Spousal Consent for Liens Incurred Pursuant to a Collateral Pledge
Married persons who become loan parties under financing arrangements (for example, as guarantors) may be asked to pledge collateral (often equity of an entity borrower or real estate) as security for a credit accommodation. There are pitfalls to foreclosing on collateral in this scenario and potential creditors should proceed with caution.
We are the lender/lender’s counsel in a secured financing, and one of the collateral pledgors is married. Is this a problem for the lender?
Potentially. As a lender or lender’s counsel facing this scenario, it might be a good idea to investigate whether the pledgor’s spouse should sign a spousal consent, or even be named in a security agreement or financing statement. One or all of these measures may be required depending on the laws related to married persons’ property in the applicable jurisdiction.
How is marital property treated under U.S. law?
The United States has wide variety of legal regimes related to the treatment of personal property in the context of marriage. Each state’s rules are unique, and the regimes have different influences, from the English common law, to Spanish and French civil law, to the reforms resulting from the Married Women’s Property Acts. In community property states, property acquired during a marriage due to one spouse’s efforts is owned by both spouses. Similarly, in many non-community property states, if property is conveyed to both spouses during a marriage, it can be held by the spouses as a single person (in a tenancy by the entirety).
Creditors should be wary of attempting to encumber property held by married persons under these paradigms. In many states, under either regime, a debtor spouse cannot successfully encumber marital property also held by the non-debtor spouse. In community property states, for example, depending on the type of property, a spouse’s consent to such an encumbrance could be required. In a majority of states recognizing a tenancy by the entirety, creditors cannot encumber the non-debtor spouse’s interest in property owned by the entirety, and a creditor exercising on a lien will be thwarted. We want to stress that under both regimes, the laws of each state are unique, and exceptions exist. For example, in some community property states, including Louisiana and Wisconsin, a debtor spouse who owns stock of a corporation in his or her own name can pledge such stock in its entirety without the consent of the non-debtor spouse, notwithstanding the general rule discussed above.
What steps can a lender take to protect collateral of a married pledgor?
If it is imperative for a secured lender to take a lien on a married person’s assets, then we recommend a variety of protections. First, make sure your local counsel is aware of the issue, or if no local counsel has been retained in the appropriate jurisdiction, consider retaining one. To reiterate the warnings above, whether spousal consent is required is a very fact specific analysis and each jurisdiction’s rules are different. The issue is more likely to be relevant if the marriage is governed by the laws of community property states, which at the time of writing are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Second, if counsel determines the issue is relevant, it may be appropriate for the spouse sign a spousal consent to the security agreement or even the security agreement itself. It’s important that the document follow the relevant provisions of the Uniform Commercial Code, including UCC §9-203(b) and §9-509, requiring the agreement to be authenticated and properly describe the collateral pledged. Finally, it may be necessary, depending on the jurisdiction, to file a financing statement naming the spouse individually or both spouses as debtor(s).
How is this relevant to shipping?
Lenders in the shipping industry and their counsel should be wary when attempting to encumber the assets of married persons in credit transactions in the United States. Although natural person pledgors are rare for most transactions, they do exist, perhaps particularly in transactions involving high-net-worth individuals such as personal yacht financings without multiple holding companies. A lender should also be on the lookout for this issue if real estate such as a homestead is included in the collateral package. These individuals, if married, may not be able to adequately encumber assets without their spouse’s consent depending on the jurisdictions in which they reside. Lenders should consult local counsel to know what exactly is required to protect their security interest in such collateral.
Please contact any member of S&K’s Maritime Practice Team.