Oral Assumption of Debt Between Debtor and Third Party Is Not Barred by N.D.C.C. § 9-06-04(2) or (5)

Case: Hofer v. Paulson, 2026 ND 111 (N.D. June 4, 2026)

1. Introduction

Hofer v. Paulson arose out of the breakup of a long-running business partnership (the parties’ “Takeout”). Michael J. Hofer and Daniel J. Paulson co-owned multiple entities, including Imaging Solutions, Inc. (“ISI”). Over time, ISI had funded other ventures that failed, leaving shareholder-level debts to ISI: Paulson owed about $1.9M and Hofer owed about $4.3M.

As part of the Takeout, the district court found Hofer and Paulson reached an Oral Assumption Agreement under which Hofer would assume Paulson’s $1.9M debt to ISI. Years later, after Hofer discovered “Written Assumption Agreements” bearing stamped signatures (which the district court ultimately deemed invalid), Hofer sued Paulson and ISI’s CFO, Mark V. Heier, asserting fraud-based and equitable theories and disputing that he ever agreed to assume the debt.

The appeal centered on three issues: (1) whether the statute of frauds required the alleged debt assumption to be in writing under N.D.C.C. § 9-06-04(2) or (5); (2) whether (if the statute applied) part performance removed the agreement from invalidity; and (3) whether mutual consent could be communicated through Heier.

2. Summary of the Opinion

The North Dakota Supreme Court affirmed after a bench trial judgment for Paulson and Heier. The Court held:

  • N.D.C.C. § 9-06-04(2) (the “special promise to answer for the debt of another”) did not apply because the district court found an assumption (substitution of debtor), not a guaranty (collateral promise).
  • N.D.C.C. § 9-06-04(5) (agreement “to alter the terms of repayment or forgiveness of a debt” ≥ $25,000) did not apply because the oral assumption agreement between Hofer and Paulson did not modify the creditor’s repayment terms as such; it changed who would bear responsibility as between the two men.
  • The district court did not clearly err in finding mutual consent and communication of acceptance occurred through Heier as a “reasonable and usual mode” of communication under the parties’ chosen process.

Because the Court concluded the statute of frauds did not apply, it did not reach the district court’s alternative part-performance rationale.

3. Analysis

3.1. Precedents Cited

A. Appellate review, factfinding, and credibility deference

The Court framed the appeal through familiar bench-trial standards:

  • Sargent Cnty. Water Res. Dist. v. Beck (findings reviewed for clear error; law reviewed de novo).
  • Knudson v. Kyllo (definition of clear error; appellate court does not reweigh evidence).
  • Moody v. Sundley (special deference to trial court credibility determinations).

Those standards mattered because the dispositive classification—assumption versus guaranty—and whether assent was communicated were treated as heavily fact-dependent.

B. Oral contracts and mutual assent

The Court reiterated that the existence of an oral contract is a question of fact, citing:

  • In re Est. of Thompson and Kuntz v. Kuntz (existence and intent of oral contract are factual issues), with Ehrman v. Feist as the quoted source in Kuntz.
  • GeoStar Corp. v. Parkway Petroleum, Inc. (enforceable contract requires mutual acceptance and understanding of terms).
  • Lire, Inc. v. Bob's Pizza Inn Rests., Inc. (mutual intent; assent judged by objective manifestations, not secret intent).
  • Meuchel v. MR Props. LLC (consent requires agreement on the same thing in the same sense), anchored in N.D.C.C. § 9-03-16.

These cases supported affirmance of the trial court’s conclusion that the parties’ outward conduct—during negotiations and for roughly six years thereafter—objectively manifested assent to the assumption term.

C. Statute of frauds: interpreting N.D.C.C. § 9-06-04

For statutory interpretation methodology, the Court relied on Kost v. Kraft (plain meaning; harmonize provisions; give effect to all terms). For ambiguity and legislative-history resort, it cited Fargo Educ. Ass'n v. Fargo Pub. Sch. Dist..

D. Guaranty vs. assumption: the controlling distinction

The Court’s central doctrinal anchor was Dakota Bank and Trust Co. v. Funfar, which drew a line between: (i) a statutory “guaranty” (promise to answer for another’s debt) and (ii) an “assumption” (the promisor becomes primarily liable). Funfar itself cited Morris v. Twichell for the proposition that an assuming party becomes primarily liable.

