Unlike the Fifth Circuit, an exemption that the Fourth Circuit takes away with one hand, it gives back with the other, as District Judge James K. Bredar of Baltimore explained in his Aug. 29 opinion.
A man filed a chapter 7 petition owning a home as tenants by the entireties with his wife, who did not file. The husband claimed an exemption in the home under Section 533(b)(3)(B), which applies to an interest in entireties property that is exempt from process under state law.
After bankruptcy, the wife died, and the trustee claimed that her death brought the home into the estate since there was no longer entireties ownership. The bankruptcy judge ruled against the trustee, and Judge Bredar affirmed, albeit on a somewhat different theory.
Using the so-called snapshot test, Judge Bredar said that most courts hold that a postpetition change in the character of exempt property does not change the status of the property. The Fourth Circuit, however, holds otherwise.
In Birney v. Smith (In re Birney), 200 F.3d 225 (4th Cir. 1999), the appeals court held that an exemption in entireties property lapses after bankruptcy as a consequence of divorce or death of the spouse. But that “does not end the inquiry,” the Fourth Circuit said. Id. at 228.
Even if an exemption lapses after bankruptcy, the Birney court said, there still must be a provision in the Bankruptcy Code to “bring the property into the estate.” Id.
Like the circuit court in Birney, Judge Bredar found no Code provision that would bring previously exempt entireties property into a chapter 7 estate based on an event after filing. “Although the Bankruptcy Code provides several mechanisms by which a debtor’s interest in property acquired postpetition becomes part of the bankruptcy estate, none apply here,” he said.
Unlike chapters 11, 12 and 13, nothing generally brings property into a chapter 7 estate that is acquired after filing. Significantly, Birney held that a survivor does not “inherit” entireties property on the death of a spouse, thus making Section 541(a)(5)(A) inapplicable. That section brings property into the estate if the inheritance was within 180 days of filing.
Upon his wife’s death, the debtor became the sole owner of the home in fee simple. However, Judge Bredar, like in Birney, said that the fee simple interest was not estate property because Section 541(a)(1) only reaches property interests “as of the commencement of the case.”
Although the debtor lost his entireties exemption on his wife’s death, Judge Bredar upheld the result in bankruptcy court by ruling that the home was not brought into the chapter 7 estate.
A similar controversy is brewing in the Fifth Circuit, with a petition for rehearing en banc in Hawk v. Engelhart (In re Hawk), 16-20641 (5th Cir. July 19, 2017). There, the Fifth Circuit went a step further than the Fourth Circuit by effectively holding that an exemption never becomes final in a chapter 7 case. The en banc petition is challenging Hawk and a predecessor Fifth Circuit opinion that together mean a home loses its homestead exemption if sold after bankruptcy and that an individual retirement account loses exempt status if withdrawn after filing in chapter 7.
Indeed, Birney is authority directly contrary to Hawk, because Birney says there must be a mechanism for bringing property into a chapter 7 estate if the exemption terminates after filing. If rehearing fails in Hawk, Birney can be held out as a circuit split justifying a grant of certiorari by the Supreme Court.
To read ABI’s discussion of the en banc petition in Hawk, click here. To read ABI’s discussion of Hawk itself, click here.