Court Opinion

ID: 3030593
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:44:37.140968+00
Date Added: 2024-06-11T12:05:38.914241
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Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-7-2007

In Re: Brannon
Precedential or Non-Precedential: Precedential

Docket No. 05-4600

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Recommended Citation
"In Re: Brannon " (2007). 2007 Decisions. Paper 1550.
http://digitalcommons.law.villanova.edu/thirdcircuit_2007/1550

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                                         PRECEDENTIAL

        UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT

                Nos. 05-4600 & 05-5060

           IN RE:

            KENNETH E. BRANNON
            KATHY FICK SIPPOLA,
                          Appellants in 05-4600

     IN RE: THOMAS MICHAEL LEWIS, ET AL.,
                       Debtors

             THOMAS MICHAEL LEWIS;
             SHERRY MICHELLE LEWIS,
                          Appellants in 05-5060
                  ____________

Paul W. Johnson, Esquire (ARGUED)
420 Temple Building
New Castle, PA 16101
Attorney for Appellants

Tamera Ochs Rothschild, Esquire (ARGUED)
314 S. Franklin Street, Suite A
Titusville, PA 16354
Attorney for Appellee in 05-4600

Of Counsel:
Charles O. Zebley, Jr., Trustee
Zebley, Mehalov & White, P.C.
18 Mill Street Square
P.O. Box 2123
Uniontown, PA 15401
Attorneys for Appellee in 05-5060

                       ____________

        Appeal from the United States District Court
          for the Western District of Pennsylvania
      (D.C. Civ. Nos. 05-cv-00948 and 05-cv-01336)
      District Judges: Honorable Terrence F. McVerry
               and Honorable Arthur J. Schwab
                       ____________

               Argued October 26, 2006
  Before: SMITH, WEIS and NYGAARD, Circuit Judges.

                 (Filed: February 7, 2007)
                      ____________

                         OPINION
                       ____________

WEIS, Circuit Judge.

                             2
       These two bankruptcy appeals ask us to determine the
“aggregate interest,” for purposes of claiming a bankruptcy
exemption, that one spouse holds in property owned as a tenant
by the entirety under Pennsylvania law. In both cases, the
District Court concluded that a spouse is entitled to no more
than 50% of the value of entireties property claims as an
exemption. We conclude that the Bankruptcy Code neither
compels nor allows such a severance of the undivided interest a
spouse holds in the whole of entireties property, and accordingly
we will reverse.1
                               I.
                           Brannon
        Kenneth and Kathy Brannon filed a joint petition for
Chapter 7 relief in the Bankruptcy Court for the Western District
of Pennsylvania.2 They listed in their bankruptcy schedule the
real and personal assets they owned as tenants by the entireties
at the time of filing. Among the entireties property listed was a
stock portfolio valued at $15,796.00 that they sought to exempt.
They also identified several other items they wished to exclude

       1
       The two cases present the same issue in their respective
appeals. We therefore consolidate them and treat them in the
same opinion.
       2
        When spouses file a joint Chapter 7 petition, two
separate bankruptcy estates are created. See, e.g., Bunker v.
Peyton, 312 F.3d 145, 150 (4th Cir. 2002). The court may
thereafter determine to substantively consolidate the cases, see
11 U.S.C. § 302(b), but that did not occur here.

