arguing that there is no justifiable basis for extending the recognition of a tenancy by the entirety estate to personal property which replaces real property owned in the entireties formSummary of this case from Jensen v. Montemoino (In re Montemoino)
Argued May 26, 1969 —
Decided June 30, 1969.
Appeal from The Superior Court, Chancery Division.
Before Judges GOLDMANN, KOLOVSKY and CARTON.
Mr. Richard B. Goldsmith argued the cause for appellant ( Messrs. Williams, Gardner, Caliri, Miller Otley, attorneys).
Respondents did not file a brief.
On December 3, 1964 defendants Joseph R. LiButti and Joanne LiButti, husband and wife, executed a purchase money bond and mortgage to secure a loan of $42,000 at 6%. They defaulted in installment payments and, following a foreclosure judgment entered July 17, 1967, the property was ordered sold. The sale resulted in a surplus of $18,440.12, which was deposited with the court.
The LiButtis were tenants by the entirety of the property in question. Defendant Mitchell, Hutchins Co., Inc., had recovered a judgment on April 27, 1964 in the amount of $5,570.49 and costs against Joseph LiButti — this prior to the execution of the bond and mortgage mentioned. Mitchell, Hutchins applied to the court for payment of its judgment out of the surplus. That application was eventually denied on the basis of Servis v. Dorn, 76 N.J. Eq. 241 ( Ch. 1909), and the decision of this court in Dorf v. Tuscarora Pipe Line Co., Ltd., 48 N.J. Super. 26 (1957) ( dictum, at page 32).
In Servis Vice-Chancellor (later Chancellor) Walker held (76 N.J. Eq., at page 243) that surplus money arising from a foreclosure sale of real property held by the entirety "stands in the place of the land itself in respect to liens thereon or vested rights therein." The holding of that case has withstood the test of time. See Morris v. Glaser, 106 N.J. Eq. 585 , 592 ( Ch. 1930), affirmed o.b. 110 N.J. Eq. 661 ( E. A. 1932); Vineland S. L. Ass'n v. Felmey, 12 N.J. Super. 384 , 392 ( Ch. Div. 1951); Danes v. Smith, 30 N.J. Super. 292 , 301-302 ( App. Div. 1954). See also, 4 Pomeroy, Equity Jurisprudence (5 th ed. 1941), § 1167, p. 495; 7 N.J. Practice ( Clapp, Wills and Administration) (3 d ed. 1962), § 1781, p. 521, and Annotation, "Estate by entirety in personal property," 64 A.L.R.2d 8, 60 (1959).
We agree with the Chancery Division judge that Mitchell, Hutchins is not presently entitled to satisfaction of its judgment out of the principal of the surplus monies. The principal will be held under the control of the court to await severance of the estate by the death of Joseph or Joanne LiButti, "when it will or will not become available * * * accordingly as the judgment debtor [Joseph] survives or dies before the other tenant by entirety [Joanne]." Servis v. Dorn, above, 76 N.J. Eq., at page 245.
For an indefinite period, possibly stretching into the distant future, the challenged order removes from the reach of the judgment creditor the husband's share of that fund which in justice ought to be applied against his valid indebtedness. Inasmuch as the ultimate ownership of the proceeds of sale is made to depend upon the hazard of survivorship inherent in tenancies by the entirety, that order compounds the injustice by making any expectation of recovery highly fanciful. It establishes an exception to the salutary rule that tenancies by the entirety may not exist in personal property and by means of a fiction extends in new form a type of tenancy whose values has been widely questioned even so far as it applies to real property. Furthermore, it imposes upon the court system an unwarranted burden of administering the funds and supervising their investment until such time as one of the spouses dies.
Of the slightly less than $25,000,000 paid into court pursuant to N.J.S. 2 A:15-73, 74 and maintained in trust funds, the great bulk represents the proceeds of various condemnation proceedings in some 4,000 separate accounts. About $2,000,000 is distributed among 1700 additional accounts maintained under a general trust category, and the remainder of about $500,000 in about 200 accounts representing funds held in connection with liquidations of building and loan associations. The exact amount deposited and kept in trust funds representing surplus monies from foreclosures and the number of accounts required to be administered in connection with such funds cannot readily be ascertained from available statistics. However, it seems safe to assume the amount of money and the number of accounts of this nature to be more than nominal even in these prosperous times when relatively few mortgage foreclosures occur.
