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“I
Due”Characterizing Debt in Marriage Dissolution Debts,
like assets, may be marital or nonmarital and are apportionable in
marriage dissolution. But the
factors that courts rely on in apportioning debt differ slightly from
those they rely on in apportioning assets. “Love
is grand; divorce a hundred grand.” Characterization of debts as marital or nonmarital
depends on factors such as when the debt was incurred, the purposes
of the debt, and whether the other party benefited from the acquisition
of the debt. Whereas the timing of acquisition of an asset and the
source of the asset may be the two most important factors in determining
whether an asset is marital or nonmarital, they are of lesser importance
in determining whether a debt is marital or nonmarital. More significant
are factors such as who incurred the debt and when, the purpose of
the debt, whether both parties consented to the incurring of the debt,
who will benefit from the debt, and who is better able to pay the
debt. There, is of course, no bright-line rule, but each factor must
be considered and weighed in relation to the others. Equitable Distribution Once a debt has been characterized as marital,
it is subject to apportionment between the parties. Because debts
are apportionable to the same extent as assets,3 the statute regarding
equitable distribution of assets, Minn. Stat. Ann. §518.58, is instructive:
Business Debts Debts incurred in the course of and incident
to the running of a business logically should be apportioned to the
party who receives the business interest itself. When a debt is incurred
for the purpose of running a business, the debt should be paid from
the profit generated by the business. When a family business is a
going concern, the party receiving the business is the only one with
any control over the business profits, and apportioning the debt to
that party provides a reasonable incentive to make the business as
profitable as possible.6 However, because property division has to
be only equitable, not necessarily equal, this distribution can potentially
leave the business-owning party with a smaller amount of marital assets,
depending on the amount of debt owed by the business in relation to
the value of the business. In Nolan
v. Nolan, 354 N.W.2d 509 (Minn. App. 1984), the trial court’s
decision to allocate $500,000 of marital business debt to the husband
was upheld by the Court of Appeals. The business debt was one that
the husband had incurred as a personal obligation guaranteeing a bank
loan made to a business in which he owned a 25 percent interest. The
trial court refused to include the obligation on the marital balance
sheet, primarily because: first, the value of the business to which
the loan was made did not include the value of the loan; second, because
the husband might never have to pay the loan personally; and third,
because the husband had received all income-generating assets, and
therefore had “substantial capacity … to continue to acquire assets
and produce income.” A similar result was reached in Plaster
v. Plaster, 373 N.W.2d 604 (Minn. App. 1985). In Plaster, the Minnesota Court of Appeals held that it was not an abuse
of discretion for the trial court to characterize $219,000 of debt
incurred in the wife’s travel business as the wife’s personal debt
and assign responsibility for the entire debt to her. The wife had
incurred the debt to finance the upcoming travel season, and expected
to recoup her investment months in the future. In holding her solely
responsible for the debt, the Court of Appeals stated, “[i]t would
not be equitable to require [husband] to share in that debt since
he will receive none of the profits expected to result from the 1984-1985
travel season.”7 Further complicating the allocation of business
debt is the circumstance in which the business debt is owed to a family
member. Unfortunately for the party seeking to have the business debt
included on the marital balance sheet, courts have frequently determined
that, without sufficient documentation of the loan or proof that repayment
is expected, such a debt is actually a gift. In Wehner v. Wehner, 374 N.W.2d 569 (Minn. App. 1985), the Court of Appeals
held that, because the husband’s father would not be actively enforcing
repayment of the “loan” he had made to the parties for purchase and
continuation of the family business, it was not an abuse of discretion
for the trial court to order the husband to pay the “debt” to his
father. This was true even though, as the Court of Appeals recognized,
the obligations the husband was ordered to pay “greatly exceeded the
value of the property awarded to him.” The Court of Appeals noted
that it would be unfair to hold the wife liable for business debts
when the businesses have been awarded to the husband, because the
award of the businesses gave the husband the higher income-producing
capabilities, and thus a greater ability to pay the debts. A similar result was reached in Gabrielson v. Gabrielson, 363 N.W.2d 814
(Minn. App. 1985). In Gabrielson,
the husband received all of the corporate stock and the attendant
debt, which arguably gave him a negative net worth. In determining
that such a division was equitable, the trial court (and in turn the
Court of Appeals) found persuasive the fact that the husband’s father
had made no attempt to collect the debt. In Lenz
v. Lenz, 409 N.W.2d 68 (Minn. App. 1987), the parties had borrowed
$70,000 from the husband’s father in order to keep their auto parts
store financially afloat. The loan was documented by a signed promissory
note and the parties paid annual interest on the note. The trial court
was influenced by the fact that the parties had not made any principal
payments, and that the husband’s father had previously forgiven $13,500
in debts. The trial court found that it was “admittedly unclear” whether
the $70,000 debt to the husband’s father would not enforced, and so
allocated the debt to the husband, leaving him with a substantially
smaller net property award, according to the marital balance sheet.
