Bonanno v. GORDON P. PEYTON, Trustee

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 In Re: PETER A. BUNKER; In Re:
MICHELINA P. BONANNO,
Debtors.
PETER A. BUNKER; MICHELINA P. No. 01-2071 BONANNO,
Plaintiffs-Appellees,
v.
GORDON P. PEYTON, Trustee,
Defendant-Appellant. 
 In Re: JOSEPH MICHAEL THOMAS; In
re: MYRTLE ANNE THOMAS,
Debtors.
JOSEPH MICHAEL THOMAS; MYRTLE No. 01-2074 ANNE THOMAS,
Plaintiffs-Appellees,
v.
GORDON P. PEYTON, Trustee,
Defendant-Appellant. 
Appeals from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, District Judge.
(CA-01-743, BK-00-80792-RGM, CA-01-742,
BK-00-80673-RGM)

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Argued: April 4, 2002
Decided: November 21, 2002
Before MICHAEL and MOTZ, Circuit Judges, and
Walter K. STAPLETON, Senior Circuit Judge of the
United States Court of Appeals for the Third Circuit,
sitting by designation.
Affirmed by published opinion. Judge Michael wrote the opinion, in
which Judge Motz and Senior Judge Stapleton joined.
COUNSEL
ARGUED: H. Bradley Evans, Jr., REDMON, PEYTON & BRAS-
WELL, L.L.P., Alexandria, Virginia, for Appellant. Robert Ross
Weed, ROBERT WEED LAW OFFICES, Alexandria, Virginia, for
Appellees. ON BRIEF: Klinette H. Kindred, ROBERT WEED LAW
OFFICES, Alexandria, Virginia, for Appellees.
OPINION
MICHAEL, Circuit Judge:
Today we take up one aspect of the bedeviling issue in bankruptcy
law of how to deal with property held by debtors as tenants by the
entirety. We hold that when a husband and wife in Virginia file a joint
Chapter 7 bankruptcy petition, and they have — apart from their
mortgage lender — only individual creditors, the two spouses may
exempt a home they own as tenants by the entirety to the extent of
their equity. See 11 U.S.C. § 522(b)(2)(B). The spouses may take the
exemption notwithstanding the joint administration or substantive
consolidation of their individual bankruptcy estates.
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I.
We have before us consolidated appeals that arise from two bank-
ruptcy cases. In the first case Peter A. Bunker and Michelina P.
Bonanno, who are husband and wife, filed a joint, voluntary petition
under Chapter 7 of the Bankruptcy Code in the Eastern District of
Virginia. The Bunker-Bonannos list fifteen unsecured creditors with
claims totaling $48,896. Each claim is listed against either the hus-
band or the wife; none is identified as a joint claim against both. In
Schedule A (Real Property) the Bunker-Bonannos list as an asset their
home in Falls Church, Virginia, noting that they own it as tenants by
the entirety. According to the schedule, the home has a current market
value of $215,300 and is subject to mortgage liens, representing the
only joint debt, totaling $134,212. When the Bunker-Bonannos filed
their joint petition, only Mr. Bunker claimed the home as exempt on
Schedule C, valuing the exemption at roughly the equity, $75,000. He
asserted the exemption under § 522(b)(2)(B) of the Bankruptcy Code,
which governs a debtor’s exemption of property held as a tenant by
the entirety. The bankruptcy trustee filed an objection to Mr. Bunker’s
claim of exemption.
In the second case Joseph M. Thomas and Myrtle A. Thomas, also
husband and wife, voluntarily filed a joint Chapter 7 petition in the
Eastern District of Virginia. Except for their mortgage debt, the
Thomases had no joint debts at the time of filing. Together, the
Thomases list twenty-one unsecured creditors with claims totaling
$80,296. Each unsecured creditor is owed by only one of the debtor
spouses, either Mr. Thomas or Mrs. Thomas. The Thomases list as an
asset the home they own in Reston, Virginia, as tenants by the
entirety. According to the schedules, the home has a current market
value of $227,000 and is subject to a mortgage lien of $7,600.