                               3
from the bankruptcy estate. The wife sought to exempt $10,200
of the portfolio and the husband $1,150. $4,446 remained in the
account and available to the trustee.3 The trustee objected,
asserting that the wife was merely a “co-owner” of the portfolio
and thus only entitled to exempt one-half of its value.
       The bankruptcy judge sustained the trustee’s objection,
reasoning that “[t]he presumption is that each spouse is a one-
half owner of the tenancy by the entirety asset.” He based this
on the rationale that “[u]pon divorce of the parties, the asset is
equally owned by the parties and the ownership becomes an
ownership in common.” Id. The judge seemingly assumed
that the filing of a bankruptcy petition, like a divorce,
transformed the spouses’ entireties interests into an ownership
in common. He further stated that “[n]o basis is stated why the
[w]ife has been or should become owner of more than one half
of the asset.”
                             Lewis
       The facts in the Lewis case are substantially similar.
Thomas and Sherry Lewis also filed a joint Chapter 7 petition in
the Bankruptcy Court for the Western District of Pennsylvania.
They included in their schedule a 6.5 acre parcel of realty valued
at $3,000 that they owned as tenants by the entireties. The wife
sought to exempt the entire value of the parcel; her husband
made no claim with respect to it. The wife also asserted an

       3
        The debtors also listed the equity in their home of
$13,734 in their Schedule C. No issue about that asset has been
raised in this appeal.

                                4
exemption for more than 50% of the value of certain items of
personal property the debtors owned as tenants by the entireties.
       It appears that the parties chose this arrangement because
the husband wished to exhaust his exemptions by applying them
to items that he owned individually, such as a car, truck, and
checking account. 4 The trustee objected to the unequal
allocation, contending that exemptions for property held as
tenants by the entireties should be divided equally between the
debtors.
       The bankruptcy judge, relying on the ruling in Brannon,
decided two months earlier, held that each debtor could exempt
only 50% of the parcel owned as a tenant by the entireties.
Citing Pennsylvania law on tenancy by the entireties, he
concluded that “[k]eeping these legal precepts in mind, we do
not see how debtors may ‘allocate’ all the value of entireties
property to one spouse and none of the value to the other.”
      In both cases, the District Court affirmed and timely
appeals followed.
                               II.
        We have jurisdiction pursuant to 28 U.S.C. § 158(d) and
exercise plenary review over an appropriate order issued by a
district court in an appeal from a bankruptcy judge’s ruling. In

       4
        The wife had available exemptions of $10,225. Of that
sum, she utilized $6,859 to shield certain personalty, leaving
$3,336 which she sought to apply to the parcel of realty valued
at $3,000.

                               5
re Kaiser Aluminum Corp., 456 F.3d 328, 334 (3d Cir. 2006).
We review a bankruptcy judge’s conclusions of law de novo.
Id.
                                III.
        Before addressing the bankruptcy issues presented in this
case, it will be helpful to have a brief sketch of relevant tenancy
by the entireties principles. In Pennsylvania, a tenancy by the
entireties is a form of co-ownership of real or personal property
by husband and wife. It is a venerable common law doctrine of
ancient vintage, based on the legal fiction that husband and wife
are one person. The essential characteristic is that “each spouse
is seised per tout et non per my, i.e., of the whole or the entirety
and not of a share, moiety or divisible part.” In re Gallagher's
Estate, 43 A.2d 132, 133 (Pa. 1945) (citations omitted). As the
author of a respected treatise explains,
       “[H]usband and wife are looked upon, together,
       as a single entity, like a corporation. The single
       entity is the owner of the whole estate. When the
       husband or wife dies, the entity continues,
       although it is now composed of only one natural
       person rather than two.”
Ladner on Conveyancing in Pennsylvania, § 1.08 at 16 (John
Makdisi, ed., rev. 4th ed. 1979). Further, “neither tenant by the
entirety owns any undivided share at all; both together, as a
single entity, own the whole, or entire, estate.” Id.
       Entireties property may not be accessed by the creditors
of only one spouse. As the Pennsylvania Supreme Court
explained in Madden v. Gosztonyi Savings & Trust Co., 200 A.
6
624 (Pa. 1938), with respect to property owned by the entireties,
neither spouse “has any individual portion which can be
alienated or separated, or which can be reached by the creditors
of either spouse.” Id. at 627-628; see also Patwardhan v.
Brabant, 439 A.2d 784, 785 (Pa. Super. 1982).
       It is presumed that each tenant by the entirety may,
without specific consent, act individually on behalf of both.
Madden recognized that “either spouse presumptively has the
power to act for both, so long as the marriage subsists, in
matters of entireties, without any specific authorization,
provided the fruits or proceeds of such action inures to the
benefit of both and the estate is not terminated.” Madden, 200
A.2d at 630-31. In that case, the Pennsylvania Supreme Court
held that a spouse could consent to the reorganization of a bank
that held an account he owned by the entireties. Id. at 626, 631.
        A spouse may act on behalf of both spouses with respect
to entireties property as long as the tenancy remains intact. The
only established ways in which it may be severed, other than by
the death of one of the spouses, are “a joint conveyance of the
estate, divorce, or mutual agreement, either express or implied.”
Clingerman v. Sadowski, 519 A.2d 378, 381 (Pa. 1986) (internal
citations omitted).
        Pennsylvania courts have found an implied agreement to
sever a tenancy where a spouse wrongfully appropriated
entireties properties for individual benefit or excluded the other
spouse from enjoyment of the asset. See Id. at 381-82 (Pa.
1986). For example, in Steminski v. Steminski, 169 A.2d 51
(Pa. 1961), the court reasoned:

                                7
       “A violation of the rules by one spouse’s
       appropriating the property to his own use works a
       revocation of the estate [by the entireties] by the
       fiction of appropriation's being an offer of an
       agreement to destroy the estate and an acceptance
       of that offer when the other spouse starts suit; the
       property is then fit for accounting and division.”
Id. at 53.
       In Johnson v. Johnson, 908 A.2d 290 (Pa. Super. Ct.
2006), the Pennsylvania Superior Court noted that the
presumption that one may act on behalf of the whole remains
only “so long as both spouses share the proceeds, and neither
spouse may appropriate property for his or her own use, to the
exclusion of the other spouse, without the consent of the other
spouse.” Id. at 295 (citations omitted).
       Thus, the “presumption may be rebutted by evidence that
the spouse acting was not in fact authorized by the other
spouse.” Kennedy v. Erkman, 133 A.2d 550, 553 (Pa. 1957).
Absent the other’s consent, a spouse may not unilaterally convey
property to another party nor appropriate property for his or her
own use, to the exclusion of the other. Shapiro v. Shapiro, 224
A.2d 164, 172 (Pa. 1966).
        Having examined the law surrounding tenancies by the
entireties in Pennsylvania, we may now discuss the effect that
filing for bankruptcy has on the interest a spouse has in
entireties holdings. Under 11 U.S.C. § 541(a)(1), “all legal and
equitable interests that a debtor holds in property at the
commencement of a bankruptcy case” are included in the
bankruptcy estate.

                                8
       We have held that § 541(a) is “certainly broad enough to
include an individual debtor's interest in property held as a
tenant by the entirety.” Napotnik v. Equibank & Parkvale
Savings Ass’n, 679 F.3d 316, 318 (3d Cir. 1982).
       Although entireties property may be initially included in
a bankruptcy estate, the process does not end there because a
debtor may exempt certain holdings pursuant to § 522.
        The Bankruptcy Code provides two alternative plans of
exemption. Under § 522(b)(2)5 , a debtor may elect the specific
federal exemptions listed in § 522(d) (“federal exemptions”) or,
under § 522(b)(3), may choose the exemptions permitted, inter
alia, under state law and general (nonbankruptcy) federal law
(“general exemptions”).
      Debtors may select either alternative, unless a state has
“opted out” of the federal exemptions category. Pennsylvania
has not done so and thus debtors are entitled to claim
exemptions under either the general or federal methods.
       A debtor who chooses to use the general exemptions may
claim an exemption in “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

       5
        Under the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, P.L. 109-8; 119 Stat 23, § 522(b)(1) was
renumbered § 522(b)(2) and § 522(b)(2)(B) was renumbered
§ 522(b)(3)(B), but otherwise remained unchanged. All
references are to the amended statute.

