Bankruptcy: Debtor's Exemption Request for Personal Property Disallowed in Chapter 7 Case

     The United States Bankruptcy Court at Alexandria, in the case of In re Potter, disallowed a Chapter 7 debtor’s exemption request under Bankruptcy Code §522(b)(2)(B) for stock. The debtor claimed that the stock was exempt because it was held as tenants by the entireties with his wife. The Court, however, ruled that the stock was not held as tenants by the entireties, but merely as joint tenants. Accordingly, the debtor was not entitled to the exemption. 

     The Court found that the debtor was estranged from his wife, and that the shares of stock listed the parties’ two names as joint tenants with right of survivorship, but without any indication of a marital relationship. In determining whether the stock was held as tenancy by the entireties or joint tenants the Court was required to review Virginia law. In doing so, the Court stated that under Virginia law, property held as tenants by the entirety could be reached by joint creditors of both spouses, but such property could not be reached for the debts of either spouse alone. The Court noted that while there was at one time a question as to whether personal property could be held as tenants by the entirety, Virginia Code §55-20.1, enacted in 1999, expressly provides that personal property can be held as tenants by the entirety. In order to create a tenancy by the entireties, it is necessary that the interest so created satisfy the five common-law “unities” of interest, time, title, possess and marriage. Further, under Virginia Code §55-21, a tenancy by the entireties cannot result unless the parties involved have manifested an intent that the part of the one dying should belong to the other. In Virginia, it is not necessary that the deed or other evidence of title actually use the magic words “tenants by the entirety” in order to create such an estate, so long as the owners are described as husband and wife jointly taking with the right of survivorship. On the other hand, the use of the words “tenants by the entireties” (or some reasonable abbreviation thereof) is sufficient to create a tenancy by the entirety even without words expressly describing the joint owners as husband and wife.

     In summary, the Court ruled that in order to create a tenancy by the entireties, the document by which the debtor and the debtor’s spouse acquire or hold joint title must either 1) designate them as tenants by the entireties, or 2) designate them as husband and wife, joint tenants with the right of survivorship.

     In Potter the Court ruled that since the stock shares were titled simply in two names as joint tenants with right of survivorship, but without any indication of marital relationship, the stock was not held as tenants by the entireties but merely as joint tenants. Accordingly, the debtor’s interest in the stock could not be claimed as exempt under Bankruptcy Code §522(b)(2)(B).

     The lesson of Potter is that creditors should not assume that an exemption is proper simply because it is claimed. Check the record of title.

Bankruptcy: Exemption - Ownership of Realty by Tenants by the Entirety

     In In Re Scialdore, the United States Bankruptcy Court, Eastern District of Virginia, Judge Tice sustained a creditor's objection to a debtor's claimed exemption of real estate as "tenants by the entirety" under Bankruptcy Code §522 (b)(2)(B). The creditors objected on the ground that the debtor and his wife did not own the property as tenants by the entirety. 

     Under Virginia law, creditors of one spouse may not attach property held by the entirety; only joint creditors of both spouses may reach entireties property. If property owned by an individual debtor and nondebtor spouse is not held by the entirety then the debtor's interest is an asset of the bankruptcy estate. 

     In Virginia, estates by the entirety are abolished except where the deed or will manifests an intent of survivorship. When real property is conveyed to a husband and wife, the deed must specify that a tenancy by the entirety is intended, or this intent must otherwise appear in the deed. 

     In Scialdore, the objecting creditor claimed that the deed did not create a tenancy by the entirety because the grantors did not acknowledge the tenancy by the entirety language inserted by the debtor, nor was the deed re-executed by the grantors after the insertion. Consequently, the debtor's interest was not exempt under Virginia law and not entitled to exemption under Bankruptcy Code §522(b)(2)(B). The debtor argued that the deed, although altered, specifically conveyed a tenancy by the entirety and is thus exempt under Virginia Law. 

