Selling real estate owned by a bankruptcy debtor is a unique situation where Realtors® should proceed with caution. What would you do if it is the bankruptcy trustee who is seeking to sell the property instead of the debtor? What if that sale is over the objection of the non-debtor spouse who lives in the property as the principal residence with the debtor as tenants by the entirety? This is the exact situation that the U.S. Bankruptcy Court recently addressed in Desmond v. Green.
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In Desmond, the husband filed for Chapter 7 bankruptcy. The bankruptcy trustee sought to sell the condominium that the debtor and his wife lived in as their principal residence, even though the wife was not a party to the bankruptcy. The non-debtor wife filed a motion to dismiss the case, based on the argument that Massachusetts General Laws Chapter 209, §1 prohibits the sale of the condominium because it was held as tenants by the entirety. The case turned on the issue of federal preemption. Federal preemption happens when a federal law supersedes a conflicting state law.
Massachusetts law provides that creditors cannot execute on a debtor spouse’s interest in property held as a tenancy by the entirety if the property serves as a principal residence of the non-debtor spouse. The U.S. Bankruptcy Code, which is federal law, allows a bankruptcy trustee to sell property so long as the benefit to the bankruptcy estate outweighs any harm to the non-debtor spouse.
The Court denied the wife’s dismissal motion, finding that it was not possible to reconcile the state tenancy by the entirety statute and the federal Bankruptcy Code’s policy encouraging prompt administration of bankruptcy estates.
Because a tenancy by the entirety can only be extinguished by death, divorce, or deed, prioritizing the state statute in this instance could theoretically stall the bankruptcy proceeding for years. As a result, the Court denied the wife’s motion to dismiss, holding that the U.S. Bankruptcy Code preempts state law in this situation, even though state law generally governs property interests. However, it remains an open question as to whether the harm to the non-debtor spouse in a trustee sale of the property outweighs any benefit to the bankruptcy estate.
What This Means for Realtors®
Before taking a listing that is subject to a bankruptcy, Realtors® should speak with the attorney handling the bankruptcy and the bankruptcy trustee. This will allow you to ensure that the seller can sell the property and to discover any additional information that may affect the transaction. As this case highlights, it is always a good idea for Realtors® who find themselves in a situation with a seller client in bankruptcy to proceed with caution.