Laverne Williams v. Scott Jaffe ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 18-2726
IN RE: SCOTT N. JAFFE,
Debtor-Appellee,
APPEAL OF: LAVERNE WILLIAMS.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 17 C 04662 — John J. Tharp, Jr., Judge.
ARGUED FEBRUARY 7, 2019 — DECIDED AUGUST 5, 2019
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 inter-
est as a tenant by the entirety or joint tenant to
2 No. 18-2726
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 malprac-
tice 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
No. 18-2726 3
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. Ill.
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.
4 No. 18-2726
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. § 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 supreme court would, if
presented with the issue. Liberty Mut. Fire Ins. Co. v. Statewide
Ins. Co., 352 F.3d 1098, 1100 (7th Cir. 2003).
To answer this question we turn to the applicable Illinois
statutes, which have long controlled the attachment of judg-
ment liens. Lehman v. Cottrell, 19 N.E.2d 111, 114 (2d Dist. 1939)
(“At common law, land was subject neither to execution nor to
the lien of a judgment. Both these results are purely statu-
tory.”). Section 12–101 of the Illinois code creates judgment
liens and controls their ability to attach to certain property
interests. The statute dictates that judgment liens may attach to
all “real estate” and defines “real estate” broadly to include all
“lands, tenements, hereditaments, and all legal and equitable
rights therein.” 735 ILCS 5/12–105.
The Illinois legislature 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.” 765 ILCS 1005/1c. These
No. 18-2726 5
contingent future interests fall within the statute’s broad
definition of “real estate.” Therefore, a judgment lien attaches
to these individual interests, absent some exception. See In re
Tolson, 338 B.R. 359, 369 (C.D. Ill. 2005). The only exception that
12-101 identifies is section 12-901—the homestead exception.
See 735 ILCS 5/12-901 (the “homestead and all rights in and
title to that homestead is exempt from attachment, judgment,
levy or judgment sale for the payment of his or her debts or
other purposes … .”).
Otherwise, “where the Illinois legislature has determined
that a judgment lien should not be created as to a debtor’s
interest in particular property, it has provided that
the property is ‘exempt from judgment,’ see 735 ILCS 5/12-1001
(specified personal property), or that it is not ‘subject to any
lien,’ see 820 ILCS 305/21 (workers’ compensation award).”
Chinosorn, 243 B.R. at 695–95. But Illinois does not “exempt
from judgment” interests held in tenancy by the entirety or
contingent future interests held by tenants by the entirety.
Illinois law merely exempts the tenancy interest from the
attachment of a judgment lien. 735 ILCS 5/12-112. Section 12-
112 provides that judgment liens may attach to all “lands,
tenements, goods and chattels.” It then carves out a narrow
exception, the tenancy interest, without mentioning the
contingent future interests explicitly created by the Illinois
legislature.
It is clear that if the Illinois legislature wanted to exempt
particular interests from the attachment of judgment liens, it
had no problem in doing so. Because the Illinois legislature
failed to do so, we find that Williams’s judgment lien attached
to Jaffe’s contingent future interest in the property. See Yotis,
6 No. 18-2726
518 B.R. at 486–90; Tolson, 338 B.R. at 367 (holding that “the
contingent right of survivorship of each entireties tenant is a
present property right to which a judgment lien extends.”).
B. Exemption Under § 522(b)(3)(B)
Tenancy by the entirety is a form of property ownership
that arose out of common law and developed as part of the
English feudal system. Oval A. Phipps, Tenancy by the Entire-
ties, 25 Temp. L.Q. 24 (1951). Until the nineteenth century,
married women in the United States were subject to coverture.
This meant a wife’s legal identity and property were absorbed
by her husband and he was granted legal dominion over
everything. Id. Therefore, if a married couple purchased
property, it could not be owned by the husband and wife
because both spouses were considered a single legal entity (the
husband). Id. Tenancy by the entirety was created so spouses
could own property jointly and upon the death of one spouse
the property would belong to the surviving spouse. Then,
“during the middle and latter part of the nineteenth century,
as part of a reform movement aimed at emancipating married
women from their state of social and economic dependency,
the Married Women’s Property Acts were enacted practically
universally by the legislatures of the several states.” Id.
Following the passage of the Married Women’s Property
Acts, states splintered in their approach to tenancy by the
entirety. Many state courts thought the acts destroyed tenancy
by the entirety and a few courts held they were unaffected;
several state courts gave both spouses the rights of the hus-
band under common law and a large number of states found
both spouses had only the limited interests a wife previously
No. 18-2726 7
had under common law. Chinosorn, 243 B.R. at 692–93 (collect-
ing cases). States also divided over whether tenancy by the
entirety encompassed real property and personal property, or
just real property. Id. at 693. The Illinois judiciary found that
the state’s Married Women’s Act abolished tenancy by the
entirety but, in 1990, the legislature codified tenancy by the
entirety for real estate owned by spouses who were using the
property as their homestead. 765 ILCS 1005/1c.
