Background
Michael Hofer and Daniel Paulson were equal partners in approximately fifteen business entities, including Imaging Solutions, Inc. (ISI), which they solely owned. Over the years ISI extended loans to other jointly held ventures that ultimately failed, and by 2016 Paulson owed ISI roughly $1.9 million while Hofer owed ISI roughly $4.3 million. Concerned about Hofer’s mounting debt and a proposed refinancing, Paulson moved to sever their shared business interests through a negotiated separation the parties called the “Takeout.” The parties communicated largely through ISI’s CFO, Mark Heier, and expected attorney David Hauff to document the deal.
As part of the Takeout, Hofer agreed orally to assume Paulson’s $1.9 million debt to ISI, with each side relaying consent through Heier. The arrangement was reflected in ISI’s financial records beginning in 2017, Hofer issued a $370,000 “true-up” payment to Paulson that same year, and both parties conducted themselves consistently with the assumption for roughly six years. Separately, someone within ISI later created three Written Assumption Agreements bearing stamped signatures of Hofer and Paulson, but the district court found those documents were created without the parties’ knowledge or authorization and declared them invalid.
In 2022 Hofer claimed he discovered the unauthorized written documents and, for the first time, denied ever agreeing to assume the $1.9 million debt. In May 2023 he sued Paulson and Heier on eight counts including fraud, breach of fiduciary duty, and civil conspiracy. After a six-day bench trial in November 2024, the district court entered judgment for Paulson and Heier, finding the Oral Assumption Agreement valid and enforceable, dismissing all of Hofer’s claims, and declaring that Hofer had properly assumed the debt. Hofer appealed.
The Court’s Holding
The North Dakota Supreme Court affirmed. On the first statute-of-frauds argument, the court held that N.D.C.C. § 9-06-04(2)—requiring a writing for “a special promise to answer for the debt, default, or miscarriage of another”—did not apply. Drawing on its own precedent in Dakota Bank and Trust Co. v. Funfar and persuasive federal authority, the court reaffirmed the well-established distinction between a guaranty and an assumption of debt: a guarantor makes a collateral promise to answer for another’s remaining obligation, while an assumer substitutes himself as the primary debtor. Because the district court’s factual finding that this was an assumption and not a guaranty was not clearly erroneous, the suretyship provision of the statute of frauds did not reach the agreement. The court further noted that § 9-06-04(2) has historically been confined to promises made to the creditor, not to agreements between a debtor and a third party.
On the second statute-of-frauds argument, the court held that N.D.C.C. § 9-06-04(5)—requiring a writing for agreements “to alter the terms of repayment or forgiveness of a debt” of $25,000 or more—likewise did not apply. Examining the provision’s 1991 legislative history, the court concluded that subsection (5) was intended as the reciprocal of subsection (4) (which requires a writing for loan agreements of $25,000 or more), aimed at protecting against undocumented debt forgiveness by creditors. Changing the identity of the debtor does not alter the “terms of repayment”; the payment schedule, amount, and conditions remained the same. Because no repayment terms were modified, the writing requirement was not triggered.
Having disposed of the statute-of-frauds challenges, the court affirmed the district court’s declaration that the Oral Assumption Agreement between Hofer and Paulson was valid and enforceable. The court emphasized that the existence of an oral contract is a question of fact reviewed only for clear error, and that the district court’s credibility findings—including its rejection of Hofer’s 2022 denial as not credible—were supported by the record.
Key Takeaways
- An oral agreement to assume another party’s debt, substituting the assumer as primary debtor, is legally distinct from a guaranty and is not governed by North Dakota’s suretyship statute-of-frauds provision (N.D.C.C. § 9-06-04(2)).
- The statute-of-frauds writing requirement for promises to answer for another’s debt applies only to promises made to the creditor, not to agreements between a debtor and a third party to take over the obligation.
- N.D.C.C. § 9-06-04(5) requires a writing only when the terms of repayment are altered; substituting a new obligor without changing the payment terms does not trigger the provision.
- Whether an oral agreement constitutes a guaranty or an assumption of debt is a factual question for the trier of fact, reviewed on appeal only for clear error.
- Six years of conduct consistent with an oral agreement—including reflected financial records, payments, and silence on any claimed obligation—can provide powerful evidence of contract formation and party intent.
Why It Matters
This decision offers important guidance for attorneys advising clients on business dissolutions and partner buyouts. Oral debt-assumption arrangements struck in the context of complex multi-entity separations may be fully enforceable in North Dakota without any written documentation, provided the agreement qualifies as a true assumption rather than a guaranty. Counsel should advise clients that the absence of a signed writing will not automatically void such an arrangement—and that years of conduct consistent with the deal may be treated as compelling evidence that the agreement was formed and understood by both sides.
The court’s analysis of § 9-06-04(5) also clarifies the scope of a provision that had little prior case law interpreting it. By grounding the provision in its legislative history as the “flip side” of the lending-agreement requirement, the court limits its reach to modifications of actual repayment conditions by creditors and debtors—not to changes in who bears the repayment obligation. This narrowing construction reduces the risk that § 9-06-04(5) will be invoked as a technicality to void arm’s-length restructuring agreements reached between sophisticated commercial parties.