Legal Case Summary

have his reeds versus Callaway. Mr. Brewer, when you're ready. Thank you. Good morning, judges. Chad Hamilton and Wynn. My name is William E. Brewer, Jr. I'm an attorney from Raleigh, North Carolina. And I represent the appellate debtors in this appeal to the fourth circuit. This appeal entails the issue of whether a chapter seven trustee has the authority to liquidate a fully encumbered asset, which the debtor has exempted from the bankruptcy of state. Now, that issue is obscured in this case somewhat by the fact that the lien, in this case, the fully encumbered debtors' residence is a federal tax claim. We're on the same page with this. Which debtor has exempted? Yes. What has the exempted? That's the focal point we need to decide. I agree. And I submit that they are one and the same as put out my brief, Your Honor. I think, and this comes back, I think, to the Schwab opinion. Tell me a little real estate law, too, and tell me how interest and property are the same in terms of title. What seems like we talked about legal and equitable title. Are you saying those are the same? Yes. When I took property law, my first share property class from DNA cop. Yes, that was a long time ago. Did you make a good grade? I made. As I recall, but as I recall, I made a A, but I kind of recall making A's in everything. You know what? You know I had the same record, you know what I'm saying? But if you look at the interest in property, talking about real estate, look, is that interest a fee-simple absolute? Is it tenets by the entirety? Is it a, you know, that had all these free, simple, conditional or condition precedent? Is it a lie for- Talking about, we're talking about the difference between legal and equitable interests. Yes, but the bankruptcy code brings the debtors interest whatever it is into the bankruptcy code. Section 541A says the debtors interest of whatever type

. But legal, equitable, comes into the bankruptcy. You know, they're disputed that the house was part of the bankruptcy estate. No, when they filed the bankruptcy on the day he filed, yes. All right. And then section 522L and 522B allows the debtor to remove from that state his interest in property and he removed the interest in that property. I don't think that's correct. I think that the exemption pertains to the debtor's interest in the asset, not to the asset per se. And that was a ruling that the bankruptcy code made. And that's pursuant to the case of Swah versus Riley 2010 in Supreme Court. When the bankruptcy code defines the property, a debtor is authorized to exempt as an interest, the value of which may not exceed a certain dollar amount. And in a particular type of asset, the exemption pertains to the debtor's interest in the asset, not to the asset itself. In other words, the debtor had an interest in the bankruptcy estate of what was it? $60,000 subject to the preexisting superior leans. But he didn't have that interest in the house per se. Let me address that specifically with, because I think Swah was misconstrued by the bank ruptured court. I think it was misconstrued by the district court and which it cited after sitting on the case for 10 months, Judge Fox issued a two page opinion that said the bankruptcy court was right more or less. Well, you got to convince me that I'm misconstruing Swah. And that's what I'm going to do right now, Yarn. At least I'm going to try. Swah involved interest in the sense of there was an exemption. And in that case, it was equipment in a business. And the debtor under the bank, which the code exemptions had exempted an interest. And I think you could exempt about $12,000 combining the wild card exemption in the bankruptcy code and the tools of the trade. And he put a value, she put a value that was less than that. Trustee didn't object to that claim of exemption. And then later found out this property, I believe based on what I'm being told I can liquidate it for, is worth much more. So Judge Justice Thomas in discussing interest was talking about in my opinion monetary interest. And he makes that clear that if the interest, in that case of monetary interest, the debtor's interest was greater than the loud exemption

. So that interest wasn't exempt. I will quote from Justice Thomas' opinion, whereas here is important to the debtor to exempt the full market value of the asset or the asset itself. That's Justice Thomas' words. What cases are that in? This is swap. All right. Our decision will encourage the debtor to declare the value of her claim to exemption in a matter that makes the scope of the exemption clear. For example, by listing the exempt value as the full fair market value 100%, such a declaration will incur the trustee to object promptly to the exemption, if he willens to challenge it and preserve for the state, any value in the asset beyond the relevant statutory limit. The next sentence is very important. If the trustee fails to object or if the trustee objects and the objections is overruled, the debtor will be entitled to its exclusive full value of asset. If the trustee objects. What would it mean if the objection is overruled? And that's what happened in this case. But in fact, our case is unlike swap because even though this case predated swap, we were, I was claiming this exemption on behalf of the debtors for swap came out. But I had claimed a full 100% of the value the debtors and tie interest in property exempt. So how do you get the $60,000 ahead of the mortgage link? I'm not saying I'm getting ahead to mortgaling. What I'm saying is North Carolina statute says the debtor may exempt his or her interest or their interest in property you use a residence, the value of which may not exceed the numbers actually 35. So I could have claimed 70. In this case, as in many cases, I didn't exempt but 60. Because North Carolina has a wild card exemption. It's $5,000 that you have to take out of the residence exemption, so only claim 60. But the point is there is no value there. The debtors value did not exceed 60. It didn't exceed zero because at the judge found in its order denying the trustees objection to exemptions that the properties were $325. There's a $195,000 mortgage. There's a $300 and some $1000 tax lane and therefore the value is zero. So the debtor's interest, unlike swap, did not exceed the statutory limit. Somebody looked for guidance on how you read that North Carolina statute. Did you just say that North Carolina statute? Yes, yes

. What do we look for guidance on how you read that? I would say it's the plain language of the statute. How do you deal with somebody's speech of what do we look North Carolina Supreme Court is your decision on how you read that statute? I'm not, I am nowhere of any issue where that issue has been raised in the North Carolina courts. In court of appeals or or or or or or to Supreme Court, at least with respect to what the debtor exempts. You need to understand those situations always work, are not being played out in the in the bankruptcy context, but a single creditor trying to execute. But you do have to piece of prune. On the North Carolina law, there aren't two different types of exemptions that are committed. One allows exemptions up to the fine value. And another type of exemption, perhaps the one you alluded to on the personal product, allows you, it is like health aids or something like that, allows you to exempt the property. And this is of the first type. This is the type that allows you to exempt up to a fine value. Again, y'all know, my interpretation of North Carolina statute is that the debtor again, exempts his interest in the property. And interest means, whatever the debtor has. And I want to make you understand that, do you accept that equitable interest can be extinguished in profit? Do I? In other words, can you extinguish equitable interest in profit? Debtor has both legal title and equitable title. Can he extinguish the equitable, by over-encomerant as clearly this is done? His property is way, incumbent way beyond the value. So he has, except your client has no equitable interest in this problem. I would disagree that slightly. Tell me what the equitable interest people say. The value of that equitable interest is zero. That's what I want to say. The debtor's equitable interest is a place to sleep at night. It's a place to go to get away from everyone. That equitable interest is in fact, I don't know about that, but I'll deal with the zero. The zero is the equitable interest. So in fact, he only has interest in terms that it has a dollar value on it, legal. Exactly. So it's the legal interest that pass over it. And the only question to be for us is whether legal interest can be subject to an exemption

. Is that right? I would submit, the issue before you is, whatever interest the debtor came into the bank rep, see with legal and equitable. Can he remove that from? It has a zero value. Yes, but if I were, he only has, trust he's not interested in anything that has zero value. Well, what if they pass it in his state? He can do nothing with it. So the only thing he has that is a value is the legal title to it. But if he's selling it, then he is trying to get something of that. That's the selling of it. I'm talking about from a bankruptcy perspective of what is, because he can only sell that that is in the estate. Yes. And all that's in this state is legal title. And that got exempted by the debtor. What is that all we are considering here is whether, on the bank versus law, in the law, or on the law of life, legal interest can be subject to an exemption. And my answer to that question, yes, it can. Yes, that's all I want to know. And that's all that you got. That's all we're dealing with, is legal interest. Yes. OK. But I mean, I need to understand, but there's arguments made in that was made by the trustee, both before the exemption was heard by the Amicus brief, by the National Association of the Bank of Representatives of attorneys, and by the trustee. In his brief, it says, if there is no value, there's nothing to exempt. And that is just absolutely positively wrong. The statute does not say that you have to get your equitable interest, or your legal interest has to have value. It's just that it can't exceed a certain amount. And of course, zero is less than the statutory amount. I want you to explain to me, under your theory, how you get priority over the mortgage lien. I think it's well-stored or something. I have not asserted I got priority over the mortgage lien

