Just about every divorce case involves a house and its corresponding mortgage.  In a small number of cases parties agree that dissolution of the marriage is also an opportune time to downsize the residence, but in most situations, at least one of the parties wants to keep the residence, even if just, “for a while.”

This is where complications can arise.  Certainly one spouse can transfer their interest in the home to the other.  Nevertheless, any such transfer comes “under and subject” to existing liens and encumbrances.  In most instances, when the parties acquired title to their home they did so subject a promissory note payable to the lender secured by a mortgage.  A mortgage is essentially a pledge of the home to secure the money due under the promissory note.

The promissory note is a “joint and several obligation.”  That means both borrowers agree that the lender has recourse against either or both of them.  So if I transfer my interest in my home to my spouse, it does not affect my duty to keep paying the old mortgage even though it’s no longer my house.

Needless to say, that issue needs to be ironed out.  Usually there is a property settlement agreement and it customarily has a clause stating that the spouse in the house will “indemnify and hold the other spouse harmless” from the obligations of that promissory note.  Understand that such a clause does nothing to assist the “out of house” spouse in the event that the spouse in the house stops paying.  That also means that many lenders look askance at borrowers who come knocking to buy a new house while they still owe money on the residence they left when in search of greener pastures.  In practical terms, if I sign an agreement transferring my home to my ex and she later stops paying the mortgage, I can expect the sheriff to come knocking on my door when the lawsuits are filed.  And my dopey “indemnification and hold harmless clause” is of no effect as a defense to the suit demanding that I pay the $200,000 still due on my now former home.  Reason; my old lender is not bound by my later agreement with my wife.

The clean solution to this dilemma is for the house to be refinanced.  A re-fi actually terminates the mortgage my spouse and I signed and substitutes a mortgage in my spouse’s name alone.  The promissory note spouse and I used to buy the home long ago is cancelled and the mortgage is recorded as “satisfied.”  My spouse walks away with a clear title (my transfer to her) and a note and mortgage in her name alone.  If she falls off the wagon and stops paying that new loan, I am clear of any suit because I’m not on the new promissory note.

Alas, as Ken Feinman, a mortgage broker with CrossCountry Mortgage noted in a recent Pennsylvania Bar Association seminar, the refinance business can be tricky.  Borrowers tend to think that a refinance is easy if the home has significant equity (market value less mortgage debt), but lenders don’t make money foreclosing on real estate.  They make their money by lending to people who have a history of paying their debts on time.  Home equity is a benefit but the real keys to a refinance are a solid credit history (of paying bills) and regular income.

Feinman discussed those two elements after noting that each lender has its own underwriting rules governing to whom they will lend and how much.  Often the trickier element of the refinance is the income history of the spouse who is getting the home in a divorce transaction.  This is also affected by what kind of loan the borrower is seeking.  FHA loans impose lower lending standards; however, the cost of the loan will be higher.  Non-FHA loans take the opposite approach.  Child support and alimony can be credited as income available to pay for the newly refinanced mortgage, but the lender wants to see not just an agreement but 3-6 months of actual compliance with the support/alimony obligation on the part of the person paying.

Payment history has recently been clouded by forbearances related to COVID-19 relief statutes.  If there has been a default but it fits within COVID-19 protections, lenders are looking for at least three (3) months of resumed payments before a refinance will move forward.  If there has been a bankruptcy, it isn’t usually possible to refinance until four (4) years after the case has closed.  If there was a short sale of property, that typically takes three years to “cleanse.”  Allowing a property to be exposed to foreclosure usually takes seven (7) years to clear for refinance.

Feinman’s takeaway was that the sooner there is contact with a mortgage broker in a divorce finance transaction the easier the process can be.  Mortgage brokers are the “guides” who lead borrowers through the morass of legal and underwriting rules.  He noted that there are times when he refers potential clients to consultants who advise clients on how to cleanse bad credit history and improve credit scores.  His lamentation was that potential clients often come to him too late in the divorce process.  Applicants often arrive with no agreement for support or payment history or with a credit history that could have been repaired but was not.