Jurisdictions that recognize tenancy by the entirety,
however, are not uniform in their approach to creditors’ rights
against the estate:
A creditor’s right to levy on a married person’s
property is complex, and varies by state and the
type of debt and property. Every state allows
satisfaction of a debt which has been jointly
incurred by a husband and wife against jointly
held property, even if that property is held in a
tenancy by the entirety … . Some states allow
the satisfaction of an individual spouse’s debt
against entireties property, but most do not.
Creditors’ Rights Against Entireties Property In and Out of
Bankruptcy, 1983 Ann. Surv. of Bankr. Law Part II (September
1983). With this kaleidoscopic background in mind, we turn
to the bankruptcy aspect of this case.
A debtor’s bankruptcy estate must include “all legal or
equitable interests of the debtor in property as of the com-
mencement of the case.” 11 U.S.C. § 541(a). This includes an
individual debtor’s interest in property held as a tenant by the
entirety. In re Hunter, 970 F.2d 299, 303 (7th Cir. 1992); Napotnik
8 No. 18-2726
v. Equibank & Parkvale Savings Association, 679 F.2d 316 (3d Cir.
1982). All property in the estate is liquidated by the bankruptcy
trustee and the proceeds are distributed to creditors based on
their priority. 11 U.S.C. § 704. But the Bankruptcy Code allows
debtors to exempt certain estate property. Exempt property is
removed from the estate and retained by the debtor.
Section 522(b)(3)(B) exempts:
[a]ny interest in property in 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.
The law of co-tenancies is almost exclusively a matter of state
law since there is no general federal property law, therefore,
the “applicable nonbankruptcy law” is Illinois law. The
question here is to what extent § 522(b)(3)(B) exempts Jaffe’s
contingent future interest in the tenancy property. There is no
dispute that a lien that attached to Jaffe’s tenancy interest would
be exempt. However, the nub of this case lies in the exemption
of the lesser interests that are not exempted under Illinois law.
The district court interpreted § 522(b)(3)(B) to exempt
Jaffe’s contingent future interest in the entireties property,
despite the fact that Illinois provides no exemption for these
interests. In reaching this conclusion the district court parti-
tioned the statutory language into four elements:
§ 522(b)(3)(B) exempts: (i) any interest in prop-
erty; (ii) in which the debtor had an interest as a
No. 18-2726 9
tenant in the entirety; (iii) at the time the bank-
ruptcy petition was filed; (iv) to the extent that
state law exempts an interest as tenant in the
entirety from legal process.
Jaffe v. Williams, No. 1:17-cv-4662, slip op. at *4 (N.D. Ill.
May 22, 2018). The district court noted that Jaffe had an interest
as a tenant by the entirety (as well as contingent future
interests) at the time the bankruptcy petition was filed (satisfy-
ing the first three elements). The district court then concluded
that any interest he held (contingent future interests included)
was exempt to the extent that the tenancy interest was exempt
under Illinois law. And since Illinois exempts the tenancy
interest, more specifically the forced sale of the tenancy
property to collect a debt against just one tenant, all other
interests Jaffe had as a tenancy by the entirety were exempt
completely.
But the fourth element of the district court’s analysis left
out a key word—“such.” Section 522(b)(3)(B) exempts certain
interests “to the extent that such interest as a tenant by the
entirety” is exempt under state law. By not giving sufficient
weight to the word “such,” the district court interpreted the
statute to mean that any property interest is exempt to the
extent that the entirety interest is exempt. But identifying what
“such” refers to is the main interpretive issue in this case. If
“such” refers just to “any interest,” as Jaffe argues, the district
court’s conclusion is correct because the statute would exempt
“any interest” the debtor had to the extent that any tenancy
interest is exempt from state law. However, if “such interest”
refers to something more limited, like the precise interests the
10 No. 18-2726
debtor was seeking to exempt, the district court’s interpreta-
tion is incorrect.
Section 522(b)(3)(B) begins broadly by stating it exempts
“any interest in property.” The provision goes on to state that
the debtor must have an interest in the property “as a tenant by
the entirety” in order to claim an exemption, thus cabining “any
interest in property.” This means that if, for example, a tenant
by the entirety transferred her interest in the income the
property generated, the transferee could not claim an exemp-
tion under § 522(b)(3)(B) since she does not hold the interest as
a tenant by the entirety. The provision goes on to state that the
exemption applies “to the extent that such interests as a tenant
by the entirety,” meaning the precise interests that the debtor
holds as a tenant by the entirety, are exempt under state law.
We read this provision to establish two things. First, the
opening language indicates the interests that may qualify for
exemptions—any interest the debtor has, so long as she holds
that interest as a tenant by the entirety. The provision then
defines which of those qualifying interests are exempt—all of
the debtor’s qualifying interests to the extent that they are
exempt under applicable nonbankruptcy law. Our reading of
the statute yields a simple result—interests a debtor holds as
a tenant by the entirety are exempt to the extent that those
interests the debtor holds as a tenant by the entirety are exempt
under state law.
