1998 WL 757988 (S.D.Fla.)
United States District Court, S.D.
Florida.
In re: Juan E. PLANAS Debtor.
Juan E. PLANAS, Appellant,
v.
James S. FELTMAN, Trustee for the
Estate of Juan E. Planas, Appellee.
No. 98-0506-CIV-NESBITT.
Aug. 21, 1998.
Barbara Lynn Phillips, Phillips
& Phillips, Miami, for Juan E. Planas.
David C. Profilet, Profilet Vazquez
& Hess, Miami, for James S. Feltman.
ORDER AFFIRMING IN PART AND
REVERSING AND REMANDING IN PART BANKRUPTCY COURT'S
ORDER
NESBITT, District J.
*1 THIS CAUSE came before the Court
upon an appeal of the bankruptcy court's Memorandum Decision and Order on the
Trustee's Renewed Objection to Debtor's Claimed Exemptions, entered on July 22,
1996. The issues presented are as follows: (1) whether the bankruptcy court erred
in determining that assets held by the Debtor and his non-debtor spouse as
tenants by the entireties could be liquidated to satisfy the Debtor's
individual debts; and (2) whether the bankruptcy court erred in concluding that
the Debtor and his non-debtor spouse failed to demonstrate their intent to own
their money-market account as tenants by the entireties.
I. Factual and Procedural Background
Juan E. Planas (the
"Debtor") filed an individual Chapter 7 bankruptcy petition on
December 30, 1994. His wife Sylvia Planas ("Mrs.Planas"), did not
file for bankruptcy protection. In his bankruptcy schedules, the Debtor listed
secured debt of $260,093.80, consisting of two mortgages on real property owned
by the Debtor and Mrs. Planas. The Debtor and Mrs. Planas are co-obligors on
the mortgages. One of the joint secured debts is their home mortgage. [FN1] The
other joint secured debt is a non-residential mortgage on a commercial
warehouse (the "Warehouse"). The Warehouse mortgage (the
"Mortgage") is the only joint debt of the Debtor and Mrs. Planas at
issue. [FN2] At all relevant times the Mortgage was current and in good
standing.
FN1. The bankruptcy court did not
examine the legal effect of a joint debt on a homestead; therefore, exemption
of this asset has not been challenged and is not the subject of this appeal.
FN2. The Debtor scheduled
$1,972,489.68 of individual unsecured debt in his bankruptcy petition.
The non-secured scheduled assets
which the Debtor sought to exempt as tenancy by the entireties property are as
follows:
1) Warehouse--$110,000.00
(approximately $23,000 in equity);
2) Merrill Lynch Cash Management
Account--$67,051.00 (the "Merrill Account");
3) Stock in two Florida corporations
(Eastern Contracts Co. and Eastern Drywall Co.)--$30,000.00 (the "Stock
Certificates");
4) SunBank Checking Account--$500.00
(the "SunBank Account");
5) Household goods and
furnishings--$3,000.00 (the "Furnishings"); and
6) Art--$1,000.00 (the
"Art").
James S. Feltman (the
"Trustee"), objected to the Debtor's claimed tenancy by the
entireties exemptions and demanded turnover of all entireties property. Mrs.
Planas responded to the turnover demand by claiming that the assets were immune
from levy or sale because they were owned as tenants by the entireties.
Trial on the Trustee's objection to
exemptions was conducted on August 24, 1995. The trial consisted of the
testimony of the Debtor and Mrs. Planas, and documentary evidence admitted
without objection. On July 22, 1996 the bankruptcy court entered its Memorandum
Decision and Order on Trustee's Renewed Objection to Debtor's Claimed
Exemptions (the "Order on Exemptions"). The bankruptcy court
concluded that the existence of the joint debt of husband and wife on the
Warehouse mandates liquidation of all of the Debtor and non-debtor spouse's
entireties property. Accordingly, the bankruptcy court ordered that one-half of
the proceeds of the sale of the entireties property was to be distributed to
the Debtor's individual creditors. Finally, the court determined that the
Debtor and Mrs. Planas had not intended to own the Merrill Account by the
entireties . [FN3] The Debtor now appeals the Order on Exemptions.
FN3. On rehearing, the bankruptcy
court corrected one erroneous factual finding which is not pertinent to the
resolution of the instant appeal.
