Opinion
No. 7-00-15959 MA
June 4, 2001
E. C. Mike Gomez, Attorney for Debtors, Roswell, NM.
Linda S. Bloom, Attorney for Chapter 7 Trustee, Albuquerque, NM.
MEMORANDUM OPINION
THIS MATTER came before the Court on the Trustees Objection to Exemptions and Notice of Filing of Objections, the Trustees Objection to Second Amended Exemptions and Notice of Filing Objection, and the First Amendment to Trustees Objection to Second Amended Exemption (together, Objections to Exemptions). At stake is whether Debtor Winona E. Smith can claim, pursuant to 11 U.S.C. § 522(d), an exemption in certain royalty interests from oil and gas and other mineral interests that her husband, Debtor Charles H. Smith, inherited from his mother. For the reasons discussed below, this Court finds that she cannot.
BACKGROUND
Charles H. Smith and Winona E. Smith filed a joint petition for bankruptcy under Chapter 7 of the Bankruptcy Code on November 6, 2000. The Debtors did not include any interest in oil and gas royalties on their initial schedules, but they did list income from royalties on Schedule I. When the Trustee became aware of the extent of the oil and gas interests, she withdrew her no asset report filed after the § 341 meeting of creditors. The Debtors then amended their schedules on March 1, 2001, and again on March 30, 2001, ultimately claiming the royalties exempt in the amount of $16,000 pursuant to 11 U.S.C. § 522(d)(5).
The Amended Schedule B filed on March 1, 2000 lists royalties valued at $ 15,000. The Amended Schedule C, filed on the same date, claims as exempt royalties in the amount of $8,100 pursuant to 11 U.S.C. § 522(d)(5).
The Debtors did not submit a second amended Schedule B.
The Trustee has found a buyer for the oil and gas and other mineral interests and seeks the sell them free and clear of liens. See Trustees Motion to Sell Oil and Gas and Other Mineral Interests Free and Clear of Liens (Motion to Sell). The Debtors objected to the Motion to Sell on grounds that they amended their exemptions to exempt the full value of the royalties, and that they have a tentative offer in excess of the amount stated in the Motion to Sell. The Debtor Charles H. Smith inherited the oil and gas and other mineral interests from his mother in 1992. They are his separate property. There is no evidence before the Court that Charles H. Smith deeded or otherwise transferred his interest in the oil and gas and other mineral interests to Winona E. Smith.
DISCUSSION
In New Mexico, debtors may either choose state or federal exemptions. See 4 Collier on Bankruptcy ¶ 522.01 (Lawrence P. Kind, ed., 15th ed. rev. 2000) (New Mexico has not opted out of the federal bankruptcy exemption scheme, so debtors may choose between the exemptions contained in 11 U.S.C. § 522(d) or exemptions available under state or federal non-bankruptcy law). The Debtors in this case have elected the federal exemption statutes as provided in the Bankruptcy Code.
Pursuant to 11 U.S.C. § 522(m), the exemptions apply separately to each joint debtor. 11 U.S.C. § 522(m) (Subject to the limitation in subsection (b), this section shall apply separately with respect to each debtor in a joint case.). In this case the Debtors seek to claim as exempt royalties from certain oil and gas and other mineral interests pursuant to 11 U.S.C. § 522(d)(5). That section provides:
The following property may be exempted under subsection (b)(1) of this section:
(5) The debtors aggregate interest in any property, not to exceed in value $850 plus up to $8,075 of any unused amount of the exemption provided under paragraph (1) of this subsection.
Paragraph (1) of subsection (d) provides:
(1) The debtors aggregate interest, not to exceed $16,150 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.
Debtors claim that 11 U.S.C. § 522(d)(5) allows both debtors to exempt the interest they each claim on any property, subject to the total exemptions allowed. The Debtors then focus on the words debtor or a dependent of the debtor contained in § 522(d)(1), and on the words any property contained in § 522(d)(5) to support their argument that Winona E. Smith and Charles H. Smith can each claim an exemption in the royalty interests, for a total claimed exemption in the amount of $16,000. This argument misses the true focus of the applicable exemption statutes.
