When the tenancy by the entirety doctrine meets the Bankruptcy Code: clash of the Titans.

• Author: Massey, Michael O.
• Position: Florida

This article was the winning entry in the Business Law Section's first annual writing competition conducted by the Student Liaison Committee.

The tenancy by the entirety doctrine is one of the most disputed and confusing issues facing bankruptcy courts. Practitioners, trustees, and clients often are clueless as to how a debtor's entireties assets will emerge from a bankruptcy proceeding. Usually, the answer will be decided based on which bankruptcy judge happens to hear the debtor's case.

Bankruptcy judges across the U.S. must deal with entireties property. Twenty-five states, including the District of Columbia, currently recognize the tenancy by the entirety as a form of ownership.[1] This note, though, focuses on possible solutions to the problems created when Florida's tenancy by the entirety doctrine meets the current Bankruptcy Code.

Today's Bankruptcy Code

Under the current version of the Bankruptcy Code, [sections] 541(a)(1) states that a debtor's estate includes "all legal and equitable interests of the debtor in property as of the commencement of the case.[2] Courts across America have almost unanimously interpreted this section to include property held as tenants by the entirety.[3] Therefore, entireties property is property of the estate, unless exempted.[4]

Section 522 allows an individual to exempt property from the estate and provides specific federal exemptions listed in [sections] 522(d)[5] In place of these exemptions, though, [sections] 522 allows a state to opt out of the federal exemptions provided in [sections] 522(d) in favor of the exemptions provided by state law.[6] Florida has exercised this option in F.S. Ch. [sections] 222.20, thus allowing a Florida resident to claim exemptions pursuant to [sections] 522(b)(2)(A)-(B), Fla. Const. Art. X, [sections] 4, and F.S. Ch. 222.[7]

Section 522(b)(2)(B) allows a debtor to exempt tenancy by the entirety property if the state, such as Florida, has opted out of the federal exemptions.[8] Therefore, if no objections are made to the debtor's claim that the property is exempt based on a tenancy by the entirety, the property will "emerge from the bankruptcy in the hands of the debtor subject to creditor's claims" under state law.[9] Any creditor, though, may file an objection to the debtor's claimed exemption.[10] Once the objection is filed, Florida bankruptcy courts must filter though a mountain of conflicting case law and public policies to find a solution.

Solutions and Analysis

The right of tenancy by the entirety may be claimed in any personal asset, including promissory notes,[11] checking accounts,[12] and tax exempt bonds.[13] This broad, limitless range of the doctrine provides the careful debtor with a possible way to defeat the bankruptcy process in regards to unsecured creditors. Consequently, a debtor could theoretically own all of his or her assets as tenancies by the entireties, receive a full discharge, and exit the bankruptcy process with an enormous amount of property.

As for real property, Florida's legislature has addressed this issue through creation of the homestead exemption. Article X, [sections] 4(a)(1) of the Florida Constitution already provides for a homestead exemption, limited by certain size restrictions. The doctrine of tenancy by the entirety, though, demands that all real estate, not only homesteads, may become exempt without any restrictions on the size of the property Therefore, the tenancy by the entirety doctrine provides a way for all real property, including homesteads, to become exempt without size restrictions. This seemingly violates the legislature's intent behind the homestead exemption as expressed in the Florida Constitution.

Another problem stems from courts' efforts to curb the first problem. In attempting to solve the problems previously mentioned, courts have created vast amounts of differing opinions on several tenancy by the entirety issues. This lack of clarity creates difficulty for practitioners who must be extremely cautious when counseling clients and when attempting to use the tenancy by the entirety exemption." This also is a problem for the acting trustee of a case involving claimed exemptions based on the doctrine of tenancy by the entirety.

Additionally, due to the split in authority within districts, the outcome of a bankruptcy case could depend upon which judge within a district happens hear the case. Thus, in the Southern District, if your case is heard by Judge Cristol, all creditors of the estate may share in the proceeds from the sale of entireties property if a small joint claim exists.[15] However, these proceeds would be exempt for a similar individual living in the Southern District who might have his or her case heard by Judge Mark.[16] This provides an apparent lack of justice for both the creditors and the debtor.

Amending the Bankruptcy Code

The first solution to these problems is to amend the bankruptcy code. The most appropriate place to make this amendment would be to [sections] 522(b)(2)(B), which recognizes the tenancy by the entirety exemption if available under state law.[17] This amendment could be drafted to allow the tenancy by the entirety exemption only in the case where the state does not already recognize a homestead exemption. Through this mechanism, Congress could alleviate...