The truth is that in most cases, it becomes fairly clear early in the divorce whether one party wants the house and whether that aspiration is realistic.  The takeaway from this seminar was that once retention of the home becomes clear, it might be time to identify a mortgage broker or lender even though not all the terms of the overall settlement have been resolved.  The purpose would be so that support payment histories can be established and credit scores cleansed under the guidance of someone who knows what mortgage underwriters want to see.  To do otherwise is to risk that the refinance written so carefully into the property settlement agreement will not “fly” with potential lenders.  Bear in mind that few, if any, lenders are going to go to settlement on a refinance until all the terms of the property settlement are concluded and presented to the refi lender for review.  However, while we are all admonished to not let the cart go before the horse, this is one instance where parties should consult with lenders about whether the horse will be able to pull the cart when the credit and income histories are fully evaluated.

This is a slow news week in the world of domestic relations. For this lawyer only two Christmas crises and those easily resolved. Hollywood is obsessing over whether Jennifer Anniston’s holiday ornament with a Covid theme was insensitive. We know that at least 1,600 people who started the day with the ability to worry about that subject won’t have to grapple with it any longer as they will have died today from the disease.

The interesting subject for me today was at the corner of constitutional rights and adult authority. It is a case decided in Pennsylvania and headed to the Supreme Court of the United States. It ties into a subject we have written about before; that of free speech versus responsible speech in an age where the power to publish is governed only by the “send” button.

Our subject is a high school student we know only as B. Levy. She attends school in central Pennsylvania, not too far from Williamsport. As a freshman she was selected as a junior varsity cheerleader. Nothing unusual there except that in her junior year she did not make the varsity squad.

This did not sit well with Ms. Levy and it was accompanied by other life disappointments related to her softball team and her concerns about how she would do in those nettlesome exams that come about when you are a junior. In my day, these indignities were suffered alone. But, today we live in an age of social media, and Ms. Levy decided she would let the world or at least her 250 closest electronic “friends” have the benefit of her views. So, the social media application called Snapchat received a photo posted by Ms. Levy and a friend in which they are depicted with their middle fingers elevated and a caption that employed the four letter “f” word. The  “f” word was applied  to “school….softball….cheer [and] everything.” She then wrote a sentence of protest, which was as grammatically offensive as the four letter word was to refined sensibilities.

As you might have suspected, one of her 250 friends decided to dime out Ms. Levy to a coach at school.  The school district has one of those arcane policies that suggest students representing the school on their teams and clubs should have respect for their status as representatives and avoid “foul language and gestures.” The policies even noted that the internet was not an appropriate place to air grievances.

So, the school acted in conformity with its policy. The coaches imposed a one year suspension and the district approved it.  The parents of Ms. Levy, whose names are fully identified although the student is named as B.L., appropriately exhausted their appeals through the school district’s hierarchy. When they did not succeed, they filed suit in the United States District Court. They alleged that conduct of their daughter’s kind, when posted on social media off the school campus and not thereafter brought onto the campus (think protest signs or pamphlets although both are decidedly decadent in this century) is free speech protected by the 1st Amendment of the Constitution. In denying her the right to cheer with the team who had rejected her varsity entitlement and incurred her ire, the school district had deprived her of civil rights she had under the Constitution and the United States Code, 42 U.S.C. 1983.

The case was assigned to Judge A. Richard Caputo.  School speech cases are among the trickiest cases in constitutional law. The state requires students to attend schools, so kids are not there voluntarily. The schools are responsible for educating and to the best of their abilities “regulating” students. Those are incompatible forces from the start. And, case law regulating whether students could be required to wear bras or skirts below the femoral head have floated about since the 1960s. These cases also included speech such as whether one’s tee shirt can demean the President of the United States or the wrestling coach.

Judge Caputo decided that under prevailing law, speech of the kind offered by Ms. Levy to her Snapchat friends was protected because it did not invade school property. Thus, you can attack the character of the coach while wearing your tee-shirt in town but the school had the right to insist you dress “better” once the bus dropped you on school property.  Judge Caputo also observed that while school is mandatory but activities like cheer are not, public authorities couldn’t subvert free speech or other constitutional rights by requiring students to agree to abandon those rights as a condition for participating in extracurricular activities.

The school district appealed to the United States Circuit Court, which ruled in favor of Ms. Levy on June 30, 2020.  No fewer than eleven attorneys participated in the appeal, representing nineteen different constituencies including the American Civil Liberties Union, four school board groups and four groups of school administrators.

