In Pennsylvania, as in many other jurisdictions, real property owned jointly by a husband and wife – property held in a "tenancy by the entirety" – cannot be attached to satisfy the debt of only one spouse. Rather, a creditor only can attach entireties property if it has a judgment against both spouses. In a recent decision, the Pennsylvania Superior Court held that a creditor may not consolidate separate judgments against individual spouses into a single judgment that would enable the creditor to attach entireties property, even if the separate judgments relate to the same debt.
In ISN Bank v. Rajaratnam, a partnership that owned a property in Philadelphia borrowed almost $7 million from ISN Bank in 2005 to finance a conversion of the property into condominium units. Arasu Rajaratnam signed an agreement pursuant to which he personally guaranteed repayment of the loan. In 2007, in connection with the bank's agreement to extend the maturity date of the loan, both Mr. Rajaratnam and his wife signed an agreement guaranteeing repayment of the modified loan.
When the borrower defaulted on the loan, the bank confessed judgment in the amount of almost $5 million against Mr. Rajaratnam under the 2005 guaranty agreement. The bank also sued Mrs. Rajaratnam under the 2007 guaranty agreement, and obtained a $3.3 million deficiency judgment against her. The bank then moved to consolidate the two judgments, presumably so that it could attach entireties property held by the Rajaratnams.
On appeal from the trial court's denial of the bank's motion to consolidate, the Superior Court affirmed. The Court held that "separate actions by spouses resulting in separate judgments are not sufficient to encumber entireties property." Rather, "[t]o establish a joint debt that may serve as the basis for a lien on entireties property, the two spouses must act together in the same transaction and in so doing incur a joint liability." Because the judgments against Mr. and Mrs. Rajaratnam "were entered pursuant to separate documents, in separate transactions, and for separate considerations [and were] not even in the same amounts," the Court held that the judgments could not be consolidated into a single judgment.
The ISN Bank case makes clear that lenders who are relying on entireties property as collateral for a loan must take care to not only have both spouses sign a single guaranty, but also must pursue and obtain a single judgment against both spouses simultaneously. The fact that both spouses have guaranteed the same obligation may not be sufficient in the absence of single judgment against both spouses.
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