Because the home is held as entireties property, each Thomas spouse
claimed it as exempt (valuing the exemption at $219,400) under
§ 522(b)(2)(B). The trustee objected to the claims of exemption.
The filing of a joint bankruptcy petition by a husband and wife
does not consolidate the separate bankruptcy estates of the two
spouses. In the Thomas case the estates of the two spouses were sub-
stantively consolidated by order of the bankruptcy court. Consolida-
tion has not been ordered in the Bunker-Bonanno case. There, the
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estates of the two spouses are being jointly administered pursuant to
local rule. See E.D. Va. Loc. Bankr. R. 1015-1. The two cases, the
Bunker-Bonanno case and the Thomas case, are assigned to the same
bankruptcy judge, and Gordon P. Peyton serves as trustee in both. The
bankruptcy court used one proceeding to consider the central issue in
both cases, whether to allow the exemption for the home owned by
the debtors as tenants by the entirety.
The trustee sought to block the exemptions so that he could admin-
ister the entireties properties to benefit the individual creditors, who
are unsecured. In each case the trustee would sell the home, pay off
the mortgage debt, and use the balance to satisfy the claims of the
individual creditors. The bankruptcy court, in sustaining the trustee’s
objections to the claims of exemption in both cases, issued a single
opinion, In re Thomas, 261 B.R. 848 (Bankr. E.D. Va. 2001). The
court held that while the § 522(b)(2)(B) exemption shields property
held in a tenancy by the entirety from the claims of individual credi-
tors when only one spouse files for bankruptcy, it is not available
when spouses file jointly. When spouses file jointly, the court said,
the trustee "possess[es] in the two estates the entire ownership of the
property and may, just as the spouses could before bankruptcy, unite
the two interests in the execution of a single deed and thereby convey
the property to a third party." Thomas, 261 B.R. at 854-55 (Bankr.
E.D. Va. 2001). In the Thomas case the bankruptcy court held in the
alternative that the substantive consolidation of the spouses’ estates
allows the trustee to administer the entireties property for the benefit
of all creditors, joint and individual. Id. at 862. The bankruptcy court
disallowed the claim of exemption for the entireties property (the
home) in both cases.
The Bunker-Bonannos and the Thomases appealed the bankruptcy
court’s decision to the district court. In the meantime, after the bank-
ruptcy court had rendered its decision, the Bunker-Bonannos
amended their Schedule C to reflect Ms. Bonanno’s claim of the
entireties exemption with respect to the home. See Fed. R. Bankr. P.
1009(a) (providing that a schedule "may be amended by the debtor as
a matter of course at any time before the case is closed"). In review-
ing the bankruptcy court’s decision, the district court assumed that the
bankruptcy court would have also denied the exemption to Ms.
Bonanno. Thomas v. Peyton, 274 B.R. 450, 452 n.1 (E.D. Va. 2001).
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The district court reversed, concluding that the debtors should have
been allowed to claim their homes as exempt entireties property under
§ 522(b)(2)(B). The district court emphasized that "the statutory
exemption applies to any pre-bankruptcy entireties property interest
held by the debtor to the extent that the interest ‘is exempt from pro-
cess under applicable nonbankruptcy law.’" Id. at 455 (quoting 11
U.S.C. § 522(b)(2)(B)). Section 522(b)(2)(B) pointed the court to Vir-
ginia’s "strong common law rule protecting entireties property from
the claims of individual creditors." Id. In allowing the exemption for
each of the four debtor spouses, the district court held that the trustee
could not administer the entireties property in either case for the bene-
fit of individual creditors.
