UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 12-2127

GARON REEVES; DIANE LINDSEY REEVES,

Debtors - Appellants,

v.

JOSEPH N. CALLAWAY,

Trustee - Appellee,

INTERNAL REVENUE SERVICE,

Defendant - Appellee.

-----------------------------------

NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS,

Amicus Supporting Appellants,

THE NATIONAL ASSOCIATION OF BANKRUPTCY TRUSTEES,

Amicus Supporting Appellee.

Appeal from the United States District Court for the Eastern 

District of North Carolina, at Raleigh. James C. Fox, Senior 

District Judge. (5:11-cv-00280-F; 10-02562-8-SWH)

Argued: September 19, 2013 Decided: November 20, 2013

Before SHEDD and WYNN, Circuit Judges, and HAMILTON, Senior 

Circuit Judge.
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Affirmed by unpublished per curiam opinion.

ARGUED: William Earl Brewer, Jr., THE BREWER LAW FIRM, Raleigh, 

North Carolina, for Appellants. Angus Scott McKellar, BATTLE, 

WINSLOW, SCOTT & WILEY, PA, Rocky Mount, North Carolina, for 

Appellees. ON BRIEF: Raymond M. DiGuiseppe, Tara Twomey, 

NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS, San Jose, 

California, for Amicus National Association of Consumer 

Bankruptcy Attorneys. Martin P. Sheehan, SHEEHAN & NUGENT, 

P.L.L.C., Wheeling, West Virginia, for Amicus The National 

Association of Bankruptcy Trustees.

Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:

The Chapter 7 debtors in this case contend that because the 

value of their actual interest in their residence does not 

exceed the amount of aggregate interest in such residence they 

claim as exempt from the bankruptcy estate under North Carolina 

law, the bankruptcy court’s grant of their claimed exemption in

the residence actually removed the entirety of the residence 

from the bankruptcy estate, such that the bankruptcy court 

lacked statutory authority to grant the bankruptcy trustee 

permission to sell the residence as part of his duties in 

administering the bankruptcy estate. For reasons that follow, 

we disagree and affirm the district court’s affirmance of the 

bankruptcy court’s grant of the trustee’s motion to sell the 

residence.

I.

On March 31, 2010, husband and wife Garon and Diane Reeves 

(Debtors) filed a joint Chapter 7 bankruptcy petition in the 

United States Bankruptcy Court for the Eastern District of North 

Carolina. 11 U.S.C. §§ 701-784. Debtors are residents of North 

Carolina. On the real property schedule of their petition, 

Schedule A, Debtors listed their residence at 1425 Chelton Oaks 

Place, Raleigh, North Carolina (Debtors’ Residence). At a 

hearing before the bankruptcy court on July 15, 2010, the 
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parties stipulated that the fair market value of Debtors’ 

Residence is $325,000. There is also no dispute that: (1) 

Debtors’ Residence is encumbered by a first mortgage lien in 

favor of Wells Fargo Mortgage in the approximate amount of 

$195,500; (2) the excess value in Debtors’ Residence beyond the 

first mortgage is encumbered by a federal tax lien in the 

approximate amount of $382,300; and (3) no equity exists in 

Debtors’ Residence over and above the first mortgage lien and 

the federal tax lien.

Because North Carolina is as an opt-out state with respect 

to the Bankruptcy Code’s uniform list of property for which a 

debtor can seek to exempt from the bankruptcy estate, see 11 

U.S.C. § 522(b); N.C. Gen. Stat. 1C-1601(f), the ability of 

Debtors to exempt any interest with respect to Debtors’ 

Residence is governed by North Carolina law. Of relevance here, 

North Carolina law entitles a single debtor to exempt “[t]he 

debtor’s aggregate interest, not to exceed thirty-five thousand 

dollars ($35,000) in value, in real property . . . that the 

debtor . . . uses as a residence . . . .” N.C. Gen. Stat. 1C1601(a)(1). Notably, this exemption expressly pertains to a 

debtor’s “aggregate interest” in the real property, “not to 

exceed” $35,000 “in value . . . ,” and does not pertain to the 

real property itself, id. See Schwab v. Reilly, 130 S. Ct. 

