How a Wife’s Rights of Survivorship and Possession in Real Estate Interfered with a Creditor’s Plan to Sell a Vacation Home to Satisfy a Judgment Against her Husband
REPEAT AFTER ME—”There is no such thing as a ‘family friend’ when it comes to lending money!”
Work-around
A Client lent $150,000.00 on a handshake to the father of his old college roommate (“Debtor”). The only evidence of the loan was the checks transferring the funds.
The Client did not secure the loan with a mortgage or other lien against real property, even though the Debtor and his wife owned an unencumbered summer home (“Vacation Home”). The client was unconcerned because he had spent many school holidays at the roommate’s home and knew his friend’s parents very well. He was glad to help the father, who was experiencing severe financial problems.
The Debtor never repaid the loan, despite the client’s repeated requests.
The Client ultimately sued the Debtor, bringing an end to his friendship with his college roommate and to holiday celebrations with the family. The Debtor defended the lawsuit by claiming the funds were not a loan, but rather a down payment to purchase the Debtor’s fledgling business. The court ruled in favor of the Client, awarding a judgment against the Debtor in the amount of $202,834.71 (“Loan Judgment”).
The Judgment Collection & Asset Recovery Group attorneys were hired by the Client to collect on the Loan Judgment. Reviewing the Debtor’s assets, counsel discovered that after receiving the loan, the Debtor engaged in asset protection planning clearly designed to evade creditors, including the client. Specifically, the Debtor transferred his interest in the Vacation Home to his wife, making her the sole owner on paper.
Prior to this transfer, the Debtor and his wife owned the property as tenants by the entirety. See EPTL 6-2.2(b) (“A disposition of real property to a husband and wife creates in them a tenancy by the entirety, unless expressly declared to be a joint tenancy or a tenancy in common.”). Owning real estate as tenants by the entirety provides certain protections, including:
· (i) Both spouses enjoy an equal right to possession of and profits yielded by the property (Goldman v. Goldman, 95 N.Y.2d 120, 122 (2000)); and
· (ii) The married couple takes title as one person, and the right of survivorship inheres from the original grant (Prario v. Novo, 168 Misc. 2d 610, 611 (Sup. Ct. 1996); see also Plancher v. Plancher, 35 A.D.2d 417, 420 (2d Dept. 1970), aff’d, 29 N.Y.2d 880 (1972) (“[O]n the death of one [spouse], the surviving spouse takes the entire estate. The survivor takes the whole in case of death, because that event has terminated the marriage, and the consequent unity of person”)). (Citations and internal quotation marks omitted).
The Judgment Collection & Asset Recovery Group attorneys determined that the transfer was a fraudulent conveyance. They successfully sued under New York’s pre-April 4, 2020 Debtor and Creditor Law §§ 273, 274, 276, and 278[1] for the right to (i) place a lien against the Vacation Home in the amount of the Client’s Loan Judgment, (ii) levy upon the property, and to sell it at a sheriff’s sale with the proceeds to be applied to the judgment.
In support of these claims, counsel argued that the transfer was fraudulent because, among other factors:
· (i) It was made without fair consideration;
· (ii) It was made to an insider (the debtor’s wife);
· (iii) A presumption arose that the Debtor was insolvent or rendered insolvent by the transfer; and
· (iv) The wife’s purported estate-planning rationale made no sense, given that the couple had owned the property for over thirty years and only executed the transfer when the Debtor faced severe financial trouble.
Furthermore, the wife would have inherited the property in full upon the Debtor’s death anyway, rendering a pre-death transfer unnecessary.
Counsel successfully argued that the property—though held in the wife’s name—could be levied upon to satisfy the judgment against the Debtor. They cited Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 133–34, 508 N.Y.S.2d 17, 20 (2d Dept. 1986) (holding that, as a remedy for fraudulent conveyance, wherein the Debtor transferred his interest in the marital home to his wife, that interest may be reached by levy despite being titled in a spouse’s name,) and Sweeney, Cohn, Stahl & Vaccaro v. Kane, 6 A.D.3d 72, 77, 773 N.Y.S.2d 420, 425 (2d Dept. 2004) (holding that execution on a judgment against one spouse against a home held as tenants by the entirety can be sold under execution).