. Well, how are you going to get any money out of it then? My clients does not try to get money out of it. They're trying to, they're trying to, they're are comparing Wells Fargo. They continue to pay Wells Fargo. They just don't want the property to be so, so they can sleep in it at night and have a place to live. Is that so? They get the property, what are you saying? They get the property subject to the Wells Fargo lien? Oh, yes, sir. The statute clearly says that. It is subject to the Wells Fargo lien and to the, to the, to the federal tax link. And all I'm saying is those creditors have to pursue their rights against a property outside the bankruptcy context. They, they, they, they, they, they, they're misconstruing the North Carolina statute. Which provides that that exemption expressed to pertains to a debtors quote aggregate interest in quote in the real property quote not to exceed the sum of money and does not pertain to the real property itself. So, you know, yonder my time's up. So, I, I, so I want to answer your question. You can do it on my time. Okay. So, what that is saying is that the debtor in his exemption would have an interest in the overall bankruptcy estate, not in the specific residential real property. The honor debtors, what you are doing is you're saying debtors exemptions have to do with money. And it doesn't have to do with money. Debtors exempt cars, they exempt residents, they exempt household furnaces, not so they can sell them to get money. They exempt their clothes so they have something to put on to go to work. They exempt their cars so they can get work. They exempt their residents. So, to construe the statute somehow to say, if it's got no monetary value, then, then the exempt, then that property can't be removed from the state, completely obeliorates the fresh start promised by the United States bankruptcy code. How did the reefs get in bankruptcy? Were they behind on their mortgage, for instance? They owed $300,000 worth of tax debt, which they could discharge in this bankruptcy, because it was more than three years old. That's how they got. That's the status of the mortgage. This mortgage was current. They continued to pay the mortgage

. If you look at the record, it shows that they were current when they found that they intended to continue to make payments. I don't think it's in the record here, but we had a motion to stay the sale of the property. And what of that motion was that the debtors continued to keep the payments made? Does your reading need to lead to no distinction between exempting an interest and exempting the property itself? Yes. It makes no difference. In other words, if the statute said property or the statute said interest, your reading, that word difference doesn't matter. It would make a difference only if you're talking about monetary value, but if you're talking about... I mentioned it before all that on there. I'm just saying if you looked at the statute and it said you may exempt an interest in property or the statute said you may exempt property, your reading is, that's the distinction that makes no difference. That's correct. And I think I try to make that clear in my reply brief, a good section of that, saying, look, the bankruptcy code used the word property and used the word interest almost interchangeably. And that is correct. Let me ask you this. Aren't you in a situation where the liability has exceed the assets of this bankruptcy? Oh, yes. Okay, that's all I want to know. Thank you. Thank you. Thank you, Mr. Brewer. Mr. McKellor. Good morning, May it please the Court. I'm Scott McKellor from Rocky Mountain, North Carolina appearing on behalf of Joseph and Callaway, who is the Chapter 7 trustee in the subject bankruptcy case. Excuse me. The distinction and it was made, it was pressed upon with Mr. Brewer

. This case revolves around the distinction of whether the debtors are allowed to exempt an interest in this property or the property itself. This case revolved, that is the distinction and that is the issue. Because your honors, if, if, and as the law and as we support and operate. He says, when you read the law, you heard my last question to him. He says to exempt an interest in property is exactly the same as the statute saying you may exempt the property. Absolutely not. We could tend otherwise. He said that. Well, I respectfully disagree. Even in his brief, and if I may cite a statute, it's North Carolina General Statute, 1c-1601b2, which defines the value of the debtor's interest that you may exempt. And value means the fair market value of an individual's interest in property, less valid lean superior to the judgment lean sought to be enforced. So here, as the Schwab case, relied on by the lower courts, makes clear, there is a distinction between the interest being exempted and the property itself. There's no dispute, there's no factual dispute as the valuation. This property is completely over-encumbered. While the debtors and their schedules see their amended schedule see to their petition, they claimed an exemption value of $60,000, 30 per each individual. He says that the remedies will still be there for the creditors outside of bankruptcy. Why are you fighting that then? If that's the case, would the tax lean be extinguished? The tax leaner on a will be extinguished after 10 years. And so the predicament that we have here is that there is a distinction between a regular consensual mortgage lean, which is the Wells Fargo lean that's in first priority position, as opposed to the IRS lean. I understand. It seems to me that he then does make an argument that this bankruptcy procedure is just being used to ease the way for creditors to get their money rather than just go through the normal state mandated procedures. I guess that's where he's going with that. That's where he's going. I respect. I just agree. He is wrong. I'm just asking why should you be allowed to use the bankruptcy provisions in a way that he is least colorably wrong, I don't say that it is wrong. But it looks like the purpose is just to really, like he says, aid some creditors

. They have rights outside of bankruptcy. That is the trustee. You're that is the trustees of Farmative Duty under section 704 of the bankruptcy code to liquidate property of the bankruptcy estate and distribute that to creditors. But to help a creditor who is current, who's dead is current. You're talking about the first mortgage holder. I know, but I'm talking about the first mortgage holder. You're just saying the whole thing is driven by the tax lane. That's correct. Well, there's a distinction. Let's close the hypothetical. I mean, yes, you're on. That's what I was getting to carve out. That's correct. I'm not really not supposed to be a bit of trying to execute on a current type credit. It's because they have this interest. They have their state law remedies. So that's really not the focus. It's going to be, I mean, what Judge Shed is getting at is really with the value of this property. It's not going to be a whole lot. If anything, it's going to be a credit, but at least in principle, because you got a 30% carve out of the net amount, which is presuming that the house is supposed to be worth, I guess, around 300,000. You got a 200,000 mortgage on it. You sell the same from 300,000, which is probably not going to happen, but we'll see. And then you got a 100,000, you got a 30,000, you pay off all administrative costs from all that and everything else. And in theory, that's supposed to be some money there that you didn't go to distribute to this unsecured creditors. So isn't that really the focus of what you're supposed to be? Absolutely. Absolutely. And when this case started, and that's still the trustees intent, that this carve out will create a return for unsecured creditors that would otherwise not receive a dime

. No, I stand all that. I stand that and I see that. And by the way, I think that not a bad deal for unsecured creditors, but I think the argument is, yeah, but you're doing that by running roughshod over the relationship between the secured creditors and the owner of the asset, just to create an interest that otherwise doesn't exist. Isn't that the argument? Because because, because, as between the mortgage company and the homeowner, the unsecured creditors in the normal procedure, unsecured creditors probably not going to get anything there. It's just the way they're going to get something is because he says you're writing, overwriting his rights, to grab something you can't have just to cut a deal and to make your deal look decent, you have a little carve out for the unsecured creditors. Isn't that his argument? I would submit from the trustees perspective that's one of the tenants of chapter seven. Is in cases that there are assets and by virtue of this carve out, that there are assets which can be liquidated, then unsecured creditors that would otherwise go unpaid will receive a recovery. This would not create, this would not create any value. This home wouldn't create any value in the estate to be distributed absent that carve out provision, right? Yes, sir. Based on the record. Yes, sir. So in other words, that's my point. I think I understand his argument. You've artificially created by running roughshod over his rights. That's his argument. Nobody argues that the trustees done a good job for the unsecured, but he's just saying, you can't, that's fine to help the unsecured, but you can't do that by running roughshod over what other rights we have. I would submit. I think that's his argument. That's probably true. I would submit that the debtor has not been prejudiced at all. He has claimed an exemption. It's a fiction. There is no exemption interest. I'm going to make that out of standard, because you say he's not prejudiced, but he should have spoken to his rights. Exemption rights, which I don't know what that means, the same. He's not, he's not prejudiced, but nevertheless have your rights run over. That means that's committed

. You can run over his rights because he's not going to be public. What rights are we specifically talking about? He will, you know, the debtors presumably, if the trustee prevails, then the house likely will be sold. So that right of, but the house, what is the likelihood that the house may be sold anyway? I struggled to understand what rights we're talking about that the debtors asserted his exemption rights. I'd say he said it through a full time. His right to have a place to live in. And he said he has a right, I don't know if he's right, but he's asserting that under the law he has an interest to stay in that house. And the mortgage company he didn't try to throw him out. He said he's current on that. That's what I think I heard him say that. I am not, the trustee is not submitting that Wells Fargo, the first mortgage order, is being prejudiced in any way whatsoever. The issue here is the potential benefit to, and the likely benefit to creditors that would otherwise not get paid, the unscured class, and to the federal tax lane, which potentially your honors, if the discharge goes through, the discharge is already entered in this case. So the debt owing to under the tax lane has been discharged. Let me ask you about this right to live in the place because the right, I'm not sure the North Carolina statute says right to live in. I thought he said $30,000 exemption and 60 if you married. And then what the right, it was seen to me that, and take it in an instance where there was only just, I see $100,000 mortgage on the house. House is worth $300,000. And there are nothing else owed on. So then presumably he can get $30,000 or $6,000 exemption. But it seems to me you still could sell the property, but don't you then have to just, then you just give back the $60,000. That's the normal situation you see your honor where you would not see a trustee step in. Yeah, in that case, yeah, you're right. There would not be any return to creditors there. That's the typical situation you would have. We wouldn't be here today if it was, if you follow his example, he's entitled to stay in a house. But if you didn't owe anything on it, he wouldn't be entitled. His house could be sold. And the best he could come out might be $6,000. It's correct. So he's better off having a good old income from his perspective. It's an interesting tactic that he's taken. Not us to be sure. But... What was this? I think he said that. I think the other side said this. The bankruptcy action filing was driven by the tax lane. What drove the bankruptcy filing? If he represented... I don't recall. I thought he said he dealt with taxes. Wait, it's a huge tax lane, your honor? It was over $300,000. I didn't say it wasn't. But the point is, it looks to me like it was a calculation on the debtors part that he could keep the house and deal with that under the normal dealings between the mortgage company and the owner of the house to protect that interest as he describes it. That's fine. He could deal with the tax lane and bankruptcy. And you just say his miscarculation on the debtors part as to what rights he would retain after five years. Well, I don't see anywhere in the statute talking about a place to sleep. I understand it's a sympathetic argument. I didn't say that debtor. I didn't say that. No, sir. I didn't say that

