Presented by:
Robert P. Dickerson, Esq. and Shann D. Winesett, Esq.
December 2, 2009
I. INTRODUCTION.
In the days of escalating property values, Nevada family courts had no difficulty in adhering to Nevada’s paradigm of presumptive equal distribution of community property. Most divorcing couples owned a marital home with a pot of equity which, upon divorce, could be used to “equalize” the distribution of community property and debt. With the drastic decline in property values in Nevada, the specter of negative equity has begun to haunt most divorce cases. In many cases, not only is there no equity in the marital home to use as an equalizer, but the home has become a “toxic asset” representing a cumbersome liability which neither party wants to assume.
II. WHAT IS NEGATIVE EQUITY?
In its most basic form, equity is defined as the fair market value of property minus any loan encumbrances or other liabilities relating to it.1 Where a piece of property has a fair market value in excess of related liens and encumbrances, it is said to have equity. By obvious contrast, negative equity arises where the owner owes more on the property than the property is worth.2
While clearly the opposite of positive equity, negative equity is not its converse, and, as one court has noted, there exists a certain amount of “unease” regarding “negative equity.”3
The “unease” surrounding negative equity is directly related to how the parties tend to deal with it. Under most circumstances, a party will not walk away from an asset with positive equity. Not so with negative equity. When faced with the dilemma of servicing loan obligations for thousands of dollars in excess of a property’s fair market value, property owners are now beginning to abandon property even where they have the financial wherewithal to maintain the encumbrances. These so-called “strategic foreclosures,” along with the options of a “short-sale” or traditional bankruptcy, all have the capacity to reset negative equity to zero. The potentially ephemeral nature of debt in the current economy is what troubles the courts and family law practitioners when it comes to negative equity.
III. HOW IS NEGATIVE EQUITY TO BE DISTRIBUTED UPON DIVORCE?
In Nevada, “[a]ll property, other than that stated in NRS 123.130, acquired after marriage by either husband or wife, or both, is community property unless otherwise provided by:
(1) An agreement in writing between the spouses, which is effective only as between them.
(2) A decree of separate maintenance issued by a court of competent jurisdiction.
(3) NRS 123.190.
(4) A decree issued or agreement in writing entered pursuant to NRS 123.259.”4
Nevada Revised Statute 125.150(1)(b), which mandates equal disposition of community property in Nevada, is remarkably brief and reads in pertinent part as follows:
In granting a divorce, the court . . . shall, to the extent practicable, make an equal disposition of the community property of the parties, except that the court may make an unequal disposition of the community property in such proportions as it deems just if the court finds a compelling reason to do so and sets forth in writing the reasons for making the unequal disposition.
Notably, NRS 125.150 does not specifically refer to the disposition of “debts,” and there is precious little case authority from the Nevada Supreme Court on the issue. What case authority does exist, however, suggests that the Nevada Supreme Court interprets community property to be inclusive of the community debt.5 For example, in Wolff v. Wolff,6 the Nevada Supreme Court concluded that the district court had abused its discretion in ordering the husband to purchase a life insurance policy to cover lost retirement benefits in the event of his death before actual retirement. In reversing the district court’s decision, the Nevada Supreme Court stated:
The decree does not provide for a corresponding “equal” liability to [the wife]. Accordingly, the district court’s requirement that [the husband] expend money on the life insurance policy is an “unequal” distribution of debt. See NRS 125.150(1)(b).7
The Nevada Supreme Court’s analysis of NRS 125.150(1)(b) in Wolff is, by no means, exhaustive, but it is, nonetheless, instructive. If nothing else, Wolff stands for the proposition that
NRS 125.150(1)(b) is applicable to the distribution of community debt and that community debt should be equally distributed.8
IV. THE INEQUITY OF EQUAL DISTRIBUTION OF NEGATIVE EQUITY.
The inequity of dividing negative equity equally upon divorce can be demonstrated by analyzing simple hypothetical situations. For example, suppose a divorcing couple own a community home with negative equity of $100,000 and a savings account with a positive value of $100,000. In the divorce, the husband receives the marital home along with the $100,000 savings account as an offset for the negative equity.
In this hypothetical situation, each party theoretically leaves the marriage with a zero net worth and NRS 125.150(1)(b)’s mandate of equal disposition is met. Yet, assume finally, that six months after the entry of the decree, the husband “short sells” the marital home and thereby erases the negative equity. Even though the husband no longer owns the home in this situation, the division of community property has, nonetheless, swung $100,000 in the husband’s favor. The results of this hypothetical situation are neither fair, just, nor equitable, but they are certainly plausible in the event of a mechanical application of NRS 125.150(1)(b) to negative equity. The issue, therefore, becomes what “tools” are available to the court and the family law practitioners to rectify such an inequitable result that could very well arise post-divorce.
