## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 98-2201

___________ In re: Gerard Robert Van Der Heide, * * Debtor. *

--------------------------------------- * * Gerard Robert Van Der Heide, * Appeal from the United States * Bankruptcy Appellate Panel. Appellant, * * v. * * John V. LaBarge, Jr., * * Appellee. *

___________ Submitted: December 16, 1998 Filed: January 22, 1999

___________ Before FAGG, HEANEY, and WOLLMAN, Circuit Judges.

___________ HEANEY, Circuit Judge.
The bankruptcy court denied confirmation of Gerard Robert Van Der Heide’ s Chapter 13 plan on the grounds that it did not satisfy the “best interests of creditors” test and the bankruptcy appellate panel affirmed. Because both the bankruptcy court-2-

and appellate pane l misconstrued our holding in Garner v. Strauss ( In re Garner ), 952 F.2d 232 (8 Cir. 1991), we reverse and remand.

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I.
On January 7, 1997, Van Der Heide filed his Chapter 13 petition. At the time of filing, general unsecured creditors claimed that Van Der Heide and his nonfilin g wife owed approximately $23,180. In his plan, Van Der Heide proposed to pay th e creditors $2,858. The trusteeobjected to confirmation of the plan, claiming that it did not satisfy the “best interests of creditors” test under 11 U.S.C. § 1325(a)(4).

Van Der H eide and his wife own a residence as tenants by the entirety i n Missouri

. The parties agreed that after deducting transactional costs, the propert y would yield $24,495 in a hypothetical Chapter 7 liquidation, but they did not agre e ho w those proceeds should be distributed. Van Der Heide contended that only one

half of the proceeds ($12,247.50) would be subject to the bankruptcy estate because his wife has an indivisible interest under Missouri law. O f this amount, Van Der Heide claimed that he was entitled to deduct $9, 900 in exemptions, leaving $2,347.50 for the credito rs. Because his plan ($2,858) exceeded the value of the entireties propert y available to t

he creditors ($2,347.50), Van Der Heide argued that he had satisfied the “best interests of creditors” test under 11 U.S.C. § 1325(a)(4). The trustee, on the other hand, argued t hat the entire $24,495 was subject to the bankruptcy estate, subject only to the $9,900 in exemptions, leaving $14,595 to b e distributed among the creditors. The bankruptcy court adopted this view, denie d confirmation of Van Der Heide’s plan, and di rected Van Der Heide to file an amended plan meeting the trustee’s objections within twenty days or face dismissal. Becaus e Van D er Heide failed to submit an amended plan, the bankruptcy court dismissed his case. The appellate panel affirmed. We reverse.-3- II.
A court shall confirm a Ch apter 13 plan if “the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowe d unsecured c laim is not less than the amount that would be paid on such claim if th e estate of the debtor were liquidated under chapter 7 . . . .” 11 U.S.C. § 1325(a)(4). In eval uating whether the bankruptcy court properly denied confirmation of Van De r Heide’s plan, we must determine the proper disposition of the proceeds from th e hypothetical sale of the Van Der Heide re sidence. Contrary to the views expressed by both the bankruptcy court and app ellate panel, we conclude that the rule announced in Gar ner dictates that only one-half of the hypothetical sale proceeds, less exemptions, are subject to the bankruptcy estate.

An interest of the debtor in property held as a tenant by the entirety at th e comme ncement

