In our practice, we are often surprised that clients, accountants and many attorneys are not fully familiar with the rights of creditors against property owned by tenants by the entirety.
As noted by the New Jersey Supreme Court in the case of King v. Greene, 30 N.J. 395, 400 (1959), tenancy by the entirety is an unique form of concurrent ownership by spouses whose roots can be traced back as far as the fourteenth and fifteenth centuries.
Prior to King v. Greene, there was substantial question whether the right of survivorship of a tenant by the entirety was alienable in New Jersey. In King, the majority of the New Jersey Supreme Court held that either spouse could alienate their right of survivorship and judgment creditors of either spouse could levy and execute upon their separate rights of survivorship. Id. at 412.
In 1976, the New Jersey Supreme Court again addressed the rights of creditors against property held by tenancy by the entirety in the seminal case of Newman v. Chase, 70 N.J. 254 (1976). In Newman, the court addressed the ability of a party that had purchased a debtor spouse’s interest from a bankruptcy trustee, to compel partition and sale of a property owned by tenancy by the entirety. The majority in Newman held that, where the debtor-husband lived in a house with his young family, it was within the equitable discretion of the court to deny partition to a purchaser of the husband’s interest in the residence, leaving the creditor to resort to some other remedy. Id. at 266.
The Supreme Court in Newman preserved for the buyer of the husband’s interest in the property alternative remedies, including an accounting from the non-debtor spouse. The court also held that, where the tenants by the entirety owned commercial properties, generating rents, the creditor purchasing one spouse’s interest was entitled to their proportionate share of the rents and profits. Id. at 267.
In 1988, the New Jersey Legislature enacted N.J.S.A. 46:3-17.2 – 17.4. The statute became effective in April 1988 and applies only to property acquired thereafter. Freda v. Commercial Tr. Co., 118 N.J. 36, 40 (1990). Section 17.2(a) expanded tenancy by the entirety over not only real property, but also personal property acquired under a written instrument designating the names of both spouses as husband and wife.
With regard to alienation, Section 17.4 provides as follows: “Neither spouse may sever, alienate, or otherwise affect their interest in the tenancy by the entirety during the marriage or upon separation without the written consent of both spouses. N.J.S.A. 46:3-17.4.”
Earlier this year, in the case of Jimenez v. Jimenez, 454 N.J. Super. 432 (App. Div. 2018), the Appellate Division examined the impact of N.J.S.A. 46:3-17.4 on the law set forth in Newman v. Chase. The Appellate Division noted that, under Newman v. Chase and subsequent case law, the equities could have favored permitting partition. Id. at 437-38. The Appellate Division held that N.J.S.A. 46:3-17.4 essentially overruled Newman v. Chase and eliminated the equitable authority of a court to order partition of a property, even where it was not the marital residence, to satisfy claims against only one spouse. Id. at 438.
Based upon the foregoing, unless the New Jersey Supreme Court rules otherwise, the law in New Jersey is that a creditor of only one spouse cannot force the partition and sale of property held by tenancy by the entirety.
Remedies Remaining for Creditors
N.J.S.A. 46:3-17.4, which became effective in 1988, provides that neither spouse “may sever, alienate or otherwise affect their interest in the tenancy by the entirety property.” N.J.S.A. 46:3-17.4. One could certainly argue that, since the right of a creditor of one spouse to execute on the tenancy by the entirety interest of that spouse is grounded on the right of the debtor-spouse to alienate their survivorship interest, passage of N.J.S.A. 46:3-17.4 extinguished the right of the creditor to levy upon the tenancy by the entirety interest. Curiously, no one has apparently made that argument. The courts have continued to embrace the right of a creditor of one spouse to levy on and sell the tenancy by the entirety interest of the debtor spouse. Capital Finance Co. of Delaware Valley v. Asterbadi, 389 N.J. Super. 219 (Ch. Div. 2006); S.E.C. v. Antar, 120 F Supp. 2d 431, 449 (D.N.J. 2000); United States v. Avila, 88 F.3d 229, 234 (3rd Cir. 1996).
In S.E.C. v. Antar, decided 12 years after the enactment of N.J.S.A. 46:3-17.4, the United States District Court continued to rely upon Newman v. Chase and held that, “it is well established that a Debtor’s interest in property held as tenants by the entirety may be reached by the Debtor’s creditors.” Id. at 449.
Similarly, in the case of NTB v. D.D.B., 442 N.J. Super. 205, 219 (App. Div. 2015), decided 27 years after the passage of N.J.S.A. 46:3-17.4, the Appellate Division appears to affirm the right of a tenant by the entirety to alienate his or her right of survivorship and the ability of a judgment creditor of either spouse to levy and execute upon the debtor’s interest in the property. This, in spite of the fact that N.J.S.A. 46:3-17.4 specifically provides that “neither spouse may sever, alienate, or otherwise affect their interest in the tenancy by the entirety during marriage ….” N.J.S.A. 46:3-17.4.
