In the January 1997 issue of the DCBA Brief, Michael J. Davis wrote an excellent article entitled "The effects of Tenancy by the Entirety on Creditors’ Claims." Since that time, there have been significant developments related to the rights of creditors and their ability to enforce judgment liens against property held in tenancy by the entirety. The purpose of this article is to summarize some of those developments and provide the practitioner with some advice on the topic.
Generally speaking, any transfer of an asset for less than fair value which renders the debtor/transferor insolvent or for less than reasonably equivalent value by a person with intent to defraud creditors can be reversed under the Uniform Fraudulent Transfer Act.1 The law in the State of Illinois was unsettled regarding whether a transfer into tenancy by the entirety constituted a fraudulent conveyance in violation of the Uniform Fraudulent Transfer Act until recent changes were made to the act by Public Act 90-514. In E.J. McKernan Co. vs. Gregory,2 the Illinois Appellate Court for the Second District held that because tenancy by the entirety was effectively recreated by the General Assembly’s adoption of the Uniform Fraudulent Transfer Act, a debtor could, by definition, avail himself of the protection of tenancy by the entirety without being liable for a fraudulent transfer. In that case, the Second District was focusing on the language of the act which required a showing of "actual intent" to hinder, delay or defraud a creditor.
In the case of In re Marriage of Michelle Del Giudice,3 the Appellate Court for the First District took the opposite position, namely, that a debtor who does transfer property into tenancy by the entirety after judgment has been entered against him may violate the Uniform Fraudulent Transfer Act. The majority determined that legislative intent could not have been to allow this sort of transaction.
Subsequent to both of those cases, the Illinois Legislature amended the Code of Civil Procedure "as a clarification of existing law and not as a new enactment."4 The newly added language "clarified" the law to provide that tenancy by the entirety property may not be sold upon judgment "except if the property was transferred in tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor’s ability to pay those debts as they become due."5
On the basis of that amendment, the Second District had occasion to hold that the decisions in both the McKernan and the Del Guidice cases were erroneous. In Harris Bank of St. Charles vs. Ray Weber,6 the Second District discussed the change in the language of the statute and found that prior to the 1997 amendment, the Code of Civil Procedure provided "without qualification, that, when a husband and wife hold property as tenants by the entirety, the property may not be attached by a creditor of one spouse…"7 According to the court, that amendment made the analyses in McKernan and Del Guidice inconsistent with the law and made "clear that the property may be excluded from the protection of the statute depending upon the intent of the transferor.8 The Second District went on to hold, however, that the Uniform Fraudulent Transfer Act does not apply to transfers into tenancy by the entirety.9 In Levy v. Markal Sales Corporation,10 the First District made clear that the statute of limitations for challenging a transfer into tenancy by the entirety commences running upon the conveyance and not upon the entry of the judgment against the property owner.
To what, then, does a judgment lien attach and what is a judgment creditor to do to protect its interest? One U.S. Bankruptcy court has held that there is no lien under Illinois law against property held in tenancy by the entirety as a result of a judgment against only one of the tenants.11 In In re Chinosorn, a different judge in the same bankruptcy court theorized that "the courts of Illinois may find that a lien against the contingent future interest of an individual tenant by the entirety arises from the recording of a judgment against that tenant only."12
The difficulty with the analysis of the Chinosorn court is both practical and theoretical. Theoretically, the Black’s Law Dictionary defines a future interest as an interest in land or other things in which the privilege of possession or enjoyment is future and not present. Tenants by the entirety enjoy a current right of use and enjoyment. Practically, what occurs when the owners of tenancy by the entirety property wish to convey it? If, as Allard theorizes, no lien exists, the property can be conveyed free and clear of the lien. If, as Chinosorn suggests, there is some lien, does it run with the land or attach to the right of the judgment debtor to his or her share of the proceeds of the sale if any? In the latter case, how is the attorney representing the parties in that transaction to safeguard the interest of the non-debtor spouse in his or her share of the proceeds and how is that interest to be determined? Further, how is the attorney for the creditor to ensure that his or her client is paid upon the conveyance of the property to a third party?
