Garon Reeves v. IRS

Filing

UNPUBLISHED PER CURIAM OPINION filed. Originating case number: 5:11-cv-00280-F,10-02562-8-SWH. Copies to all parties and the district court/agency. [999243641].. [12-2127]

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UNPUBLISHED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

Before SHEDD and
Circuit Judge.

WYNN,

Circuit

Decided:

Judges,

and

November 20, 2013

HAMILTON,

Senior

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Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.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

lacked

bankruptcy

statutory

permission

to

estate,

authority

sell

the

such
to

that

grant

residence

as

administering the bankruptcy estate.

the

the

bankruptcy

bankruptcy

part

of

his

court

trustee

duties

in

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.
Carolina.

11 U.S.C. §§ 701-784.
On

the

real

Debtors are residents of North

property

schedule

of

their

petition,

Schedule A, Debtors listed their residence at 1425 Chelton Oaks
Place,
hearing

Raleigh,
before

North
the

Carolina

bankruptcy

(Debtors’
court

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on

Residence).
July

15,

At

2010,

a

the

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parties

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stipulated

that

Residence is $325,000.

the

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fair

market

value

of

Debtors’

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

approximate

is

encumbered

amount

of

by

$382,300;

a

federal

and

(3)

no

tax

lien

equity

in

exists

the
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);

Debtors

to

N.C.

exempt

Gen.

any

Stat.

interest

1C-1601(f),
with

the

respect

Residence is governed by North Carolina law.

ability
to

of

Debtors’

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

debtor . . . uses as a residence . . . .”
1601(a)(1).
debtor’s

. . . that

the

N.C. Gen. Stat. 1C-

Notably, this exemption expressly pertains to a

“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).
exemption

stands

in

contrast

to

The nature of this

exemptions

which

pertain

certain property in kind or in full regardless of value.
e.g.,

11

U.S.C.

§

522(d)(9)

prescribed health aids).

(exemption

for

to

See,

professionally

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.
this

information,

Debtors

listed

the

following

Just below
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
Notably,

exemptions
the

in”

bankruptcy

Debtors’
court

Residence.

stated

in

its

(J.A.
order

111).

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.”
The

Trustee

subsequently

moved

for

authority

Id.
to

sell

Debtors’ Residence free and clear of liens with the transfer of
any valid liens to attach to the net sale proceeds.
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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

respect
Residence

to

them

to

Debtors’

from

the

reserve

their

Residence

bankruptcy

claimed

actually

estate,

such

exemption

removed
that

the

with

Debtors’
Trustee

lacked statutory authority to sell it.
The
authority

bankruptcy
to

specifically

sell

court
Debtors’

rejected

granted

the

Residence.

Debtors’

argument

Trustee’s
The
in

motion

bankruptcy
opposition

for
court

to

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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the

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(J.A. 25-26).

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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.
district

court’s

order

Debtors filed a timely appeal of the
to

our

court

as

the

appellate review in bankruptcy proceedings.

second

layer

of

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).
that

the

amount

of

the

liens

Debtors also acknowledge

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

flaw

in

bankruptcy court and the district court.
Debtors’

position

is

without

merit.

The

fatal

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.
claimed

certain

restaurant

In that case, the debtor

equipment

as

exempt

value within the allowed exemption range.
later

appraisal

valued

the

equipment

and

placed

Id. at 2657-58.
at

an

amount

a
A

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

creditors.

exemption

and

the

Id.
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balance

distributed

to

her

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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.
(3d Cir. 2008).

In re Reilly, 534 F.3d 173

“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

allowed her to withdraw from the bankruptcy estate.”

the

Code

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.
relevance
Court

to

the

present

explained

the

appeal,

process

in

under

Id. at 2661-63.

so
the

agreeing,

the

Bankruptcy

Of

Schwab

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

detriment.”
Third

in

those

Id. at 2663-64.

Circuit’s

Bankruptcy

interests

decision

Code’s

assets,

to

the

creditors’

Notably, the Court opined that the

not

definition

only
of

fails
the

to

account

“‘property

for

claimed

the
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

compels us to affirm the district court.
at

the

commencement

of

their

the

present

appeal

Debtors concede that,

bankruptcy

case,

their

legal

interest in Debtors’ Residence became part of the bankruptcy
estate.
North

There is also no dispute that, pursuant to applicable
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.

bankruptcy

court

Following
entered

an

a

hearing

order

on

denying

the

matter,

the

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

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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

carve-out.

from

the

sale

proceeds

as

part

of

the

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.”
re: Feinstein Family Partnership, 247 B.R. at 507.

In

Here, the

carve-out operates to assign equity in Debtors’ Residence for
the

benefit

creditors),

of
thus

the

bankruptcy

justifying

the

estate

Trustee’s

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(i.e.,
action

unsecured
in

selling

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Debtors’

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Residence

as

opposed

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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

estate is without merit.

no

longer

property

of

the

bankruptcy

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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