A.C. (Wife) and N.C. (Husband) signed a prenuptial agreement–also referred to as a martial agreement–before they were married in 2010. The agreement identified their separate property–the property that each had acquired before their marriage–which included some land Husband owned that was referred to as the Shoshone property. According to the prenuptial agreement, the Shoshone property would remain as Husband’s separate property in the event he and Wife later divorced.

About a month after they were married, Husband and Wife decided to buy some real estate together. Husband pledged his Shoshone property as collateral for a home equity line of credit, which they used as a down payment and to remodel the property they wanted to buy, which was referred to as the Pinyon property.

Some time later, Husband and Wife decided to end their marriage, and a dissolution of marriage (divorce) case was filed in a Colorado district court. Because they could not agree on how their marital property should be divided, Husband and Wife had to appear before a judge at a permanent orders hearing so the judge could make the decision.

After hearing the parties’ evidence, the district court judge ruled that Husband’s Shoshone property became marital property when Husband pledged it as collateral to secure a marital loan.

Husband appealed the district court judge’s decision to the Colorado Court of Appeals.

The Division of Marital Property in a Colorado Dissolution of Marriage (Divorce) Case

When dividing marital property between divorcing spouses, a Colorado district court judge must first set apart to each spouse his or her separate property and then equitably divide the parties’ marital property between them. While marital assets are divided between and distributed to the parties in a Colorado divorce case, a party’s separate assets are supposed to remain separate from the divided marital estate and not be divided during the divorce.

Under Colorado’s Uniform Dissolution of Marriage Act, separate property includes–among other things–any property that a spouse acquired before marriage and property that the married couple agreed will remain separate from their marital property.

When Separate Property Can Become Marital Property

There are circumstances where a spouse’s separate property can become marital property. One way is when a spouse transfers separate property into joint ownership with the other spouse during the marriage, which “creates a presumption that the separate property has become marital property.” Property that was once a spouse’s separate property can also become marital property if the property “is so commingled with marital property that it cannot be traced back to its original separate form….” In re Marriage of Corak, 412 P.3d 642, 645 (Colo. App. 2014).

Wife argued to the court of appeals that the Shoshone property was marital property because “(1) [H]usband had pledged it as collateral for the line of credit and (2) [H]usband and [W]ife used the line of credit for marital purposes.” The court of appeals disagreed.

It was clear to the Colorado Court of Appeals “that the Pinyon property was a marital asset, that the money obtained from the line of credit was a martial asset, and that the obligation created by the line of credit was a marital debt.” However, because the title to Husband’s Shoshone property never changed hands and was never transferred to the lender or to Wife, the Shoshone property never became marital property. Furthermore, because Husband never commingled his Shoshone property with Husband and Wife’s marital property, the Shoshone property did not become marital property. And even though Husband’s Shoshone property was used as collateral to help Husband and Wife purchase the Pinyon property–which presumably was marital property because it was purchased during their marriage–this did not mean that Husband gifted the Shoshone property to the marriage.

The Colorado Court of Appeals concluded that

the act of pledging separate property as collateral to obtain a loan for marital purposes does not automatically turn separate property into marital property.

In re Marriage of Corak, 412 P.3d 642, 644 (Colo. App. 2014)

The court of appeals reversed the district court’s marital property division determination and “remand[ed] the case to the trial court to re-determine the division of marital property and marital debt after setting aside all the Shoshone property as [H]usband’s separate property.” Id. at 646.

Lessons Learned

  • Under Colorado’s Uniform Dissolution of Marriage Act, separate property includes–among other things–any property that a spouse acquired before marriage and property that the married couple agreed will remain separate from their marital property.
  • While marital assets are divided between and distributed to the parties in a Colorado divorce case, a party’s separate assets are supposed to remain separate from the marital estate and not be divided during the divorce.
  • A spouse’s separate property can become marital property if (1) a spouse transfers separate property into joint ownership with the other spouse during the marriage and (2) if the separate property is so commingled with marital property that it cannot be traced back to its original separate form.
  • A spouse’s act of pledging separate property as collateral to obtain a loan for marital purposes does not automatically turn the separate property into marital property.