In re Hutchins

• Decision Date: 18 February 2004
• Docket Number: No. 03-10730.,03-10730.
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re Kathleen M. HUTCHINS, Debtor.

306 B.R. 82

In re Kathleen M. HUTCHINS, Debtor.

No. 03-10730.

United States Bankruptcy Court. D. Vermont.

February 18, 2004.

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Gleb Glinka, Esq., Cabot, VT, Movant-Trustee, Pro Se.

Nancy J. Creswell, Esq., Office of the U.S. Attorney, Burlington, VT, for the Creditor.

MEMORANDUM OF DECISION DENYING IN PART, AND GRANTING IN PART, THE TRUSTEE'S MOTION TO AVOID TWO FEDERAL LIENS

COLLEEN A. BROWN, Bankruptcy Judge.

Trustee Gleb Glinka has moved under 11 U.S.C. §§ 544(a) and 724(a)¹ to avoid two liens filed by the United States against Debtor Kathleen M. Hutchins' homestead property. The two liens secure federal criminal fines owed by the Debtor's former husband, Stephen B. Hutchins. On October 30, 2003, the parties presented oral argument about whether the first Notice of Lien ("the First Lien") could attach to a property interest held in a tenancy by the entirety; how the Debtor's subsequent divorce from Mr. Hutchins, which granted the entire property to her "free of any interest or claim," affected the First Lien and his property interest under Vermont law; whether the United States' filing of its second Notice of Lien ("the Second Lien"), between the date of the divorce and the date the Debtor recorded a certified copy of the Divorce Decree with the Colchester Town Clerk, constituted a valid Second Lien; and the extent of the bankruptcy estate's interest in this property.

After considering the Parties' papers, the evidence presented, and relevant federal and state law, the Court finds that the Trustee may not avoid either the First or Second Lien to the extent they encumber the property interest formerly held by Mr. Hutchins. The Court also finds that the Trustee is entitled to declaratory judgment that the Debtor has, at all relevant times, held an interest in the property which is distinct from Mr. Hutchins' interest, that the liens do not encumber the Debtor's interest, and therefore, that the estate's interest includes two distinct components, only one of which is encumbered by the United States' two liens.

This Court has jurisdiction in this proceeding under 28 U.S.C. §§ 1334 and 157(b)(2)(K).

I. BACKGROUND

On September 10, 1976, the Debtor and her husband, Stephen B. Hutchins, took title to real property located at 98 Clay Point Road, in Colchester, Vermont ("the Property") as tenants by the entirety. On January 19, 1999, the United States District Court for the District of Vermont convicted Mr. Hutchins on seven counts related to drug trafficking, sentenced him to 276 months imprisonment, and fined him $500,000. On February 3, 1999, the United States executed the first Notice of Lien, pursuant to the Anti-Terrorism and Effective Death Penalty Act of 1996, 18 U.S.C. §§ 3613(c), (d). Two days later, the Colchester Town Clerk's Office recorded the First Lien against the Property.

Meanwhile, the Debtor filed for a divorce from her husband. On December 19, 2001, a Vermont family court issued a Default Final Order and Decree of Divorce ("the Divorce Decree") and awarded the Property to the Debtor "free of any interest or claim" from Mr. Hutchins.

On March 17, 2003, the United States District Court convicted Mr. Hutchins on four additional counts related to drug trafficking, sentenced him to 188 months imprisonment, and imposed a fine totaling $500,400. The United States executed the second Notice of Lien, pursuant to 18 U.S.C. §§ 3613(c), (d), on March 31, 2003; it recorded the Second Lien against the Property on April 4, 2003.

Subsequently, pursuant to 15 V.S.A. § 754, the Debtor recorded a certified copy of the Divorce Decree and a property transfer tax return, effective April 30, 2003.

On May 12, 2003, the Debtor filed for protection under Chapter 7 of the Bankruptcy Code and, on August 15, 2003, this Court entered an order granting the Debtor a discharge.

II. DISCUSSION

The Trustee initially moved to avoid the First and Second Liens pursuant to §§ 544(a) and 724(a). The United States objected and argued that the subject liens may attach to an interest in a tenancy by the entirety as a matter of federal law and are absolutely exempt from avoidance by bankruptcy trustees. Based on the language of the federal statute,² the Trustee conceded he could not avoid the First and Second Liens under § 544, but maintained that, under the facts of this case, the United States could not enforce its liens against the Debtor's — now the estate's — interest in the Property.

