In In re Chernushin, 911 F.3d 1265 (10th Cir. 2018), Gregory and Andrea Chernushin owned a second home in Colorado in joint tenancy with right of survivorship. Eventually, Mr. Chernushin (but not Ms. Chernushin) filed for bankruptcy. During the bankruptcy proceedings, Mr. Chernushin died. The bankruptcy trustee then filed an adversary complaint against Ms. Chernushin, seeking to sell the home. Ms. Chernushin argued the bankruptcy estate no longer included any interest in the home because Mr. Chernushin’s joint tenancy interest ended at his death. The bankruptcy court held that because the bankruptcy estate had no more interest in the home than Mr. Chernushin and Mr. Chernushin’s interest was extinguished when he died, the bankruptcy estate no longer had an interest in the real estate. The Tenth Circuit affirmed.
The court ruled that under Colorado law, where a debtor and his nondebtor spouse owned their home in joint tenancy with right of survivorship, the joint tenancy was not severed by the debtor’s bankruptcy petition. The court noted that the Colorado General Assembly specifically amended the joint tenancy statute to expressly provide “[f]iling a petition in bankruptcy by a joint tenant shall not sever a joint tenancy.” Id. at 1276 (citing to Colo.Rev.Stat. §38-31-101(5)(b)). However, in a footnote, it also noted that this appears to be the law in most jurisdictions:
It appears every court that has considered a case involving a joint tenancy where either a debtor joint tenant or non-debtor joint tenant died has assumed, without explanation, that the joint tenancy operates exactly as it would in the absence of the bankruptcy. See, e.g., In re Peet, 2014 WL 11321405, at *3 (Bankr.W.D.Mo. Aug. 25, 2014) (finding a lack of severance of joint tenancy and thus, after the death of the non-debtor joint tenants, “the [bankruptcy] estate now holds the entire interest” in the property), aff’d sub nom. Peet v. Checkett (In re Peet ), 529 B.R. 718 (8th Cir.BAP 2015), aff’d, 819 F.3d 1067 (8th Cir.2016); In re Benner, 253 B.R. 719, 723 (Bankr.W.D.Va.2000) (finding a lack of severance of joint tenancy so, at the non-debtor joint tenant’s death, “the trustee had no one else to share the property with and, therefore, he takes it all”); Durnal v. Borg-Warner Acceptance Corp. (In re DeMarco ), 114 B.R. 121, 126–27 (Bankr.N.D.W.Va.1990) (finding a lack of severance of joint tenancy so, at the death of the debtor joint tenant, “there remains no interest or property right in the deceased” and the property was no longer in the bankruptcy estate).
At least two other courts have mentioned in dicta the same conclusion with respect to the effect of a joint tenancy or life estate death on a bankruptcy estate. See Daff v. Wallace (In re Cass ), 2013 WL 1459272, at *3 (9th Cir.BAP Apr. 11, 2013) (quoting, without comment, from a bankruptcy court order that “[u]pon the Debtor’s death, the life estate terminated and no longer constituted property of bankruptcy estate which could be administered by the Trustee for the benefit of creditors”); Feldman v. Panholzer (In re Panholzer ), 36 B.R. 647, 651–52 (Bankr.D.Md.1984) (after determining that filing for bankruptcy severed joint tenancy, opining that under joint tenancy, the bankruptcy estate would either be “depleted by the death of the debtor who is a joint tenant” or “enriched by the death of a joint tenant survived by the debtor”).
Id. at 1276.
In In re Nakhsin, 644 B.R. 402 (Bankr. N.D.Ill. 2022), the court considered this issue under Illinois law. Here, the debtor filed his petition for relief under Chapter 7 of the Bankruptcy Code on February 4, 2021. His wife was not a debtor. On April 25, 2021, the debtor passed away. On July 21, 2022, the trustee filed a motion to approve the sale of certain properties under Sections 363(b) and (f) of the Bankruptcy Code. These properties were either held in joint tenancy, or because of failures in maintaining tenancy by the entirety, were deemed to be held in joint tenancy.
The court started its analysis by noting that Illinois requires a conveyance of the joint tenant’s interest in property to sever a joint tenancy. It further held that a “bankruptcy petition is not [such] a conveyance under Illinois law.” Id. at 406. In support of this conclusion, it quoted Maniez v. Citibank, 404 Ill.App.3d 941, 956-97 (1st Dist. 2010) as follows:
[T]he Bankruptcy Code provides that the debtor’s legal and equitable interests in property are transferred to the bankruptcy estate. However, under Illinois law, more than a transfer of the debtor’s interest in property is required to sever the joint tenancy. Illinois law requires a conveyance, which does not occur until the trustee sells or otherwise disposes of the property and title passes.
The court then followed the Tenth Circuit’s logic in Chernushin, i.e., that joint tenancy operates exactly as it would in the absence of a bankruptcy.
If the debtor, then, owns property in joint tenancy subject to extinguishment if he dies, the estate takes this same interest. Upon the debtor’s death, the surviving joint tenant “owns the entire property and it is no longer part of the bankruptcy estate.”. Chernushin, 911 F.3d at 1270. This logic is consistent with the notion that, “[t]o the extent an interest is limited in the hands of a debtor, it is equally limited as property of the estate.” In re Sanders, 969 F.2d 591, 593 (7th Cir.1992).
Id. at 407-08.
The court recognized that while Section 363(h) of the Bankruptcy Code allows the trustee to sell estate property, he had to do so while the estate still had an interest in the property. In Nakhshin, by the time the trustee attempted to sell the property, the estate no longer had any interest in it and, consequently, Section 363(h) confers no power on the trustee to sell the property. Id. at 408. In further support, the court cites to and quotes In re Etoll, 425 B.R. 743, 748 (Bankr. D.N.J. 2010) as follows: “[F]or 363(h) to apply the estate must have an interest in property. Upon 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 [property].”
Matthew T. Gensburg