Opinion
Case No. 04-53521.
February 4, 2005
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART OBJECTIONS TO EXEMPTIONS
This matter is before the Court upon objections filed by the Chapter 7 Trustee and by a creditor, Comerica Bank, to the exemptions taken by the Debtor, Edwin Nelms. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and 157(a) as a core matter under 28 U.S.C. § 157(b)(2)(A) and (O). For the reasons set forth in this memorandum opinion and order, Comerica's objections to the Debtor's exemption in the personal residence at 22260 Balmoral, Grosse Ile, Michigan are denied and the Trustee's and Comerica's objections to the Debtor's exemption in the second home at 917 Toulouse, Unit #7, New Orleans, Louisiana are sustained.
On May 10, 2004, Edwin Nelms filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. Subsequently, the Debtor converted the case to Chapter 7. On June 8, 2004, the Debtor filed his schedules of assets and liabilities and statement of financial affairs. On Schedule C, the Debtor claimed certain property as exempt. The Debtor's exemptions were taken under § 522(b)(2) of the Bankruptcy Code. Those exemptions are commonly referred to as the state law exemptions. Among the exemptions claimed on the Debtor's Schedule C are the following: Description of Property Specify Law Providing Each Exemption 11 USC § 522 11 USC § 522
Personal residence (b)(2)(B); Michigan case law 22260 Balmoral, Grosse Ile, MI 48138 (joint with wife, Judith Nelms) Second home (b)(2)(B); Michigan case law 917 Toulouse, Unit #7, New Orleans, Louisiana 70112 (joint with wife, Judith Nelms) Charles L. Wells, III is the duly appointed Chapter 7 Trustee in this case. Comerica is a creditor. Both the Trustee and Comerica objected to a number of the Debtor's claimed exemptions. A hearing was held on December 3, 2004. As a result of issues raised at that time, the parties determined to brief certain issues relative to the objections and the hearing was adjourned until January 21, 2005. By the time of the January 21, 2005 hearing, there were only two outstanding objections raised by the Trustee and by Comerica. The first objection, made only by Comerica, is that the Debtor cannot exempt his interest in either the Grosse Ile property or the New Orleans property as a tenant by the entirety because the filing of the bankruptcy severs the tenancy by the entirety. The second objection, made both by the Trustee and by Comerica, is that the tenancy by the entirety, even if not severed and therefore still applicable to real property in Michigan, does not permit the exemption claimed in the New Orleans property. Under Fed.R.Bankr.P. 4003(c), the party objecting to an exemption bears the burden of proof.In support of the first objection, Comerica argues that the analysis made by the Bankruptcy Court in In re Spears, 308 B.R. 793 (Bankr. W.D. Mich. 2004), rev'd Spears v. Boyd (In re Spears), 313 B.R. 212 (W.D. Mich. 2004), is correct and that there is a severing of a tenancy by the entirety upon the filing of a bankruptcy case by one spouse. Comerica further asserts that this analysis is strengthened by the recent passage of an amendment to the State of Michigan constitution commonly known as Proposal 2. Proposal 2 was passed on November 2, 2004 and it provides that "the union of one man and one woman in marriage shall be the only agreement recognized as a marriage or similar union for any purpose." Comerica believes this constitutional amendment supports the reasoning of the Bankruptcy Court in In re Spears and undermines the reasoning of the District Court when it reversed the Bankruptcy Court.
This Court is persuaded that the reasoning and analysis employed by the District Court in its Spears opinion is correct. The Court will follow it in this case. There is no reason to restate it. Morever, the Court does not find that the passage of Proposal 2 on November 2, 2004 in any way alters or undermines that analysis. Further, Comerica's argument that the adoption of Proposal 2 somehow supports its contention that a tenancy by the entirety is severed upon the filing of a bankruptcy petition by one spouse is completely at odds with the recent passage of Public Act No. 575 on December 30, 2004 by the Michigan legislature. That act, entitled "Chapter 54A. Bankruptcy," sets forth the available exemptions for an individual who files bankruptcy in Michigan. Among other exemptions, that statute expressly provides in § 5451.1(o) that an individual who files bankruptcy in Michigan may exempt from property of the estate under § 522(b)(2) of the Bankruptcy Code "real property, held jointly by a husband and wife as a tenancy by the entirety. . . ." This act became law after the passage of Proposal 2 and reflects the State of Michigan legislature's most current thinking with regard to the entitlement of a filing spouse to take advantage of a tenancy by the entirety exemption. It is a legislative recognition that a tenancy by the entirety in Michigan is not severed upon one spouse filing a bankruptcy petition. Accordingly, the Court rejects Comerica's contention that the tenancy by the entirety in any real property of the Debtor was severed upon the Debtor's filing bankruptcy. Comerica's first objection is overruled as it applies to both the Grosse Ile and New Orleans properties.
