STEPHEN RASLAVICH, Bankruptcy Judge.
Apex Realty LLC has objected to the Debtor's Claim of Exemptions. The Debtor filed a Response to the Objection. A hearing on the matter was held on June 30, 2015. Following the hearing, the parties agreed to submit the matter on a stipulated record and the Court allowed the parties time to brief the issues. Upon receipt of the briefs, the Court took the matter under advisement. For the reasons which follow, the Objection will be dismissed.
On Schedule A the Debtor has listed the ownership of real property at 110 Barley Mill Road in Wallingford, Pennsylvania. The property is her residence (the Residence). She owns it jointly with her husband. It is valued at $327,000. Suntrust holds a first mortgage on it and is owed $200,000.
On Schedule C, the Debtor has claimed the Residence as exempt. The basis of the exemption is that she owns the property with her husband as tenants by the entireties.
Property held as a tenant by the entirety comes within the Bankruptcy Code's broad definition of property of the estate. See Napotnik v. Equibank & Parkvale Savings Ass'n, 679 F.2d 316, 318 (3d Cir.1982). Notwithstanding, the Code provides for exemption of entireties property:
11 U.S.C. § 522(b)(3)(B)(emphasis added); In re Holler, 2012 WL 3526466, at *2 (E.D.Pa. Aug. 4, 2012)
As a party in interest, Apex may object to a claim of exemption. B.R. 4003(b)(1). Apex asserts four reasons why the claim of exemption as to the Residence should be disallowed, as follows:
Objection, 4. The Debtor disputes the claim that her husband failed to list the Apex debt in his earlier individual bankruptcy; that Apex was ever a joint creditor entitled to proceed against entireties property in the first place; and that the marital entity was ever terminated. As the objecting party, Apex bears the burden of proof. B.R. 4003(c).
In lieu of trial the parties submitted a Stipulation of Facts. From the stipulation the following is established: the parties' relationship began in June 2005. Stip. ¶¶ 1, 13. At that time, Meridian Bank made a loan (the Investment Note) to the Debtor and her husband and granted a line of credit (LoC) to her husband's business. Id. ¶¶ 1, 13. The Investment Note was in the amount of $380,000 and the LoC was for $100,000. Id. As security, the Debtor and her husband gave the Bank a mortgage on an investment property in Media, Pennsylvania (the Media Property). Id. ¶¶ 4, 16. They also guaranteed the line of credit. Id. ¶ 22
In April 2011 the Debtor filed for divorce. Id. ¶ 30. In August 2012 the Debtor and her husband defaulted on both obligations to Meridian. Id. Ex. 1 Complaint, ¶ 11. In December 2012 the Debtor's husband filed an individual Chapter 7 bankruptcy case. Id. ¶ 33. In February 2013 Meridian obtained relief from the bankruptcy stay in order to file a foreclosure complaint against the husband. Id. ¶ 43. In May 2013 the husband received a bankruptcy discharge. Id. ¶ 44. That same month Meridian confessed judgment against the Debtor in state court. Id. ¶ 24. In August 2013 the Bank filed a foreclosure action based on both loans. Id. ¶ 46. In March 2014 Meridian was granted summary judgment against the Debtor in the amount of $616,000. Id. ¶ 47. In May 2014 Meridian assigned its interests in the Investment Note and the LoC to Apex. Id. ¶¶ 48-49. In June 2014 the Media Property was sold at sheriff's sale to a third party. Id. ¶ 52. The sale price was $325,000. Id. In November 2014 Apex filed a Petition to Fix Fair Market Value of the Media Property. That petition was filed against the Debtor. Id. ¶ 53. On January 22, 2015 the Debtor commenced her Chapter 7 bankruptcy case. Id. ¶ 54.
The Court addresses Apex's fourth argument first, because it challenges the essential premise of the exemption; to wit: that the Debtor is married and is therefore entitled to exempt property owned by her and her spouse. See Frederick v. Southwick, 165 Pa.Super. 78, 83 (Pa.Super.1949) (listing among the five "unities," or requirements, for tenancy by the entireties that the two persons be married). To dispute that premise, Apex relies on the Stipulation of Facts which states that on September 9, 2013 a divorce decree was entered. Stip. ¶ 31, Divorce Case docket, Ex. 3. Thereafter, contends Apex, the entireties entity was terminated. In re Davis, 356 B.R. 385, 387 (Bankr.W.D.Pa. 2006) (explaining that effect of divorce in Pennsylvania is to sever tenancy by the entirety) The Debtor's filing of her bankruptcy case after that date, says Apex, means that she may not exempt property as being owned by the entireties. See Napotnik, supra, at 319.
This premise, however, is flatly contradicted by the next paragraph in the Stipulation. Paragraph 32 states that four days after the divorce decree was entered, it was vacated. Stip. ¶ 32. There is no evidence before the Court as to why this occurred. The Stipulation, in particular, sheds no light. What evidence there is shows that after the decree was vacated the case continued and remained pending as of the petition date. Stip. Ex. 3. The effect of the order vacating the divorce decree rendered it a nullity. It was, in other words, as if the divorce decree was never entered. See Legory v. Finch, 424 F.2d 406, 409-410 (3d Cir. 1970) ("No case is cited and our research has disclosed no case holding that once a divorce decree is vacated it continues to have legal effect as an interruption of the continuity of the marriage for the period preceding its vacation"); see also Rosen v. Rosen, 549 A.2d 561, 562 (1998) (vacating of divorce decree had the effect of resuming the divorce proceeding). The Court accordingly holds that that the Debtor was married on the date she filed this bankruptcy and that the Residence continued to be owned by her and her husband by the entireties. Exemption of the residence by the Debtor on that basis is therefore valid.