In affirming Ms. Levy’s right to her snapchat posting the Circuit Court relied upon a 1969 decision of the Warren Court in Tinker v. DesMoines Independent Community School District, 393 US. 503.  That case held that free speech rights are not lost at the school house door unless they interfere with the rights of other students to be secure or simply left alone. If speech on campus creates a risk of disruption it may be regulated but even then the risk needs to be balanced against the constitutional right. Disruption presents its own sets of problems as shown by the 2007 Supreme Court case, which held that students were not protected when carrying banners promoting drug use. 551 U.S. 393. Note that the 2007 decision in Moore v. Frederick was 5-4 with a very strange set of concurring and dissenting opinions.

Ms. Levy’s attack upon her cheer colleagues, her softball team and her school generally may be evaluated by a still more conservative US Supreme Court next year. The Court has not granted certiorari (appellate review) but the New York Times today reported that this is considered by constitutional scholars as a case of interest to a more conservative court.

In this case, the plaintiff is appearing through her parents because she is a minor. As a person who enjoys constitutional law, cases such as B.L. v. Mahanoy Area School District fascinate me. I am instantly offended by her vulgar behavior and wonder what lesson the child is to learn from a dispute where her offhand snapchat message is now evaluated by the New York Time’s Supreme Court correspondent. Meanwhile, in 1968 I lived through whether “girls” could wear “pants” in school and as a student council president in 1973 I secured the rights of students to smoke cigarettes on school property. (Hmmmm…)

But, suppose Pere et Mere Levy (parents of B.) were separated and did not agree about whether their daughter should be teaming up with the ACLU and the Pennsylvania Center for the First Amendment? Suppose one parent thought a one year suspension was just for a published attack on her coaches and fellow cheerleaders? Suppose the parents agreed that her speech should be protected but one parent saw harm coming to the child from the notoriety associated with a legal attack on the local school district and to some extent, the child’s peers.  Are family court judges supposed to decide these matters.  And, what criteria should they employ?

I also have concerns about the practical aspects of what our society now wants judges to do to remedy these situations. I have not seen the specific order entered by the trial court, but put yourself in Judge Caputo’s position. You order the child to be re-instated to the cheerleading squad.  If the coach does not permit Ms. Levy to participate in the half –time festivities; is this a contempt of your order? Should you direct the school district to re-form its squad and eliminate a person to create an opening for this child. A three or four person cheerleading pyramid does not work better or at all simply because the federal courts order more personnel to participate. I get the constitutional principles involved and realize that people like Rosa Parks or John Lewis did not win many friends in their broader community by advancing constitutional principles. But teenagers are poor cannon fodder in constitutional warfare and I wonder whether all the lawyers, judges and scholars can ever provide Ms. Levy with the relief she was seeking when she posted her intemperate message. In the end, she just wanted to be varsity and not a famous relic of constitutional law.  Parents and adults sometimes forget that message when they take matters to court.

We have heard about the data.  In 2015, the Labor Department’s Bureau of Labor Statistics published a study indicating that the average worker could expect to hold 12 jobs during his/her career.  More recently, another study indicates that among younger workers (ages 25-35), job changes are occurring once every 2.8 years.

Many of these jobs are temporary or independent contractor arrangements.  Those folks are typically not eligible to participate in qualified retirement plans under the Employee Retirement Income Security Act (ERISA).  Nevertheless, many people are eligible, and many do participate, sometimes without realizing that they are participants.  That may seem improbable, but we have run into a broad range of clients from CEO’s to hourly employees who cannot decipher their own paystubs.  Bear in mind that if the employee is enrolled in a defined benefit retirement plan, the paystub is not going to reflect participation.

Let us suppose the employee is in the 25-35 age range and leaves after this reported 2.8-year period.  He or she may have put away $9,000 in contributions and seen it matched by the employer with another $4,500.  The employee leaves and takes on new employment.  Then, after several moves, the retirement administrator could lose track of the participant’s address.  The employee in most instances could, in fact, should, roll the defined contribution benefits to an IRA or a subsequent plan.  However, that’s something that is often ignored or forgotten.

This problem is so common that the Pension Benefit Guaranty Corporation has done something to try to remedy the problem.  Their approach actually comes at it from a different angle.  Many businesses close, merge or are acquired by others.  Their employee retirement benefits are separately held and the company the employee worked for may no longer exist even though the retirement benefits are still there.

I have not experimented with the website but it is there online if you click here.  Another resource they offer on their site is a page to contact them about unclaimed pensions.  Click here to be transferred to that page.

