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Non-debtor co-owner a necessary party to bankruptcy sale: Bankruptcy Exchange, Inc. v Langsland

Bankruptcy Exchange, Inc. v Langsland 2009 U.S. Dist. LEXIS 84005 (W.D.N.Y., District Judge Scretny, decision September 15, 2009: This is a District Court decision out of Buffalo which upholds a Bankruptcy Court decision from 2008. In April 2005, Deborah Langslands filed a Chapter 7 case in Buffalo. She jointly owned her home with her mother, Eleanor Landsley, and claimed the $10,000 homestead exemption (unknown to the debtor at the time, the homestead exemption would jump up to $50,000 four months after the case was filed.) A speculative company, Bankruptcy Exchange, Inc., made a $12,500 offer to the trustee for the debtor's interest in the house. $10,000 would go to the debtor (the exemption) and $2,500 would go to the trustee. On March 22, 2006, a notice of intent to sell was served on all creditors by the court clerk. However, Eleanor Langslands, the non-debtor co-owner of the property, was not served. There was no opposition filed against the intent to sell so, presumably, the trustee completed the sale to Bankruptcy Exchange.

On November 9, 2007, Eleanor Langslands, the co-owner filed a motion to vacate the sale on the grounds that she was never notified of the sale and she now had a hostile co-owner. A letter from her attorney filed later stated, among other things, that she lost her STAR property tax exemption because of the new non-resident co-owner. The issue, as framed by the court, was whether the co-owner was a "creditor" as that term is used in bankruptcy and, therefore, a party that must be served with notice of sale. Bankruptcy Judge Kaplan wrote a decision, entered April 2, 2008, stating that the term "creditor" was broad enough to include the non-debtor co-owner. Interestingly, Bankruptcy Judge Bucki, who was not the judge in the case, co-signed the decision, indicating that this would be the rule at least in the Buffalo Division of the Western District of New York Bankruptcy Court. This decision is NOT found on the court website under Judge Kaplan's written decisions, but it can be found and viewed, at no charge, under the April 2, 2008 PACER docket entry for this case.

Bankruptcy Exchange, Inc. appealed to District Court, which upheld the bankruptcy court's decision. The District Court noted that "joint tenants", which Deborah and Eleanor Langsland were before the filing of the bankruptcy, must have the four "unities" of ownership: time, title, interest and possession. When Deborah Langsland filed her case, the trustee became the real estate owner, breaking at two of the unities. The court said the trustee became "tenant-in-common", rather than joint tenant, with Eleanor Landsland. The change in Eleanor Landsland's interest gave her a possible claim in the case. Therefore, as a creditor, she was entitled to notice of sale.

This case appears to be an effort of the courts to find grounds to give the co-owner the right to object to this egregious sale. It is odd that the bankruptcy code does not give co-owners a direct right to notice of a cale of a co-owner's interest. An interesting unforseen consequence of the District Court's decision is the conclusion that a joint tenancy becomes a tenancy-in-common upon filing. Would that also happen if only one spouse of married tenants-by-the-entireties filed? Is the joint tenancy restored when the real estate is abandoned back to the debtor at the conclusion of the case? What if both owners filed? Further complications can be imagined.

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