Missouri practitioners often look with envy at the generous exemptions provided to debtors in surrounding states, particularly Kansas. Our neighbors to the west have an unlimited exemption for the homestead, its contents, plus a vehicle. According to Judge Koger, these luxuries are the price to be paid by those who must live in Kansas. As succinctly put in In Re: Chadwick, 113 B.R. 540 (Bankr. W.D. Mo. 1990):
"It has been suggested by some observers that liberal exemptions are something of reward to those persons willing to reside in a state whose main claims to fame are the largest hand dug well in the United States and the second largest ball of twine in the country." FN1
But Missouri bankruptcy debtor practitioners, given the right set of circumstances, may have an opportunity of their own for even better exemption planning. In Missouri, the opportunity for unlimited exemption of all assets and for the discharge of all debts is possible as long as the facts presented verify that ownership of these assets is by husband and wife but the debts are strictly those of only one.
But Missouri bankruptcy debtor practitioners, given the right set of circumstances, may have an opportunity of their own for even better exemption planning. In Missouri, the opportunity for unlimited exemption of all assets and for the discharge of all debts is possible as long as the facts presented verify that ownership of these assets is by husband and wife but the debts are strictly those of only one.
How does the debtor get the best of both worlds? In the landmark case In Re: Garner, 952 F.2d 232 (1991), the Eighth Circuit issued a clear and unambiguous mandate. It held that entirety property is completely and 100% exempt, at least to the extent of separate debts. That is, if the debtor has all entirety property and only individual liabilities, the trustee in bankruptcy can seize no assets and the creditors get no distribution of the debtor's assets.
Here's the result. Under §522(b)(2)(B) debtors are allowed non-bankruptcy exemptions for joint or entirety assets. Outside of bankruptcy, Missouri entirety property is exempt from individual debts. § 513.427 RSMo. So by extension the bankruptcy trustee, holding claims against only one spouse, may take no action against the assets of husband and wife. For clients such as owners of small businesses or professionals who have a constant concern of uninsured claims, the entirety exemption is alive and well and serves as the ultimate liability insurance policy. But what if the debtor has separate debt but some joint debt? In Re: Rentfro, 234 B.R. 97 (Bankr. W.D. Mo. 1999), held that in such a situation, as long as the debtor reaffirms the joint debt, any action by the trustee against entirety property would be fruitless and the claim of exemption will be allowed absolutely
The prospect of entirety property as 100% exempt can be greatly reassuring. Consider this not uncommon scenario: Dr. Debtor is a 45 year old, board certified neurosurgeon, annual income $450,000, with a luxury home in Ladue, a condo at Lake of the Ozarks, and expensive foreign vehicles to shuttle back and forth from home to the hospital and the children's private school. Dr. Debtor's husband is a stay at home dad who, while not raising the children, attends garden club, book club, and keeps himself busy organizing local charity balls, dinners, auctions, and the like. While the doctor's malpractice policy with $1 million limits once looked quite sufficient, a recent slip of a scalpel has brought about an unintended, but nonetheless real, potential for significant personal liability. Dr. Debtor's assets are all unencumbered and would seem easy targets. Although her house husband has not contributed monetarily to any of the assets, Missouri law clearly states that everything acquired during the marriage is presumed entirety property. Dr. and Mr. Debtors' joint debts consist of $50,000 to American Express and $4,000 in past due membership fees to the country club. If Dr. Debtor decides to file bankruptcy, In Re: Garner clearly allows her to claim all of the entirety property as exempt, and if she reaffirms the unsecured debt, the trustee is left with absolutely no assets with which to pay the malpractice claimant. Dr. and Mr. Debtor keep the house, the place at the lake, the fancy cars, and the kids do not miss so much as one riding lesson.
Another interesting situation arises when the trustee liquidates entirety property while administering the bankruptcy estate of only one spouse. That is, under § 363(h) the bankruptcy trustee has the authority to sever any joint tenancy and to partition the assets. That right remains as to entirety property, but only to the extent the debtor has joint debts with the non-filing spouse. In Re: Brown 234 B.R. 907 (Bankr. W.D. Mo. 1999), Judge Federman held the sale proceeds from entirety properties, even when only one spouse was before the court, would be distributed by the trustee to the claimants of husband and wife. Because creditors of any individual spouse are not entitled either in state court or in bankruptcy to pursue entirety assets, the balance was returned to the debtors. In other words, the trustee liquidated a substantial asset, paid the joint creditors, and even if there were substantial and numerous claimants of the sole debtor, the balance would be paid over to the debtor and the non-filing spouse. As a result, a situation may arise in which the trustee liquidates assets, distributes to joint creditors, but pays the bulk over to the debtor while the remaining creditors receive nothing. The same result applies in the Eastern District. In Re: Mayes, 141 B.R. 669, Judge McDonald held that a creditor's claim against only one spouse could not be paid through the liquidation of joint assets.
It often seems the entirety exemption can be not only a shield but a sword as well. Whether inside a bankruptcy proceeding or defending a debtor's rights in Circuit Court, the use of the entirety exemption continues to confound judges and trustees alike. However, it appears there will be no easy solutions in the near future.Until then counsel is well advised to keep the entirety exemption as one more technique to best serve clients.
This article by Kevin Checkett was originally published in the Missouri Lawyers Weekly newspaper.