II. The Warehouse: Joint
Creditor-Joint Debt Issue
*2 Initially, it is important to
examine whether the bankruptcy court correctly determined that the Warehouse
was held by the Debtor and Mrs. Planas as entireties property. The evidence
reflected that the Warehouse and the Mortgage encumbering it were both in the
name of the Debtor and Mrs. Planas, as husband and wife. Florida law provides
that where real property is acquired "specifically in the name of husband
and wife, ... a tenancy by the entireties is created." First Nat'l Bank of
Leesburg v. Hector Supply Co., 254 So.2d 777, 780 (Fla.1971). Because the
Warehouse is realty, the Florida presumption of the creation of entireties
property is applicable to the Warehouse. Accordingly, the bankruptcy court
correctly concluded that the Warehouse was held by the Debtor and Mrs. Planas
as tenants by the entireties.
Section 541(a)(1) of the Bankruptcy
Code provides that a debtor's bankruptcy estate includes "all legal or
equitable interests of the debtor in property as of the commencement of the
case." 11 U.S.C. ¤ 541(a)(1). Section 522(b)(2)(B) of the Code, however,
allows the debtor to exempt entireties property under certain conditions:
Notwithstanding section 541 of this
title, an individual debtor may exempt from property of the estate ... 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)(B). In the
case at hand, Florida law is the "applicable nonbankruptcy law"
referred to in section 522(b)(2)(B). Longstanding Florida case law does, in
fact, provide an exemption for entireties property. See, e.g., Stanley v.
Powers, 123 Fla. 359, 166 So. 843, 845 (Fla.1936) (holding that "[i]t is
well settled that an estate by the entireties exists in Florida").
While Florida law provides that
entireties property is exempt from process to satisfy debts of individual
creditors of a spouse, it is not exempt to satisfy joint debts of both spouses.
Balding v.. Fleisher, 279 So.2d 883, 884 (Fla. 3rd DCA 1973). Clearly,
bankruptcy courts have required administration of entireties property if joint
creditors exist. See, e.g., In re Pepenella, 103 B.R. 299, 301-02
(M.D.Fla.1988). Bankruptcy courts in Florida, however, have reached different
results in determining whether entireties property can be sold by the trustee
for distribution to all creditors when a joint creditor of the debtor and
non-debtor spouse exists.
In the instant case, the bankruptcy
court determined that the joint debt, the Mortgage on the Warehouse, could be
used as a lever to overturn the exempt status of all of the entireties
property. To reach this result the court concluded that the holder of the
Mortgage was a joint creditor who was entitled to levy on the Warehouse under
Florida law. Due to the existence of a single joint creditor, the bankruptcy
court determined that the entireties exemption claimed by the Debtor was
completely destroyed. Under the principle that there must be equality of
distribution among creditors, the court held that the Debtor's entireties property
must be liquidated and distributed to all of the Debtor's creditors, whether
joint or individual. Thus, the court ordered that the Warehouse could be sold,
with the Debtor's half of the equity to be distributed to both joint and
individual creditors of the estate.
*3 This result is contrary to that
reached by the majority of bankruptcy courts in Florida. Most courts have held
that only debts to joint creditors can be satisfied from entireties property.
See, e.g., In re Monzon, 214 B.R. 38, 48 (Bankr.S.D.Fla.1997) (holding that
"entireties property which is non-exempt under ¤ 522(b)(2)(B) may be
distributed only to those creditors who had rights against the property under
Florida law--the joint creditors of both spouses"); In re Geoghegan, 101
B.R. 329, 332 (Bankr.M.D.Fla.1989) (concluding that "the sale proceeds [of
the non-exempt entireties property] shall be distributed only to those
creditors with allowed joint claims against the Debtor and his non-debtor
spouse"); and In re Pepenella, 103 B.R. 299, (M.D.Fla.1988) (stating that
"a sole creditor cannot benefit from the equity in property held by
tenancy by the entireties"). [FN4] The courts in these cases did not
consider the entireties exemption destroyed by the presence of a joint creditor,
they simply considered the exemption not applicable to the joint creditor. See,
e.g., In re Pepenella, 103 B.R. at 302 (determining that the most appropriate
rule is to apply the equity in tenancy by the entireties property solely to
joint creditors, rather than to "eliminate[ ] the exemption
entirely"). These courts applied the proceeds of the sale of the debtor's
entireties property solely to satisfy the joint creditor, while the individual
creditors of the Debtor did not share in the proceeds.