     In Allen v. Parkey, the Virginia Supreme Court held that an unsigned memorandum, attached to a deed that was complete and duly signed, had no effect. The facts in Parkey are substantially similar to Scialdore. 

     In Scialdore, the debtor altered the delivered deed, seeking to establish a tenancy by the entirety which was not specified originally. Accordingly, the language added by the debtor, "as tenants by the entirety with right of survivorship as at common law," had no effect on the type of estate conveyed to the grantees. The Court ruled, "Once the tenancy by the entirety language is removed, the deed does not manifest intent to create a survivorship estate. To the contrary, the deed unequivocally states that the conveyance was made to the debtor as his sole and separate estate free of any interest of his wife." 

     The creditor's objection to the exemption was therefore sustained.

Collection: Child Support Exemption for Garnishment

     In the case of General Electric Capital Auto Lease, Inc. v. Turner, the City of Richmond Circuit Court denied a debtor's exemption to garnishment claim.

     In Turner the debtor claimed an exemption based on the amount of monthly child support the debtor owed. The Court noted that the specific exemption claimed by the debtor on the garnishment form was the exemption created by Virginia Code §55-165. The judgment creditor argued that this code section only applied to assignments of wages executed and approved by a judge under the procedure specifically set out in Virginia Code §55-161 through 167. That procedure included notice to and consent of the debtor's creditors, the appointment of a trustee, and so on. The Court found as fact that none of those things were done in this case. Therefore, the Court ruled that an exemption under Virginia Code §55-165 did not apply. The Court also considered all the other exemptions from garnishment listed in Virginia Code §8.01-512.4, and none of those exemptions applied either. Accordingly, the debtor's claim of exemption was denied.

Bankruptcy: IRA Exemption in Chapter 7

     The United States Bankruptcy Court in Alexandria, in the case of In Re Hasse, ruled that a federal employee who participated in the federal thrift savings plan may claim an unlimited exemption in an individual retirement account, despite the objection of the Chapter 7 trustee.

     The IRA, valued at $100,000, was claimed exempt under Virginia Code §34-34. Virtually all the debtor’s other assets were either encumbered by liens or were exempt, with the result that the IRA was the only asset potentially available for the payment of creditor claims. At issue in this case was the Virginia General Assembly’s decision to amend Virginia Code §34-34 in 1999 by adding subsection H, which provided that an individual who claimed an exemption under federal law for any retirement plan established pursuant to §§ 401, 403(a), 403(b), 409 or 457 of the Internet Revenue Code (“IRC”) shall not be entitled to claim the exemption under this subsection for a retirement plan established pursuant to §408 or §408 A of the IRC. The thrust of the amendment was to give a debtor who had no other tax-qualified retirement plan the right to an unlimited IRA exemption but to deny the unlimited exemption to a person who was covered by such a plan. By giving a person who was not covered by an ERISA-qualified plan the right to an unlimited IRA exemption, such a person would be put on an equal footing with an employee who was a participant in an ERISA-qualified plan.
     The Bankruptcy Court found that a federal thrift savings plan account, while it is similar to, and for tax purposes is treated exactly like a private employer 401(k) plan - was nevertheless not subject to all the regulations governing §401(k) plans. The question was therefore whether, for the purpose of applying §34-34(H), a thrift savings plan account should be treated as a “retirement plan established pursuant to” §401 of the IRC. If so, the debtor was not entitled to a further exemption for his IRA; otherwise, he could exempt it in full.  
     The trustee took the position that Congress, by treating the thrift savings plan for tax purposes in the same fashion as 401(k) plans, sufficiently equated the two for the purposes of applying Virginia Code §34-34(H). Debtor took strenuous exception to that argument and points out that 5 U.S.C. §8440 only governed the tax treatment of thrift savings plan contributions and distributions. The Bankruptcy Court noted that not only did the enabling statute mandate compliance with the “requirements” of §401(k), it expressly exempted it from compliance with two of those requirements.
     The Bankruptcy Court found that the trustee’s argument ignored the words chosen by the Virginia General Assembly. Those words were very precise. The Bankruptcy Court ruled that a debtor was entitled to an unlimited exemption in an IRA unless the debtor was a participant in, or beneficiary of, a plan that is “intended to satisfy the requirements of” and is “established pursuant to” certain specific sections of the IRC. Although the thrift savings plan operates like, and enjoys the tax benefits of, a 401(k) plan, it was not a 401(k) plan and was not subject to all the “requirements” of a 401(k) plan. The Bankruptcy Court stated that for whatever reason, the General Assembly chose not to define “retirement plan” in such a way as to embrace, not only plans “established” under the enumerated sections of the IRC, but also plans treated for tax purposes like such plans.
     Prior the enactment of Virginia Code §34-34(H), only a limited exemption was available in Virginia for IRAs. The Bankruptcy Court found that the statute plainly intended to expand that exemption. The ability of people to provide adequately for their old age is obviously a matter of great public importance, and it is certainly reasonable that the General Assembly would want, as a matter of sound public policy, to protect savings set aside for that purpose.
     Accordingly, the trustee’s objection was overruled and the debtor’s exemption was allowed.

