by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
BANKRUPTCY; LIENS; ENTIRETIES PROPERTY: All judicial liens are completely avoided on entireties property when only one spouse files bankruptcy.
In re Lashley, Adv. #95-4403-172, ___ B.R. ___, 1997 WL 145012, 1997 LXB 314, Bankr. E.D. Mo. (3/19/97) (Barta, J.).
Where only one spouse files bankruptcy, §7522(f) permits the avoidance of a judgment lien on property held in a tenancy by the entireties, *even though the creditor holding the judgment lien is a joint creditor of both spouses.*
The court first reasoned that the property in question was exempt under §75 22 because Missouri law rendered tenancy by entireties interests exempt from claims against only one spouse. Therefore, even though the claim outside of bankruptcy was available against only both spouses, the bankruptcy claim is against the bankrupt debtor's interest alone, and is exempt to the entire value of the property.
The court appeared to support its reasoning by discussing the strongarm power, although it is not clear how the strongarm power interracts with exemptions based upon state law. The court stated that since the trustee in an individual case has a hypothetical judgment lien against only one spouse under §7544, the entireties property is exempt to the extent permitted under §7522(b).
Thus, since the joint creditor's judgment lien is a "judicial lien" and does impair the exemption to which the debtor would otherwise be entitled, it is avoidable under §7522(f). The entire lien is avoided regardless of the value of the property. The court stated:
"[I]t is not necessary to determine the value of the real property when only one spouse is a debtor, because the sum of liens and exemption amount referred to in Section 522(f)(2)(A) will always be greater than the value of the Debtor's interest in the property by at least the amount of the judgment lien."
Further, since each spouse owns the whole under Missouri law, avoidance of the lien in the husband's bankruptcy avoids the lien on the whole property and defeats collection against the wife's interest in the entireties property (but does not affect her personal liability for the debt).
The effect of the bankruptcy will be to discharge the judgment creditor's claim against the bankruptcy debtor, but not against the non-filing spouse. Thus, presumably the creditor will not be able to reach the entireties interest of the non-filing spouse, since its lien will be discharged as to the bankrupt entireties tenant and is no longer joint debt.
Comment: Traditional Missouri law had been that a tenancy by the entireties is an entity separate from either spouse, and cannot be reached by creditors of one of them. Thus, early bankruptcy decisions had exempted such property entirely from bankruptcy when a single spouse filed. But the Eighth Circuit, in In re Garner, 952 F.2d 232 (8th Cir. 1991), held that the entireties property should be part of an individual spouse's bankruptcy estate is exempt only the extent that it is "exempt from process under applicable nonbankruptcy law." Misosuri bankruptcy mavens have assumed that this means that the property is in the estate to the extent it could be reached by joint creditors under state law. This would suggest that where there is joint debt, a portion of the debtor's interest in the entireties land should be reachable in the bankruptcy.
The Eighth Circuit did not "do the math" to tell use how to compute the debtor's non-exempt interest. One way to measure this would be to take half the value of the overall parcel and allocate any joint debt to that half. (The Eighth Circuit decision suggests that the bankruptcy court should partition where appropriate.)
Although the Eighth Circuit opinion is hardly a model of clarity, it seems to be inconsistent with the instant decision. The judge in the instant case viewed the individual bankrupt debtor's exempt interest in the entireties property to be the entire value of the property, and thus viewed it as entirely exempt. As a consequence, to protect it, the entire joint lien also had to be avoided.
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