Contingent Future Interest In Tenancy by Entirety Not Exempt

Posted by NCBRC - August 21, 2019

Where state exemption law does not specifically apply to a contingent future interest in a tenancy by the entirety, the interest is not exempt under bankruptcy law and the debtor cannot avoid a judgment lien under section 522(f). In re Jaffe, No. 18-2726 (7th Cir. Aug. 5, 2019).

Including a mini-tutorial on the history of women’s property rights, from coverture (married woman’s property interests absorbed by her husband), to tenancy by the entirety (co-ownership and transfer to surviving spouse), to the Married Women’s Property Acts (providing means for women to own property and emerge from financial and social dependency), the circuit court explored the interaction of bankruptcy exemptions and Illinois property law.

The debtor entered bankruptcy owning his residence with his wife as a tenant in the entirety. When his wife died post-bankruptcy, he sought to exempt his entire fee simple interest in the property and avoid his creditor’s judgment lien under section 522(f) as impairing his exemption. The district court found that he could do so, and the creditor appealed.

Section 522(b)(3)(B) permits a bankruptcy debtor to exempt property which he holds as a tenant by the entirety at the time of his bankruptcy petition, “to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable” state law.

The circuit court began its analysis with the threshold question of whether the creditor’s judgment lien attached to the debtor’s contingent future interest. Under Illinois law, section 12-101, a judgment lien attaches to broadly-defined “real estate,” with a specific exemption for a debtor’s tenancy interest. The debtor argued that the exemption extended to his future contingency interest, or, in the alternative, that the lien never attached to that interest. The circuit court disagreed. It found that while, under the narrow exception to the statute, the judgment lien could not attach to the tenancy interest, there was no similar exemption in the state statute for a future contingent interest in property. Therefore, state law allowed the judgment lien to attach to such interest.

Turning to the issue of whether the debtor’s contingent future interest (as opposed to his tenancy interest) was exempt in bankruptcy, the answer turned on interpretation of the word “such” in section 522(b)(3)(B). In finding that section 522(b)(3)(B) exempts any interest the debtor has as a tenant in the entirety, including his contingent future interest, the district court did not address the impact of the word “such.” The circuit court, on the other hand, said “Our reading of the statute yields a simple result—interests a debtor holds as a tenant by the entirety are exempt to the extent that those interests the debtor holds as a tenant by the entirety are exempt under state law.” In this case, Illinois law exempted only the tenancy interest and said nothing about the contingent future interest. The court reasoned that this conclusion harmonized with the state’s apparent policy decision to preclude the sale by a creditor of property held in a tenancy by the entirety when only one of the tenants was indebted to that creditor. That policy consideration would not apply once the non-debtor spouse died.

Therefore, the circuit court concluded that the district court erred in extending the exemption to the debtor’s contingent future interest. The court reversed and remanded.

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