How North Carolina Deals with Loans in Divorce

In Bodie v. Bodie, 727 S.E.2d 11 (N.C. App., 2012), the Equitable Distribution case for loans is discussed in detail. While most Equitable Distribution affidavits simply subtract the loan from the cars value, this case explains a more clearly defined step process that should be taken.

N.C. Gen.Stat. § 50–20(a) provides that, in an equitable distribution proceeding, “the court shall determine what is the marital property and divisible property and shall provide for an equitable distribution of the marital property and divisible property between the parties in accordance with the provisions of this section.” As a result:

The first step of the equitable distribution process requires the trial court to classify all of the marital and divisible property—collectively termed distributable property—in order that a reviewing court may reasonably determine whether the distribution ordered is equitable. In fact, “to enter a proper equitable distribution judgment, the trial court must specifically and particularly classify and value all assets and debts maintained by the parties at the date of separation.” Robinson v. Robinson, ––– N.C.App. ––––, ––––, 707 S.E.2d 785, 789 (2011) (citing Cunningham v. Cunningham, 171 N.C.App. 550, 555–56, 615 S.E.2d 675, 680 (2005), and quoting Dalgewicz v. Dalgewicz, 167 N.C.App. 412, 423, 606 S.E.2d 164, 171 (2004)).

“It is not enough that evidence can be found within the record which could support such classification; the court must actually classify all of the property and make a finding as to the value of all marital [and divisible] property.” Robinson, ––– N.C.App. at ––––, 707 S.E.2d at 790 (citing Warren v. Warren, 175 N.C.App. 509, 514–15, 623 S.E.2d 800, 804 (2006)).

According to N.C. Gen.Stat. § 50–20(b)(4)d, divisible property includes “[i]ncreases and decreases in marital debt and financing charges and interest related to marital debt.” For that reason, a trial judge deciding an equitable distribution case must make findings classifying and distributing increases and decreases in marital debt. In this case, after finding that Plaintiff “paid $216,000.00 towards the mortgage, insurance, upkeep and taxes for the marital residences after the DOS and that these payments were for marital debt,” the trial court failed to classify these payments as divisible property or make specific findings distributing this divisible property. We believe that the trial court’s failure to make such findings and a related distribution decision constituted an error of law.

A spouse is entitled to some consideration, in an equitable distribution proceeding, for any post-separation payments made by that spouse (from non-marital or separate funds) for the benefit of the marital estate. Likewise, a spouse is entitled to some consideration for any post-separation use of marital property by the other spouse.” Walter v. Walter, 149 N.C.App. 723, 731, 561 S.E.2d 571, 576–77 (2002) (citing Edwards v. Edwards, 110 N.C.App. 1, 11, 428 S.E.2d 834, 838,disc. review denied, 335 N.C. 172, 436 S.E.2d 374 (1993), and Becker v. Becker, 88 N.C.App. 606, 607–08, 364 S.E.2d 175, 176–77 (1988)). For that reason, the trial court may, after classifying post-separation debt payments as divisible property, distribute the payments unequally. Stovall v. Stovall, 205 N.C.App. 405, 413, 698 S.E.2d 680, 686 (2010) (stating that “the trial court properly classified defendant’s post-separation payments as divisible property,” that the trial court concluded that “ ‘defendant is entitled to a credit of $160,000 for the payments of the marital debt,’ ” and that, although “the trial court labeled the $160,000.00 as a ‘credit[,]’ in actuality, it treated the $160,000.00 as divisible property and concluded that an equal distribution was not equitable”). Plaintiff has not cited any cases, and we know of none, holding that a spouse is entitled to a “credit” for post-separation payments made using marital funds. As a result, in order to properly evaluate the trial court’s treatment of post-separation marital debt payments, the source of the funds used to make the payments should be identified.

The equitable distribution order at issue here does not include a finding that the post-separation payments in question constituted divisible property or any findings regarding the extent, if any, to which Plaintiff paid these marital debts using separate property. Although the trial court found that Plaintiff paid $216,000.00 towards the mortgage, insurance, upkeep and taxes on the marital residences after the date of separation; that a 401(k) retirement account associated with Plaintiff’s employment at Western Carolina Urology had a date of separation “marital component” of approximately $225,600.00; that, after the date of separation, the value of Plaintiff’s 401(k) account experienced passive fluctuations stemming from market pressures; and that Plaintiff spent approximately $335,000.00 from the 401(k) account after the date of separation, including $125,000.00 used to reduce marital debts and about $167,888.00 used to cover personal, non-marital expenses, the trial court never addressed the extent to which specific post-separation debts were paid using Plaintiff’s separate property or the manner in which any payments made using Plaintiff’s separate property should be recognized in the equitable distribution process.

Specifically dealing with after separation payment of marital debts were more clearly set forth in Shope v. Pennington, 753 S.E.2d 688 (N.C. App., 2014), as the Court specifically clarified the Bodie case above.

The [d]efendant has paid $511,522.69 toward marital debts associated with Pennington Farms after the date of separation and before the date of trial as stipulated to in Schedule M of the pretrial order. The funds for these payments came from the [d]efendant by virtue of his effort in operating Pennington Farms after the date of separation which generated income to pay these debts. The Court will consider this divisible property, as defined in G.S. 50–20(b)(4) and (d) in its final judgment. This divisible property is assigned to the [d]efendant. (Emphasis added).