The Trustee's revised argument focused on: (i) whether the First Lien could attach to an entireties interest at all; (ii) if the First Lien were validly perfected, whether the divorce extinguished Mr. Hutchins' interest, thus invalidating the First Lien and leaving no value to which the Second Lien could attach; (iii) whether the entry of the Divorce Decree per se constituted an extinguishment of Mr. Hutchins' entireties interest and a conveyance of the Property to the Debtor; (iv) whether this Court should adopt the "innocent spouse" theory to protect the Debtor's interest in the Property as of the date of the recording of the Divorce Decree; and (v) whether the Court would issue a declaratory judgment determining the secured status of the United States' Liens, and the extent and value of the Debtor's interest in the Property, as of the date of the filing of the instant bankruptcy case.

The United States countered by arguing that: (i) federal law authorizes federal liens to attach to entireties property; (ii) the Divorce Decree neither extinguished Mr. Hutchins' interest in the Property nor transferred the entire fee in the Property to the Debtor, and, in any event, that a federal lien attaches to the actual property, not merely to the criminal party's interest in that property; (iii) the Debtor had to record either a quitclaim deed or a certified copy of the Divorce Decree to effectuate the transfer directed by the Divorce Decree; (iv) the innocent spouse theory is applicable only to the enforcement of a lien and has no bearing on the question of whether the lien attaches to a particular property interest; and (v) it is premature to address the valuation issue. The United States further asserted that the Trustee's position that one can extinguish a lien arising from a federal criminal fine simply by obtaining a divorce was nonsensical and contrary to both public policy and the congressional intent manifest in 18 U.S.C. § 3613. The United States did not oppose the Trustee's request for a declaratory judgment as to the Parties' respective interests in the Property.

A. The Recording and Attachment of the First Lien (1) Can a Lien Attach to Property Held in a Tenancy by the Entireties?

Tenancy by the entirety is a particularly venerable form of ownership that dates back to the legal fiction that marriage creates one individual. A tenancy by the entirety is comprised of the four "unities" required in any joint tenancy: time, title, interest, and possession, along with a fifth unity: that of marriage. See Patrick J. Concannon, Note, Bankruptcy and the Tenancy by the Entirety Property: Its Treatment under the Code and in the Courts, 58 UMKC L. REV. 501, 503 (1990) (citing 2 AMERICAN LAW OF PROPERTY § 6.6(c)). Likewise, in Vermont, "a conveyance to them by name was a conveyance in law to but one person." Stewart v. Bleau's Estate, 102 Vt. 273, 276, 147 A. 692 (1929). Because these "two real individuals" were a sort of "legal fiction" and held "no estate which was discernable or devisable," each held the estate "seized of the whole." Id. Furthermore, state law dictates that "[a] person shall not convey an interest in a tenancy by the entirety or in homestead property to any person except his spouse, unless the spouse joins in the conveyance." 27 V.S.A. § 349(a)(3) (2000). Moreover, a creditor of only one spouse may not attach a lien to a tenancy by the entirety; a lien may only attach if it is a joint debt. See Cooper v. Cooper, 173 Vt. 1, 20, 783 A.2d 430 (2001); In re Cerreta, 116 B.R. 402, 403 (Bankr.D.Vt.1990). "Vermont law makes clear that the undivided interest of one tenant by the entirety may not be reached by the sole creditors of that tenant." Id. at 405. Vermont recognizes "tenancy by the entirety as an indivisible interest between spouses regardless of the circumstances." Id. at 405 n. 4. Thus, Vermont is one of the "full bar" states that, as a settled matter of law, prohibit any unilateral lien from attaching to any entireties property or interest. See Steven R. Johnson, After Drye: The Likely Attachment of the Federal Tax Lien to Tenancy-by-the-Entireties Interests, 75 IND. L.J. 1163, 1169 (2000). This Court has been a clear and consistent voice in the chorus of federal courts that sing the praises of protecting tenancy by the entirety interests under state law.³

However, in recent years the archaic concept of tenancy by the entirety has come into frequent conflict with the United States' interest in collecting back taxes or criminal fines as well as "the modern understanding of tax liens." Id. at 1163. The Supreme Court has specifically directed the federal courts to give less deference to state courts' protections for tenancies by the entirety when federal debts are at issue. "There is no doubt ... that not only do both spouses (rather than neither) have an independent interest in the homestead property, but that a federal tax lien can at least attach to each of those interests." United States v. Rodgers, 461 U.S. 677, 703 n. 31, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983). The Supreme Court made clear that the authority for determining whether a property interest existed encompassed not only state law definitions of property interests, but also "the breadth of the control the [taxpayer] could exercise over the property," as defined by federal law. Drye v. United States, 528 U.S. 49, 61, 120 S.Ct. 474, 145 L.Ed.2d 466 (199...