EXEMPTION BY THE ENTIRETY: A “LAWFUL HOCUS-POCUS”
January 31, 2012 § 8 Comments
Remember tenancy by the entirety from law school? It was that peculiar property creature available only to married couples that was in the nature of joint tenancy, but different. Most of us, other than property lawyers I am sure, relegated the concept to that ephemeral legal never-land populated by other seldom-visited concepts such as quasi-contracts, the rule in Shelley’s case, and the statute against mortmain.
Several years ago entireties had somewhat of a resurrection among professionals who realized that the arrangement created a singular advantage: the entirety is exempt from the independent debts of a spouse. So, for instance, a doctor who is sued for malpractice will not have to worry that his joint real property will be subject to a judgment against him if it is owned with his wife by the entireties. Likewise a lawyer who finds herself in the same boat. A wife need not fret that her property owned by the entirety will be subject to her profligate husband’s gambling debts.
A deed by the entireties also insulates the property from the claims of the predecedent’s estate creditors. In fact, the property is not merely insulated, it is exempt, which means in essence that it is no part of the estate at all. This feature is something that you need to take into account when helping your client make estate planning decisions. You can read more about exempt property in estates here and here.
Death of one party or a divorce terminates the entirety.
In March, 2011, the US Bankruptcy Court for the Southern District of Mississippi, Judge Katharine M. Samson, rendered an opinion and order in In re: Vel Marie Dixon, no. 10-51214-KMS, that is about as well-researched, reasoned and helpful an exposition on the topic that you will find anywhere. It’s lengthy, but it’s definitely worth your time to read and digest for the benefit of your clients.
Here is the pertinent part:
As early as 1868, the high court of Mississippi explicitly recognized that the common law concept of estates by the entirety was in force in the state. See Hemingway v. Scales, 42 Miss. 1, 12-13 (1868). FN6. Furthermore, the Mississippi legislature has statutorily preserved the right of a husband and wife to own land in this manner. See Miss. Code. Ann. 89-1-7; Ayers v. Petro, 417 So.2d 912, 916 (Miss. 1982).
FN6. The Mississippi Supreme Court has provided the following commentary regarding the Hemingway decision:
The cases cited in volume 42 Miss. were the opinions of a tribunal appointed by the military satrap and have no binding authority but must be regarded as res judicata. Lusby v. Kansas City, Memphis & Birmingham Railroad Co., 73 Miss. 360, 19 So. 239 (1896). However, the rationale of Hemingway . . . has received full endorsement by this Court on a number of occasions. See Ayers v. Petro, 417 So.2d 912, 914 (Miss.1982); Cuevas v. Cuevas, 191 So.2d 843, 850 (Miss.1966); McDuff v. Beauchamp, 50 Miss. 531, 535 (1874).
Newton v. Long (In re Estate of Childress), 588 So.2d 192, 195 n.4 (Miss. 1991).
An estate by entirety is a peculiar type of institution, which may only exist between a husband and wife. See Ayers, 417 So.2d at 913-14. Although an estate by entirety is similar to a joint tenancy, the Mississippi Supreme Court has emphasized that there are some fundamental differences between the two types of estates.
The unities of time, title, interest, and possession are common to both [a joint tenancy and an estate by the entirety,] but in an estate by entirety there is an additional unity, namely, that of person. Strictly speaking, a tenancy by entirety is not a joint tenancy but is a sole tenancy, and, while the two estates resemble each other and possess some qualities in common, yet they differ both in form and substance and are distinguishable, and it has been said that the disfavor with which the courts look on joint tenancies does not extend to estates by entirety. The seizin of the tenants distinguishes the two estates, and a marked, and perhaps the principal, distinction lies in the possibility of severance and destruction.
Id. (quoting 41 C.J.S., Husband and Wife, § 33(b)).
