992 F.

2d 611

Bankr. L. Rep. P 75,231

In re Norbert M. ARANGO, Debtor.
Norbert M. ARANGO, Plaintiff-Appellant,
v.
THIRD NATIONAL BANK IN NASHVILLE, DefendantAppellee.
No. 92-5929.

United States Court of Appeals,

Sixth Circuit.
Argued March 15, 1993.
Decided April 26, 1993.

William S. Lockett, Jr. (argued and briefed), Kennerly, Montgomery &

Finley, Knoxville, TN, for plaintiff-appellant.
Robert C. Goodrich, Jr. (argued), Anthony N. Creasy (briefed), Farris,
Warfield & Kanaday, Nashville, TN, for defendant-appellee.
Before: MARTIN and SILER, Circuit Judges; and COFFIN, Senior
Circuit Judge.*
BOYCE F. MARTIN, Jr., Circuit Judge.

Norbert N. Arango appeals the district court's refusal to allow him to avoid a
judicial lien in bankruptcy. We affirm.

Third National Bank received a judgment against Norbert Arango in the

amount of $87,283.82 on March 12, 1991. On April 19, 1991, Third National
recorded the judgment in Blount County, Tennessee. Third National's recorded
judgment is a judicial lien against all property owned by Arango in Blount
County. See Tenn.Code Ann. 25-5-101(b) (1986 & Supp.1993).

On September 18, 1991, Arango filed a petition for personal bankruptcy under
Chapter 7 of the Bankruptcy Code, 11 U.S.C. 701, et seq. (West 1980 &

Supp.1993). As required, he filed a list of property that is exempt from

bankruptcy, claiming as exempt all property that he held as a tenant by the
entirety. At the time he filed his bankruptcy petition, Arango and his wife
owned three parcels of property, numerous personal items, stocks, and checking
accounts in Blount County, Tennessee as tenants by the entirety.
4

Pursuant to 11 U.S.C. 522(f), Arango initiated an adversary proceeding in the

bankruptcy court to avoid Third National's judicial lien. The bankruptcy court,
136 B.R. 740, refused to allow Arango to avoid any part of Third National's
lien, and the district court affirmed the bankruptcy court's decision. Arango
then filed this timely appeal.

The underlying policy of Chapter 7 of the Bankruptcy Code of 1978 is to allow

insolvent honest debtors to declare bankruptcy and, following the bankruptcy
proceedings, receive a fresh start. At the conclusion of Chapter 7 bankruptcy
proceedings, the debtor's bankruptcy estate is distributed to the debtor's
creditors according to the criteria established in the Bankruptcy Code. See 11
U.S.C. 541, 726. All remaining debt of honest debtors is discharged. 11
U.S.C. 727. To ensure that debtors do not begin their fresh starts with
absolutely no property, the Bankruptcy Code exempts some property from
debtors' bankruptcy estates. See 11 U.S.C. 522 (to exempt entireties property
from the bankruptcy estate, it must first be considered part of the bankruptcy
estate). To protect their exempt property following bankruptcy, debtors may file
suit as part of their bankruptcy proceedings to avoid certain liens that "impair"
their exemptions. 11 U.S.C. 522(f).

Debtors may have a choice of exemption schedules. Under section 522(b), the
debtor may choose to exempt property under subsection 522(b)(1) or
subsection 522(b)(2). Under the former, the debtor may choose from the list of
federal exemptions under section 522(d) or from a list of exemptions under
applicable state law, unless the state has "opted out" of the federal exemptions.
See 11 U.S.C. 522(b)(1). However, under subsection 522(b)(2), a debtor who
owns entireties property may exempt interests in that property if it is not subject
to process under applicable state law. See 11 U.S.C. 522(b)(2). Arango has
claimed exemptions under subsection 522(b)(2), so we must refer to that
subsection to decide this case.

Under 11 U.S.C. 522(b)(2)(B), a debtor may exempt from the bankruptcy

estate:

8 interest in property in which the debtor had, immediately before the

any
commencement of the case, an interest, as a tenant by the entirety or joint tenant to

the extent that such interest as a tenant by the entirety or joint tenant is exempt from
process under applicable nonbankruptcy law.
9

Therefore, to determine whether Third National's lien impairs any of Arango's

exempt property, we must first look to Tennessee law to classify Arango's
interests in entireties property. We then determine which of those interests is
exempt from his bankruptcy estate by determining whether each particular
interest is subject to execution under Tennessee law.