The Court of Appeals upheld this decision. In presenting a case regarding the allocation
of marital business debt, the most important considerations are:
If the facts are against you, and you find yourself
fighting a losing battle to have marital debt allocated equally rather
than solely to your client, you should prepare a reasonable alternative
property distribution to propose to the court. “Failure to propose
reasonable alternative property divisions to the trial court in difficult
cases will cause an appellate court to hesitate in upsetting the trial
court’s division.”8 Loans from Family Members In Wolter
v. Wolter, 395 N.W.2d 417 (Minn. App. 1986), the Court of Appeals
upheld the trial court’s determination that the obligation which the
husband owed to his mother, which was incurred prior to the marriage
and documented by a promissory note signed after the marriage, was
the husband’s nonmarital debt. The Court of Appeals affirmed the trial
court’s finding that, “[T]he obligation to repay this loan was established
prior to the marriage. Furthermore, Respondent never signed this note.
Any amount owing on this note is [appellant’s] sole liability and
is not a marital debt.”9 The Court of Appeals in O’Donnell v. O’Donnell, 412 N.W.2d 394 (Minn. App. 1987) overturned
the trial court’s determination that the husband should repay $9,500
owed to the wife’s parents. In reaching this conclusion, the Court
of Appeals reasoned that, “because the $9,500 debt was incurred for
the benefit of the family, because respondent’s parents may be hostile
creditors as far as appellant is concerned, and because appellant’s
voluntary assumption of the remaining $69,205 in marital debts is
a reasonable alternative property division in a difficult case, appellant
should not be required to assume responsibility for this debt.”10 Proving that a loan is really a loan is dependent
on the facts: Is the loan validly documented in writing, signed by
both parties? Have regular payments been made? Have regular payments
been demanded? Does the giftee’s family have a history of financial
gift-giving or loan forgiveness? If you represent the party attempting
to prove that the claimed “loan” is really a gift, not to be repaid,
you should gather proof of repayment demands and proof of how the
spouse seeking the “loan” designation has treated the loan. Has she
claimed the loan as an obligation in making applications for credit?
Does he even disclose the loan in interrogatories? In short, if you
can prove that the giftee spouse never treated the money as a real
loan, your chances of convincing a court that it wasn’t a real loan
are good. Student Loans Oftentimes student loans must be allocated in
the dissolution proceeding. When the parties have been married a very
short time, or when the parties have comparable incomes and comparable
student loan balances, each party may be assigned responsibility for
his or her student loans. If the student loans were incurred in whole
prior to the marriage, the loans would likely be considered nonmarital
debt. However, what about the 25-year marriage, in which the doctor
or lawyer owes significant student loans and the other party has few,
if any, student loans? While, again, there is no bright-line rule
in this regard, several factors do take priority when courts are allocating
responsibility for student loans. The party or parties who benefited
or will benefit the most from the education purchased with the student
loans, provided he or she has the ability to pay, will likely to end
up bearing some, if not all, responsibility for the repayment of the
student loans. In Tasker v. Tasker, 395 N.W.2d 100 (Minn.
App. 1986), the Court of Appeals upheld the trial court’s determination
that the husband’s student loan, “incurred and expended during the
marriage, benefited appellant and is his responsibility.”11 It is
relevant to note that, in Tasker,
the husband was frequently unemployed, while the wife worked three
different part-time jobs and was primary caretaker for the parties’
child. “Both appellant and respondent have realized very little, if
any, monetary benefit from appellant’s education. Any benefit that
may have been realized thus far as a result of appellant’s education
has apparently been of a non-financial nature, benefiting only appellant.”12
The Tasker court went further
to state, “To have burdened [wife] further with responsibility for
payment of part or all of the student loan may have caused severe
economic hardship not only for [her] but for the parties’ child also.”13
In the unpublished case of Gross v. Gross, 2000 WL 1376446 (Minn.
