Generally, a transfer of a judgment debtor’s real property interest is not effective against a creditor whose judgment was recorded prior to the debtor’s transfer (C.P.L.R. §5203). However, that rule will yield to the equitable interests of a former spouse. So held the Appellate Division, First Department, in its August 19, 2021 decision in Tiozzo v. Dangin.
There, the parties’ 2004 Judgment of Divorce incorporated their surviving Stipulation of Settlement. Under the Stipulation, the wife was “entitled to sole ownership and exclusive use and occupancy” of the marital residence. The husband was to “provide a quitclaim deed to [the wife] only if doing so would not jeopardize the existing mortgage.” In the meantime, the husband was solely responsible to continue to pay the mortgage. The Stipulation further provided:
In the event that the Husband is unable, for any reason, to execute and/or record such quitclaim deed, the Husband agrees and covenants that notwithstanding the joint ownership of the Jane Street property, he will not act in any way or manner or through any deed or omission, whether directly or indirectly, to interfere with the Wife’s exclusive use and occupancy of the said property, including the sale of the said property by the Wife should she so choose.
The wife did not demand a quitclaim deed from the husband until 2019, almost 15 years after the divorce. The wife had then decided to sell the residence when the husband went into default of his obligation to make the mortgage payments.
By then, in February 2019, Lenz Capital Group, LLC (Lenz) had entered a two million dollar judgment against the husband upon his confession of judgment.
In July, 2019, the wife brought this action to assert her 100% equitable interest in the residence and to declare that Lenz’s recorded judgment against the husband had no legal effect against the property in which he still had an interest of record.
The wife moved for summary judgment, opposed by the husband and Lenz. The husband also cross-moved to dismiss the wife’s action as allegedly waived or time-barred by the six-year Statute of Limitations to enforce contract rights.
New York County Supreme Court Justice Lynn R. Kotler denied both motions. Justice Kotler held that as the Stipulation had no deadline for the wife to demand a quitclaim deed from the husband, the action was not time-barred. Justice Kotler, however, found that there were issues of fact as to whether the wife asked her husband not to issue a quitclaim deed, and as to whether the wife’s conduct constituted laches or unclean hands, barring her from enforcing the terms of the stipulation of divorce.
On the wife’s appeal, the Appellate Division, First Department, reversed. The Court relied upon the Court of Appeals decision in Pangea Capital Mgt., LLC v Lakian, 34 N.Y.3d 38 (2019), that held that under Domestic Relations Law § 236(B)(5)(a) “legal rights to specific marital property vest upon the judgment of divorce, with inchoate rights becoming actual ownership interests by virtue of an equitable distribution judgment.”
The First Department noted that here, the parties’ ongoing “joint” ownership [presumably a tenancy in common by virtue of the divorce] was limited and based solely on their agreement to avoid jeopardizing the existing mortgage on the property. With respect to the wife, the husband gave up any right to continue to use the property or to share in any proceeds of the sale. He also agreed not to take any action that could interfere with the wife’s “exclusive use and occupancy of the said property, including the sale of the said property.” Thus, the First Department held, the Stipulation and Judgment of divorce divested the husband of his rights in the subject property.
Under C.P.L.R. Article 52, a judgment creditor may only seek to enforce its money judgment against a judgment debtor’s property. The determining factor as to whether a judgment debtor’s interest can constitute property vulnerable to a judgment creditor is whether it “could be assigned or transferred” (C.P.L.R. 5201[b]). The husband had given up any right to do so under the Stipulation and Judgment. The residence was therefore beyond the reach of the judgment creditor, Lenz.
The First Department rejected Lenz’s argument that the Stipulation and Judgment was only binding on the husband and wife; and that as to third parties, the husband’s interest was determined only by the recorded deed. The appellate court, however, held that deeds do not reflect after-acquired encumbrances, liens, or other limitations on an owner’s interest in real property. The court apparently placed the burden on Lenz to determine whether post-deed limitations on the husband’s interest in the subject property existed. Here, Lenz could not reasonably rely on the deed to determine that the husband’s interest in the property was sufficient security.
More fundamentally, the court held the deed on its face invited further inquiry. The husband was only one of two owners on the deed. Here, the record was silent on whether Lenz inquired about the wife, much less about the two parties’ respective interests in the subject property. The First Department stated:
To be sure, matrimonial judgments are generally not open to public inspection, but that did not prevent Lenz from asking [the husband] for proof about [the wife] and the parties’ respective interests in the [marital residence].
As a result, the wife was entitled to the declaratory and injunctive relief sought in her causes of action.
[Comment: Presumably, the result would be no different if the husband had executed a deed conveying his interest to the wife, and the wife chose not to record the deed to prevent the mortgagee from finding out that there had been a technical default under the mortgage, i.e., the husband’s transfer of his interest. However, the priority given to recorded deeds, judgments and liens exists to eliminate any burden upon a judgment creditor to investigate. Here, the parties made the choice not to record the transfer of the husband’s interest in order not to risk having to refinance or sell the property. The parties made their choice not to secure the wife’s benefits under D.R.L. §236(B)(5), the Stipulation and the Judgment. Should they not have done so at their peril.]