Mortgages on Tenancy By the Entireties Property

The Second Department affirmed, noting correctly that the tenancy by the entirety had been extinguished by merger. That is, when Sheila and Jalloop, the only parties who then had an interest in the property, together conveyed their interests to Feliciano, the tenancy by the entirety was at an end, and Feliciano was free to mortgage the entire property, which he did. As a result, when he conveyed the 99% interest back to the Ellerbees, their interest was subject to the mortgage, just as it would have been if the Ellerbees together had applied for, and obtained, a mortgage from a bank or other financial institution.

Mortgages by One Tenant By the Entirety

Perhaps Sheila Ellerbee (or her lawyer) can be excused for litigating a hopeless case because New York courts have been less than clear about what rights a mortgagee has when one of two tenants by the entirety executes a deed or mortgage. New York law makes it clear that a mortgage executed by one tenant by the entirety confers rights on the mortgagee, but leaves it less clear what rights the mortgagee actually receives. Courts frequently cite dicta in V.R.W., Inc. v. Klein, 68 N.Y.2d 560, as authoritative on the rights of the mortgagee.

V.R.W. v. Klein itself involved the rights, after divorce, of a mortgagee whose mortgage had been executed only by one spouse. After executing the mortgage, the mortgagor spouse defaulted, leading to a foreclosure proceeding. During the proceeding, he conveyed his interest to his wife, and the parties subsequently divorced. All parties agreed that the mortgagee was effective only with respect to the husband's half of the property, but the wife challenged the mortgagee's contention that the interest the purchaser would receive at the foreclosure sale would be the interest of a tenant in common ' which would enable the purchaser to obtain partition of the property.

Three levels of court rejected the wife's argument, with the Court of Appeals sensibly concluding that because the divorce dissolved the tenancy in common, the right of survivorship was then at an end, and a foreclosure sale purchaser would “acquire all of the rights of an ordinary tenant in common, including the right to seek partition.” 68 N.Y.2d at 568.

Suppose, however, the parties had not divorced. What rights would the mortgagee have had? The Court of Appeals opined on that issue, which was not presented by the case, and indicated that “the grantee's or mortgagee's rights in the property are essentially the same as those possessed by the grantor or mortgagor: a right to shared possession and ownership subject to the original cotenants' reciprocal rights of survivorship.” Id. at 565.

What does that formulation mean in practice? Suppose the subject property is a single-family home. What constitutes “a right to shared possession” with the spouse who did not execute the mortgage? If the foreclosure sale purchaser does not have a right to partition, is the purchaser without redress if the spouse refuses to let the purchaser enter?

So long as the tenants by the entirety are spouses, there is a way to resolve these disputes: divorce. But, in a footnote, the Court of Appeals indicated that the closest equivalent to divorce ' partition ' is not available to a foreclosure sale purchaser: “It would make little sense to allow partition at the instance of a third party to whom one spouse has conveyed, since to do so would be, in effect, to authorize the destruction of the nonconveying spouse's possessory rights as a consequence of the unilateral action of the other spouse.” Id. at 566, footnote.

Does that mean the foreclosure sale purchaser obtains only the survivorship right of the spouse who executed the mortgage? Or does the purchaser also obtain the right to require the non-executing spouse to account for the value of his or her own possession (assuming the spouse has excluded the purchaser from possession of the premises)? And what if the property is not a single-family home, but rental property owned by the spouses as tenants by the entirety. Would a foreclosure sale purchaser obtain a right to rents collected by the non-executing spouse? The Court of Appeals has not addressed those questions, but the answers might have a significant impact on how much a purchaser would pay at a foreclosure sale.

Conclusion

The bottom line message for lenders, however, should be clear: Obtaining a mortgage from only one tenant by the entirety provides little of the security lenders seek from a mortgage.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

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The rights of a mortgagee with respect to property held by a married couple as tenants by the entirety engenders considerable confusion, sometimes leading to litigation even of easy cases, where there should be no dispute. The Second Department recently confronted such a case in Deutsche Bank Nation Trust Co. v. Feliciano, NYLJ 4/19/13, p. 33, col. 1. Unfortunately, not every case is so easy, and the treatment of mortgagee rights in the New York courts has been cryptic at best.