The court awarded the requested relief, granting a lien against the property in the amount of $202,834.71, but held that the lien was subject to the wife’s rights of survivorship and possession.[2] This conditional relief is supported by Marine Midland Bank v. Murkoff, 120 A.D.2d at 130 (affirming that a creditor cannot obtain an order extinguishing a non-debtor spouse’s survivorship interest if the spouse held that right prior to the conveyance, limiting the creditor’s remedy to what could have been obtained had there been no conveyance).
(citing to Hamilton Natl. Bank v. Halsted, 134 N.Y. 520)). See also Hamilton Natl. Bank v. Halsted, 134 N.Y. 520, 526, 31 N.E. 900, 902 (1892) (“The equity of the creditors… extends to the full value of the debtor’s interest in the property at the time of the fraudulent conveyance…”).
Based upon the Court’s decision, the Client faced a collection problem, as the wife’s continued rights of possession and survivorship would likely depress the Vacation Home’s price at a sheriff’s sale. Any successful bidder would become a tenant in common with the wife, share possession, and—most significantly—lose all ownership interest if the wife survived the Debtor. See Finnegan v. Humes, 252 A.D. 385, 387, 299 N.Y.S. 501 (4th Dept. 1937) (cited to by the Second Department in Sweeney) (stating that a third-party purchaser upon execution becomes a tenant in common subject to the other tenant’s right of survivorship); Hiles v. Fisher, 144 N.Y. 306, 310, 39 N.E. 337, 337 (1895) (holding that a husband’s sold interest in a tenancy by the entirety entitles the buyer to use an undivided half of the estate during joint lives, and to the fee if the husband survives).
The court also awarded the Client a $28,017.35 attorney fee judgment against the wife (“Attorney Fee Judgment”) for the fraudulent conveyance pursuant to pre-April 4, 2020 Debtor & Creditor Law § 276-a.[3]
As a work-around for the hurdle of the wife’s continuing ownership rights, the Judgment Collection & Asset Recovery Group attorneys advised the client to schedule a sale of the property based upon the Attorney Fee Judgment. Because that judgment was solely against the wife, she would have no survivorship or possessory rights vis-à-vis a purchaser at such a sale, allowing the buyer to acquire the property free of her interest. Additionally, the Client could also pursue any surplus funds from the sale (up to the Debtor’s share) exceeding the attorney fee judgment, to be applied toward the primary Loan Judgment.
This strategy made sense because the Debtor and his wife were cash poor, raising hopes that the looming sale would force the wife to satisfy both judgments via a mortgage or an open-market sale.
The strategy worked. Shortly after the Client filed a motion to sell the property, the parties entered into a settlement agreement. Under its terms, the Client gave the wife a year and a half to sell the property on the open market, with the proceeds of sale to be used to pay an agreed-upon settled sum for both judgments (with the full amount reinstated if she failed to sell within that window). Most importantly, the wife agreed to waive her survivorship and possessory rights, and thus the Client was no longer in danger of having the lien for the Loan Judgment extinguished from the property if the Debtor died first. Finally, the Client retained the right to force an open-market sale or proceed with a sheriff’s sale if the deadline passed.[4]
Footnotes:
[1] Post-April 4, 2020 Uniform Voidable Transactions Act §§ 274 and 276 are comparable sections.
[2] Meaning that if the Debtor predeceased the wife, she would own the property free of the client’s Loan Judgment lien.
[3] The court’s order and case details can be found in Goodman v. Entin, Index No. 605454/2019, NYSCEF Docket No. 82.
[4] A copy of the agreement can be found in Goodman v. Entin, Index No. 605454/2019, NYSCEF Docket No. 89.
Melissa Levine of the Judgment Collection & Asset Recovery Group at Adam Leitman Bailey, P.C., secured this settlement for the Client.