Generally, a creditor may not require the signature of an applicant’s spouse (or any other person other than a joint applicant) on any loan if the applicant qualifies for the credit requested under the lender’s standards of creditworthiness. If an applicant does not meet the lender’s standards of creditworthiness, then the lender may (among other things) condition approval of the credit upon the applicant furnishing the signature of another person (e.g., guarantor), but the creditor may not require that person to be the applicant’s spouse. If a creditor routinely requires spousal guarantees, for example, without first ascertaining whether an applicant is creditworthy, then the conditioning of the loan on the spousal guarantee violates Federal Reserve Board Regulation B.
Of course, there are exceptions to this rule. Regulation B expressly permits a spousal guaranty when the spouse’s guaranty is necessary to make property available as collateral to satisfy the debt in the event of a default. Understand that potential borrowers tend to push back on requests for spousal guaranties and waivers, but there are reasons why they are necessary. We will look at a recent case from the Second Circuit Court of Appeals which addressed a fraudulent conveyance action where the spouse transferred her interests in jointly owned property to her daughter.
In May 2015, Husband and Wife conveyed their respective interests in valuable real property to their daughter. Their apparent goal in this conveyance, as in two prior transactions, was to shelter the property from enforcement of a $45 million default judgment entered days earlier against the Husband. In 2017, the U.S. District Court for the Eastern District of New York (EDNY) voided the transfer as fraudulent under New York law. Then in 2020, the EDNY issued an order extinguishing Wife’s right of survivorship in the property, determining that Wife had acted in bad faith by participating in the conveyance to the daughter.
The EDNY analyzed the text of the fraudulent conveyance provisions of the New York Debtor and Creditor Law which provided for two remedies for creditors whose claim has matured:
[h]ave the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim,
[d]isregard the conveyance and attach or levy execution upon the property conveyed.
The judgment creditor and the EDNY recognized that the Debtor and Creditor Law does not state generally that a creditor may seek equitable remedies, much less the specific equitable remedy awarded here: termination of a non-debtor’s right of survivorship to a fraudulently conveyed property.
In considering the issue, the Second Circuit noted:
The New York Court of Appeals has not ruled directly on this question. Our task therefore is ‘carefully to predict how the [state’s] highest court’ would interpret the statute.
Note, that unlike the Second Circuit decision addressed in yesterday’s issue of WurstCaseScenario, the Second Circuit did not certify the question to the New York Court of Appeals but, instead, predicted how it would interpret the statute.
… case law strongly suggests that the New York Court of Appeals would follow [the decision of a New York intermediate appellate court] and find that the remedy the [EDNY] Court ordered is impermissible [under the statute]. The [EDNY]’s first order, voiding the conveyance from [Husband] and [Wife] to [the daughter] as fraudulent, restored the “status quo ante” in this case: under that order, [Judgment Creditor] retains its preexisting lien over [Husband]’s interest in the property, and [Wife] retains her share of the tenancy by the entirety for the [p]roperty, including her right of survivorship. Extinguishing [Wife]’s right of survivorship expands [Judgement Creditor]’s’ rights relative to the status quo ante….
The Second Circuit concluded:
…we predict with confidence that were the New York Court of Appeals to address this issue, it would conclude that the remedy ordered by the District Court was not available under New York’s [Debtor Creditor Law]. Because we conclude that the District Court could not terminate [Wife]’s right of survivorship under that statute, we vacate the District Court’s order and remand for proceedings consistent with the interpretation of New York law described in this Order.
So what does this mean? It means that despite Wife’s dirty hands, she retains her right of survivorship and, assuming Husband predeceases her, she will take the property free and clear of the Judgment Creditor’s judgment lien. It also means that the existence of the joint tenancy will prevent the Judgment Creditor from executing on the property. Understand that there is a 20-year statute of limitations in which an action may be brought on a judgment. The joint tenancy makes it more possible to retain the property until after the statute of limitations has run.
Now – what does all of this mean to you? It means that if you intend to rely on property that is subject to a joint tenancy, you very much need to have a spousal guaranty or spousal waiver. Without it, your judgment will very likely remain in limbo hoping that your judgment creditor’s spouse predeceases him or her prior to the expiration of the applicable statute of limitations.
We recognize that it is unpleasant to require a spousal guaranty or waiver, and many lenders just hope that they won’t need it. But when they do, they will be pleased they have it. Or they will be disappointed that they failed to get it when they should have.
Deerbrook Insurance Company v Mirvis, 2021 WL 4256845 (2d Cir. September 20, 2021)