Protecting Against a Free Wheeling Spouse

In a number of my divorce cases, a client will complain that the other spouse is a spendthrift or is reckless with finances. They may recount that the other spouse has a gambling problem, has an addiction, or has made poor business decisions. They may express concerns that the spouse may have incurred debts and liabilities as a result of these actions. They question the extent they may also be liable for same in the disposition of the divorce matter. They wonder whether their marital assets, and most notably the marital home they own together, is at risk as a result. To the extent the marital home or other assets were owned as “tenancy by the entirety”, the recent case of Jimenez v. Jimenez, 454 NJ Super 432 (App. Div. 2018), appears to protect same, at least from the reach of third-party creditors themselves due to the actions of a “free-wheeling spouse”.

Before discussing this case, what exactly is meant by a tenancy by the entirety. A tenancy by the entirety is a form of joint property ownership available only to spouses that is created when property is held by a husband and wife with each becoming seized and possessed on the entire estate. Each co-tenant enjoys the right of survivorship, meaning that after the death of one, the survivor takes the whole. Historically it was predicated on the presumed unity of spouses, and was a means of protecting marital assets during the marriage and to serve as security for one spouse on the death of the other. A tenancy by the entirety is created when a husband and wife together take title to an interest in real or personal property under a written instrument designating both of their names as husband and wife. It is also created when a husband and wife become lessees of property containing an option to purchase it, or when an owner spouse conveys or transfers and interest in that property to the non-owner spouse and the former jointly, in both circumstances there being a written instrument and a designation of both of their names as husband and wife.

The Jimenez case involves third-party creditor rights in regards to real estate held by spouses as tenants by the entirety. In this matter, a husband and wife had purchased a tract of vacant land in Mansfield, New Jersey. Subsequently, persons related to the spouses filed a complaint in the Law Division against the husband seeking repayment on a line of credit they allegedly extended to him as well as repayment of additional funds he allegedly owed them. A Consent Judgment was ultimately entered into between the creditors and the husband. When other efforts to make collection on this judgment failed, the creditors moved to compel the partition sale of the Mansfield property. The trial court declined to do so relying upon the provisions of N.J.S.A. 46:3-17.4. The creditors appealed. The Appellate Division affirmed.

The issue before the Appellate Division was the legal interpretation of N.J.S.A. 46:3-17.4 which was contained within a series of provisions, N.J.S.A. 46:3-17.2 to 17.4, approved in 1988, and applicable to all tenancies which were created on or after that effective date. In addition to defining what constitutes a tenancy by the entirety, section 17.4 provided that “neither spouse may sever, alienate, or otherwise affect their interest in the tenancy by entirety during the marriage or upon separation without the written consent of both spouses”. The Appellate Division noted that prior to the adoption of this statute, the case law of this date had authorized courts to compel the partition and sale of a spouse’s interest in property held in a tenancy by the entirety in instances where equitable considerations justified such a remedy, including as noted in the Supreme Court case of Newman v. Chase, 70 N.J. 254(1976). Notwithstanding that under the prior case law, the apparent equities may in fact have favored the creditors in this matter, namely that the parcel of property had not been used as a marital residence, and that the funds extended by the creditors to the husband allegedly related to the anticipated development of the property, the Appellate Court nevertheless determined that this statute precluded the partition and for sale of the real property because it was owned as tenants by the entirety. They concluded that the statutory prohibition applies to such a situation where, as here, one spouse’s failure to pay his personal debts to third party creditors with a resulting money judgment against him; otherwise, a free-wheeling spouse, by amassing such individual debt could detrimentally “affect” the other spouse’s interest in their co-owned property. However, the Appellate Court made clear that it was not precluding a remedy by creditor against a property held by tenancy by the entirety when the title was deeded as a fraudulent conveyance in order to avoid known debts to creditors, nor did they want their decision to in any way question or qualify the distinguishable authority of a court to order the sale of a marital asset held by tenancy by the entirety in the setting of a divorce action.

As a practical matter what does the holding mean for the non-debtor spouse in a divorce case? Jimenez deals primarily with the ability or inability of third-party creditors to go after property held as tenancy by the entirety where only one spouse is the debtor. Clearly the rights of a creditor to obtain a forced petition of such property, absent consent of the non-debtor spouse, are prescribed by statute according to the Appellate Division. Hence, a non-debtor does not seem to have to worry that the other spouse’s creditor themselves being able to force the sale or take away the marital home, assuming it is held as tenancy by the entirety. Certainly this appears to be the case where the spouses are still married or merely separated. However, that is not to say that those underlying debts, including those incurred by the “free-wheeling” spouse, won’t need to be addressed in the event of divorce. Who will be responsible to pay them? What was the reason for the debt? Was it for a “marital” purpose or not? Just like a court can determine how assets should be “equitably” distributed, they are also charged with doing so when it comes to distributing debts incurred during the marriage. As was noted in Jimenez, the judge in a divorce case is not precluded from requiring the sale of a property, even those held as tenancy by the entirety, to pay off marital debts regardless of who incurred them. In the divorce case, debts owed to third-party creditors will need to be addressed one way or the other. Jimenez merely prescribes the remedies available to the creditors themselves to go after property held as tenancy by the entirety.