of the case is exempt under bankruptcy law to the extent that it i s exempt fro m process under applicable nonbankruptcy law. See 11 U.S.C. § 522(b)(2)(B). The applicable nonbankru ptcy law in this case is Missouri property and exempt ionlaw. In Missouri, entireties property is not subject to the claims of th e creditors of only one of the tenants, but is subject to such claims by creditors of joint debtors. See Garner , 952 F.2d at 234-35. Missouri’s homestead exemption la w prov ides that the homestead of every person, not to exceed $8,000, is exempt fro m attachment and execution. See Mo . Rev. Stat. § 513.475(1) (1994). If the property is owned by more than one owner, a single owner can claim the entire amount. See id. Because a residence is incapable of partition and because Van Der Heide’s wife is jointly responsible for the debt, the trustee may liquidate the residence. See Garner , 952 F.2d at 234; 11 U.S .C. § 363(h); see also Sumy v. Schlossberg ( In re Sumy ), 777 F.2d 921, 932 (4 Cir. 1 985) (“[T]o the extent the debtor and the nonfiling spouse are th indebte d jointly, property owned as a tenant by the entireties may not be exempte d from an individual debtor’s bankruptcy estate . . . .”). In the event of such a sale, the-4-

trustee w ould distribute the net proceeds to the estate and Van Der Heide’s wif e according to their respective interests. See 11 U.S.C. § 3 63(j). Our decision in Garner defines those rights.

In Garner , like this case, both husband and wife owned property as tenants by the entirety and, while both husband and wife were j oint debtors, only the husband had declare d bankruptcy. See 952 F.2d at 233. Balancing the notion that the bankruptcy estate is composed of all legal and equitable interests of the debtor in property at the time o f the petition, see 11 U.S.C. S 541(a)(1), and the fact that under Missouri la w tenants by the entirety own indivisible interests in entireties property, see Ronollo v

. Jacobs , 775 S.W.2d 121, 123 (Mo. 1989) (en banc), we ordered that one-half of th e entireties property be retu rned to the wife, reasoning that doing so did not insulate her from whatev er recourse her creditors might have against her. This resolution wa s consistent with the legislative history of § 541: The bill also changes the rules with respect to marit al interests in property . . . . With respect to other co-ownership i nterest(s), such as tenancies by the ent irety, . . . the bill does not invalidate the rights, but provides a method b y which the estate may realize on the value of the debtor’ s interest in the property while protecting the [co-tenant’s] rights.

H. R. Rep. No. 95-595 at 177 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 6137

. Ac cordingly, the result in Garner was an equitable rule that preserves the balance o f the breadth of federal bankruptcy and state property law.

In its o pinion below, the bankruptcy appellate panel determined that, becaus e Van Der H eide owned an indivisible interest in the residence and because it wa s subject to the bankruptcy estate, all of the sale proceeds are subject to the bankruptcy estate

. See Van Der Heide v. LaBarge ( In re Van Der Heide ), 219 B.R. 830, 83 3 (B.A.P. 8 Cir 1998). In reachin g this conclusion, the panel misconstrued as dicta our

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order in Garner requiring the trustee to distribute one-half of the sale proceeds of the entir eties property to the nonfiling wife. See id. at 833-34. In attempting t o distinguish this case, the panel stated that:
The Garner

court was not called upon to determine the respectiv e interest s of tenants by the entirety, but to decide whether entiretie s prop erty becomes property of the estate when only one spouse files fo r bankruptcy. We also note that the court itself remarked that its rulin g “leaves open the question of the trustee’s disposition of the stock.”

Id. at 834. We disagree.

In Garner , we first determined that entireties property is subject to th e bankruptcy estate whe n only one spouse filed; and, on the basis of this determination, we identified the respective interests of tenants by the entirety. This is made clear by
our conclusion as to the appropriate disposition of the sale proceeds of the entiretie s property. The appellate panel’s assertion to the contrary is untenable. As stated above, the Garn er

rule establishes a balance between the notion that the bankruptcy estate is composed of all l egal and equitable interests of the debtor and the fact that tenants by the entirety own indivisible interests in entireties property.
The panel’s misunderstanding may be a result of our statement in Garne r “leav[ing] open the question of the trustee’s disposition of th e stock.” 952 F.2d at 235. In Garner , husband and wife owned stock as tenants by the entirety. See 952 F.2d at 233. P rior to filing for bankruptcy, the stock had been liquidated, making partitio n impossible. See id. at 236. In determining t hat the trustee’s intent was to liquidate the stock, we applied the provisions of 11 U.S.C. § 363 and ordered that one-half of the sale proceeds be returned to Margie Garner. See id. at 236. As the above discussion shows, the question left open was whether the trustee had to liq uidate the stock, not the relative property interests of the parties involved. Because the bankruptcy court and-6-

