Trustee can't use IRS rights to reach debtor's home

Daily Record, The (Baltimore), Aug 18, 2004 by Alisa Bralove

A bankruptcy trustee cannot assert the rights of the Internal Revenue Service in order to reach a debtor's home that she holds with her non-debtor husband as tenants by the entirety, the 4th U.S. Circuit Court of Appeals has said.

The trustee seeks to circumvent the well-recognized distinction between the rights of individual and joint creditors to reach entireties property on the basis of a novel interpretation of the Supreme Court's decision in United States v. Craft, Judge Allyson K. Duncan wrote for the appeals panel.

Roger Schlossberg, the bankruptcy trustee, said he hopes the Supreme Court will grant cert on his appeal.

I am grateful for the fact that the founding fathers created a Supreme Court to correct this miscarriage of justice, he said yesterday.

Jean Barney filed a voluntary petition for individual bankruptcy under Chapter 7 in September 2000, owing more than $83,000 to various credit card companies. Along with her petition, Barney sought to exempt her Silver Spring home, valued at $266,650, from the bankruptcy estate.

Barney and her husband had about $210,000 in equity in the home.

Schlossberg objected to Barney's attempt to exempt the home and sought to reach her interest in it under the strong-arm clause, which allows the trustee to stand in the shoes of a hypothetical creditor.

Schlossberg's hypothetical creditor was the IRS. He based his argument on the 2002 U.S. Supreme Court decision in Craft, which held that when one spouse owes federal taxes, the IRS may attach property held as tenants by the entirety to collect the tax debt.

But the bankruptcy court overruled Schlossberg's objection, noting that his argument would remove the tenancy by the entireties exemption from the Bankruptcy Code.

U.S. District Judge Richard D. Bennett affirmed the bankruptcy court decision and said the IRS would not qualify as a creditor under the strong-arm clause, 11 U.S.C. Section 544(a)(2), because it does not extend credit voluntarily.

On appeal to the 4th Circuit, Schlossberg argued that the code section gives the trustee the same powers as the IRS to circumvent the entireties exemption for the benefit of individual creditors.

The three-judge panel, however, said Schlossberg misinterpreted the decision in Craft because the IRS is not a creditor that extends credit. Unlike a voluntary creditor, Duncan noted, the IRS does not decide who it wants to entrust with tax liability.

Even if we considered the IRS a 'creditor that extents credit,' we do not believe that Congress intended a bankruptcy trustee to wield the extraordinary collection powers of the federal government, Duncan wrote.

The court also noted that Schlossberg successfully circumvented the entireties exemption once before, in Sumy v. Schlossberg. But in that 1985 case, the 4th Circuit allowed the trustee to reach the couple's property because both the husband and wife were in debt to the joint creditors.

Lawrence F. Regan Jr., the attorney representing Barney, did not return a call seeking comment.

WHAT THE COURT HELD

Case:

Roger Schlossberg, trustee v. Jean Barney, US 4th No. 03-2081 Published. Opinion by Duncan, J. Filed Aug. 16, 2004.

Issue:

Did the district court err in blocking a bankruptcy trustee's attempt to circumvent the entireties exemption for the benefit of individual credits?

Holding:

No. The IRS cannot be construed as a creditor that extends credit and the trustee cannot use the collection powers of the federal government for private creditors.

Counsel:

Roger Schlossberg for trustee-appellant; Lawrence F. Regan Jr. for debtor-appellee.