The trustee has appealed the district court’s order reversing the
bankruptcy court and allowing the exemptions. An order allowing or
disallowing a bankruptcy exemption is a final, appealable order. Sumy
v. Schlossberg, 777 F.2d 921, 923 (4th Cir. 1985). We apply the same
standard of review that the district court applied to the bankruptcy
court’s decision. Because only legal conclusions are challenged, the
review is de novo. In re Southeast Hotel Props. Ltd. P’ship, 99 F.3d
151, 154 (4th Cir. 1996).
II.
Before analyzing the specific exemption question presented in this
case, we review some basic principles about the creation of a bank-
ruptcy estate, the Bankruptcy Code’s exemption scheme, and the
nature of the tenancy by the entirety in Virginia.
The filing of a Chapter 7 petition creates a bankruptcy estate to be
administered by the bankruptcy trustee. 11 U.S.C. § 541(a). The "es-
tate is comprised of . . . all legal or equitable interests of the debtor
in property as of the commencement of the case." Id. Thus, a debtor’s
interest in entireties property becomes part of the bankruptcy estate.
See Sumy, 777 F.2d at 924; Greenblatt v. Ford, 638 F.2d 14 (4th Cir.
1981), aff’g In re Ford, 3 B.R. 559 (Bankr. D. Md. 1980). Parentheti-
cally, we note that when spouses file a joint Chapter 7 petition, sepa-
rate bankruptcy estates are created. After an estate is created, the
debtor may exempt eligible property. 11 U.S.C. § 522(b). Exempted
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property is not available to satisfy the debtor’s obligations. Id.
§ 522(c).
The Bankruptcy Code provides two alternative schemes of exemp-
tion. Under § 522(b)(1) a debtor may elect the specific federal exemp-
tions listed in § 522(d). Or, under § 522(b)(2) a debtor may choose
the exemptions permitted under (i) state law, (ii) general (nonbank-
ruptcy) federal law, and (iii) § 522(b)(2)(B), covering interests held
as a tenant by the entirety or as a joint tenant. Section 522(b)(1)
allows a debtor to choose the first alternative (the federal list) unless
applicable state law restricts the debtor to the exemptions that are
available under § 522(b)(2), the second alternative. Virginia, like
most states, has opted out of the federal exemption scheme, restricting
its debtor citizens to the second alternative. See Va. Code Ann. § 34-
3.1 (Michie 1996). A debtor in Virginia thus has available the Com-
monwealth’s list of exemptions, federal nonbankruptcy exemptions,
and § 522(b)(2)(B)’s entireties and joint tenancy exemption. Under
§ 522(b)(2)(B) a debtor may exempt "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). The Thomases and the Bunker-Bonannos claim the
entireties exemption under this provision, and the trustee objects. The
ultimate question, which we consider in part III, is whether the debt-
ors’ interests in their entireties property is "exempt from process
under applicable nonbankruptcy law."
Virginia law on tenancies by the entirety is the "applicable non-
bankruptcy law" that we look to in this case. The Commonwealth of
Virginia is one of about two dozen states that continue to recognize
the tenancy by the entirety. See Robert D. Null, Tenancy by the
Entirety as an Asset Shield: An Unjustified Safe Haven for Delinquent
Child Support Obligations, 29 Val. U. L. Rev. 1057, 1085-86 &
nn.207-08 (listing states). The modern tenancy by the entirety is based
on the same four unities that support a joint tenancy: the unities of
title, estate, time, and possession. However, the tenancy by the
entirety is supported by a fifth unity that is not shared with a joint ten-
ancy: the unity of marriage. Jones v. Conwell, 314 S.E.2d 61, 64 (Va.
1984). Each spouse possesses the right of survivorship: "Upon the
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death of either spouse the whole of the estate by the entireties remains
in the survivor." Vasilion v. Vasilion, 66 S.E.2d 599, 602 (Va. 1951).
The tenancy by the entirety may be severed only by mutual consent
of the spouses or by divorce. Although husband and wife acting
together may alienate or encumber the entireties property, "neither
spouse can convey [or encumber] any part of the property by his or
her sole act." Hausman v. Hausman, 353 S.E.2d 710, 711 (Va. 1987).