2652, 2661-63 (2010) (when Bankruptcy Code defines the property 
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a debtor is authorized to exempt as an interest, the value of 

which may not exceed a certain dollar amount, in a particular 

type of asset, the exemption pertains to the debtor’s interest 

in the asset, not to the asset per se). The nature of this 

exemption stands in contrast to exemptions which pertain to 

certain property in kind or in full regardless of value. See, 

e.g., 11 U.S.C. § 522(d)(9) (exemption for professionally 

prescribed health aids). See also Schwab, 130 S. Ct. at 2662-63 

(observing Bankruptcy Code’s distinction between exemptions for 

a debtor’s interest in a certain asset up to a certain dollar 

amount and exemptions for certain assets themselves).

On Amended Schedule C, filed by Debtors as part of Debtors’ 

Chapter 7 petition, Debtors listed $60,000.00 as the “VALUE OF 

REAL ESTATE CLAIMED AS EXEMPT.” (J.A. 96). The form described 

such real estate as Debtors’ residence and listed 1425 Chelton 

Oaks Place, Raleigh, North Carolina as its address. Just below 

this information, Debtors listed the following information 

denoted by an asterisk:

Debtors exempt their entire interest in this property

despite the lack of equity. The $60,000.00 amount is 

the value of the interest in the residence that

debtors can exempt and without using up any wild card 

exemption under NCGS §1C-1601(a)(2). Should the 

trustee or any other party in interest contend that 

the[re] would be any funds available for distribution 

to creditors after paying the consensual lien, [and] 

the Federal Tax lien, . . . that party should file a 

timely objection to this claim of exemption.
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(J.A. 96) (emphasis added).

The bankruptcy trustee assigned to Debtors’ bankruptcy (the 

Trustee) filed an objection to Debtors’ exemption claim with 

respect to Debtors’ Residence on the ground that Debtors had no 

equity in it. Debtors filed a response to the Trustee’s 

objection, taking the position that they have a right to exempt 

their interests in an asset in which they have no equity. 

Following a hearing on the matter, the bankruptcy court 

entered an order denying the Trustee’s objection on the ground 

that, notwithstanding the Debtors’ lack of equity in Debtors’ 

Residence, Debtors “are entitled to assert and reserve their 

available exemptions in” Debtors’ Residence. (J.A. 111). 

Notably, the bankruptcy court stated in its order that its 

denial of the Trustee’s objection and its grant of the Debtors’ 

reservation of their exemption in Debtors’ Residence did not 

prevent the Trustee from filing a subsequent motion seeking 

authority to sell Debtors’ Residence “in order to generate funds 

for a recovery to unsecured creditors in the case upon a carve 

out assigned by the IRS or some other method.” Id. 

“Similarly,” the bankruptcy court stated, “the objections of the 

Debtors to such a motion are deemed reserved as well.” Id. 

The Trustee subsequently moved for authority to sell 

Debtors’ Residence free and clear of liens with the transfer of 

any valid liens to attach to the net sale proceeds. In such 
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motion, the Trustee correctly stated that the IRS had agreed to 

carve out 30% of the net proceeds of the sale of Debtors’ 

Residence otherwise subject to the IRS’ tax lien for the payment 

of allowed administrative claims, with any balance to be paid on 

a pro rata basis to unsecured creditors. Debtors objected to 

the Trustee’s motion on the ground that the bankruptcy court’s 

order allowing them to reserve their claimed exemption with 

respect to Debtors’ Residence actually removed Debtors’ 

Residence from the bankruptcy estate, such that the Trustee 

lacked statutory authority to sell it.