In prior postings, we have suggested that attorneys recommend to clients that they secure their own credit reports so that they can make certain they know all of their marital debt and to assure themselves that their spouse has not fraudulently applied for credit using their identity.  We have also observed situations where an adult has secured credit in the names of their parents; even their in-laws, because that person has access to data related to social security or bank accounts of those people.

Needless to say, some parties to divorce are knowingly guilty of allowing benefit plans to be undisclosed.  It can and should be embarrassing for a person to be confronted with an undisclosed benefit he or she otherwise had a duty to disclose.  In most instances, the amount may be trivial, but Pennsylvania law more or less defines trivial as “less than $500.”  Clients need to investigate their own financial houses on both the asset and liability side before casting stones at others in the divorce process.

Divorce Complaints come in a variety of ways.  Most lawsuits require delivery by people in patrol cars and uniforms. In the divorce world, things are a bit more “loose.”  Your complaint can come by sheriff, or a constable without uniform, or by another adult.  It can be sent by mail if a return receipt is involved.

The complaint itself is innocuous.  It says that a divorce is sought and specifies if economic claims for alimony, property division, counsel fees and other relief is sought.  But the package may also contains an affidavit of separation.  This sets forth if and when the parties separated.  Separation is a complex topic.  Today people rarely just “walk out.”  However, the affidavit specifies a date and it says you have 20 days to file a pleading if you want to dispute that date.  Otherwise, that date is the date.  It defines how long the divorce may take and what property is marital and what is not.  So you ignore a date of separation affidavit at your peril.  Perhaps you and your spouse started disliking each other in 2016.  Perhaps you stopped having “relations” in 2018.  But, your spouse didn’t actually leave until 2020.  If the affidavit served on you says that you separated in 2016 and you don’t contest that with a court filing within 20 days of service, 2016 will be the date of separation, even if you had a wedding anniversary with 200 guests in 2019, or if your spouse was in a car accident or hit the lottery after 2016.  The recovery on the accident or the ticket will not be marital property.

So if you want to delay conferring with a lawyer, you can do so, but read your mail carefully in the meantime.  There could a be a lot of money at stake.

It has been a very long, if not a very good year.  We noted in an earlier post that one of the challenges reserved for 2021 would be to see how the IRS would address the dischargeable loans granted to hundreds of thousands of businesses under the Paycheck Protection Program (PPP).  Recall that those who “borrowed” under that program were eligible to have the loan forgiven if it was shown that the funds were deployed to cover: (a) payroll; (b) mortgage interest; (c) rent; and, (d) utilities.

The CARES Act specified that the discharge of the loan by itself would not be income.  Section 1106(b).  A Notice issued in May (No. 2020-32) signaled that the taxpayer could not take a deduction for expenses that were effectively paid by a loan that had been discharged.

We now have Revenue Ruling 2020-27 confirming much of this.  Even if the PPP loan has not been formally discharged, the expenses paid with that loan are not deductible if the taxpayer expects the loan to be forgiven at the time of filing.  In fact, the deduction is denied even if forgiveness has not yet been requested so long as the money was spent for one of the four qualified purposes specified above as (a-d).

The IRS also issued Revenue Procedure 2020-51.  It covers the back door in the event that the PPP loan is not forgiven.  Where the lender denies PPP loan forgiveness and the taxpayer wishes to claim the deduction because the expense was paid from revenue and not the money disbursed under the PPP loan, the taxpayer has to attach a statement to the return setting forth the history of what occurred, and how/when the indebtedness was not discharged.  The specifics can be ascertained by reference to the IRS documents.  A summary of it is found in an Alert titled, IRS Confirms Non-Deductibility of Expenses Related to PPP Loans, published by the Tax & Wealth Planning attorneys at Fox Rothschild.

When reviewing a tax return for purposes of calculating support obligations or in determining the value of a business, the practitioner should be aware that these rules should affect income/valuations and should beware that some taxpayers will not avoid the temptation to deduct expenses even though they were effectively payed by the IRS.  Every business should have kept a ledger specifying what expenses were allocated to the PPP loan in order to qualify for discharge of the loan.  That ledger needs to be a part of any discovery request you make henceforth.

Imagine being a kid; any age over four.  Unless you are well north of age 100, you have never seen anything like this.  Adults fighting about everything and demonstrating some levels of rudeness not seen since the school bussing controversy in the 1970s where people fought in the streets over whether or how to promote integration.

