Opinion
Case No. 95-12941-SSM, Adversary Proceeding No. 97-1416
March 19, 1998
Adam C. Paul, Esquire, Gold Stanley, P.C., Alexandria, VA, Of Counsel for plaintiff, H. Jason Gold, Trustee
Roy B. Zimmerman, Esquire, Alexandria, VA, Of Counsel for defendant Meryl D. Simon
John Donelan, Esquire, Alexandria, VA, Of Counsel for intervenor Martin M. Simon
MEMORANDUM OPINION AND ORDER
A hearing was held in open court on March 17, 1998, on the plaintiff's motion for summary judgment. At the conclusion of the hearing, the court ruled from the bench that the motion for summary judgment would be denied, since there were material facts in dispute that could only be resolved in the context of a trial. This memorandum opinion supplements the court's bench ruling.
Background
Martin M. Simon (the "debtor") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in this court on July 5, 1995. On September 24, 1996, the case was converted to chapter 7. The plaintiff, H. Jason Gold ("the trustee"), was appointed as chapter 7 trustee on October 28, 1996.
On November 3, 1997, the trustee brought this action under section 363(h) of the Bankruptcy Code to sell both the estate's interest, and the interest of the debtor's wife, Meryl Simon (the "defendant"), in property located at 1044 Bellview Road, McLean, Virginia 22102. The property is owned by the debtor and his wife as tenants by the entirety. The debtor's schedule A ("Real Property") reflects that the property has a fair market value of $520,000. Additionally, the debtor's schedule D ("Creditors Holding Secured Claims") reflects that PNC Mortgage Corporation is the holder of a first lien deed of trust against the property in the amount of $310,000 and that Crestar Bank is the holder of a second lien deed of trust in the amount of $39,000. The debtor's schedule F ("Creditors Holding Unsecured Nonpriority Claims") reflects that the debtor has $232,628.50 of obligations for which he and the defendant are jointly liable and has only $1,901.50 of obligations for which he is solely liable.
On March 2, 1998, the trustee brought this motion for summary judgment asserting that no material issues of fact are in dispute and that all of the elements of § 363(h) are met. On March 13, 1998, the defendant filed a response, supported by the affidavits of the debtor and the defendant, asserting that material facts are in dispute with respect to whether the benefit to the estate from selling the co-debtor's interest outweighs the resulting detriment to the co-owner. At the hearing on March 17, 1998, the court, out of an abundance of caution, granted the debtor's motion to intervene as a party defendant.
Conclusions of Law
This court has jurisdiction of this proceeding under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. Under 28 U.S.C. § 157(b)(2)(N), this is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge, subject to the right of appeal under 28 U.S.C. § 158.
I.
Under Fed.R.Civ.P. 56, made applicable to adversary proceedings by F.R.Bankr.P. 7056, a party may move, with or without supporting affidavits, for summary judgment at any time after the parties are at issue. Rule 56(c) provides:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. A summary judgment, interlocutory in character, may be rendered on the issue of liability alone although there is a genuine issue as to the amount of damages.
The burden of establishing the nonexistence of a genuine issue of material fact rests on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 88 L.Ed.2d 285 (1985). In considering a motion for summary judgment, the court should draw all inferences from the underlying facts in a light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 530 (1986). Nevertheless, not just any factual dispute is sufficient to bar summary judgment; the dispute must be as to a "material" fact. Id. at 247-248. Where, as here, it is the plaintiff that is moving for summary judgment, this means that the dispute must concern a fact which, if established, would defeat a required element of the moving party's case or constitute an affirmative defense.
"By its very terms, [Rule 56] provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.
As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Anderson, 477 U.S. at 247-48, 106 S.Ct. at 2510.
II.
Under § 541, Bankruptcy Code, a debtor's interests in property held as tenant by the entireties with a non-debtor spouse becomes property of the estate once the debtor files a bankruptcy petition. Greenblatt v. Ford (In re Ford), 638 F.2d 14 (4th Cir. 1981). That interest, however, may be exempted to the extent it is exempt from creditor process under applicable state law. § 522(b)(2)(B), Bankruptcy Code. Under Virginia law, property held as tenants by the entirety may be reached by joint creditors of both spouses but is not liable for the debts of either spouse alone. Williams v. Peyton (In re Williams), 104 F.3d 688, 690 (4th Cir. 1997); Sumy v. Schlossberg, 777 F.2d 921, 927-28 (4th Cir. 1985); Price v. Harris (In re Harris), 155 B.R. 948, 950 (Bankr. E.D. Va. 1993) (Tice, J.); Vasilion v. Vasilion, 192 Va. 735, 740-43, 66 S.E.2d 599, 602-04 (1951). Moreover, it is clear that the trustee may sell the interests of the debtor and the debtor's spouse for the benefit of their joint creditors. Williams, 104 F.3d at 690; Sumy, 111 F.2d at 932. After payment of secured claims in full and the joint unsecured claims, any balance remaining is returned to the debtor and the non-debtor spouse. Harris, 155 B.R. at 151; § 363(j), Bankruptcy Code.