. It's correct. So he's better off having a good old income from his perspective. It's an interesting tactic that he's taken. Not us to be sure. But... What was this? I think he said that. I think the other side said this. The bankruptcy action filing was driven by the tax lane. What drove the bankruptcy filing? If he represented... I don't recall. I thought he said he dealt with taxes. Wait, it's a huge tax lane, your honor? It was over $300,000. I didn't say it wasn't. But the point is, it looks to me like it was a calculation on the debtors part that he could keep the house and deal with that under the normal dealings between the mortgage company and the owner of the house to protect that interest as he describes it. That's fine. He could deal with the tax lane and bankruptcy. And you just say his miscarculation on the debtors part as to what rights he would retain after five years. Well, I don't see anywhere in the statute talking about a place to sleep. I understand it's a sympathetic argument. I didn't say that debtor. I didn't say that. No, sir. I didn't say that. I didn't say that. I said that's how he describes it. I didn't ask that. But I'm just trying to figure out where he's buying yourself. So it looks like he took the option to file on his reading of the state statute thinking he was still be protected. We know how he reads it, how the debtor reads it. And what you did, the trustee did, was then strike a deal with the tax lane people to say, we will do something. And you'll get some of your money. But for me looking out for you, some part of that money that you get, you'll have to give back to me to give to the unsecured. That's correct. That's correct. And if I may, this is, if we can go back to the intent, and it's not on the record, but if you think conceptually, why the case was filed, you have $300,000 house and encumbered by $190,000 first mortgage. You have this huge tax lane. It's coming under. It makes perfect sense to file if you can get out from 100. And so if what I was trying to allude to earlier, the discharge is already being entered in the case. So the underlying debt is wiped out. The debt's wiped out in chapter 7, but the lane survived. Which debt? The tax debt. The IRS taxed it. So the lane will survive post when the case closes. Well, and that's true Wells Fargo too. But there's a difference between consensual lanes and federal tax lanes, and it's an important distinction. Because the mortgage lanes will survive, and those rights will not expire. Whereas the tax lane is going to expire in 10 years. And therefore, I mean, and just several more years, that tax lane is going to be gone. It's going to be extinguished

. I didn't say that. I said that's how he describes it. I didn't ask that. But I'm just trying to figure out where he's buying yourself. So it looks like he took the option to file on his reading of the state statute thinking he was still be protected. We know how he reads it, how the debtor reads it. And what you did, the trustee did, was then strike a deal with the tax lane people to say, we will do something. And you'll get some of your money. But for me looking out for you, some part of that money that you get, you'll have to give back to me to give to the unsecured. That's correct. That's correct. And if I may, this is, if we can go back to the intent, and it's not on the record, but if you think conceptually, why the case was filed, you have $300,000 house and encumbered by $190,000 first mortgage. You have this huge tax lane. It's coming under. It makes perfect sense to file if you can get out from 100. And so if what I was trying to allude to earlier, the discharge is already being entered in the case. So the underlying debt is wiped out. The debt's wiped out in chapter 7, but the lane survived. Which debt? The tax debt. The IRS taxed it. So the lane will survive post when the case closes. Well, and that's true Wells Fargo too. But there's a difference between consensual lanes and federal tax lanes, and it's an important distinction. Because the mortgage lanes will survive, and those rights will not expire. Whereas the tax lane is going to expire in 10 years. And therefore, I mean, and just several more years, that tax lane is going to be gone. It's going to be extinguished. And the debtors have the very real chance of owning this property just subject to the Wells Fargo mortgage, which would be a home run from their perspective. And they won't seek to sell the property to collect on the lane. The tax. I would bet that Mr. Brewer would argue when that foreclosure, tax foreclosure is initiated, would say that there's no underlying debt because it's been extinguished. And the only thing that survives is the lane. But the lane, and we alluded to this in our brief, that the lane, while the lane survives, there's no underlying. The debt's been discharged, so the tax foreclosure can't go full. Well, then, the note would be depressed without a note. I mean, that's that big of a specific thing. It must be Brewer is correct that the debtors would get the property, and the tax lane would still be on the property. That's correct, Your Honor. And you say it would last for 10 years. So if the bankruptcy... I think it's now it'll set to expire in 2017. All right, well, so if the, somehow rather the debtor got the property and the bankruptcy state was closed and so forth, the IRS would certainly foreclose on its tax lane if the debtor got the house. That could happen. However, I'll point out to you, in that situation, what's going to happen to the unsecured class that would otherwise benefit in this case? And I'm going to get anything. That's correct. And we're saying, Your Honor, we... Let's say that was going to happen. I said that if the debtors was correct, and that they got the house, then the tax lane would still be on the house, and the IRS would certainly foreclose on it. They could, but they're not understanding you, Slay, that they foreclose on it

. And the debtors have the very real chance of owning this property just subject to the Wells Fargo mortgage, which would be a home run from their perspective. And they won't seek to sell the property to collect on the lane. The tax. I would bet that Mr. Brewer would argue when that foreclosure, tax foreclosure is initiated, would say that there's no underlying debt because it's been extinguished. And the only thing that survives is the lane. But the lane, and we alluded to this in our brief, that the lane, while the lane survives, there's no underlying. The debt's been discharged, so the tax foreclosure can't go full. Well, then, the note would be depressed without a note. I mean, that's that big of a specific thing. It must be Brewer is correct that the debtors would get the property, and the tax lane would still be on the property. That's correct, Your Honor. And you say it would last for 10 years. So if the bankruptcy... I think it's now it'll set to expire in 2017. All right, well, so if the, somehow rather the debtor got the property and the bankruptcy state was closed and so forth, the IRS would certainly foreclose on its tax lane if the debtor got the house. That could happen. However, I'll point out to you, in that situation, what's going to happen to the unsecured class that would otherwise benefit in this case? And I'm going to get anything. That's correct. And we're saying, Your Honor, we... Let's say that was going to happen. I said that if the debtors was correct, and that they got the house, then the tax lane would still be on the house, and the IRS would certainly foreclose on it. They could, but they're not understanding you, Slay, that they foreclose on it. Is this charged? It is discharged? No value in the lane. I don't understand that. How you have a lane that has no underlying obligation to it. With it. So if you foreclose, there's no, that nothing that he can, that IRS can collect, because you say it's been discharged. My premise was that if the debtor got the house, the tax lane is still on the house. That was my premise. And we agree with that. But he said the lane is worth enough. He said the word nothing. He said, he didn't you say on a that scenario? That's an argument that can be made. Now I don't have any of that. Let me finish my comment. I'm sorry, Your Honor. I said, didn't you say in response to the question about the lane attaching or continuing on the house outside of bankruptcy, that you would anticipate if there was an attempt to foreclose your own that lane, there would be an argument made that there is a lane, but there's no debt, because the debt had been discharged. The tax debt had been discharged in bankruptcy. That's at least what you just said. I believe that argument would be made, whether it be successful or not. I can't represent that to you. Go ahead. I'll let you go ahead. I see my time is wrapping up. Unless there are any further questions. Judge Wynn, I see you shaking your head. I'm happy to try to flush this out. No, no, no, no, thank you very much. Thank you, Your Honor