The bankruptcy court granted the Trustee’s motion for 

authority to sell Debtors’ Residence. The bankruptcy court 

specifically rejected Debtors’ argument in opposition to the 

motion as follows:

All property of the debtors became property of the 

estate at the time of the filing of the petition in 

this case. After the property came into the estate, 

the debtors were entitled to exempt it under § 522 of 

the Code, which invoked the exemptions objections 

procedure followed by the trustee. See Tignor v. 

Parkinson, 729 F.2d 977 (4th Cir. 1984); Shirkey v. 

Leake, 715 F.2d 859, 863 (4th Cir. 1983). In this 

case, the debtors’ claimed exemptions in the Property 

were upheld by the court, notwithstanding the fact 

that there was indisputably no equity in the Property. 

See In re McQueen, 196 B.R. 31 (E.D.N.C. 1995); In re 

Thennes, Case No. 03-04271-5-ATS (Bankr. E.D.N.C. Oct. 

7, 2004). However, the effect of allowance of the 

debtors’ exemptions in the Property was to exempt 

their interest in the Property from the estate, not 

the Property itself. Schwab v. Reilly, 130 S. Ct. 

2652 (2010).
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(J.A. 25-26). The bankruptcy court went on to explain that 

because Debtors’ Residence is property of the bankruptcy estate, 

the Trustee, with the permission of the bankruptcy court, is 

authorized to sell it and distribute the proceeds in accordance 

with Bankruptcy Code provisions.

Debtors appealed the bankruptcy court’s order granting the 

Trustee permission to sell Debtors’ Residence to the district 

court. On appeal, the district court affirmed on the reasoning 

of the bankruptcy court. Debtors filed a timely appeal of the 

district court’s order to our court as the second layer of 

appellate review in bankruptcy proceedings. The Trustee and the 

IRS are appellees in the present appeal.

II.

 In the present appeal, Debtors acknowledge that, upon 

filing their Chapter 7 petition on March 31, 2010, their legal 

interest in Debtors’ Residence became property of the bankruptcy 

estate pursuant to 11 U.S.C. § 541(a). Debtors also acknowledge 

that the amount of the liens encumbering Debtors’ Residence 

exceed its actual value, thus eliminating any equitable interest 

in Debtors’ Residence which they otherwise may have had. 

Debtors argue, however, that because the value of their actual 

interest in Debtors’ Residence, i.e., zero, does not exceed the 

amount of aggregate interest in Debtors’ Residence for which 
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they are entitled to claim as exempt from the bankruptcy estate 

under North Carolina law, i.e., $60,000.00, the bankruptcy 

court’s grant of their claimed exemption in Debtors’ Residence 

actually removed Debtors’ Residence in its entirety from the 

bankruptcy estate, such that the bankruptcy court lacked 

statutory authority to grant the Trustee permission to sell it. 

Appellees’ arguments in response track the reasoning of the 

bankruptcy court and the district court.

Debtors’ position is without merit. The fatal flaw in 

Debtors’ position is that it ignores the distinction between 

exempting an asset itself from the bankruptcy estate and 

exempting an interest in such asset from the bankruptcy estate. 

The Supreme Court made the point crystal clear in its Schwab

decision, 130 S. Ct. at 2661-63. In that case, the debtor 

claimed certain restaurant equipment as exempt and placed a 

value within the allowed exemption range. Id. at 2657-58. A 

later appraisal valued the equipment at an amount that 

substantially exceeded the statutorily allowed exemption amount. 

Id. at 2658. Because the equipment appraised at a higher value 

than the debtor’s claimed exemption, the Schwab trustee moved 

the bankruptcy court for permission to sell the equipment, with 

the proceeds first distributed to the debtor in the amount equal 

to her claimed exemption and the balance distributed to her 

creditors. Id. 
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The debtor opposed the sale. Id. In so opposing, the 

debtor did not dispute the validity of the higher appraisal. 

