Welcome to a law student’s nightmare: the convergence of property law and bankruptcy.

If a debtor owns property as a joint tenant with right of survivorship, the trustee can’t sell the property if the debtor dies, because the property left the bankrupt estate. In other words, the filing of a petition does not sever a joint tenancy nor convert ownership to a tenancy in common, according to Bankruptcy Judge Deborah L. Thorne of Chicago.

The individual debtor in chapter 7 owned real property with his wife as joint tenants with right of survivorship. The property was not eligible for an exemption. The wife was not in bankruptcy.

The debtor died a few months after filing. The trustee filed a motion to sell both properties under Section 363(b) and (f). The wife had been in prison, but her whereabouts were unknown. The wife did not object to the sale, even though the trustee gave required notice, including notice by publication.

Sua sponte, Judge Thorne directed the trustee to brief the question of whether the estate retained an interest in the property after the debtor’s death. The trustee proffered several theories, but none persuaded Judge Thorne.

First, the trustee contended that the bankruptcy filing severed the joint tenancy and created a tenancy in common. Judge Thorne said that the question has “divided courts,” in part because the Bankruptcy Code does not provide an answer.

Judge Thorne consulted Illinois law about the steps necessary to sever a joint tenancy. She learned that there must be a “conveyance,” and that a conveyance does not occur until there is a sale or disposition of the property and title passes. In short, the filing of a petition, which only created an estate, did not qualify as a conveyance to sever a joint tenancy.

Judge Thorne observed that the result might have been different under the former Bankruptcy Act, where the trustee actually took title to the debtor’s property. Under the Bankruptcy Code, the trustee does not take title. The filing creates an “estate,” which the trustee administers.

Next, the trustee argued that the property remained in the estate despite the death of the debtor.

Judge Thorne cited the Tenth Circuit for holding that a joint tenancy operates the same in bankruptcy as it does in the outside world when a joint tenant dies: The joint tenant owns the entire property, and it is no longer part of the estate.

Judge Thorne compared Illinois law to Colorado law involved in the Tenth Circuit case and held that the property left the estate, because the trustee can have no greater rights in the property than the debtor.

Finally, the trustee argued that Section 363(h) gave the right to sell the interest of the debtor and a co-owner.

Again, the Tenth Circuit answered the question. By the time the trustee had moved to sell, the property had left the estate. Or, as Judge Thorne said, quoting a bankruptcy court in New Jersey, “‘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].’”

Summing up, Judge Thorne said that she “agrees with the other courts that have considered this same issue and finds that the right of survivorship operates as it would absent the bankruptcy.” When the debtor died, the estate’s interest “instantly passed by right of survivorship to [the wife] and left the estate.”

Judge Thorne therefore held that “the Trustee has no right to sell” the properties.