Summary:
Christopher Gifford and Shana Gifford owned real property as tenants by the entireties. On April 1, 2019, they separated and Christopher filed a complaint for Equitable Distribution. While that was still pending, on August 7, 2020, Christopher filed a Chapter 7, claiming the real property as exempt as tenancy by the entireties.
The Trustee obtained an extension of time to object to exemptions until December 17, 2020. On December 1, 2020, Shana Giffords sough relief from the automatic stay to continue the Equitable Distribution action in state court. The Trustee then sought second and third extensions (with Christopher Gifford objecting to the third). The bankruptcy court grantted a final extension until April 7, 2021. No Objection to Exemptions was ever filed.
On April 12, 2021, the bankruptcy court approved a settlement between the Trustee and Shana Gifford approving the sale of the property, but reserving the rights of both the Trustee and Christopher Gifford.
An Absolute Divorce between Christopher Gifford and Shana Gifford was entered on June 28, 2021. Christopher Gifford then moved the bankruptcy court to determine that the real property was either not part of the bankruptcy estate or that it should be abandoned, as any severance of the tenancy by the entireties occurred more than 180 days after the filing of the petition. The Trustee argued that Christopher Gifford's vested right to an equitable distribution of the real property and the subsequent divorce made Christopher Gifford's interest an asset of the bankruptcy estate.
The bankruptcy court held that the termination of the exemption post-petition did not, absent a separate statutory mechanism, bring the new interest in the underlying property into the bankruptcy estate. In re Birney, 200 F.3d 225, 228 (4th Cir. 1999) (citing Cordova, 73 F.3d at 38). The re-capture does not occur by operation of state law and § 541(a)(1) because the interest as a tenant in common is a new interest in property that "did not exist as of the commencement of the case.'" Bellinger v. Buckley, 577 B.R. 193, 196-99 (D. Md. 2017).
While § 541(a)(5)(B) is one statutory mechanism by which certain types of after-acquired interests in property may be brought into the estate, including an interest in property acquired "as a result of . . . an interlocutory or final divorce decree", but only if the debtor acquires or becomes entitled to acquire an interest in the property within 180 days of filing bankruptcy. 11 U.S.C. § 541(a)(5)(B). Here, the divorce decree was entered more than 180 days after Debtor filed bankruptcy. Therefore, Christopher Gifford's new interest in the Property as a tenant in common did not come into the estate under § 541(a)(5)(B). See In re Earls, Case No. 05-53870C-7W, 2006 WL 3150923, *1 n. 2 (Bankr. M.D.N.C. 2006).
Christopher Gifford did, however, acquire a vested, but contingent, right to marital property as of the date of the parties separation on April 1, 2019. Even though the state court had not yet ruled on the equitable distribution, allocating specific assets, that right became an asset of the debtor's bankruptcy case upon filing. Should the state court award the real property to the debtor, in part or in full, that would be an asset of the bankruptcy estate, but only available to joint creditors of the debtor and his now ex-wife.
Commentary:
This shows an interesting gap as the Debtor's interest in marital property was fixed as of the date of separation but the Tenancy the Entireties was not severed until the parties divorced.
Not being an expert in family law, it is not clear whether the Chapter 7 Trustee can, on behalf of Christopher Gifford's bankruptcy estate, appear in the state court equitable distribution action to maximize the estates share of the marital property. As the real property is not available for the Debtor's individual creditors, it would seem to be in the interest of the bankruptcy estate to reach a settlement with the Shana Gifford that gave her the real property in exchange for other assets available for all of the Debtor's creditors.
Depending on what other marital assets exist, this would certainly have been a case where the Debtor should have filed the bankruptcy either 181 days before separating, waiting to file bankruptcy until the equitable distribution, or filing Chapter 13, as he would remain in control of those assets rather than ceding it to the trustee.
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