As noted in the quotation above, by virtue of “lawful hocus-pocus,” if a property is granted to a husband and wife as tenants by the entirety, the law treats the property as if it is owned by a third, fictional corporate entity consisting of the combined legal personas of the husband and wife. Hemingway, 42 Miss. at 6 (emphasis in original) (Geo. L. Potter, for the plaintiff in error) FN7; see also Newton v. Long (In re Estate of Childress), 588 So.2d 192, 194-95 (Miss. 1991) (“there is but one estate held by only one ‘person’ –the marriage itself”); In re Barber, 339 B.R. at 592 (“Husband and wife are treated as though they were a corporate entity.”). Each spouse is simultaneously “seised of the whole estate and not an undivided half interest.” Newton, 588 So.2d at 198 (emphasis in original).
FN7. It appears that during the time period when Hemingway was published, it was customary to print the arguments of the parties in the reporter along with the opinion of the Court. Throughout this opinion, the Court has noted, by way of parenthetical, when it is quoting from the printed arguments of counsel, rather than the Court’s official opinion.
Several incidents of this form of estate are established in Mississippi’s case law. For instance, in contrast to a joint tenancy, which may be destroyed by one of the joint tenants conveying his undivided interest to a third party, an estate in entirety “may not be terminated by the unilateral action of [either the husband or wife] because they take by the entireties and not by moieties.”FN8. Ayers, 417 So.2d at 914. Additionally, upon the death of one spouse, the other spouse continues in their possession of the whole estate. See Hemingway, 42 Miss. at 13; see also id. at 7 (nothing accrues to the survivor, he or she takes by virtue of their old title, being all the time seised of the whole estate) (J.Z. George, for the defendant in error). Furthermore:
While the marriage exists, neither husband nor wife can sever this title so as to defeat or prejudice the right of survivorship in the other, and a conveyance executed by only one of them does not pass title. Cuevas v. Cuevas, 191 So.2d 843 (Miss.1966); McDuff v. Beauchamp, 50 Miss. 531 (1874); Hemingway v. Scales, 42 Miss. 1 (1868).
Ayers, 417 So.2d at 914.
FN8. “Moiety” means “[a] half of something (such as an estate),” or, “[a] portion less than half; a small segment.” Black’s Law Dictionary 1026 (8th ed. 2004).
Regarding the question at hand, the Mississippi Supreme Court has never explicitly stated, nor does any Mississippi statute specifically pronounce, that an estate held by the entireties is exempt from process. However, neither an explicit statement by a state supreme court nor a specific state statute is required to satisfy the equirements of 11 U.S.C. § 522(b)(3)(B). As long as it is clear from a state’s common law, under the circumstances presented, that process could not be served on the debtor’s property, held as an estate by the entirety, then that property should be exempt from the bankruptcy estate. See 4 Collier on Bankruptcy ¶ 522.10, at 522-85 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2010) (“Property may be recognized as exempt under section 522(b)(3)(B) to the extent it is exempt from process under a state’s common law.”); In re Holland, No. 05-58959, 2009 WL 2971087, at *2 (Bankr. N.D. Ill. Sept. 8, 2009) (the exemption from process need not appear in a state’s exemption statute, nor need it appear in a statute at all; nor must the statute or case law use the specific word exempt). Under Mississippi’s common law, it is clear that Dixon’s homestead would be exempt from process arising out of her unilateral actions, i.e., the debt that she incurred independent of her husband.
Mississippi case law clearly states that in an estate by entirety each spouse simultaneously is seised of the whole estate, that is title, interest and possession, and the Mississippi Supreme Court has emphasized that no action taken by one of the two tenants in entirety can terminate the rights of the other to the full panoply of rights in the estate. See Ayers, 417 So.2d at 913-14; Newton, 588 So.2d at 196. Allowing judgment creditors to execute process against an estate in entirety by virtue of the actions, i.e., the accumulation and non-payment of debt and the associated liability incurred by only one spouse violates these core principles. Accord In re Barber, 339 B.R. at 593. FN9.