V. THE COURT RETENTION OF JURISDICTION IS THE KEY.
The critical issue in this type of “negative equity” situation is how can the court retain jurisdiction to address and rectify any inequities that may arise post-divorce (and particularly more than six months post-divorce after a Rule 60(b) motion no longer is available to the aggrieved party) should the husband, in our example above, be relieved of his legal obligation to pay the full amount of the debt he was ordered to assume. In considering this issue, one must keep in mind that we are dealing with “property rights.” In Kramer v. Kramer,9 the Nevada Supreme Court held that the district court loses its jurisdiction to modify property rights established by a divorce decree six months after the entry of the decree. Thus, the property division portion of the decree of divorce becomes unmodifiable six months after the decree is entered.10
However, Martin v. Martin11 provides the family law practitioners and family court judges with excellent guidance on the language that should be used in marital settlement agreements and divorce decrees in order to give the family court continuing jurisdiction to rectify these type of “negative equity problems” that may arise post-divorce. In Martin, the decree of divorce was entered in August 1988. In the decree, the husband agreed to assume responsibility for certain debt and to hold the wife harmless from such debt. The following month, the husband filed for Chapter 7 bankruptcy, and in April 1989, the debt he was ordered to pay pursuant to the decree of divorce was discharged, thereby relieving the husband from the financial obligation he was to pay pursuant to the divorce decree. Thereafter, the wife filed a motion with the divorce court seeking spousal support.12 After an evidentiary hearing, the court found that the debt payment terms were “characterized as being in the nature of alimony, maintenance and support.” Therefore, the court ordered support in an amount sufficient to repay the wife for the debt she now was required to pay because of the husband’s bankruptcy.
On appeal, the Nevada Supreme Court noted that the husband’s assumption of debt was tied to an agreement for lower child support. In affirming the lower court’s award of alimony to the wife, the Supreme Court concluded that the “hold harmless” provision qualified as maintenance or support, since without payment of the debt by the husband, the “spouse would be inadequately supported.”13
Therefore, in our “negative equity” hypothetical discussed above, and pursuant to the authority of Martin v. Martin, it is suggested that the trial court can retain jurisdiction over the “negative equity” issue by making the specific finding that the husband’s payment of the debt is “in the nature of alimony, maintenance and support,” and that the wife “would be inadequately supported without the husband’s payment of the debt.”
It is suggested that the following type of provision could be used in a settlement agreement (or revised for the purpose of including in a decree of divorce) to assure that the court retains jurisdiction to address the type of “negative equity” situation discussed in this paper:
The parties agree that HUSBAND’s monetary obligations and agreement to pay the community and joint debt set forth in this Agreement are in the nature of alimony, maintenance, or support to WIFE, and that WIFE and the parties’ children would be inadequately supported without HUSBAND’s payment of the same.14 The parties further agree that HUSBAND’s agreement to pay such monetary obligations and debt is in consideration of the different work experience, training and education of HUSBAND and WIFE, and in an effort by HUSBAND and WIFE to enable WIFE to maintain her standard of living and the children’s standard of living. Notwithstanding the foregoing, HUSBAND shall not deduct such payments from his gross income for purposes of federal income taxes, and WIFE shall not declare these payments as income for purposes of federal income taxes. The parties further agree that the court having jurisdiction over the parties’ divorce shall retain jurisdiction to modify such support obligation HUSBAND owes to WIFE should HUSBAND fail to fully pay the debts and obligations to be assumed by him pursuant to the terms of this Agreement. It is further acknowledged that WIFE would not have executed this Agreement in the absence of the assurances and representations set forth above in this paragraph.
VI. OTHER TOOLS FOR COPING WITH NEGATIVE EQUITY.
A. Offsetting the Inequities through Alimony.
Another possible tool available to the court in ameliorating the harsh impact of equally dividing negative equity is an actual award of alimony (instead of simply relying on the language of the Martin case as suggested in Section V immediately above). In this regard, Nevada Revised Statute 125.150(1)(a) provides that “[i]n granting a divorce, the court . . . may award such alimony to the wife or to the husband, in a specified principal sum or as specified periodic payments, as appears just and equitable . . .” The statute further provides that “[i]n addition to any other factors the court considers relevant in determining whether to award alimony and the amount of such an award, the court shall consider: (a) The financial condition of each spouse; (b) The nature and value of the respective property of each spouse; . . . (j) The award of property granted by the court in the divorce, other than child support and alimony, to the spouse who would receive the alimony.”15
Nevada Revised Statute 125.150 gives the court a tremendous amount of discretion in awarding alimony and arguably provides the court with a possible tool to adjust the inequity of dividing negative equity. Take for example the hypothetical situation in which the only community assets are the marital home with its negative equity of $100,000 and a $100,000 savings account. Assume that the husband is awarded the home subject to the encumbrances and the $100,000 savings account as a set off. Again, the parties are theoretically leaving the marriage with a net worth of zero dollars.
