Divorce, Co-Op Style: Shares and Share Alike

May the widow of a shareholder receive a portion of the proceeds of the sale of the shares of an apartment owned by her husband and his former wife? That was the question in Beudert?Richard v. Richard.

Michele Beudert-Richard was the second wife and widow of Adam Richard. She began this action against Adam’s first wife, Pamela Richard. Michele was trying to share in the proceeds of the sale of a cooperative apartment that had been the joint marital property of Adam and Pamela before their divorce.

Pamela and Adam purchased a cooperative apartment in 1978, while they were married. They took title to the co-op shares as joint tenants with rights of survivorship. Until a New York statute was amended in 1996, the rule was that co-op shares were treated not as real property but as personal property. Accordingly, married couples who wished to plan their estates purchased as “joint tenants with right of survivorship” rather than as “tenants by the entirety” (many homes are owned by married couples as tenants by the entirety, which – like ownership by joint tenants – allows the surviving spouse to own 100 percent of the property upon the death of his/her partner).

This distinction was important because if married couples owned a property as tenants by the entirety and thereafter divorced, the law automatically converted the ownership to “tenants in common,” meaning that each person could transfer his/her interest in the property as desired. If a married couple owned property as joint tenants with right of survivorship, however, and they then divorced, the property did not convert to an ownership as tenants in common and 100 percent of the property would be owned by the survivor upon the death of the other. In other words, in a joint tenancy situation, neither party had the right to bequeath his/her portion of the property because it automatically transfers to the survivor.

On April 12, 1989, Pamela and Adam entered into a separation agreement that provided for distribution of the marital property. The paragraph of the separation agreement concerning the apartment incorrectly stated that they owned the apartment as tenants by the entirety, and gave Pamela exclusive possession during their child’s minority, after which the apartment was to be sold and the net proceeds split.

Adam married Michele after his divorce from Pamela. Adam died on September 23, 1999, and in his will, he left his ownership interest in the apartment to Michele. The obligation to sell the apartment under the separation agreement had not yet been triggered because his child with Pamela was then only 16 years old.

Several years after Adam and Pamela’s son completed college and became emancipated, Michele and Pamela entered into an agreement dated November 21, 2007, which provided that Pamela was the owner of a one-half interest in the apartment and Michele was the beneficiary of Adam’s one-half interest in the apartment. They agreed to sell the apartment and split the net proceeds. In January 2008, Michele and Pamela, as sellers, entered into a contract to sell the apartment for $1,385,000. However, in February 2008, the managing agent of the cooperative insisted that the contract be amended so that Michele’s name was not on the contract. Although the court’s decision does not say so, this was presumably because the co?op’s records showed that Pamela and Adam owned the shares as joint tenants with right of survivorship.

Pamela thereafter filed an application in the Connecticut court where Adam’s estate was being probated. She asked for a determination that the estate did not have a legal right to the apartment or the proceeds of the sale. At the same time, Michele brought this action seeking to enforce the separation agreement and the 2007 contract between Pamela and Michele. The Connecticut court refused to hear the matter.

In this case, Michele moved for an order directing Pamela to sell the apartment and equally divide the proceeds. Pamela cross-moved for an order that Michele was not entitled to share in the proceeds of the sale of the apartment and rescinding the November 2007 agreement between them. She claimed that the agreement should have been rescinded based on mutual mistake and that, because the co-op had been owned by Adam and Pamela as joint tenants with the right of survivorship, his share in the apartment should have passed to her so that she was the sole owner.

The lower court agreed with Pamela, dismissed Michele’s complaint and rescinded the 2007 agreement. The majority of the appellate court did not agree, reversed and sent the case back to the lower court so that it could continue.

The appellate court discussed a case that the lower court had relied on. It involved a situation where spouses who owned their residence as tenants by the entirety entered into a separation agreement under which they agreed to sell their residence within four years and split the net proceeds. The wife died a year later, before the parties were divorced, with the residence still unsold. Since the parties had not altered their tenancy by the entirety by contract or transfer of the deed, the husband became the owner of the whole property.

Pamela and Adam, in the court’s eyes, had actually entered into a separation agreement and had obtained a final judgment of divorce. It was clear from the documents that the parties believed that Adam and Pamela owned the apartment as tenants by the entirety and that, as a result, their divorce would have automatically converted the ownership into a tenancy in common so that each could bequeath their share of the apartment as they saw fit.

While a married couple’s tenancy by the entirety automatically converts into a tenancy in common upon entry of a divorce judgment, the same does not hold true for a married couple’s joint tenancy. While Adam and Pamela did not specifically state in their separation agreement an intent to convert their ownership of the co-op from joint tenancy to a tenancy by the entirety, as they had the right to do, their failure to do so appeared to be based on their incorrect understanding that their ownership already took that form. The court found that there was little doubt from the language of their separation agreement that Adam and Pamela intended, and assumed, that upon entry of their divorce judgment that they would automatically become tenants in common without any right of survivorship. There was no indication that Adam intended to waive his estate’s interest in the co-op apartment, or that Pamela thought he had done so.

