Tenants By The Entireties Asset Protection in New Jersey

At common law, a husband and wife have the right to acquire real estate in New Jersey in a special form of co-ownership known as a tenancy by the entireties. In this form of ownership, they hold the property as tenants in common for their joint lives with each spouse having a right of survivorship upon the death of the other spouse. Further, either spouse has the right to alienate his or her separate interest in the property, including the right of survivorship. A creditor has the right to execute and levy on a debtor spouse’s separate interest in the property and the creditor at execution sale becomes a tenant in common with the remaining non-debtor spouse for the joint lives of the husband and wife. If the non-debtor spouse outlives her debtor spouse husband, the survivorship interest of the husband acquired by the creditor is cut off entirely. King v. Greene, 30 N.J. 395, 412 (1959).

In the seminal decision of Newman v. Chase, 70 N.J. 254 (1976), the New Jersey Supreme Court held under the common law that a purchaser of a bankrupt husband’s interest in a marital home owned by husband and wife as tenants by the entireties could not partition the property based on the equities of the case before it, but allowed the creditor to obtain an accounting for one-half of the imputed rental value of the home less the cost of carrying the property.

Because the cost of maintaining a home, including paying the mortgage, taxes, utilities and insurance is many times significant, the accounting remedy as provided in Newman in many cases is not worth much. Without the right to partition and sell the property, the creditor’s main hope is that the non-debtor spouse will die before her husband and the creditor will become the sole owner of the property by survivorship as successor in interest to the debtor husband’s right of survivorship.

A current topical question is whether the New Jersey common law as enunciated in King v. Green and Newman v. Chase is still good law in light of New Jersey legislation redefining tenancy by the entireties in 1988. In 1988, the New Jersey Legislature fundamentally changed New Jersey tenancy by the entireties law, including expanding entireties protection to personal property in addition to real estate. N.J.S.A. §§ 46:3-17.2—46:3-17.4 (the “Act”). The legislature made the changes effective solely as to property interests acquired on or after the effective date of the legislation which is April 4, 1988. Property interests acquired prior to that date appear to be governed by the common law as interpreted by the New Jersey courts prior to the passage of the Act. Freda v. Commercial Tr. Co., 118 N.J. 36, 40 (1990). Accordingly, the first step in analyzing any particular case is to determine when the property was acquired. Depending on the date, either the old common law will apply as before or the new law based on the Act will govern.

The critical language of the Act is set forth at N.J.S.A. § 46:3-17.4 which expressly prohibits either spouse from severing, alienating or otherwise affecting their respective interests in the tenancy during the marriage or upon separation without the written consent of the other. (emphasis added). The above-cited statutory language is sweeping in its asset protection scope. Based on its plain meaning, it is right to question whether a single creditor of only one debtor spouse could execute and levy in any manner on entireties property acquired on or after the effective date of the Act outside of bankruptcy during the joint lives of the married couple.

The question of how far the legislative changes have gone remains a partially open question. As will be discussed below, a 2012 bankruptcy court decision from Florida and a 2016 bankruptcy court decision from Pennsylvania have questioned whether prior New Jersey state and federal court decisions were properly decided on the scope of asset protection afforded to married couples who own real estate in entireties form in the State of New Jersey. In 2018, the New Jersey Appellate Division specifically addressed the applicability of the Act to a case involving an attempt by a creditor of one spouse to invoke the remedy of involuntary partition of entireties property. The Appellate Court found some guidance in the prior holdings of both the Pennsylvania Bankruptcy Court and the Florida Bankruptcy Court as will be addressed below.

In 2012, the Bankruptcy Court from the Middle District of Florida was called upon to decide as a matter of first impression whether some portion of the proceeds from a pre-petition sale of New Jersey real estate by a married couple could be clawed back by the Chapter 7 Bankruptcy Trustee in a bankruptcy case brought by the non-debtor wife alone. In re Montemoino, 491 B.R. 580, 588-89 (Bankr. M.D. Fla. 2012). Although the case was brought in Florida, the Court found that New Jersey state entireties law applied because the real property was located in New Jersey and the purchase and sale transaction occurred in New Jersey. The subject real estate in question was acquired after the effective date of the new statute and accordingly its application was squarely at issue in the case. Applying the old common entireties law in New Jersey, the trustee would have won her fraudulent conveyance claim. Applying the Act, the debtor and her husband were the victors in the court proceedings.

