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Did You Know? | Debtors and Non-Filing Spouses May Lose Right to Rebut Presumption of Equal Ownership if Debtor Has Equal Rights to Asset

Often in bankruptcy cases involving a debtor with a non-filing spouse, the presumption of equal ownership arises.  Subject to certain exclusions, Section 541 of the Bankruptcy Code provides that all property in which the debtor has a legal or equitable ownership interest becomes property of the estate at the commencement of the case.  This includes property the debtor owns with a non-filing spouse.  In some situations, particularly if the debtor does not have an exemption available, the debtor will try to rebut the presumption of equal ownership.

Through the presumption of equal ownership, courts presume that assets jointly owned are also equally owned.  In some instances a debtor will attempt to rebut the presumption of equal ownership by arguing that the debtor's interest is not property of the bankruptcy estate because the debtor did not purchase or contribute to the asset.

The Bankruptcy Court for the Eastern District of Michigan has held that debtors and non-filing spouses lose any defense and right to rebut the presumption of equal ownership once a debtor's spouse purchases an asset, regardless if the asset was purchased solely from the non-filing spouse's funds, with the debtor's name included as a joint owner with rights of ownership and benefit.  In re Olson, 424 BR 770, 772-773 (Bank. E.D. Mich. 2010).

The issue in Olson was whether the debtor's one-half interest in an annuity account that had been funded solely with proceeds from her non-filing spouse's settlement proceeds was property of the estate.  The debtor argued that she had properly rebutted the presumption of equal ownership by showing that her non-filing spouse solely contributed the funds to purchase the annuity and that, therefore, no part of the annuity was property of her estate.  Id. at 772.

The Bankruptcy Court first noted that it "doubt[ed] that the presumption regarding jointly held funds applies to the annuity" at issue because the cases cited by the debtor applied to bank accounts and certificates of deposit - neither of which applied in the Olson case.  Id. at 773.

The Bankruptcy Court went on - assuming arguendo that the presumption did apply - to hold that the debtor could not rebut the presumption of equal ownership.  Id.  The Court reasoned that "[o]nce the Debtor's spouse purchased an asset in which Debtor has equal ownership and equal benefits, he lost any defense that the annuity belongs entirely to him."  Id.

Interestingly, the Court also noted that to the extent the presumption of equal ownership applied at all, the Trustee also had the right to rebut the presumption and assert that the annuity contract allowed the debtor to withdraw 100% of the assets, and that therefore, the Trustee had the right to seek 100% of the assets. Id.

The Bankruptcy Court in Olson ultimately held that the annuity was property of the estate, regardless of the source of funds used to buy the annuity, because the annuity was purchased three years before the debtor filed her petition and the debtor (as co-owner) could withdraw from the balance of the funds in the annuity. Id. at 773.

In light of the holding in Olson, debtors' counsel must be aware and inform their clients that the Trustee may pursue 100% of jointly held assets – even if the non-filing spouse solely purchased or contributed to purchasing the asset – if the debtor has equal ownership, right and benefit to the asset.

Related Blog post:

Annuity Purchased by Non-Filing Spouse Can Become Property of Bankruptcy Estate

In the "Did You Know?" section of the Michigan Bankruptcy Blog, we feature opinions that are not newly issued but that may be helpful for Michigan bankruptcy practitioners.

Categories: Did you Know?, Eastern District of Michigan

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