Tennessee Husband Must Pay Debt to Wife Despite His Bankruptcy

Tennessee law case summary on divorce and bankruptcy in divorce and family law from the Court of Appeals.

Lori Anne Yattoni-Prestwood v. John Stewart Prestwood – Tennessee divorce and bankruptcy law

Following a meeting on an internet-dating site, the wife, Lori Anne Yattoni-Prestwood and the husband, John Steward Prestwood, married three months later, in July 2008.  Both were married before and the wife had one teenage daughter.   The husband, aged 44, was a real estate appraiser who owned his own business for over 15 years.   He estimated that he earned about $30,000 a year.   The wife, aged 46, had a real estate license but did not work much in the field and said she earned between $7,000 and $15,000 a year.  The couple separated ten months after they married and in June 2009 the wife filed for divorce.

Both parties brought many assets to the marriage.  The wife had a home and a rental property (“Signal View”), a Mercedes sports car, jewelry and a Rolex watch plus approximately $20,000 in her bank account.  She had almost no debt, other than a loan on her car and a $5,000 balance on her credit card.

The husband also came in with assets, including three or four rental properties.   He also owned a boat, a new Ford truck, a Corvette, a collection of sports cars, and a Harley Davidson motorcycle.   The husband also had mortgages totaling $5,000 a month and there were leans on several of his properties.

Just prior to and during the short marriage, the couple accumulated additional debt.   The first debt was from a second mortgage on a property the husband purchased in 2007, before the parties met.  This property, Intermont, was refinanced by the parties ten days before they married in 2008.  The husband signed as the primary borrower and the wife was a co-signer.  The money from the loan was used to pay off the husband’s original loan on the property (just over $105,680) and the rest, over $62,000, went into the husband’s personal checking account.  While the divorce was pending, the bank holding the loan on the Intermont property sued the couple.  The husband filed for bankruptcy and his debts were discharged.   The Intermont property was sold at foreclosure, the husband’s debts were cleared, and the bank sought payment of the rest of the loan – over $35,000 – from the wife.  The wife came to an agreement with the bank that she would pay back $15,000.

The second debt was acquired after the parties married, when the wife refinanced her Signal View property and received a $99,000 line of credit.  She paid out over $90,000 in checks directly to the husband or for his expenses.  These outlays included fees for his Corvette, $30,000 in checks to him directly, and $16,000 to cover the husband’s credit card debt for her engagement ring.

The last debt incurred by the couple was credit card debt.  All told, by the time of the divorce trial, there was a debt of $155,000.

The wife sued the husband to repay her for the money she had given him, the bankruptcy court dismissed her claims.  Following this decision, the trial court granted the divorce, found that the couple had no marital assets and ruled that each party would be liable for his or her own debt.  Since the husband declared bankruptcy, the wife was left with the burden of paying back the rest of the debt.   The court also ruled that the money the wife gave the husband prior to and during the marriage, either directly or by paying his bills, were gifts from her and therefore she could not reclaim them from him as loans.

In post-trial proceedings, the trial court was asked to determine if the husband still owed money to the wife, despite his declaration of bankruptcy.   A bankruptcy lawyer, Jerrold D. Farinash, advised the court that it had the authority to impose domestic support obligations or a lump sum judgment against the husband and that these debts could still be imposed without violating the bankruptcy court’s discharge order.  Despite this expert opinion, the court ruled that its original opinion held.  The wife appealed.

Shared marital debt trumps bankruptcy

The appeals court overturned the decision of the lower court.   Marital debt, according to Tennessee law, is all debts incurred by either spouse during the course of the marriage.  In order to equitably distribute the debt between the ex-spouses, the court considers the debt’s purpose, who incurred the debt, who benefitted from the debt and who is best able to repay the debt.  Also, one spouse should not be punished for the excesses of the other spouse.

The appeals court considered each of the three major debt areas.  The Intermont loan was not a marital debt since it was acquired before the parties married.  However, the court held that based on the four considerations listed above, the remaining debt of $15,000 that belongs to the wife should be paid by the husband.  The loan was made to pay off the husband’s debt and most of the remaining money was given to the husband, so he benefited the most from the loan and the subsequent debt.  The court ruled that the husband should pay the $15,000 remaining debt back to the wife in the form of alimony in solido.

The court ruled that the Signal View debt of $99,000 was marital debt since it was incurred after the parties married.  Of this sum, $89,000 went into the wife’s checking account and was spent during the marriage.   The third debt, from the wife’s credit cards, amounted to $19,700.

The court found that the total amount of $108,700 (from the Signal View loan and the credit card debt) was indeed given as gift to the husband, as the trial court noted, but they were given to him for the benefit of the marriage.   Therefore, the debt was marital debt and should be distributed equitably between the two parties.

In a short marriage, every effort should be made to restore the parties to the situation they were in prior to marriage.  The lower court found this impossible to do since the parties had accumulated so much debt so quickly.  The appeals court ruled that keeping this rule in mind, along with the four considerations in distributing debt, the fairest way to divide the debt was by making each side equally responsible.   Since the wife is the only one legally responsible to the creditors, the husband must pay her back his share of the debt through an additional payment of alimony in solido in the amount of $54,350.   This award ensures that the husband pays his share of the marital debt and also gives the wife the support she needs.  Alimony is provided when one spouse is in need and the other spouse is able to pay.  The court found that the burden of debt made it difficult for the wife to meet her monthly expenses and the husband was in a better financial position and had a greater earning capacity.

No. E2011-01967-COA-R3-CV (Tenn. Ct. App. Aug. 29, 2012).

See original opinion for exact language.  Legal citations omitted.

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