In re Nakhshin

• Docket Number: Case No. 21-01528
• Decision Date: 28 September 2022
• Citation: 644 B.R. 402
• Parties: IN RE Eugene NAKHSHIN, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

644 B.R. 402

IN RE Eugene NAKHSHIN, Debtor.

Case No. 21-01528

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed September 28, 2022

Gregory K. Stern, Gregory K. Stern, P.C., Chicago, IL, Attorney for Chapter 7 Trustee.

MEMORANDUM OPINION

Deborah L. Thorne, United States Bankruptcy Judge This matter comes before the Court on Chapter 7 Trustee's Motions to Approve Sale of Real Property Pursuant to 11 U.S.C. §§ 363(b) and (f). (See Dkt. Nos. 38, 39.) The Trustee is seeking to sell two properties (together, the "Properties"). The first is located at 1608 Sycamore Place in Schaumburg, Illinois (the "Sycamore Property"). (Mot. to Approve Sale of Sycamore Property ("Sycamore Mot.") ¶ 3, Dkt. No. 38.) The second is located at 2604 North Windsor Dr., Unit 307, in Arlington Heights, Illinois (the "Windsor Property"). (Mot. to Approve Sale of Windsor Property ("Windsor Mot.") ¶ 3, Dkt. No. 39.) For the reasons explained below, the Trustee's motions are denied.

I. BACKGROUND

On February 4, 2021, Eugene Nakhshin ("Debtor") filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. (Dkt. No. 1.) At the time of filing, Debtor and his wife Irina Nakhshin owned the Properties. (Id. ) The deed to the Sycamore Property lists Debtor and Irina as tenants by the entirety, and the Windsor Property deed lists Debtor and Irina as joint tenants.¹ (See Dkt. Nos. 50, 51.) Prior to filing, Debtor and Irina did not reside in either of the Properties, and both Properties are currently vacant. (Sycamore Mot. ¶ 4; Windsor Mot. ¶ 4.). Neither of the Properties is subject to an exemption.²

On April 25, 2021, Debtor passed away. (Sycamore Mot. ¶ 6.) Irina was incarcerated and released in November of 2021. (Id. ) Irina does not seem to currently reside at either of the Properties—her location is unknown.³

On July 21, 2022, the Trustee filed motions to approve the sale of the Properties under §§ 363(b) and (f). The Trustee provided notice of these motions to Irina at both the Windsor Property and the Sycamore Property. The Trustee also provided notice by publication in a local newspaper. Irina has not filed an objection. The Trustee presented the motions on August 18, 2022, and—considering Irina's possible right of survivorship—the Court asked the Trustee whether the bankruptcy estate retained an interest in the Properties. On August 29, the Trustee filed a supplement to the motions, arguing that filing a chapter 7 petition severs a joint tenancy and that the estate retains an interest in the Properties after Debtor's death. (See Dkt. No. 48.) The Court subsequently took this issue under advisement.

II. DISCUSSION

A. Both Properties Were Held As Joint Tenancies

Before addressing the disposition of the Properties, the Court must determine what ownership interests Debtor and Irina held in them. There is no question that the Windsor Property was a joint tenancy. A separate issue is whether the Sycamore Property was a valid tenancy by the entirety at the time Debtor filed his chapter 7 petition.

The Illinois Joint Tenancy Act provides: "Whenever a devise, conveyance, assignment, or other transfer of property ... maintained or intended for maintenance as a homestead by both husband and wife together during coverture shall be made ... the estate created shall be deemed to be in tenancy by the entirety." 765 ILCS 1005/1c. This language makes clear that a married couple can only hold property as tenants by the entirety if they use the property as their homestead. See, e.g. , In re Est. of Aryeh , 454 Ill.Dec. 904, 190 N.E.3d 886, 891 (Ill. App. Ct. 2021) (stating that the Illinois Joint Tenancy Act "provides that a valid tenancy by the entirety applies only to property maintained or intended to be maintained as a homestead by a husband and wife"); Maher v. Harris Tr. & Sav. Bank , 506 F.3d 560, 562 (7th Cir. 2007) (explaining that the Illinois Joint Tenancy Act "specifically provides that property maintained as a homestead may be held as a tenancy by the entirety"); In re Giffune , 343 B.R. 883, 889 (Bankr. N.D. Ill. 2006) ("An estate held in tenancy by the entirety, however, is limited to ‘homestead’ property held by a husband and wife ‘during coverture.’ " (quoting 765 ILCS 1005/1c )). Limiting the ownership interest and the exemption to homestead property serves the goal of "secur[ing] the debtor and his family the necessary shelter from creditors." In re Owens , 269 B.R. 794, 797 (Bankr. N.D. Ill. 2001).