. Is this charged? It is discharged? No value in the lane. I don't understand that. How you have a lane that has no underlying obligation to it. With it. So if you foreclose, there's no, that nothing that he can, that IRS can collect, because you say it's been discharged. My premise was that if the debtor got the house, the tax lane is still on the house. That was my premise. And we agree with that. But he said the lane is worth enough. He said the word nothing. He said, he didn't you say on a that scenario? That's an argument that can be made. Now I don't have any of that. Let me finish my comment. I'm sorry, Your Honor. I said, didn't you say in response to the question about the lane attaching or continuing on the house outside of bankruptcy, that you would anticipate if there was an attempt to foreclose your own that lane, there would be an argument made that there is a lane, but there's no debt, because the debt had been discharged. The tax debt had been discharged in bankruptcy. That's at least what you just said. I believe that argument would be made, whether it be successful or not. I can't represent that to you. Go ahead. I'll let you go ahead. I see my time is wrapping up. Unless there are any further questions. Judge Wynn, I see you shaking your head. I'm happy to try to flush this out. No, no, no, no, thank you very much. Thank you, Your Honor. We may have more questions, just not a few. Mr. Brewer. Mr. Brewer, why are you coming up here? You questioned the validity of swab, and you said that you read something where Judge Thomas had said so and so. Was Judge Thomas in the majority in that case? Yes, just there was a, leave a fine for opinion. As I recall, and Justice Thomas was in the majority. Specifically if he was in the majority. Yes, he wrote the opinion for the court. Let me talk about tax leans, and let me tell you what I would argue rather than let Mr. McKellor tell you what I want to. If the IRS, it is clear that the IRS tax leans survives this bankruptcy. Sight in my brief on pace. This won't turn on tax leans. It's going to turn on the question of interest. The issue in this case, I mean this is a nice little side discussion will happen, but your issue is going to turn on whether that legal interest is subject to exemption in this case. But you want to talk about tax leans going in. Well, I just want to make, I'm further to talk further about the interest, but I do want to make the point that the tax leans survives the bankruptcy and the IRS retains the right, the cases are there in 27 US Henry, the US versus Henry, to sell the property. And there's no way I can go in and argue you don't have the right. Just as a mortgage lien, the personal liability on mortgage. I follow a bank ruptsy and less than my debt. Is that a value to that tax lien? Is that a value to that tax lien? Yes, that's the tax should that be a value to that tax lien? Yes, even though the personal liability is gone, the tax lien remains. That's, you know, it's long versus blurred is the case that leans survive bankruptcy. Just like if I got a mortgage debt, my debtors personal liability to Wells Fargo has been extinguished. If my client never pays Wells Fargo another dime. You answered it, you taking your time to further explain it. All right

. We may have more questions, just not a few. Mr. Brewer. Mr. Brewer, why are you coming up here? You questioned the validity of swab, and you said that you read something where Judge Thomas had said so and so. Was Judge Thomas in the majority in that case? Yes, just there was a, leave a fine for opinion. As I recall, and Justice Thomas was in the majority. Specifically if he was in the majority. Yes, he wrote the opinion for the court. Let me talk about tax leans, and let me tell you what I would argue rather than let Mr. McKellor tell you what I want to. If the IRS, it is clear that the IRS tax leans survives this bankruptcy. Sight in my brief on pace. This won't turn on tax leans. It's going to turn on the question of interest. The issue in this case, I mean this is a nice little side discussion will happen, but your issue is going to turn on whether that legal interest is subject to exemption in this case. But you want to talk about tax leans going in. Well, I just want to make, I'm further to talk further about the interest, but I do want to make the point that the tax leans survives the bankruptcy and the IRS retains the right, the cases are there in 27 US Henry, the US versus Henry, to sell the property. And there's no way I can go in and argue you don't have the right. Just as a mortgage lien, the personal liability on mortgage. I follow a bank ruptsy and less than my debt. Is that a value to that tax lien? Is that a value to that tax lien? Yes, that's the tax should that be a value to that tax lien? Yes, even though the personal liability is gone, the tax lien remains. That's, you know, it's long versus blurred is the case that leans survive bankruptcy. Just like if I got a mortgage debt, my debtors personal liability to Wells Fargo has been extinguished. If my client never pays Wells Fargo another dime. You answered it, you taking your time to further explain it. All right. So, but again, that's what you want to say at the time. No, so to get back to the interest in property, North Carolina statute says the debtors may exempt his interest in property not to exceed a value. And then Miss McCullough cited the statute in my brief. Value equals the total value less leans, all leans. Concentral leans to Wells Fargo. If it is leans to the IRS. The red interest in property in period as does the Florida statute clearly has clearly a case which the property subject exemptions. When you add up to a value, aren't you talking about a different kind of interest than just the property? With all due respect, no, Your Honor. Florida statute says your interest in property and there's no limit on it. It's, you know, it, it, it, it, okay. North Carolina says interest in property not to exceed a certain amount. So as long as I'm not exceeding property, you just get that up to that certain amount. That's, that's the problem. I'm getting my interest, but I'm not exempting money. I'm exempting the interest in the property is just that that interest can't exceed a certain amount. So North Carolina's exemption law in Florida is the same. It's just North Carolina's got a cap on it. Florida's does not. And as long as I'm underneath that cap, which the debtors were in this case, then I've exempted the interest in the property. And as I answered, uh, Judge Shedge's opinion at the end of my opening argument, interest in property with all due respect means to the same thing. So if the property is foreclosed upon, then your, the debt is within being titled to six thousand dollars. No, no, of the net for six hundred. Because under, if there are any, if it's foreclosed upon by the IRS, then the only interest would be six thousand dollars of the net preceding. Yes, but they don't, they don't have the whole property. North Carolina isn't giving the whole property like Florida. Florida, if it's foreclosed, it gets everything. Because the whole property is exempt, but it doesn't have to line up if it's foreclosed on

. So, but again, that's what you want to say at the time. No, so to get back to the interest in property, North Carolina statute says the debtors may exempt his interest in property not to exceed a value. And then Miss McCullough cited the statute in my brief. Value equals the total value less leans, all leans. Concentral leans to Wells Fargo. If it is leans to the IRS. The red interest in property in period as does the Florida statute clearly has clearly a case which the property subject exemptions. When you add up to a value, aren't you talking about a different kind of interest than just the property? With all due respect, no, Your Honor. Florida statute says your interest in property and there's no limit on it. It's, you know, it, it, it, it, okay. North Carolina says interest in property not to exceed a certain amount. So as long as I'm not exceeding property, you just get that up to that certain amount. That's, that's the problem. I'm getting my interest, but I'm not exempting money. I'm exempting the interest in the property is just that that interest can't exceed a certain amount. So North Carolina's exemption law in Florida is the same. It's just North Carolina's got a cap on it. Florida's does not. And as long as I'm underneath that cap, which the debtors were in this case, then I've exempted the interest in the property. And as I answered, uh, Judge Shedge's opinion at the end of my opening argument, interest in property with all due respect means to the same thing. So if the property is foreclosed upon, then your, the debt is within being titled to six thousand dollars. No, no, of the net for six hundred. Because under, if there are any, if it's foreclosed upon by the IRS, then the only interest would be six thousand dollars of the net preceding. Yes, but they don't, they don't have the whole property. North Carolina isn't giving the whole property like Florida. Florida, if it's foreclosed, it gets everything. Because the whole property is exempt, but it doesn't have to line up if it's foreclosed on. All it's going to get is sixty thousand with a two of them, sixty thousand dollars. Well, that's the only, that's the whole exemption they got. Now, now, in Florida, if property gets so consent, leans get paid under Florida law as well. Otherwise, the mortgage market in Florida would would be worse than what it is now. Because it's exempt. That's the first thing. You're not going to get it because it's exempt. You have a, they have a complete exemption on the whole property. No, but, but, but, but, but, but, but, but, but, but, but mortgage companies in Florida can foreclose. But that's, that's a secured credit. That's what I'm talking about. Yeah, that's what I'm talking about. So, in both states, it's the same. Leans take priority over exemptions. The North Carolina statute, the bankruptcy code provides that. It's just that once it's being sold under North Carolina law, you can't, if it is sold, if it's property sold, your value, we keep using sixty. It's truly thirty five per person. It's seventy. I've used sixty because of, because of the wildcard carve out. I hate to use that word in this case because I want to talk about carve out a minute because Judge Shed talked about what the trustee is trying to do here. The honor, trustees are to sell property or not to, if, if this carve out works, then you open up a Pandora's box. Because let's take away the tax link. Let's take somebody with a three hundred thousand dollar first house with a two hundred ninety thousand dollar first and a hundred thousand dollar second. So, they're upside down but ninety thousand dollars. In this, you real estate market, that is a very common situation. If, if this works, debt or files bankrupts, he's got no equity in his house, claims the property is exempt. But the mortgage, but the trustee goes to the second mortgage and say, you know, it's real pain in the butt to follow your state court remedies to foreclose on a piece of property

