Tenancy by the Entirety not Exempt in Bankruptcy

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Laverne Williams (“Williams”) sued her former attorney Scott Jaffe (“Jaffe”) for legal malpractice.  She obtained a default judgment against him and recorded her judgment on a property that Jaffe and his wife owned as tenants by the entirety.   Jaffe then filed for chapter-seven bankruptcy, but his wife died before the proceedings were complete.  According to Illinois law, this converted Jaffe’s tenancy by the entirety to a fee-simple interest.  Jaffe insisted his property was exempt from the bankruptcy proceeding, as his interest had been a tenancy by the entirety when the bankruptcy commenced.  Williams responded that Jaffe’s property was not exempt even as a tenancy by the entirety because federal bankruptcy law “looks to state law to determine whether a tenancy property is exempt,” and Illinois “does not exempt contingent future interests” like Jaffe’s.  Id. at 605.  The District Court disagreed, and Williams appealed.

The Seventh Circuit disagreed with the District Court.  Illinois law, the Court explained, states that “judgment liens may attach to ‘real estate’ and defines ‘real estate’ broadly to include all lands, tenements, hereditaments, and all legal and equitable rights therein.”  Id. at 607.  Additionally, the Illinois legislature had “enumerated the precise interests tenants by the entirety enjoy individually, including the following contingent future interests:  (a) an interest as a tenant in common in the event of a 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.”  Id. at 605.  Therefore, the Seventh Circuit concluded that “contingent future interests” such as Jaffe’s “fall within the statute’s broad definition of ‘real estate,’” and so were subject to judgment liens.  Id. at 605.  Thus, the District Court’s decision was reversed and remanded.

In re: Jaffe, 932 F.3d 602 (7th Cir. 2019)

(This is for informational purposes and is not legal advice.)

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