Posted by: koherston | October 8, 2012

Property Classification and Division of Debt in Tennessee Divorce: Yattoni-Prestwood v. Prestwood

Knoxville divorce lawyerFacts: The parties met on an internet dating site in April. After a whirlwind courtship, they were married three months later. Ten months after marrying, they separated. At the time of the marriage, Wife had no significant debt, and Husband claimed to have a net worth of $1.6 million. During the marriage, Wife paid $90,000 for various expenses for Husband, e.g., credit cards, car payments, boat repair, Wife’s engagement ring, etc. Days before the marriage, Wife co-signed on the mortgage refinancing on Husband’s residence, the proceeds of which were deposited into Husband’s checking account. During the divorce, the mortgage company sued the parties after they defaulted on the mortgage. Husband discharged his obligation in bankruptcy, leaving Wife on the hook for the entire debt. At the time of trial, Wife’s debts totaled $155,000. The trial court ruled that the payments Wife made for Husband during the marriage were “gifts,” classified the debts as separate property belonging to the party who incurred them, i.e., Wife. In other words, the trial court assigned all of the debt to Wife as her separate property. Wife appealed.

On Appeal: The Court of Appeals reversed the trial court.

Marital debts are all debts incurred by either or both spouses during the course of the marriage up to the date of the final divorce hearing. In Tennessee, the equitable distribution of marital debt is accomplished by considering (1) the debt’s purpose, (2) which party incurred the debt, (3) which party benefitted from incurring the debt, and (4) which party is best able to repay the debt. A careful application of these factors will insure the fairest possible allocation of debt and protect the spouse who did not incur the debt from bearing responsibility for debts that are the result of personal excesses of the other spouse.

It is a well-established principle of Tennessee divorce law that in cases involving a marriage of relatively short duration, it is appropriate to divide the property in a way that, as nearly as possible, places the parties in the same position they would have been in had the marriage never taken place. Even so, the over-arching goal in division of marital property is to divide the parties’ marital estate in a just and equitable manner.

After reviewing the record, the Court explained its reversal of the trial court as follows:

The trial court . . . stated that the debts now under discussion “are viewed as gifts and it is impossible to now compensate Wife for these transfers.” But to whom were the gifts made? It is clear that the trial court treated the expenditures represented by the debts as being gifts from Wife to Husband. We agree that they were gifts — Wife’s use of her separate property for something not exclusively for Wife’s direct benefit — but we view these expenditures, made during the marriage, as gifts of her separate property for the benefit of the marriage. As such, they are clearly characterized as marital obligations. The trial court erroneously labeled these debts as Wife’s separate obligations. These obligations are marital debt subject to equitable distribution.

On the record before us, we conclude that the evidence preponderates against the trial court’s finding that Wife’s “transfers” of funds or numerous check and credit card expenditures during the marriage were “gifts” to Husband. We hold that the burdening of Wife with all of this debt is not equitable. . . .

[W]e think it incumbent upon the courts to approach the equitable distribution of the parties’ debts with the shortness of the marriage in mind. To that end, we conclude that a consideration of the [following] factors — (1) the debt’s purpose; (2) which party incurred the debt; (3) which party benefitted from incurring the debt; and (4) which party is best able to repay the debt — leads to the conclusion that, in the present case, equitable means equal. . . .

We believe that equity is not done by placing Husband in a better financial position than Wife following the division of the debt undisputedly incurred by both parties during the marriage.

Accordingly, the division of the parties’ debt in this short marriage was modified to an equal division.

Yattoni-Prestwood v. Prestwood (Tennessee Court of Appeals, Eastern Section, August 29, 2012).

Information provided by K.O. Herston: Knoxville, Tennessee Matrimonial, Divorce and Family Law Attorney.


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