10

Under Tennessee law, when husband and wife hold property together, they are
presumed to hold it as tenants by the entirety unless the documents which
evidence their ownership indicate that the property is held separately. E.g.,
Smith v. Sovran Bank Central South, 792 S.W.2d 928, 930 (Tenn.Ct.App.1990)
(citations omitted). Under tenancy by the entirety, the husband and wife as a
unit have the right to the current use and enjoyment of the property. Robinson
v. Trousdale County, 516 S.W.2d 626, 632 (Tenn.1974). As individuals, they
each possess a right of survivorship: if one spouse dies, then the other spouse
takes the property in fee simple absolute. Id. Each spouse may convey his or
her right of survivorship without the consent of the other. Id.; Third Nat'l Bank
v. Knobler, 789 S.W.2d 254, 255 (Tenn.1990). However, the husband and
wife's present right to use and enjoy the property may be transferred only by
consent of both the husband and the wife. Robinson, 516 S.W.2d at 632.
Therefore, a third party, such as a lien creditor, may own one spouse's right of
survivorship without the consent of the other spouse, but a third party may not
own a present possessory interest in the property without the approval of both
spouses. Third Nat'l Bank, 789 S.W.2d at 255. Accordingly, a creditor of only
one spouse may execute a judgment against only that spouse's right of
survivorship but not against the spouse's present possessory interest.

11

Congress could have taken two main approaches in dealing with tenancy by the
entirety. Congress could have excluded entireties property from the definition
of the "legal or equitable" interests of the debtor in section 541(a)(1). Under
this approach, the Arangos' present possessory interest in the entireties property
would not be a part of Arango's individual bankruptcy estate because he and his
wife, as a unit, but not as individuals, own the present possessory interest in
their entireties property. Congress did not choose this approach. Instead,
Congress implicitly defines all of Arango's interest in entireties property as
property which is part of his individual bankruptcy estate, but exempts his
interest in entireties property from his bankruptcy estate to the extent that his
interest is not subject to execution under Tennessee law. See 11 U.S.C. 522(b)
(2)(B). Therefore, incorporating Tennessee law into 11 U.S.C. 522(b)(2)(B),
as required by that subsection, Arango's bankruptcy estate does not include his

present possessory interest in property he holds as a tenant by the entirety, but

his bankruptcy estate does include his right of survivorship in that property.
12

This case highlights the fact that the Bankruptcy Code does not always
incorporate a state's definition of property into section 541(a)(1). By writing in
section 522(b)(2)(B) that entireties property is exempt from the bankruptcy
estate, Congress implies that an individual's entireties property is a "legal or
equitable interest" in property that is part of his bankruptcy estate, despite the
fact that Tennessee law does not consider entireties property to be owned by an
individual.

13

In addition, the Bankruptcy Code's method for dealing with entireties property
highlights a reconcilable conflict between Tennessee's understanding of
property and the Bankruptcy Code's understanding of property. Under
Tennessee law, Arango does not, as an individual, have a present possessory
interest in entireties property. Instead, Arango and his wife, as a unit which is
separate and apart from them as individuals, have a present possessory interest
in entireties property. The practical effect of Tennessee's legal construct is that
Arango has the right to use and enjoy entireties property, at least until his wife
may predecease him or he and his wife, together, convey their present
possessory interest, despite the legal belief that Arango does not have a present
possessory interest. Under the Bankruptcy Code, on the other hand, Arango
does have a present possessory interest in entireties property which is
considered part of his individual bankruptcy estate under section 541(a)(1). The
Bankruptcy Code reconciles its concept of entireties property with Tennessee's
concept of entireties property, however, by exempting entireties property from
the debts of individual spouses under section 522(b)(2)(B). In this way, the
Bankruptcy Code accommodates states like Tennessee that have adopted the
entireties-property concept, without having to incorporate that concept into the
bankruptcy definition of property in section 541(a)(1).

14

Based on the premise that his present possessory interest in entireties property
is exempt from his individual bankruptcy estate, Arango argues that he may
avoid Third National's lien against his survivorship interest under 11 U.S.C.
522(f)(1). That subsection provides:

15
Notwithstanding
any waiver of exemptions, the debtor may avoid the fixing of a lien
on an interest of a debtor in property to the extent that such lien impairs an
exemption to which the debtor would have been entitled under subsection (b) of this
Section, if such a lien is-(1) A judicial lien; ....
16

17

Arango bases his argument that Third National's lien impairs his interest in
exempt property, his present possessory interest, on language in Third Nat'l
Bank, 789 S.W.2d at 255-56, which states,

18 order to convey a marketable title, a spouse must obtain the consent of the other
In
spouse if the property is held by the entireties. If the survivorship interest is held by
a third party, the spouse must obtain the consent of that party in order to convey a
marketable title. The marketability of the title is the same, in either event.
19

Arango argues that the Tennessee Supreme Court in Third Nat'l Bank decided
that the owner of a survivorship interest must give consent before the spouses
may convey their present possessory interest in the property. Arango argues
that he should therefore be allowed under 11 U.S.C. 522(f)(1) to avoid Third
National's lien on his survivorship interest because it impairs his and his wife's
ability to convey their present possessory interest. In the language of subsection
522(f)(1), Arango argues that Third National's lien "impairs an exemption to
which the debtor would have been entitled."