In that bankruptcy case, the New Jersey entireties real estate was sold by the husband and wife pre-petition to a third-party and the net sales proceeds check of $129,045.69 was paid to the couple. Ultimately, the net proceeds were transferred into a bank account titled solely in the name of the non-filing spouse. There was no consideration paid to the debtor spouse for the transfer. The Trustee sought to claw back fifty percent (50%) of the net proceeds, alleging that a fifty percent (50%) share belonged solely to the wife which could be clawed back. In response, the couple argued that the net sales proceeds were entireties property which could not be the subject of a fraudulent transfer action by the Trustee. The Court agreed with the couple based on its view of New Jersey law after the passage of the Act.

Ultimately, the Court held that the couple had the right to transfer the net sale proceeds to the non-debtor spouse free of any claim of a fraudulent transfer by the bankruptcy trustee. It cited to numerous cases in Florida and elsewhere which stop a judgment creditor of a debtor spouse or a bankruptcy trustee of the debtor spouse from asserting a fraudulent transfer claim to object to the transfers of entireties property proceeds to a non-debtor spouse.

In its analysis and holding, the Court carefully reviewed the history of entireties law based on the common law in New Jersey. The Court found that the common law should not apply to property subject to the Act, the Court expressly holding the Act superseded the common law as pertains to tenancy by the entireties. The Court specifically found that the 1988 statute created a new form of entireties ownership in New Jersey in personal property as well as strengthened the asset protection afforded to both spouses. It was particularly impressed with the new statutory prohibition on either spouse “severing, alienating, or otherwise affecting their interest in the tenancy by entireties during the marriage without the consent of both spouses.” In the Court’s view, that was a significant change from prior common law in New Jersey.

The Florida case was followed by the 2016 case of In re Wanish, 555 B.R., 496 (Bankr. E.D. Pa. 2016). That Court, similar to the Florida Court, was required to consider the impact to the Act on the rights of non-debtor spouses holding New Jersey real estate with their debtor spouse as tenants by the entireties. It was persuaded that under the clear language of §17.4 of the Act, that Section 522(b)(3)(B) of the Bankruptcy Code could be used to exempt the full amount of the debtor’s value in a mobile home owned by the debtor and his non-debtor spouse.

Neither Montemoino nor Wanish square with King v. Green, Newman v. Chase or any of the many prior cases in both lower federal court and lower state court which applied the old common law to their holdings regardless of the date of acquisition of the property in question. These out-of-state non-precedential cases are aligned with cases from other jurisdictions such as Pennsylvania which provide full asset protection to the non-debtor spouse without qualification or exception. To be clear, outside of bankruptcy, a regular non-governmental creditor of a debtor spouse cannot execute and levy on property jointly held in tenants by the entireties form in Pennsylvania absent some kind of fraudulent circumstances. O’Malley v. O’Malley, 272 Pa. 528, 116 A. 500 (1922); In re Maloney, 146 B.R. 168 (W.D. Pa. 1992). A Husband and wife can convey entireties property free from the claims of their separate creditors. See, C.I.T. Corp. v. Flint, 333 Pa. 350, 5 A.2d 126, 121 A.L.R. 1028 (1939); ISN Bank v. Rajaratnam, 83 A.3d 170 (Pa. Super. 2012).

In 2018, the New Jersey Appellate Division, in a reported precedential case, expressly held that a third-party creditor of one spouse could not force the involuntary partition of entireties property subject to the 1988 Act based on the statutory changes made to the common law. Jimenez v. Jimenez, 454 N.J. Super. 432 (App. Div. 2018). The Court specifically declared that the statute in question supersedes and nullifies earlier case law that had allowed non-consensual partition. The Court cited favorably to Montemoino and Wanish.

Recently, the Third Circuit, in a complex federal tax collection case, also acknowledged that entireties protections to spouses had been strengthened under the Act in obiter dictum. The case was decided on the basis of federal law which pre-empted state law and involved property interests which were created prior to the effective date of the Act. Courts which had failed or refused to consider the import of the Act on prior common law precedent will now have appellate authority at the Third Circuit level and the New Jersey Appellate Division to assist them in possibly reconsidering their prior holdings along with the out-of-state cases mentioned above. The Third Circuit case is United States. v. Cardaci, 856 F.3d 267 (3rd Cir. 2017). (Cardaci discusses the applicability of federal law and its express override of state law in the context of a federal tax case—Reader Beware).