The Court also relied on Funfar for a procedural-substantive point: whether statements amount to guaranty or assumption is for the trier of fact and reviewed for clear error. Funfar in turn referenced a line of North Dakota cases reinforcing that classification as factbound:

  • Ned Nastrom Motors, Inc. v. Nastrom-Peterson-Neubauer Co., citing Nelson v. TMH, Inc. and State Bank of Towner, Inc. v. Rauh.
  • Baker Mfg. Co. v. Kramer Sheet Metal and Sec. State Bank v. Schultz (used in Funfar as examples in guaranty/assumption contexts).

The Court also discussed Funfar’s treatment of the “leading object” rule—citing Austford v. Smith—to underscore that one reaches exceptions to the suretyship statute only after an oral guaranty exists; here, the factual finding was assumption, so the suretyship analysis never triggered.

E. Persuasive authority: suretyship statutes generally do not reach assumption agreements

The Court found persuasive the Sixth Circuit’s reasoning in GBJ Corp. v. Eastern Ohio Paving Co., which distinguished a bilateral assumption agreement from a suretyship promise. In discussing GBJ Corp., the Court referenced the New York decisions Martin Roofing, Inc. v. Goldstein (and within that quotation, Witschard v. Brody & Sons and Clark v. Howard).

The Court also noted a widely adopted limitation: the suretyship provision is generally confined to promises made to the creditor, not promises made to the debtor, citing out-of-state cases (First Natl. Bank of Omaha v. iBeam Sols., L.L.C.; Ex parte Ramsay; Steinberger v. Steinberger; Magrann v. Epes) and older North Dakota support (Murphy v. Hanna).

F. Written credit agreements and “identity of the parties” as an essential term

While analyzing N.D.C.C. § 9-06-04(5), the Court linked that subsection to subsection (4) via legislative history, and drew on its prior construction of subsection (4) in Roth v. Meyer, which quoted Trosen v. Trosen for the proposition that a statute-of-frauds writing must include essential terms such as the identity of the parties.

G. Contract modification and discharge principles

To explain why an assumption agreement between debtor and third party should not be treated as modifying the creditor-debtor contract absent the creditor’s participation, the Court cited:

  • Shift Servs., LLC v. Ames Savage Water Sols., LLC (modification requires mutual assent of the parties).
  • Rosenberg v. Son, Inc. (discharging an obligor requires mutual assent of original contracting parties).

This supported the Court’s conclusion that § 9-06-04(5) targets agreements that actually alter repayment/forgiveness terms of the debt relationship, rather than a side agreement reallocating responsibility between debtor and third party.

H. Presumption of correctness of findings

Finally, the Court invoked Brash v. Gulleson to reiterate that trial-court findings are presumptively correct and not reversed merely because the appellate court might view the facts differently.

3.2. Legal Reasoning

A. Why N.D.C.C. § 9-06-04(2) did not apply

The Court treated § 9-06-04(2) as a suretyship/guaranty writing requirement aimed at “a special promise to answer for the debt…of another.” It affirmed the district court’s classification of the deal as an assumption—i.e., Hofer substituted himself as the responsible party—rather than a guaranty (a collateral “backstop” promise).

Two intertwined rationales drove the result:

  1. Doctrinal classification (factbound): Under Dakota Bank and Trust Co. v. Funfar, an assumption makes the promisor primarily liable and is not a guaranty; and whether statements/arrangements constitute a guaranty or assumption is a trial-level factual determination reviewed only for clear error.
  2. Scope limitation (promise to debtor vs. creditor): The Court emphasized that suretyship statutes are commonly construed as reaching promises made to the creditor. Here, as found by the district court, the Oral Assumption Agreement was between Hofer and Paulson (the debtor to ISI), so it fell outside the core mischief addressed by § 9-06-04(2).

Notably, the Court also observed the district court did not find ISI to be a party to the Oral Assumption Agreement, and ISI was not a party to the lawsuit—limiting the declaratory relief available.

B. Why N.D.C.C. § 9-06-04(5) did not apply

Section 9-06-04(5) requires a writing for agreements “to alter the terms of repayment or forgiveness of a debt” ≥ $25,000. Hofer argued that changing the identity of the payer “altered” repayment terms.

The Supreme Court rejected that framing, using both textual and structural reasoning:

  • Text in context: The statute speaks to “terms of repayment or forgiveness,” not simply any change surrounding a debt. The district court found “No terms of repayment were changed…Nor were terms of debt forgiveness changed.”
  • Legislative history and symmetry with subsection (4): The legislature added subsection (5) as the “flip side” of subsection (4) (written loan/credit agreements ≥ $25,000). If subsection (4) requires essential terms (including identity of parties) to be written when creating/expanding credit, subsection (5) targets written proof when the creditor-debtor repayment/forgiveness arrangement itself is renegotiated.
  • Contract-structure integrity: Treating a debtor–third party assumption as altering the creditor’s repayment terms would “collapse” two different contracts (with different parties) into one. Citing Shift Servs., LLC v. Ames Savage Water Sols., LLC and Rosenberg v. Son, Inc., the Court reasoned that modifying or discharging obligations in the creditor-debtor contract requires mutual assent of those parties. The assumption agreement merely reallocated responsibility between Hofer and Paulson.