Sumy was a response to the potential for what the Fourth Circuit has characterized as a "legal fraud" on creditors holding joint claims against husband and wife. If only one spouse were to file a bankruptcy petition and were granted a discharge, the creditor would no longer have a joint claim and would be unable to reach the tenancy by the entireties property. To prevent such an abuse, the Fourth Circuit has long allowed a joint creditor, where only one spouse has filed for bankruptcy, to seek relief from the automatic stay and a stay of the debtor's discharge in order to obtain a judgment that could be enforced against the tenancy by the entireties property. Phillips v. Krakauer, 46 F.2d 764 (4th Cir. 1931) (decided under former Bankruptcy Act); Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057 (4th Cir. 1983) (same result under Bankruptcy Code). In Sumy, the Fourth Circuit held that while Krakauer and Bondurant remained viable remedies, "judicial economy would be better served by a single proceeding in bankruptcy court," and that "to the extent the debtor and the nonfiling spouse are indebted jointly, property owned as a tenant by the entireties may not be exempted from an individual debtor's bankruptcy estate under § 522(b)(2)(B) and the trustee may administer such property for the benefit of the joint creditors under § 363(h)." 777 F.2d at 932.
In the case where both spouses file for bankruptcy, the trustee ordinarily has no difficulties in simply administering the property. When, as here, only one spouse has filed for bankruptcy, the trustee must obtain approval under § 363(h), Bankruptcy Code, to sell the interests of the non-debtor spouse. Under § 363(h), Bankruptcy Code,
the trustee may sell both the estate's interest, under subsection (b) or (c) of this section, and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety, only if —
(1) partition in kind of such property among the estate and such co-owners is impracticable;
(2) sale of the estate's undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners;
(3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners; and
(4) such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.
The defendant's answer admits that partition in kind is not practicable and that the property is not used in the production of energy. She does, however, dispute the other two elements that must be proven under § 363(h), and also disputes whether the debtor's schedule F is a correct portrayal of the joint debts of the debtor and defendant. The answer contends that there are only two joint debts, both of which are being paid, and that she has "physical conditions that mandate her continued residence in the subject property."
It is clear that the heart of obtaining approval under § 363(h) for the sale of a non-debtor interest in property is that the trustee be able to prove that the benefit to the estate of the sale outweighs the detriment to the co-owners. Such a determination is a fact-intensive analysis, and courts have considered numerous factors such as the economic, emotional, and psychological consequences in balancing the hardships between the trustee and the non-debtor owner. Harris, 155 B.R. at 950. When the property sought to be sold is the only potential source of payment of joint debts, approval of the sale of the non-debtor's interests heavily weighs in favor of the trustee. Id. at 951. Nevertheless, it is clear that sale of property that is the home of a debtor and a non-debtor spouse is likely to impose a substantial burden due to the uprooting of the family. 3 Collier on Bankruptcy ¶ 363.08[3], at 363-56 to 57 (Lawrence P. King, ed. 15th ed. rev. 1997). Accordingly, in addition to weighing the economic benefit to the estate, the balancing test contemplated by § 363(h) must include a balancing of non-economic factors as well. 3 Collier on Bankruptcy ¶ 363.08[3], at 363-57; see also Community National Bank and Trust Co. of N.Y. v. Persky (In re Persky), 893 F.2d 15, 20-21 (2d Cir. 1989). In Persky, the court set forth the following factors to consider:
1. Actuarial calculations of the life expectancies of the spouses;
2. Respective contributions to the purchase price of the home;
3. Tax exemptions available on the property;
4. Prospects for acquiring a new home;
5. Special physical or mental handicaps; and
6. Minor children living at home.
Persky, 893 F.2d at 21. In addition to the balancing test, the non-debtor co-owner is afforded the additional protection provided by § 363(i), which gives the non-debtor co-owner a "right of first refusal", under which the non-debtor "may purchase such property at the price at which such sale is to be consummated."
After consideration of the arguments of the parties and the supporting affidavits, the court concludes that a disputed material issue of fact exists with regard to whether the benefit to the estate from the sale of the property outweighs the detriment to the defendant. The defendant has supported her opposition to the motion with an affidavit asserting that her home, the property the trustee is seeking to sell, is arranged in such a fashion as to accommodate her heart ailment. Moreover, the debtor's affidavit suggests that many of the joint debts in this case have been paid, or that the debtor is current with a payment plan reached with the creditor. It is true, as the trustee points out, that the debtor's own amended schedules, filed and sworn to under penalty of perjury on December 24, 1996, reflect that the majority of the debts listed are joint debts. Nevertheless, whether there exists a benefit to the estate, and whether that benefit outweighs any detriment to the non-debtor co-owner, are issues of fact not well suited for summary judgment. In order to make a finding as to these disputed facts, the court believes it needs to receive evidence, hear testimony, and assess the credibility and demeanor of witnesses. Accordingly, the motion for summary judgment will be denied.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion for summary judgment is DENIED.
2. The clerk will mail a copy of this memorandum opinion and order to counsel for the trustee, counsel for the defendant, and counsel for the debtor.