Interest in Joint Tenancy Drops from Estate upon Death of Debtor

Posted by NCBRC - January 4, 2019

By operation of state property law, a debtor’s interest in a joint tenancy drops out of the chapter 7 estate upon the death of the debtor, and this does not conflict with the trustee’s powers under federal law. Cohen v. Chernushin (In re Chernushin), No. 18-1068 (10th Cir. Dec. 21, 2018).

Gregory and Andrea Chernushin owned real property as joint tenants. Mr. Chernushin filed for bankruptcy but committed suicide during the pendency of his case. The chapter 7 trustee sought to retain and sell the joint tenancy. The bankruptcy court found that upon Mr. Chernushin’s death the entire interest in the property went to Ms. Chernushin and was therefore no longer part of the bankruptcy estate amenable to sale by the trustee. On appeal, the district court agreed. Cohen v. Chernushin (In re Chernushin), 584 B.R. 567 (D. Colo. 2018).

The trustee appealed to the Tenth Circuit.

The circuit court began with section 541(a)(1) which provides that property enters the bankruptcy estate only to the extent of the debtor’s interest in that property. The trustee has no greater interest in estate property than the debtor has, and property interests are established by state law. Under Colorado law, filing bankruptcy by one joint tenant does not sever the joint tenancy and, if one of the joint tenants dies, the other takes the entire interest in the property. Based on these principles, the court determined that the debtor’s interest in the joint tenancy dropped out of the estate immediately upon his death and, therefore, the trustee had no authority to sell the property.

The court went on to address the trustee’s arguments challenging that conclusion.

First, the trustee argued that Bankruptcy Rule 1016 provides that upon the death of a chapter 7 debtor, the bankruptcy estate is to be administered just as it would be absent the death. The court, however, found that while this procedural rule authorizes the continuation of the bankruptcy proceedings, it is silent with respect to the substance of the bankruptcy estate except to the extent that it permits continuation of the liquidation “so far as possible.” Because Mr. Chernushin’s death resulted in the immediate and automatic loss of his interest in the property, the court found the asset no longer part of the bankruptcy estate and therefore continuation of the administration of the estate simply did not include that property.

The trustee next argued that his plenary power under various sections of the Code provided authorization for administration of the property. Section 363(b)(1) and 363(h) permit sale of property held in joint tenancy, section 554(d) provides that property that is not affirmatively abandoned by the trustee remains property of the estate, and 549(a), authorizes a trustee to avoid a transfer.

The court found that Colorado’s joint tenancy law did not conflict or interfere with any of the cited bankruptcy provisions. The bankruptcy estate never had a greater interest in the property than Mr. Chernushin had at the filing date, and that interest was subject to extinguishment upon his death. Therefore, none of the provisions relating to the trustee’s power over estate property applied simply because the property was no longer part of the bankruptcy estate.

Finally, the court rejected the trustee’s argument that his strong-arm power under section 544 provided the basis for his ability to sell the property. That provision gives the trustee the power to avoid a transfer if a hypothetical judicial lienholder or bona fide purchaser could avoid the transfer. But there was no transfer here. Ms. Chernushin had an interest in the property at all times and Mr. Chernushin’s death simply made her interest no longer subject to the joint tenancy.

Chernushin 10th Cir Dec 2018

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