Anecdotal evidence suggests that some title companies will insure over the judgment lien in any arms length transaction with a third party on the grounds that the lien does not attach until the tenancy is severed.13 In that event, the proceeds of any sale can be shared by the parties or split. In the event they are split, the parties could/should attempt to allocate the proceeds in a manner which is consistent with the actual contributions of the parties or otherwise explainable by the various dealings of the parties. The author has been involved in one transaction where the debt which caused the problem was a business debt of one of the parties. Many years ago, the parties had agreed to separately account for their respective business activities, and the non-debtor spouse had actually "lent" money to the debtor spouse in order to satisfy other business obligations. Those monies loaned were deducted from the debtor spouse’s share before the proceeds were split. The couple was thus able to divest themselves of the marital home without paying the judgment creditor and the proceeds were maintained by "them."
Counsel for the judgment creditor has little available to him or her in that scenario by way of enforcement authority unless he or she is aware of the planned closing and the identity of the title company involved. In that case, the only apparent tool available would be to serve a non-wage garnishment or citation to discover assets (along with injunctive language prohibiting the transfer of assets of the debtor spouse) on the title company and/or the prospective purchasers. It is unclear whether the General Assembly intended that judgment creditors would have to perform such Herculean tasks of investigative collection in order to realize on their debts.
Notwithstanding the developments of case law and the revisions enacted by the General Assembly, there are still areas of the interplay between the Tenancy by the Entirety Statute and the rights of creditors which remain open to interpretation. Presumably, an attempt by the judgment creditor to foreclose his or her judgment lien after the conveyance to a third party will be the vehicle that resolves those issues.
1 740 ILCS 160/1 et. seq.
2 268 Ill. App. 3d 383, 643 N.E.2d 1370, 205 Ill. Dec. 763 (2nd Dist. 1994).
3 287 Ill.App.3d 215, 678 N.E.2d 4, 222 Ill.Dec. 640 (1st Dist. 1997)
4 735 ILCS 5/12-112.
6 298 Ill.App.3d 1072, 700 N.E.2d 722, 233 Ill.Dec. 194 (2nd Dist. 1998).
7 298 Ill.App.3d at 1077, 700 N.E.2d at 726.
8 298 Ill.App.3d at 1081, 700 N.E.2d at 728.
9 Id. See also Premier Property Management, Inc. v. Chavez , 191 Ill. 2d 101, 728 N.E.2d 476, 245 Ill. Dec. 394 (2000) (holding that the legislature intended to provide spouses holding homestead property in tenancy by the entirety with greater protection from the creditors of one spouse than that provided by the Fraudulent Transfer Act).
10 311 Ill.App.3d 552, 724 N.E.2d 1008, 244 Ill.Dec. 120 (1st Dist. 2000)
11 In re Allard, 196 B.R. 402, 410 (Bankr. N.D. Ill. 1996).
12 In re Chinosorn, 243 B.R. 688 (Bankr. N.D.Ill 2000)
13 At least Lawyers Title and Chicago Title will insure over these liens. According to Richard Bales, it requires an affidavit from both spouses attesting to their continued uninterrupted marital status, continuous residence at the property and that they are both still living. The new home of the spouses, if they are buying one, can be insured on the grounds that the mortgage for the new home is a purchase money mortgage but that protection will be available only to the mortgagee.
John Pcolinski, Jr. is a partner in the Wheaton Law Firm of Guerard, Kalina & Butkus. He graduated from North Central College magna cum laude in 1983 and The University of Illinois College of Law in 1986. He has been licensed in Arizona since 1986 and in Illinois since 1987. His practice is concentrated in Commercial Litigation and General Civil Litigation. Mr. Pcolinski wishes gratefully to acknowledge the assistance of Richard Bales of Chicago Title Insurance Company in the preparation of this article.