By: Robert L. Pryor
Time to Revisit
In re Levinson?
While a bankruptcy discharge discharges most debts, it does not automatically avoid liens. When a creditor sues,obtains a judgment, and dockets it in the county where the Debtor’s homestead is located, the lien created upon the Debtor’s homestead remains unaffected and continues as an in rem claim against that property (although the Debtor’s in personam liability may have been otherwise discharged).
In order to avoid the judgment lien itself, a Debtor must look to certain limited sections of the Bankruptcy Reform Act of 1978, as amended, “Bankruptcy Code”) to determine whether there is a separate specific statutory authorization which would allow the Debtor to avoid and thus remove that judgment lien from the property as Section 522(f) is generally regarded as the principal and most powerful vehicle to accomplish this objective.
In Levinson, the Debtor claimed a homestead exemption (at that time $50,000, now $165,550) in the home he owned with his wife as tenants by the entirety. He claimed, consistent with the then-prevailing viewpoint,that the value of his interest in the home should be valued at one-half of the total value of the property.
From this, the Court concluded that the value of his interest was twice as great as he had posited and, as a consequence, the judgment lien was found not to impair the Debtor’s homestead exemption and the judgment hen could not be avoided. However, such conclusion is facially suspect under both principles of mathematics and logic. If each tenant is deemed to have an interest of 100% of the equity then it must follow that we are valuing the equity at 200% of its actual value, thus departing from both accuracy-and reality. In reaching Its conclusion the Levinson court ignored long-existing New York precedent to the that each tenant by the entirety had equity in a homestead equal to only fifty (50%) percent of its total equity.’
The New York Court of Appeals, has reached the conclusion that the value of an individual tenant by the entireties interest is less than the value of the entire equity in the homestead in the case of Goodrich v. Otego.’ In Goodrich, a husband, but not his wife, commenced suit against the Village of Otego for damage to tenancy by the entirety property caused by the regrading of a village street. The Court of Appeals determined that insofar as the plaintiffs wife had not joined in the proceeding, the plaintiff could not recover for the value of any diminution to her interest in the property. Contrary to Levinson, the New York Court of Appeals decision made clear that each tenant by the entirety holds.a separate and divisible interest in tenancy by the entirety property even though each spouse was “seized of the whole.”
In Bradigan, Chief Judge Bucki analyzed New York Court decisions addressing the implications of a tenancy by the entirety ownership interest. In so doing,Judge Bucki articulated the underlying problem,(in his view) with the Levinson decision. In reviewing, New York law, Judge Bucki stated:
“However, “being seized” constitutes only a partial description of the debtor’s interest, which is itself subject to limitations such as the rights of any co-owner by the entirety. Despite being “seized of the whole,” neither co-tenant by the entirety has any, ability either to mortgage or to convey that whole. …Rather, each spouse retains an interest that amounts to less than the whole in which he or she is seized. Thus, in this district, Judge John C. Ninfo, II, concluded that “even when property is held by a husband and wife as tenants by the entirety, each spouse has a separate recognizable interest in the property.” In re Laborde, 231 B.R. 162, 166 (Bankr.W.D.N-Y. 1999).is seized of the whole property that he or she may own as a tenant by the entirety.The issue in bankruptcy is how to value that unique interest. Although seized of the whole, the separate interest af oneer. By reason of this limitation, we must value the debtor’s interest at something less than the interest of a single owner in a fee simple absolute, In a tenancy by the entirety, each spouse enjoys an identical form of ownership. Because each has equal claim of ownership, both the debtor and his non-debtor spouse may appropriately divide the homestead’s total value for purposes of valuation in bankruptcy.
Levinson, at the bankruptcy court level, focused too much (in my view) on the first part of the Klein holding; i.e., one tenant is “seized of the whole.” Also, it jumped to the conclusion that because “[the] value of a debtor’s interest is a function of state law, “being seized of the whole means valuing the interest of all of the equity value. This court suggests that Levinson skipped a step. It did not focus enough on the freedom that one entireties tenant has to alienate his or her own undivided interest.”9
The Court’s observation in Naples that Levinson may have unduly focused on the fact that each tenant is “seized of the whole” is worthy of further elucidation. Levinson distinguishes between tenancies by the entirety on one hand, and tenancies in common and joint tenancies on the other. However, each of these share the essential similarity that the co-owners have an undivided ownership and undivided possession of the subject property,10 and thus there is no basis for disparate treatment.
As the recent New York bankruptcy court decisions illustrate, it may be appropriate to reconsider Levinson because it may overread the implications of the fact that tenants by the entirety have an indivisible interest in their homestead, thus ignoring the reality that the value of each tenant’s interest must be discounted by the fact that each co-owns the property with his co-tenant.
Finally, it is submitted that the decision is inimical to fundamental principles of bankruptcy and debtor-creditor law. The purpose of owning property as tenants by the entirety is to protect the homestead from a creditor of only one spouse by precluding the creditor from partitioning and forcing the sale of the entire homestead. It is therefore unique in that it affords protections to married couples unavailable to either joint tenants or tenants in common. The result of Levinson however is to penalize married co-owners, placing them on a worse footing than if the property were owned as joint tenants or tenants in common, where each tenant’s equity would be valued at only fifty (50) percent of the total equity in his home.
The Levinson case, far from furthering the salutary goal of providing greater protections to married couples,instead serves to limit the scope at lien avoidance under the Bankruptcy Code so that it provides less protection to tenants by the entirety than available to joint tenants or tenants in common. Insofar as the greatest number of cases filed in bankruptcy courts involving a jointly-owned homestead are cases where the homestead is owned as tenants by the entirety, the negative impact of Levinson in the context of non-business bankruptcies cannot be overestimated. For this reason, as well as because of its analytical shortcomings, the decision should be reconsidered.
Robert L. Pryor is a partner and founder of the Westbury law firm of Pryor & Mandelup, L.L.P., concentrating in bankruptcy, reorganization and insolvency-related litigation. Mr. Pryor is past Chairman of the Bankruptcy Committee of the Nassau County Bar Association. He has also serve as a member of the panel of Trustees for the
Eastern District of New York since 1995.
1. 395 B.R. 554 (Bankr. E.D.N-Y. 2008).
2. Id. at 558.
3. Id. (citing Citibank N.A. v. Goldberg, 178 Misc.2d 787 (Sup. Ct., Nassau Co. 1998).
4. See In Re Flinn, 95 B.R. 13 (Bankr. Ct.N.D.N.Y. 1980); In Re Rouge, 56 B.R. 534 (Bank Ct. S.D.N.Y, 1986).
5. 216 N.Y.112 (1915).
6. See In re Naples, 521 B.R. 715 (Bankr. Ct.W.D.N.Y. 2014); In re Bradigan, 501 B.R. 151(Bankr. Ct. W.D.N.Y. 2013).
7. 501 B.R. 151,at 154.
8. 521 B.R. 716.
9. 521 B.R. 715 at 717.
10. § 1 Cotenancy and Partition, NY Jur 2d p.317 (2007).
