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Conrad v. Schlossberg

United States District Court, D. Maryland, Southern Division

August 10, 2016

MARIA E. CONRAD, Appellant


          GEORGE J. HAZEL United States District Judge

         Appellant Maria E. Conrad, the Debtor in the underlying bankruptcy case (the '"Debtor"), appeals the January A, 2016 order of the Bankruptcy Court, sustaining the objection to the Debtor's claim of exempt property filed by Roger Schlossberg. the Chapter 7 Trustee of the Debtor's bankruptcy estate (the "Trustee"). Oral argument is not necessary to resolve the present appeal. See Fed. R. Bankr. P. 8013(c); see also Loc. R. 105.6 (D. Md.). For the reasons that follow, the Court affirms the Bankruptcy Court's order sustaining the Trustee's objection.

         I. BACKGROUND

         Prior to tiling for bankruptcy, on August 27. 2009. the Debtor entered a plea agreement acknowledging her guilt to conspiracy under 18 U.S.C. § 1349 for her involvement in a mortgage fraud scheme in Criminal Case No. 09-CR-374-GBL-1 in the United States District Court for the Eastern District of Virginia. See ECF No. 3-6. As part of her plea agreement, the Debtor agreed to the entry of a restitution judgment in the full amount of the losses sustained by the victims of the fraudulent scheme, Id. at 7.[1] On December 4. 2009. the Debtor was sentenced to pay. as restitution, the sum of $838, 004.60 (the "'Restitution Judgment"). ECF No. 3-7 at 1.

         On June 24. 2015. the Debtor filed a Voluntary Petition under Chapter 7 of the Bankruptcy Code. See ECF No. 3-1. Among her debts, the Debtor listed the United States of America as an unsecured creditor holding an undisputed claim for $838.004.60-the full amount of the Restitution Judgment. Id. at 17. The Parties agree that the United States has recorded the Restitution Judgment in Charles County, Maryland. See ECF No. 7 at 6 n.2; ECF No. 12 at 6.

         The Debtor listed among the assets of her bankruptcy estate certain real property located in Waldorf. Maryland (the "Property") which she owns in a joint tenancy by the entirety with her non-debtor husband. Timothy W. Conrad. Id. at 6, 8. The Debtor listed the Property as having an unencumbered value of $227, 447. id. at 8. but she claimed the Property as an exempt asset under 11 U.S.C. § 522(b)(3)(B). id. at 12.

         On August 25. 2015. the Trustee filed an objection to the Debtor's claim of exempt property, in which he argued that the Property was not exempt from administration by the Trustee to satisfy the Restitution Judgment entered against the Debtor. ECF No. 3-2. The Debtor filed an opposition to the Trustee's objection on September 22. 2015. as well as a supplemental memorandum on December 5. 2015. ECF Nos. 3-18. 3-20.

         On December 21. 2015, the Bankruptcy Court held a hearing on the Trustee's objection. see ECF No. 3-28 at 3. and, on January 4, 2016. issued a memorandum opinion and order sustaining the Trustee's objection. ECF Nos. 3-25. 3-26; see also In re Conrad. 544 B.R. 568, 571 (Bankr. D. Md. 2016). On January 19. 2016. the Debtor filed a Notice of Appeal from that Order in this Court. ECF No. 1.


         The Court hears this bankruptcy appeal under 28 U.S.C. § 158(a). Parties of bankruptcy cases can appeal orders that dispose of discrete disputes within the larger case. See Mori Rama v. Gorman, 721 F.3d 241. 246 (4th Cir, 2013). In this case, the Property exemption issue is appealable as it was completely resolved by the Bankruptcy Court. Bankruptcy appeals "shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts." 28 U.S.C. § 158(c)(2). On appeal from the Bankruptcy Court, this Court reviews the Bankruptcy Court's findings of fact for clear error and conclusions of law de novo. See In re Merry-Go~Round Enterprises, Inc., 400 F.3d 219. 224 (4th Cir. 2005): In re Kielisch, 258 F.3d 315. 319 (4th Cir. 2001).


         Section 541 of the Bankruptcy Code defines the property of a debtor that becomes the property of the bankruptcy estate as including "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541 (a)(1). A debtor may exempt certain property from the bankruptcy estate, however, in accordance with Section 522 of the Bankruptcy Code. Pursuant to that section, where a debtor's property is held as "an interest as a tenant by the entirety or joint tenant." that property is exempt from process in a bankruptcy proceeding "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)(3)(B).

         Under Maryland law. where the Debtor's property is located, a debtor's creditors cannot "levy upon nor sell a debtor's undivided interest in entireties property to satisfy debts owed solely by the debtor." In re Bell-Breslin, 283 B.R. 834. 837 (Bankr. D. Md. 2002): see also Schlossberg v. Barney. 380 F.3d 174. 178 (4th Cir. 2004) (citing Bruce v. Dyer. 524 A.2d 777. 781 (Md. 1987)) ("While both spouses are alive, a tenancy by the entireties may only be severed by divorce or joint action by both spouses."). Thus, in an ordinary case applying Maryland law as "applicable nonbankruptcy law." there is no question that entireties property may be exempted from the bankruptcy estate. See Barney. 380 F.3d at 178.

         Here, however, the Trustee argues that because a restitution judgment was entered against the Debtor, making the United States a creditor of the bankruptcy estate, the Property is not exempt from process. See ECF No. 12 at 10-14. In support of his position, the Trustee relies principally on United Stales v. Craft.535 U.S. 274. 122 S.Ct. 1414 (2002). in which the United States Supreme Court held that, pursuant to 26 U.S.C. § 6321, a federal tax lien can attach to property held in a tenancy by the entirety to satisfy the debt of only one spouse. See ECF No. 12 at 11-16. Under § 6321. "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount. . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." In ('raft, the Court considered whether a husband's interest in entireties property constituted "property" or "rights to property" for purposes of § 6321. See Craft. 535 U.S. at 278. The Court initially observed that $ 6321 "itself creates no property rights but merely attaches consequences, federally defined, to rights created under state law." Id. The Court accordingly began its analysis by considering ...

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