Thus, "real property held as tenants by the entireties is exempt from
the claims of creditors who do not have joint judgments against the
husband and wife." Rogers v. Rogers, 512 S.E.2d 821, 822 (Va.
1999). See also Reid v. Richardson, 304 F.2d 351, 353 (4th Cir. 1962)
("[U]nder Virginia law property held by the entireties is not subject
in any manner to individual claims of creditors of one spouse, and . . .
neither the land itself nor any interest therein may be reached in satis-
faction . . . against only one of them."); In re Cordova, 177 B.R. 527,
529 n.1 (E.D. Va. 1995) ("In Virginia, property held as tenants by the
entireties is completely immune from the claims of creditors against
either spouse alone, but not from the claims of joint creditors of both
spouses.") (citing Vasilion, 66 S.E.2d at 599).
III.
We turn to whether the debtor spouses are entitled to claim the
entireties exemption under § 522(b)(2)(B). Again, that section allows
a debtor to exempt "any interest in property in which the debtor had,
immediately before the commencement of the case, an interest as a
tenant by the entirety . . . to the extent that such interest as a tenant
by the entirety . . . is exempt from process under applicable nonbank-
ruptcy law." 11 U.S.C. § 522(b)(2)(B).
The trustee’s principal argument is that when both debtor spouses
are before the court in a joint case, neither is allowed to take the
entireties exemption. According to the trustee, his simultaneous con-
trol over the spouses’ separate bankruptcy estates allows him to take
the entireties property and defeat the exemption. He adopts wholesale
the holding of the bankruptcy court: "The trustee . . . possess[es] in
the two estates [in each case] the entire ownership of the [entireties]
property and may, just as the spouses could before bankruptcy, unite
the two interests in the execution of a single deed and thereby convey
the property to a third party." Thomas, 261 B.R. at 855. This conten-
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tion ignores the design of the Bankruptcy Code, and, if adopted,
would render the entireties exemption meaningless when husbands
and wives file joint petitions. The trustee’s argument that he has the
power to join the two interests in each of the entireties properties and
dispose of them depends on two sections of the Bankruptcy Code:
§ 541, which operates to place the entireties interest of each debtor
spouse into his or her bankruptcy estate; and § 363(b)(1), which
allows the trustee, with court approval, to "use, sell, or lease" property
brought into the estate by § 541. The argument, however, overlooks
§ 522(b), which states that "an individual debtor may exempt [quali-
fying property] from property of the estate," "[n]otwithstanding sec-
tion 541." When a debtor takes an allowable exemption, the exempt
property passes out of the estate created by § 541, and this property
becomes unavailable to the trustee. See 11 U.S.C. § 522(c). Thus, a
trustee’s general power under § 363 to dispose of estate property can-
not defeat a debtor’s right to claim a proper exemption under § 522.
See Sumy, 777 F.2d at 923-24 ("For property that becomes part of the
estate under § 541 and that is not exempted under § 522(b), the trustee
has the general power [granted by § 363]."); see also In re Paeplow,
972 F.2d 730, 733 (7th Cir. 1992). When a husband and wife file a
joint Chapter 7 petition, the trustee’s § 363 power is still subject to
each spouse’s right to exempt property under § 522. A trustee there-
fore cannot unite the entireties interests of spouses in a joint case and
dispose of the property if the spouses assert valid claims of exemption
under § 522(b)(2)(B).
This brings us to whether the debtor spouses in these cases are enti-
tled to the § 522(b)(2)(B) exemption. Each spouse may exempt his or
her interest in the entireties property "to the extent that such interest
as a tenant by the entirety is exempt from process under applicable
nonbankruptcy law," that is, the law of Virginia. See 11 U.S.C.