Here, unlike Bodie, the trial court properly classified the defendant’s payment of debts associated with Pennington Farms as divisible property in its amended equitable distribution order. However, the trial court distributed all of those payments, $511,522.69, to defendant without making specific findings as to the source of those funds. While a trial court may distribute payments unequally, see Stovall v. Stovall, 205 N.C.App. 405, 413, 698 S.E.2d 680, 686 (2010), plaintiff would be entitled to some consideration of those payments if the source of those funds was marital property. See Bodie, ––– N.C.App. at ––––, 727 S.E.2d at 15. Here, the trial court’s identification of the source of those funds is ambiguous. However, given that the average monthly gross income defendant earned from the operation of Pennington Farms was $1,275.00,

It seems unlikely that defendant was able to generate over half of a million dollars in debt payments solely on income he earned from his work on the farm. In other words, the numbers do not add up. Consequently, the trial court erred in not making clear findings as to the source of these funds and, if the source included defendant’s use of the marital property to generate income, in not giving plaintiff any consideration for that use. Therefore, we remand this matter back to the trial court to make additional findings of fact which identify the source of the funds used to pay down the marital debt associated with Pennington Farms and redistribute those payments if necessary.

Finally, bringing this discussion back to the equity-line debts as set forth is Hill v. Hill, 748 S.E.2d 352 (N.C. App., 2013):

Equity Line Debt: plaintiff contends that the trial court erred in failing to find that his payments on an equity line of credit debt were divisible property. We agree.

The parties had stipulated that there was a Wachovia (now Wells Fargo) equity line debt, secured by plaintiff’s separate real property, of $42,505.10 on the date of separation. The parties did not stipulate to the classification of this debt. The trial court found that:

Prior to the marriage, Plaintiff used the credit line to purchase a vehicle for $25,000. The parties made interest payments on the equity line throughout the marriage. The debt was never entirely paid off and on date of separation the balance was $42,505.10[.]

In another portion of the order, the trial court found that: The Wachovia Equity Line was linked as an overdraft protection account to the Speaking of Inc. account. Plaintiff managed all of the bank accounts and transferred funds between accounts as needed. The corporate funds were used for marital purposes from time to time, and the equity line was used for corporate purposes from time to time. There was no evidence provided showing an accounting for these funds. Plaintiff maintains that the corporation owes the parties $7400 but that was not substantiated.

The trial court’s findings seem to indicate that to some extent the equity line debt was incurred as plaintiff’s separate debt (for the vehicle purchase prior to the marriage), and to some extent for marital purposes. Indeed, as the value of the debt at separation, $42,505.10, exceeded the original premarital debt of $25,000.00, it is clear that some portion of the increase in the debt occurred during the marriage.

While we note that N.C. Gen.Stat. § 50–20(b)(2) provides that the “increase in the value of separate property … shall be considered separate property[,]” we have previously held that:

Increases in value to separate property attributable to the financial, managerial, and other contributions of the marital estate are “acquired” by the marital estate. When the increase in value to separate property is attributable to both the marital and separate estates, each estate is entitled to an interest in the “acquired” increase consistent with its contribution. Accordingly, the marital estate shares in the increase in value of separate property “it has proportionately ‘acquired’ in its own right” through financial, managerial, and other contributions, but does not share in the increase in value of separate property acquired through passive appreciation, such as inflation.

Ciobanu v. Ciobanu, 104 N.C.App. 461, 465, 409 S.E.2d 749, 751–52 (1991) (citations omitted). On remand, the trial court should clarify whether and in what proportion this debt is separate or marital.

Plaintiff contends that the payments on this debt should have been classified as divisible property pursuant to N.C. Gen.Stat. § 50–20(b)(4)(d). The trial court found that the amount of this debt at separation was $42,505.10, based upon the parties’ stipulation. Plaintiff asserts in his brief that he made post-separation payments of $3,883.00 towards the equity line debt. However, there is no citation to the record or transcript supporting this assertion. Further, there is no finding in the trial court’s order as to the value of the equity line debt as of the date of distribution.

In Warren v. Warren, 175 N.C.App. 509, 623 S.E.2d 800 (2006), we held:  [N.C. Gen.Stat. § 50–20(b)(4) ] authorizes the court to classify postseparation payments of marital debt as divisible property. Whether these payments reduce the principal of the debt, the finance charges related to the debt, or interest related to the debt, the court should consider the postseparation payments as divisible property. If the postseparation reduction of the marital debt increases the net value of the marital property, the court may classify the increase as divisible property. Warren at 517, 623 S.E.2d at 805 (citations omitted).

We vacate the portion of the trial court’s order pertaining to the equity line debt. Upon remand, the trial court shall determine whether this was a marital debt, a separate debt, or partially marital and partially separate. If it finds that any portion of the debt is marital, it shall determine the amount of the debt at the date of distribution, and shall distribute the increase or decrease as divisible property. Finally, it shall determine the amount of post-separation payments on the debt by the parties, and treat those payments as divisible property in accordance with Warren.