Indemnification is an important concept in contract law. Most divorces are finalized by a contract which divides assets AND debts. Indemnification provides the functionality of how those debts are paid back and by whom.
Debts, Divorce And Indemnification In Illinois
Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 503(d)
“”[M]arital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 503(a) (emphasis mine)
“It is well settled that marital debts as well as marital assets must be distributed equitably.” In re Marriage of Lees, 224 Ill. App. 3d 691, 693 (Ill. App. Ct. 1992)
The parties can agree on this division of debts or the court can order the debts to be divided equitably.
Courts and parties have a great preference for assigning the responsibility for a party’s debts to the party themselves. This is because of the logistical nightmare that is required for one party to be responsible for the debts of another party. In fact, courts are inclined to order assets sold in order to pay off joint debts or debts that the other party would, alternatively, be responsible for.
Parties to a divorce do not have to allow a judge to carve up their debts. They can come to mutual agreements regarding their debts and who will be responsible. This mutual contracting for debt responsibility is called “indemnification.”
To indemnify is “[t]o reimburse (another) for a loss suffered because of a third party’s or one’s own act or default; [to] hold harmless….To promise to reimburse (another) for such a loss.” Black’s Law Dictionary (11th ed. 2019)
The responsibility for those debts may be allocated by the final Marital Settlement Agreement but the third-party creditor does not care. The third-party creditor just wants their money. The third-party creditor does not care who they get their money from, the third-party creditor just wants their money no matter what the parties’ Marital Settlement Agreement says.
Indemnification solves the “third-party creditor doesn’t care who it collects from” problem by creating an agreement between the parties that promises to reimburse the other party if a third-party creditor collects from the other party.
Upon receiving a bill for a debt that was properly indemnified, the party should inform their indemnifier to pay the debt per the agreement.
Failure to pay the debt per the agreement, will result in a motion to enforce the agreement.
“A judgment of dissolution or of legal separation or of declaration of invalidity of marriage may be enforced…by order of court pursuant to petition.” 750 ILCS 5/511
A court should order the agreement followed and any failure to properly indemnify the former spouse will result in a finding of contempt.
“A court is vested with inherent power to enforce its orders and preserve its dignity by the use of contempt proceedings.” People v. Warren, 173 Ill. 2d 348, 368, 671 N.E.2d 700, 710 (1996).
Enforcing an indemnification clause is not a modification of the agreement and requires no demonstration of a “substantial change in circumstances.”
“[A] substantial change in [a party’s] circumstances was not a prerequisite to enforcement of that standing [indemnification] order” IN RE MARRIAGE OF DRAGOIZULICIC AND ZULICIC, 195 NE 3d 695 – Ill: Appellate Court, 1st Dist., 6th Div. 2021
Most indemnification clauses in a Marital Settlement Agreement are a simple one-liner after the award of an asset (possibly encumbered by debt) or a debt: “FRED shall be responsible for all obligations and liabilities associated therewith and shall indemnify and hold WILMA harmless with regard to same.”
That’s not a lot of detail. An indemnification is a contract. You can contract for any trigger or condition you want to specifically indemnify for. Virginia Sur. Co. v. Northern Ins. Co., 866 NE 2d 149 – Ill: Supreme Court 2007
As I said, most Marital Settlement Agreements don’t specify the trigger and the question becomes whether the indemnification occurs before OR after the payment to the third-party creditor occurs.
Indemnification For Actual Loss Or Liability In An Illinois Divorce
“An indemnity contract may indemnify against (1) loss or damage or (2) liability.” In re Marriage of Hopwood, 882 NE 2d 205 – Ill: Appellate Court, 5th Dist. 2008
This distinction is important because if the indemnification is read to be exclusively for actual loss the indemnifier can say, “I don’t need to pay the third-party creditor. I only need to pay you after you have paid the third-party creditor.”
This is clearly a headache and games-playing. The indemnified party would much rather hand the indemnifier the invoice and say “Pay this like you promised.” But, without specific language to that effect.
“Actions to enforce the terms of an indemnity agreement accrue at different times, depending on whether the agreement covers loss or liability…[I]ndemnification obligations generally accrue only on an event-fixing liability, rather than on preliminary events that eventually may lead to liability[] but have not yet occurred.” 41 Am.Jur.2d Indemnity § 23, at 442 (2005).
“A cause of action on a contract indemnifying against loss or damage does not arise until the indemnitee has actually incurred loss. Therefore, the obligation to indemnify arises at the time of payment of the underlying claim, the payment of a judgment on the underlying claim, or payment in settlement of an underlying claim.” 41 Am. Jur.2d Indemnity § 24, at 443 (2005).
“Where the contract is one of indemnity against liability, an action may be brought as soon as the liability is incurred. Where there is a promise to indemnify against liability, and not merely against loss or damage, the obligation of the indemnitor to pay arises when the liability of the party seeking indemnity is established, and the party seeking indemnity need not prove that he or she has made payment.” 41 Am.Jur.2d Indemnity § 25, at 443 (2005).
“It is clear that a cause of action on an indemnity agreement does not arise until the indemnitee either has had a judgment entered against him for damages[] or has made payments or suffered actual loss.” Gerill Corp. v. Jack L. Hargrove Builders, Inc., 128 Ill.2d 179, 199, 131 Ill. Dec. 155, 538 N.E.2d 530, 539 (1989).
This makes sense because if you cannot say precisely what the indemnified debt is…how should the indemnifier be expected to pay that debt?