The Feliciano Case

In Feliciano, the subject property was owned by John and Sheila Ellerbee as tenants by the entirety. Five years after the Ellerbees acquired the property, John transferred his interest in the property to Jalloop Corp. Two years later, Sheila and Jalloop together transferred the property to Feliciano, who then mortgaged the property and, after executing the mortgage, transferred a 99% interest back to John and Sheila, as husband and wife, retaining a 1% interest for himself. When Feliciano defaulted on the mortgage, the mortgagee's assignee foreclosed. Sheila moved to dismiss, contending that the tenancy by the entirety created when she and John originally took title had never been terminated. Supreme Court denied her motion.

The Second Department affirmed, noting correctly that the tenancy by the entirety had been extinguished by merger. That is, when Sheila and Jalloop, the only parties who then had an interest in the property, together conveyed their interests to Feliciano, the tenancy by the entirety was at an end, and Feliciano was free to mortgage the entire property, which he did. As a result, when he conveyed the 99% interest back to the Ellerbees, their interest was subject to the mortgage, just as it would have been if the Ellerbees together had applied for, and obtained, a mortgage from a bank or other financial institution.

Mortgages by One Tenant By the Entirety

Perhaps Sheila Ellerbee (or her lawyer) can be excused for litigating a hopeless case because New York courts have been less than clear about what rights a mortgagee has when one of two tenants by the entirety executes a deed or mortgage. New York law makes it clear that a mortgage executed by one tenant by the entirety confers rights on the mortgagee, but leaves it less clear what rights the mortgagee actually receives. Courts frequently cite dicta in V.R.W., Inc. v. Klein , 68 N.Y.2d 560, as authoritative on the rights of the mortgagee.

V.R.W. v. Klein itself involved the rights, after divorce, of a mortgagee whose mortgage had been executed only by one spouse. After executing the mortgage, the mortgagor spouse defaulted, leading to a foreclosure proceeding. During the proceeding, he conveyed his interest to his wife, and the parties subsequently divorced. All parties agreed that the mortgagee was effective only with respect to the husband's half of the property, but the wife challenged the mortgagee's contention that the interest the purchaser would receive at the foreclosure sale would be the interest of a tenant in common ' which would enable the purchaser to obtain partition of the property.

Three levels of court rejected the wife's argument, with the Court of Appeals sensibly concluding that because the divorce dissolved the tenancy in common, the right of survivorship was then at an end, and a foreclosure sale purchaser would “acquire all of the rights of an ordinary tenant in common, including the right to seek partition.” 68 N.Y.2d at 568.

Suppose, however, the parties had not divorced. What rights would the mortgagee have had? The Court of Appeals opined on that issue, which was not presented by the case, and indicated that “the grantee's or mortgagee's rights in the property are essentially the same as those possessed by the grantor or mortgagor: a right to shared possession and ownership subject to the original cotenants' reciprocal rights of survivorship.” Id. at 565.

What does that formulation mean in practice? Suppose the subject property is a single-family home. What constitutes “a right to shared possession” with the spouse who did not execute the mortgage? If the foreclosure sale purchaser does not have a right to partition, is the purchaser without redress if the spouse refuses to let the purchaser enter?

So long as the tenants by the entirety are spouses, there is a way to resolve these disputes: divorce. But, in a footnote, the Court of Appeals indicated that the closest equivalent to divorce ' partition ' is not available to a foreclosure sale purchaser: “It would make little sense to allow partition at the instance of a third party to whom one spouse has conveyed, since to do so would be, in effect, to authorize the destruction of the nonconveying spouse's possessory rights as a consequence of the unilateral action of the other spouse.” Id. at 566, footnote.

Does that mean the foreclosure sale purchaser obtains only the survivorship right of the spouse who executed the mortgage? Or does the purchaser also obtain the right to require the non-executing spouse to account for the value of his or her own possession (assuming the spouse has excluded the purchaser from possession of the premises)? And what if the property is not a single-family home, but rental property owned by the spouses as tenants by the entirety. Would a foreclosure sale purchaser obtain a right to rents collected by the non-executing spouse? The Court of Appeals has not addressed those questions, but the answers might have a significant impact on how much a purchaser would pay at a foreclosure sale.

Conclusion

The bottom line message for lenders, however, should be clear: Obtaining a mortgage from only one tenant by the entirety provides little of the security lenders seek from a mortgage.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

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