Id. Rather, she opposed the motion to sell on the ground that 

because the monetary value in the equipment that she claimed as 

exempt in Schedule C of her bankruptcy petition equaled the 

monetary value that she listed in Schedule C as the equipment’s 

fair market value, the trustee was obliged to object to her 

claim of exemption if he wanted to preserve the estate’s right 

to retain any value in the equipment above the monetary value 

that she claimed to be exempt. Id. In this regard, the debtor 

reasoned that her equating of the two values put the trustee on 

sufficient notice that she intended to exempt the full value of 

the equipment. Id.

Agreeing with the debtor, the bankruptcy court in Schwab

denied the trustee’s motion to sell the equipment. Id. at 2659. 

The district court affirmed the bankruptcy court, and the Third 

Circuit affirmed the district court. Id. In affirming the 

district court, the Third Circuit relied upon Taylor v. Freeland 

& Kronz, 503 U.S. 638 (1992), which decision the Third Circuit 

interpreted as having the unstated premise that a debtor who 

exempts the entire estimated value of an asset reported on 

Schedule C is claiming the full amount of such asset, whatever 

the actual value turns out to be. In re Reilly, 534 F.3d 173 

(3d Cir. 2008). “Relying on this ‘unstated premise,’ the [Third 
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Circuit] held that [the trustee’s] failure to object to [the 

debtor’s] claimed exemptions entitled [the debtor] to the 

equivalent of an in-kind interest in her business equipment, 

even though the value of that exemption exceeded the amount that 

[she] declared on Schedule C and the amount that the Code 

allowed her to withdraw from the bankruptcy estate.” Schwab, 

130 S. Ct. at 2659.

The majority opinion in Schwab ruled against the debtor, 

holding that the Third Circuit’s approach failed to account for 

the text of the relevant provisions of the Bankruptcy Code and 

misinterpreted Taylor. Id. In setting up the opposing 

arguments, the Court noted that the debtor asserted that the 

“‘property claimed as exempt’” under the Bankruptcy Code by the 

debtor is defined by reference to all the information on 

Schedule C, including the estimated market value of each asset 

in which the debtor claims an exempt interest. Id. at 2660. 

The Court then noted that the

Schwab [trustee] and the United States as amicus 

curiae argue[d] that the [Bankruptcy] Code 

specifically defines the “property claimed as exempt” 

as an interest, the value of which may not exceed a 

certain dollar amount, in a particular asset, not as 

the asset itself. Accordingly, they argue that the 

value of the property claimed exempt, i.e., the value 

of the debtor’s exempt interest in the asset should be 

judged on the value the debtor assigns the interest, 

not on the value the debtor assigns the asset.

Id.
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The Schwab Court agreed with this argument by the trustee 

and the United States as amicus curiae. Id. at 2661-63. Of 

relevance to the present appeal, in so agreeing, the Schwab

Court explained the process under the Bankruptcy Code for 

property coming into the bankruptcy estate to be later reclaimed 

by the debtor through the exemption process. Id. at 2663-65. 

The Court explained that first, most of a debtor’s assets become 

property of the estate upon commencement of the bankruptcy case. 

Id. at 2663. The Schwab Court then explained that “exemptions 

represent the debtor’s attempt to reclaim those assets or, more 

often, certain interests in those assets, to the creditors’ 

detriment.” Id. at 2663-64. Notably, the Court opined that the 

Third Circuit’s decision not only fails to account for the 

Bankruptcy Code’s definition of the “‘property claimed as 

exempt,’” id. at 2662-63 (quoting 11 U.S.C. § 522(l)), but “[i]t 

also fails to account for the provisions in § 522(d) that permit 

debtors to exempt certain property in kind or in full regardless 

of value,” id. at 2663.

