The common law tenancy by the entireties, recognized in Maryland, Virginia, and a few other states, is a strange and mysterious thing. It is founded on the premise that married persons constitute a “marital unit” that is a legal entity separate and apart from either spouse. Consequently, neither spouse owns property held as tenants by the entireties. The marital unit does.
A number of consequences flow from the concept that a marital unit, not the spouses, owns tenants by entireties property. Because neither spouse owns the property, a creditor who obtains a judgment against one spouse or the other cannot execute on the property to satisfy the judgment. Only a creditor with a judgment against the marital unit, i.e., both spouses jointly and severally, can execute on it. When the marital unit ceases to exist, title to the property automatically changes. If the marital unit ends due to divorce, the former spouses co-own the property as tenants in common. If the marital unit ends because one of the spouses dies, the surviving spouse owns the property outright.
The treatment of property held as tenants by the entireties has been a particularly vexing issue in the context of bankruptcy cases filed by one of two married persons, but not both. When a bankruptcy case is filed, a bankruptcy estate is created and the property in that estate is subject to liquidation by a trustee for the benefit of creditors. The United States Supreme Court has held that a debtor’s property rights are governed by state law, but that federal law governs whether those rights become property of the bankruptcy estate. Since both Maryland and Virginia are in the Fourth Circuit, the Fourth Circuit has been called upon repeatedly to decide how state law governing tenancies by the entireties and federal bankruptcy law interact.
Under the Bankruptcy Act of 1898 which said that property of the estate was comprised of “the title of the bankrupt as of the date of the petition,” the Fourth Circuit held that if the bankrupt was a married person, since that person held no title to property held as tenants by the entireties under state law, no interest in that property became part of the bankruptcy estate at all. When the definition of property of the estate was broadened by the Bankruptcy Reform Act of 1978 to specify that the bankruptcy estate included “all legal or equitable interests of the debtor in property as of the commencement of the case,” the Fourth Circuit held that a spouse’s undivided one-half interest in property and rights of survivorship became property of the bankruptcy estate, but that the property itself still did not. However, since the Bankruptcy Reform Act permits debtors to exempt from their bankruptcy estate property that “is exempt under State or local law that is applicable on the date of the filing of the petition” and judgment creditors of a married person cannot execute on his or her undivided one-half interest in tenants by entireties or right of survivorship, the Fourth Circuit held that a married debtor who filed for bankruptcy alone could exempt his or her interest in tenants by entireties property from the bankruptcy estate. Later, the Fourth Circuit held that since creditors of both spouses can reach tenants by entireties property, a spouse’s undivided one-half interest and right of survivorship in tenants by the entireties property can be exempted from the bankruptcy estate only as to creditors of the filing spouse who cannot reach the property. Tenants by entireties property is subject to liquidation by the trustee for the benefit of creditors holding claims against the filing spouse and the non-filing spouse jointly.
Against this backdrop, the United States District Court for the District of Maryland issued its opinion in In re Buckley on August 29, 2017 in which the Court reached a conclusion that is surprising, yet presaged by the decisions of the Fourth Circuit that the District Court was obligated to follow. In Buckley, a married woman, but not her husband, had filed for bankruptcy. The debtor and her husband owned real property as tenants by the entireties. No creditors held claims against the debtor and her husband jointly. She claimed an exemption for her interest in the property.
Within thirty days after the debtor filed her bankruptcy case, her husband died. Since the husband’s death resulted in the debtor owning the property outright, the bankruptcy trustee objected to her exemption claim and sought to liquidate the property to pay the debtor’s creditors. The Bankruptcy Court ruled against the trustee on the grounds that the death of the debtor’s husband after the bankruptcy case was pending did not destroy the debtor’s right to claim an exemption for her interest in the property. The trustee appealed to the District Court.
On appeal, the District Court said that the Bankruptcy Court’s conclusion that the husband’s death did not extinguish her exemption was wrong because it ignored a Fourth Circuit case that held otherwise. However, because of other Fourth Circuit precedent, the District Court concluded that the Bankruptcy Court had reached the right result, albeit for the wrong reasons, and affirmed the Bankruptcy Court’s decision.
The District Court noted that what constitutes property of a bankruptcy estate is generally determined as of the date of the filing of the bankruptcy case. On that date, the debtor in Buckley did not own the property that the trustee wanted to liquidate. She owned only a right of survivorship and an undivided one-half interest. To sell the property, the trustee had to show that the interest that the debtor received when her husband died post-bankruptcy became property of her bankruptcy estate.
The trustee argued that a section of the Bankruptcy Code that provides that property acquired by the debtor within 180 days after the filing of the bankruptcy case by “bequest, devise, or inheritance” applied since the debtor’s husband had died less than 180 days after the debtor filed her bankruptcy estate. Unfortunately for the trustee, the Fourth Circuit had already addressed this issue and held that a spouse does not “inherit” tenants by entireties property when his or her spouse dies. Title passes to the surviving spouse automatically when the marital unit ceases to exist. Since the tenants by entireties property was not part of the debtor’s bankruptcy estate, the trustee could not sell it.
The District Court’s decision allowed the debtor to discharge her debts to creditors and keep property that they could have reached had her husband died without an intervening bankruptcy filing, which seems like an unfair result. It seems particularly unfair when one considers that fact that if the debtor’s husband had owned the property outright when the debtor filed and she had no interest in it at all, the trustee could have liquidated the property for the benefit of her creditors if her husband had died within 180 days after the bankruptcy filing and the debtor had become the owner of the property because her husband died without a will and she inherited it as the surviving spouse or because her husband provided in his will for the property to be given to his wife. However, the District Court was bound to follow Fourth Circuit precedent. In the context of tenants by entireties property in bankruptcy, there is an abundance of that.