Daily Development for
Monday, April 20, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

MARITAL PROPERTY; TENANCY BY ENTIRETY: Mortgagee taking interest of one spouse's interest in tenancy by entirety obtains interest subject to equitable distribution rights of other spouse in a divorce judgment; any mortgagee taking such an interest has duty of inquiry, since such mortgage is so unusual as to put mortgagee on notice that extraordinary circumstances exist, and that divorce is probably pending or contemplated.

Vander Weert v. Vander Weert, 700 A.2d 894 (N.J.Super. 1997).

In this unusual situation, an attorney representing the husband in a divorce action took from his client a mortgage on property owned by the spouses as tenants by the entirety, to secure payment of his legal fees. With obvious disapproval of the attorney's actions, the court limited the efficacy of the mortgage by making the mortgage subject to equitable distribution. A state statute passed in 1988 now prohibits either spouse from severing or alienating their interests in such a tenancy without the written consent of the other, but the statute applies only to tenancies created after its effective date.

Comment 1: The new statutory language corresponds to what likely is the majority rule tenancies by the entirety are too slippery to permit attachment of any interest through the actions of just one spouse. There is a substantial minority, albeit splintered into a number of different approaches.

Comment 2: Although the attorney in this case never had a chance, it is interesting to note the court's extensive excursion into the general issue of the relative priority between mortgagee's of an individual spouse's tenancy by the entirety interest and the equitable distribution claims of the nondebtor spouse in a divorce proceeding. Court indicates that in such circumstances the mortgagee will be "on notice" of a possible divorce proceeding due to the unusual behavior of the an individual spouse in giving a mortgage on entireties property.

First, the court cites Freda v. Commercial Trust Co., 570 A.2d 409 (N.J. 1990), for the principle, stated in dicta in that case, that a bona fide encumbrancer of the single spouse's interest, taking prior to any divorce filing, will preempt the interest of the nondebtor spouse (as to pre-1988 tenancies). But the court then carefully isolates Freda by commenting that typically the primary reason that parties to such an encumbrance would deem the encumbrance to be of any value would be that a divorce is likely to occur. Even prior to 1988, a tenancy by the entireties was nonseverable. So the only interest a mortgagee could attach would be the possible survivorship right (of neglible cash value) and the potential distribution rights following divorce. Because the postdivorce rights are most likely to drive the parties to use the debtor spouse's interest as collateral, the court concludes that most parties who take an encumbrance on a single spouse's tenancy by the entireties interest are doing so because they anticipate that a divorce is imminent.

Coupling this view of the world with the court's notion that, in equity, the equitable interests of the nondebtor spouse ought to prevail, the court concludes that parties who encumber a single spouse's entireties interest take with inquiry notice of any pending divorce. Note that it is quite possible that the divorce might be filed in a county other than the county where the real property is located, but the court nevertheless appears to feel that the mortgagee should go look for the filing and, if it is reasonably discoverable, the mortgagee will be subordinate to the results in the pending divorce whether it actually knows of the divorce or not.

The court's language would appear to go so far as put make the encumbrancer on inquiry notice of an imminent divorce filing even before there is any court record. But the court does not go into detail as to how the mortgagee would be expected to inquire about such things, so we can surmise that it is not really serious on that score. But forcing the mortgagee to be subordinate to filed divorce proceedings even in other states does seem to be a noteworthy burden in and of itself.

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