Spring 2012 Newsletter
Wife Gets the House and Estate Pays the Mortgage:
Why the Dolby Court Got it Right.
By Jerad R. Tomac
In Dolby v. Dolby,1 the Virginia Supreme Court recently had occasion to answer the question of whether a surviving spouse or the decedent’s estate bore the burden of fulfilling the mortgage obligation on a house which passed to the spouse by a tenancy by the entirety. Cornelius A. Dolby died testate, owning real property with his second wife, Christine, as tenants by the entirety; however, the decedent was the sole obligor on the mortgage associated with the property.2 Mr. Dolby’s will was a pour-over to his revocable living trust, the beneficiaries of which were the decedent’s three children and the decedent’s wife and her three children.3 The fiduciary instituted an aid and direction suit seeking a determination as to who was responsible for the mortgage debt. The trial court found that the property passed to the decedent’s spouse subject to the mortgage.4 The Supreme Court of Virginia reversed, holding that, while the property passed by operation of law to the decedent’s spouse, the mortgage was a just debt of the estate and, as such, the estate was responsible for its satisfaction.5
This article analyzes the case law preceding the Dolby decision and explains why the Supreme Court of Virginia was correct in holding that Dolby’s estate was responsible for satisfaction of the mortgage. The article begins with an examination of the historical significance and purpose of decedent’s estates and the descent of real property at common law and in Virginia. It then analyzes Virginia case law relating to the satisfaction of the debts of a decedent’s estate. Next, the article provides a comprehensive examination of the factual scenario in Dolby and explains the Court’s opinion in relation to the estate’s obligation to pay the just debts of the decedent. Finally, the article applies Virginia case law to the Dolby facts and explains why the Court’s decision was correct.
I. History of Decedent’s Estates and the Descent of Real Property at Common Law and in Virginia
As long as individuals have owned property, there has been a question regarding the disposition of that property at an individual’s death. Under English common law, prior to 1540, an individual’s real property passed only by descent subject to primo-geniture6 and he had no authority to dictate how the property descended.7 However, in 1540, the English Parliament passed the Statute of Wills, which, for the first time, allowed landowners to dispose of their interests in land by will and testament.8
While the Statute of Wills was influential in determining the passage of a decedent’s real property, the authority to dispose of a decedent’s personality was controlled by different law.9 Distribution of a decedent’s personal property fell under the authority of the ecclesiastical courts. One of the roles of the ecclesiastical courts was to appoint a personal representative to marshal and properly distribute the decedent’s assets.10 The authority of the ecclesiastical courts and, in turn, the right of a creditor to seek payment of the decedent’s debts did not encompass the transfer of the decedent’s real property.11 Although this bifurcated system of disposing of real and personal property was complex and difficult to navigate, it remained in effect until Parliament passed the Will Act in 1837.12
At its founding, Virginia established a probate system based on English common law.13 Even prior to the creation of the House of Burgesses in 1619, matters of local concern -- including probate matters -- were under the bailiwick of the county courts.14 In 1748, the General Assembly passed major legislation revising, inter alia, probate matters in Virginia.15 Many of the revisions instituted by the 1748 legislation hold true in the Commonwealth to this day. The probate system in colonial Virginia mimicked the English common law system by devising real property outside the decedent’s estate.16 Said another way, the decedent’s estate, and legislation associated therewith, dealt only with the “personal estate” -- real estate was a different matter entirely.
