Bankruptcy Law

Suspended lawyer can't shield home in bankruptcy from malpractice judgment, 7th Circuit says

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A suspended Illinois lawyer who had owned his home as a tenant by the entirety before his wife’s death won’t be able to shield the property in bankruptcy from a former client who won a default malpractice judgment.

The 7th U.S. Circuit Court of Appeals at Chicago ruled against lawyer Scott N. Jaffe in an Aug. 5 opinion, Law360 reports. The appeals court overturned a May 2018 decision shielding his property in Highland Park, Illinois.

The 7th Circuit determined that the malpractice lien attached to Jaffe’s contingent future interest in the residence after his wife’s death, and he can’t shield the property in bankruptcy now that he alone owns the property.

A former client, Laverne Williams, had obtained a $500,000 default judgment against Jaffe in 2005 based on allegations that he did not file her medical malpractice action before the deadline for filing suit, according to a bankruptcy judge’s decision in the case. With interest, the amount comes to more than $1 million.

Jaffe filed for Chapter 7 bankruptcy in November 2015, He listed Williams’ lien on his residence that he held with his wife as a tenant by the entirety. Before bankruptcy proceedings ended, Jaffe’s wife died, and Jaffe now holds the property individually.

At issue is a section of the U.S. Bankruptcy Code that in some cases exempts property from bankruptcy that is held as a tenant by the entirety or as a joint tenant. The bankruptcy code looks to state law to determine whether such property can be retained by the debtor and shielded from creditors.

Tenancy by the entirety was initially created when husbands had legal control over women’s legal identity and property, the 7th Circuit explained. Under tenancy by the entirety, spouses could own property jointly, and when one spouse died, the other spouse owned the property.

After the laws changed to give married women the right to own property, states differed on how tenancies by the entirety were affected. Illinois courts found that the law abolished tenancy by the entirety, but the state legislature reestablished the ownership device for spouses who used a property as their home.

Jurisdictions that still recognize tenancy by the entirety differ in whether an individual spouse’s debt can encumber the property.

In Illinois, a creditor can’t force the sale of a property held by tenants in the entirety to collect a debt against only one of the owners. But there is no exemption for a contingent future interest in the property held by the debtor, the 7th Circuit ruled.

Jaffe was suspended from law practice for 18 months in 2001, until further order of the court, according to the Illinois Attorney Registration & Disciplinary Commission. He has not been reinstated. The ethics charges accused him of neglecting two client matters, failing to return an unearned fee advance of $750, and making a racially and sexually degrading statement to a prison employee while attempting to bond out a client.

Jaffe’s lawyer, Stephen Rosenfeld, said he and Jaffe are disappointed by the 7th Circuit ruling and its interpretation of the bankruptcy provision on exempt interests. “We are considering our options, including a request for rehearing en banc,” he said.

As a result of the decision, Rosenfeld said, debtors in Jaffe’s position “are no longer afforded the fresh start that bankruptcy is supposed to provide. And parties will now be encouraged to hold bankruptcy proceedings open to wait for some fortuitous post-petition event that may destroy the tenancy by the entireties.”

Updated Aug. 6 at 10:50 a.m. to include Rosenfeld’s comments. Updated Aug. 9 at 12:45 p.m. to link to the correct lower court opinion that was reversed by the 7th Circuit.

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