FN4. Some courts have held that all
creditors, whether joint or individual, must share in entireties property which
has been liquidated due to the existence of a joint creditor. Such courts,
however, have also held that entireties property will be available to satisfy
the claims of all creditors only up to the amount of the claims of the joint
creditors. See, e.g., In re Boyd, 121 B.R. 622, 624-25 (Bankr.N.D.Fla.1989)
(determining that "administration [of entireties property] is limited to
the extent of the claims held by joint creditors of both the debtor and his
non-filing wife" and any equity above the amount of the joint obligations
is exempt).
This Court chooses to follow the
holding of the majority of cases and disagrees with the bankruptcy court below
for the following reasons. First, if the existence of a joint creditor enables
individual creditors to gain access to the proceeds of liquidated entireties
property new substantive rights would be created for such creditors under the
state law. It is clear that under Florida law only joint creditors can attack
entireties property. The effect of the bankruptcy court's decision is to expand
those state created rights under the premise that paying only joint, and not
individual creditors, conflicts with the distribution scheme of section 726 of
the Code [FN5] and the general bankruptcy policy of "equality of
distribution among creditors." [FN6]
FN5. This is the general
distribution section for liquidation cases. It dictates the order in which
distribution of property of the estate is made.
FN6. "Equality of distribution
among creditors is a central policy of the Bankruptcy Code. According to that
policy, creditors of equal priority should receive pro rata shares of the
debtor's property." Beqier v. I.R.S., 496 U.S. 53, 58, 110 S.Ct. 2258, 110
L.Ed.2d 46 (1990).
In In re Monzon, 214 B.R. at 45-48,
the bankruptcy court determined that section 726's distribution scheme does not
require that entireties property be distributed to individual creditors. The
court examined the Supreme Court's holding in Butner v. U.S., 440 U.S. 48, 99
S.Ct. 914, 59 L.Ed.2d 136 (1979), that:
Property interests are created and
defined by state law. Unless some federal interest requires a different result,
there is no reason why such interests should be analyzed differently simply
because an interested party is involved in a bankruptcy proceeding.
Id. at 55. Thus, the Monzon court
applied the "Butner principle" as follows:
[T]he issue under Butner becomes
whether the Code, and more specifically ¤ 726, embodies an overriding federal
interest justifying this curtailment of state property rights. The Court finds
that the Code does not preclude the application of Florida law. In fact, ¤
522(b)(2)(B) mandates strict adherence to it.
*4 Id. at 47. The lack of a
statutory basis for the administration of a separate estate for joint and
individual creditors under section 726, does not mandate changing Florida
tenancy by the entireties law so that individual creditors can reach entireties
property owned by a husband and wife. Accordingly, this Court concurs with
Monzon 's analysis of why neither the distribution scheme of 11 U.S.C. ¤ 726
nor the general bankruptcy policy of "equality of distribution," is
violated by providing the proceeds of entireties property solely for the
benefit of joint creditors. Id. at 45-48.
Second, the purpose underlying the
Florida entireties exemption is to protect entireties property held by husband
and wife from attack by creditors of one spouse individually. The rule of
entireties property is that "[n]either spouse can sell, forfeit, or
encumber any part of the estate without consent of the other." Stanley v.
Powers, 123 Fla. 359, 166 So. 843, 845 (Fla.1936). The rationale behind the
entireties exemption would be sacrificed if the individual creditors of a
debtor spouse could reach the entireties property of the debtor and his/her
non-debtor spouse. The bankruptcy court below examined the facts of the case at
hand from the perspective of the Debtor's ability to discharge his individual
debts despite the preservation of his entireties property. The appropriate way
to view the entireties property, however, is through the non-debtor's spouse's
ability to protect the family's entireties property, notwithstanding the large
debt incurred by her debtor spouse. The Florida entireties exemption provides
every spouse with the security that the family's entireties property cannot be
reached by a creditor unless both spouses agree to become obligated to that
specific creditor. This security should not evaporate simply because one spouse
incurred large amounts of individual debt and then filed for bankruptcy
protection.
For these reasons, the Court
concludes that the bankruptcy court erred in its legal conclusion that the
single joint debt could be used by the Trustee to destroy the exemption as to
all of the entireties property held by the Debtor. Thus, the Warehouse, as
entireties property should not be liquidated to satisfy the claims of
individual creditors.
