Recent case development: § 363(h) sales of tenancy by the entirety property

Case: John O. Desmond, Chapter 7 Trustee v. Marsha S. Green (In re Warren I. Green), no. 13-10204-MSH (Bankr. D. Mass.).

Opinion By:

Chief Judge Melvin S. Hoffman

October 11, 2018

Facts:

The Chapter 7 Trustee filed an action pursuant to 11 U.S.C. § 363(h) for authority to sell a condominium held by the debtor and his non-debtor spouse as tenants by the entirety. The defendant non-debtor spouse, Ms. Green, moved for summary judgment objecting to the sale on the ground that the Trustee could not meet the balancing test of § 363(h)(3). That section requires the court to determine if the proposed sale will confer upon the estate a benefit that outweighs any detriment to the non-debtor. Relying on Butner v. United States, 440 U.S. 48 (1979), Ms. Green argued that such a determination could not be made because: (i) under Massachusetts tenancy by the entirety law, each owner enjoys equal rights to the entire ownership and proceeds and, as a result any distribution to the estate would result in Ms. Green not receiving her full interest as required by § 363(j); and (ii) Massachusetts law precluded the Trustee from distributing any funds until termination of the tenancy, meaning that neither she nor the bankruptcy estate would receive a benefit from the sale so long as the tenancy remained intact.

Holding:

The Bankruptcy Court held that strict compliance with Massachusetts tenancy by the entirety law would run counter to the policies of the Bankruptcy Code and was therefore preempted to the extent it was inconsistent with Bankruptcy Code § 363(h) and (j). The Court noted that although the Butner decision holds that, “property interests are created and defined by state law,” Ms. Green – like many other litigants – had glossed over the qualifier in the next sentence of that decision, which is that courts must also look to whether “some federal interest requires a different result.”

In Green, the Bankruptcy Court determined that federal bankruptcy law did indeed require a different result, a conclusion reinforced by the Bankruptcy Code’s legislative history, which explicitly states that a trustee should be permitted to sell entireties property.  Further, the Court observed that requiring a trustee to hoard the proceeds of such a sale would be incompatible with the dictates of § 704, which requires the trustee to administer the bankruptcy case expeditiously and consistent with the best interest of the parties. Finally, the Court rejected the notion that § 363(j) should be incorporated into the balancing test of § 363(h). Rather, § 363(j) simply governs what happens after a sale vis-à-vis the non-debtor spouse and does not create a condition precedent to a sale by the Trustee under § 363(h). Interestingly, one question the Court did not decide was the appropriate formula for dividing the sale proceeds, in light of Massachusetts law entitling each party to ownership rights in the entirety of those proceeds. The Court did note, however, that a 50-50 distribution would appear to be a reasonable approach.

Find The Full Case Here:

http://www.mab.uscourts.gov/mab/opinions

Summary Prepared By:

Erica James

New Lawyers Section Liaison to Bankruptcy Law Section