20

Third Nat'l Bank does not stand for the proposition that owners of the present
possessory interest of a tenancy by the entirety must receive the consent of a
third-party owner of one spouse's right of survivorship before conveying their
present possessory interest. As the bankruptcy court wrote,

21
[Arango]
mistakenly equates "control" of the entireties property with the ability to
convey marketable title. When one spouse conveys away his or her survivorship
interest in entireties property, the parties are left with something less than the entire
interest in the property. The couple is, therefore, unable to convey marketable title,
i.e., the fee simple absolute estate. However, nothing prevents the couple from
conveying the entire interest they hold, i.e., the "joint right to the use, control,
incomes, rents, profits, usufructs, and possession" of the entireties property.... Even
though they hold less than the entire interest, they remain in complete "control" over
the interest they do hold.
22

Therefore, Third National's lien does not impair Arango's present possessory
interest in the property because Third National's lien simply does not affect the
Arangos' present possessory interest in entireties property under Tennessee law.

23

Arango argues that Owen v. Owen, --- U.S. ----, 111 S.Ct. 1833, 114 L.Ed.2d
350 (1991), requires that he be allowed to avoid Third National's lien. In Owen,
the court allowed a debtor to avoid a lien because the lien prevented the debtor
from claiming the underlying property as exempt property. Id., --- U.S. at ----,
111 S.Ct. at 1837-38, 114 L.Ed.2d at 360. Until 1985, unmarried Florida

condominium owners could not exempt their condominiums from their

bankruptcy estate under Florida's homestead exemption because they were not a
"head of a household." See Owen, --- U.S. at ----, 111 S.Ct. at 1838-39, 114
L.Ed.2d at 361 (Stevens, J., dissenting). In 1985, Florida expanded its
homestead exemption by allowing it to extend to "natural person[s]." However,
the Florida Supreme Court, to protect creditors, refuses to implement changes in
exemptions against lienholders who perfect their liens before an applicable
exemption is broadened. E.g., Bessemer v. Gersten, 381 So.2d 1344, 1347
(Fla.1980). Helen Owen perfected a judgment lien against Dwight Owen while
his condominium was not considered a homestead under Florida law.
Nonetheless, Dwight Owen filed suit in bankruptcy in 1986 to avoid Helen
Owen's lien. The United States Supreme Court ruled that Helen Owen's lien
impaired Dwight Owen's homestead exemption, even though Dwight Owen's
condominium was not exempt under Florida law from execution by Helen
Owen. Owen, --- U.S. at ----, 111 S.Ct. at 1837-38, 114 L.Ed.2d at 360. The
court reasoned that Dwight Owen's home would be exempt property under
Florida law but for the fact that Helen Owen had perfected her lien. Id., --- U.S.
at ----, 111 S.Ct. at 1837, 114 L.Ed.2d at 359. Therefore, under 11 U.S.C.
522(f)(1), the lien impaired an exemption to which the debtor "would have
been entitled" had the lien not existed. Id. Thus, Dwight Owen could avoid
Helen Owen's lien against his condominium.
24

Unlike the situation in Owen, Third National's lien does not impair an
exemption to which Arango would be entitled but for the existence of the lien.
Third National's lien encumbers Arango's right of survivorship, which Arango
concedes is part of his bankruptcy estate. Third National's lien, however, does
not encumber Arango's present possessory interest in his entireties property
under Tennessee law because Tennessee does not consider entireties property to
be the property of each individual spouse. Third National is not able under
Tennessee law to foreclose on its lien against Arango's present ability to use
and enjoy the entireties property. Therefore, Arango's present possessory
interest in the entireties property is not impaired, for purposes of section 522(f),
by Third National's lien. Owen simply does not apply to this case.

25

Third National's lien does not impair, for purposes of 11 U.S.C. 522(f)(1),
any of Arango's exemptions, and the bankruptcy court and the district court
correctly refused to allow Arango to avoid Third National's lien. The judgment
of the district court is therefore affirmed.

The Honorable Frank M. Coffin, Senior Circuit Judge of the United States

Court of Appeals for the First Circuit, sitting by designation