Recent Posts in Family Home Category

Marriage of Ruiz (Opinion Published 4/14/11) E049310

In the recently published Fourth Appellate case of Marriage of Ruiz out of Riverside County, the parties' marriage lasted 32 years - married in 1973 (not the summer of love), they separated in March, 2005. A major bone of contention was how to characterize Wife's lump-sum worker's comp settlement of $250,000 received several years before the breakup, which netted $172,364 after attorney fees and costs. Wife believed it was all hers in the absence of proof by Husband of what portion of the money she received should be allocated between compensation for loss of past income verses what portion was intended to compensate her for loss of future earning capacity. Not surprisingly if Husband indeed had the burden of proof on this issue, he was never going to meet it - worker's compensation awards and financial settlements relating to personal injuries are simply gross numbers that some insurance bean counter crunches and then offers a gross settlement to resolve. No one in Wife's work compensation team was thinking about a fixed amount that was intended to resolve temporary compensation benefits as opposed to wife's lifetime loss of income producing ability - these claims just don't get settled in that fashion. Hence, if Husband had the burden of proving an imaginary apportionment he would never be able to do so and Wife would take all.

This case illustrates what can happen where one party or another has the "burden of proof" on a particular issue - often this is a short hand way of saying "you lose."

Four years later their divorce proceedings resulted in a discretionary trial court finding that $103,033 of the award was CP, with a balance of $71,311 being Wife's separate property. This finding was upheld on appeal as a reasonable exercise of discretion by Judge Irma Poole Asberry.

Wife argued that despite the statutory community presumption per Family Code section 760 that property acquired during marriage belongs to the community, existing caselaw (Raphael v. Bloomfield) (2003) 113 Cal.App.4th 617) required a conclusion that the award is community property only to the extent that it is intended to compensate for the injured spouse's reduced income during the marriage and before separation, and for injury-related expenses that were paid with community funds. She urged that the remainder of an injured spouse's recovery is intended to compensate her for their diminished earning capacity and/or medical expenses which continue after the DOS.

Therefore, the Wife here argued that Raphael carved an exception to the rebuttable presumption that all property acquired during marriage is community property, instead creating a presumption that the award is the injured spouse's separate property. If true, this would impose the burden of proof as to allocation upon the noninjured spouse. Hence, she argued, if neither party could show evidence of how the award was calculated the party with the burden of proof would lose. The record on appeal was clear that neither party produced any evidence one way or the other because - frankly - there was and could be none.

Judge Asberry correctly declined to find that the general overriding FC § 760 presumption could be trumped by this supposed exception. Since Wife evidently concluded her best litigation strategy was not to offer any compromise solution for determining the competing community verses separate property interests, the court applied a formula suggested by Husband for apportioning the award as between CP and SP. Wife took and all or nothing position that was a high stakes gamble, and she lost. Interestingly, the decision is clear that had she suggested some other valuation method the trial court could have found that was more equitable than Husband's proposal instead, and it would not have been reversed.

Play hard ball, get slammed.

The rule reiterated by the Ruiz court is simple, fair, and obvious. It is already established that period disability retirement payments which are received during marriage are community property, in that they are intended to compensate the community for loss of income that the injured spouse would otherwise have earned. Periodic disability payments received after separation are the separate property of the injured spouse alone for his or her diminished earning capacity. Citing the California Supreme Court in Marriage of Jones (1975) 13 Cal.3d 457, the Riverside justices stated "[s]o long as the marriage subsists, the [injured spouse's] reduced earnings worked a loss to the community. But such community loss does not continue after dissolution; at that point the earnings or accumulations of each party are the separate property" of each.  "[O]nly such payments as are received during marriage are community property."

But within the context of worker's compensation permanent disability awards, as was presented here, Raphael had concluded that the timing of the award (i.e., whether received before or after separation) should not dictate the outcome - instead the inquiry was what portion was intended to compensate the injured spouse for his/her reduced earnings during the marriage, which would be CP. Again, a question that is not likely to be answered by the non-injured spouse because they have no access to such information assuming it even was part of the settlement calculation; yet, this perhaps reasonably did suggest to Wife's attorney he might successfully argue that the burden of proof was hence placed upon the Husband.

The Ruiz Court decided that neither party had a burden of proof that would create a rebuttable presumption in the favor of one or the other because the trial court properly concluded that the award was part community and part separate property of Wife. The issue was then for the trial court to decide in terms of equitable apportionment of the competing interests. "In doing so, the court may use any method which fairly apportions the assets or its value between community and separate property interests. Because it is the court's obligation to make an equitable apportionment, neither party has the burden of proof in the sense that a failure of proof will result in an award of the asset in its entirety to the other party."