                                 9
nonbankruptcy law.” 11 U.S.C. § 522(b)(3)(B). See also
O’Lexa v. Zebley No. 06-2254 (filed concurrently with this
opinion).
        Where spouses are joint debtors they may not claim the
general exemption in § 522(b)(3)(B) for property they hold by
the entireties. In Napotnik, 679 F.2d at 320, we held that where
a creditor had claims against both husband and wife jointly one
spouse could not exempt the entire value of property held by the
entireties because “in Pennsylvania entirety property may be
reached by creditors to satisfy the joint debts of husband and
wife.” Id. We thus concluded, “In this respect at least, such
property is not exempt from process in Pennsylvania.” Id.
        Nevertheless, filing a bankruptcy petition does not sever
a tenancy by the entirety and thus an individual spouse may be
able to exempt the whole of entireties property from the
bankruptcy estate in some circumstances. Bunker v. Peyton,
312 F.3d 145 (4th Cir. 2002) presented a situation in which
husband and wife filed joint bankruptcy petitions and, under the
general entireties exemption of § 522(b)(3)(B), sought to exempt
the home that they owned as tenants by the entirety. The Court
held that the benefits of entireties property survived bankruptcy
filings and that the debtors’ home could not be reached by
creditors of only one of the spouses. Id. at 148, 153-55.
       Bunker makes it clear that a joint filing in bankruptcy
does not sever a tenancy by the entireties so as to make the
property available to creditors of either husband or wife

                               10
individually.6 That holding is different from, but consistent
with, Napotnik.
        Likewise, in a companion opinion to this case, O’Lexa v.
Zebley, No. 06-2254, we concluded that the wife’s home which
she held as a tenant by the entirety was exempt under the general
entireties exemption of § 522(b)(3)(B) from creditor’s claims
against her individually.
        In that case, we rejected the trustee’s argument that
entireties property could be accessed under a Pennsylvania
statute that made both spouses liable for debts contracted for
necessaries by one spouse. Because the statute as we read it did
not create joint liability, but rather made the spouse contracting
for the necessaries primarily liable and the other only
secondarily liable, we held that the entireties property was not
subject to execution for the primary debtor’s obligations.
       O’Lexa makes clear that the presence of joint liability is
necessary for a creditor to access property in a bankruptcy estate
held as tenants by the entireties.

       6
         A number of bankruptcy courts have determined that the
filing of a bankruptcy petition does not act to sever a tenancy by
the entirety. See In re Eichhorn, 338 B.R. 793 (Bankr. S.D. Ill
2006) (joint petition); In re Spears 313 B.R. 212, 217 (Bankr.
W. D. Mich. 2004) (individual petition); In re Ford, 3 B.R. 559,
576 (Bankr. D. Md. 1980) (in banc) (applying Maryland law)
(individual petition); In re Hackett, 13 B.R. 755, 757 (Bankr.
E.D. Pa. 1981) (individual petition).

                               11
        The presence of joint liability, however, does not
necessarily prevent a debtor from excluding entireties property
from the estate. The debtors’ other option for shielding their
holdings, including entireties property, from bankruptcy
administration is through the federal exemption. Unlike the
general exemptions, the federal ones do not provide an
exemption for entireties property as such. Instead, they grant
debtors a series of specific exemptions, including the provision
at issue in this case, § 522(d)(5). See § 522 (d), (b)(2).
       Under § 522(d)(5), a debtor may exempt his “aggregate
interest in any property, not to exceed in value $975 plus up to
$9,250 of any unused amount of the exemption provided under
paragraph (1) of this subsection.” § 522(d)(5) provides for a
dollar cap of the property that may be exempted, but does not
require that the property be “exempt from process” under
nonbankruptcy law.
       Thus, even though spouses may not be able to shield all
their possessions from joint debtors under the general
exemptions, that does not preclude a claim for an exemption of
the property under the federal provisions up to the dollar limit
specified.
       As noted earlier, bankruptcy does not sever a tenancy by
the entireties, but leaves its general characteristics in place,
including the right of one tenant to act on behalf of both. The
trustee’s authority does not generally supersede that power. As
the bankruptcy court in In re Ford, 3 B.R. 559, 576 (Bankr. D.
Md. 1980) (in banc), aff'd on the opinion of the bankruptcy
court sub nom. Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981)
explained:

                              12
       “The trustee merely obtains and retains custody of
       the debtor's undivided interest consisting of the
       same unities, intact and unaltered, as they existed
       immediately prior to the filing of the petition,
       until such time as that interest, still intact and
       unaltered, is exempted from the estate . . . .”
Id. at 570.
        A tenancy by the entireties has a number of unique
features designed to protect the property of husband and wife.
The ability of the husband and wife to shield property through
this form of ownership is to some extent in friction with the
bankruptcy process of making a debtor’s assets available to
creditors. Nonetheless, the attributes of entireties ownership
remain intact while the trustee holds the property following the
filing of a bankruptcy petition unless, or until, spouses fail to
seek exemptions for the entireties assets.
        Thus we arrive at the specific issue in this case: whether,
under § 522(d)(5) of the Bankruptcy Code, a spouse’s
“aggregate interest” in entireties property is only half of the
value of the property, as the District Court concluded, the full
value of the property, or some other sum. The Bankruptcy Code
does not define “aggregate interest” and we generally turn to
state law for the “determination of property rights in the assets
of a bankrupt’s estate.” Butner v. United States, 440 U.S. 48, 54
(1979).
       As we have seen, under Pennsylvania law, despite the
objection of his creditors, a tenant may act on behalf of both
spouses with respect to the whole of the entireties property, so
long as the other spouse does not object. Because these were

                                13
joint bankruptcies and joint creditors were listed,appellants in
both cases chose to apply the federal exemptions.
        In the Brannon case, each of the debtors identified
unequal parts of the entireties property that they wished to
exempt. In the Lewis case, the wife applied all of her
exemptions to entireties property and the husband used his
exemptions against other property. In both cases, the spouses
agreed to the respective allocations. We hold that these uses of
the federal exemptions were permissible under the Bankruptcy
Code. The trustee’s attempt to limit exemptions to 50% of the
total allowed through the bankruptcy system is a restriction of
each spouse’s rights to act with respect to the portion of the
entireties property eligible for exemption; that is, the dollar
amount available to the spouses under § 522(d)(5). In the
bankruptcy setting, the trustee is granted no more authority than
that given to creditors in nonbankruptcy circumstances.
        The trustee cites United States v. Craft, 535 U.S. 274
(2002), which held that entireties property may be subject to a
tax lien against one spouse. But that case is inapposite because
it was concerned with the power of the Internal Revenue Service
under a statute authorizing a lien on all “‘property’ or ‘rights to
property’” of a delinquent taxpayer. Id. at 276 (quoting 26
U.S.C. § 6321). Such sweeping authority is not granted to the
trustee, who is bound in the circumstances here by state property
law rather than a federal statute. See Schlossberg v. Barney,
380 F.3d 174 (4th Cir. 2004); In re: Sinnreich, 391 F.3d 1295
(11th Cir. 2004).
        If the trustee’s position prevailed, it would sever the unity
of the tenancy and make the husband and wife co-tenants with

                                 14
different rights and obligations. This result is illustrated in a
situation in which a husband files for bankruptcy and his
creditors are able to reach 50% of the entireties property. The
non-bankrupt wife would become a tenant in common of the
remaining property, which would be subject to access by her
creditors. Such a result would be contrary to the policy of
tenancy by the entireties to shield the marital estate. We decline
to weaken this time-honored doctrine to that extent.
       We conclude, therefore, that the District and Bankruptcy
courts erred. The judgments in both cases will be reversed and
the cases remanded for further proceedings consistent with this
opinion.

                               15