§ 522(b)(2)(B). The central question is the extent to which Virginia
law protects the entireties properties here from the claims of the listed
creditors. As we have already observed, under Virginia law an indi-
vidual creditor of either spouse cannot reach property held in a ten-
ancy by the entirety. Insofar as individual creditors are concerned,
entireties property is, in the words of § 522(b)(2)(B), "exempt from
process" under Virginia law. See Vasilion, 66 S.E.2d at 602. Thus, the
presence of individual claims against either or both of the spouses in
a joint case does not prevent the debtor spouses from exempting their
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interests in entireties property under § 522(b)(2)(B). Cf. Cordova v.
Mayer, 73 F.3d 38, 40 (4th Cir. 1996) ("[W]hen [the debtor] claimed
her § 522[(b)(2)(B)] exemption, her entireties interest in the marital
home was exempt from the bankruptcy estate to the extent it was
immune [under Virginia law] from the claims of her individual credi-
tors.").
We turn to the specific question of whether the debtor spouses in
the Bunker-Bonanno case may exempt their home, which they hold
as tenants by the entirety. The Bunker-Bonannos have filed a joint
case, but as we have indicated, that does not affect their right to claim
the entireties exemption. Because Mr. Bunker and Ms. Bonanno filed
a joint case, their separate bankruptcy estates are subject to joint
administration by local rule. See E.D. Va. Loc. Bankr. R. 1015-1. We
must consider whether this affects their exemption claims. Under joint
administration the estate of each debtor remains separate and distinct.
In re Reider, 31 F.3d 1102, 1109 (11th Cir. 1994). Joint administra-
tion does not affect the substantive rights of either the debtor or his
or her creditors. William L. Norton, Jr., 1 Norton Bankr. L. & Prac.2d
§ 20:1 (2002). Thus, the joint administration of Mr. Bunker’s and Ms.
Bonanno’s estates does not affect their claims to the entireties exemp-
tion.
The Bunker-Bonanno case boils down to a simple proposition:
none of the unsecured creditors is a joint creditor of the husband and
wife; each of these creditors is an individual creditor with a claim
against either the husband or the wife. The governing exemption pro-
vision, § 522(b)(2)(B), points us to Virginia law, which shields entire-
ties property from the claims of the individual creditors of either
spouse. Mr. Bunker and Ms. Bonanno may therefore exempt their
entireties property (their home) under § 522(b)(2)(B) to the extent of
their equity.
The trustee expands his argument when it comes to the Thomases.
The separate bankruptcy estates of Mr. and Mrs. Thomas have been
substantively consolidated. See 11 U.S.C. § 302(b). This, the trustee
argues, has converted their individual unsecured creditors into joint
creditors, thereby exposing their entireties property under Virginia
law. Focusing on the Bankruptcy Code, the trustee says that the
entireties property is no longer "exempt from process under applica-
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ble nonbankruptcy law," see 11 U.S.C. § 522(b)(2)(B), and must
remain in the bankruptcy estate.
After finding that the Thomases "treated themselves as a single
financial entity" with "substantial, almost total, commingling of assets
and liabilities," the bankruptcy court ordered the substantive consoli-
dation of their two bankruptcy estates. Thomas, 261 B.R. at 865. (The
court found, however, that "[t]here is nothing improper with the man-
ner in which the [Thomases] maintained their accounts and personal
finances." Id. at 865.) The Thomases do not appeal the order of con-
solidation. "In general, substantive consolidation results in the combi-
nation of the assets of both debtors into a single pool from which the
claims of creditors of both debtors are satisfied ratably." 2 Collier on
Bankruptcy ¶ 105.09[3] (Lawrence P. King ed., 15th ed. rev. 1999).
At least one court has said that in substantive consolidation "all credi-
tors, regardless of the nature of their claim, would become joint credi-
tors." In the Matter of Steury, 94 B.R. 553, 556 (Bankr. N.D. Ind.
1988).