. All it's going to get is sixty thousand with a two of them, sixty thousand dollars. Well, that's the only, that's the whole exemption they got. Now, now, in Florida, if property gets so consent, leans get paid under Florida law as well. Otherwise, the mortgage market in Florida would would be worse than what it is now. Because it's exempt. That's the first thing. You're not going to get it because it's exempt. You have a, they have a complete exemption on the whole property. No, but, but, but, but, but, but, but, but, but, but, but mortgage companies in Florida can foreclose. But that's, that's a secured credit. That's what I'm talking about. Yeah, that's what I'm talking about. So, in both states, it's the same. Leans take priority over exemptions. The North Carolina statute, the bankruptcy code provides that. It's just that once it's being sold under North Carolina law, you can't, if it is sold, if it's property sold, your value, we keep using sixty. It's truly thirty five per person. It's seventy. I've used sixty because of, because of the wildcard carve out. I hate to use that word in this case because I want to talk about carve out a minute because Judge Shed talked about what the trustee is trying to do here. The honor, trustees are to sell property or not to, if, if this carve out works, then you open up a Pandora's box. Because let's take away the tax link. Let's take somebody with a three hundred thousand dollar first house with a two hundred ninety thousand dollar first and a hundred thousand dollar second. So, they're upside down but ninety thousand dollars. In this, you real estate market, that is a very common situation. If, if this works, debt or files bankrupts, he's got no equity in his house, claims the property is exempt. But the mortgage, but the trustee goes to the second mortgage and say, you know, it's real pain in the butt to follow your state court remedies to foreclose on a piece of property. Why don't I sell it and carve out some money for you to give you money? Well, in a world in which there's not a bankruptcy code that controls how things could happen. So, I'm going to say that's maybe a fine thing to do. But, all right. So, he's got sell out house with credit in that. All right. You got to, you got to subordinate a lien on that house. All right. That ain't go ahead. Then I'll change the facts. I'll make it a two hundred thousand dollar first and a two hundred thousand dollar second. So, now I've got a hundred thousand dollars. Okay. So, now he doesn't have to sell it but for three hundred and he does a carve out. You're right. My example was a bad one because I didn't leave much room there. But, you leave a lot of room. That means when debtors file bankruptcy now, it's a free fall on what trustees can do to be selling property through carve outs that is totally, I think, the right word I would use is inimical to the provisions of United States of Bankrupts to go that trustees can go around carving out deals with... The example because the second is going to foreclose himself. You can do that. He's a secured creditate and simply pay off the first. There's no reason to give a call out carve out to a second mortgage. Second mortgage is may allow a carve out because debt rather have a trustee that they may rather have a trustee to sell than to follow their state court remedies. My point is the law should say second mortgage companies, first mortgage companies, the United States, a government and the IRS follow their non-bankruptcy remedies to collect their secured debts and you can't do it through property that the debtor has claimed as exempt in a bankruptcy case. Let me ask you this on my time since your time has expired. The residence or the real property we are getting over was included in the bankruptcy filing

. Why don't I sell it and carve out some money for you to give you money? Well, in a world in which there's not a bankruptcy code that controls how things could happen. So, I'm going to say that's maybe a fine thing to do. But, all right. So, he's got sell out house with credit in that. All right. You got to, you got to subordinate a lien on that house. All right. That ain't go ahead. Then I'll change the facts. I'll make it a two hundred thousand dollar first and a two hundred thousand dollar second. So, now I've got a hundred thousand dollars. Okay. So, now he doesn't have to sell it but for three hundred and he does a carve out. You're right. My example was a bad one because I didn't leave much room there. But, you leave a lot of room. That means when debtors file bankruptcy now, it's a free fall on what trustees can do to be selling property through carve outs that is totally, I think, the right word I would use is inimical to the provisions of United States of Bankrupts to go that trustees can go around carving out deals with... The example because the second is going to foreclose himself. You can do that. He's a secured creditate and simply pay off the first. There's no reason to give a call out carve out to a second mortgage. Second mortgage is may allow a carve out because debt rather have a trustee that they may rather have a trustee to sell than to follow their state court remedies. My point is the law should say second mortgage companies, first mortgage companies, the United States, a government and the IRS follow their non-bankruptcy remedies to collect their secured debts and you can't do it through property that the debtor has claimed as exempt in a bankruptcy case. Let me ask you this on my time since your time has expired. The residence or the real property we are getting over was included in the bankruptcy filing. Was that not correct? Yes, you're on. You'll see or something like that. Yes. And it always remained in the bankruptcy state. That's correct. Until the debtor exempted it and the bankruptcy judge entered an order, then it was removed from the state. Then it was removed from the state. Legal title in the bankruptcy state? The entire debtor's interest came into the bankruptcy state. Legal title to the real property debt? Yes. The bankruptcy code says both legal and equitable interest come into the bankruptcy. So the trustee couldn't sell the property unless he had legal title? And the debtor exempted it. No, you just got to say that the debtor did exempt the property exempted the value of the interest state of a high-budget. Now, my construction is whatever the debtor brought into the bankruptcy state is to find in Section 541 is the interest that when you exempt, you're exempted what? You're exempted interest. And there's no reason to believe interest that comes in is any different than the exempted exemption that goes out. So under your theory, once legal title got into the bankruptcy state, got into trust in the state, your theory is that they could exempt that legal title back to the debtors. That's exactly what exemptions allow debtors to do. That, yes, exactly, Your Honor. Thank you. Thank you very much.