Bankruptcy: ERISA Funds, the Bankruptcy Estate and Homestead Exemptions

     In the case of Philips v. Bottoms, Judge Payne of the United States District Court at Richmond, Virginia, upheld a Bankruptcy Court ruling that the Virginia homestead exemption, Virginia Code §34-34, was not preempted by ERISA, and that the bankruptcy trustee could claim a portion of an individual retirement account (IRA) not funded by the debtor’s funds from an ERISA-qualified plan.

     In Phillips, it was disputed that the IRA was not an ERISA-qualified plan. However, because the debtors used funds from an ERISA-qualified plan to create the IRA, the debtors contended that the exemption applicable to an ERISA-qualified plan exempted the IRA because it was created by funds having their origin in such a plan. The Bankruptcy Court held that the IRA was property of the bankrupt estate and that Virginia Code §34-34 was not preempted by ERISA. The Court further held that the debtor’s claimed exemption should be allowed in the amount of $21,532.
     In the Bankruptcy Court, the trustee sought to thwart the claim that the IRA funds were partially exempt by arguing that Virginia Code §34-34 was preempted by ERISA and therefore was not available to protect any part of the IRA from the claims of creditors. The Bankruptcy Court allowed $21,532 of the $48,858 in interest in the IRA because the parties had agreed that if an exemption was allowable at all, that was the correct amount.
     The District Court, in its review, found that although the federal bankruptcy provisions permitted exemption of a payment under a pension to the extent reasonably necessary for the support of the debtor and any dependent, Virginia had enacted an alternative exemption provision, found in Virginia Code §34-34. The state provision, like the federal one it replaced, limited the exemption of retirement benefits. However, rather than limiting the exemption to the extent reasonably necessary for the support of the debtor and his dependents, the Virginia law provided instead that the exemption should not apply to the extent that the interest of the individual in the retirement plan would provide an annual benefit in excess of $17,500. The District Court concluded that given the legislative intent underlying the Bankruptcy Code, it was logical to conclude that the limit on pension plan exemptions was Virginia’s attempt to set an exemption level appropriate for the Commonwealth, precisely as was envisioned by Congress when it revised the Bankruptcy Code.
     The District Court affirmed the Bankruptcy Court’s decisions that the debtor’s interest in the IRA was part of the bankruptcy estate and that Virginia Code §34-34, even if theoretically preempted by §514(a) of ERISA, was saved from preemption by §514(d) of ERISA.