Finally, even the Jiminez v. Jiminez decision, in dicta (at 436), appears to embrace the right of a tenant by the entirety to alienate their right of survivorship and the right of a creditor to levy and execute on such right.
Based upon the foregoing, applicable New Jersey case law would seem to continue to support the right of a creditor of one spouse to levy on and sell that spouse’s interest in property owned as tenancy by the entirety, including the debtor-spouse’s right of survivorship.
Treatment by the Bankruptcy Courts
Subject to satisfaction of certain factors, Section 363(h) of the Bankruptcy Code allows a bankruptcy trustee to sell both the debtor-spouse’s interest in property owned by tenancy by the entirety, as well as that of the non-debtor spouse.
The most significant of the conditions to allowing a bankruptcy trustee to sell the full fee interest of a property owned by tenancy by the entirety is that which requires the trustee to demonstrate that the benefit to the bankruptcy estate of a sale outweighs the detriment to the non-debtor spouse. 11 U.S.C. §363(h)(3).
The Bankruptcy Courts recognize that, especially in the case of a single family residence shared by the debtor and non-debtor spouse, there is no practical way to partition the property other than a sale and a division of the proceeds. In re Addario, 53 B.R. 335 (Bankr. D.Mass. 1985); In re Griffin, 123 B.R. 933, 935 (Bankr. S.D.Fla. 1991); In re Vassilowith, 72 B.R. 803 (Bankr. D.Mass. 1987); In re Ivy, 10 B.R. 230, 232 (Bankr. N.D.Ga. 1981); In re Roswick, 231 B.R. 843, 858 (Bankr. S.D.N.Y. 1999).
Once the bankruptcy trustee comes forward with evidence that a sale of the entire fee would benefit the bankruptcy estate, the burden shifts to the non-debtor spouse to demonstrate why the sale should not be approved. Sapir v. Sartorius, 230 B.R. 650, 655-656 (D.S.N.Y. 1999). In our experience, the non-debtor spouse seldom is able to demonstrate cause to prevent a sale of the residence under §363(h).
Some bankruptcy professionals have asserted that the debtor’s interest in a home owned by tenancy by the entirety may be exempted under §522(b)(3)(B) of the Bankruptcy Code. That section provides that a debtor may exempt “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as 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 non-bankruptcy law.” 11 U.S.C. §522(b)(3)(B).
The Bankruptcy Court for the Eastern District of Pennsylvania, applying New Jersey Law, in the case of In re Wanish, 555 B.R. 496 (E.Bankr. E.D.Pa. 2016), upheld the use of §522(b)(3)(B) to exempt the full amount of the debtor’s value in a mobile home owned by the debtor and his non-debtor spouse. Relying upon N.J.S.A. 46:3-17.4 and rejecting the applicability of cases involving properties acquired prior to the effective date of the statute, the Wanish court concluded that “given the clear language of the New Jersey Statute and the unanimous holding of all of the cases issued after the enactment of the New Jersey Statute which analyzed the New Jersey Statute, it is clear that creditors of the debtor are prohibited from levying or selling the mobile home under applicable New Jersey Law without the consent of the debtor’s spouse and, therefore, the Debtor’s interest in the mobile home is exempt under §522(b)(3)(B).” Id. at 499-500.
In this author’s opinion, the Wanish court incorrectly applied New Jersey Law. As set forth in this article, New Jersey case law continues to hold that creditors of one spouse may levy upon and sell that spouse’s interest in a property owned as tenants by the entirety. Nothing in N.J.S.A. 46:3-17.4 has been held to overrule the right to levy on the debtor’s interest in the property. Section 522(b)(3)(B) only exempts the debtor’s interest in the entirety property if that interest (as opposed to the property) is exempt from process.
In the case of In re Tarquinio, 2017 WL5707538 (D.N.J. 2017), the United States District Court affirmed the Bankruptcy Court’s denial of the debtor’s claimed exemption of his interest in real properties owned with his non-debtor spouse, as tenants by the entirety. In affirming the Bankruptcy Court, the district court held that the debtor’s interest in property owned as tenants by the entirety may be reached by creditors, and, therefore, “New Jersey Law does not exempt a creditor’s interest in property held by the entirety.” Id.
While the Third Circuit Court of Appeals has not addressed this specific issue to date, it is this author’s opinion that Tarquinio rather than Wanish, represents the appropriate application of §522(b)(3)(B) to property owned by tenants by the entirety under New Jersey law.
Daniel M. Stolz is a shareholder in the firm of Wasserman, Jurista & Stolz in Basking Ridge. The author thanks Scott Rever for his assistance in the preparation of this article.