Both Comerica and the Trustee raised the second objection to the Debtor's exemption in the New Orleans property. In his Schedule C, the Debtor elected to exempt property under § 522(b)(2)(B) of the Bankruptcy Code. Section 522(b)(2) permits a debtor to exempt the following property:
(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180 day period than in any other place; and
(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.
11 U.S.C. § 522(b)(2). The Debtor's exemption is set forth on Schedule C as being claimed under § 522(b)(2)(B). However, both the Debtor, on the one hand, and Comerica and the Trustee, on the other hand, also address § 522(b)(2)(A) in their pleadings and arguments.
The Debtor argues that tenancy by the entirety law in Michigan is not limited in application to real property located within the state of Michigan, but enables the Debtor to enjoy this protection for real property located in Louisiana as well as in Michigan. The Debtor reasons that, because he is domiciled in Michigan, and because Michigan law recognizes tenancy by the entirety, Michigan law permits him to exempt his interest as a tenant by the entirety in the New Orleans property as well as the Grosse Ile property. In support, the Debtor relies on In re Stockburger, 192 B.R. 908 (E.D. Tenn. 1996), aff'd, Farinash v. Stockburger (In re Stockburger), No. 96-5409, 1997 WL 41202 (6th Cir. Jan. 31, 1997), which addressed personal property exemptible under § 522(b)(2)(A). The Debtor conflates § 522(b)(2)(A) and (B), concluding that § 522(b)(2)(B) "clearly states [that] the law of Debtor's domicile controls." The Debtor is mistaken.
Sections 522(b)(2)(A) and (B) use different words. "State law that is applicable . . . at the place in which the debtor's domicile has been located" is not the same thing as "applicable nonbankruptcy law."
[Section] 522(b)(2)(B) contains no provision limiting the governing "applicable nonbankruptcy law" to that of the debtor's state of domicile. In wording § 522(b)(2)(B) this way, Congress clearly chose to identify the protected class of property by two characteristics: its legal form of ownership, and the existence of protection "under applicable nonbankruptcy law" for assets held in such forms of ownership. Insofar as the latter characteristic is concerned, the situs of the debtor's domicile is irrelevant.
In re Cochrane, 178 B.R. 1001, 1020 (Bankr. D. Minn. 1995);see also McNeilly v. Geremia (In re McNeilly), 249 B.R. 576, 580 (B.A.P. 1st Cir. 2000) (finding the debtor was "entitled to any claimable exemptions under subsection (B), as well as those under subsection (A); In re Gillette, 248 B.R. 845, 848-49 (Bankr. M.D. Fla. 1999) (same) In re Weza, 248 B.R. 470, 472-75 (Bankr. D.N.H. 2000) (separately analyzing a debtor's claimed homestead exemption in real property owned by the entireties under both § 522(b)(2)(A) and (B)). Therefore, a debtor's ability to exempt personal property under § 522(b)(2)(A) using the law of the domicile, as occurred in Stockburger, is irrelevant to an exemption of an entireties interest in real property under § 522(b)(2)(B).
In support of their objection to the exemption claimed by the Debtor in the New Orleans property, Comerica and the Trustee argue that, because this property is located in Louisiana and not in Michigan, it does not enjoy the protection afforded by Michigan law to a tenancy by the entirety in real property located in Michigan. The Trustee and Comerica assert that the law of the domicile is only applicable to exemptions claimed in personal property and not to exemptions claimed in real property. Comerica and the Trustee rely on the principle that ownership, transfer, control and disposition of real property are matters that are reserved to the state in which the real property is located.
The Court rejects the Trustee's and Comerica's assertion that § 522(b)(2)(A) applies only to exemptions taken in personal property and not to exemptions to real property. AlthoughStockburger dealt with an exemption taken in personal property and applied § 522(b)(2)(A), there is nothing on the face of the statute that limits the exemptions available under that section of the Bankruptcy Code to personal property. However, whether the Debtor's claimed exemption in the New Orleans property as a tenant by the entirety is asserted under § 522(b)(2)(A) or § 522(b)(2)(B), the result in this case is the same.
