In re Jaffe, 18-2726 (7th Cir. August 5, 2019), the Seventh Circuit held that a homeowner’s “contingent future interest” in an otherwise exempt form of home ownership – tenancy by the entireties – was not exempt and was instead property of his bankruptcy estate. This decision not only resolves a dispute among lower courts regarding the exempt status of homes held in tenancy by the entireties, but it also means that a home held in tenancy by the entireties that is exempt on the bankruptcy filing date can lose that status if during the bankruptcy case the property is sold or one of the spouses passes away.
Under Illinois law, real estate jointly owned by a husband
and wife can be held in a “tenancy by the entirety.” As a general rule under
Illinois law, real estate held in a tenancy by the entirety is exempt from the
claims asserted against one spouse. In
other words, the creditors of only one spouse cannot enforce their judgments
against property owned like this. Id. at 13 (“The main protection that
Illinois law provides tenants by the entirety is that a creditor is unable to
force the sale of the property to collect a debt against only one of the
tenants.”).
In the Jaffe case,
a creditor obtained by default a $500,000 judgment against the debtor, a
lawyer, in a malpractice case in 2005. The creditor recorded the judgment,
giving her a lien on the debtor’s real estate. Ten years later, the debtor filed
a chapter 7 petition. In the bankruptcy
case, the debtor exempted his home on the grounds that he owned it with his
wife in tenancy by the entireties.
During the bankruptcy case, the debtor’s wife passed away, but the debtor
continued to argue the exemption was available because, at the time he filed the
bankruptcy case, the home was exempt.
The Seventh Circuit analyzed the different interests related
to tenancy by the entireties property and ultimately concluded, based upon
Illinois law, that the debtor held not a single interest, but a bundle of
rights:
The
Illinois legislature enumerated the precise interests tenants by the entirety
enjoy individually, including the following contingent future interests: “(a)
an interest as a tenant in common in the event of a divorce, (b) an interest as
a joint tenant in the event that another homestead is established, and (c) a
survivorship interest in the entire property in the event of the other tenant’s
death.” 765 ILCS 1005/1c. Id. at 4.
The Circuit Court then analyzed whether the Bankruptcy Code
exempted the entire bundle of rights, or just the right as a tenant by the
entirety. Based upon the language of §
522(b)(3)(B), the Court concluded that the “exemption applies ‘to the extent
that such interests as a tenant by the entirety,’ meaning the precise interests
that the debtor holds as a tenant by the entirety, are exempt under state
law.” Id. at 10. In other words, the Seventh Circuit held that the
“contingent future interests”, including the right to own the property
individually upon the death of one spouse, were not exempt from creditor
claims. And as the bankruptcy court
noted, because the creditor “had a lien on Jaffe’s contingent future interest,
she has a lien on his current interest as fee simple owner” upon the passing of
Mrs. Jaffe.” See In re Jaffe, Case
No. 15-39490 (Bankr. N.D. Ill. June 7, 2017).
The Seventh Circuit’s opinion in Jaffe clarifies the law in the Northern District of Illinois. Prior to the case, several bankruptcy courts
(including the bankruptcy court hearing the underlying bankruptcy case of Mr.
Jaffe) had concluded that the contingent future interest was not exempt under
Illinois law and that a debtor could not avoid a judgment lien that had been
recorded against property held in a tenancy by the entireties. The District Court decision reversing the
bankruptcy court in the Jaffe case
introduced a conflict between the lower courts in the Seventh Circuit, which
now appears to have been resolved by the Circuit Court’s ruling in Jaffe.
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