The statutory language does not support the argument that
“such interest as a tenant by the entirety” is referring more
broadly to “any interest in property” as Jaffe argues. It is much
more sensible to read “such interest” as referring to the
No. 18-2726 11
complete introductory phrase, which identifies the debtor’s
specific interests that potentially qualify for an exemption.
Additionally, the signifier (“such interest”) and referent
(“interest as a tenant by the entirety”) use mirroring language
indicating that the latter is referring to the former: “property in
which the debtor had … an interest as a tenant by the entirety …
to the extent that such interest as a tenant by the entirety” is
exempt. This buttresses the conclusion that “such interest” was
meant to refer to the specific interests that the debtor held as a
tenant by the entirety, rather than only referring to “any
interest.”
Given the variety of rights, interests, and exemptions in
tenancy by the entirety, it is likely that Congress enacted
§ 522(b)(3)(B) to reflect the full spectrum of different ap-
proaches states have taken. See Chinosorn, 243 B.R. at 700 (“the
apparent intent of the provision is to provide, in bankruptcy,
a level of protection from claims of creditors identical to the
protection that owners of entireties property would have in
collection proceedings outside of bankruptcy, under applicable
state law.”). “Any interest in property in which the debtor
had … an interest” is broad, inclusive language that signals
that all state exemptions for tenants by the entirety will be
honored in federal bankruptcy court. But the district court’s
reading would mean that no matter how nuanced state
exemptions for tenants by the entirety are, all interests would
be exempt if the state exempts the entirety interest. This means
that if Illinois decided to explicitly exempt the contingent
future interests that Williams’s lien attached to, such an
exemption would be given no effect by a bankruptcy statute
12 No. 18-2726
that relies on state law. This interpretation leads to an absurd
result and could not be what Congress intended.
Additionally, our reading of the statute is in line with each
of our sister circuits that have considered the issue. While it
does not appear that those cases involved arguments by the
parties that required similar exegesis of the statutory text, the
fact that the no party argued otherwise implies that the statute
is naturally read as we read it today. See e.g., In re Arango, 992
F.2d 611, 613 (6th Cir. 1993) (“[W]e must first look to Tennessee
law to classify Arango’s interests in entireties property. We
then determine which of those interest is exempt from his
bankruptcy estate by determining whether each particular
interest is subject to execution under Tennessee law” (emphasis
added)); Ragsdale v. Genesco, Inc., 674 F.2d 277, 239 (4th Cir.
1982) (“The phrase ‘to the extent such interest … is exempt
from process under applicable nonbankruptcy law’ is of
decisive importance. If the Ragsdales’ residential real property
could be reached to satisfy a state court judgment in Virginia,
it could not be successfully claimed as exempt”); Napotnik v.
Equibank & Parkvale Sav. Ass’n, 679 F.2d 316 , 322–23 (3d Cir.
1982) (“Since the debtor’s interest in the real property owned
with his wife as tenants by the entirety is not exempt from
process in Pennsylvania because they are joint obligors, he is
not entitled to exempt that portion of his equity subject to
Equibank’s judicial lien, and cannot avoid that lien under
Section 522(f)”).
Here, Williams obtained a judgment lien on Jaffe’s contin-
gent future interest that existed when Jaffe filed his bankruptcy
petition. The first determination that must be made is whether
Jaffe’s interest is the kind that potentially qualifies for an
No. 18-2726 13
exemption under § 522(b)(3)(B). Any interest can qualify so
long as it is an interest one holds “as a tenant by the entirety.”
Jaffe held his interest as a tenant by the entirety so we must
determine whether the interest is exempt. This requires looking
to Illinois law to determine whether contingent future interests
are exempt from process.
The main protection that Illinois law provides tenants by
the entirety is that a creditor is unable to force the sale of the
property to collect a debt against only one of the tenants. 735
ILCS 5/12-112 (2014). Illinois law does not make all interests
held by tenants by the entirety immune from process and we
need not look hard for a state that does—Indiana law exempts
“any interest the judgment has in real estate as a tenant by the
entireties.” Ind. Code § 34-2-28-1(a)(5); In re Paeplow, 972 F.2d
730, 737 (7th Cir. 1992). Illinois law explicitly refuses to exempt
income from entirety properties and fails to provide an
exemption for the contingent future interests. 765 ILCS 1005/1c;
see also Yotis, 518 B.R. at 489–90 (holding that “any future
interest that may be held by either tenant alone, such as the
contingent future interest, is not exempt at all”). Accordingly,
we find that Jaffe is not entitled to an exemption of his contin-
gent future interest. The district court’s conclusion otherwise
was erroneous.
III. CONCLUSION
Because the statute exempts an individual’s tenancy
interest to the extent that state law exempts that interest, we
reverse the decision of the district court and remand for further
proceedings consistent with this opinion.