The Trustee's motion explains that the Sycamore Property was not a homestead: "Prior to the Petition date, neither the Debtor nor Irina resided at the [Sycamore] Property. The [Sycamore] Property is currently vacant and was abandoned by the joint owners." (Sycamore Mot. ¶ 4.) It follows that, at the time Debtor filed his petition, he and Irina could not have held the Sycamore Property as tenants by the entirety. The question becomes, then—what interest did Debtor and Irina hold in the Sycamore Property?

The Illinois Joint Tenancy Act is a helpful starting place; it states that divorce or annulment will convert the tenancy by the entirety into a tenancy in common, and "the creation and maintenance by both spouses together of other property as a homestead" will turn an entireties property into a joint tenancy. 765 ILCS 1005/1c. In 2021, an Illinois appellate court considered as an issue of first impression how section 1c of the Act applies to a failed tenancy by entirety conveyance. In re Estate of Aryeh , 454 Ill.Dec. 904, 190 N.E.3d 886 (Ill. App. Ct. 2021), concerned the ownership interests of a husband and wife who held a property (the "Monticello Property") as tenants by the entirety and attempted to acquire a second property (the "Lawndale Property") also as tenants by the entirety. After the husband died, his creditor filed a claim against the probate estate, alleging that "the Lawndale Property was held as tenants in common and accordingly did not automatically pass to [his wife] through any rights of survivorship, therefore making it a probate asset." Id., 454 Ill.Dec. 904, 190 N.E.3d at 891. The court determined that, because the husband and wife owned the Monticello Property as tenants by the entirety and used it as their homestead, the ownership of the Lawndale Property as tenants by the entirety had to fail. Id ., 454 Ill.Dec. 904, 190 N.E.3d at 896. To determine their ownership interest in the Lawndale Property, the court looked to prior Illinois Supreme Court decisions, which showed that the "intent of the parties" is controlling. See id., 454 Ill.Dec. 904, 190 N.E.3d at 898 (citing Mittel v. Karl , 133 Ill. 65, 24 N.E. 553 (1890) ). Because the husband and wife "intended to hold the [Lawndale] property as tenants by the entirety, which included a right of survivorship," their ownership interest became a joint tenancy with a right of survivorship. Id., 454 Ill.Dec. 904, 190 N.E.3d at 900 ; see also id., 454 Ill.Dec. 904, 190 N.E.3d at 895 ("An inherent feature of the estate of joint tenancy is the right of survivorship, which is the right of the last survivor to take the whole estate.").

The Illinois appellate court's interpretation of Illinois law leads this Court to conclude that the Sycamore Property must have been a joint tenancy with a right of survivorship. Just like the spouses in Aryeh , Debtor and Irina intended to hold the Sycamore property as tenants by the entirety, which includes a right of survivorship. In both cases, the ownership failed, as the property was not a homestead. Because their intent was to create an ownership interest with a right of survivorship, Debtor and Irina owned the Sycamore Property as joint tenants. This is the same ownership interest they had in the Windsor Property.

B. Debtor's Chapter 7 Petition Did Not Sever the Joint Tenancies

The Court next addresses whether filing under chapter 7 severs a joint tenancy, such that the Properties became tenancies in common upon the filing of Debtor's petition. This is a question that has divided courts. See Maniez v. Citibank, F.S.B. , 404 Ill.App.3d 941, 344 Ill.Dec. 531, 937 N.E.2d 237, 248 (2010) (collecting cases). The Bankruptcy Code "does not address specifically whether the filing of a petition in bankruptcy severs the joint tenancy," and the courts that have examined this issue have done so "in light of their own state laws governing property interests." Id .

An Illinois appellate court addressed this exact issue in Maniez v. Citibank . After reviewing the various types of property interests available under Illinois law, the court concluded that "Illinois requires a conveyance of the joint tenant's interest in the property to sever a joint tenancy." Id ., 344 Ill.Dec. 531, 937 N.E.2d at 249. The court's review of the Bankruptcy Code revealed that filing a bankruptcy petition is not a conveyance under Illinois law:

[T]he Bankruptcy Code provides that the debtor's legal and equitable interests in property are transferred to the bankruptcy estate. However, under Illinois law, more than a transfer of the debtor's interest in property is required to sever the joint tenancy. Illinois law requires a conveyance, which does not occur until the trustee sells or otherwise disposes of the property and title passes.

Id., 344 Ill.Dec. 531, 937 N.E.2d at 251. For this reason, the court held that, "in Illinois, the filing of a bankruptcy petition does not sever a joint tenancy." Id .

The Trustee argues that the Seventh Circuit has held otherwise, citing to Flynn v. O'Dell , 281 F.2d 810 (7th Cir. 1960). As the court explained in Maniez , Flynn was decided before bankruptcy law was reformed in the late 1970s. Maniez , 344 Ill.Dec. 531, 937 N.E.2d at 249. Prior to the 1979 Bankruptcy Code, "section 70a of the Bankruptcy Act provided that the bankruptcy trustee was vested with the title of the debtor to all his or her nonexempted property as of the date of the filing of the bankruptcy petition." Id . (internal citation omitted). This...