In re Etoll, Case No. 08-23238; U.S. Bankruptcy Court (DNJ); opinion by Lyons, U.S.B.J.; filed March 5, 2010. DDS No. 42-6-7066 [10 pp.]

Janette Etoll filed a petition under Chapter 7 of the U.S. Bankruptcy Code. Her only significant asset was her interest in residential real property that she and her nondebtor spouse owned as tenants by the entirety. Daniel Straffi was appointed trustee of the debtor’s estate. After filing bankruptcy, the debtor died. The trustee then filed an adversary proceeding to obtain court approval to sell the estate’s interest in the property together with the interest of defendant, the nondebtor spouse, pursuant to § 363(h) of the Bankruptcy Code.

Defendant, who continues to reside at the property, argues that on the debtor’s death, he became the 100 percent owner of the property and any interest of the debtor that had passed to the trustee was divested. The trustee argues that his interest in the property was fixed as of the date of filing, at which point he held the property as co-owner with defendant and now has the authority to sell the property pursuant to § 363(h).

Held: Bankruptcy does not terminate a tenancy by entireties. Therefore, here, on the debtor’s death, the tenancy by the entirety operated to immediately divest her, and thus the trustee, of her interest in the property. The surviving spouse owns the entire fee in the real estate. Thus, the trustee’s right to sell the premises did not survive the debtor’s death.

The court explains that a tenancy by entireties is created when a married couple takes title to property jointly. Tenants by the entirety have survivorship rights. On the death of either spouse, the surviving spouse is deemed to have owned the whole of all rights under the original instrument of purchase or conveyance from its inception. Five states, including New Jersey, allow creditors of either spouse to levy on the property, subject to survivorship.

The court notes that there have been several New Jersey cases to discuss alienation of one tenant’s interest in entireties property; however, none that address the specific issue at hand. King v. Greene , 153 A.2d 49 (N.J. 1959), held that a purchaser at an execution sale of the debtor-wife’s interest in entireties property acquired her survivorship rights and thus takes the entire property on the death of the nondebtor spouse.

Newman v. Chase , 359 A.2d 474 (1976), held that partition was not automatically available in an action for partition of property owned by a nondebtor spouse and a purchaser from the trustee in the debtor-spouse’s bankruptcy where neither spouse was deceased at the time. It recognized that the purchaser had succeeded to both the debtor’s interest as tenant in common for the joint lives of the debtor and his wife and also the debtor’s interest in full possession should he survive his wife. The court says Newman supports defendant’s argument that a tenancy by the entireties is not severed on filing for bankruptcy and the trustee holds only the debtor’s life estate as a tenant in common with the defendant for the joint lives of the married couple with a right of survivorship.

The court also notes that the Third Circuit has expressly stated that “bankruptcy does not sever a tenancy by the entireties, but leaves its general characteristics in place. … The trustee’s authority does not generally supersede that power.” In re Brannon , 476 F.3d 170, 176 (3d Cir. 2007).

The parties do not quarrel that the property rights of the debtor and the creditors are fixed on filing for bankruptcy. What the trustee fails to recognize, says the court, is that property rights are subject to change and/or expiration.

New Jersey allows the creditors of either spouse to reach his interest in entireties property, subject, however, to the other spouse’s right of survivorship. It is well-established that if the nondebtor spouse were to die, a tenancy by the entirety operates to immediately vest the whole of the property in the surviving spouse, eliminating any interest in the deceased spouse or anyone claiming through her. It would be illogical not to apply this same principle on the death of the debtor spouse. Bankruptcy does not terminate a tenancy by entireties; therefore, in this situation, the tenancy by the entirety operated to immediately divest the debtor, and thus the trustee, of her interest in the property on her death.

The court says the Bankruptcy Code does give a trustee greater rights in the entireties property than the debtor spouse. Under § 363(h) the trustee has the right to sell the estate’s interest together with the interest of a co-owner if the benefit to the estate outweighs any detriment to the co­-owner. The debtor spouse could not have unilaterally forced the sale of jointly owned property. However, for § 363(h) to apply the estate must have an interest in property. On the death of the debtor, the estate’s interest expired, so the trustee’s enhanced powers in bankruptcy no longer permit him to sell the marital residence.

— By Judith Nallin

For plaintiff-trustee — Daniel E. Straffi (Straffi & Straffi). For defendant — Leonard S. Needle.