At least when joint tenancies with right of survivorship are involved, the common conception of the snapshot test does not apply to fix an interest in property as of the filing date, according to the Tenth Circuit.

A husband filed a chapter 13 petition, but his wife did not. At the time of filing, they owned a vacation home as joint tenants with right of survivorship (or JTWROS). The couple also owned a primary residence, as to which the husband claimed a homestead exemption. The husband claimed no exemption with regard to the vacation home.

After the husband converted his case to chapter 7, he committed suicide.

After the husband’s death, his chapter 7 trustee filed a complaint under Section 363(h) to sell both the deceased husband’s and his non-debtor wife’s interests in the vacation home.

Chief Bankruptcy Judge Michael E. Romero of Denver granted summary judgment in favor of the wife, ruling that the estate lost its interest in the vacation home on the husband’s death. The district court affirmed.

Circuit Judge Carolyn B. McHugh upheld the lower courts in an opinion on December 21.

Judge McHugh built her opinion on two principles of federal law: (1) Property interests are defined by state law, citing Butner v. U.S., 440 U.S. 48 (1979); and (2) Section 541(a)(1) limits estate property to the debtor’s property interests on the commencement of the case.

Judge McHugh combined those principles with state law, which provides that when ownership is JTWROS, the right of survivorship immediately vests title to the entire property in the survivor at the moment of death of the other joint tenant.

Because the trustee had no greater rights than the debtor, Judge McHugh held that the estate’s JTWROS interest in the vacation home terminated on the death of the debtor. As a result, she said the wife “owns the entire property and it is no longer part of the bankruptcy estate.”

Judge McHugh noted that every court confronting the question has assumed that JTWROS ownership operates the same in bankruptcy as it would in the absence of bankruptcy. She also found two lower courts that reached the same result in dicta.

Judge McHugh spent the bulk of her opinion deconstructing creative-yet-unsuccessful arguments made by the trustee.

The trustee contended that Bankruptcy Rule 1016 changes the result. That rule provides that the death of a debtor does not “abate” a chapter 7 case that “shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.”

Judge McHugh said the rule “is a procedural rule. It says nothing about the substance of the bankruptcy estate.” [Emphasis in original.]

The trustee’s argument based on Section 363(h) also failed. That section allows a trustee to sell the interests of a debtor and a non-debtor co-owner.

Judge McHugh said the argument was based on a misunderstanding about property of the estate. The vacation home was not property of the estate. She said the estate’s property was the JTWROS interest that was “extinguished automatically” on the debtor’s death.

“Consequently, Section 363(h) confers no power on [the trustee] to sell the second home,” Judge McHugh said. In sum, she said, the estate had “no interest in the second home that extends beyond [the debtor’s] death.”

Caution: The same principle will disadvantage a debtor if the non-bankrupt spouse dies.