Another part of the Schwab opinion relevant to the present 

appeal before us is the Court’s response to the debtors’ 

contention that the Court’s approach creates perverse incentives 

for trustees and creditors to sleep on their rights:

Where a debtor intends to exempt nothing more than an 

interest worth a specified dollar amount in an asset 

that is not subject to an unlimited or in-kind 
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exemption under the [Bankruptcy] Code, our approach 

will ensure clear and efficient resolution of 

competing claims to the asset’s value. If an 

interested party does not object to the claimed 

interest by the time the Rule 4003 period expires, 

title to the asset will remain with the estate 

pursuant to § 541, and the debtor will be guaranteed a 

payment in the dollar amount of the exemption. If an 

interested party timely objects, the court will rule 

on the objection and, if [the debtor’s claim of 

exemption] is improper, allow the debtor to make 

appropriate adjustments.

Id. at 2667-68 (emphasis added).

Applying the teachings of Schwab to the present appeal 

compels us to affirm the district court. Debtors concede that, 

at the commencement of their bankruptcy case, their legal 

interest in Debtors’ Residence became part of the bankruptcy 

estate. There is also no dispute that, pursuant to applicable 

North Carolina law, Debtors sought to exempt an aggregate 

interest in Debtors’ Residence in the amount of $60,000. The 

Trustee objected on the ground that Debtors had no equity in 

Debtors’ Residence. Following a hearing on the matter, the 

bankruptcy court entered an order denying the Trustee’s 

objection on the ground that, notwithstanding the Debtors’ lack 

of equity in Debtors’ Residence, Debtors “are entitled to assert 

and reserve their available exemptions in” Debtors’ Residence. 

(J.A. 111). Under the clear teachings of Schwab, because 

Debtors’ Residence is not subject to an unlimited or in-kind 

exemption, title to Debtors’ Residence remained with the 
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bankruptcy estate pursuant to 11 U.S.C. § 541. See 11 U.S.C. 

§ 363(b)(1) (“The trustee, after notice and a hearing, may use, 

sell, or lease, other than in the ordinary course of business, 

property of the estate.”); Schwab, 130 S. Ct. at 2667; In re: 

Feinstein Family Partnership, 247 B.R. 502, 507 (Bankr. M.D. 

Fla. 2000) (“[F]ully encumbered property is still property of 

the estate until it is either abandoned by the trustee pursuant 

to Section 554(a) or released upon stay relief and sold by the 

secured creditor . . . .”).

Notably, the fact that the IRS agreed to allocate part of 

its tax lien as a carve-out for unsecured creditors has no 

adverse consequences for Debtors because the Trustee confirmed 

before the bankruptcy court that Debtors will receive full 

credit with respect to the IRS lien for any amount paid to 

unsecured creditors from the sale proceeds as part of the 

carve-out. Also notable is the fact that the carve-out takes 

this case out of the “now almost universally recognized [rule] 

that where the [bankruptcy] estate has no equity in the 

property, abandonment is virtually always appropriate because no 

unsecured creditor could benefit from the administration.” In 

re: Feinstein Family Partnership, 247 B.R. at 507. Here, the 

carve-out operates to assign equity in Debtors’ Residence for 

the benefit of the bankruptcy estate (i.e., unsecured 

creditors), thus justifying the Trustee’s action in selling 
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Debtors’ Residence as opposed to abandoning it. See In re 

Rambo, 297 B.R. 418, 433-34 (Bankr. E.D. Pa. 2003) (trustee may 

sell debtor’s property under 11 U.S.C. § 363, but generally only 

to benefit unsecured creditors, i.e., when sale proceeds will 

fully compensate secured creditors and produce some equity for 

benefit of unsecured creditors).

III.

To summarize, Debtors’ Residence remained property of the

bankruptcy estate despite the bankruptcy court allowing Debtors 

to reserve an exemption of $60,000 as their aggregate interest

in Debtors’ Residence subordinate to the first mortgage lien and 

the federal tax lien. Therefore, Debtors’ argument that the 

Trustee lacks the statutory authority to sell Debtors’ Residence 

because such asset is no longer property of the bankruptcy 

estate is without merit. Accordingly, we affirm the district 

court’s affirmance of the bankruptcy court’s order granting the 

Trustee permission to sell Debtors’ Residence. 

AFFIRMED