Thus, in equitable apportionment cases involving disability awards, which includes all hybrid mixes of community/separate attributes, a disadvantaged party (here the Husband who could not marshal much less control the evidence of what the worker's comp carrier intended when it settled Wife's case) does not lose simply because of a failure of their access to proof. Instead trial courts are free to fashion any result which works substantial justice. This was fair because nothing indicated that Wife had received any temporary disability benefits during the marriage that got banked - this lump sum settlement was all that she apparently received for the total loss occasioned to her, and to the community, for the injuries she suffered.

To the extent that the Wife argued the trial court's division of the CP amounts vs. the SP amounts was arbitrary, she had no right to complain because she never suggested any other measure that the trial court might use in supporting a different allocation scheme.

So, the lesson is this: Play hardball, get slammed..... (mediate your disputes instead, and don't disconnect from reasonableness - one never knows how a court might rule!)

Thurman W. Arnold, III, C.F.L.S

Q.  My attorney has used the word "tracings" several times, and I really don't understand how this works.  Can you give me a simple explanation?

A.  Unlikely (sorry!).

Tracings may be required by California law in a number of settings in order to find out what each spouse's share of the community property is. They generally show up in several recurring situations, but unfortunately for simplicity's sake there are numerous permutations of where tracings come into play. Chief among them is where cash or assets that was used to purchase property was "commingled" (think tossed salad with separate property lettuce leaves and community property mixed vegetables) at the time it was contributed. Please use the search engine at the upper right to see my Blog Articles for the definitions of community and separate property.

These include:

• Determining the community verses separate property attributes of an asset that was acquired with funds contributed during marriage that were a combination of each (CP and SP). This is called "characterization" - does the asset belong in whole or in part to the community estate, or to one party's separate estate, or both in different degrees? The community component is sometimes earnings that were used to pay down secured debt each month when, for instance, a mortgage principal payment is made for a separate property asset (a Moore-Marsden situation). It can include one time downpayments from joint bank accounts that contain community income or earnings (or separate property accounts that may have been commingled with joint funds or not or community property accounts that include separate property components) further complicated in the case of a refinance, and more.

• It is extremely common that a community property asset (acquired during marriage, possibly but not necessarily in joint names), or improvements to it, traces partly or 100% to a separate property source. Many parents 'gift' their child part or all of  the downpayment for the couple's first home. Or, a separate property asset (acquired during marriage but titled in one spouse's name alone - usually seen with real estate) may be purchased using joint funds.  In either event there is a tracing right of reimbursement per Family Code section 2640 to the respective community or separate property interests that bought it, in the event of a dissolution or legal separation. FC §2640 is in the top five of all California property division statutes and is critical for an understanding of what your legal interests are if either spouse has any colorable claims to separate property used during marriage. Many middle income and high asset property division cases are a puzzle map of assets that are not what they seem at first glance.

• There are a number of situations where reimbursement claims arise from the payment of joint or separate debts using money that the other spouse had an interest in (whether community funds or separate). Under limited situations there may be a right for the community, or the other spouse's separate property, to be reimbursed, but you will be required to trace these funds to claim them.

• Often intended or unintended transmutations have occurred. Family Code section 852 is the chief transmutation statute, and another of the top five California dissolution property statutes. Transmutations involve a change in the character of property, from community to separate or from separate to community or separate to the other party's separate property. These commonly require tracings in order to establish the FC § 2640 interest. For instance, husband and wife own a residence together in joint names. It was purchased during marriage. But there is need for a refinance, and one spouse's credit is bad. The parties agree that husband will borrow the money, and the lender requires that wife sign a quitclaim deed before escrow can close. Husband assures wife 'not to worry.' Wife signs the transfer deed and doesn't seek legal advice. She has unwittingly transmuted her community interest to husband's separate property. Years later the property has appreciated. What is Wife's interest? (Breach of fiduciary duty questions have to be the subject of a separate Blog but, again, please try our search engine for more information!)

Did I say I would give a simple answer?  No?  Good!

In order to unwind transactions during marriage where monies and property with separate and community property attributes have been mixed together, the "separatizer" (the party seeking to establish their separate property contributions to the community or separate property of the other spouse or partner) has the burden of proof to present reliable tracing evidence to the Court. In order to settle even mildly complex dissolutions as between the parties without going to trial, this information must be provided and laid out in a concrete manner to convince the other side that you have the ability to meet your burden.

Here are some of the rules that apply the mechanics of tracings in dissolution actions and legal separations.

If the commingled funds are used to purchase property, the party who deposited the separate funds may attempt to trace the source of the funds used to purchase the property to establish that it is separate because separate funds were used to purchase it. This may overcome the presumption that property acquired during marriage is community. Marriage of Mix (1975) 14 Cal.3d 604.

If separate and community property or funds are commingled in such a manner that it is impossible to trace the source of the property or funds, the whole must be treated as community property. Marriage of Mix, supra.