In modern day Virginia, the separation between realty and personality still exists. Property “drops like a stone” and the beneficiaries take by operation of law at the decedent’s death. Therefore, even if the personal representative has the power to sell the real property, he can only execute this power by divesting the beneficiaries of their interest in the real property.17 When the testamentary document gives the fiduciary the power to sell the property, the fiduciary is said to have a “naked power of sale.”18 The ability of the fiduciary to divest the beneficiaries of their interest in the real property depends upon whether the authority to sell is paired with a legal basis for doing so.19
II. Statutory and Case Law Surrounding Descent of Realty
Understanding a personal representative’s limited authority in relation to the decedent’s real property is important in determining the proper disbursement of estate assets. In satisfying the decedent’s just debts, the fiduciary may only utilize the assets under his control.20 Case law has clearly established the order in which assets may be used to satisfy the debts of the decedent. Sources for payment of a decedent’s debts are to come from:
(1) the “personal estate at large not exempted by the will”;
(2) real estate set apart for payment of debts;
(3) “real estate descended to [an] heir”;
(4) from real or personal property that was specifically devised but also specifically charged for payment of debts;
(5) from “general pecuniary legacies”;
(6) from specific legacies; and
(7) from “real property devised by the will.”21
A personal representative is responsible for determining the debts of the estate and satisfying those debts with the proper assets of the estate. Failure to do so can result in personal liability on the part of the fiduciary.22
As noted above, real property passes by operation of law and does not become a part of the probate estate unless the fiduciary executes his power of sale. Similarly, property owned as joint tenants with the right of survivorship or as tenants by the entirety also passes by operation of law and does not enter a decedent’s estate.23 At common law, jointly owned property was presumed to pass by survivorship to the co-tenant; however, Virginia Code § 55-20 effectively deleted the common law presumption of survivor-ship among joint tenants of property.24 However, the presumption established in § 55-20 can be overridden by the clear intent of the parties and the code specifically allows for joint ownership of property with survivorship.25 In addition to the survivorship interests created in joint property, the Virginia legislature has provided that a married couple can hold property as tenants by the entirety. The Code makes it explicit that “[a]n intent that the part of the one dying should belong to the other shall be manifest from a designation of a husband and wife as “tenants by the entireties” or “tenants by the entirety.”26
III. Details of the Dolby Decision
Cornelius A. Dolby was a wealthy commercial real estate developer in Fairfax County, Virginia.27 He died on Christmas Day, 2006, married to Christine Greenlaw Dolby, his longtime employee and wife of eleven months.28 Mr. Dolby’s will was a pour-over to his revocable living trust of which his three adult children, his wife Christine and her three adult children were all beneficiaries.29
One of Mr. Dolby’s assets at the time of his death was real property situated in McLean, Virginia that he owned with his wife as tenants by the entirety.30 Mrs. Dolby was not a signatory on either the mortgage note or the deed of trust.31 Additionally, Mrs. Dolby did not assume any responsibility for the satisfaction of the mortgage in her capacity as personal representative.32
Following Mr. Dolby’s death, the estate filed an “aid and direction suit” seeking a determination as to who was responsible for satisfying the mortgage on the real property.33 Mrs. Dolby argued that the mortgage was a debt of the decedent that should be satisfied by the estate.34 Conversely, the decedent’s children argued that the mortgage obligation should “run with the land” and should be the responsibility of Mrs. Dolby.35
The trial court held that the estate was not responsible for the satisfaction of the mortgage debt and that the real property passed to Mrs. Dolby subject to the mortgage.36 The trial judge reasoned that Article 1.3 of the decedent’s will indicated his testimonial intent that the property should pass to Mrs. Dolby subject to the mortgage.37 Additionally, the trial judge indicated that to require the estate to satisfy the mortgage would be to leave his daughters “with very little from his substantial estate. To Rule that he so intended would be contrary to the evidence.”38 Mrs. Dolby appealed the decision of the Fairfax County Circuit Court to the Supreme Court of Virginia.39 The Supreme Court explained that two questions were required to resolve the issue of liability – “(1) whether Dolby had a personal obligation to pay the debt, and (2) whether the mortgage debt is secured by real property owned by Dolby upon his death.”
Relying on Brown v. Hargraves,40 the Court answered the first question affirmatively holding that Mr. Dolby had executed the mortgage note in his individual capacity and “Mrs. Dolby was not added as a joint obligor on the note, nor did she assume the obligation.”41 As the mortgage was a personal obligation at Mr. Dolby’s death, it subsequently became an obligation of his estate.42 The principle that a decedent’s estate is subject to the decedent’s just debts and expenses should itself be enough to indicate that the estate is required to pay all of the decedent’s bills. However, Article 1.3 of Mr. Dolby’s will contained express language requiring the fiduciary to pay all “legally enforceable debts.”43
Article 1.3 of the decedent’s will further directed that “[the decedent’s] [e]xecutor shall not be required to pay prior to maturity any debt secured by mortgage, lien or pledge of real or personal property owned by me at my death, and such property shall pass subject to such mortgage, lien or pledge.”44 In order to determine the effectiveness of the second clause of Article 1.3 of the decedent’s will, the Court then addressed whether the mortgage was secured by real property owned by the decedent at his death.45 The court determined that the mortgage was not secured by such property because, as Mr. and Mrs. Dolby owned the property as tenants by the entirety, Mrs. Dolby received sole ownership of the property by operation of law and the property never entered the decedent’s estate.46 If the property did not enter the decedent’s estate, it could not be subject to any language or direction in the decedent’s will.
