Tenancy by the entireties: has the Bankruptcy Court found a chink in the armor?

• Author: Chaneles, Steven B.
• Position: Florida

Estate planners, bankruptcy lawyers, CPAs, title insurance companies, mortgage lenders, collection attorneys, financial planners, asset protection specialists--practically everyone--have relied for years upon a form of property ownership known as tenancy by the entireties (TBE) as a fundamental tool for insulating assets from creditors' claims and final process such as execution and garnishment. Few will dispute that Florida has a long-standing reputation as a debtor's haven in light of the generous exemptions provided by Florida law. It should come as no surprise, then, that a case would arise with just the right set of facts to push a court over the edge in favor of creditors.

On July 19, 1996, Chief JudgeA. Jay Cristol of the Bankruptcy Court for the Southern District of Florida took the plunge in In re Planas, 199 B.R. 211 (Bankr. S.D. Fla. 1996).(1) In a memorandum decision that began to stir discussion almost immediately,(2) Judge Cristol substantially eroded, if not completely eliminated, a debtor's ability to claim an exemption pursuant to 11 U.S.C. [sections] 522(a)(2)(B) for TBE property if the debtor and the debtor's nondebtor spouse have any joint debt. This article briefly explores the nature of TBE, the effect of such ownership on creditor claims, Florida precedent, and the continuing viability of titling property as TBE as a shield against creditors in light of the Planas decision. A full discussion of all the nuances of TBE and bankruptcy mechanics, such as stay relief for joint secured creditors and joint creditors desiring to reduce their joint claims to judgment, and sale or partition pursuant to 11 U.S.C. [sections] 363, etc., is beyond the scope of this article.

TBE is a form of property ownership unique to husband and wife requiring the same four unities as joint tenancies, plus a fifth: 1) unity of possession (joint ownership and control); 2) unity of interest (the interests must be the same); 3) unity of title (the interests must originate in the same instrument); 4) unity of time (the interests must commence simultaneously); and 5) unity of marriage.(3) Florida recognizes TBE ownership of real and personal property.(4)

Under Florida law, when property is held as TBE, an individual spouse may not voluntarily or involuntarily alienate TBE property without the consent of the other spouse.(5) It logically follows, then, that a creditor of only an individual spouse cannot reach the TBE property to satisfy its claim without the consent of the other spouse and only a joint creditor, one who has a claim against both spousal tenants, may reach the TBE property not otherwise exempt.(6)

A common asset planning technique entails placing all or a substantial amount of assets in TBE form while keeping all debts separate, i.e., incurring debts only on an individual, not joint, basis. By structuring assets in such a manner, the debtor avoids subjecting TBE property to any creditor claims absent any joint debt, except in only a few limited circumstances.(7) The invincibility of this technique comes into question once one spousal tenant files bankruptcy and claims an exemption pursuant to [sections] 522(b)(2)(B) for property held as TBE with the nondebtor spouse.

TBE and Bankruptcy

Upon the filing of a bankruptcy petition, a bankruptcy "estate" is created.(8) Although TBE property would be includable in the debtor's bankruptcy estate,(9) a debtor may exempt certain property from the estate.(10) A Florida debtor may utilize the exemptions available under applicable state law because Florida has opted out of most of the [sections] 522(d) exemptions.(11)

Section 522(b)(2)(B) permits a debtor to exempt:

any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable non-bankruptcy law.(12)

As will be discussed, the italicized language is the linchpin of the TBE exemption inquiry.

Assuming no objections are made to the exemption, the TBE property will emerge from bankruptcy in the hands of the debtor subject to creditors' claims only as permitted by state law.(13) Any creditor or the bankruptcy trustee may file an objection to the exemption in an attempt to make the TBE property available to satisfy the claims of the debtor's creditors.(14) It is not difficult to conceive of a situation in which a debtor owns a substantial amount of property as TBE with a nondebtor spouse, then files a Ch. 7 petition to discharge all of the debtor's debts with the expectation of emerging from bankruptcy with all of the debtor's assets still in the debtor's possession without a single asset being liquidated, while leaving the debtor's creditors without any property for distribution.

Case Law Prior to Planas

The majority of courts has held that TBE property may be used to satisfy the claims of joint creditors, but the remaining equity is exempt as to the individual creditors of one of the tenants.(15) A minority of courts has held that the remaining equity in the TBE property may be used to satisfy the claims of all creditors, but only to the extent of joint claims, i.e., TBE property is nonexempt only up to the amount of joint claims, but the proceeds from the nonexempt property are treated as general assets of the estate to be distributed without distinction among creditors as joint or individual.(16) Of the circuit courts of appeal, only the Third,(17) Fourth,(18) and Eighth(19) circuits have addressed the subject. Both the Third and Fourth circuits squarely held that [sections] 522(b)(2)(B) exempts the value of TBE property in excess of the amount of joint creditor claims.(20)

Prior Florida Cases

The Northern, Middle, and Southern districts of Florida all have addressed TBE in the context of [sections] 522(b)(2)(B), but have not taken uniform positions on the extent of [sections] 522(b)(2)(B) exemption for TBE property, creating an opportunity for a judge presented with the right facts to chart new waters.(21)

In Hadley v. Koehler, 19 B.R. 308 (Bankr. M.D. Fla. 1982), a Middle District case, the bankruptcy trustee filed an adversary complaint seeking turnover of personal property held by the debtor and the debtor's nondebtor spouse as TBE. The court held that TBE property was property of the estate pursuant to [sections] 541 of the Code, but the trustee was entitled to liquidate all of the TBE property under [sections] 363(h) notwithstanding [sections] 522(b)(2)(B) due to the existence of joint creditors.(22) However, the court did not engage in any explicit discussion of the availability of exemption for proceeds in excess of joint claims or distribution to all or only joint creditors.

The Bankruptcy Court for the Southern District of Florida stepped into the fray in 1983 in In re Traurig, 34 B.R. 325 (Bankr. S.D. Fla. 1983). In Traurig, then Ch. 7 trustee A. Jay Cristol planted seeds of Planas by making a similar objection and presenting a similar question as presented in Planas, but was overruled by his predecessor, Chief Bankruptcy Judge Sidney M. Weaver, who followed the majority rule, and disagreed with Koehler.(23) Although the basis for the disagreement is not clear, a careful reading of Traurig should lead the reader to conclude that the court disagreed with Koehler to the extent it stands for the...