There was also evidence that Pamela did not believe Adam had given up his interest. Both Pamela and Adam proceeded in the belief that the divorce would convert their ownership of the apartment into a tenancy in common, so that each owned half of the apartment. The court looked to Pamela’s entry into the 2007 agreement with Michele to sell the apartment, which stated “Michele is the Executrix of the Estate of Adam Richard who died owning the other one-half interest in said apartment.”

In addition, Adam’s will stated: “I give, devise and bequeath to my wife, Michele F. Beudert, my entire ownership interest in [the apartment], to be hers outright.” The court found that this reflected his understanding that he had an interest in the apartment after his divorce from Pamela. Finally, the court noted that Pamela did not claim the sole right of survivorship until after the managing agent of the cooperative insisted that the contract of sale be amended to omit Michele’s name.

The majority of the appellate court found, at a minimum, that the evidence raised questions of fact. Did the separation agreement demonstrate an understanding that the ownership of the apartment was intended to be altered upon Adam and Pamela’s divorce so that there would be no right of survivorship? This issue alone precluded the entry of final judgment declaring that Adam’s estate (and therefore Michele) was not entitled to share in any portion of the proceeds of the sale of the apartment.

The court reinstated the complaint and vacated the lower court’s rescission of the 2007 agreement. One judge wrote a dissenting opinion, finding that the majority disregarded completely centuries-old black letter law controlling joint ownership of property. He added that Pamela and Adam purchased a cooperative apartment, that the stock certificate indicated that they took title shares as “tenants with rights of survivorship,” and that they never changed the form of ownership of these co-op shares.

The dissenting judge believed that Adam’s estate had no property interest in the apartment because the separation agreement did not change the status of the property from a joint tenancy with right of survivorship. Pamela and Adam did not hold the shares in the apartment as tenants by the entirety, the dissenter noted, but as joint tenants with rights of survivorship. A joint tenancy with rights of survivorship does not convert to a tenancy in common upon the divorce of the parties. Thus, Pamela and Adam’s divorce did not convert the form of ownership to a tenancy in common. Accordingly, once Adam died, Pamela became the sole owner of the apartment.

The dissenting judge did not agree with the majority that the separation agreement’s mere expression of Adam and Pamela’s mistaken belief that they held the co?op shares as tenants by the entirety changed the status of the property from a joint tenancy with right of survivorship to tenants in common or any other form of ownership. First, the judge wrote, before 1996, it would not have been legally possible for Pamela and Adam to have held the co-op shares as tenants by the entirety. They entered into the separation agreement in 1989. Accordingly, it was irrelevant that Pamela and Adam thought they held the shares as tenants by the entirety. Nor would it have been possible for the parties to evince an intent in the separation agreement to hold the shares as tenants by the entirety, because to do so would have been a legal impossibility.

Nevertheless, even if they could have held the co-op shares as tenants by the entirety in 1989, “as a general matter, title to estates in land should be altered only by clear expressions of intent.”

Nor was Pamela’s recognition in the November 2007 agreement that “Adam Richard ... died owning the other one-half interest in said apartment” sufficient to change the form of ownership. Pamela’s adoption of that language in the 2007 agreement relied on the same mistaken assumption she made in the separation agreement, namely that she owned the property as a tenant by the entirety. Similarly, when Adam bestowed his one-half interest in the apartment to plaintiff, this was also based on the same mistaken assumption.

The dissenting judge noted that a result that did not allow Pamela and Michele to share in the proceeds contradicted the assumption of the parties, but that that assumption had been based on a mistake that kept repeating itself with each step Adam and Pamela took concerning the property. As the majority admitted, “there is no direct assertion of intent to alter their joint tenancy.” But, a “direct assertion of intent” was precisely what was necessary to alter the form of ownership. The dissenting judge concluded that there was nothing Adam and Pamela did, no action they took, to change the form of ownership of the shares to the apartment. This judge would have held that Pamela was the sole owner of the shares.

The majority of the court, however, ultimately concluded that a mutual mistake of fact could constitute grounds for rescission of the 2007 agreement, but that since rescission was an equitable remedy, it may not have been appropriate under the unique circumstances here. The case was sent back to the lower court.

Comment: This case presents an excellent example of what may happen when there is a change in the law not addressed by property owners. The majority decided to allow the case to proceed, taking into consideration the apparent intent of Adam and Pamela, even though neither ever formally altered the way in which they held title to the co-op shares.

The dissenting judge would have adhered strictly to the long?standing rules concerning ownership of shares and would have dismissed the complaint, as the lower court did. While we question whether there are many apartments that were purchased by couples as joint tenants prior to 1996 who have since divorced, we offer this case as a cautionary tale and a reminder that it is important that you communicate with your attorney about any changes in the law or your marital status which may affect ownership of property.

Attorneys
For Michele: Julie Hyman

For Pamela: Toback, Bernstein & Reiss