To balance the equities in this property division, the court could award such alimony to the wife “as appears just and equitable.” In fact, subsections (b) and (j) of NRS 125.150 require the court to consider “the respective property of each spouse” as well as the “award of property to the spouse who would receive the alimony.” In this case, the husband would be leaving the marriage with a home (which cannot be sold unless the husband can convince the lender to accept a short-sale of the property) and a $100,000 savings account. The wife would be leaving the marriage with nothing. Under NRS 125.150, the court would be well within its discretion to award the wife alimony in “specified periodic payments” in order to at least be able to retain jurisdiction and appropriately compensate the wife should the husband succeed in walking away from the home without losing the $100,000 in the savings account. For example, the court initially could make specific findings that it is awarding wife alimony of $1 per year for the sole purpose of retaining jurisdiction over the matter should the husband end up not having to pay the entire obligation owed on the loan encumbering the home, while at the same time having full benefit to the $100,000 in the savings account. In this type of situation where the husband receives a windfall due to his inappropriate actions after the divorce, the court could, and should, do whatever is necessary to assure that the wife is treated fairly in the situation.
Thus, offsetting such a “negative equity” situation by retaining jurisdiction through an alimony award allows the court to modify the initial $1 per year alimony should the husband “short sell” the home, allow its foreclosure, or file for bankruptcy. See Allen v. Allen16 (stating “under no circumstances, bankruptcy or no bankruptcy, should one party to a divorce be allowed to take all of the benefits of the divorce settlement and leave the other party at the disadvantage suffered by the wife in the present case”); see also, Siragusa v. Siragusa,17 (holding that the court may consider a spouse’s discharged property settlement obligation as a “changed circumstance” in ruling upon a motion for modification of alimony).
B. “Compelling Reasons” to Unequally Divide Negative Equity.
Another potential tool for dealing with the problem of negative equity is found in NRS 125.150(1)(b) itself. Specifically, NRS 125.150(1)(b) permits the court to “make an unequal disposition of the community property in such proportions as it deems just if the court finds a compelling reason to do so and sets forth in writing the reasons for making the unequal disposition itself.”
In addressing what constitutes a “compelling reason” for making an unequal disposition of community property, the Nevada Supreme Court has focused primarily upon financial misconduct or so-called “marital waste.”18 Nothing in NRS 125.150(1)(b), however, requires the court to find malfeasance or “unclean hands” before making an unequal distribution. In Putterman v. Putterman,19 the Nevada Supreme Court noted that financial misconduct is just one “species of ‘compelling reasons’ for unequal disposition of community property.”20 Although the Nevada Supreme Court in Putterman upheld an unequal distribution of community property in favor of wife on account of the husband’s charging several thousand dollars on credit cards after separation, lying about his purported lack of income, and failing to account for finances under his control, the Court nonetheless noted:
There are, of course, other possible compelling reasons, such as negligent loss or destruction of community property, unauthorized gifts of community property and even, possibly, compensation for losses occasioned by marriage and its breakup.21
Negative equity in property only results in a “loss” when the property is sold or foreclosed upon. Since the parties upon divorce are no longer able to share the possession of the home, the divorce itself forces the parties and the court to confront the issue of negative equity and the “loss” associated with it. Depending upon the situation, an argument could be made that negative equity in a marital home represents a loss occasioned by the breakup of the marriage which might justify a court in distributing it unequally among that parties pursuant to NRS 125.150(1)(b).
C. Judicially Imposed Co-Tenancy.
Nevada Revised Statute 125.150(1)(b) requires an equal “disposition” of the community property, not an equal “division” of community property. To resolve the issue of negative equity, the court could order that the parties each remain co-tenants to the property and that each continue to be equally responsible of the debt related to the property. To the extent that one of the parties is to live in the home after the divorce, the Court would then establish a reasonable rental value which would be credited against the non-possessing party’s share of the monthly debt burden.22
D. Judicially Encouraged Foreclosure or Walkaway.
On occasion, the family court is faced with a situation where both parties want to retain an asset after divorce or neither party wants to retain the asset after divorce. If the asset has a positive equity, the court’s resolution of the problem is simple: Sell the assets and divide the net proceeds. When the home has negative equity, the court’s resolution of the problem is just as simple albeit not so tidy: Let the home go and divide the deficiency (if any). Forcing the parties into foreclosure is clearly not palatable to any family court, but depending upon the amount of negative equity in the asset, the parties may have no choice but to let the asset go and share equally in the aftermath.
