November 2015

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By Attorney Vince Bauer

A creditor need not focus solely on the named defendant in an action to collect on a money judgment, as a creditor may look to a non-judgment spouse to collect on a judgment. While the laws vary from state to state, Wisconsin is what is referred to as a marital property state. In a simplified view, this means that what a husband owns and owes, so too does his wife, and vice versa. There are of course exceptions to every rule, with the arena of marital property being no different. The exception in the marital property realm is that of the marital property agreement. A marital property agreement allows spouses to classify certain assets or other items as solely the property of a specific spouse. In the world of collecting on a money judgment, a non-judgment spouse with a marital property agreement may attempt to use such an agreement to block a creditor from satisfying a judgment from his or her segregated assets. The question then becomes whether the specific marital property agreement does indeed bar a creditor from pursuing a non-judgment spouse. Like any legal issue, the answer isn’t always apparent on its face, but the Court of Appeals of Wisconsin recently assisted in clarifying.

In Orlando Residence, Ltd. v. Nelson, the Court of Appeals of Wisconsin took up the task of clarifying when a debt incurred by one spouse can still be held against the other spouse even with the existence of a martial property agreement specifying that all the property, including wages, were the sole property of the non-judgment spouse. Orlando Residence. Ltd. v. Nelson, 2014AP2155 (Wis. App., Sept. 24, 2015). In Orlando Residence, Kenneth Nelson backed a loan used to finance a construction project in 1986. In 1990, Kenneth and his wife Susan entered in to a marital property agreement outlining that all property owned by Susan was hers individually. 

Four years later, the predecessor to Orlando Residence entered into a settlement agreement with Kenneth whereby Kenneth and his other partners who joined in funding the 1986 loan confessed to judgment. In 2012, Orlando Residence, through the settlement agreement signed in 1994, obtained a $4 million judgment against Kenneth. Orlando Residence then moved to garnish Susan’s wages, at which time Susan argued Orlando Residence could not collect on its judgment against Kenneth through her because of the marital property agreement between her and Kenneth. 

In so arguing, Susan relied on Wisconsin Statute § 766.55(4m) which states, “[N]o provision of a marital property agreement . . . adversely affects the interest of a creditor unless the creditor had actual knowledge of that provision when the obligation to that creditor was incurred . . . .” The statute further provides that, “[I]f a creditor obtains actual knowledge of a provision of a marital property agreement . . . after an obligation is incurred . . . the provision does not adversely affect the interest of the creditor with respect to that obligation . . . including any renewal, extension, modification or use of the obligation . . . .”  Susan maintained that Orlando Residence had actual knowledge of the marital property agreement signed in 1990 in 1994, when Kenneth agreed to be held financially liable to Orlando Residence through the settlement agreement. 

The issue for the Court to decide was when the obligation was incurred. The Court concluded that Kenneth’s obligation to Orlando Residence occurred in 1986, when he backed the loan to begin with and that the settlement agreement in 1994 fell under the statute’s language of, “any renewal, extension, modification or use of the obligation.” The key for the Court was that the term “use” in the statute was to be given expansive effect to include such things as transformations and new agreements arising from an original obligation. 

            Thus, the important takeaway is that a marital property agreement will only block the collection of a judgment through a non-judgment spouse where the inception of the debt occurred after the marital property agreement was in place and modifications and alterations to the obligation don’t drag it over the line to being uncollectable against a non-judgment spouse.  

Posted: 11/10/2015 8:16:33 AM by Tom Connor | with 0 comments