“Because a third-party claim for indemnity cannot be determined until the underlying action establishing liability and damages is decided, the claim for implied indemnity does not accrue until the defendant has a judgment entered against him or until he settles the underlying suit against him.” Kerschner v. Weiss & Co., 667 NE 2d 1351 – Ill: Appellate Court, 1st Dist., 6th Div. 1996
Obviously, the vague language regarding indemnity in Illinois divorce judgments was meant to eliminate the problem of “who owes what” and not to create a labyrinth of triggers until the correct person finally pays a debt twice removed. So, without specific language the indemnified party needs to emphasize intent.
“An indemnity agreement is to be construed as any other contract, and under the rules of contract construction, the intention of the parties is the paramount concern.” Charter Bank v. Eckert, 223 Ill.App.3d 918, 925, 166 Ill.Dec. 282, 585 N.E.2d 1304, 1310 (1992).
By including the word “liability” in the indemnification clause, the trigger to pay the debt can be the mere existance of the debt itself.
“`A single contract may… indemnify against both actual loss or damage and liability.'” Diaz v. Diaz, 83 Ill.App.3d at 343, 38 Ill.Dec. 615, 403 N.E.2d at 1220 (quoting 41 Am.Jur.2d Indemnity § 1, at 687 (1968)).
Knowing the difference actual loss and liability as a trigger to an indemnification should highlight how poor the previous example of the standard vague indemnification clause was. Contrast that vague one-liner indemnification clause to this very specific indemnification clause: “FRED shall indemnify and hold WILMS harmless for any liability or collection activity by any creditor related to the Chase joint credit card #XXXX. Husband shall make all payments directly and promptly. Upon receipt of any bill, Wife may forward such bill to Husband, and Husband shall pay it in full within 14 days of receipt.”
Can An Illinois Divorce Court Order Indemnification?
While the vast majority of financial issues in an Illinois divorce are settled by agreement if the parties do not agree, a court will divide assets and debts equitably.
In doing so “[t]rial courts may order indemnification as part of a judgment for dissolution of marriage, as occurs anytime the trial court orders one spouse to pay a joint debt.” IN RE MARRIAGE OF LACH AND LACH, 2024 IL App (2d) 220230 – Ill: Appellate Court, 2nd Dist. 2024
Even though indemnification is created by order, you still follow contract rules when enforcing the indemnification clause.
“Although this indemnity was created by a court order, it is analogous to a contract of indemnity.” In re Marriage of Hopwood, 882 NE 2d 205 – Ill: Appellate Court, 5th Dist. 2008
Indemnification And Attorney’s Fees
Indemnification clauses are especially important (and sometimes irrelevant) based on the way attorney’s fees are allocated at the end of a divorce.
The Illinois Marriage and Dissolution of Marriage Act is set up so that the parties’ assets, debts, incomes and support obligations are established before the court awards attorney’s fees. Attorney’s fees are a marital debt and should be allocated equitably in consideration of all the other allocations.
“After proofs have closed in the final hearing on all other issues between the parties (or in conjunction with the final hearing, if all parties so stipulate) and before judgment is entered, a party’s petition for contribution to fees and costs incurred in the proceeding shall be heard and decided, in accordance with the following provisions:…Any award of contribution to one party from the other party shall be based on the criteria for division of marital property under this Section 503 and, if maintenance has been awarded, on the criteria for an award of maintenance under Section 504.” 750 ILCS 5/503(j)(2)
Parties will often indemnify each other for their attorney’s fees usually do so because one party has no capacity (or intent) to pay their own attorney’s fees. This leaves the attorney out in the cold. Those attorneys are not bound by their clients’ or former client’s indemnification agreements.
“The parties’ agreement regarding who will pay attorney fees and costs is not binding on [the former attorney] . The parties provided in the addendum to their legal separation agreement that each party would pay their own attorney fees and costs. However, as stated previously, the right to attorney fees and costs belongs to the attorney, not to either of the parties. Therefore, a marital settlement agreement (or, as in this case, an agreement of legal separation) purporting to allocate attorney fees will generally not extinguish a spouse’s former attorney’s right to pursue an award of fees from the other spouse. The parties are free to settle the division and allocation of their property, assets and liability but their agreement is not binding on third party creditors such as prior counsel. They cannot waive something that belongs to someone else. . Accordingly, neither party can waive by their agreement [the former attorney]’s statutory right to pursue or request a hearing on a claim for attorney fees and costs against [their former client’s opposing party].” In Re Marriage of Cozzi-DiGiovanni, 2014 I App(1st) 130109.
The Strategy Behind Indemnification Of Debts In An Illinois Divorce
Indemnification is a headache because it just promises further litigation. If courts had their way, they would just sell all the marital property and pay off all the marital debts. This is rarely in the parties’ interests, however.
Parties may, in fact want to indemnify for as many debts as possible so as to get as many marital assets as possible (if they’re using a balance sheet). The debts can then be renegotiated with the third-party creditor.
The debts can even be wiped out via bankruptcy. The party filing bankruptcy may no longer owe the third-party but if there’s an indemnity clause as to those joint debts, the bankrupt party will still have an obligation to their former spouse.
“A discharge under [U.S. bankruptcy laws] does not discharge an individual debtor from any debt… to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit” 11 U.S. Code § 523(a)(15)
“While [a bankrupt former spouse’s] liability to the creditors was obviously discharged by the bankruptcy proceedings, those proceedings did not discharge [the bankrupt former spouse’s] obligations to the marriage resulting from its dissolution.” In re Marriage of Lees, 224 Ill. App. 3d 691, 694 (Ill. App. Ct. 1992)
Debts in Illinois divorce are a “hot potato” you may get stuck holding the “hot potato” but maybe what you’re getting in exchange is well worth it.
To learn more about debts and divorce in Illinois, contact my Chicago, Illinois family law firm to schedule a free consultation with an experienced Illinois divorce attorney.
