Was it a Loan or a Gift?

By Jim Duzak

Dear Jim:  Eighteen months ago, I loaned my daughter (Melanie) and her husband (Scott) $90,000 to help purchase and renovate a coffee shop in Atlanta. The shop is profitable but it has indirectly led to the breakup of their marriage (Scott became involved with a 22 year-old barista they employed and Melanie has filed for divorce). Scott is now claiming that the money was a gift and that he has no obligation to repay any of it. There were no papers drawn up, but I always used the word “loan” in referring to the money, and Melanie will back me up on that. I’m close to retirement and I’m going to need that money soon. Melanie is willing to pay what she can, but right now she’s overwhelmed with everything and she’s not sure what’s going to happen with the business. What can I do? (“Ellen”)

Dear Ellen:  If you want to do everything possible to protect your rights---or at least clarify what your rights are---you should consult a Georgia attorney to see if you can “intervene” in the divorce case; i.e., become an official party for the purpose of asserting your claim to the $90,000.

Intervention would allow you to testify that you always spoke of the money being a loan and that you never used the word “gift.” Melanie would presumably give similar testimony.

But the mere fact that two people say one thing and one person says the opposite doesn’t mean that the issue is settled. The judge might feel that Scott’s testimony is more credible than yours or Melanie’s, or question whether the money could truly have been a loan without any discussion of interest or repayment terms.

In theory, oral contracts (other than to purchase real estate) are enforceable. But in reality they’re hard to enforce because everyone’s memories of what was said always seem to differ. And keep in mind that you---the person asserting there was a loan agreement---have the burden of proof, which in essence means you have to make a more convincing argument than Scott does.

There’s also the issue of collectability. Chances are, every penny of that $90,000 was spent long ago on furnishings, equipment, supplies, advertising, rent, salaries, and a hundred-and-one other things. The judge might order assets to be sold, and possibly even the business itself to be sold, but court-ordered sales often bring lowball offers.

I don’t mean to sound pessimistic; your story may well have a happy ending if you’re patient enough and determined enough. But for people reading about your situation, this is a cautionary tale.

If something is intended to be a loan, treat it as a loan from Day One. Agree on repayment and interest terms. Decide if you’re going to have a security interest in whatever is going to be purchased with the money. Have a lawyer draft the agreement, and don’t release the funds until everyone has signed it. 

Of course, the best policy is not to make loans to family members unless you can afford never to see the money again. It’s all well and good to want to help children and their spouses, but young marriages are prone to divorce (over half of divorces occur in the first ten years of marriage). Once divorce papers are filed, loyalties change, promises are forgotten, and money is always in short supply.  

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