But my parents paid for that
I recently had a huge win in trial on an issue that comes up quite often in divorce cases. It is not uncommon for family members such as parents, grandparents or siblings to provide money for the down payment on a house or other real property. Then, at trial, the judge has to decide if this money was a loan or a gift. Here’s what happened in my trial.
We represented Husband. Husband and Wife had been married for over twenty years. They had three kids together. When they were starting their family, Husband and Wife lived in a house owned by Wife’s parents. They only had to pay a nominal rent that was well below the actual rental price for the home. They stayed in Wife’s parent’s house for many years.
Eventually, Husband and Wife wanted to move into a house of their own as is perfectly natural. Unfortunately, because of their financial situation, Husband and Wife did not qualify for a loan. So, Wife’s parents wanted to help Husband and Wife in getting their own house. Wife’s parents paid $100,000.00 of the down payment for the new house from their own bank account. Everyone knew that the $100,000.00 down payment came from Wife’s parents. Wife’s parent’s names were on an offer letter for the purchase of the residence and both Wife’s parents and Husband and Wife signed on that offer letter.
However, there was never any writing that explained that the money from Wife’s parents was a loan to Husband and Wife rather than a gift to Husband and Wife. Wife’s parents’ names were never on title for the new house.
Our client told us that years ago that he and his Wife refinanced the house twice, once to get a better interest rate and then again to pull some equity from the house to make repairs. Neither Husband nor Wife gave any money back to Wife’s parents during either of the refinances or at any other time. Wife’s parents never even asked for any money from Husband or Wife during their entire marriage.
Now, Husband and Wife are getting divorced.
Wife suddenly remembers that her parents gave $100,000.00 for the purchase of the house and declares in both her financial disclosures and in answers to discovery that the $100,000 from her parents was a “loan” which was to be repaid during a refinance. However, Wife is unable to produce any documents supporting the existence of this loan. She can only point to some of the documents related to the purchase of the new house where Wife’s parents were named and the wire transfer showing the deposit of $100,000.00 into escrow that originated from her parents.
Husband readily admitted that Wife’s parents gave them $100,000.00 for the purchase of their home. He did not deny that happened at all. But Husband stated and continued to state throughout the divorce that that money was a gift from Wife’s parents to help them get a house of their own, that Wife’s parents never expected any money back from Husband and Wife.
Eventually, after multiple requests for a loan agreement between the spouses and Wife’s parents, Wife finally claimed that the “agreement to repay” her parents was “an oral agreement” and never written down. But then Wife said that her parents were to be repaid not only when the house was refinanced but also when the house was sold.
By this time in the divorce, the house actually had been sold and the sales proceeds were being held equally by both spouse’s attorneys in trust.
Wife continued to insist that her parents “loaned” $100,000.00 and should be repaid while Husband stated that it was a gift to both Husband and Wife. Wife even tried to “join” her parents as parties to the divorce by filing a formal joinder motion, that is to say in addition to Husband and Wife, Wife’s parents would also be named parties in the divorce process. We opposed that motion and the Court agreed with us, stating that Wife’s parents were not necessary to determine if the $100,000.00 was a gift or a loan.
Though multiple settlement offers were made, Wife refused to finish out her case because, in part, she wanted Husband to pay her parents $50,000.00. Then, we went to trial.
Over the course of three days, Husband, Wife and Wife’s parents all testified about this $100,000.00 provided by Wife’s parents. Predictably, Wife’s parents and Wife testified that the money was a loan. However, crucially, I was able to make clear to the Court the key facts which showed that this was a gift.
Firstly, generally speaking when it comes to loans related to the purchase of a house, California law says there is supposed to be some writing of some kind, signed by the debtor, in order for the loan to be valid. There was no such writing. Instead, Wife’s attorney pointed to the fact that the offer letter to purchase the house had Wife’s parent’s names and their signatures, but not as a lender.
Secondly, at no time did Wife’s parent’s demand any payment from Husband or Wife. Wife’s parents testified that they knew that Husband and Wife didn’t have any money to give them.
Thirdly, neither Husband nor Wife ever made any payment to Wife’s parents. Though Wife and Wife’s parents testified that at either refinance or sale of the house, Wife’s parents were to be repaid, but that never happened even after two refinances.
Fourthly, neither Wife nor Wife’s parents were ever able to testify clearly what the “terms” of their supposed loan agreement were other than repaying upon either refinance or sale.
In the end, the Court ruled in our favor. The Court decided that Husband was right, and the money was a gift, not a loan. The Court pointed out when a loan agreement is made, there has to be some evidence that such a loan obligation exists and what the terms of the loan actually are, such as amount of the loan, the repayment date, interest on the loan, and so on. The Court also pointed out that usually, money given by family members are considered a gift, not a loan.
We were able to save Husband from having to pay $50,000.00 for a loan that never existed. Further, because Wife insisted on going to trial on this issue instead of settling it, the Court ordered that Wife pay some of Husband’s attorney’s fees, $20,000, to be specific.