At the time of the foreclosure of the mortgage resulting in the $18,000 "surplus," the LiButti property was encumbered by other mortgages totaling $48,000 and by four other judgment liens in the amount of $8,000. The existence of this imposing lien indebtedness against the property eliminated for all practical purposes any reversionary interest either the husband or wife may have had in that surplus. These circumstances underscore the inherent injustice and the utter unreality of the entry of an order which consigns the funds to the legal and economic limbo of "await(ing) the severance of the estate [by the entirety] by the death of Joseph and Joan C. LiButti."
The majority has concluded that the doctrine of stare decisis compels this result. In doing so it adverts to the pronouncement of Vice-Chancellor Walker in Servis v. Dorn, 76 N.J. Eq. 241 ( Ch. Div. 1909), that surplus money arising from a foreclosure sale of real property held by the entirety "stands in the place of the land itself in respect to liens upon or vested rights therein."
The philosophy behind this general statement, as it applies to a variety of situations where real property has been converted to personalty, is set forth in Morris v. Glaser, 106 N.J. Eq. 585 ( Ch. Div. 1930), affirmed o.b. 110 N.J. Eq. 661 ( E. A. 1932):
"* * * The proceeds retain the character of real estate for the purposes of succession. Oberly v. Lerch, 18 N.J. Eq. 346. The theory upon which such surplus proceeds are held to be land is that the surplus usually arises because more land is sold than is necessary, in one case, to pay the debts of decedent; in another (foreclosure), than is necessary to satisfy the mortgage debt; and in partition, because the land is impossible of division and for practical purposes it has been converted into money. But in each case the money stands for the land and the rights therein are determined as though the court were dealing with the land itself. Upon an application for distribution of such surplus moneys, the division amongst those entitled is, in effect, an equitable partition of the land for which the money stands. The excess, though in the form of money, remains, as before, impressed with the character of the land. Cooke v. Dealey, 22 Beav. 196. Such money passes by succession on `the principle that money impressed with the character of land remains such until it is accepted as money by its absolute owner of sufficient capacity to make such election.' Oberly v. Lerch, supra. * * *" (at pp. 592-593)
The generality that the surplus money stands in the place of the land itself, although acceptable as a general proposition, does not provide a valid foundation for the conclusion reached in Servis.
Granted that surplus monies may in a sense be said to stand in the place, that is, replace the real property. Granted too that there is a valid reason for making a distribution of the surplus as between the former owners on the basis of their respective rights in the real property as they existed at the time their interests in the real property ceased and for preserving the order of priorities of the creditors who obtained liens on the property.
A far different thing it is to say that the proceeds of the mortgage foreclosure sale are for all purposes to be treated as real property and cannot be distributed and must be held in abeyance out of the reach of creditors until the marriage terminates. Such a conclusion rests upon the pure fiction that somehow the tenancy by the entirety which exists in the real property is born anew and becomes infused into the proceeds of sale and that that unique status, with all its ancient incidents, abides in the proceeds for the indefinite future.
The estate by the entirety has been described as a "remnant of other times" which rests upon the "fiction of a oneness of husband and wife." See dissenting opinion of Chief Justice Weintraub in King v. Greene, 30 N.J. 395 , 413 (1959). The social purpose of the tenancy by the entirety seems to be to solidify the marital status by encouraging and protecting home ownership and to protect and insulate the institution of marriage from the onslaught of creditors. Upon death of one of the spouses, it assures the survivor, normally the wife, possession of a home free and clear of the individual indebtedness of the other.
But whatever social purpose this tenancy was designed to serve in the interest of married parties and whatever the reasons for its continued existence in this State, there is no justifiable basis for extending it to the personal property which replaces it. To indulge in the further fiction necessary to achieve such a result serves no useful purpose and acts to frustrate justice. Furthermore, it runs counter to the policy of this State against recognizing the existence of tenancies by the entirety in personalty. Central Trust Co. v. Street, 95 N.J. Eq. 278 ( E. A. 1923); Brown v. Havens, 17 N.J. Super. 235, 238 ( Ch. Div. 1952). See Annotation, "Estates by entirety in personal property," 64 A.L.R.2d 8, 31 (1959).
