The United States Court of Appeals For the Seventh Circuit (“Federal Appellate Court”), in its decision filed on August 5, 2019, stated, “We must determine to what extent contingent future interests created by Illinois law are exempt under this section. The most natural reading of the statute exempts any interest held by an individual as a tenant by the entirety to the extent that state law exempts that particular interest … The main protection that Illinois law provides tenants by the entirety is that a creditor is unable to force the sale of the property to collect a debt against only one of the tenants. 735 ILCS 5/12-112 (2014) … Illinois law explicitly refuses to exempt income from entirety properties and fails to provide an exemption for the contingent future interests. 765 ILCS 1005/1c … Accordingly, we find that Jaffe is not entitled to an exemption of his contingent future interest. The district court’s conclusion otherwise was erroneous.”
The Underlying Facts
In 1998, Laverne Williams wanted to file a medical malpractice lawsuit and hired Scott Jaffe to be her attorney. The statute of limitations expired before Jaffe filed a complaint and Williams sued for legal malpractice, obtained a default judgment, and recorded that judgment on a property that Jaffe and his wife owned as tenants by the entirety. Williams claimed post-judgment interest brings her total claim against Jaffe to $1.04 million.
Jaffe filed a chapter 7 bankruptcy petition in November 2015, which identified his debt to Williams and indicated it was secured by a judgment lien on his residence. On the petition date, Jaffe and his wife owned the property as tenants by the entirety, but before bankruptcy proceedings were complete Jaffe’s wife died. According to Illinois law, when his wife died the tenancy by the entirety terminated and Jaffe held the property individually in fee simple.
To avoid the judgment lien, Jaffe filed a motion in the bankruptcy court arguing the property was exempt under 11 U.S.C. § 522(b)(3)(B). Williams responded that the property was not exempt because the federal bankruptcy provision that Jaffe relied upon looks to state law to determine whether a tenancy property is exempt. Because Illinois does not exempt contingent future interests, Williams argued, the federal bankruptcy statute does not allow Jaffe to exempt the property from the bankruptcy estate.
The Federal Appellate Court stated, “We must first determine whether a lien exists and what interests it attached to. If no lien exists the debtor cannot seek an exemption under 11 U.S.C. § 522(f) and our inquiry is complete … If a lien attached we must also determine to what interests it attached. Jaffe argues that, if any lien exists, it attached only to his tenancy interest which is exempt under Illinois law. Williams asserts her lien attached to Jaffe’s contingent future interest in the property. If we determine a lien attached to a property interest we must then determine whether that interest is exempt under § 522(b)(3)(B).”
The Federal Appellate Court held, “It is clear that if the Illinois legislature wanted to exempt particular interests from the attachment of judgment liens, it had no problem in doing so. Because the Illinois legislature failed to do so, we find that Williams’s judgment lien attached to Jaffe’s contingent future interest in the property.”
U.S. Bankruptcy Code, Section 522(b)(3)(B)
The U.S. Bankruptcy Code, Section 522(b)(3)(B) exempts: “[a]ny interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.”
The Federal Appellate Court stated, “We read this provision to establish two things. First, the opening language indicates the interests that may qualify for exemptions—any interest the debtor has, so long as she holds that interest as a tenant by the entirety. The provision then defines which of those qualifying interests are exempt—all of the debtor’s qualifying interests to the extent that they are exempt under applicable nonbankruptcy law. Our reading of the statute yields a simple result—interests a debtor holds as a tenant by the entirety are exempt to the extent that those interests the debtor holds as a tenant by the entirety are exempt under state law … “such interest” was meant to refer to the specific interests that the debtor held as a tenant by the entirety, rather than only referring to “any interest.””
The Federal Appellate Court continued: “Here, Williams obtained a judgment lien on Jaffe’s contingent future interest that existed when Jaffe filed his bankruptcy petition. The first determination that must be made is whether Jaffe’s interest is the kind that potentially qualifies for an exemption under § 522(b)(3)(B). Any interest can qualify so long as it is an interest one holds “as a tenant by the entirety.” Jaffe held his interest as a tenant by the entirety so we must determine whether the interest is exempt. This requires looking to Illinois law to determine whether contingent future interests are exempt from process.”
The Federal Appellate Court held: “Illinois law explicitly refuses to exempt income from entirety properties and fails to provide an exemption for the contingent future interests. 765 ILCS 1005/1c … Accordingly, we find that Jaffe is not entitled to an exemption of his contingent future interest.”
Source IN RE: SCOTT N. JAFFE, No. 18-2726.
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