Finally, the Court addressed Mr. Dolby’s children’s argument that the testator intended to pass the property subject to the mortgage. The Court held that while “the testator’s intent is the ‘guiding star’ in interpreting wills,”47 such intent may not “violate some rule of law, or [be] contrary to public policy.”48 A decedent may not direct his estate to forego the payment of its just debts and expenses nor may he direct his fiduciary to control assets outside the estate.49 Thus, even if the decedent intended to pass the property to Mrs. Dolby subject to the mortgage, his intention to do so was ineffective as the will could not direct the disposition of property outside the estate, nor could he relieve his estate of the requirement to pay it’s just debts – namely the mortgage executed solely by Mr. Dolby.50
IV. Why the Supreme Court was Correct
At first blush, it appears that the Dolby court’s decision is somewhat unjust. As the trial court stated, “[to hold] that Mr. Dolby intended for Mrs. Dolby to have the house and then to have his children from his first marriage pay the mortgage on that house [would] thereby leav[e] them with very little from his substantial estate.”51 To support the lower court’s ruling, the Dolby children raised an argument as to whether the intention of the testator viewed in toto could be considered when determining whether or not a joint-tenant could be exonerated from the mortgage.52 However, as the Supreme Court noted, “a testator cannot lawfully . . . charge . . . debts against property that passes outside of the testator’s estate.”53
The lower court’s statement paints the “decedent’s intent” with a very broad brush. To presume such an intent in the decedent’s will would require the Court to ignore the fact that the parties did not execute a new deed of trust in August 2006 when they re-titled the property as a tenancy by the entirety. The decedent knew that he was the sole obligor at the time he re-titled the property and also knew, or should have known, that conveying the asset to himself and Mrs. Dolby as tenants by the entirety would allow Mrs. Dolby to take the property upon his death. It would be improper to interject an intent to pass the mortgage obligation to Mrs. Dolby in the face of the retitling. Moreover, as the Supreme Court noted, there would also be no basis in law for allowing such an interjection, as the decedent’s will does not control assets outside the decedent’s estate. Thus, as the mortgage was a valid debt of the decedent, the satisfaction of that debt was subject to the priorities established in Elliot v. Carter, discussed above.54 As a result, Mr. Dolby’s personal estate was responsible for the satisfaction of the mortgage. To the extent that the estate was insufficient to satisfy the entirety of the debt, the estate would be insolvent and thus subject to the priorities established in Virginia Code § 64.1-157.
Dolby v. Dolby is a remarkable case not because it created a new test or rule of interpretation as applied to previous law. It is remarkable, because the decision showed the discipline of a principled bench that applied centuries old jurisprudence to a set of facts that may have provided a distasteful result. The Dolby decision should remind all drafters and practitioners to work with their clients to ensure that all of their estate planning documents are complete and accurate and that they accomplish the intended result.
1 694 S.E.2d 635 (Va. 2010).
2 Id. at 638.
3 Id. at 636.
4 Id. at 635.
5 Id. at 637-38.
6 Under the system of primogeniture, the eldest son had an exclusive right of inheritance. See Richard B. Morris, Studies in the History of American Law 73-81 (1930).
8 32 Hen. 8, c. 1. The Statute of Wills gave a man the authority to write a will explaining how up to two-thirds of his property should pass upon his death. Id.
9 Prior to any statutes on the subject, a decedent’s widow and heirs had a right to a portion of the decedent’s personal property. Nickerson v. Bowley, 49 Mass. (8 Met.) 424, 426 (Mass. 1844). This right, known as para rationabilis existed as early as the Magna Carta and was confirmed through several parliamentary statutes.
10 See 3 William Blackstone, Commentaries on the law of England 22-85 (1765-69).
11 John F. Winkler, The Probate Courts of Ohio, 28 U. TOL. L. REV. 563, 565 (1997)
12 See Winkler, supra note 12, at 566-67.
13 WARREN M. BILLINGS, JUSTICE, BOOKS, LAWS AND COURTS IN SEVENTEENTH-CENTURY VIRGINIA, 290-92 (1993).
14 Harold B. Gill, Jr. & George M. Curtis, III, Virginia’s Colonial Probate Policies and the Preconditions for Economic History, 87 THE VIRGINIA MAGAZINE OF HISTORY AND BIOGRAPHY, Jan. 1979 at 69.
15 Gill, supra note 15, at 69. The revision of probate practices in the Commonwealth “emphasized two major responsibilities of estate settlement, [(1)] the payment of outstanding debts, and [(2)] the insurance that the testamentary heirs or heirs at law received their just legacies. Gill Supra note 15, at 69-70. The legislation kept the jurisdiction of probate in the local county court, set out clear priorities of who could serve as administrator and gave the court the duty to witness the oath of the administrator. Id.