FN9. In contrast to the case discussed herein, the Court recognizes that Mississippi’s case law clearlystates that an estate in entirety may be alienated by the joint act of the husband and wife. Thus, if the couple enters into a mortgage and both the husband and wife sign a deed of trust securing that mortgage, on default, the creditor may legitimately seize the collateral, even if it is held by the married couple as a tenancy by the entirety. See Newton, 588 So.2d at 196 (citing McDuff v. Beauchamp, 50 Miss. 531, 535-36 (1874)).
The Hemingway decision provides support for this finding. In Hemingway, one of the two tenants by entirety, the husband, died insolvent. The probate court decreed that the property held in entirety should be sold “for the payment of his debts.” Newton, 588 So.2d at 195 (emphasis added). The Hemingway Court reversed the lower court’s order, finding that the debts of the husband did not give his creditors the right to impinge upon the wife’s right, under the principles of entirety estates, to continue in her possession of the whole estate. Hemingway, 42 Miss. at 7 and 11-13.
The Court also notes that the Hemingway Court specifically found that Mississippi’s statutes of partition do not apply to estates in the entirety. See Hemingway, 42 Miss. at 12; Miss. Code Ann. 11-21-1, et seq.; see also Newton, 588 So.2d at 199 (“Involuntary partition of real property is not available to tenants by the entirety”) (Prather, J., dissenting). This makes sense, as there is no interest attributable to only one spouse which can be seized based on the actions taken and debts owed by that spouse alone. See Newton, 588 So.2d at 198 (“each spouse is seised of the whole estate and not an undivided half interest”). The only interest in an estate in entirety is possessed corporately by the married couple. Id. at 194-95.
The unique immunity enjoyed by tenants in entirety from process arising out of the liabilities incurred by only one spouse certainly could give rise to abuse. However, the Court’s decision today is the natural fruit of entirety principles reaffirmed consistently over the years by the Mississippi Supreme Court. Indeed, the Mississippi Supreme Court has stated that one of the primary purposes of this unique estate is “to protect” one spouse “from the improvidence of the other spousal tenant.” Newton, 588 So.2d at 196 (citing Cuevas v. Cuevas, 191 So.2d 843, 846-47 (Miss. 1966)). FN10. Today’s decision comports with this policy statement. Since it is state law that creates property rights and defines their scope, unless some federal interest requires otherwise, it is generally not the purview of the federal courts to question the purposes or policies underlying such laws. See Cmty. Nat’l Bank and Trust Co. of N.Y. v. Persky (In re Persky), 134 B.R. 81, 87 (Bankr. E.D.N.Y. 1991). Finally, though it does not bear on the present analysis, the Court notes that the finding above is in accord with the findings of the majority of courts that have considered whether or not estates held by the entirety are exempt from process for liabilities and debts incurred through the actions of one spouse. See J.H. Cooper, Interest of Spouse in Estate by Entireties as Subject to Satisfaction of His or Her Individual Debt, 75 A.L.R.2d 1172, §2 (“In a majority of jurisdictions, it has been held that a creditor of an individual spouse cannot reach the spouse’s interest in an entirety estate during the joint lives of the spouses.”).
FN10. It appears that this policy has some basis in the historical origins of estates by the entirety. If a joint-tenant was convicted of a felony in pre-colonial England, the share of the jointly owned property owned by that particular joint-tenant was forfeited to the King. However, this policy did not extend to a husband and wife holding property by the entirety. No share of the property held in entirety was surrendered to the King upon the individual conviction of either spouse on felony charges. See Hemingway, 42 Miss. at 7 (J.Z. George, for the defendant in error) (citations omitted).
There are practice implications in tenancy by the entirety not only for property lawyers, but also for probate and family practitioners. Do you have some clients who might benefit from such an arrangement?
Thanks to Marcus D. Evans, Esq., for providing the Dixon opinion.