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In re Jaffe

United States Court of Appeals, Seventh Circuit

August 5, 2019

In Re: Scott N. Jaffe, Appeal of: Laverne Williams. Debtor-Appellee,

          Argued February 7, 2019

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 17 C 04662 - John J. Tharp, Jr., Judge.

          Before Bauer, Hamilton, and Brennan, Circuit Judges.

          BAUER, CIRCUIT JUDGE

         Section 522(b)(1) of the United States Bankruptcy Code states that a "debtor may exempt from property of the [bankruptcy] estate the property listed in either paragraph (2) or, in the alternative paragraph (3)." At issue in this case is paragraph (3) subsection (B), which states, in full, that:

Property listed in this paragraph is any interest in property which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.

11 U.S.C. § 522(b)(3)(B). We must determine to what extent contingent future interests created by Illinois law are exempt under this section. The most natural reading of the statute exempts any interest held by an individual as a tenant by the entirety to the extent that state law exempts that particular interest. The district court found that any interest held by the debtor is exempt to the extent that state law exempted the entirety interest. We reverse the district court and hold that the debtor's property cannot be excluded from the bankruptcy estate.

         I. BACKGROUND

         In 1998, Laverne Williams wanted to file a medical malpractice lawsuit and hired Scott Jaffe to be her attorney. The statute of limitations expired before Jaffe filed a complaint and Williams sued for legal malpractice, obtained a default judgment, and recorded that judgment on a property that Jaffe and his wife owned as tenants by the entirety. Williams now claims post-judgment interest brings her total claim against Jaffe to $1.04 million.

         Jaffe filed a chapter 7 bankruptcy petition in November 2015, which identified his debt to Williams and indicated it was secured by a judgment lien on his residence. On the petition date Jaffe and his wife owned the property as tenants by the entirety, but before bankruptcy proceedings were complete Jaffe's wife died. According to Illinois law, when his wife died the tenancy by the entirety terminated and Jaffe held the property individually in fee simple. To avoid the judgment lien Jaffe filed a motion in the bankruptcy court arguing the property was exempt under 11 U.S.C. § 522(b)(3)(B). Williams responded that the property was not exempt because the federal bankruptcy provision that Jaffe relied upon looks to state law to determine whether a tenancy property is exempt. Because Illinois does not exempt contingent future interests, Williams argued, the federal bankruptcy statute does not allow Jaffe to exempt the property from the bankruptcy estate. On appeal the parties renew these arguments.

         II. DISCUSSION

         We must first determine whether a lien exists and what interests it attached to. If no lien exists the debtor cannot seek an exemption under 11 U.S.C. § 522(f) and our inquiry is complete. See In re Chinosorn, 243 B.R. 688, 694 (Bankr. N.D. 111. 2000) (noting there are "three elements for lien avoidance: (1) a lien must have fixed on an interest of the debtor in property, (2) the lien must impair an exemption to which the debtor would have been entitled under § 522(b), and (3) the lien must be a judicial lien-with the debtor bearing the burden of each element."). If a lien attached we must also determine to what interests it attached. Jaffe argues that, if any lien exists, it attached only to his tenancy interest which is exempt under Illinois law. Williams asserts her lien attached to Jaffe's contingent future interest in the property. If we determine a lien attached to a property interest we must then determine whether that interest is exempt under § 522(b)(3)(B). We will address each issue in turn.

         A. The Existence of a Lien

         If a judicial lien attaches to property that is entitled to exemption from the bankruptcy estate, § 522(f) allows the debtor to avoid the fixing of the lien. See 11 U.S.C. ยง 522(f). Illinois courts have not decided whether a judgment lien attaches to the individual interests (in particular contingent future interests) of a tenant by the entirety. Where a state's highest court has not ruled on an issue, we must apply the law in a manner we believe the state ...


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