The way you phrase the credit is just as important as the amount.
Let’s assume that when the divorce action was filed, the parties’ marital residence was encumbered by a mortgage with a principal balance of $250,000.
Let’s further assume that while the divorce action is pending, the wife, only, makes all the mortgage payments. The parties get divorced three years later and the marital residence is then sold. At the time of sale, solely due to the payments of the wife, the mortgage principal has been reduced to $200,000. Finally, assume there are $300,000 of sales proceeds remaining after paying off the mortgage, the broker and other closing expenses.
Is the wife entitled to a credit for “her” $50,000 reduction of the mortgage, and if so, how much?
That was the issue facing the Second Department in its March 8, 2011 decision in Le v. Le. In that case, the Court modified the decision of Westchester County Supreme Court Justice Linda Christopher which, I believe, correctly awarded the wife a credit against the marital residence sales proceeds for “the difference between the princip[al] balance of the mortgage as of March 22, 2007 and the amount due at closing . . . .”
As in our example, the wife had made the mortgage payments while the action was pending without any contribution from the husband. The Appellate Division recognized that the wife was entitled to be reimbursed:
Where, as here, a party has paid the other party’s share of what proves to be marital debt, such as the mortgage, taxes, and insurance on the marital residence, reimbursement is required . . . .
Here, however, the Court held that the wife was entitled to a credit equal only to 50% of the reduction in the mortgage principal. Such, the Court stated, reflected that it was the responsibility of both parties to maintain the marital residence while the divorce action was pending.
When reducing the credit from 100% to 50%, the Second Department cited its 2004 decision in Palumbo v. Palumbo, In that case, the Court directed that the plaintiff wife’s “share of the proceeds” be reduced by “by one half of the total of the defendant’s payments of principal on the mortgage . . . .”
Using the numbers in our example, Mr. Palumbo would receive his own 50% share of the $300,000 in net proceeds, or $150,000. In addition, Mr. Palumbo would receive from the wife’s share, another $25,000 (50% of the reduction). Mr. Palumbo leaves the sale with $175,000 in proceeds; the wife with $125,000.
On the other hand, Ms. Le would only walk out with $162,500. Ms. Le is first to receive her $25,000 credit (50% of the mortgage reduction) against 100% the net sales. So, from the $300,000 in net sales proceeds, first give Ms. Le her $25,000. Then, split the remaining $275,000: $137,500 to each party. Ms. Le ends up with $162,500; Mr. Le with $137,500.
In order to give Ms. Le the 50% of the mortgage principal reduction with which her husband should be charged. you take 50% of the mortgage reduction from the husband’s share, as was done in Palumbo. Alternatively, as was done by Justice Christopher in Le, you return to the wife 100% of the mortgage reduction off the top. What you cannot do, is only give Ms. Le 50% off the top.