Cohen v. Chernushin et al, (In re Chernushin), 2018 WL 6729716, 66 BCD 159 (10th Cir. 2018)
In an action involving an adversary proceeding commenced by a Chapter 7 trustee to sell certain property, the United States Court of Appeals for the 10th Circuit (the “Court”) affirmed the U.S. District Court, District of Colorado, who had previously affirmed the bankruptcy court’s grant of summary judgment in the defendant’s favor. The Court supported the lower courts’ finding that Fed. R. Bankr. P. 1016 did not prevent the debtor’s joint tenancy in the home in question from terminating at his death to the detriment of the bankruptcy estate because his interest extinguished at his death, leaving him with no entitlement to the home.
Gregory Chernushin (the “debtor”) and his wife, Andrea Chernushin, owned a second home in Colorado in joint tenancy with right of survivorship. Ten months into bankruptcy proceedings, Gregory died, and the Chapter 7 trustee commenced an adversary proceeding against Andrea seeking authorization to sell the home in question. Andrea asserted that the home was no longer an asset of the bankruptcy estate, since the estate’s interest in the property terminated at the debtor’s death. The bankruptcy court granted summary judgment in Andrea’s favor, which the district court affirmed.
In its review of the ruling, the Court declared that the trustee had not cited any case law where a court determined that a joint tenancy survived a bankruptcy petition, yet failed to vest title to the surviving tenant upon the death of a debtor joint tenant. The Court examined Fed. R. Bankr. P. 1016, which states “death or incompetency of the debtor shall not abate a liquidation case under Chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.” In its reading of the section, the Court remarked that the language of the rule does not state that bankruptcy estates can never change upon the death of a debtor, but instead directs that bankruptcy proceedings can continue and the estate “shall be administered and the case concluded in the same manner, so far as possible.” In essence, the Court signaled that the case should procedurally continue as though the debtor had not died.
In addition, the trustee argued that allowing the termination of the debtor’s interest in the home would impair the trustee’s plenary power over the bankruptcy estate. Citing § 363(h), the trustee pointed to his power to sell the estate’s interest, as well as the interest of any co-owner in property in which the debtor carried an undivided interest as a joint tenant at the outset of bankruptcy proceedings, such as in this case. Furthermore, the trustee asserted that Rule 6007’s requirement that a trustee give notice of a proposed disposition of property and a hearing if a party objects to a disposition may in fact cause Colorado’s joint tenancy regime to violate the due process rights of creditors. The Court rejected this argument, stating that it did not align with the property in the case in question. The Court focused on § 541(a)(1), which limits the property in the estate temporally to interests of the debtor in property when bankruptcy proceedings begin, as well as establishing a qualitative limitation, that in the case at hand, established that only a joint tenancy interest in the second home was ever part of the estate. Because of this limitation, the estate’s rights were at most the same as when they were actually held by the debtor, and did not expand the trustee’s rights in any way. Through this analysis, the Court concluded that the bankruptcy estate contained a joint tenancy interest subject to extinguishment in favor of the surviving joint tenant upon death, just as it did when the debtor was still alive.
Finally, the trustee advanced an argument based on his strongarm powers under § 544, which prohibits recognition of the effects of the debtor’s death on estate property. This argument failed, as the Court held that this provision was inapplicable in this case. Andrea Chernushin was never a creditor, nor was there any question about the status of any creditors related to the property, and there was never a transfer of the property. Andrea continuously held an interest in the entire property, and her interest was no longer subject to the debtor’s joint tenancy, whose interest extinguished upon death. For these reasons, the Court affirmed the decisions of the lower courts to grant summary judgment in the defendant’s favor.
Article courtesy of Michael Robson of Greenberg Traurig, LLP.