C. Communication of consent through a third party

Hofer also argued acceptance had to be communicated directly and absolutely. The Court answered by tying contract formation to objective manifestations and “reasonable and usual” methods of acceptance, relying on statutory provisions in N.D.C.C. ch. 9-03 (including §§ 9-03-01, 9-03-17, and 9-03-18) and the factual record.

The district court’s finding that Heier served as the mutually chosen conduit—“their longtime CFO” and a knowledgeable, trusted intermediary—was supported by evidence and credibility determinations, and therefore survived clear-error review.

3.3. Impact

1) Clarification of the statute of frauds’ boundaries in business restructurings. The decision sharpens the distinction between (a) a collateral suretyship promise governed by § 9-06-04(2) and (b) a bilateral assumption arrangement between debtor and third party. In complex entity “takeout” transactions, parties often allocate internal responsibility for legacy obligations; Hofer indicates such allocations may be enforceable even if oral, depending on how the obligation is structured and proven.

2) Narrower reading of § 9-06-04(5) (repayment/forgiveness modifications). The Court’s analysis suggests subsection (5) is aimed at agreements that actually modify repayment/forgiveness terms in the creditor-debtor relationship (the kind of deal that, per legislative history, mirrors written-credit requirements), not at side agreements reallocating who will bear the economic burden as between two non-creditor parties.

3) Litigation posture matters: creditor absence limits remedies. The Court reaffirmed that where the creditor/entity (here, ISI) is not a party, the court may be unable to issue declaratory relief about contracts to which that entity is a party (as the district court noted under N.D.C.C. § 32-23-11). Practically, parties seeking global clarity on debt ownership and enforceability may need to ensure all necessary parties are joined.

4) Proof will remain highly fact-driven. While Hofer is doctrinally significant, its holding is closely tied to trial findings: the parties’ long course of performance, internal financial reporting, the “true-up” payment, and credibility determinations. Future litigants should expect assumption-versus-guaranty disputes to turn on meticulous factual records, not labels.

4. Complex Concepts Simplified

  • Statute of frauds: A rule that makes certain contracts unenforceable unless written and signed, to prevent fraud and unreliable “he said/she said” claims about major obligations.
  • Guaranty vs. assumption: A guaranty is a backup promise—“if they don’t pay, I will.” An assumption is taking the obligation as your own—“I will pay; treat me as responsible.” The former is typically within § 9-06-04(2); the latter may not be, depending on structure and parties.
  • “Leading object” rule: A doctrine that can sometimes remove an oral guaranty from the statute of frauds if the promisor’s main purpose was to benefit themselves. Under Dakota Bank and Trust Co. v. Funfar, it matters only if a guaranty exists in the first place.
  • Integrated agreement: A written contract that says it is the “entire agreement” between the parties on that subject. Here, the ISI Redemption Agreement was integrated between ISI and Paulson, but Hofer individually was not a party—contributing to the Court’s focus on the separate oral agreement between Hofer and Paulson.
  • Part performance: When parties act in a way that strongly confirms a contract existed (payments, bookkeeping changes, performance consistent only with the agreement), sometimes allowing enforcement despite writing requirements. The Supreme Court did not reach this issue because it held the statute of frauds did not apply.
  • Third-party beneficiary: Even if a promise is made between two people, a third person (like a creditor) may sometimes enforce it if the contract intended to benefit them. The Court referenced this concept in discussing why promises to the debtor are often outside the suretyship statute, but it did not adjudicate ISI’s rights because ISI was not a party.

5. Conclusion

Hofer v. Paulson cements a practical and doctrinally important rule in North Dakota: an oral agreement reallocating a debt through an assumption—as found on the facts—need not be treated as a suretyship promise under N.D.C.C. § 9-06-04(2), and it does not necessarily constitute an agreement “to alter the terms of repayment or forgiveness” under N.D.C.C. § 9-06-04(5). The decision also reinforces that mutual assent may be communicated through a mutually selected intermediary where that is a reasonable and usual mode of communication.

The broader lesson is transactional: when parties want certainty, a writing remains best practice—but in litigation, North Dakota courts will enforce an oral assumption supported by credible testimony and sustained objective performance, and will resist expanding statute-of-frauds categories beyond their targeted purposes.