Kids can’t understand this.  Why are adults so angry?  From a child’s point of view, we just did the Halloween thing.  It’s time now to slip into Thanksgiving and the magic of Christmas or Kwanza or Hanukah, right?

So this week kids are watching television news about illness rates and death rates and seeing video every bit as sad and creepy as last spring.  Then they watch parents of all stripes, from intact and separated families, spar over whether they can cross-township lines, county lines, or state lines to share a single meal with Uncle Sol and Aunt Selma.  Mom and dad are yelling at each other, “It’s not safe.  Our kids could get sick.  Our elderly relatives could die.”  In response, “You’re crazy; we need to get back our way of life.  This is all exaggerated if not entirely fabricated.”

For a child, could there be a worse way to celebrate “the holidays?”  People screaming and swearing on television.  They turn it off and then watch it live.  All so that we can celebrate our families, right?  Nothing like the childhood memories of having mother call father a selfish boor and an idiot while father announces that he could give a damn what mother thinks because his children will celebrate with family this year.  Celebration, indeed.  Nothing signals celebration more than two parents screaming at each other over whether you will eat turkey at home or the turkey in neighboring Ohio.

I write this as I am presiding over some of this warfare and it makes me angry.  Arguably I should be celebrating myself because lawyers charge good money to preside overs fights about where the turkey is consumed.

Then common sense overcomes me.  It’s not often.  But I ask; what’s to celebrate when you are a child and the people you are taught every day to love and cherish spend their days leading up to a national day of prayer and Thanksgiving by shouting, slamming doors and yelling at children who are upset by this?  Now, that’s a holiday, right?  Especially when one parent goes nuclear and yells that even though I’m just a kid, if I do go to Ohio, I could DIE or bring about the demise of Aunt Selma.  No pressure there, right?  Selma and I will be buried as heroes in the wars over freedom to celebrate Thanksgiving.

If you are engaged in this conflict, or about to be, please stop and ask yourself how your kids are supposed to process this.  Whatever the cause, a lot of people are dying this year and kids are hearing that something bad is in the air.  They are scared because they want to be safe and they want you to be safe because they love you.  Respect both their love and their fear even if you think their fear is unwarranted.  They get scared because they think there are critters outside who might eat them.  The risk posed by those critters, as well as lightning, aliens and terrorists is pretty modest in America.  Yet, we do respect those fears.  I happen to think the fear of respiratory illness is a bit more real than critters.  However, my thoughts are unimportant.  Think about your kid’s fear and do the right thing to address it when you plan a day to give thanks.

Family law blogs are usually not fertile grounds to write about criminal law.  Yet even family lawyers are not immune from situations where our specialty crosses paths with the dark side.  We have previously written about Pennsylvania’s tightly wound wiretap law, which requires that both parties consent before sound is electronically recorded.  Failure to get the consent of the person recorded may be a crime.  18 Pa.C.S. 5701.

A recent article in the current issue of The Bencher, a magazine published by the American Inns of Court, reminds us that federal law addressing computer access has its own legal snag that can yield significant legal problems.

Say you are on Match.com. or even the more innocent Facebook.  You are asked to describe yourself and you resort to “tall, dark and handsome,” when your honest answer would be short, pasty and homely.  Or, you indicate that you are writing from your condominium on the Florida intercostal when you are typing from a trailer overlooking the Youghiogheny outside McKeesport.  You are now making false statements on a website where you have promised to write only what is true.  Thus, you are no longer using the site “legally.”  Some Courts are holding this is a crime.

Accessing data under false pretenses or for corrupt purposes can also cause problems under what is termed the “Computer Fraud and Abuse Act.”  If you use someone else’s credentials to gain access to a site, you may be violating federal law.  In Van Buren v. United States, a cop was arrested and charged with violating the CFAA when he used his credentials to help a “friend” outside law enforcement identify whether a “dancer” in a nearby club was an undercover agent.  Sentenced to 18 months in prison, Van Buren has asked the U.S. Supreme Court to evaluate whether this was a valid purpose of the act and the Court has agreed to hear the case.  The question before that court in a formal sense is whether legal access can become a crime when it is used for corrupt purposes.  The defendant had access to the database by reason of his employment, but the 11th Circuit US Court of Appeals was not happy that he was paid several thousand dollars to “investigate” another law enforcement person for private purposes.  The case is due to be argued on November 30, 2020, and a ruling is expected next year.  However, in the meantime, read your access rules and if you are going to claim to be a Size 4, make it a point to drop a few pounds.  At least then, your sentence for violating federal internet laws should be “lighter.”

