Court Opinion

ID: 9488502
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:47:31.587468+00
Date Added: 2024-06-11T17:52:55.821569
License: Public Domain

K.K. HALL, Circuit Judge,
dissenting:
I dissent because I believe that the sale of the property had the effect of severing the tenancy by the entireties, and, as a result, each bankruptcy estate should be deemed to contain half of the proceeds. It is therefore necessary to determine whether Mrs. Ballard was hable on the tax claims; if she was not, the tax creditors would be limited to the proceeds in her husband’s estate.
At filing, all property of the debtors came into their respective estates. 11 U.S.C. § 541(a)(1). Filing alone did not sever the tenancy by the entireties. See In re DeMarco, 114 B.R. 121, 123 (Bankr.N.D.W.Va.1990). However, the debtors-in-possession, who act as trustees,1 are charged with administering the estate, and the sale of the house severed the tenancy by the entireties. See id. at 124 (“The trustee has no title to property of the estate until he elects to take affirmative action and proceedings are had or orders made.”). In the absence of an exemption that might dictate a different result,2 the *373money is simply allocable between the two estates.
I would agree that, had the sale occurred outside bankruptcy, there is support in Virginia law for finding a new tenancy by the entireties in the proceeds. See Oliver v. Givens, 204 Va. 123, 129 S.E.2d 661, 663 (1963) (“It is true ... that the sale of the real estate which the husband and wife owned as tenants by the entireties terminated such an estate in that property.... [I]n the absence of an agreement or understanding to the contrary, the proceeds derived from a voluntary sale of real estate held by the entireties are likewise held by the entireties.”). However, the sale of the Ballards’ residence was not a “voluntary sale” by a husband and wife. Instead, it was a liquidation of bankruptcy estate assets by debtors-in-possession, undertaken with the “agreement or understanding” that creditors would eventually consume the entire amount. By focusing on how state law would view the transaction, the majority loses sight of the bankruptcy context in which the sale took place.
“[A] debtor in possession shall have all the rights, ... and shall perform all the functions and duties ... of a trustee serving in a case under [chapter 11].” 11 U.S.C. § 1107(a). One of a trustee’s duties is to “collect and reduce to money the property of the estate....” 11 U.S.C. § 704(1). The bankruptcy court ruled that the sale of the Ballards’ residence was authorized under 11 U.S.C. § 363(b)(1), which provides that “[t]he trustee, after notice and hearing, may ... sell ... property of the estate_”3 The debtors-in-possession gave notice of the proposed sale pursuant to Bankr.R. 6004, which is required for the sale of estate property by a trustee or debtor-in-possession. The debtors’ initial reorganization plan, filed after the sale, stated that the plan was one “of liquidation.” The net proceeds, which were earmarked in the plan for payment to their creditors, constitute property of the estate that was being temporarily held by them in their role as debtors-in-possession.
The pivotal fact underlying the bankruptcy court’s ruling that the tenancy by the entire-ties survived the sale of the residence was that “the proceeds were deposited into an interest-bearing account requiring the signature of both parties and their attorney.” J.A. 25 (bench ruling on IRS’s summary judgment motion). The majority likewise holds that “the manner in which the proceeds from the sale were paid and retained by order of the bankruptcy court preserved the tenancy by the entireties.” Majority op. at 370. I believe this logic elevates form over substance.
A trustee “may make such deposit or investment of the money of the estate ... as will yield the maximum reasonable net return on such money_” 11 U.S.C. § 345. Debtors-in-possession, in the performance of their administrative duties, may do the same. Had the proceeds been placed in separate accounts, would the majority’s analysis be different? Inasmuch as the debtors had not identified any individual debts of either of them, it simply made sense to require that the proceeds be kept in a single account. This mere administrative detail should not be permitted to eclipse the substance of the sale.
I would vacate the judgment below and remand with directions to determine whether Mrs. Ballard was liable on the tax claims.

. A trustee was not appointed until after the cases were converted to chapter 7.

. With regard to the residence, the only exemption claimed was the state homestead exemption; the debtors did not claim the exemption under 11 U.S.C. § 522(b)(2)(B). The majority notes that had Mrs. Ballard not died, liquidation of the entireties estate would have been for the benefit of the joint creditors only. See majority op. at 371 & n.4. The majority seems to assume that this result would obtain even without a § 522(b)(2)(B) exemption having been claimed. Only when the exemption option has been exercised, however, does the entireties property stand available for the satisfaction of only the joint debts. See Sumy v. Schlossberg, 777 F.2d 921, 927-29 (4th Cir.1985); In re Fori, 3 B.R. 559, 570 (Bankr.D.Md.1980) ("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 under § 522(b)(2)(B).”), aff'd. *373Greenblatt v. Ford, 638 F.2d 14 (4th Cir.1981). In each of the cases cited by the majority — Sumy, Ragsdale, Martin and Reid (see majority op. at 371) — the debtor(s) had in fact claimed the exemption.
Even if only Mr. Ballard is liable for the tax claims, the IRS and other individual creditors would still be able to reach his portion of the sale proceeds. This result, however, is dictated by his failure to claim the § 522(b)(2)(B) exemption and not, as the majority holds, by a dissolution of the tenancy by the entireties occasioned by Mrs. Ballard's death.

. Whether the sale was conducted pursuant to § 363(b)(1) or (h) is irrelevant. Inasmuch as both co-tenant spouses had filed for bankruptcy, there was no need to invoke § 363(h) to consider the benefits of partition in kind or sale of one debtor's undivided interest. Subsection (h) was clearly written with non-debtor co-owners in mind.