If the title to the property was taken jointly, tracing cannot be used to overcome the presumption from the form of title. Marriage of Lucas (1980) 27 Cal.3d 808, 813–814.

Direct tracing and tracing through family expenses are two independent methods of tracing to establish that property purchased with commingled funds is separate property.

Direct Tracing

Separate funds do not lose their separate character when commingled with community funds in a bank account so long as the amount of separate funds can be ascertained and at no time period were the funds spent down below the balance of SP claimed unless replenished with SP instead of CP. Marriage of Mix (1975) 14 Cal.3d 604.

If money is withdrawn to purchase specific property, questions of fact that must be determined include (Marriage of Mix, supra):

• Whether separate funds continue to be on deposit; and

• Whether the drawer intended to withdraw separate funds.

The party seeking to establish a separate interest in presumptive community property must keep adequate records. The party must show the exact amount of money allocable to separate property and the exact amount of money allocable to community property before it can be said that the money allocable to separate property is not so commingled that all funds in the account are community property. Marriage of Frick (1986) 181 Cal.App.3d 997. If the payments claimed to be separate were made periodically, each payment must have been made when separate property funds were in the account and must have been accompanied by an intent to use those funds rather than community funds. Marriage of Higinbotham (1988) 203 Cal.App.3d 322, 329.

Tracing Through Family Expenses

The second method of tracing to establish that property purchased with commingled funds is separate property requires a consideration of family expenses. This tracing method is based on the presumption that family expenses are paid from community funds.

If at the time the property is acquired it can be shown that all community cash and income in a commingled account was exhausted by family expenses, then all funds remaining in the account at the time the property was purchased were necessarily separate funds. Marriage of Mix, supra.

This method can be used only when, through no fault of the spouse claiming separate property, it is not possible to ascertain the balance of income and expenditures at the time property was acquired. See v See (1966) 64 Cal.2d 778, 784.

The spouse claiming separate property must keep adequate records to overcome the presumption that property acquired during marriage is community property. See v See, supra.  Most people don't.

The take-away:  If you are contemplating a divorce and have tracing issues, protect your records now so that they do not 'disappear.'  It can be very expensive to obtain bank statements and canceled checks dating back years, and with all of the bank failures and mergers today these records may become impossible to obtain.  If you cannot meet your tracing burden of proof, you lose on the particular reimbursement issue.

As you probably have guessed, tracings are quite expensive and typically involve the assistance of a forensic accountant. Moreover, not just any attorney will know what to do with this information!

I have residential property in La Quinta  My wife and I are divorcing and in the process of splitting assets.  She and her parents employed * * * of * * * in Palm Desert to value the property.  I'd like a second opinion regarding its value.  

I need some help in getting an honest appraisal.  What would your fee be to provide some help in finding an appraiser?

Thanks.

Frederic

Thurman

Q.  I am considering filing for divorce, and am beginning to pencil out what the division of our assets and debts might look like.  What is a good way to go about this?

• Use net value numbers, i.e., equity in homes and automobiles.  Secured debt is subtracted from fair market value - it is not divided as unsecured debt would be.  If you take the house, you take 100% of the mortgage.

• Be sure to use realistic fair market value numbers.  Don't make your final decisions based on Zillow.  If your assumptions are flawed, your balance sheet analysis will be of limited use.

• Use wholesale Kelly Blue Book values for cars or at least make sure whatever yardstick you use is consistent for both parties.

• Obtain accurate and current pay-off information as to debts.  Typically that will be the value of the debts on the date they are assigned, as adjusted for Epstein Credits. 

• Don't treat apples and oranges as apples.  For instance, list pension assets as a class separate from other assets - the present value of IRA's, 401k's, and other defined contribution plans is always different than the present value of a bank account.  These pension accounts are not valued in real dollars but must be discounted, and that may require a pension forensic or CPA.

• Don't include separate property (the other spouse may dispute that characterization).  Pure SP doesn't go on the marital balance sheet. 

• Assign the debts, placing those numbers in parentheses to ensure they are subtracted and not added in your running total.  Remember that it doesn't matter in whose name a credit card is parked.  If a debt was incurred during marriage the general rule as between spouses is that each owes 50-50.

• Separate property debts don't go onto the balance sheet because they don't get evenly divided and if they were listed you may inadvertently charge yourself for half.

• Use total values rather than 1/2 community values.  These numbers get divided as one of the last steps.

• Don't include support or support arrears.

• Include Epstein credits.

• Calculate and note Watts' and Jeffries' claims

• List professional practices and businesses but realize you probably have no practical way to put a number on them, would be entirely guessing as to their value, and would probably be wrong anyway.  Understand that business are worth more than the sum of their balance sheets or book values.