18 United States Code 1030

We have recently had inquiries about foreclosures.  Given the current economic climate, this is probably going to become more common.  The good news is that home prices are up, particularly in the Philadelphia suburbs.  But for those who have a house that’s underwater (debt exceeds sales price less commission/transfer taxes) there are things worth knowing.

First, what we like to term a “mortgage” is usually two different legal documents.  A mortgage is actually a legal document filed in the Recorder of Deeds telling the public that the owner’s rights come subject to the claims of a lender.  The mortgage is the product of a document, which you won’t find in the Recorder of Deeds called a promissory note or simply a “note.”  The note says essentially, “I have borrowed money in a certain amount (or up to a certain amount), and here is how I agree to pay it back.”  The mortgage itself just references the note and indicates that if someone tries to buy the property the note and the mortgage will have to be paid in full.  The legal name for this is “due on sale.”

Today, people in relationships often have very different credit histories.  Suppose I am married and I own a house with my spouse.  My spouse has a horrible credit history.  I want to borrow money but the lender looks at my spouse’s credit history and says “We will lend to you but we want nothing doing with that spouse.”  I respond “OK, just loan me the money.”  Lender says “We want security for the loan.  We want a mortgage on your house.”  “But I own the house with my spouse and you don’t like her.”  Lender says, “You still need to get her to sign a mortgage because she is on the deed.”

Note well:  In this transaction, spouse is not an obligor on the debt.  But what spouse actually is doing is agreeing that if I default on the debt, the lender can foreclose on the jointly owned house even though my spouse is not actually a borrower.  In other words the spouse signing the mortgage is effectively saying, “Even though I don’t owe the lender any money, I am prepared to see my interest in a house I own lost to foreclosure if the borrower spouse does not pay.”  It doesn’t matter whether the non-borrower ever got a dimes worth of benefit from the transaction.  Also, once the lender forecloses and even before the lender’s only recourse against the the non-borrower spouse is the equity in the house.  In short, if the lender forecloses but the proceeds from the sale are insufficient to pay off the debt, the spouse is not on the debt but pledged the property via a mortgage is off the hook.

So, I borrow the money to start a business and my spouse agrees to pledge whatever interest she has in our house to secure my debt.  Then I default on the note by not paying it on time.  The lender sues me to recover the debt and takes action to foreclose on the jointly titled house.  My spouse typically has no defense.  By signing the mortgage (not the note), she pledged the house as security for what was my debt alone.

The house goes to foreclosure.  That’s a slow process and in many instances, the home sells at a distressed price.  Often, the borrower and the lender will agree to a private sale to a third party even though the proceeds are less than the lender is due.  However, that requires agreement between the borrower and the lender – and in a world of big banks with vast bureaucracies, getting lenders to agree to anything requires hours/weeks of time trying to secure their cooperation.  Let’s assume that the house is worth $200,000.  I owe the lender $205,000.  I have a buyer at $185,000.  In simple terms, the lender is going to come up $20,000 short if they let the transaction go through.  They could force the property to be sold by the sheriff at foreclosure.  Then they risk the possibility that the sheriff’s top bid is $175,000; now we have a $30,000 shortfall. The lender has the right to a deficiency judgment against the spouse who signed the loan (the borrower) for the $30,000, but the lender now wishes it had consented to the private sale, which would have produced more money.

Title insurance issues can complicate the problem.  Almost every homebuyer wants and should have title insurance.  Most lenders on home purchases insist the property have title insurance to protect them as well as the buyer.  No title insurer has to insure a transaction and like most insurance companies, they are risk averse.  Lenders can release liens of mortgage meaning that even though they are entitled to more money than the house will yield at sale; they would rather take a private deal than see the property sold by the sheriff.  However, unless they file a document with the Recorder of Deeds releasing their lien interest, the private sale cannot be concluded.  Understand that if a lender releases as lien to permit a sale, they are not releasing the balance of the debt but retaining its rights against the borrower alone.  A sale by the sheriff can effectively dissolve the lien on the property even where the debt is greater than the value.  Nevertheless, that’s because the sheriff is selling it in an open bid auction.  If the debt is larger than the value of the home, the lender has the right to take the property in lieu of the debt repayment.  Most lenders avoid that because they don’t like having the responsibility to manage property and deal with utilities, taxes and securing the property.