Having disposed of this threshold challenge, the Court turns next to the argument that to "permit such an exemption would enable the Debtor to perpetrate a legal fraud upon the Creditor and upon the Court." The term "legal fraud" is synonymous with "constructive fraud," which has been so defined:
In re Butler, 86 B.R. 829, 832 (Bankr.E.D.Pa. 1988) quoting 37 Am.Jur.2d 23 (1968) (emphasis added). See In re Bowen, 151 F.2d 690, 691-92 (3d Cir.1945); Carr-Consolidated Biscuit Co. v. Moore, 125 F.Supp. 423, 433 n. 28 (M.D.Pa.1954); and LaCourse v. Kiesel, 366 Pa. 385, 390, 77 A.2d 877, 880 (1951).
In using the term legal fraud Apex appears to imply that allowing the Debtor to exempt the Residence under these circumstances works an unfairness upon Apex. The perceived prejudice Apex alludes to is the collateral effect that the husband's prior bankruptcy discharge has on certain creditors in his wife's bankruptcy case. Specifically, the husband's prior discharge converted creditors holding joint claims against husband and wife to individual creditors of the wife alone. In turn, real property formerly attachable by joint creditors can be claimed as exempt by the wife under the above described provisions of the Bankruptcy Code.
This is indeed prejudicial. It might be actionable had Meridian been without an available remedy to protect its interests. But that is not the case. The fact is that Meridian had ample opportunity to protect its interests in the Residence but inexplicably failed to act. Meridian could have preserved its rights against entireties property, such as the Residence, in at least two ways. In In re Cotterman, 67 B.R. 788 (Bankr.W.D.Pa. 1986), for example, a joint creditor as to a debtor and her spouse sought relief from the bankruptcy stay to continue a lawsuit against the debtor spouse. The bankruptcy court granted that request. The Cotterman Court's cogent analysis is worth quoting at length:
67 B.R. at 790. The Cotterman court went on to note that courts could fashion a remedy one of two ways:
Id. at 790-91. As a result, the Court concluded that
67 B.R. at 791 quoting Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057 (4th Cir.1983) citing Phillips v. Krakower, 46 F.2d 764, 765-66 (4th Cir.1931). Such relief was available to Meridian. Had Meridian acted in the husband's bankruptcy, Apex would not face the problem it does now. Meridian could and should have asserted its claim against the Residence in the husband's bankruptcy.
Apex's second and third arguments are puzzling. Apex claims that the Debtor's husband failed to list the Investment Note owed to Meridian in his schedules. The effect of that alleged omission is said to be two-fold. First, it precluded Meridian from proceeding against other attachable property; to wit, the Residence (Argument #2). Second, it prevented the trustee from realizing that the Residence could be sold for the benefit of joint creditors (Argument #3). See 11 U.S.C. §363(h), (j) (providing for the sale of entireties held property based on benefit to co-owners).
The crux of this claim, however, is clearly unsupported by the stipulated record. A review of the husband's schedules reveals that the husband listed the Investment Note, the line of credit, and his guarantee. See Stip., Ex. 4, Husband's Bankruptcy Schedules.
The above findings obviate the need to rule on whether the lender was a joint or individual creditor at the time the loans were made. There is some evidence to support the Debtor's claim that the Debtor and her husband signed the note "individually" as opposed to jointly as married persons. See Stip. Ex.1 Confession of Judgment, Ex. A Promissory Note, last page. But there is also some evidence to support Apex's claim that this was a joint obligation, inasmuch as the same note states that both husband and wife were primarily liable and that both received the consideration. Id.; see also A. Hupfel's Sons v. Getty, 299 F. 939, 941 (3d Cir. 1924) (identifying four elements to determine joint liability as between husband and wife: whether the couple consented to change the attributes of tenancy by the entireties; whether both husband and wife are primarily liable on the obligation; whether each have a mutual interest in the res of the loan and liability is without doubt; and whether either spouse received separate consideration for the obligation) Importantly, even were the Court to find for present purposes that the liability of the spouses was joint when the loan was made, what ultimately matters is the result of the husband's bankruptcy. In that proceeding, Meridian's claim against the husband was discharged, thereby changing its creditor status from joint to individual. Thereafter, Meridian, and perforce Apex, stood precluded from proceeding against entireties property.
The arguments advanced by Apex in its Objection fail. The Court rejects Apex's contentions that the Debtor was not married on the date she commenced this bankruptcy case and that the entireties estate as to the residence was terminated. The Court likewise finds no evidence of fraud or misconduct in the circumstances detailed in the parties' stipulated record. Consequently, the exemption of the Residence as entireties property is valid and the Objection will be dismissed.
An appropriate Order follows.