have his reeds versus Callaway. Mr. Brewer, when you're ready. Thank you. Good morning, judges. Chad Hamilton and Wynn. My name is William E. Brewer, Jr. I'm an attorney from Raleigh, North Carolina. And I represent the appellate debtors in this appeal to the fourth circuit. This appeal entails the issue of whether a chapter seven trustee has the authority to liquidate a fully encumbered asset, which the debtor has exempted from the bankruptcy of state. Now, that issue is obscured in this case somewhat by the fact that the lien, in this case, the fully encumbered debtors' residence is a federal tax claim. We're on the same page with this. Which debtor has exempted? Yes. What has the exempted? That's the focal point we need to decide. I agree. And I submit that they are one and the same as put out my brief, Your Honor. I think, and this comes back, I think, to the Schwab opinion. Tell me a little real estate law, too, and tell me how interest and property are the same in terms of title. What seems like we talked about legal and equitable title. Are you saying those are the same? Yes. When I took property law, my first share property class from DNA cop. Yes, that was a long time ago. Did you make a good grade? I made. As I recall, but as I recall, I made a A, but I kind of recall making A's in everything. You know what? You know I had the same record, you know what I'm saying? But if you look at the interest in property, talking about real estate, look, is that interest a fee-simple absolute? Is it tenets by the entirety? Is it a, you know, that had all these free, simple, conditional or condition precedent? Is it a lie for- Talking about, we're talking about the difference between legal and equitable interests. Yes, but the bankruptcy code brings the debtors interest whatever it is into the bankruptcy code. Section 541A says the debtors interest of whatever type. But legal, equitable, comes into the bankruptcy. You know, they're disputed that the house was part of the bankruptcy estate. No, when they filed the bankruptcy on the day he filed, yes. All right. And then section 522L and 522B allows the debtor to remove from that state his interest in property and he removed the interest in that property. I don't think that's correct. I think that the exemption pertains to the debtor's interest in the asset, not to the asset per se. And that was a ruling that the bankruptcy code made. And that's pursuant to the case of Swah versus Riley 2010 in Supreme Court. When the bankruptcy code defines the property, a debtor is authorized to exempt as an interest, the value of which may not exceed a certain dollar amount. And in a particular type of asset, the exemption pertains to the debtor's interest in the asset, not to the asset itself. In other words, the debtor had an interest in the bankruptcy estate of what was it? $60,000 subject to the preexisting superior leans. But he didn't have that interest in the house per se. Let me address that specifically with, because I think Swah was misconstrued by the bank ruptured court. I think it was misconstrued by the district court and which it cited after sitting on the case for 10 months, Judge Fox issued a two page opinion that said the bankruptcy court was right more or less. Well, you got to convince me that I'm misconstruing Swah. And that's what I'm going to do right now, Yarn. At least I'm going to try. Swah involved interest in the sense of there was an exemption. And in that case, it was equipment in a business. And the debtor under the bank, which the code exemptions had exempted an interest. And I think you could exempt about $12,000 combining the wild card exemption in the bankruptcy code and the tools of the trade. And he put a value, she put a value that was less than that. Trustee didn't object to that claim of exemption. And then later found out this property, I believe based on what I'm being told I can liquidate it for, is worth much more. So Judge Justice Thomas in discussing interest was talking about in my opinion monetary interest. And he makes that clear that if the interest, in that case of monetary interest, the debtor's interest was greater than the loud exemption. So that interest wasn't exempt. I will quote from Justice Thomas' opinion, whereas here is important to the debtor to exempt the full market value of the asset or the asset itself. That's Justice Thomas' words. What cases are that in? This is swap. All right. Our decision will encourage the debtor to declare the value of her claim to exemption in a matter that makes the scope of the exemption clear. For example, by listing the exempt value as the full fair market value 100%, such a declaration will incur the trustee to object promptly to the exemption, if he willens to challenge it and preserve for the state, any value in the asset beyond the relevant statutory limit. The next sentence is very important. If the trustee fails to object or if the trustee objects and the objections is overruled, the debtor will be entitled to its exclusive full value of asset. If the trustee objects. What would it mean if the objection is overruled? And that's what happened in this case. But in fact, our case is unlike swap because even though this case predated swap, we were, I was claiming this exemption on behalf of the debtors for swap came out. But I had claimed a full 100% of the value the debtors and tie interest in property exempt. So how do you get the $60,000 ahead of the mortgage link? I'm not saying I'm getting ahead to mortgaling. What I'm saying is North Carolina statute says the debtor may exempt his or her interest or their interest in property you use a residence, the value of which may not exceed the numbers actually 35. So I could have claimed 70. In this case, as in many cases, I didn't exempt but 60. Because North Carolina has a wild card exemption. It's $5,000 that you have to take out of the residence exemption, so only claim 60. But the point is there is no value there. The debtors value did not exceed 60. It didn't exceed zero because at the judge found in its order denying the trustees objection to exemptions that the properties were $325. There's a $195,000 mortgage. There's a $300 and some $1000 tax lane and therefore the value is zero. So the debtor's interest, unlike swap, did not exceed the statutory limit. Somebody looked for guidance on how you read that North Carolina statute. Did you just say that North Carolina statute? Yes, yes. What do we look for guidance on how you read that? I would say it's the plain language of the statute. How do you deal with somebody's speech of what do we look North Carolina Supreme Court is your decision on how you read that statute? I'm not, I am nowhere of any issue where that issue has been raised in the North Carolina courts. In court of appeals or or or or or or to Supreme Court, at least with respect to what the debtor exempts. You need to understand those situations always work, are not being played out in the in the bankruptcy context, but a single creditor trying to execute. But you do have to piece of prune. On the North Carolina law, there aren't two different types of exemptions that are committed. One allows exemptions up to the fine value. And another type of exemption, perhaps the one you alluded to on the personal product, allows you, it is like health aids or something like that, allows you to exempt the property. And this is of the first type. This is the type that allows you to exempt up to a fine value. Again, y'all know, my interpretation of North Carolina statute is that the debtor again, exempts his interest in the property. And interest means, whatever the debtor has. And I want to make you understand that, do you accept that equitable interest can be extinguished in profit? Do I? In other words, can you extinguish equitable interest in profit? Debtor has both legal title and equitable title. Can he extinguish the equitable, by over-encomerant as clearly this is done? His property is way, incumbent way beyond the value. So he has, except your client has no equitable interest in this problem. I would disagree that slightly. Tell me what the equitable interest people say. The value of that equitable interest is zero. That's what I want to say. The debtor's equitable interest is a place to sleep at night. It's a place to go to get away from everyone. That equitable interest is in fact, I don't know about that, but I'll deal with the zero. The zero is the equitable interest. So in fact, he only has interest in terms that it has a dollar value on it, legal. Exactly. So it's the legal interest that pass over it. And the only question to be for us is whether legal interest can be subject to an exemption. Is that right? I would submit, the issue before you is, whatever interest the debtor came into the bank rep, see with legal and equitable. Can he remove that from? It has a zero value. Yes, but if I were, he only has, trust he's not interested in anything that has zero value. Well, what if they pass it in his state? He can do nothing with it. So the only thing he has that is a value is the legal title to it. But if he's selling it, then he is trying to get something of that. That's the selling of it. I'm talking about from a bankruptcy perspective of what is, because he can only sell that that is in the estate. Yes. And all that's in this state is legal title. And that got exempted by the debtor. What is that all we are considering here is whether, on the bank versus law, in the law, or on the law of life, legal interest can be subject to an exemption. And my answer to that question, yes, it can. Yes, that's all I want to know. And that's all that you got. That's all we're dealing with, is legal interest. Yes. OK. But I mean, I need to understand, but there's arguments made in that was made by the trustee, both before the exemption was heard by the Amicus brief, by the National Association of the Bank of Representatives of attorneys, and by the trustee. In his brief, it says, if there is no value, there's nothing to exempt. And that is just absolutely positively wrong. The statute does not say that you have to get your equitable interest, or your legal interest has to have value. It's just that it can't exceed a certain amount. And of course, zero is less than the statutory amount. I want you to explain to me, under your theory, how you get priority over the mortgage lien. I think it's well-stored or something. I have not asserted I got priority over the mortgage lien. Well, how are you going to get any money out of it then? My clients does not try to get money out of it. They're trying to, they're trying to, they're are comparing Wells Fargo. They continue to pay Wells Fargo. They just don't want the property to be so, so they can sleep in it at night and have a place to live. Is that so? They get the property, what are you saying? They get the property subject to the Wells Fargo lien? Oh, yes, sir. The statute clearly says that. It is subject to the Wells Fargo lien and to the, to the, to the federal tax link. And all I'm saying is those creditors have to pursue their rights against a property outside the bankruptcy context. They, they, they, they, they, they, they're misconstruing the North Carolina statute. Which provides that that exemption expressed to pertains to a debtors quote aggregate interest in quote in the real property quote not to exceed the sum of money and does not pertain to the real property itself. So, you know, yonder my time's up. So, I, I, so I want to answer your question. You can do it on my time. Okay. So, what that is saying is that the debtor in his exemption would have an interest in the overall bankruptcy estate, not in the specific residential real property. The honor debtors, what you are doing is you're saying debtors exemptions have to do with money. And it doesn't have to do with money. Debtors exempt cars, they exempt residents, they exempt household furnaces, not so they can sell them to get money. They exempt their clothes so they have something to put on to go to work. They exempt their cars so they can get work. They exempt their residents. So, to construe the statute somehow to say, if it's got no monetary value, then, then the exempt, then that property can't be removed from the state, completely obeliorates the fresh start promised by the United States bankruptcy code. How did the reefs get in bankruptcy? Were they behind on their mortgage, for instance? They owed $300,000 worth of tax debt, which they could discharge