Tuesday, April 20, 2010

Marital Debts Do Not Need To Be Divided Equally

Virginia Lawyers Weekly
Marital debt should not be divided equally
By Alan Cooper
Published: April 20, 2010

When the General Assembly enacted equitable distribution in 1982 as the mechanism for dividing the property of divorcing spouses, it created a presumption that property acquired during the marriage is marital – the property of both spouses.

The legislature created no such presumption for debts acquired during the marriage.
The case of Gilliam v. McGrady (VLW 010-6-052) illustrates the reason for treating property and debt differently, according to Senior Justice Charles S. Russell.

Louis B. Gilliam and Arthur L. McGrady were married in 1990 and separated in 2005.

In 2000, McGrady formed a painting business and operated it until 2004. He was responsible for running the business and had sole authority to write checks for it.

In the first year of the business, Gilliam became aware that McGrady was not paying payroll taxes to the Internal Revenue Service. From that year on, Gilliam filed separate income tax returns.

She told him that McGrady that must pay the taxes, but he responded that he couldn’t afford to pay them and that she had no business sense.

The business took in about $214,000 while it was in existence, and McGrady transferred about $53,350 to Gilliam’s checking account for household expenses. He testified that he also had paid household expenses directly out of the business account.

By October 2006, McGrady owed more than $118,000 in payroll taxes, penalties and interest.

Albemarle County Circuit Judge Cheryl V. Higgins ruled that both parties had benefited from the nonpayment of taxes and that McGrady had the burden of showing how and why the debt was incurred.

Higgins ordered McGrady to pay 65 percent of the penalties and interest but divided the principal amount of the taxes due equally between the parties.

A panel of the Virginia Court of Appeals affirmed Higgins’ holding on the burden of proof, although it acknowledged that Virginia Code § 20-107 creates a presumption for the treatment of property but not debt. “[W]e see no principled reason why the presumption should not apply to debt acquired during the marriage,” the panel said. “Property and debt are both components of an equitable distribution award.”

Writing for a unanimous Supreme Court, Russell said, however, a presumption on debt would interfere with the legislative goad of arriving “at a fair and equitable monetary award.”

In this case, he said, “The wife had no knowledge of the business affairs of Premier Painting and no means of controlling its non-payment of taxes. Far from condoning or encouraging the husband’s failure to pay them, she insisted that they be paid as soon as she became aware of the situation and immediately began filing separate income tax returns.

“Because the husband kept his business affairs secret from her, she had no way of knowing the extent to which the husband’s failure to pay taxes may have benefited the family’s finances, if at all,” Russell wrote. “As the circuit court found, there was no specific evidence of where the money went that had been obtained from the husband’s non-payment of taxes.”

In the absence of a presumption, “traditional rules concerning the allocation of the burden of proof apply.”

A party seeking to prove a debt was jointly incurred has the burden of showing that the debt is martial and shifting to the other party the burden of persuading the court that the debt was separate, Russell said.

On the other hand, the party seeking to prove that a debt was incurred by the other spouse has to make a prima facie case that the debt was separate in order to shift the burden of persuading the court that it was marital.

The decision caught family law practitioners off guard, even though they acknowledged the correctness of Russell’s analysis.

“My e-mail traffic lit up Thursday afternoon” (April 15), the day the decision came down, said Cheshire I’Anson Eveleigh, chair of the Virginia Family Law Coalition.

Eveleigh said family law practitioners traditionally have used the same analytical tools for allocating assets and debts.

The approach has the appeal of surface logic and consistency, she said. Practitioners approached a divorce with the idea of two separate trials, one for issues of custody and the other to allocate the couple’s resources – or lack of them.

Now, the different allocations of proof may well require three trials, she said. The ultimate result may be the same as it is under the approach lawyers and trial courts have been using, she said. “It’s just going to take longer to get there. It’s going to take up more of the court’s time, I believe” as judges may become more involved “in the minutia of who charged what on the credit card.”

Lawrence D. Diehl, the Chesterfield County lawyer who helped draft the statute, said even though Russell “correctly analyzed the words and terms set forth in the statute,” the practice of lawyers and the decision of the Court of Appeals may better reflect the overall intent of the law.

A legislative fix might be in order, he said, and Eveleigh said that possibility certainly will come up before the coalition shortly, although she would not predict what position it might take.

Joseph A. Condo, a family law specialist in McLean, said he understands the concerns of Diehl and Eveleigh about more work for judges and lawyers.

But Russell’s decision is “a fair result. If this is what is necessary to reach a fair result, then we’ll have to do what we have to do.”

Charlottesville lawyer Francis L. Buck represented Gilliam. McGrady was unrepresented in the appellate courts.

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