Gerard Van Der Heide v. John v. LaBarge, Jr. ( 1998 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 97-6090EM
In re: Gerard Van Der Heide, *
*
Debtor. *
*
*
Gerard Van Der Heide, * Appeal from the
United States
* Bankruptcy Court for the
Appellant, * Eastern District
of Missouri
*
v. *
*
*
John V. LaBarge, Jr., *
*
Appellee. *
Submitted: February 18, 1998
Filed: April 15, 1998
Before KOGER, Chief Judge, KRESSEL and DREHER, Bankruptcy
Judges.
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.
1
The Honorable Barry S. Schermer, United States Bankruptcy Judge for the Eastern
District of Missouri.
BACKGROUND
Van Der Heide filed his Chapter 13 case 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
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 7. . . .
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.
2
liquidation, Van Der Heide argued that he had satisfied 11
U.S.C. § 1325(a)(4)’s “best interests of creditors” test.
3
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 (B.A.P. 8th Cir. 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
4
whether stock held in tenancy by the entirety came into the
bankruptcy estate. The court concluded that “[s]ection
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 &
5
Parkvale Sav. 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 debtor 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 (”[U]nder 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) (“[U]nder
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
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
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.
7
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.3d 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, 85 S.W. 375, 377 (Mo. 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 caselaw, we conclude that Van Der Heide
possesses an indivisible interest in the whole residence. As
8
such, one hundred percent of the property is property of the
estate, and the trustee 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
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).
9
Edmonston v. Murphy (In re Edmonston), 107 F.3d 74, 75 (1st
Cir. 1997) (holding that a joint creditor “may reach and apply
the entireties 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].” Garner, 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
Garner 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
10
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
7
In the wake of the Eighth Circuit’s opinion, several bankruptcy courts have expressly
cited Garner 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) (“[W]hen the bankruptcy case of one spouse
includes debts that are joint obligations with the other spouse . . . the trustee in the
debtor/spouse’s case may administer upon entirety property as an asset of the bankruptcy
estate.”).
11
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 debtor’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.
KOGER, Chief Judge, dissenting
I respectfully dissent. While I do not disagree with the
majority’s analysis (as they state), I believe that the Eighth
Circuit’s decision in Garner v. Strauss (In re Garner), 952
F.2d 232 (8th Cir. 1991), compels a different result in this
case.
12
Clearly, the majority’s analysis is correct in its
determination that the entireties property is property of the
debtor’s estate. I also agree that it is not exempt to the
extent that the debtor has joint creditors with his non-debtor
spouse and that the property can be sold by the trustee
pursuant to §363. Where I disagree with the majority is in how
the proceeds are to be distributed once the property is sold.
This disagreement is a result of my interpretation of the
Eighth Circuit’s directive in Garner, which differs from the
majority’s interpretation. Essentially, I disagree with the
majority’s conclusion that Garner’s directive regarding the
non-debtor spouse’s share of the entireties proceeds is mere
dicta. According to the majority, the Garner Court was not
called upon to determine the respective interests of the
parties, but to decide solely whether entireties property
becomes property of the estate when only one spouse files
bankruptcy.
The majority opinion states that the Garner Court remarked
that its ruling “leaves open the question of the trustee’s
disposition of the stock.” Garner, 952 F.2d at 235. However,
rather than leaving that question open, I believe the Garner
Court then went on to immediately answer that question. The
paragraph containing that phrase reads in its entirety:
Having failed to qualify as exempt under section
522(b)(2)(B) of the Bankruptcy Code, the stock at
issue is part of [the debtor’s] bankruptcy estate
pursuant to section 541(a) of the Code. Our ruling,
however, leaves open the question of the trustee’s
disposition of the stock. If liquidation is the
intent of the trustee, as is the case here, 11 U.S.C.
§ 363 (1988) governs the trustee’s disposition of the
stock.
Id. As I read this passage, the Court did not leave the
question regarding the trustee’s disposition of the entireties
13
property for another day; rather, the Court answered the
question in the very next sentence, specifically holding that
§ 363 governs the trustee’s disposition of the asset.
Even more telling is that the Eighth Circuit then went on
to make its analysis under § 363. As I interpret Garner, that
analysis is as follows:
Where partition is impracticable, § 363(h) permits the
sale of both the debtor’s interest (the estate’s interest) and
the non-debtor spouse’s interest in entireties property. Id.
The Court noted that the entireties property in that case,
stock, could have been relatively easily
14
partitioned, implying that a sale would not have been
necessary. Id. at 236. Unfortunately, the stock had already
been sold.
Because the stock here, however, has already
been liquidated, it cannot be partitioned in
accordance with section 363. Thus, in 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 non-debtor spouse]. Returning one-
half of the proceeds from the sale of the stock
shares to [the non-debtor spouse] does not insulate
her from creditors pursuing whatever actions they
possess against her.
Id. (footnotes omitted). This is a plain order compelling one-
half of the proceeds to be returned to the non-debtor spouse.
Nowhere in Garner is it suggested that the joint creditors are
to be satisfied out of the proceeds first. In fact, the Eighth
Circuit specifically suggested that such creditors would be
free to pursue the property in the hands of the non-debtor
spouse. Id. at 236. (“Returning one-half of the proceeds from
the sale of the stock shares to [the non-debtor spouse] does
not insulate her from creditors pursuing whatever actions they
possess against her”).