App. 2000), the Court of Appeals upheld the trial court’s determination
that the parties should share responsibility for the wife’s student
loans. “Appellant enjoyed the fruits of respondent’s enhanced nursing
salary, made possible by the loans that allowed her to obtain her
nursing degree. Even had he not received any benefit from the loans,
the district court, by requiring, in equity, that appellant share
the burden of respondent’s student loan debt, would have been within
its discretion.”14 Factors that counsel should focus on include
the date the student loan was incurred, the purpose of the student
loan, and who benefited and will benefit from the student loan. Of
course, other factors will certainly come into play, such as each
party’s ability to pay, and the division of other property and debts. Consent While equity requires consideration of all relevant
facts before apportioning debt, it does not condition a finding or
assignment of shared liability for a debt on both parties’ express
agreement to each and every debt incurred during the marriage.15 While
not conclusive, whether both parties consented to incurring the debt
is a factor for the court to consider.16 When deciding the disposition
of debts incurred by one party without the other’s consent, trial
courts will give significant weight to the purpose of the debt and
whom the debt benefited. For instance, a debt incurred in order to
preserve the marital estate will be treated far differently than gambling
debts. In the case of Stromberg v. Stromberg, 397 N.W.2d 396 (Minn. App. 1986), the Court
of Appeals upheld the trial court’s order that each party was responsible
for one-half of the cost of property improvements made by the husband,
even though he made the improvements without the wife’s permission.
The Stromberg court reasoned that, “since the
improvements added to the overall value of the property and would
be reflected in the final sale price, appellant should be responsible
for half of the cost.”17 Certainly, if a debt benefits only one of
the parties, that debt may reasonably be apportioned to that party
alone.18 Conclusion Although debts, like assets, are equitably distributed
in marital dissolution cases, the primary factors which dictate how
the debt will be classified and apportioned differ slightly from the
factors used in classifying and apportioning assets. The conscientious
practitioner would be well-advised to gather all available information
regarding the circumstances surrounding the incurring of the debt,
as well as each party’s ability to pay the debt, in order to present
a comprehensive set of facts to the court, so the court can equitably
apportion the debt. Notes 2
Plaster v. Plaster,
373 N.W.2d 604 (Minn. App. 1985). 3
Filkins v. Filkins,
supra, n. 1. 4
Dahlberg v. Dahlberg,
358 N.W.2d 76, 80 (Minn. App. 1984). (“courts should be ‘guided by
equitable considerations in distributing rights and liabilities,’
and should have ‘broad discretion in the distribution.’”) 5
Id. 6
See Buhr
v. Buhr, 395 N.W.2d 433 (Minn. App. 1986); Gabrielson v. Gabrielson, 363 N.W.2d 814 (Minn. App. 1985). 7
Plaster v. Plaster, supra
n. 2, at 607. 8
Wehner v. Wehner,
374 N.W.2d 569, 571-72 (Minn. App. 1985). See
also O’Donnell v. O’Donnell,
412 N.W.2d 394 (Minn. App. 1987). 9
Wolter v. Wolter,
395 N.W.2d 417, 422 (Minn. App. 1986). 10
O’Donnell v. O’Donnell,
412 N.W.2d 394, 396-97 (Minn. App. 1987), citing
Wehner v. Wehner, supra n. 8. 11
Tasker v. Tasker,
395 N.W.2d 100, 105 (Minn. App. 1986). 12
Id. 13
Id. See also Bliss v. Bliss, 493 N.W.2d 583 (Minn. App.
1992) (Wife ordered to pay her own student loan, at least partly because
of wife’s failure to present sufficient evidence regarding the nature
and purpose of the student loan). 14
Gross v. Gross, 2000
WL 1376446 (Minn. App. 2000), at *3. 15
See Buhr
v. Buhr, 395 N.W.2d 433 (Minn. App. 1986) (“[T]he fact [that]
appellant had no knowledge of the loan or did not consent to it does
not make it a non-marital debt.”). 16
Dahlberg v. Dahlberg, 358 N.W.2d 76 (Minn.
App. 1984) (All marital debts assigned to appellant in part because
“most of the debts appear to have been amassed by the appellant without
consulting the respondent.”). 17
Stromberg v. Stromberg,
397 N.W.2d 396, 401 (Minn. App. 1986). But
see Jensen v. Jensen,
440 N.W.2d 152 (Minn. App. 1989) (Final decree did not make nonpossessory
spouse liable for improvements, and so it was error to order parties
to split cost of improvements.) 18
See Olsen v. Olsen, 2007 WL 2364736 (Minn. App. 2007) (unpublished) (Husband
solely responsible for attorneys fees incurred in domestic violence
criminal defense); see also
Oberstar v. Oberstar, 2004 WL 422551 (Minn.
App. 2004) (unpublished) (Husband ordered to assume responsibility
for $100,000 debt which he lost in the stock market without wife’s
consent). |