The plain words of § 522(b)(2)(B) ultimately defeat the trustee’s
argument that substantive consolidation blocks the Thomases’ entire-
ties exemption. A debtor’s interest in entireties property may be
exempted "to the extent that such interest . . . is exempt from process
under applicable nonbankruptcy law." 11 U.S.C. § 522(b)(2)(b)
(emphasis added). Substantive consolidation, to the extent it might
turn individual creditors into joint creditors, is a creature of bank-
ruptcy law. Because § 522(b)(2)(B) directs us to "applicable nonbank-
ruptcy law," we must determine how Virginia law treats a creditor’s
claim against entireties property at the moment before the debtor files
his or her petition for bankruptcy. Cf. In re Ford, 3 B.R. at 571
("Under [§ 522(b)(2)(B)] the moment of significance is the instant
immediately before the commencement of the case . . . ."), aff’d by
Greenblatt v. Ford, 638 F.2d at 15.
We are thus back to the main question, that is, whether Virginia
law would allow individual creditors to reach the Thomases’ entire-
ties property. The bankruptcy court determined that because the
Thomases’ finances were so intermingled, their separate bankruptcy
estates would be substantively consolidated. The bankruptcy court
held that substantive consolidation, which was ordered under bank-
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ruptcy law, made the entireties property available to satisfy the claims
of the Thomases’ individual creditors. But the bankruptcy court did
not hold — and the trustee does not argue — that the Thomases’ indi-
vidual creditors can be considered joint creditors under Virginia law.
The bankruptcy court and the trustee recognize, we expect, that such
a proposition cannot be advanced, for under Virginia law the routine
intermingling of finances by spouses would not allow the individual
creditors of either spouse to reach entireties property. The Virginia
rule that entireties property is immune from the claims of individual
creditors is "clear[ ] and without equivocation." Rogers, 512 S.E.2d
at 822. Rogers illustrates just how jealously Virginia protects entire-
ties property from the claims of individual creditors. In that case cer-
tain creditors filed an action in Virginia state court to compel the sale
of entireties property to satisfy separate judgments against a husband
and wife. The creditors had obtained a judgment against the husband
in a bankruptcy proceeding. In a later case in Virginia state court, the
same creditors obtained a separate judgment against the wife, based
on a finding by the court that the wife had participated with the hus-
band in a scheme to delay, defraud, and hinder the creditors in their
attempts to collect the judgment against the husband. The creditors
then filed the action to force the sale of the spouses’ entireties prop-
erty to satisfy the individual judgment against each spouse. The credi-
tors alleged that the joint tortious acts of the husband and wife to
avoid payment of the original debt gave rise to the related judgments
against each spouse, thereby converting the creditors into joint credi-
tors. The trial court dismissed the case, holding that the creditors
failed to state a cause of action because the entireties property was
immune from the individual judgments against the husband and wife.
The Supreme Court of Virginia affirmed. Even though the husband
and wife had jointly schemed to hinder the creditors, the court held
that the "separate judgments do not impose joint liability upon the
husband and wife. Thus, the [creditors] do not have a cause of action
to compel the sale of real property held by the husband and wife as
tenants by the entireties . . . to satisfy the [individual] judgments."
Rogers, 512 S.E.2d at 822.
If the circumstances in Rogers did not result in the imposition of
joint liability on the husband and wife, then the Thomases’ innocent
practice of commingling their finances would not convert their indi-
vidual creditors into joint creditors under Virginia entireties law. In
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short, an individual creditor of one of the Thomases could not reach
their entireties property under Virginia law. The property, in other
words, is "exempt from process under applicable nonbankruptcy law,"
and the Thomases may claim the entireties exemption with respect to
their home to the extent of the equity.
IV.
The district court was correct in holding that each of the four debt-
ors, Mr. Bunker and Ms. Bonanno and Mr. and Mrs. Thomas, should
have been permitted to exempt their homes, which they held as ten-
ants by the entirety, from their bankruptcy estates. The order of the
district court is affirmed.
AFFIRMED
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