I recognize that the Garner Court was addressing an asset
which should have been partitioned, rather than sold, and that
in making this order the Garner Court may have been attempting
to put the parties into the same position they would have been
had the partition, rather than the sale, occurred. However,
in an important footnote, the Court went on:
We recognize that we could have ordered similar
action under 11 U.S.C. § 363(j) (1988), which
provides:
(j) After a sale of property to which
subsection (g) or (h) of this section applies,
the trustee shall distribute to the debtor’s
spouse or the co-owners of such property, as the
15
case may be, and to the estate, the proceeds of
such sale, less the costs and expenses, not
including any compensation of the trustee, of
such sale, according to the interests of such
spouse or co-owners, and of the estate.
Had it been impracticable to partition the stock, we
would have certainly ordered the trustee to comply
with section 363(j). As noted in the text, however,
we have no evidence that the stock could not have
been partitioned. We choose to act under section
363(h)(1) and not under section 363(j), because the
former subsection does not subtract transactional
costs from the non-debtor’s property interest, while
the latter provision imposes such costs.
16
It would not be equitable to penalize [the non-debtor
spouse] by reducing her property interest simply
because the trustee liquidated the stock without
first attempting to comply with section 363(h)(1).
If, however, the bankruptcy court decides that
partitioning the stock would have been impracticable
and that none of the other section 363(h) limitations
apply, section 363(j) becomes the relevant statute.
Id. at 236 n.5. I interpret these comments by the Eighth
Circuit, in conjunction with the order to return half of the
proceeds to the non-debtor spouse, to compel the non-debtor
spouse’s share of the proceeds be distributed to her after a
sale of entireties property by the trustee. Nowhere in §
363(j) or Garner is it suggested that the joint creditors are
to be satisfied out of the proceeds first.
Moreover, while I recognize that several other circuits
and bankruptcy courts have agreed with the majority’s opinion
here, I believe the Eighth Circuit’s directive that the non-
debtor spouse is to be paid from the proceeds is not without
merit. Certainly, as the majority states, Missouri law
considers the owners of entireties property to each hold an
undivided interest in the whole and I find the majority’s
conclusion that because Van Der Heide owns an indivisible
interest in the whole residence, one hundred percent of the
property is property of the estate, to be a sensible extension
of that state law premise.
However, I do not believe that the premise that the debtor
and his wife each own an indivisible interest in the whole
mandates the distribution scheme suggested by the majority.
The Code expressly authorizes, and arguably prefers, partition
of entireties property where only one tenant files
17
bankruptcy.8 Partitioning, by definition, requires the
property to be divided into two halves, despite Missouri
entireties law. I see little difference between partitioning
the asset and returning the non-debtor’s share of the asset to
her on the one hand, and selling the asset and returning the
non-debtor’s share of the proceeds to her on the other hand.
Arguably, both may be contrary to Missouri entireties law.
Nevertheless, I would
8
Partition appears to be preferred because a trustee is authorized to sell entireties
property only if partition is impracticable. 11 U.S.C. § 363(h)(1).
18
suggest that since the Code specifically authorizes one, the
other is not necessarily impermissible.
Furthermore, subsection (j), which the Eighth Circuit
plainly directed would be applicable where the bankruptcy court
determines that partition is impracticable, directs that after
a sale of the entireties property, “the trustee shall
distribute to the debtor’s spouse . . . and to the estate, the
proceeds of such sale . . . according to the interests of such
spouse . . . and of the estate.” 11 U.S.C. § 363(j) (emphasis
added). No mention of payment to joint creditors is made here
and this section appears to require (by use of the word
“shall”) that the non-debtor spouse receive her share of the
proceeds.
Restating, I suggest that rather than holding that the
debtor owns only a one-half interest in the property, the
Eighth Circuit’s directive in Garner is premised on the Code’s
permitting partitioning in § 363(h) and directing in § 363(j)
that the trustee is to distribute proceeds from the sale to the
non-debtor spouse.
In sum, then, I perceive the Eighth Circuit’s decision in
In re Garner mandates that where only one spouse files
bankruptcy and entireties property is sold pursuant to § 363,
one-half of the proceeds must be returned to the non-debtor
spouse before joint creditors are satisfied. Although contrary
to the authority coming from the majority of other circuits
addressing this issue, I believe the Garner decision has merit,
and more importantly, I am compelled to follow what I interpret
the law of the Eighth Circuit to be at this time.
Because I disagree with the majority’s opinion on this
narrow issue, I would reverse the bankruptcy court’s dismissal
of the debtor’s case for failure to propose a plan which
19
complies with § 1325(a)(4)’s “best interest of creditors” test.
It is my opinion that because Garner requires the non-debtor
spouse to be paid her share of the proceeds of the sale of
entireties property before unsecured creditors, the debtor’s
proposed plan in this case did not violate the best interest
of creditors test. For that reason, I respectfully dissent
from the majority’s affirmance of the bankruptcy court’s
decision dismissing the debtor’s Chapter 13 case.
20
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT
21