Leave Me a Loan
| Publication year | 2019 |
| Author | Justin O'Connell, CFLS |
Justin O'Connell, CFLS
Justin M. O'Connell is a partner at Cavassa O'Connell, located in Monterey, California, where his practice includes family law and civil litigation. Mr. O'Connell is a Certified Family Law Specialist, served as a Commissioner on the California State Bar Family Law Advisory Commission from 2012 to 2015, and is currently the Legislation Chair of the California Lawyers Association Family Law Executive Committee (FLEXCOM). He has been the professor of Property Law at the Monterey College of Law since 2007, and a member of the Alternative Dispute Resolution Executive Committee for the Monterey County Superior Court since 2013.
When does a dissolution client really owe a money back to a family member? This question often arises when dividing the community estate in a dissolution or legal separation action. As examples:
- A wife claims she borrowed money from her dad many times during marriage and claims repayment is a community liability in her dissolution case.
- A husband and wife received the down payment for their house from husband's grandma, and husband now claims repayment is a community liability in his dissolution case.
- A wife testifies in her dissolution trial, "We agreed to pay back the money we borrowed from my parents if we ever could." (Now that a dissolution is occurring, apparently opportunity to repay is knocking.)
Did these alleged liabilities actually arise at the time of the transaction, or do they appear to have manifested well after the money was received when the petition was filed? Can the trial court do what is fair by finding an intra-family loan exists for purposes of division of the community estate, though it might not exist for purposes of a civil action? These are important questions, the answer to which can be found at the intersections of the trial court's adjudicatory functions with the law of gifts and contracts.
The below discussion addresses these situations. Irrespective of which side one represents in this dispute, the family law attorney should be prepared to litigate the existence or non-existence of a contract, and not rely on equitable principles to guide the trial court.
This analysis begins by recognizing two closely-related roles the trial court plays in the division of the community estate: 1) determination of the existence of assets and liabilities; and 2) allocation of assets between the parties. The first role is a legal one and the second an equitable one, and they occur in that sequence. (A third role - valuation - is disregarded for this discussion.)
The determination of whether a community liability exists has a mathematical effect on the division of the community estate. The community is liable for debts incurred by either spouse during the marriage.1 Where a debt arises from a contract, the debt is incurred "at the time the contract is made."2 The party whose family member is allegedly owed the money back (e.g., $ x is owed) will likely seek to have the debt assigned to him or her, thereby getting more ($ x/2) community assets.
As to the legal determination of the existence of community assets and obligations, the trial court is mandated to divide the community estate equally.3 In doing so, the trial court must determine "the liabilities of the parties for which the community estate is liable."4 "In order to comply with these rules, the trial court must add all the community assets, deduct all the community obligations and divide the residual assets equally."5 "Under the Family Law Act clearly the ideal is a mathematically equal division."6 This is the result of California's move from a fault to a no-fault divorce jurisdiction; math - not equity - governs an equal division of the community estate.7
Such determination is not discretionary or otherwise guided by equitable principles. This is an important consideration because not every alleged liability is a legally recognized as such, just as not every alleged asset is legally recognized as such.8 If the community estate is not liable to a third-party creditor, then a claim is not a community liability under Family Code section 2551.
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After making a legal determination of the existence of a liability, the trial court must allocate the liability between the parties. As to this power of equitable allocation, Family Code section 2503 grants discretion to "make any orders the court considers necessary to carry out the purposes of this division." Thus, the trial court has broad discretion as to the method of allocation to effectuate a substantially equal division of property.9 The trial court's method is reviewed based on the abuse of discretion standard.10
"It is important to note . . . that although the method of division is left to the court, the substantially equal division requirement is still present."11 This is a helpful reminder that the trial court must determine the existence of a liability as a matter of law, or it fails in its mandated role to equally divide the community estate. Such failure would occur where a loan is recognized as a community liability for equitable and not legal reasons. Including a non-existent liability would result in an unequal division of the community estate. If the trial court first determines that the community estate is not subject to a legally recognized third-party claim - e.g. an unenforceable "loan" from a parent - then the trial court cannot not reach the second step to equitably allocate such lability. Equitable division left our law together with fault.
"Thank you, Mom and Dad, for sending me to college. I don't think I can ever repay you." - a thought by a grateful and penniless college graduate
The fact that a transferee of funds is a child or other natural object of bounty of a transferor is more than merely a circumstance to be raised at trial; i.e. a spouse's relationship with its lender (e.g., a parent) carries more evidentiary importance than a basic weighing of the evidence. Such relationship raises a presumption that a gift was intended, and the burden of proof is upon the person seeking to prove an agreement that a gift was not intended.12 Therefore, the trial court should be made aware that a familial relationship between the purported lender (parent or grandparent) and purported borrower (child or grandchild) means the borrowing spouse has the burden to prove the transfer of funds was not a gift.
"Guilt - the gift that keeps on giving." - Erma Bombeck
Consider what a gift is. Such a simple transaction, but with such important consequences. A gift is a transfer of property, made voluntarily, and without consideration.13 The three foundational elements of a gift in practice are the same as those learned in law school:
- There must be a present intent, on the part of the donor, to make an unconditional transfer of property.
- There must be an actual, constructive, or symbolical delivery by which the donor relinquishes all control of the property.
- The donee must accept the property (though acceptance of property with value is presumed)14
As to the second and third elements, for purposes of this discussion, they have no relevance. If a party received monies, there is no question of delivery, and the law...
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