Pledging Separate Property as Collateral for Marital Property Loan in Colorado

In a Colorado divorce, when the court divides property, it must determine whether an asset is marital (subject to division) or separate (not subject to division). Generally, marital property doesn’t include property that spouses obtained before marrying or that they have agreed will remain separate. If a spouse places separate property into joint ownership with the other spouse, however, the court presumes he or she intended it to be marital property. This presumption can be rebutted by clear and convincing evidence. However, if separate property is commingled with marital property such that it can’t be traced back to separate property, it is transmuted into part of the marital estate.

In re the Marriage of Amy Corak and Nevan Corak considered a husband’s appeal of a Colorado trial court’s allocation of marital property. The case arose in 2010 when a couple entered into a prenuptial agreement. The agreement identified assets that would be separate property, which included a parcel of the husband’s property (“Shoshone”). All separate property was supposed to remain separate property if the marriage ended.

A month after the couple married, they purchased the Pinyon property. The husband pledged Shoshone as collateral for a home equity line of credit. This was to be used as a down payment for the new marital property. The couple decided they would use $16,000, drawn from the line of credit, to pay off the wife’s credit card debt from before the marriage.

The couple decided to divorce a couple of years later. In court, the wife testified she made all the payments on the line of credit during the marriage and paid down other premarital debts too. The husband testified that he had paid down some separate debt.

The trial court determined that when the husband pledged Shoshone as collateral in order to get a loan for Pinyon, the separate property became marital property. The trial court also decided not to include in the marital estate any amounts the wife spent during marriage to pay off her premarital debt.

The husband appealed. On appeal, the wife had argued that the lower court was right in including a “marital portion” of the Shoshone property in its calculations of an equalization payment. An equalization payment is calculated if one spouse gets substantially more than the other of the marital estate.

The appellate court rejected the wife’s argument. It disagreed with the trial court’s decision that the husband had gifted part of Shoshone to the marriage. In getting the line of credit, Shoshone wasn’t given to the wife or anyone else. The appellate court also concluded there was no commingling.

The appellate court explained Pinyon was a marital asset, as was the money from the line of credit. The line of credit was a marital debt. However, it ruled that using Shoshone to obtain the line of credit didn’t transmute it into marital property. The appellate court remanded to the trial court to reconsider the property and debt distribution as necessary. The judgment was affirmed.

If you are considering a divorce, it is important to find an attorney that is experienced in how courts are likely to handle property division issues. The knowledgeable and experienced Denver divorce attorneys at Plog & Stein, P.C. can help you understand your rights and responsibilities and prepare the strongest possible case on your behalf. To schedule an initial consultation with a dedicated Colorado family law attorney, contact us today through our website or at 303-781-0322.