In light of the Jimenez holding, effective as to property interests acquired on or after April 4, 1988, it is clear that involuntary partition is no longer an available remedy afforded to the creditor of a debtor spouse as against property owned by the spouses together as tenants by the entireties outside of bankruptcy in the State of New Jersey. As for the tougher question of whether a sole creditor of the debtor spouse can levy and execute on tenants by the entireties property post-Act in any manner, it is this author’s view that a credible argument could be made that the creditor cannot execute or levy in spite of prior holdings to the contrary even after Jimenez, any dicta in Jimenez notwithstanding. Any future discussion of this issue should focus on the express language of the Act which appears to clearly supersede the common law.

There is nothing in the language of the §17.4 of the Act to suggest that there is somehow any limited exception to the asset protection afforded to both spouses as against creditors of only one spouse. To suggest that creditors should somehow have better rights than the non-debtor spouse under the Act would be to limit the asset protection expressly afforded to the non-debtor spouse under the Act. It simply makes no sense. The ultimate argument is to assert that New Jersey has joined Pennsylvania in affording full asset protection to married couples through the device of tenancy by the entireties.

From a spousal asset protection and estate planning point of view, clients would relish the ability to asset protect their homes to the maximum amount permitted by law. Of course, creditors of only one spouse will continue to forcefully argue that they may still execute and levy on tenants by the entireties property despite the changes brought about by the Act. With the right case, a strong challenge could be made. Based on the trending cases as addressed in this article, there is a chance of success on the merits.

If you are faced with a situation where the creditor is asserting that a judgment lien of one spouse has to be paid in full out of the voluntary sale of spousal entireties property in New Jersey, there now may be grounds to fight with the creditor, but you are probably going to have to litigate the issue absent a settlement in light of the conflict in the caselaw and the absence of a definitive ruling by the New Jersey Supreme Court. Your argument would have to be that the Act did more than merely prevent involuntary partition. It went even further, making it impossible for a judgment creditor of one spouse to levy or execute against tenants by the entireties property of the couple during the joint lives of the marital couple. In the meantime, it is clear that involuntary partition is out unless the New Jersey Supreme Court overrules Jimenez which is unlikely in light of the Act’s express language on the subject matter in question.

Caution should be exercised here, however. Federal tax liens and other specialized rights or remedies may pre-empt state entireties law. Bankruptcy trustees have specialized rights to sell joint property under 11 U.S.C. Section 363(h) of the Bankruptcy Code in a bankruptcy case of only one debtor spouse. Those rights must be analyzed in the context of the debtor’s and non-debtor’s property rights under state law and reconciled.

Nothing stated in this article is intended to suggest that a married couple could or should engage in blatant fraud and use the statutorily-created rights to avoid any responsibility to creditors through improper means. The couple in the Florida case cited in this article owned the property in tenants by the entireties form from the inception. The transaction in question in that case was not part of a broader step transaction which might be problematic. Also, the analysis of the fraudulent transfer issues in that Florida case might be analyzed differently in New Jersey today under either federal bankruptcy law or the New Jersey version of the Uniform Fraudulent Transfer Act. If a successful fraudulent transfer case is brought by a bankruptcy trustee, both a bankruptcy discharge and the right to exempt an otherwise exempt asset may be at risk. Transferring property interests prior to bankruptcy without consideration is fraught with risks of many kinds which is beyond the scope of this article.

Lenders and other persons or entities which are considering taking personal guarantees from married individuals in New Jersey without obtaining a reciprocal spousal guaranty of the non-obligor spouse might wish to reconsider. The statutory changes in New Jersey require heightened consideration of the need for the personal guaranty of the non-obligor spouse on any commercial loan or business transaction. The personal guaranties should be joint and several so that they are considered to be joint debt obligations. And it goes without saying that no lender should ever take a mortgage or security interest against the property of husband and wife in entireties form in New Jersey without obtaining the signature of both spouses.

If you have any questions about titling property in the entireties form, for asset protection purposes or otherwise, need advice on a pending real estate transaction, need advice on a state or federal proceeding involving an entireties issue or are looking to make sure that your lending institution or company as a creditor is properly protected against an obligor under a commercial loan or otherwise, please contact us to assist you.