in this bankruptcy, because it was more than three years old. That's how they got. That's the status of the mortgage. This mortgage was current. They continued to pay the mortgage. If you look at the record, it shows that they were current when they found that they intended to continue to make payments. I don't think it's in the record here, but we had a motion to stay the sale of the property. And what of that motion was that the debtors continued to keep the payments made? Does your reading need to lead to no distinction between exempting an interest and exempting the property itself? Yes. It makes no difference. In other words, if the statute said property or the statute said interest, your reading, that word difference doesn't matter. It would make a difference only if you're talking about monetary value, but if you're talking about... I mentioned it before all that on there. I'm just saying if you looked at the statute and it said you may exempt an interest in property or the statute said you may exempt property, your reading is, that's the distinction that makes no difference. That's correct. And I think I try to make that clear in my reply brief, a good section of that, saying, look, the bankruptcy code used the word property and used the word interest almost interchangeably. And that is correct. Let me ask you this. Aren't you in a situation where the liability has exceed the assets of this bankruptcy? Oh, yes. Okay, that's all I want to know. Thank you. Thank you. Thank you, Mr. Brewer. Mr. McKellor. Good morning, May it please the Court. I'm Scott McKellor from Rocky Mountain, North Carolina appearing on behalf of Joseph and Callaway, who is the Chapter 7 trustee in the subject bankruptcy case. Excuse me. The distinction and it was made, it was pressed upon with Mr. Brewer. This case revolves around the distinction of whether the debtors are allowed to exempt an interest in this property or the property itself. This case revolved, that is the distinction and that is the issue. Because your honors, if, if, and as the law and as we support and operate. He says, when you read the law, you heard my last question to him. He says to exempt an interest in property is exactly the same as the statute saying you may exempt the property. Absolutely not. We could tend otherwise. He said that. Well, I respectfully disagree. Even in his brief, and if I may cite a statute, it's North Carolina General Statute, 1c-1601b2, which defines the value of the debtor's interest that you may exempt. And value means the fair market value of an individual's interest in property, less valid lean superior to the judgment lean sought to be enforced. So here, as the Schwab case, relied on by the lower courts, makes clear, there is a distinction between the interest being exempted and the property itself. There's no dispute, there's no factual dispute as the valuation. This property is completely over-encumbered. While the debtors and their schedules see their amended schedule see to their petition, they claimed an exemption value of $60,000, 30 per each individual. He says that the remedies will still be there for the creditors outside of bankruptcy. Why are you fighting that then? If that's the case, would the tax lean be extinguished? The tax leaner on a will be extinguished after 10 years. And so the predicament that we have here is that there is a distinction between a regular consensual mortgage lean, which is the Wells Fargo lean that's in first priority position, as opposed to the IRS lean. I understand. It seems to me that he then does make an argument that this bankruptcy procedure is just being used to ease the way for creditors to get their money rather than just go through the normal state mandated procedures. I guess that's where he's going with that. That's where he's going. I respect. I just agree. He is wrong. I'm just asking why should you be allowed to use the bankruptcy provisions in a way that he is least colorably wrong, I don't say that it is wrong. But it looks like the purpose is just to really, like he says, aid some creditors. They have rights outside of bankruptcy. That is the trustee. You're that is the trustees of Farmative Duty under section 704 of the bankruptcy code to liquidate property of the bankruptcy estate and distribute that to creditors. But to help a creditor who is current, who's dead is current. You're talking about the first mortgage holder. I know, but I'm talking about the first mortgage holder. You're just saying the whole thing is driven by the tax lane. That's correct. Well, there's a distinction. Let's close the hypothetical. I mean, yes, you're on. That's what I was getting to carve out. That's correct. I'm not really not supposed to be a bit of trying to execute on a current type credit. It's because they have this interest. They have their state law remedies. So that's really not the focus. It's going to be, I mean, what Judge Shed is getting at is really with the value of this property. It's not going to be a whole lot. If anything, it's going to be a credit, but at least in principle, because you got a 30% carve out of the net amount, which is presuming that the house is supposed to be worth, I guess, around 300,000. You got a 200,000 mortgage on it. You sell the same from 300,000, which is probably not going to happen, but we'll see. And then you got a 100,000, you got a 30,000, you pay off all administrative costs from all that and everything else. And in theory, that's supposed to be some money there that you didn't go to distribute to this unsecured creditors. So isn't that really the focus of what you're supposed to be? Absolutely. Absolutely. And when this case started, and that's still the trustees intent, that this carve out will create a return for unsecured creditors that would otherwise not receive a dime. No, I stand all that. I stand that and I see that. And by the way, I think that not a bad deal for unsecured creditors, but I think the argument is, yeah, but you're doing that by running roughshod over the relationship between the secured creditors and the owner of the asset, just to create an interest that otherwise doesn't exist. Isn't that the argument? Because because, because, as between the mortgage company and the homeowner, the unsecured creditors in the normal procedure, unsecured creditors probably not going to get anything there. It's just the way they're going to get something is because he says you're writing, overwriting his rights, to grab something you can't have just to cut a deal and to make your deal look decent, you have a little carve out for the unsecured creditors. Isn't that his argument? I would submit from the trustees perspective that's one of the tenants of chapter seven. Is in cases that there are assets and by virtue of this carve out, that there are assets which can be liquidated, then unsecured creditors that would otherwise go unpaid will receive a recovery. This would not create, this would not create any value. This home wouldn't create any value in the estate to be distributed absent that carve out provision, right? Yes, sir. Based on the record. Yes, sir. So in other words, that's my point. I think I understand his argument. You've artificially created by running roughshod over his rights. That's his argument. Nobody argues that the trustees done a good job for the unsecured, but he's just saying, you can't, that's fine to help the unsecured, but you can't do that by running roughshod over what other rights we have. I would submit. I think that's his argument. That's probably true. I would submit that the debtor has not been prejudiced at all. He has claimed an exemption. It's a fiction. There is no exemption interest. I'm going to make that out of standard, because you say he's not prejudiced, but he should have spoken to his rights. Exemption rights, which I don't know what that means, the same. He's not, he's not prejudiced, but nevertheless have your rights run over. That means that's committed. You can run over his rights because he's not going to be public. What rights are we specifically talking about? He will, you know, the debtors presumably, if the trustee prevails, then the house likely will be sold. So that right of, but the house, what is the likelihood that the house may be sold anyway? I struggled to understand what rights we're talking about that the debtors asserted his exemption rights. I'd say he said it through a full time. His right to have a place to live in. And he said he has a right, I don't know if he's right, but he's asserting that under the law he has an interest to stay in that house. And the mortgage company he didn't try to throw him out. He said he's current on that. That's what I think I heard him say that. I am not, the trustee is not submitting that Wells Fargo, the first mortgage order, is being prejudiced in any way whatsoever. The issue here is the potential benefit to, and the likely benefit to creditors that would otherwise not get paid, the unscured class, and to the federal tax lane, which potentially your honors, if the discharge goes through, the discharge is already entered in this case. So the debt owing to under the tax lane has been discharged. Let me ask you about this right to live in the place because the right, I'm not sure the North Carolina statute says right to live in. I thought he said $30,000 exemption and 60 if you married. And then what the right, it was seen to me that, and take it in an instance where there was only just, I see $100,000 mortgage on the house. House is worth $300,000. And there are nothing else owed on. So then presumably he can get $30,000 or $6,000 exemption. But it seems to me you still could sell the property, but don't you then have to just, then you just give back the $60,000. That's the normal situation you see your honor where you would not see a trustee step in. Yeah, in that case, yeah, you're right. There would not be any return to creditors there. That's the typical situation you would have. We wouldn't be here today if it was, if you follow his example, he's entitled to stay in a house. But if you didn't owe anything on it, he wouldn't be entitled. His house could be sold. And the best he could come out might be $6,000. It's correct. So he's better off having a good old income from his perspective. It's an interesting tactic that he's taken. Not us to be sure. But... What was this? I think he said that. I think the other side said this. The bankruptcy action filing was driven by the tax lane. What drove the bankruptcy filing? If he represented... I don't recall. I thought he said he dealt with taxes. Wait, it's a huge tax lane, your honor? It was over $300,000. I didn't say it wasn't. But the point is, it looks to me like it was a calculation on the debtors part that he could keep the house and deal with that under the normal dealings between the mortgage company and the owner of the house to protect that interest as he describes it. That's fine. He could deal with the tax lane and bankruptcy. And you just say his miscarculation on the debtors part as to what rights he would retain after five years. Well, I don't see anywhere in the statute talking about a place to sleep. I understand it's a sympathetic argument. I didn't say that debtor. I didn't say that. No, sir. I didn't say that. I didn't say that. I said that's how he describes it. I didn't ask that. But I'm just trying to figure out where he's buying yourself. So it looks like he took the option to file on his reading of the state statute thinking he was still be protected. We know how he reads it, how the debtor reads it. And what you did, the trustee did, was then strike a deal with the tax lane people to say, we will do something. And you'll get some of your money. But for me looking out for you, some part of that money that you get, you'll have to give back to me to give to the unsecured. That's correct. That's correct. And if I may, this is, if we can go back to the intent, and it's not on the record, but if you think conceptually, why the case was filed, you have $300,000 house and encumbered by $190,000 first mortgage. You have this huge tax lane. It's coming under. It makes perfect sense to file if you can get out from 100. And so if what I was trying to allude to earlier, the discharge is already being entered in the case. So the underlying debt is wiped out. The debt's wiped out in chapter 7, but the lane survived. Which debt? The tax debt. The IRS taxed it. So the lane will survive post when the case