Court Opinion

ID: 2643234
Source: CourtListenerOpinion
Date Created: 2013-11-20 19:42:22.220682+00
Date Added: 2024-06-11T12:31:12.372181
License: Public Domain

UNPUBLISHED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.
Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.

                              - 2 -
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

                                         - 3 -
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. 1C-

1601(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

                                             - 4 -
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.

                                   - 5 -
(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

                                             - 6 -
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).

                                           - 7 -
(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

                                           - 8 -
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.

                                        - 9 -
      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

                                     - 10 -
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.

                                    - 11 -
     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

                                            - 12 -
     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

                                     - 13 -
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

                                           - 14 -
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

                                     - 15 -