Bulletin: MD2015005

Date:
February 03, 2015
To:
All Maryland Issuing Offices
RE:
UNDERWRITING - Effects of Judgments and Tax Liens on Maryland Real Property Owned by Tenants in Common, Joint Tenants, or Tenants by the Entireties

Dear Associates:

Maryland has unique laws on the concurrent ownership of real property. Sometimes this leads to confusion as to whether a lien or judgment must be satisfied and paid off as part of a closing. This Bulletin summarizes Maryland law, recent Bankruptcy Court decisions, and IRS guidance on these issues.

I. TENANCY IN COMMON:

a. What it is:

Tenancy in common is the concurrent ownership of property by two or more related or unrelated persons, in either equal or unequal shares. Each tenant holds an undivided interest in the property, and has an equal right, along with all the other tenant(s), to use and possess the property. Each tenant has the right of alienation (i.e., the right to sell the property, convey it, mortgage it, etc.) without the consent of the other(s). There is no right of survivorship, i.e., upon the death of a tenant in common, that person’s interest in the property vests in his/her personal representative, and passes through a will or the laws of intestacy.

b. How Created:

  • Tenancy in common exists when the deed explicitly conveys property to the grantees as “tenants in common”. 
  • Tenancy in common is presumed where no form of tenancy is stated in the deed, and the deed does not indicate that the grantees are married. 
  • Tenancy in common results when a joint tenancy or tenancy by the entireties is severed (see below regarding severance).
  • Any deed, which professes to convey property to joint tenants in unequal shares, creates a tenancy in common.

c. Effects of Tenancy in Common on Judgments and Tax Liens:

Judgments and tax liens of all kinds, (including State of Maryland and Federal), filed in the Circuit Court of the county in which the real property is located (or in the District Court for Baltimore City) attach to real property owned as tenants in common. This is true regardless of whether the judgment or lien is filed against one or all tenants in common. Any such judgments or tax liens must be paid in full and released of record when the property is sold or refinanced.  

II. JOINT TENANCY WITH THE RIGHT OF SURVIVORSHIP:

a. What it is:

Joint tenancy with the right of survivorship is the concurrent ownership of property by two or more related or unrelated persons, in equal shares. Each tenant holds an undivided interest in the property, and has an equal right, along with all other joint tenants, to use and possess the property. Each tenant has the right of alienation, without the consent of the other(s).

The right of survivorship is a principal characteristic of joint tenancy. Young v. Young, 37 Md. App. 211, 376 A.2d 1151, cert. denied, 281 MD 746 (1977). Unlike tenancy in common, upon the death of one joint tenant, that person’s interest in the property vests in the surviving joint tenant(s), in equal shares. In other words, joint tenancy property passes automatically (by operation of law), and without regard to the laws of testacy or intestacy. For example, if three joint tenants own the property, each starts with an undivided 1/3 interest in the property. If one joint tenant dies, the remaining two joint tenants each own an undivided ½ interest. 

b. How created:

In order to create a joint tenancy in Maryland, it must be so clearly expressed as to have no doubt of the intention of the parties. Register of Wills v. Madine, 242 Md. 437, 219 A.2d 245 (1966). Further, Maryland Real Property §2–117 states:  “No deed, will or other written instrument which affects land or personal property, creates an estate in joint tenancy, unless the deed, will, or other written instrument expressly provides that the property granted is to be held in joint tenancy.” 

The entire phrase “joint tenancy with the right of survivorship, and not as tenants in common” need not be included in the deed. A conveyance to two or more persons “… as joint tenants” suffices to create a joint tenancy with the right of survivorship in Maryland. Downing v. Downing, 326 Md. 468, 606 A.2d 208 (1992).

In order to create a joint tenancy, the “four unities” of title must exist. Alexander v. Boyer, 253 Md. 511, 253 A.2d 359 (1969). These include:

  • Unity of time:  all joint tenants must obtain their interest in the property at the same time.
  • Unity of title:  all joint tenants must acquire the property from the same source and in the same deed.
  • Unity of possession:  each joint tenant has the right to possess the entire property with the other joint tenants.
  • Unity of interest:  each joint tenant must have the same interest in the property. 

As mentioned previously, real property may be owned as joint tenants by related or unrelated persons, including spouses. However, spouses usually own property as tenants by the entireties (see below). 

A deed that purports to convey property to two persons, as tenants by the entireties, but the persons are actually unmarried, creates a joint tenancy. McManus v. Summers, 290 Md. 408, 430 A.2d 80 (1981).

c. Severing a Joint Tenancy:

The following events (among others) sever a joint tenancy:

  • A voluntary conveyance of the property by one joint tenant , e.g., a contract to sell the property, a deed from one joint tenant to a third party, a mortgage/deed of trust signed by only one joint tenant, or a lease:  Id., and Alexander v. Boyer, 253 Md. 511, 253 A.2d 359 (1969).
  • If one joint tenant files a Chapter 7 bankruptcy:  See Feldman v. Panholzer, 36 B.R. 647 (Bankr. Md. 1984), which holds that the filing of a Chapter 7 bankruptcy by a joint tenant converted the joint tenancy to a tenancy in common.
  • Death of a joint tenant:  if there are only two joint tenants, the deceased joint tenant’s interest in the property is terminated, and the survivor owns the entire property. If there are two or more surviving joint tenants, their interests shall continue in proportion to their respective ownership of the property. 

d. Effects of Joint Tenancy on Judgments and Tax Liens:

Judgments and tax liens (including State of Maryland and Federal), against all joint tenants, attach to real estate, and must be paid in full and released of record when the property is sold or refinanced.

