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.”
Anyone who says divorce is easy has clearly never been through one. Stress levels peak, nerves are frayed, and bank accounts are emptied. As if issues involving child custody, parenting time, support/maintenance and property division aren’t enough, sometimes debt becomes a major issue of dispute. While debts such as rent payments, groceries and payment of utility bills are generally easily classified as marital, other debts are not so effortlessly pigeonholed. This article will explore various types of debt that the practitioner might encounter, certain factual scenarios that might change the characterization of the debt, and arguments one can make in furtherance of the client’s position regarding the debt
Characterization of Debt
Although not specifically referenced in Minnesota’s equitable distribution statute, debts are apportionable to the same extent as assets.1 Debts, like assets, can be marital or nonmarital.2 In order to prevent parties from incurring significant debt in anticipation of the spouse being held liable for half, courts conduct a slightly different evaluation of debt than would be done of assets.
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.
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:
Because the courts place emphasis on apportioning the debts equitably, rather than just equally, such debts can be, and frequently are, allocated disproportionately.4 For instance, in Filkins v. Filkins, 347 N.W.2d 526 (Minn. App. 1984), the Minnesota Court of Appeals determined that the trial court’s assignment of $32,000 of debt to the husband and only $4,000 of debt to the wife was not an abuse of discretion, as most of the debts were incurred by the husband for his own purposes. Furthermore, “a party to a dissolution may be held liable for marital debts even though the other party receives the benefit of payment.”5
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:
the source of the loan (family member or arms-length?);
the purpose of the debt;
how much input each spouse had in the decision to incur the debt;
the extent of documentation of the loan, especially if the loan is from a family member;
whether and how much each spouse benefited or will benefit from the debt;
if the loan is from a family member, whether repayment will be enforced;
if the loan is from a family member, whether that family member has a history of giving similar gifts and/or forgiving loans; and
which party has the greater ability to pay the debt.
The clever practitioner will ensure that these matters are fully presented to the court.
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
Even when the loan from a family member is not in the nature of a business loan, intrafamily loans can be the source of much dispute in a dissolution action. As is shown below, the results are generally the same, whether the intrafamily loan is a business or personal loan. In Novick v. Novick, 366 N.W.2d 330 (Minn. App. 1985) the Court of Appeals found that the trial court did not err in characterizing transfers of money to the wife from her parents as “gifts” rather than “loans.” The trial court’s finding was supported by evidence that the transfers were undocumented, unsecured, and without interest. Furthermore, the wife’s father had a significant history of making unrepaid financial advances to 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.
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.
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
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.
1 Filkins v. Filkins, 347 N.W.2d 526 (Minn. App. 1984).
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.’”)
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).
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).
PHYLLIS “PHYL” BEAN is an attorney with the firm of Morrison Fenske & Sund, P.A. located in Minnetonka. She was awarded her J.D. in 1991 from George Mason University School of Law, where she served as a staff member of the George Mason University Law Review. She is admitted to practice in Minnesota, Florida, Virginia, and the District of Columbia and concentrates her practice in the area of family law, including adoption, divorce, custody and support.