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Jaffe v. Williams

United States District Court, N.D. Illinois, Eastern Division

May 22, 2018

SCOTT N. JAFFE, Debtor-Appellant,
v.
LAVERNE WILLIAMS, Creditor-Appellee. Adversary Proceeding 16 AP 156

          MEMORANDUM OPINION AND ORDER

          John J. Tharp, Jr. United States District Judge.

         This is an appeal from a bankruptcy court order denying the debtor's motion to avoid a creditor's judgment lien on property that the debtor held with his wife on the petition date in tenancy by the entirety. Sections 522(b) and (f) of the bankruptcy code (11 U.S.C. § 522), in combination, permit a debtor to avoid a judgment lien for property held in tenancy by the entirety to the extent that that the tenancy interest is exempt from legal process under state law. In Illinois, tenants by the entirety also hold, in addition to their entirety interests, individual contingent future interests in the tenancy property. This case presents the questions of whether a judgment lien attaches to those contingent future interests and, if so, whether that lien may be avoided. The bankruptcy court denied the debtor's motion to avoid the creditor's lien, holding that-unlike the tenancy interest-contingent future interests are not exempt under § 522(b) and a lien on those interests may therefore not be avoided under § 522(f). This Court agrees with the bankruptcy court that the creditor's judgment lien attached to the debtor's contingent future interests in the property, but concludes that those contingent future interests-like the tenancy interests-are exempt under § 522(b)(3). The bankruptcy court's denial of the debtor's motion to avoid the creditor's judgment lien is therefore reversed.

         I. BACKGROUND

         The facts are undisputed and are set forth in the bankruptcy court's order. Briefly, Appellant Scott Jaffe and his wife owned, as tenants by the entirety, [1] a residence in Highland Park, Illinois. In 2005, Appellee Laverne Williams obtained a judgment against Jaffe for $500, 000 and recorded that judgment in Lake County, Illinois.

         Jaffe filed a chapter 7 bankruptcy petition in 2015. His wife died about a year later, in November 2016. Jaffe subsequently moved to avoid Williams' judgment lien on the ground that the property was exempt from satisfaction of the judgment and the lien impaired that exemption. Conceding that the property was exempt when Jaffe filed his petition, Williams contested the motion by arguing that when he filed his petition, Jaffe also possessed contingent future interests in the property that were not subject to the tenancy by the entirety exemption. Williams maintained that her lien attached to those interests which, after Jaffe's wife died and the tenancy by the entirety ended, were no longer contingent.

         The bankruptcy court agreed and denied Jaffe's motion to avoid Williams' judgment lien. Jaffe then filed a timely appeal. This Court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a)(1).

         II. ANALYSIS

         This case presents two interrelated questions of law: (1) whether a judgment lien attaches to contingent future interests in real property held in tenancy by the entirety when a bankruptcy petition is filed; and (2) if so, whether such a lien may be avoided. The parties agree about everything of relevance to these questions except the answers.

         Section 522 of the bankruptcy code permits debtors to exempt from the bankruptcy estate administration[2] certain property, including as relevant here “any interest in property in which the debtor had, immediately before the commencement of the [bankruptcy] case, an interest as a tenant by the entirety, … to the extent that such interest as a tenant by the entirety is exempt from process under applicable nonbankruptcy law.” 11 U.S.C. § 522(b)(3)(B). The reference to applicable non-bankruptcy law takes us to section 12-112 of the Illinois Code of Civil Procedure, which provides in relevant part that “[a]ny real property … held in tenancy by the entirety shall not be liable to be sold upon judgment entered … against only one of the tenants ….” 735 ILCS 5/12-112. In combination, these provisions preclude the sale in the bankruptcy case of property held by the debtor as of the petition date in tenancy by the entirety to satisfy a judgment lien entered against the debtor only.

         Section 522 also provides that a debtor “may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs[3] an exemption to which the debtor would have been entitled under [§ 522(b)].” 11 U.S.C. § 511(f)(1)(A). Judicial liens are expressly identified as among the liens that may be avoided on this basis. Id. This is the provision on which Jaffe's motion to avoid Williams' judicial lien directly relies.

         The parties agree that Williams' judgment, properly recorded, gave rise to a lien; they disagree, however, about the extent of that lien. Jaffe maintains that Williams' lien attached only to his interest in the property as a tenant by the entirety and that the express terms of § 522(b)(3) and § 12-112 exempt that property interest from the bankruptcy estate and allow him to avoid that lien under § 522(f). Williams is agnostic on whether she had a lien on Jaffe's interest in the property as a tenant by the entirety because she acknowledges, lien or no, she could not force a sale of the property itself while it was held in tenancy by the entirety.[4] Williams contends, however, that even if she has no lien as to Jaffe's tenancy by the entirety, she has a judgment lien as to Jaffe's contingent future interests in the property-that is, his future individual possessory interests in the property upon termination of the tenancy. Those interests, Williams maintains, are not exempt and therefore cannot be avoided under § 522(f). Jaffe, in turn, argues in the alternative that § 522(b) and § 12-112 permit him to avoid Williams' lien even if that lien also attached to his contingent future interests in the property.

         In Illinois, a tenancy in the entirety exists “only if, and as long as, the tenants are and remain married to each other, ” and only for as long as the married couple use the property as their “homestead.” 765 ILCS 1005/1c. And because a tenancy by the entirety will inevitably terminate at some point, whether by reason of death, dissolution of the marriage, or some mutual decision of the tenants (such as changing their homestead), the statute creating tenancy by the entirety also describes the interests that the tenants will hold when the tenancy by the entirety ends, such as “(a) an interest as a tenant in common in the event of divorce, (b) an interest as a joint tenant in the event that another homestead is established, and (c) a survivorship interest in the entire property in the event of the other tenant's death.” In re Chinosorn, 243 B.R. 688, 695 (Bankr. N.D. Ill.), rev'd on other grounds, 248 B.R. 324 (2000); 765 ILCS 1005/1c. In this case, the survivorship interest is front and center, because Jaffe's tenancy by the entirety interest terminated with his wife's passing. The statute providing for tenancy by the entirety expressly holds that “upon the death of either such tenant the survivor shall retain the entire estate.” Id. That is to say that upon the death of one of the tenants by the entirety, the fee simple interest in the property passes from the entirety to the surviving spouse.

         “The contingent right of survivorship of each entireties tenant is a present property right to which a judgment lien extends.” In re Tolson, 338 B.R. 359, 367 (Bankr. C.D. Ill. 2005). Judge Wedoff provided the foundation for this conclusion in Chinosorn:

[U]nder the language of the relevant Illinois statutes, a judgment against an individual owning property as a tenant by the entirety, when properly recorded, appears to give rise to a lien, not against the entirety property itself, but rather ...

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