Bankruptcy: Lien Avoidance Case Review: Avoidance of Exemptions Impaired by a Judicial Lien

     In the case of Massie v. Yambrose the United States District Court at Harrisonburg, Virginia, decided that where a creditor had obtained a judgment lien that was docketed against real property that the debtor owned with her non-debtor spouse as tenants by the entirety, that lien impaired the debtor's exemption and may be avoided. This decision reversed a bankruptcy court decision. In summary, the District Court decided that although the creditor's judgment lien would not have been enforced against the debtor's property unless and until the tenancy by the entirety dissolved, the lien nevertheless impaired the exemption. The focus of the exception granted in Bankruptcy Code §522(b)(2)(B) was the property itself, not the tenancy. If it was not avoided, the lien could be enforced against the property after the tenancy by the entirety dissolved. This would constitute an impairment of the debtor's exemption; therefore, the District Court ruled that the debtor may avoid the lien pursuant to Bankruptcy Code §522(f)(1). The issue before the Court in Massie was whether the creditor's docketed judgment was a "judicial lien" that "impaired" an exemption to which the debtor would be entitled as a tenant by the entirety, even though the lien could not be enforced while the tenancy survived. Although this was a judgment lien pursuant to Virginia law, that did not determine whether it was a judicial lien as defined by the bankruptcy code. The interest held by the creditor was obtained pursuant to Virginia Code §8.01-458, which clearly qualified as being obtained by judgment or other legal process. The core issue, therefore, was whether there truly was "a charge against or interest in" the property held by debtor and her non-debtor spouse given the invalidity of any lien against property held by tenants by the entirety. For all practical purposes, this question was the same as whether the lien impaired the exemption. If the creditor did not have a charge against or interest in the property, then nothing existed that could impair the exemption. Conversely, if the lien (assuming that it was one) did impair the exemption, then it must have been a charge against or an interest in the property. As a result, for the purposes of the issue involved in this case, the Court assumed that the creditor held a judicial lien in order to decide whether such lien impaired the debtor's exemption. The determinative issue was whether a lien "impaired" an exemption pursuant to Bankruptcy Code §522(f) if it was not capable of being enforced until the basis of the exemption itself disappeared. In this case, the creditor's lien was completely ineffective against the property held by the debtor and her non-debtor spouse as tenants by the entirety, unless and until the tenancy itself dissolved and the debtor was left with an interest in the property other than as a tenant by the entirety. The District Court stated that it was guided in its decision by the 4th Circuit Court of Appeals case of In re Opperman. As applied to Massie, Opperman suggested that the proper question was not whether the basis for the exemption was impaired, but whether the property currently subject to the exemption could become impaired by the lien. This implication was buttressed by the language granting the exemption in Bankruptcy Code §522(b). That section allowed the debtor to exempt from property of the estate the property specified in the remainder of the section. Bankruptcy Code §522(b) further states that such exempt property was any interest in property in which the debtor had, immediately before the commencement of the case, as a tenant by the entirety. In Massie the exemption was granted to the property itself, rather than to the tenancy by the entirety, and the relevant date in determining the exemption was the date that the debtor filed the bankruptcy petition. The exemption was granted to the debtor's interest in the property because on the date that debtor filed her bankruptcy petition, the property was owned by tenants by the entirety, and this was not dependent on how it is owned at anytime in the future. As the 4th Circuit implied in Opperman, therefore, the question was whether the creditor's lien could attach to the property, not to the tenancy, thereby impairing the exemption to which the debtor currently is entitled. Absent avoidance of the lien pursuant to Bankruptcy Code §§522(f)(1), the lien could attach to the property if the tenancy by the entirety dissolved. If the unity of husband and wife is broken, the tenancy by the entirety would be lost along with it. The debtor's husband could die, or she could divorce him and retain an individual interest in the property. If either of these events occurred, the creditor then would be able to enforce the lien against the property. Although the tenancy could never be impaired, the exemption surely could be. The Court therefore ruled that the creditor's lien impaired an exemption to which the debtor would be entitled but for the lien. Pursuant to Bankruptcy Code §522(f)(1), the Court held that the debtor may avoid the lien.

