In fixing the value of a debtor’s interest in property held as tenants by the entireties when avoiding a judicial lien as an impairment of an exemption under Section 522(f), the First Circuit held that the value for the purpose of Section 522(f) is not the value of the entire property as though it had only one owner.
At least when Massachusetts law governs tenancies by the entireties, the August 24 opinion seems to mean that a debtor’s interest in entireties property is something less than the entire value, unless the parties otherwise agree. How much less is evidently a fact question to be determined in every case.
The Value of the Homestead
Years before bankruptcy, a husband and wife purchased a home. The Massachusetts homestead exemption was $500,000.
The wife filed a chapter 13 petition, but the husband did not. The parties agreed that the home was worth $1.05 million. There were mortgages on the home for about $180,000 and a judicial lien on the wife’s interest in the home for about $250,000.
Under Section 522(f), the wife moved to avoid the judicial lien as an impairment on her homestead exemption. The holder of the judicial lien objected. The objection raised the question of how to value the interest in property held as tenants by the entireties when only one spouse is bankrupt.
The judicial lienholder argued that the value of the debtor’s interest was the home’s entire value of more than $1 million. In that event, the debtor could not avoid the judicial lien because her homestead exemption would not be impaired.
The debtor contended that her value was either 50% of the home’s value or should be determined under an actuarial approach. If actuarial tables applied, the value for the debtor would have allowed the debtor to avoid all but about $5,000.
If the debtor’s value were half of the home’s total value, the judicial lien could be avoided entirely.
First Circuit BAP Precedent
The dispute came before now-retired Bankruptcy Judge Frank J. Bailey of Boston. The lienholder argued that the bankruptcy court was bound by the Snyder decision from the First Circuit Bankruptcy Appellate Panel in 2000. Snyder v. Rockland Tr. Co. (In re Snyder), 249 B.R. 40 (B.A.P. 1st Cir. 2000).
In Snyder, the BAP interpreted the Massachusetts Supreme Judicial Court as having held in Coraccio v. Lowell Five Cents Sav. Bank, 415 Mass. 145 (1993), that the state’s concept of “unitary title” with regard to entireties property means that the interest of one spouse must be the value of the entire property. [Note: The Supreme Judicial Court is the highest court in the Massachusetts court system.]
As Circuit Judge Jeffrey R. Howard said in his opinion for the Court of Appeals, Judge Bailey believed that Coraccio “did not compel the conclusion that a spouse’s share in a tenancy by the entirety had to equal the full value of the property.”
Evidently to avoid a tedious valuation hearing, the debtor and the lienholder stipulated that the fair market value of the debtor’s interest in the homestead was no more than $525,000.
Judge Bailey ruled that other liens on the home would not be allocated between the husband and wife. He therefore ruled that the debtor could avoid the judicial lien in its entirety.
The First Circuit accepted a direct appeal from Judge Bailey’s interlocutory order. The appeal raised only legal issues, so review was de novo.
[Note: The First Circuit had affirmed Snyder in a nonprecedential, unpublished opinion. Snyder v. Rockland Tr. Co. (In re Snyder), 2 F. App’x 46 (1st Cir. 2001). Judge Howard said that the opinion “lacks precedential value” and that the circuit court did not address valuation because the debtor had waived arguments based on valuation.]
What ‘Unitary Title’ Doesn’t Mean
On the merits, Judge Howard began by reciting statutory definitions, which would govern his conclusions.
Section 522(f)(1) permits a debtor “to avoid the fixing” of a “judicial lien” that “impairs an exemption” to the extent that the judicial lien, all other liens on the property and the exemption “exceeds the value of that debtor’s interest in the property that the debtor would have in the absence of any liens.”
Critically, Section 522(a)(2) defines “value” to mean “fair market value as of the date of the filing of the petition.” In turn, Judge Howard said that FMV means the price a willing buyer would pay to a willing seller, neither being under compulsion to buy or sell.
The lienholder argued that the “unitary title” concept espoused by the SJC in Coraccio requires finding that the share of one spouse equals the value of the entire property. Judge Howard disagreed with that reading of Coraccio. He added that Snyder “impermissibly departed from Congress’s explicit instructions to value the debtor’s interest in the property absent any liens as the fair market value thereof for the purposes of the § 522(f) formula.”
Judge Howard proceeded to parse Coraccio to identify what the case meant for the purpose of a Section 522(f) valuation. He said that “unitary value” described the extent of a spouse’s interest, not the value. “Unitary interest” means “an equal right to the whole,” but the interest is limited because a spouse’s interest is defeasible upon death. For example, a spouse could encumber or sell an entireties interest, but that interest would be lost if the spouse were to predecease.
Given the more precise meaning of Coraccio, Judge Howard returned to federal law. He said that “the value in question here is not of the property, nor of the tenancy as a whole, but rather of the debtor’s interest in the tenancy, which is subject to the suite of encumbrances described above that do not apply to the tenancy as a whole.” The encumbrances, he said, include “uncertainty” about the debtor’s ownership were the debtor to predecease.
Judge Howard therefore held that the value of the debtor’s interest in the property is the fair market value as of the date of filing, “no more, no less.” In the case on appeal, the parties had stipulated that the value was half, or $525,000. He therefore affirmed Bankruptcy Judge Bailey and his conclusion that the judicial lien was entirely avoided.
What Does the Opinion Mean?
In a state with a similar concept of entireties property, the First Circuit’s opinion means that the value of the interest of one spouse is not the value of the entire property. The opinion does not seem to mean, however, that the interest of one spouse is 50% of the property’s total value.
In the case before the First Circuit, the parties had stipulated to the value of the debtor’s interest if it was not the value of the entire property. But what’s the value in the absence of stipulation? Is the value of the interest of one spouse always 50%?
Judge Howard said he was “acutely aware” that his decision “would create some uncertainty.” He cited a New York bankruptcy court decision for the proposition that valuation of one spouse’s interest is subject to the rights of the other spouse.
In the absence of agreed value about one spouse’s interest, this writer interprets the decision to mean that valuation would entail reference to actuarial tables and the comparative, predictable longevity of the spouses.
In fixing the value of a debtor’s interest in property held as tenants by the entireties when avoiding a judicial lien as an impairment of an exemption under Section 522(f), the First Circuit held that the value for the purpose of Section 522(f) is not the value of the entire property as though it had only one owner.
At least when Massachusetts law governs tenancies by the entireties, the August 24 opinion seems to mean that a debtor’s interest in entireties property is something less than the entire value, unless the parties otherwise agree. How much less is evidently a fact question to be determined in every case.