16 See, The Personal Representative’s Power to Sell Realty in Virginia, 15 WM. & MARY L. REV. 949, 949 (1973).
17 Id. at 949-950.
18 Id. at 959. “t is equally clear that only a naked power is conferred when realty is devised to a named beneficiary expressly authorized to take possession subject to the debts of the testator or to the payment of legacies.” Id.
19 See e.g., Mosby’s Adm’r v. Mosby’s Adm’r, 50 Va. (9 Gratt.) 442 (1887) (holding that a power to sell realty must be “coupled with other trusts and duties which require the execution of the power of sale.”), Cf., Machir v. Funk, 90 Va. 284 (1893) (holding that a fiduciary only held a “naked power” when the will provided a power to sell all of the residue to pay debts and expenses and devised the property to a named beneficiary).
20 Va. Code ann. § 64.1-181.
21 Elliott v. Carter, 50 Va. (9 Gratt.) 541, 549 (Va. 1853).
22 Bliss v. Spencer, 99 S.E. 593, 601 (Va. 1919) (holding that in a ward’s suit for an accounting of how the guardian expended assets of the guardianship, the guardian could be compelled to individually restore assets that he improperly distributed).
23 Va. Code ann. §§ 55-20.1, 55-20.2 and 55-21.
24 “When any joint tenant dies . . . his part shall descend to his heirs, or pass by devise, or go to his personal representative, subject to debts or distribution, as if he had been a tenant in common.” Va. Code Ann. § 55-20.
25 See, Va. Code Ann. § 55-21.
26 Va. Code ann. § 55-20.2.
27 Id. at 636.
28 Id. Prior to his marriage with to Christine Greenlaw Dolby, Mr. Dolby had been married for 30 years until his wife’s passing in 1994. Id. His first marriage produced three children, Catherine Dolby, Kimberly Lauth and Heather Kho, who represented a portion of the appellees in the appeal brought before the Supreme Court of Virginia. Id. Christine Greenlaw Dolby helped Mr. Dolby recover from a stroke he experienced in 2001. Id. While Mr. Dolby and Christine were not technically married until 2006, he made testamentary provisions for her prior to their marriage evinced by the Cornelius A. Dolby Revocable Inter Vivos Trust drafted in 2002 and his Last Will and Testament. Id.
29 In re Estate of Dolby, 78 Va. Cir. 59, 1 (Va. Cir. Ct. 2008)
30 Dolby, 694 S.E.2d at 636. Mr. Dolby had purchased the real estate in 2002, titled it in his individual name and executed a deed of trust in the amount of $1.57 million. Id. Approximately three years later, in December 2005, Mr. Dolby refinanced the note, changed lenders and executed a new deed of trust in his individual name on the property in the amount of approximately $1.75 million. Id. Three weeks later, Mr. and Mrs. Dolby were married and, in August 2006, Mr. Dolby executed and recorded a deed conveying the property from himself individually to himself and his wife as tenants by the entirety. Id.
36 In re Estate of Dolby, 78 Va. Cir. 59, 3 (Va. Cir. Ct. 2008).
37 Id. “[The decedent’s] [e]xecutor shall not be required to pay prior to maturity any debt secured by mortgage, lien or pledge of real or personal property owned by me at my death, and such property shall pass subject to such mortgage, lien or pledge.”
39 Dolby, 694 S.E.2d at 638.
40 96 S.E.2d 788, 791 (Va. 1957).
41 Dolby, 694 S.E.2d at 637.
44 Id. at 636 (emphasis added).
45 Id. at 637.
46 Id. Clearly, Article 1.3 of the decedent’s last will and testament would have no operative effect on property that did not enter the estate. See, Eppes v. Demoville, 6 Va. (2 Call) 22 (Va. 1799).
47 Id. at 637 (citing Smith v. Trustees of Baptist Orphanage, 75 S.E.2d 491, 493 (Va. 1953)).
48 Id. (quoting Conrad v. Conrad, 97 S.E. 336, 338 (Va. 1918)).
49 See, Edmunds v. Scott, 78 Va. 720, 726 (1884).
51 In re Estate of Dolby, 78 Va. Cir. 59, 3 (Va. Cir. Ct. 2008).
52 Dolby, 694 S.E.2d at 637.
53 Id. at 637-38.
54 50 Va. (9 Gratt) 541 (Va. 1853).
Jerad R. Tomac is a second-year law student at The Catholic University of America, Columbus School of Law, a staff member on the Catholic University Law Review and an active student member of the Fairfax Bar Association, Trust and Estate Section. Mr. Tomac received his B.S. in the Administration of Justice from George Mason University in 2008. In addition to his law studies, Mr. Tomac is the law clerk to the Hon. John H. Rust, Jr., Commissioner of Accounts, 19th Judicial Circuit.