Bankruptcy: "Tools of the Trade" Exemption

     Virginia Code §34-26, the "Poor Debtor's Exemption" section, allows a debtor to claim tools used in the course of his trade or occupation and keep them from creditors in bankruptcy cases. This exemption also applies to collection cases, as the debtor may use this exemption to prohibit post judgment collection by execution on the asset.
     In the case of Monticello Arcade L. P. v. Lyall, the United States Bankruptcy Court at Newport News reviewed §34-26 in regard to an architect's Acura automobile. The Bankruptcy Court denied the exemption based upon the classification of the car as a "luxury" car. The Appeals Court reversed and remanded the case with instructions that the Bankruptcy Court focus not upon whether the car is a "luxury" car, but upon whether the car is an "absolute requirement for [debtor] to efficiently and competently perform his work as an architect." Upon the Bankruptcy Court’s review, the Court ruled that the architect had demonstrated with his daily calendar and his testimony that the car was used to visit clients, job sites and government offices. The debtor was a self-employed architect in Hampton Roads, had practiced architecture on his own for six years as owner and president of his company. The debtor testified that although he used the vehicle to commute to and from work, the vast majority of the time he used the vehicle for non-commuting business purposes. The debtor also testified that he had to visit job sites in order to interpret plans and in order to understand the scope of the project. The Court noted that there was no evidence that there were alternate means of transportation available for the debtor to accomplish these requirements. Accordingly, the Court, this time around, found that the vehicle was "necessary", and therefor was exempt under Virginia Code §34-26(7).
     In the case of White v. Central Fidelity Bank the United States Bankruptcy Court at Roanoke, Virginia, reviewed the language of Virginia Code §34-26 and held that the plain meaning is that property which is "necessary for use in the course of the householder's occupation or trade" qualifies as a "tool" for purposes of exemption. In White the Court noted that in regard to automobiles, the particular facts surrounding the occupation and the necessity of the automobile must be examined. In White, the debtor had both a day and an evening job as a nursing assistant providing home health care in patients' homes, and whose employment contract required that she have an auto as a condition of her employment. Based upon these facts, proof that the creditor's lien was a nonpossessory, non-purchase money lien, and the fact that the creditor's lien impaired the debtor's exemption, the Court held that the lien was avoidable under Bankruptcy Code §522(f).
     In the civil/collection case of Hunn v. Zettel the Fairfax County Circuit Court had occasion to review a debtor's claim for an exemption for his BMW car as a "tool of the trade". Unlike the evidence obtained in Lyall which demonstrated the "absolute requirement", in Zettel, no such evidence was presented. Accordingly, the Court denied the debtor's exemption claim in Zettel.
     Looking at another case involving tools of the trade, the United States Bankruptcy Court at Newport News, in the case of In re Aldrich, upheld the debtors' motion to exempt various items of property, including an inoperable photo enlarger and two photo processors, as "tools of the trade" under Virginia Code §34-26. The Court concluded that these items were exempt under Virginia Code §34-26 and under Bankruptcy Code §522. The Court in Aldrich stated that it reached its conclusion from the plain meaning of Virginia Code §34-26, and from the obvious intention of the Virginia legislature, which substantially broadened the scope of the relevant definitions when it amended Virginia Code §34-26 in 1990. The Court in Aldrich found from the unrebutted testimony that the photo processing equipment was necessary for use in the debtors' occupation involving the family photo processing lab. There was no doubt that the debtors had been in the photo processing business for some time and, in the case of the husband, almost continuously since his retirement from the Air Force. It was likewise absolutely clear from the evidence that the wife was engaged in the photo processing business of a third party at the time of the filing of the petition, and that she too awaited the startup of the family business in order to utilize the exempted tools of the trade, which she was currently utilizing on a part-time basis. Therefore the Court found that both debtors were, or intended to be engaged, in an occupation and trade at the time of the filing of the petition. The Court found it to be sufficient that the husband had the intention of returning to his occupation as a photo processor at the time of the bankruptcy filing, even though he had been precluded from doing so by the contractual relationship with the objecting creditor, who bought out the debtor's earlier photo processing business and implemented a non compete agreement.