Parents’ Payment of Kids’ Debt Gives Kids Right of Contribution
Posted on 08/02/2018 at 03:37 PM by Mollie Pawlosky
The Iowa Supreme Court, in a factually complicated case involving multiple parties, lasting over nine year, and making two trips to Iowa’s appellate courts, ultimately reinforced a simple proposition regarding the payment of a common debt. If you and another party are both liable for a debt, and you pay more than your fair share of the debt, you can seek contribution from the other party, and it does not matter where you got the funds to pay the debt.
Shcharansky v. Shapiro, No. 16-1265 (Iowa Dec. 29, 2017) focused on a debt to Wells Fargo Bank that was owed by Continuous Control Solution, Inc. (“CCS”) and guaranteed by numerous individuals Wells Fargo obtained a judgment against CCS and all guarantors. Two of the guarantors paid Wells Fargo, resulting in Wells Fargo’s release of the judgment.
The paying guarantors then sued the other guarantors, seeking contribution. That is, the paying guarantors wanted the non-paying guarantors to reimburse the paying guarantors for some portion of what the paying guarantors had paid to Wells Fargo.
Proceedings before both the district court and the appellate court were active. Both parties filed summary judgment motions in the district court, who found that the paying guarantors were not entitled to contribution from the nonpaying guarantors. The district court focused on the fact that the paying guarantors’ parents had provided the paying guarantors the money to pay Wells Fargo. Thus, the district court felt that the paying guarantors had not “overpaid,” because the district court felt that the paying guarantors hadn’t paid at all—their parents paid. On the first appeal, the Iowa Court of Appeals found fact issues as to whether the parents had given or loaned the money and reversed the district court. After a bench trial, the district court found, again, that the paying guarantors were not entitled to contribution. A second appeal followed.
The Iowa Supreme Court ultimately held that the source of the funds to the paying guarantors was not relevant. The Court ignored the source of the funds, because the concepts of contribution focus on whether a party sharing a common liability with another party has paid more than the party’s fair share of the liability. That is, contribution concepts focus on the relationship between and among parties that share a liability. If A, B and C are jointly and severally liable, under basic concepts of liability, each party should share one-third of the liability. If party A pays more than one-third of the liability, party A has paid more than party A’s fair share. Contribution only looks at the relationship between and among liable parties; nowhere does Iowa case law consider whether party A paid the debt with borrowed money, gifted money or otherwise. Parties B and C are benefited by A’s payment of B and C’s debt, regardless of where party A got the funds to make the payment.
Shcharansky v. Shapiro, No. 16-1265 (Iowa Dec. 29, 2017) is a helpful reminder of two basic aspects of commercial litigation. First, try not to lose sight of the forest because of the trees. The exceedingly complicated factual and procedural posture did not change the Court’s basic underlying analysis. Second, when it comes to commercial litigation, patience is a virtue. The paying guarantors’ persistence paid off, despite two adverse district court and appellate court decisions. For further information regarding Shcharansky or commercial litigation, please contact Mollie Pawlosky.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- Mollie Pawlosky
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