The Commonwealth of Pennsylvania is one of many jurisdictions in the United States that recognizes a concept known as or similar to “tenancy by the entireties.” This refers to a form of property ownership unique to married couples. In Pennsylvania, it has been described succinctly as “a form of co-ownership in real and personal property held by a husband and wife with right of survivorship” … “its essential characteristic is that each spouse is seized per tout et non per my, i.e., of the whole or the entirety and not of a share, moiety, or divisible part.”1
Since property held in an entireties estate is held by each spouse in the whole, neither spouse can unilaterally sever the estate. By extension, such property is generally protected from execution by creditors of one of the spouses.2 This concept can become particularly interesting – and troublesome, from the perspective of creditors – when spousal guaranties are involved.
In ISN Bank v. Rajaratnam3, the Superior Court of Pennsylvania reminded parties of just how powerful the entireties estate is, and of how mindful creditors must be if they intend to execute against entireties property. While the crux of the case’s holding was centered on a discrete procedural issue of whether separate judgments against spouses could be consolidated to reach entireties property4, the more profound legal issue was under what circumstances spousal-guaranty judgments can be executed against entireties property.
In 2005, the predecessor to ISN Bank (ISN) extended a loan to a partnership in which Mr. Arasu Rajaratnam was a partner, in order to facilitate the renovation of a building of condominiums in Philadelphia. This loan was personally guaranteed by Mr. Rajaratnam. In 2007, and just a few months before the scheduled maturity of the loan, ISN agreed to extend the loan’s maturity date. In connection with the maturity date extension, ISN obtained a guaranty agreement executed in its favor with respect to the loan, by Mr. Rajaratnam and his wife, Emma Rajaratnam.
The loan eventually went into default, and in 2009, ISN confessed judgment against Mr. Rajaratnam on his 2005 guaranty and his partnership. Subsequently, the condominium building was sold at a sheriff’s sale. While the Rajaratnams contested the Petition to Fix the Fair Market Value in connection with the sheriff’s sale, a trial court held that Mrs. Rajaratnam was bound by the 2007 guaranty agreement she executed, and as a result, she would be liable for the to-be-determined deficiency between the property’s sale proceeds and the remaining, outstanding debt.
As it turned out, ISN, for reasons that are unclear to the outside observer, sought to enforce its rights against Mr. Rajaratnam under his 2005 guaranty and sued Mrs. Rajaratnam under her 2007 guaranty. The result was two separate judgments against two individual debtors, which could not be procedurally consolidated under Pennsylvania law in order to execute on entireties (marital) property.
The more important lessons to be learned from this case come by way of a hypothetical scenario set forth by the court. The court considered and opined on the outcome of the case if Pennsylvania law would allow procedural consolidation of the two judgments against separate persons. The Court determined that ISN still could not execute upon the Rajaratnams’ entireties property because “separate actions by spouses resulting in separate judgments are not sufficient to encumber entireties property.”5 Specifically, the Rajaratnams’ respective 2005 and 2007 guaranties “were separate documents, in separate transactions, and for separate considerations” … which does not satisfy the “joint action” needed to create a “joint debt” enforceable against the entireties estate.
The trial court below went one step further to say that even if, hypothetically, ISN had brought suit against Mr. and Mrs. Rajaratnam on the 2007 guaranty (which they both executed), that document was insufficient to establish the joint action / joint debt requirements under Pennsylvania law, because it made no reference to the two individuals being married and was an otherwise generic guaranty. In other words, it lacked a “joint act or clear indication the Rajaratnams intended to waive their rights as tenants by the entireties” … because the 2007 guaranty language was “individual and generic in nature.”6 This discussion is dicta and is not binding precedent.
The takeaway from Rajaratnam and other entireties execution cases is that parties must be very careful and specific when documenting a transaction which is underwritten based on entireties property. That is, particular care must be taken in order for entireties property to actually be available for execution. In the circumstance of guaranties intended to bind entireties property, spouses should sign the same guaranty, which guarantees the same debt, for which the consideration is the same. At the very least, the guaranty should contain language that discusses the spouses being liable jointly and severally, and ideally, it should contain language recognizing the guarantors undertaking their obligation as spouses. If separate guaranties are executed (which is not recommended), they should contain language providing that each guarantor remains jointly and severally liable with any other guarantor of the same debt in the same transaction. Care should be taken in a legal action on the guaranty or guaranties of spouses to obtain a single judgment against both spouses. If one of the defendant-spouses answers and the other does not, beware of a trap – consideration should be given to delay the non-answering party’s judgment until the judgments can be obtained and entered against both spouses together.
The particularities surrounding spousal guaranties, especially when entered into in connection with a credit accommodation such as a forbearance agreement, are complex and fact-specific, and as a result you should always consult with legal counsel to have your unique circumstances carefully considered.
1In re Gallagher’s Estate, 352 Pa. 476 (1945).
2Klebach v. Mellon Bank, N.A., 565 A.2d 448 (Pa. Super. 1989).
3ISN Bank v. Rajaratnam, 83 A.3d 170 (Pa. Super. 2013).
4The court held that they cannot be so consolidated.
5Id. at 175.
6ISN Bank v. Rajaratnam, 2009 No. 0363, 2013 WL 9900688, at *12 (C.P. Philadelphia 2013).