Daily Development for Wednesday, September 8, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

BANKRUPTCY; TENANCY BY ENTIRETIES: 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.

Spears v. Boyd, 2004 WL 1857149 (W.D. Mich. 8/19/04)

In U.S. v. Craft, 535 U.S. 274 (2002) (the DIRT DD for 4/19/02) The U.S. Supreme Court held that a federal tax lien against one spouse can reach that spouse's interest in a tenancy by the entireties. Some viewed this as the end of protection for entireties property in bankruptcy as well, although this result certainly is not compelled by the analysis in Craft. Tthe case seemed based on the supremacy claims of the federal government under the tax lien statute, and not upon any intrinsic federal rejection of the concept of tenancy by the entireties. But there was some speculation that, as a policy matter, if income tax liens can split the tenancy by the entireties, it might become necessary to permit other creditors to do the same to restore the balance of creditor claims that the Bankruptcy law envisions.

This case tests whether bankruptcy in fact can sever a tenancy by the entireties, permitting the trustee in bankruptcy to include in the estate the value of the bankrupt spouse's interest. The bankruptcy court had so held, in fact, arguing that the filing of bankruptcy and inclusion of the entireties estate in the bankruptcy estate breaks the "unities" that are the basis for survivorship estates in general, including tenancy by the entireties. But the Federal District Court, here, in a colorful opinion redolent with extended metaphor and spiced by some acidic shots at both the lower court and the trustee, concludes that nothing of the kind is possible.

The District Court acknowledges that Federal Circuit Court precedent has held that the entireties estate can be included initially in the bankruptcy estate, but notes that under the Bankruptcy Code "any individual" can seek an exemption for the entireties property. Such a petition was filed here, and the court held that it should have been granted.
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Comment: It appears from this opinion, at least, that Michigan is one of those states that recognizes the most restricted form of tenancy by the entireties - where no one can obtain any interest in the entireties estate - even a future interest contingent upon divorce or death of one of the spouses - while the estate is in existence. This form of entireties the editor refers to in class as the "slippery" estate. Missouri has the same rule. Other states do permit creditors to establish such future claims, and one would assume that where this is true the exemption should be limited to only those portions of the estate that creditors can't reach under state law.


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