spouse. With respect, we think that begs the question. The Bankruptcy Code says nothing about equal division, only partition or division according to their interests. The interests referred to are those created by state law. As we have already discussed, under Missouri law, the estate and the debt- or’s spouse each are owners of 100% of the property and its proceeds and to the extent joint creditors file claims, the proceeds would be distributable to the estate. See supra, note 5.

CONCLUSION

Since the bankruptcy court did not err in determining that Van Der Heide failed to satisfy 11 U.S.C. § 1325(a)(4), we affirm the denial of confirmation of his plan and dismissal of his case.

1 . The Honorable Barry S. Schermer, United States Bankruptcy Judge for the Eastern District of Missouri.

2 . 11 U.S.C. § 1325(a)(4) directs the court to confirm a plan if:

the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 1....

3 . This figure is reached by subtracting a 7% real estate commission of $5,005 and $42,000 in mortgage debt from the fair market value of $71,500.

4 . Pursuant to Missouri law, Van Der Heide is -seeking $8,000 in homestead exemptions and $1,900 in wildcard exemptions.

5 . 11 U.S.C. § 522(b)(2)(B) provides an alternative basis for bringing entireties property into the bankruptcy estate. Section 522(b)(2)(B) states that:

[n]otwithstanding section 541 of this title, an individual debtor may exempt from property of the estate ...

(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.

”[B]y allowing an individual debtor to exempt certain interests as a tenant by the entirety, Congress intended that such interests be included in the estate in the first place.” Garner, 952 F.2d at 234.

6 . "When entireties property is sold, the proceeds are entireties property, and are distributable to joint creditors of the husband and wife. Any surplus is claimable as an exception under Code section 522(b)(2)(B).” 5 Collier on Bankruptcy ■¶ 541.05[6][a] (Lawrence P. King ed., 15th ed.1998).

7 . In the wake of the Eighth Circuit’s opinion, several bankruptcy courts have expressly cited Gamer for the proposition that joint creditors may reach the entire proceeds of entireties property. See In re Smith, 200 B.R. 213, 215 (Bankr.E.D.Mo.1996) (holding that "it is clear that the Debtors’ joint creditors could access the entirety equity.... Garner, supra.”); In re Mayes, 141 B.R. 669, 671 (Bankr.E.D.Mo.1992) (”[T]he funds held by the Trustee that were derived from the liquidation of the Debtors’ entireties property shall first be distributed to the Debtors’ joint creditors who have filed timely claims, less administrative expenses and appropriate exemptions. ■ See In re Garner, 952 F.2d 232 (8th Cir.1991).’’); see also Riske v. Oliver (In re Oliver), 172 B.R. 924, 926 (Bankr.E.D.Mo.1994) ("[Wjhen the bankruptcy case of one spouse includes debts that are joint obligations with the other spouse ... the trustee in the debt- or/spouse’s case may administer upon entirety property as an asset of the bankruptcy estate.”).