The Eighth Circuit evaded loose language in the Supreme Court’s Harris v. Viegelahn opinion to reaffirm the principle that filing a bankruptcy petition no longer “transfers” property to a trustee, it only creates an estate administered by a trustee.
Under Section 70a of the former Bankruptcy Act, the filing of a petition “vested” title in the trustee. To avoid untoward effects that might occur as a result of vesting or transferring title on the filing of a petition, the Bankruptcy Code changed prior law by omitting vesting language and providing in Section 541(a)(1) that filing “creates an estate” that is “comprised of” the debtor’s property interests. The trustee is the “representative of the estate” under Section 323 and has various powers to administer the estate.
To argue that bankruptcy continues to transfer title even after adoption of the Bankruptcy Code, a clever debtor’s lawyer from Missouri latched onto a sentence in the high court’s 2015 Harris opinion that said that a debtor’s assets on the filing of a petition “are immediately transferred to a bankruptcy estate.” Whether or not there was a transfer meant big bucks for the lawyer’s clients.
When a couple filed chapter 13 petitions, they held title to real property as joint tenants with the wife’s parents. Two years later, the couple converted their case to chapter 7. Three months after that, the wife’s parents both died.
The trustee served notice that he would sell the real property, contending that the couple’s right of survivorship as joint tenants brought the property into the estate. The bankruptcy judge allowed the sale and was upheld by the Eighth Circuit Bankruptcy Appellate Panel. The debtors appealed and lost in an April 27 opinion by Circuit Judge Duane Benton.
The case involved arcane concepts of property law that most of us have forgotten since law school. To have a joint tenancy with right of survivorship, there must be the four unities of interest, title, time and possession. Among other requisites to joint tenancy, the interests must be conveyed from the same source and must commence at the same time.
The clever debtor’s lawyer argued that the estate came into title later, thus destroying a joint tenancy and creating a tenancy in common where there is no survivorship. Were this argument correct, the debtors might have been able to keep part or all of the real property because it would not have come into the estate.
Judge Benton pointed out the differences between former Section 70a and the Bankruptcy Code’s Section 541 to hold that “assets remain in the debtor’s name until the trustee disposes of the property.” There having been no transfer to eradicate the joint tenancy, the circuit court affirmed the ruling that the trustee succeeded to the benefits of survivorship.
To explain away the troublesome language from Harris, Judge Benton said that the Supreme Court “was not presented with the issue here.”
The appeal attracted attention from the bankruptcy bar. The National Association of Consumer Bankruptcy Attorneys submitted an amicus brief in support of the debtors, while the National Association of Bankruptcy Trustees filed a brief supporting the chapter 7 trustee.