Tax authorities, including the IRS and many municipalities can be another headache.  They have liens for unpaid taxes as well.  You and your husband own a house worth $200,000.  The mortgage you both signed is for $100,000 of which $50,000 is still unpaid.  But your husband owes $200,000 in federal income taxes for which the IRS has recorded a judgment.  That debt could prevent a title company from insuring the sale even though the taxes are not yours and the proceeds would otherwise be $200,000 minus $50,000 to pay off the mortgage or $150,000.  In theory, the husband’s income tax lien in his name alone should not “attach” to a property that is held as tenants in common or some form of joint tenancy.  But title companies don’t have to insure every transaction; only the ones they want and many would rather not risk that the IRS comes after the buyer for buying a property where a tax lien was “of record” when the transaction took place.

Even more alarming is the situation where a divorcing couple agree to sell a property.  One spouse agrees to pay the mortgage and occupy the property until it is sold.  He/she doesn’t do that causing the debt to increase.  Then that same spouse has a $50,000 IRS lien that arises after the agreement to sell the house.  The couple’s divorce severed the tenancy by entities and made them tenants in common (each owning 50%).  But the $50,000 tax lien due from husband is now clouding the title.  In theory, it should come out of husband’s half of the proceeds and if his half of those proceeds can satisfy the $50,000 debt, a title company may insure the transaction.  But they don’t have to.  Effectively, husband’s poor handling of money after divorce is barring wife from getting her half even though that is what was agreed to.  Effectively, wife’s equity has been trapped in the house even though she bargained to get it and its husband’s subsequent bad act (not paying the mortgage or his income taxes) that bar her from getting to what was to be her money.

If the parties are in a divorce, there is a noteworthy legal doctrine called custodia legis.  Under an appellate case called Klebach v. Mellon Bank, NA, the Superior Court said that in Pennsylvania, property subject to court orders is not subject to attachment by judicial liens.  Lappas v. Brown, supra.  See also Weicht v. Automobile Banking Corp., 354 Pa. 433, 47 A.2d 705 (1946) and Buchholz v. Cam, 288 Pa. Super. 33, 430A.2d 1199 (1981) (property in custodia legis is not subject to attachment until purpose for which Commonwealth holds it has been effectuated).  See generally, Ross v. Clarke, 1 Dall. 354, 1 L. Ed. 173 (1788) (inception of rule in Pennsylvania that property in the custody of the law is not subject to attachment); Bulkley v. Eckert, 3 Pa. 368 (1846) (early formulation of Pennsylvania rule that property held by a public official in his authorized capacity is not subject to attachment by creditors).  The exact limits of this doctrine are not clear.  Property settlements are typically orders of court by operation of law (23 Pa.C.S 3105).  They sometimes takes years to effectuate.  Does that mean that property subject to such an agreement is also immune from attachment for years at a time?

The author thanks Ronald Kalyan of the firm’s Real Estate group for his corrections and additions to this post.

Back in March of this year when the first lockdown began, there were news reports of people electing to quarantine together, if for no other reason, than to avoid isolation.  In some instances, it was to give a forming relationship a “test run.”

Living together, what my parents’ generation liked to call, “living in sin,” is the new normal.  The pandemic just caused some timetables to be advanced.  Nevertheless, as we know, cohabitation often breeds other entanglements, both literally and figuratively.

Take the recent example offered by the relationship of two Lackawanna County residents whose relationship toggled between “off” and “on.”  One of the “on” periods produced a child, although they never married.

In February 2018, Jeffrey Jones and Ruthann Colachino were back “on.”  It was tax time and when they reviewed their tax situations, they agreed that it would be advantageous to allow Mr. Jones to claim their child as his dependent and then file as a head of household.  Ms. Colachino was fine with that so long as Mr. Jones agreed to share the $5,500 refund that his head of household status was due to yield.

When the refund check arrived, the momentarily “happy couple” decided to do what every responsible couple does; they drove to a convenience store in Carbondale and “invested” their newfound wealth in “Bingo Squared” lottery tickets.  They returned to their common dwelling and followed the direction of Gus the Groundhog.  Mr. Jones managed to scratch his way to a $100,000 prize.  Elated, the couple told friends and family they would buy a home together.  They drove together to collect the $72,930 that Gus allows when you scratch off $100K.

