Tenth Circuit Opinion Highlights Challenges to Enforcing Personal Guarantees

A recent opinion issued by a federal appellate court offers important reminders to financial institutions that utilize personal guarantees to secure business loans. In Radiance Capital Receivables Nineteen, LLC v. Thomas Leslie Crow and Carol-Ann Crow,[1] the United States Court of Appeals for the Tenth Circuit ruled that an investment account held jointly by a judgment debtor and his wife could not be reached by the husband’s creditors. Radiance Capital highlights several critical factors that must be evaluated during the due diligence and underwriting process to ensure that personal guarantees offer meaningful security and value. The opinion also outlines possible challenges that may be raised if a guarantor claims that property is exempt from execution following default.

Facts of Radiance Capital

Thomas and Carol Crow, husband and wife, opened a Fidelity investment account (the “Account”). The Account was opened jointly with a right of survivorship known as a “tenancy by the entirety.”[2] Shortly after opening the Account, the Crows executed a Durable Power of Attorney granting their daughter broad powers to conduct transactions within the Account. The daughter made several significant withdrawals from the Account to pay off prior loans she and her husband had made to the Crows.

After Mr. Crow’s finances deteriorated, Radiance Capital entered a judgment against him and sought to garnish the Account to satisfy the judgment. The execution proceeding compelled Mr. Crow to file a Chapter 7 bankruptcy petition. Ms. Crow was not a party to the Radiance Judgment and did not seek bankruptcy protection.

In his bankruptcy proceeding, Mr. Crow claimed he held the funds in the Account as a tenancy by the entirety with his wife and, as such, the funds were exempt under the provisions of the Bankruptcy Code. This position was significant in that, if deemed exempt, the Account could not be liquidated or otherwise accessed by the Chapter 7 Trustee to pay the claims of Mr. Crow’s creditors.

Radiance Capital challenged the exemption on several grounds arguing that tenancy by the entirety was disfavored under the applicable state law and that investment accounts were not the type of property that could be held as a tenancy by the entirety. Radiance Capital further argued that, regardless of whether the Account was created as a tenancy by the entirety, the Crows’ subsequent acts, including the transfers executed by their daughter pursuant to the Power of Attorney, “severed” the tenancy, that is rendered jointly held property available to creditors of each individual spouse.

Radiance Capital’s Holding

The Tenth Circuit held that the Account was exempt under section 522 of the Bankruptcy Code which provides that property held jointly by the debtor as a tenant by the entirety or joint tenant may be exempt from property of the bankruptcy estate if the debtor’s interest would be exempt from execution under applicable state law.[3]

The Radiance Capital Court observed that section 522 recognizes rights which exist under the laws of certain states to protect entireties property from execution by creditors of one spouse. In support of its holding, the Court concluded that: (i) the application to open the Account included a hand written note made by a Fidelity representative labelling it as owned as a tenancy by the entirety; and (ii) the handwritten note expressed the parties’ intention to enable the Crows to own the Account as tenants by the entirety.

Radiance Capital’s argument that the tenancy was severed by subsequent actions was rejected. The Court concluded that the exercise of the Power of Attorney was done on behalf of both parents who, acting jointly, had the right to determine the disposition of the Account.

Lessons from Radiance Capital

The Radiance Capital opinion offers several reminders for financial institutions that rely on personal guarantees to secure loans and other obligations.[4] First, during the underwriting process, lenders should pay careful attention to which state’s law will govern the transaction and whether that law recognizes tenancy by the entirety or other ownership rights that would exempt property from execution by creditors of one spouse. State law will also dictate what types of property may be held as a tenancy by the entirety and which acts will vitiate the “entirety.”

Second, an often overlooked consideration in the due diligence process is whether the proposed guarantor is married or engaged. If so, the lender should have an understanding of what assets are held jointly and whether the proposed guarantor’s spouse will also execute a guaranty. As many lenders will attest, securing a spousal guaranty is often a challenging task.

Third, if the loan has already been made without a spousal guaranty, lenders may be able to secure the additional guaranty following a default as part of a forbearance agreement.

Fourth, in the event that a guarantor asserts that certain property is immune from execution as owned by a tenancy by the entirety, financial institutions challenging that position should examine whether: (i) applicable state law recognizes tenancy by the entireties or other property rights that would protect the asset; (ii) the subject asset is the type of property that may be owned by a tenancy by the entirety; (iii) the husband and wife properly created a tenancy by the entirety either through express language in the underlying documentation or the satisfaction of other factors; and (iv) the entireties property was acquired by the husband and wife as part of an actually or constructively fraudulent transaction.[5]

Lastly, in such situations, the lender should examine whether the guarantor engaged in any actions or transactions that would have severed the tenancy as alleged in Radiance Capital.

For more information, please contact John C. Kilgannon or the Stevens & Lee attorney with whom you regularly work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

[1] United States Court of Appeals for the Tenth Circuit, Case No. 19-8082.
[2] A tenancy by the entirety refers to a form of shared property ownership established as a legal fiction long ago under English Common Law for married couples who are thereby deemed to own property jointly as a single legal entity. Each spouse owns an equal and undivided interest and, if one spouse dies, the survivor is vested with full title. In general, a creditor of only one spouse cannot reach property held by the couple “by the entirety.”
[3] 11 U.S.C. §522(b)(3)B).
[4] Considerations of ownership rights may also applicable where a borrower or lessee is a married individual. Judgment creditors of one spouse may also apply Radiance Capital’s lessons in evaluating enforcement options.
[5] See, Board of Trustees of National Elevator Industry Health Benefit Plan v. Goodspeed, 377 F. Supp 3d 471, 480 (E.D.Pa. 2019)(examining circumstances where entireties defense was disallowed due to fraud).