Daily Development for Wednesday, February 2, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
TENANCY BY ENTIRETIES; CREATION: A conveyance of real property by a husband to himself and his wife presumptively creates a tenancy by the entireties and there is no requirement that husband make an express declaration of intention to create a tenancy by the entireties. In Re Kelly, 2004 WL 2414726 (D.Del.)(2004).
Debtor retained the plaintiff Creditor to defend him in a lawsuit brought by Debtor’s former employer. When Debtor failed to pay the creditor’s legal fees, the creditor filed an action to recover the unpaid legal fees, and ultimately obtained a default judgment against Debtor. While the case against him was still pending, Debtor, the sole owner of a piece of property on which his house was located, conveyed the property to himself and his wife. Debtor then filed a voluntary petition under Chapter 7 of the Bankruptcy Code, claiming that he and his wife held the property as tenants by the entireties and that therefore the property was exempt from Creditor’s reach. Under Delaware law, property held in tenancy by the entirety is exempt from the bankruptcy process when the Creditor has a claim only against one tenant.
The central issue on appeal concerned the form of interest in which the Debtor-husband and his wife held the property subsequent to the husband’s conveyance: as tenants by the entirety, tenants in common, or joint tenants. The court noted that the historical presumption under common law is that a conveyance of real property from a third party grantor to a husband and wife creates a tenancy by the entireties. Creditor here argued , however, that no Delaware court had ever held that a conveyance by a husband, as grantor, to himself and his wife presumptively creates a tenancy by the entireties. Creditor argued that the common law presumption “may have been the rule where the grantor is not one of the spouses, but it is not the rule where the grantor is the husband.” Creditor further argued that when the grantor conveys directly to himself and his spouse as grantees, the requisite unities of title and time, required to establish a tenancy by the entirety, are absent, and a tenan
cy in common is instead created.
The Court first looked at Section 309 of the Delaware Code, which permits a husband to convey an interest in real property to himself and his wife. However, the statute did not address whether such a conveyance presumptively creates a tenancy by the entireties. Creditor argued that under the statute, a husband, when conveying real property to himself and his wife, must make an express declaration of an intention to create a tenancy by the entireties, in other words, the deed must state “as tenants by the entireties.”
In the end, the court disagreed with this interpretation, reasoning that Section 309 was intended simply to repeal the common law rule barring a married couple’s ability to convey property to each other. The Court found no provision in the Delaware Code or in Delaware case law that would alter the common law presumption that a conveyance of real property to a husband and wife creates a tenancy by the entireties. Nor did the court find any reason to alter the common law rule to require a husband, when conveying real property to himself and his wife, to make an express declaration of an intention to create a tenancy by the entireties. Thus, because the common law presumption was so strongly entrenched in case law, the court held that the conveyance by a grantor-husband to himself and his spouse as grantees presumptively creates a tenancy by the entireties.
Comment 1: On the question of whether a tenancy by the entireties is exempt from creditors in bankruptcy, see: Spears v. Boyd, 2004 WL 1857149 (W.D. Mich. 8/19/04) (the DIRT DD for 9/8/04) (Notwithstanding the U.S. Supreme Court decision in Craft, a Michigan tenancy by the entireties estate is still completely excludable from one spouse's bankruptcy estate except as necessary to satisfy joint claims.) Keep in mind, though that in order to determine whether such interests are exempt from bankruptcy, one must first ascertain whether the law of the local jurisdiction would exempt tenants from entireties from the debts of one spouse. The answers vary.
Comment 2: What about fraudulent conveyance law? Most jurisdictions require that the debtor be insolvent at the time of the transfer to trigger presumptive fraudulent conveyance analysis. Maybe that wasn’t the case here, as the judgment had not yet been entered. But the insolvency requirement does not apply in most cases when the transfer is a deliberate attempt to defraud creditors. Maybe that’s where our Creditor will go next. The court indicated that neither the issue of attachment to the interest notwithstanding the tenancy by the entireties nor the issue of fraudulent conveyance are addressed in this appeal. But the transfer was almost five years prior to the bankruptcy. So maybe the statute of limitations on fraudulent conveyance claims had run.
Comment 3: In any event, a fraudulent conveyance in bankruptcy does not have to be intended to defraud creditors at all. The courts look only at whether the estate received “reasonably equivalent value” for the transfer. Why didn’t that apply here? The transfer (and the default judgment on the fees) occurred about five years before the bankruptcy filing. Probably beyond the reach of the bankruptcy fraudulent conveyance concept.
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