UNPUBLISHED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Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.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