The critical element of these statutes is interest. See In re Freund, 32 B.R. 622, 624 (Bankr. W. D. Wis. 1983) (key word under 11 U.S.C. § 522(d)(1) is interest which also carries through to 11 U.S.C. § 522(d)(5)); In re Cunningham, 5 B.R. 709, 711 (Bankr.D.Mass. 1980) (holding that debtor who did not jointly own property used as residence could not claim exemption pursuant to 11 U.S.C. § 522(d)(1) because that debtor held no ownership interest which could be claimed as exempt).
Both 11 U.S.C. § 522(d)(1) and 11 U.S.C. § 522(d)(5) start with the debtors aggregate interest.
Thus, in order to claim an exemption under these sections, a debtor must have an interest in the property to be claimed as exempt. A dependent of the debtor may claim an exemption on behalf of the debtor, but he or she cannot claim his or her own exemption unless he or she has an interest in the property to be claimed as exempt. Freund, 32 B. R. at 623.
At the time a joint petition for bankruptcy is filed, separate bankruptcy estates are created. 11 U.S.C. § 302. Each bankruptcy estate consists only of property in which that debtor has a legal or equitable interest. In re Freund, 32 B.R. 622, 623 (Bankr.W.D.Wis. 1983). So while it is true that both debtors are entitled to claim the exemptions listed in § 522(d), each must do so with regard to his or her own estate. [I]ndividual estates of debtors cannot be merged to permit double exemptions just because petitioners are husband and wife. Id. at 624 (citation omitted). This case is nearly identical to a case decided by the Bankruptcy Court for the Western District of Wisconsin in 1983, In re Freund, 32 B.R. 622 (Bankr.W.D.Wis. 1983). In Freund, the joint-debtor/wife, who was not an heir to the estate of her mother-in-law, was held not to be entitled to claim the remaining portion of her husbands inheritance as part of her exemptions pursuant to 11 U.S.C. § 522(d)(5). 32 B. R. at 623. The Court reasoned that because she had no interest in the inheritance prior to the bankruptcy, her bankruptcy estate has no claim to the inheritance and no exemption of the inheritance can be claimed by her or on her behalf. Id. Winona E. Smith has no interest in the royalties, therefore no royalty interest is part of her estate. Under New Mexico law, inherited property is the sole and separate property of the heir.
NMSA 1978 § 40-3-8(A)(4) (Separate property includes property acquired by either spouse by gift, bequest, devise or descent.). Charles H. Smith inherited the oil and gas and other mineral interests from his mother. There is no evidence that he transferred his interest to Winona E. Smith.
Therefore, Winona E. Smith has no ownership interest in the oil and gas and other mineral interests in which she can claim an exemption pursuant to 11 U.S.C. § 522(d)(5). In a final attempt to address the trustees objections, the Debtors claim that Winona E. Smith has an interest in the property because it is necessary to recovery from the bankruptcy, and because she is a debtor and a dependant of the co-debtor. See Answer to Trustees Objection to Second Amended Exemptions and Notice of Filing of Objection. The Court has already addressed the argument that she can claim the exemption as a dependant of the Debtor. The remaining arguments have no merit. In order to claim an exemption a debtor must have an ownership interest in the property to be claimed as exempt.
CONCLUSION
It is true that each debtor can claim the exemptions contained in § 522. It is also true that a dependent of the debtor can claim an interest on behalf of the debtor. It is also true that § 522(d)(5) does not limit the type of property that can be claimed as exempt. See In re Smith, 640 F.2d 888 (7th Cir. 1981). All these statements are true, provided each debtor has an ownership interest in the property claimed as exempt. The royalty interests are the separate property of Charles H. Smith.
Winona E. Smith has no ownership interest in those royalties in which she can claim an exemption. The Court will therefore sustain the Trustees Objections to Exemptions, subject to the exemption of Charles H. Smith in the amount of $8,925.00.
This opinion constitutes the Courts findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. An appropriate order will be entered.