The Minnesota Court of Appeals on May 2, 2016, published its opinion in the matter of NJK Holding Corp. v. The Araz Group affirming Minnesota Statute Section 513.33 requires a promise to forgive debt be reduced to writing in order to be enforceable.
A brief recitation of the facts reveals an unfortunate mix of family, business, trust funds, $7000,000 in loans, and a birthday party promise. In 1997 The Araz Group borrowed $320,000 from NJK Holding, with an additional $280,000 available to The Araz Group through a line of credit. Before long, The Araz Group borrowed the additional $280,000, thus maxing out the $700,000 credit line. The line of credit and loan were documented with standard promissory note and loan agreements. The owners of The Araz Group and NJK Holding are related through marriage. Throughout the course of the relationship NJK Holding's principal verbally told The Araz Group the $700,000 would not need to be paid back. All was well in the family...at that time.
Unfortunately for NJK Holding, The Araz Group did not make sufficient payments on the $700,000 debt and defaulted. NJK Holding took a tax write-off on the debt. On May 4, 2010, at a pleasant family birthday party, a principal of NJK Holding berated an officer of The Araz Group for The Araz Group's failure to repay the $700,000. At the time of the birthday party, the owners of NJK Holding and The Araz Group were no longer related...due to a divorce.
Fast forward to 2012, 15 years after the debt agreement was documented, and NJK Holding sues The Araz Group for repayment of the $700,000.
The Araz Group's primary defense was the verbal forgiveness of the debt by NJK Holding. Affirming summary judgment, the Court of Appeals interpreted Minn. Stat. Section 513.33 to require the forgiveness of a debt to be in writing in order to be enforceable. The supporting law is plainly expressed in the statute, and founded on the public policy that lending institutions would be overwhelmed with litigation if borrowers were able to claim verbal promises to forgive debt are enforceable.
A common theme of Dan's Desk is to document your discussions, agreements, and everything else. NJK Holding re-affirms this notion and I hope you heed the advice.
The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.