III. The Lack of Intent to Hold the Merrill
Account as TBE
The Debtor claims that the
bankruptcy court erred in finding that he did not have the intent to hold the
Merrill Account with Mrs. Planas as tenants by the entireties. The court
concluded that the Merrill Account was not entireties property, and thus, was
subject to liquidation, with half of the proceeds to be distributed to the
Debtor's creditors.
As more fully discussed in this
Court's opinion in Dzikowski v. Blais (In re Blais ), 220 B.R. 485, 490-91
(S.D.Fla.1997), "there is a presumption against the creation of an estate
by the entireties in personalty." Id. at 491. Obviously, the Merrill
Account is personalty. Therefore, in order for the Debtor to successfully
establish that the Merrill Account is entireties property, he "must establish
an intent to own the personalty as entireties property sufficient to rebut the
presumption against such a tenancy in personalty." Id. In the instant
case, the Debtor and Mrs. Planas had the opportunity to designate the Merrill
Account as a tenancy by the entireties, but they failed to do so. Instead, the
Merrill Account was designated as a joint tenancy with right of survivorship.
The evidence presented by the Debtor was not sufficient to establish the
requisite intent to rebut the presumption against the creation of a tenancy by
the entireties in the Merrill Account. Thus, the bankruptcy court did not err
in ordering the distribution of half of the proceeds of the Merrill Account to
creditors of the Debtor.
IV. The Stock Certificates,
Furnishings, and Art
*5 As for the Stock Certificates,
Furnishings, and Art, the bankruptcy court assumed they were entireties
property and, thus, concluded that they were subject to liquidation, division
and distribution in the same manner as the Warehouse. As the Court has
determined that the bankruptcy court's legal analysis with respect to the
Warehouse was erroneous, we are left solely with the bankruptcy court's
assumption that the Stock Certificates, Furnishings, and Art are entireties
property. Because such assumption was utilized for the purposes of an erroneous
legal conclusion, it will be disregarded now. Therefore, it is appropriate to
remand to the bankruptcy court the issue of whether the Stock Certificates,
Furnishings, and Art are entireties property. The bankruptcy court should
conduct an evidentiary hearing to determine whether the Debtor and Mrs. Planas
intended to hold the Stock Certificates, Furnishings, and Art as tenants by the
entireties consistent with this Court's decision in Dzikowski v. Blais (In re
Blais ), 220 B.R. 485, 490-91 (S.D.Fla.1997).
V. The SunBank Account
The Debtor claims that the
bankruptcy court erred in failing to declare the funds in the SunBank Account
exempt as the Debtor and Mrs. Planas' wages. In his bankruptcy petition,
however, the Debtor claimed the SunBank Account exempt as a tenancy by the
entireties. It is undisputed that the bankruptcy court correctly determined
that the SunBank Account failed to meet the requirements of a tenancy by the
entireties. Nevertheless, the Debtor claims that the funds are exempt as wages
pursuant to Florida Statute ¤ 222.11. A review of the record in this appeal
clearly indicates that the Debtor failed to meet his burden of proving
entitlement to the Florida wage exemption. See, In re Parker, 147 B.R. 810, 812
(Bankr.M.D.Fla.1992).
Accordingly, it is
ORDERED and ADJUDGED that the
bankruptcy court's Memorandum Decision and Order on Trustee's Renewed Objection
to Debtor's Claimed Exemptions, entered on July 22, 1996, is AFFIRMED in part, REVERSED
in part, and REMANDED as follows:
1. The bankruptcy court's holding
that the Warehouse can be liquidated, with half of the proceeds used to satisfy
the claims of individual creditors of the Debtor is REVERSED.
2. The bankruptcy court's holding that
the Merrill Account is not tenancy by the entireties property, and the
subsequent apportionment of the Merrill Account between the Debtor's estate and
Mrs. Planas is AFFIRMED.
3. The bankruptcy court's holding
that the Stock Certificates, Furnishings, and Art can be liquidated, with half
of the proceeds used to satisfy the claims of individual creditors of the
Debtor is REVERSED. The issue with respect to the Stock Certificates,
Furnishings, and Art is REMANDED to the bankruptcy court to hold an evidentiary
hearing consistent with this opinion to determine whether the Debtor and Mrs.
Planas intended to hold the Stock Certificates, Furnishings, and Art as tenants
by the entireties.
*6 4. The bankruptcy court's holding
that the SunBank Account is not tenancy by the entireties property, and the
subsequent apportionment of the SunBank Account between the Debtor's estate and
Mrs. Planas is AFFIRMED.