When Minnesota farmers divorce, often there are insufficient liquid assets to allow the non-farming spouse to be immediately paid in full for his or her fair share of the marital estate. When that happens, the non-farming spouse is often paid over a period of time—similar to a bank that loans money to a borrower. In that context, well-drafted marital lien language can ensure prompt and full payment. Failure to properly draft a marital lien leaves a spouse without sufficient certainty of payment and can lead to further time and expense in the courts trying to litigate ambiguous language or missing terms. Here are nine points to consider when negotiating a marital lien:
- Describe what serves as security. A marital lien typically attaches to real property but can be on any property. Accurately and fully describing what property serves as security is the most important task. Also, make sure that the lien carries over into any relevant documents being recorded or filed, such as a deed or a UCC financing statement.
- State a specific dollar amount. I have seen orders where the amount of the lien is stated as a fraction of equity in property at a specific time in the future. This creates significant risk that the lien will not be in an amount anticipated and allows the borrower to defeat the lien’s purpose. A specific dollar amount helps to ensure that the benefit of the bargain is ultimately obtained. Be as specific as possible.
- Include meaningful foreclosure triggering events. If the lien language does not say that foreclosure can occur upon a specific event, there may be an ambiguity a court has to resolve—or there may not be a lien at all. Typically, there is some grace period (15 or 30 days for example) to give the defaulting spouse time to cure before a foreclosure commences. If there is no language as to when the trigger occurs, at a minimum, the court would need to get involved and that can add significant, unnecessary cost. Not to mention delay.
- Maintain the right to seek a money judgment. A lien only provides security in the property secured. It does not guarantee payment or provide all of the rights that accrue if you have a judgment entered against your ex-spouse. A judgment may not make sense if payments are timely made. But if payments cease, immediately reducing the unpaid balance to judgment provides additional security and rights to obtain payment. This is usually done by reserving the court’s jurisdiction to enter a judgment upon an adequate showing of default.
- Retain jurisdiction for the court to modify security. Nobody can predict the future. Agreeing that the court retains jurisdiction to provide for additional property to serve as security (or less if property values increase, equity in property increases, or the remaining unpaid balance secured by property reduces dramatically) can provide necessary flexibility to both spouses. If the court does not retain jurisdiction to modify, a party may wind up significantly over or under secured. Or a party may be unable to sell land without paying the amount owed in full.
- Understand priority. A marital lien is “junior” to any debt already secured by the property serving as security. Sometimes, a party will refinance existing debt to ensure some unsecured property is available and allow the marital lien to serve as the “senior” debt. If that is not possible, then you need to understand what debt exists, the equity available, and the likelihood that the property is sufficient to serve as security for all priority debt in addition to your marital lien. Where debt is cross-collateralized and secured by multiple assets, priority can be tricky.
- Discuss whether the marital lien allows for additional borrowing. In many cases, the farming operation cannot operate without allowing additional borrowing in the future that is secured as senior to the marital lien. It is important to understand, discuss, and appropriately craft language that allows both parties to understand their rights and responsibilities related to additional borrowing and new farm debt.
- Life insurance can supplement a marital lien. For many farmers, the goal is to ultimately transfer the farm to the next generation. Life insurance can provide a funding source to pay off a marital lien in full and give the next generation the ability to continue farming without liquidating assets to pay off the lien debt.
- Use marital liens to ensure that a debt is refinanced. Most farm debt is in the names of both spouses. To ensure that the debt is refinanced, and the non-farming spouse is removed from liability, consider a marital lien provision with triggers to foreclose and sell the property to pay off this debt if the debt is not refinanced to remove the non-farming spouse in a reasonable and agreed upon timeframe. Without any “teeth” to the refinancing provisions, it will be next to impossible to ensure the debt is refinanced and, if default later occurs, the lender may come knocking on the non-farming spouse’s door seeking payment even though the debt was awarded to the farmer.
Andrew M. Tatge is a partner and chair of the Family Law and Divorce Practice Group at Gislason & Hunter LLP. He regularly represents farmers, business owners, professionals, and other high income and high net worth individuals (or their spouses) in divorce and related actions. He also writes and speaks regularly on divorce issues related to business owners and family farms. Andrew can be reached at firstname.lastname@example.org or (507) 387-1115. This information is general in nature and should not be construed for tax or legal advice.