Massachusetts Tenancies by the Entireties and Bankruptcy

The recent Lodi bankruptcy case illustrates Massachusetts law on tenancies by the entireties.   Nickless v. Lodi (In re Lodi), 2007 Bankr. LEXIS 3075 (Bankr. D. Mass. 2007).

A tenancy by the entireties is a legal fiction designed to protect marital assets in states having English, and not Spanish, roots (most eastern and central states; others are community property laws). The tenancy has each spouse owning a 100% interest in the marital assets until death, divorce, sale or voluntary division. This legal fiction prevents one spouse’s creditor from seizing a marital assets. Some states limit this to real estate, and others like Massachusetts do not. Massachusetts has a unique statue which allows one spouse’s creditor to attach a marital asset and wait until a death, divorce, sale, or voluntary division to see if it can get paid.

In a joint bankruptcy filing, only joint creditors can be paid from joint assets unless a bankruptcy trustee divides the entireties property, which can be done unless the division creates a hardship on the nonfiling spouse.   In re Coombs, 86 B.R. 314 (Bankr. D. Mass. 1988). (I have never seen a bankruptcy trustee divide entireties property in a joint bankruptcy filing as a way to get a separate spouse’s creditor paid.  I have seen a Chapter 7 trustee threaten to divide entireties property in a married-but-filing-alone case as a way to obtain a settlement.)

There is no decision where a MA bankruptcy court makes the division of marital property itself, although the question still lingers as of this writing in the pending case of Whitman v. Lassman, 2007 U.S. Dist. LEXIS 56830 (D. Mass. 2007).  (Lassman calls this property one of a tenancy by the “entirety” and not “entireties,” a common alternate label.)  An intermediary appellate decision has ruled that 100% should be used for valuing a married-filing-alone debtor’s interest in a home, but a higher appellate decision for this case noted that the debtor had waived his right to argue for a division based on actuarial evidence .  In re Snyder, 2 Fed.Appx. 46 (1st Cir. 2001).  A judge commented in another decision that valuing one debtor’s spouse in a marital asset without regard to how the tenancy by the entireties is terminated is not “entirely faithful” to Massachusetts law.  In re O’Connell, 334 B.R. 312, 315 n.6 (Bankr. D. Mass. 2005).

Lodi involved a bankrupt husband who had refinanced the marital home with his wife before the bankruptcy was filed. $30,000 went to the husband’s creditors and $20,000 went to the nondebtor wife’s use. The court ruled that the $50,000 was entireties property until the voluntary division.

A fraudulent transfer traps many married-but-filing-alone bankruptcy filers. Two simple definitions are when a bankrupt gave away something before the filing but did not get fair consideration in return, or where a transfer is made with the intent to hinder, delay, or defraud a creditor. The Lodi court ruled that this was not a fraudulent transfer because more than half the proceeds went to the debtor husband’s creditors.

A voidable preference is another trap.  This is when a debtor “prefers” one creditor over all others by making a payment before the bankruptcy is filed. (There are many conditions.) The Lodi court ruled that the division of the proceeds was not a voidable preference because the wife was not a creditor.