appellate panel misconstrued our holdi ng in Garner , we reverse. This does not end our analysis, however. The United States Supreme Court has held that "[p]roperty interests are created and defined by state law. Unl ess some federal interest requires a different result, there is no re ason why such interests should be analyzed differently simply because a n interested party is inv olved in a bankruptcy proceeding." United States v. Butner , 440 U.S. 48, 55 (1979). Van Der Heide claims $9,900 in state exemptio ns, $8,000 of which represents the full homestead exemption allowed under Missouri law. In Missouri, a co-tenant by the entirety is authoriz ed to claim the full homestead exemption. See Mo. Rev. Stat. § 513.475(1) (1994); Lashley v. Fuhrer ( In re Lashley ), 206 B.R. 950, 953 (Bankr. E.D. Mo. March 19, 1997). In balancing the breadth of bankruptcy es tates with the respect for state property law, G arner

created a shield to protect a nonfiling spouse’s interest in entiretie s property from joint creditors. In this case, Gerard Van Der Heide is attempting to use Garner as a sword. Under a straightforward application of Garner , the bankruptcy court should confirm Van Der Heide’s Chapter 13 plan because it offers the creditors more than they woul d receive under the hypothetical Chapter 7 liquidation. Here, however, Garner analysis leads to an impermissible result.

In this case, rather than an equitable distribution of an already liquidated asset, we have a hypothetic al sale of entireties property that is not subject to partition. If we were to apply Garner

to the facts of this case, after exemptions, Van Der Heide would be able to discharge his share of the $23, 180 joint debt by paying $2,858. We noted in Garner that, once the husband was discharged , the creditors could then proceed against his wife. See 952 F.2d at 236. Similarly, once Van Der Heide is discharged, th e creditors may proceed against his wife. Assuming the residence to be the only assetNothing i n the record indicates that any other assets are subject to th e 1 bankruptcy estate. Wer e Van Der Heide’s wife to file for bankruptcy, Garner might b e 2 inapplicable given that only one of the co-tenants by the entirety would then b e responsible for the remaining debt. The court might avoid this result, for example, by attem pting to invoke 11 U.S.C. § 105(a) in an effort to incorporate the residence into the bankrupt cy estate. Another possibility is that a subsequent filing by Van De r He ide’s wife would run afoul of the good faith provisions of 11 U.S.C. § 1325(a)(3). Because this line of speculation is beyond the record and scope of this case, we do not expr ess an opinion about subsequent filings. We only point out some potentia l anomalies of allowing Van Der Heide to use Garner as a sword. -7- in this case, however, Van Der Heide and his wife would no longer be joint debtors.

1 The cre ditors could then pursue an action against Van Der Heide’s wife but could not reach the residence because, und er state law, creditors cannot reach entireties property when the spo uses are not joint debtors. A similar result would occur in the event Van Der Heide’s wife files for bankruptcy. 2

There can be no doubt as to the federal interest in preventing debtors fro m exploiting this tension between bankruptcy and state property law. Accordingly, w e hol d that, if Van Der Heide invokes Garner in determining whether the bankruptc y cou rt should confirm his Chapter 13 plan, he is only entitled to claim one-half of th e total homes tead exemption authorized under state law. The result we reach toda y provides $4,000 for creditors that they would not have otherwise received under a blind application of Garner

. III.
Fo r the foregoing reasons, we reverse and remand this case for furthe r proceedings consistent with this opinion.-8-

A true copy.
Attest.
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.