Nor can such a doctrine be justified on the theory that the survivorship rights of husband and wife continue because the surplus monies are the product of an involuntary conversion and thus become a substituted res standing in place of the property. This aspect of equitable conversion also has its genesis in the general concept that the proceeds of the sale stand in the place of the real property and that the property, although in fact converted into personalty, must be treated as not converted. See 4 Pomeroy, Equity Jurisprudence (5 th ed. 1941), § 1167, p. 495, where the author more aptly describes this type of conversion as "conversion by paramount authority." This doctrine has been applied to the distribution of the proceeds of condemnation proceedings. Dvorken v. Barrett, 100 N.J. Super. 306 ( App. Div. 1968), affirmed o.b. 53 N.J. 20 (1968).
But it can have no logical application to a mortgage foreclosure. Mortgagors, in executing mortgages, must certainly be held to have understood both that they must pay the amount which the mortgage secures and that their interest in the property may be cut off by foreclosure and sale of the property in the event of a default. The foreclosure and sale are steps in a process entirely consensual in its origin and nature. Compare Dorf v. Tuscarora Pipe Line Co., Ltd., 48 N.J. Super. 26 ( App. Div. 1957).
A trend toward distinguishing the involuntary conversion cases evidenced in this State in Dorf has proceeded much further in the courts of New York. In Hawthorne v. Hawthorne, 13 N.Y.2d 82, 242 N.Y.S.2d 50, 192 N.E.2d 20 ( Ct. of App. 1963), the court limited the involuntary conversion theory to condemnation proceedings and found that the proceeds of a fire insurance policy on realty held by the entirety was a voluntary conversion and therefore severable as jointly held personal property. Although recognizing the loss as one resulting from accidental causes and therefore involuntary, it held that the money existed only as the result of entering into a personal contract of insurance and did not arise as a matter of law. The court cited with approval Franklin Square Nat. Bank v. Schiller, 202 Misc. 576, 119 N.Y.S.2d 291 ( Sup. Ct. 1950), which held that after a foreclosure sale of property held by the entirety the proceeds were payable in equal shares to the husband and wife as tenants in common. By way of dictum, in Hawthorne the court stated that the proceeds of a foreclosure of real property held by the entirety would be treated as personalty. The court commented:
"Putting aside the change in the use of realty, it is incontrovertible that a decision that ties up money, allowing only division of interest, is a serious impediment to its enjoyment." (242 N.Y.S.2 d, at p. 53, 192 N.E.2 d, at p. 22).
The validity of Servis was questioned recently in In re Ved Elva, Inc., 260 F. Supp. 978 ( N.J.D.C. 1966). The court held that the sale of property by a trustee as an asset of the bankrupt husband and wife destroyed the right of survivorship in the debtor-husband which the petitioner-creditor could have sold before the fee title vested in the trustee. It rejected the petitioner's claim that his judgment lien, obtained prior to the bankruptcy, was transferred to the proceeds of sale, and refused to follow the doctrine stated in Servis, commenting:
"Since King v. Greene, supra, a half century after Servis, when tenancy by the entirety in New Jersey received a new and full analysis, it is improbable that ancient incidences and equitable fiction as imposed in Servis would be so extended." (at pp. 982-983)
Keeton, in describing the function of the judiciary in maintaining a proper balance in the law between the need for stability and continuity and flexibility to meet conditions, says:
"The judiciary is, then, on the one hand a guardian of the law's continuity, stability, evenhandedness, and predictability and on the other hand a participant in creative evolution that keeps laws contemporary and viable." Robert E. Keeton, "Venturing to do Justice" (1969).
This obligation of the judiciary has often been recognized by the courts of this State. The basic principles were restated by Justice Jacobs in Schipper v. Levitt Sons, Inc., 44 N.J. 70 (1965):
"The law should be based on current concepts of what is right and just and the judiciary should be alert to the never-ending need for keeping its common law principles abreast of the times." (at p. 90)
A doctrine which renders surplus monies in foreclosure proceedings against property owned by the entirety immune from the claims of the individual spouse until the marriage ends is out of step with the times. It ignores the modern economic life about us. Contrary as it is to ordinary concepts of justice and founded as it is on legal fiction, it should be discarded as a reproach to our judicial system. We must not "reverence gray-headed doctrines; though feeble, decrepit and within a step of dust, and on this account maintain opinions which have nothing but our charity to uphold them." Joseph Glanvill, "The Vanity of Dogmatizing" (1661).
The following comment of Justice Holmes is singularly pertinent to the situation before us:
"It is revolting to have no better reason for a rule of law than that it was laid down in a time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past." Holmes, "Path of the Law," 10 Harv. L. Rev. 467, 469 (1897).
Accordingly, I would reverse the order entered in the Chancery Division.