As a general rule, judgments, and tax liens, including those from the State of Maryland, which are filed against a single joint tenant, do not attach to real property, and do not have to be paid in full or released when the property is sold or refinanced. However, if the individual against whose property a judgment or tax lien attaches dies before any of the other joint tenants, then the judgment or tax lien ceases to attach to the property. If the same individual is the last survivor of the joint tenants, then the judgment or tax lien attaches to the entire property.

Exceptions exist for federal tax liens and federal judgments, as follow:

  • Federal Tax Liens:  Per Internal Revenue Manual Part 5, Chapter 17, Section 2.5.2.2, dated December 12, 2014, “… where only one of the joint tenant owes taxes, the lien attaches to the taxpayer’s property interest and the entire property may be sold pursuant to judicial sale under IRC  §7403, although the non-liable joint tenant must be compensated from the sale proceeds”. If the individual against whose property a federal lien attaches dies before any of the other joint tenants, then the lien ceases to attach to the property. However, if the same individual is the last survivor of the joint tenants, the tax lien then attaches to the entire property http://www.irs.gov/irm/part5/irm_05-017-002.html#d0e454.
  • Federal judgments:  there is some debate as to whether federal judgments attach to property when the judgment is against only one joint tenant. Please submit all questions regarding federal judgments to a Maryland underwriter when they occur.

III. TENANCY BY THE ENTIRETIES:

a. What it is:

A tenancy by the entireties is essentially a joint tenancy. However, in addition to the four unities (see section II.b. above), the parties must be married. McManus v. Summers, 290 Md. 408, 430 A.2d 80 (1981); Schilbach v. Schilbach, 171 Md. 405, 189 A.432 (1937). Marriage is sometimes called the “fifth unity”. 

Since January 1, 2013, persons of the same sex may legally be married in Maryland, and may also own property as tenants by the entireties.

b. How created:

The following language creates a tenancy by the entireties in a deed:

From grantor to “(grantees) as tenants by the entireties”.

From grantor to “(grantees) as tenants by the entirety”.

From grantor to “(grantees) as husband and wife”.

From grantor to “(grantees) as married persons”.
 
From grantor to “(husband’s name) and wife”.
 
From grantor to “(wife’s name) and husband”.

c. Severing a Tenancy by the Entireties:

The following events sever a joint tenancy:

  • Death of one spouse.
  • Divorce.
  • A joint conveyance of the property.

Note that one spouse does not have the power to sever a tenancy by the entireties by voluntarily conveying the property to a third party.

In a recent Maryland case of first impression in the Federal 4th Circuit Court of Appeals, it was decided that a Chapter 13 bankruptcy filed by a single tenant by the entirety does not sever tenancy by the entireties status. Alvarez v. HSBC Bank USA, National Association, U.S. Court of Appeals, Fourth Circuit, No. 12-1156, decided October 23, 2013. See also Birney v. Smith, U.S. Court of Appeals, Fourth Circuit, published on December 29, 1999, which held that, in the context of a Chapter 7 bankruptcy of a single spouse, property held as tenants by the entireties cannot be taken by creditors to satisfy the individual debts of either the husband or the wife (citing Watterson v. Edgerly, 388A.2d 934 (Md. App. 1978)).

d. Effects of T/E on Judgments and Tax Liens:

Judgments and tax liens (including State of Maryland and Federal) against all tenants by the entireties attach to real estate and must be paid in full and released of record when the property is sold or refinanced.

As a general rule, judgments, and tax liens, including those from the State of Maryland, which are filed against a single tenant by the entireties, do not attach to real property, and do not have to be paid in full or released when the property is sold or refinanced. However, if the individual against whose property a judgment or tax lien attaches dies before his/her spouse does, then the judgment or tax lien ceases to attach to the property. If the same individual is the last survivor of the two spouses, then the judgment or tax lien attaches to the entire property.

Exceptions apply to federal tax liens and federal judgments, as follow:

  • Federal Tax Liens:  The U.S. Supreme Court decision in United States v. Craft, 535 U.S. 274 (2002) holds that a federal tax lien arising under Section 6321 of the IRS Code attaches to the rights of a single taxpayer in tenancy by the entireties property, even though state law may insulate such property from the claims of creditors of only one spouse. See:

https://supreme.justia.com/cases/federal/us/535/274/case.html

http://www.irs.gov/irb/2003-39_IRB/ar13.html

http://www.irs.gov/irm/part5/irm_05-017-002.html#d0e454

  • Federal judgments:  as with joint tenancy, there is some debate as to whether federal judgments attach to property when the judgment is against only one tenant by the entireties. Please submit all questions regarding federal judgments to a Maryland underwriter when they occur.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.

References

Bulletins Replaced:
None
Related Bulletins:
None
Underwriting Manual:
None
Exceptions Manual:
None
Forms:
None