You know the rest of the tale.  It lasted a week.  Two weeks after that Ms. Colachino filed to get her $36,465.  The trial included the now ubiquitous surveillance footage from the Turkey Hill store where the winning ticket was acquired.  After watching, that riveting video and hearing from the store clerk and some friends and family the Lackawanna Court ruled the proceeds must be shared as the product of a “joint venture.”

The appeal to Superior Court followed, suggesting this was not a joint venture.  So what’s the law?

A joint venture is an association of persons or entities who form an express or implied contract to engage in a common enterprise for mutual benefit.  McRoberts v. Phelps, 138 A.2d 439,443 (Pa. 1958).  It is shown by facts and circumstances illustrating what, if anything, the parties “intended when associating together.”  There are four elements spelled out in McRoberts: (1) each party must contribute something, whether cash, services, skill, knowledge or material; (2) there must be an intention to share the profit; (3) there is mutual control over the subject matter of the enterprise; and (4) an identifiable transaction rather than a general and continuous transaction.

The video showed they purchased the tickets together, as they had done in the past at the same store (per the clerk).  They called friends and family once they won and used the first person plural “We won!”  They told these same people of a plan to acquire real estate together.  The Superior Court Opinion then circles back to the common plan to share Mr. Jones’ tax refund premised upon Ms. Colachino’s contribution of a “head of household” filing status.  They went directly from where the refund was cashed to the Turkey Hill and Gus’ burrow where they bought their tix.  The suggestion by Mr. Jones that their visit was coincidental was rejected, as it was a credibility finding.

Facetious moral of the story.  Stand clear of others when buying your lottery tickets and if you do win, never, ever use the first person plural.  If someone is standing nearby do not profess to others any intention to acquire real estate with them.

More mature observation.  Lottery tickets make for amusing stories but the difference between buying a ticket and the founding of Microsoft are simply different increments of the same concept, a common enterprise resulting in an extraordinary result.  Even partnerships can be formed through implied conduct.

Colachino v. Jones, 1845 MDA 2019 Pa Superior Memorandum (10/9/20)

N.B.  I’m indebted to Judge Jason Legg of Susquehanna County for finding and reporting on this case in his regular legal column published in the Montrose Independent.  My wife, an ardent reader of the Independent, and fan of Judge Legg’s column brought it to my attention.  Whether that makes this a joint venture, I leave to the reader.

In February 2017 and again July 31, 2019, we posted an article regarding what returns should be ascribed to investment assets transferred in equitable distribution.  In 2019, with dividends reinvested the S&P 500 returned just over 33%.  This year-to-date, 8.5%, which is still not bad, but it has also been a wild ride.  In 2019, we wrote about a 10-year Treasury yielding a lousy 2.06%.  Today 0.83%.

So last July, we played off an article appearing in Kiplinger’s Magazine that set forth 11 stocks that were described as “Boring but Beautiful” because they had an average dividend yield of 5.3%.

A bit more than a year later, we thought it provident to revisit these stocks, if for no other purpose than to see what happened with the yields. Obviously, a full exploration would look at price but we wanted to test the question of whether the 5.3% yield was sustainable. On the whole the results were encouraging. The same portfolio of stocks is today producing an average of 6.48%.  Only three of the eleven stocks saw a decline in yield while one company, Macquarie (MIC), ballooned from 9.6% to 14.39%.  One company fell of out bed on the yield side.  Albemarle went from 7% to 1.6%, but when we did look at stock price, it rose from $75/share to $97/share, a consolation for the dividend loss.

Meanwhile, the Freddie Mac House Price Index has risen from 194 to 205 in the past year.  A decade ago, it was at 126.  So, while houses really did not get back their Fall 2006 mojo until 2016, they have been back on the rise and now are adding value to investor portfolia.

In a word, if you have investments, people are making money and it’s a lot more than the 1% the Treasury Department is paying or the staggering 0.05% rate my saving bank offers.  At those rates your savings doubles once every millennium.

Here’s the dividend yield chart from last July as updated last week.

July 2019                              October 2020                     Trade Symbol

Crown Castle 3.5 2.92 CCI
ATT 5.9 7.8 T
Altria 6.4 8.89 MO
CVS 3.6 3.4 CVS
Macquarie 9.6 14.39 MIC
Enterprise 5.9 6.42 EPD
3M 3.3 3.45 MMM
Iron Mountain 8.2 9.02 IRM
Realty Inc. 3.9 4.73 O
Vereit 6.0 4.7 VER
Albermarle 7.0 1.6 ALB