closes. Well, and that's true Wells Fargo too. But there's a difference between consensual lanes and federal tax lanes, and it's an important distinction. Because the mortgage lanes will survive, and those rights will not expire. Whereas the tax lane is going to expire in 10 years. And therefore, I mean, and just several more years, that tax lane is going to be gone. It's going to be extinguished. And the debtors have the very real chance of owning this property just subject to the Wells Fargo mortgage, which would be a home run from their perspective. And they won't seek to sell the property to collect on the lane. The tax. I would bet that Mr. Brewer would argue when that foreclosure, tax foreclosure is initiated, would say that there's no underlying debt because it's been extinguished. And the only thing that survives is the lane. But the lane, and we alluded to this in our brief, that the lane, while the lane survives, there's no underlying. The debt's been discharged, so the tax foreclosure can't go full. Well, then, the note would be depressed without a note. I mean, that's that big of a specific thing. It must be Brewer is correct that the debtors would get the property, and the tax lane would still be on the property. That's correct, Your Honor. And you say it would last for 10 years. So if the bankruptcy... I think it's now it'll set to expire in 2017. All right, well, so if the, somehow rather the debtor got the property and the bankruptcy state was closed and so forth, the IRS would certainly foreclose on its tax lane if the debtor got the house. That could happen. However, I'll point out to you, in that situation, what's going to happen to the unsecured class that would otherwise benefit in this case? And I'm going to get anything. That's correct. And we're saying, Your Honor, we... Let's say that was going to happen. I said that if the debtors was correct, and that they got the house, then the tax lane would still be on the house, and the IRS would certainly foreclose on it. They could, but they're not understanding you, Slay, that they foreclose on it. Is this charged? It is discharged? No value in the lane. I don't understand that. How you have a lane that has no underlying obligation to it. With it. So if you foreclose, there's no, that nothing that he can, that IRS can collect, because you say it's been discharged. My premise was that if the debtor got the house, the tax lane is still on the house. That was my premise. And we agree with that. But he said the lane is worth enough. He said the word nothing. He said, he didn't you say on a that scenario? That's an argument that can be made. Now I don't have any of that. Let me finish my comment. I'm sorry, Your Honor. I said, didn't you say in response to the question about the lane attaching or continuing on the house outside of bankruptcy, that you would anticipate if there was an attempt to foreclose your own that lane, there would be an argument made that there is a lane, but there's no debt, because the debt had been discharged. The tax debt had been discharged in bankruptcy. That's at least what you just said. I believe that argument would be made, whether it be successful or not. I can't represent that to you. Go ahead. I'll let you go ahead. I see my time is wrapping up. Unless there are any further questions. Judge Wynn, I see you shaking your head. I'm happy to try to flush this out. No, no, no, no, thank you very much. Thank you, Your Honor. We may have more questions, just not a few. Mr. Brewer. Mr. Brewer, why are you coming up here? You questioned the validity of swab, and you said that you read something where Judge Thomas had said so and so. Was Judge Thomas in the majority in that case? Yes, just there was a, leave a fine for opinion. As I recall, and Justice Thomas was in the majority. Specifically if he was in the majority. Yes, he wrote the opinion for the court. Let me talk about tax leans, and let me tell you what I would argue rather than let Mr. McKellor tell you what I want to. If the IRS, it is clear that the IRS tax leans survives this bankruptcy. Sight in my brief on pace. This won't turn on tax leans. It's going to turn on the question of interest. The issue in this case, I mean this is a nice little side discussion will happen, but your issue is going to turn on whether that legal interest is subject to exemption in this case. But you want to talk about tax leans going in. Well, I just want to make, I'm further to talk further about the interest, but I do want to make the point that the tax leans survives the bankruptcy and the IRS retains the right, the cases are there in 27 US Henry, the US versus Henry, to sell the property. And there's no way I can go in and argue you don't have the right. Just as a mortgage lien, the personal liability on mortgage. I follow a bank ruptsy and less than my debt. Is that a value to that tax lien? Is that a value to that tax lien? Yes, that's the tax should that be a value to that tax lien? Yes, even though the personal liability is gone, the tax lien remains. That's, you know, it's long versus blurred is the case that leans survive bankruptcy. Just like if I got a mortgage debt, my debtors personal liability to Wells Fargo has been extinguished. If my client never pays Wells Fargo another dime. You answered it, you taking your time to further explain it. All right. So, but again, that's what you want to say at the time. No, so to get back to the interest in property, North Carolina statute says the debtors may exempt his interest in property not to exceed a value. And then Miss McCullough cited the statute in my brief. Value equals the total value less leans, all leans. Concentral leans to Wells Fargo. If it is leans to the IRS. The red interest in property in period as does the Florida statute clearly has clearly a case which the property subject exemptions. When you add up to a value, aren't you talking about a different kind of interest than just the property? With all due respect, no, Your Honor. Florida statute says your interest in property and there's no limit on it. It's, you know, it, it, it, it, okay. North Carolina says interest in property not to exceed a certain amount. So as long as I'm not exceeding property, you just get that up to that certain amount. That's, that's the problem. I'm getting my interest, but I'm not exempting money. I'm exempting the interest in the property is just that that interest can't exceed a certain amount. So North Carolina's exemption law in Florida is the same. It's just North Carolina's got a cap on it. Florida's does not. And as long as I'm underneath that cap, which the debtors were in this case, then I've exempted the interest in the property. And as I answered, uh, Judge Shedge's opinion at the end of my opening argument, interest in property with all due respect means to the same thing. So if the property is foreclosed upon, then your, the debt is within being titled to six thousand dollars. No, no, of the net for six hundred. Because under, if there are any, if it's foreclosed upon by the IRS, then the only interest would be six thousand dollars of the net preceding. Yes, but they don't, they don't have the whole property. North Carolina isn't giving the whole property like Florida. Florida, if it's foreclosed, it gets everything. Because the whole property is exempt, but it doesn't have to line up if it's foreclosed on. All it's going to get is sixty thousand with a two of them, sixty thousand dollars. Well, that's the only, that's the whole exemption they got. Now, now, in Florida, if property gets so consent, leans get paid under Florida law as well. Otherwise, the mortgage market in Florida would would be worse than what it is now. Because it's exempt. That's the first thing. You're not going to get it because it's exempt. You have a, they have a complete exemption on the whole property. No, but, but, but, but, but, but, but, but, but, but, but mortgage companies in Florida can foreclose. But that's, that's a secured credit. That's what I'm talking about. Yeah, that's what I'm talking about. So, in both states, it's the same. Leans take priority over exemptions. The North Carolina statute, the bankruptcy code provides that. It's just that once it's being sold under North Carolina law, you can't, if it is sold, if it's property sold, your value, we keep using sixty. It's truly thirty five per person. It's seventy. I've used sixty because of, because of the wildcard carve out. I hate to use that word in this case because I want to talk about carve out a minute because Judge Shed talked about what the trustee is trying to do here. The honor, trustees are to sell property or not to, if, if this carve out works, then you open up a Pandora's box. Because let's take away the tax link. Let's take somebody with a three hundred thousand dollar first house with a two hundred ninety thousand dollar first and a hundred thousand dollar second. So, they're upside down but ninety thousand dollars. In this, you real estate market, that is a very common situation. If, if this works, debt or files bankrupts, he's got no equity in his house, claims the property is exempt. But the mortgage, but the trustee goes to the second mortgage and say, you know, it's real pain in the butt to follow your state court remedies to foreclose on a piece of property. Why don't I sell it and carve out some money for you to give you money? Well, in a world in which there's not a bankruptcy code that controls how things could happen. So, I'm going to say that's maybe a fine thing to do. But, all right. So, he's got sell out house with credit in that. All right. You got to, you got to subordinate a lien on that house. All right. That ain't go ahead. Then I'll change the facts. I'll make it a two hundred thousand dollar first and a two hundred thousand dollar second. So, now I've got a hundred thousand dollars. Okay. So, now he doesn't have to sell it but for three hundred and he does a carve out. You're right. My example was a bad one because I didn't leave much room there. But, you leave a lot of room. That means when debtors file bankruptcy now, it's a free fall on what trustees can do to be selling property through carve outs that is totally, I think, the right word I would use is inimical to the provisions of United States of Bankrupts to go that trustees can go around carving out deals with... The example because the second is going to foreclose himself. You can do that. He's a secured creditate and simply pay off the first. There's no reason to give a call out carve out to a second mortgage. Second mortgage is may allow a carve out because debt rather have a trustee that they may rather have a trustee to sell than to follow their state court remedies. My point is the law should say second mortgage companies, first mortgage companies, the United States, a government and the IRS follow their non-bankruptcy remedies to collect their secured debts and you can't do it through property that the debtor has claimed as exempt in a bankruptcy case. Let me ask you this on my time since your time has expired. The residence or the real property we are getting over was included in the bankruptcy filing. Was that not correct? Yes, you're on. You'll see or something like that. Yes. And it always remained in the bankruptcy state. That's correct. Until the debtor exempted it and the bankruptcy judge entered an order, then it was removed from the state. Then it was removed from the state. Legal title in the bankruptcy state? The entire debtor's interest came into the bankruptcy state. Legal title to the real property debt? Yes. The bankruptcy code says both legal and equitable interest come into the bankruptcy. So the trustee couldn't sell the property unless he had legal title? And the debtor exempted it. No, you just got to say that the debtor did exempt the property exempted the value of the interest state of a high-budget. Now, my construction is whatever the debtor brought into the bankruptcy state is to find in Section 541 is the interest that when you exempt, you're exempted what? You're exempted interest. And there's no reason to believe interest that comes in is any different than the exempted exemption that goes out. So under your theory, once legal title got into the bankruptcy state, got into trust in the state, your theory is that they could exempt that legal title back to the debtors. That's exactly what exemptions allow debtors to do. That, yes, exactly, Your Honor. Thank you. Thank you very much