Bankr. E.D.N.C.: In re Adams- Rents from Tenant by the Entireties Properties

Summary: In an involuntary Chapter 7 case filed against a land developer, the Trustee sought turnover of rents generated by real property owned with the Debtor’s spouse as tenants by the entireties. The Debtor argued that, while earlier case law held that it was “settled that accruing rents and profits are attributable entirely to the husband and subject to the claims of his creditors”, Stubbs v. Hardee, 461 F.2d 480, 482 (4th Cir., 1972), in 1982 North Carolina statutorily changed the rights between husbands and wives regarding control of rents from properties held as tenants by the entireties. N.C.G.S. § 39-13.6 now provides that spouses would have “an equal right to the control, use, possession, rents, income and profits” of tenant by the entireties property. Further, it restricted the conveyance or encumbrance of such property without the joinder of the other. As such, the Debtor asserted that the statute “operates to confer upon the rents derived from the entireties property, the characteristics of entireties properties.” The court, however, found a more plausible and limited interpretation of N.C.G.S. § 39-13.6 to be that as prior common law allowed the creditors of the husband to reach rents, now the creditors of the wife were also allowed to reach such. See William Reppy, North Carolina’s Tenancy by the Entirety Reform Legislation of 1982, 5 Campbell L.Rev. 1, 9 (1982). Commentary: This case has been appealed. The opinion starts from the longstanding precedent that “an estate by the entireties in personal property is not recognized in North Carolina.” There are some little noted exceptions to this rule, however: 1. N.C.G.S. § 41-2.5 actually presumes tenancy by the entireties for mobile homes co-owned by spouses. (As many of the properties involved in this action are mobile homes,  this could come into play in this case.) 2. Funds from an involuntary transfer of title can retain the character of tenancy by the entireties. Highway Commission v. Myers, 270 N.C. 258 (1967) Query: As this bankruptcy is an involuntary Chapter 7, why could it not be argued that these rents, similar to the condemnation proceeds in Myers, retain the character of the entireties real estate? Further, as this opinion points out, that while South Carolina does not have tenancy by the entireties at all, the all of other states in the 4th Circuit not only do, but allow it for ownership of many types of personal property. It is also important to note that in treating rents from entireties property as essentially property owned as joint tenants, the spouse “lacks the easy escape hatch provided the joint tenant by the power of alienation and the right to partition.” John V. Orth, Tenancy by the Entirety: The Strange Career of the Common-Law Marital Estate, 1997 BYU L. Rev. 35 (1997) As such powers do not exist for tenants by the entireties. Here, the Debtor’s spouse either must continue to share the rents from the property with the Chapter 7 Trustee (In perpetuity? How long can the Chapter 7 Trustee administer the estate?) without the ability to force a partition sale. The statute that was meant to protect and expand the rights of women, i.e. that the reform was addressed the “forward-looking concern to provide protection to marital property” Id. at 42, here becomes a form of bondage for spouses. Lastly,  it is unclear whether this is appropriately a  "Motion" for Turnover.  Rule 7001(a)  requires an adversary proceeding "to recover money or property, other than a proceeding to compel the debtor to deliver property of the estate...."  By bringing this action as a motion rather than an Adversary Proceeding,  the Trustee, who admitted only requested 50% of the rents,  only avoided putting the cart before the horse in retrospect.  This is somewhat troubling and it minimizes the due process notice rights for the Debtor's spouse,  who was not even separately served with notice of this motion.  As an Adversary Proceeding costs a Trustee nothing beyond the cost of certified mail to both spouses,  it would seem the better practice to proceed in that vein. For a copy of the opinion, please see: In re Adams- Rents from Tenant by the Entireties Properties For a copy of North Carolina’s Tenancy by the Entirety Reform Legislation of 1982, please see: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1922&context=faculty_scholarship For a copy of a law review article of “Tenancy by the Entirety: The Strange Career of the Common-Law Marital Estate”, please see: http://digitalcommons.law.byu.edu/lawreview/vol1997/iss1/7