VII. CONCLUSION.
The real estate market in Nevada is not expected to correct itself any time soon. As such, Nevada family courts and litigants will be faced with dividing negative equity for the next several years. Until the Nevada Supreme Court or the Nevada Legislature weigh in on the issue, the courts will have to dispose of negative equity on an equal basis or provide specific written findings to support their reason for not doing so. In the meantime, alimony and co-tenancy might serve as useful tools to address the inequities of negative equity.
Published in Advanced Family Law Strategies
Copyright © 2009 by State Bar of Nevada
Reprinted with Permission
1See e.g. Savage v. Pierson, 123 Nev. Adv. Rep. 12, 157 P.3d 697, 700 (Nev. 2007) (noting that “equity” for purposes of Nevada’s homestead statute is the fair market value of the property less any “allowed encumbrances”).
2In auto sales, for example, “‘negative equity’ arises when a consumer trades in a car that is “under water” — a car that has more debt against it than it is worth.” Americredit Financial. Services. v. Penrod, 392 B.R. 835, 842 (9th Cir. 2008).
3In Americredit, supra, at note 2, the Ninth Circuit noted that the term, negative equity, “seems to be an oxymoron at war with itself.” Id. at 842. “Equity in property usually is a positive amount and represents an accumulation of wealth available to the property’s owner. The use of the term ‘negative’ equity cuts against that notion.” Id.
5It is axiomatic that assets and obligations are reciprocally related and “there can be no complete and equitable disposition of property without a corresponding consideration and disposition of obligations.” Cadwell v. Cadwell, 616 P.2d 920 (Ariz. Ct. App. 1980); see also In re Marriage of Johnson, 299 N.W.2d 466, 467 (Iowa 1980) (holding that “the allocation of marital debts between the parties is as integral a part of the property division as is the apportionment of marital assets”); see also In re Marriage of Singewald, 535 P.2d 252, 254 (Colo. Ct. App. 1975) (holding that the value of marital property cannot be properly determined without considering the liabilities to which it is subject and failure to do so results in reversible error).
8The Nevada Supreme Court’s opinion in York v. York, 102 Nev. 179, 718 P.2d 670 (1986), deserves some mention here. York was decided seven years before the state legislature changed Nevada’s community property scheme from one of presumptive equitable distribution to one of presumptive equal distribution. In York, the husband argued that the district court had committed reversible error when it purportedly “failed to order an equal distribution of responsibility for community debt.” In addressing the husband’s contentions, the Nevada Supreme Court did not reject the husband’s argument as a matter of law, but instead, rejected it on the facts. In examining the record on appeal, the Nevada Supreme Court found that the trial judge had, in fact, apportioned the community debt equally, and therefore, “did not err.”
10In Kramer v. Kramer, 96 Nev. 759, 616 P.2d 395 (1980), the Nevada Supreme Court held that NRCP 60(b) governs motions to modify property rights established by divorce decrees. Thus, because NRCP 60(b) only allows the court to “relieve” an aggrieved party from a final judgment if such party files an appropriate motion “not more than six months after the judgment . . . was entered or taken,” the court’s division of the community property becomes unmodifiable six months after the decree is entered.
12The Nevada Supreme Court’s decision in Martin does not address the timeliness issue of how the wife could file a motion for alimony nearly a year after the divorce was final. However, in light of the district court’s finding that the husband’s obligation to pay the debt was “characterized as being in the nature of alimony, maintenance and support,” arguably the court concluded that alimony was addressed in the divorce decree and therefore the court had jurisdiction to modify its alimony award.
14The pertinent provision of the divorce decree or marital settlement agreement should provide that “HUSBAND shall assume, pay, defend, indemnify, and hold WIFE harmless from any liability for” the specific obligations to be assumed by the husband. It is suggested that such language requiring the husband to “assume, pay, defend, indemnify, and hold WIFE harmless from any liability for” such debt, enhances the wife’s position that the husband’s debt assumption is in the nature of alimony, maintenance, or support to the wife, and that the wife would be inadequately supported without the husband’s payment of the debt.
18See Lofgren v. Lofgren, 112 Nev. 1282, 1284, 939 P.2d 1047 (Nev. 1996) (holding that if community property is lost, expended or destroyed through the intentional misconduct of one spouse, the court may consider such misconduct as a compelling reason for making an unequal disposition of community property); see also Putterman v. Putterman, 113 Nev. 606, 608 (Nev. 1997) (holding that one species of “compelling reasons” for unequal disposition of community property is financial misconduct “in the form of one party’s wasting or secreting assets during the divorce process”).
22This judicially imposed co-tenancy creates an ongoing legal tie between the divorced couple, and, in a high tension divorce case, certainly is not an optimal solution to the issue of negative equity.
Published in Advanced Family Law Strategies
Copyright © 2009 by State Bar of Nevada
Reprinted with Permission
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