If § 522(b)(2)(A) applies, the Court must indeed look to the law of the domicile of the Debtor to determine what Michigan law provides regarding rights and interests in real property. Under Michigan conflict of law rules, rights and interests in real property are determined by the law of the situs of the property. "[S]tate laws do not have extraterritorial force. Rights and remedies of property are governed by laws of the state in which it is situate." U.S. Truck Co. v. Pennsylvania Surety Corp., 243 N.W. 311, 312 (Mich. 1932); see also Timber-Lee Evangelical Free Church v. Baraga County Road Commission, 96-2288, 1998 WL 228044 at *1 (6th Cir. Apr. 29, 1998) ("Michigan courts follow the principle of lex loci rei sitae and apply the law of the state in which the property in dispute is situated. . . .") (citations omitted). In this case, the law of the Debtor's domicile is Michigan and Michigan law provides that the law of the state in which the real property is located governs the rights and interests in that real property. In this case, that state is Louisiana.
Although § 522(b)(2)(A) is clear in directing the Court to apply the law of the domicile where there is an exemption claimed under state or local law by the Debtor, § 522(b)(2)(B) does not on its face resolve the choice of law issue that arises when a debtor seeks to exempt an interest in property as a tenant by the entirety under that section of the Code. That section of the Code instead directs the Court to follow applicable nonbankruptcy law. Again, however, applicable nonbankruptcy law in this case is Michigan law. "When faced with a true conflict of laws question, the first determination must be which state's choice of law rules are to be applied. Federal courts are bound by the choice of law rules of the forum state." In re Gillette, 248 B.R. 845, 849 (M.D. Fla. 1999) (citing Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941)); see also Bailey v. Chattem, Inc., 684 F.2d 386, 392 (6th Cir. 1982) ("The conflicts law of the forum determines which state's substantive law shall apply.") Because the forum in this case is Michigan, the Michigan choice of law rules govern under § 522(b)(2)(B). As explained above, under Michigan conflict of law rules, rights and interests in real property are determined by the law of the situs of the state. That state is Louisiana.
The Debtor argues that case law from other jurisdictions supports his contention that Michigan entireties law can protect the Louisiana property. Other courts have addressed the extraterritorial effect of a state law exemption, and some of those decisions do support the Debtor. For example, the Ninth Circuit applied California exemption law to real property located in Michigan in Arrol v. Broach (In re Arrol), 170 F.3d 934, 936-37 (9th Cir. 1999), finding nothing in the statute, legislative history, or case law limiting the exemption to property located within the state. In In re Drenttel, 302 B.R. 26, 29-33 (Bankr. D. Minn. 2003), the bankruptcy court discussed a split in authority on this issue. The Drentell court canvassed case law and concluded that the "majority" position is that state exemption laws have no extraterritorial force, and concluded that the majority position was "the more sound." Id. at 30-33 (citations omitted). However, the bankruptcy court was reversed in Drenttel v. Jensen-Carter (In re Drenttel), 309 B.R. 320 (B.A.P. 8th Cir. 2004), which followed the minority view. The Bankruptcy Appellate Panel looked to the Minnesota homestead exemption statute and found that "[t]he plain language of the statute does not require the dwelling to be located in the State of Minnesota." 309 B.R. at 323. Although Michigan courts have not specifically addressed the extraterritorial effect of the state exemption statute or of the protection extended to entireties property under Michigan law, as noted above, Michigan courts have found that its state laws cannot be applied to real property located in another state. This Court agrees with the Michigan courts and with what appears to be the majority view of other courts. An additional reason for not applying Michigan exemption law to the Louisiana property is that, to do so, the Court would vitiate Louisiana's statute that "[r]eal rights in immovables situated in this state are governed by the law of this state." La. Civ. Code Ann. art. 3535 (West 1994).
Section 522(b)(2)(A) makes it clear that when a debtor is claiming an exemption under state or local law, it is the state or local law of the debtor's domicile that governs. On the other hand, § 522(b)(2)(B) clearly provides that when an interest is claimed as exempt because it is an interest as a tenancy by the entirety, it is applicable nonbankrutpcy law that governs. In this case, whether asserted under § 522(b)(2)(A) or (B), the result is the same for the New Orleans property. The Debtor may elect to exempt his interest as a tenant by the entirety in the Grosse Ile property, which is located in Michigan, but not in the New Orleans property, which is located outside the state of Michigan. The Debtor's rights and interests in the New Orleans property are governed by the law of the situs of that real property, Louisiana. Accordingly,
IT IS HEREBY ORDERED that Comerica's objection to the Debtor's exemption in 22260 Balmoral, Grosse Ile, Michigan is DENIED.
IT IS FURTHER ORDERED that the Trustee's objection and Comerica's objection to the Debtor's exemption in 917 Toulouse, Unit #7, New Orleans, Louisiana are SUSTAINED.