• If you share this document with your spouse, be sure to write "Confidential Evidence Code section 1152 Materials" on it, which makes them inadmissible as evidence against you.  Otherwise you may find yourself stuck with your preliminary numbers when that is not what you intended.

• Realize that if you share this document, no matter how preliminary it is, with your spouse you will be creating in them expectations concerning value or division that they may become stuck on.

• Be careful how you treat negative equity on property.  For instance, if you own a car that is worth $15,000 but you owe $25,000 and want that vehicle awarded to you, the other party will not be charged for one-half of the $10,000 in negative equity.  

• Leased vehicles should be identified but have no value.  I believe it is a good idea to list everything that you own or owe whether or not it has a value or can be valued at that time, since this list becomes an important road map for you and your lawyer.

• Make a note of alleged breach of fiduciary duty claims, but don't value them.

• Don't include your separate property.  Include their separate property if you claim it to be all or partly community, but understand those aren't real numbers until a judge rules.  

• Don't leave the document lying around where someone else might find it.

• If property is held in one spouse's name alone but a mortgage or taxes were paid during marriage, or if it was improved or refinanced during marriage, understand that the community probably has some Moore-Marsden interest in that property but that you will have great difficulty figuring out what that is without expert assistance.

• Similarly, if one spouse owned property (i.e, real estate) prior to marriage and the other was placed on title during the marriage, note to yourself that the property has community and separate property attributes and understand you will need more information or help to value those competing interests.

• Make a note of all separate property contributions you made for the acquisition or improvement of any property.  These are called Family Code section 2640 credits.

• List all other reimbursements due to the community.  For instance, there are many situations where the community property is used to pay one party's separate obligations (i.e., child support from a previous marriage) and if you know to assert the claim the community may be entitled to a reimbursement.

• List consumer goods like furniture at garage sale prices unless there is something truly special about the items.  Nothing is valued at its purchase price or even its replacement cost new.

• Be sure to include loans from parents, work, or family members that were made during the marriage and assign those that relate to your family or work to you.

• Make a note of any gifts to one or the other of you alone that were used to purchase or improve community property, whether they were received before or during the marriage. 

• Look at your bank balances at the date of separation and assign those balances appropriately.  If your husband emptied the savings account the day before he walked out, list the amount he took under his column.

This is just a starting point and is valuable as a roadmap to get you thinking about what needs to be done to conclude the divorce.  Once you discipline yourself to begin to overcome any paralysis you might feel, the marital balance sheet will speak to you about what is important for you, what the issues are, and will give you some idea of what important paperwork you need to obtain to evaluate your interests now or in the future.  Get that paperwork at once.  You are going to have to do this exercise anyway once a legal actin is filed. 

This the some of the information that you must provide in your Declarations of Disclosure.  It is an efficient idea to use those forms from the beginning.  These California Judicial Council Forms include:

• The Fl-142 Schedule of Assets and Debts
• The FL-150 Income and Expense Statement
• The FL-160 Property Declaration

Getting started on this early will make any meeting with a family attorney cheaper and far more useful then if you've not even thought about these things.

To the extent you can determine values or ranges of values, add up the net equity in your column for the community property you want or get, and subtract 100% of the debts that are to be assigned to you.  Again, chances are there will be categories where you can't put a number on the items.  But if you had the numbers, then after totalling the total net to the other party, subtract the two net numbers.  One of you will show a higher number.  This number will reflect the over-credit amount to that person which needs to be equalized between you.  Divide this number by 2, and the person who netted more owes that resulting number to the one who received less.  This amount is called an "equalization payment."

This is just one way to do a marital balance sheet.  Often times there is no money to pay the equalization payment because all or most of the community is held in the form of personal and real property.  An equalization payment is no good to you unless you can collect it.  Perhaps you can get a promissory note secured by a deed of trust on the family residence that is awarded to the wife.  That is usually a bad idea - you don't want to become a bank, with all the attendant risks of default and depreciation.

Another option once you have these numbers are pencilled out is to go back and rethink how the property was divided.  Maybe you should take those Peter Max lithographs after all.  Maybe the residence or that vacant lot must be sold to raise money for the equalization payment.  It is frequently seen in Stipulated Judgments or Marital Termination Agreements.  It is not common in litigated judgments because courts generally must equalize the division at the time of trial, not in the future.  This is why property may be ordered sold to ensure an equal, current division of the estate.

If defined contribution pension plans exist these are a good place to find the money to assure the equalization payment is actually honored.  But a 401k with a net asset value of $100,000 might only be worth $80,000 after penalties and ordinary income taxes are charged on it.  Pensions can be divided without tax consequences (QDRO's) but if you are owed a $100,000 equalization, creating a new pension in your name and transferring $100,000 from the other party's interest in it is like being handed a check for $80,000. 

Q.  I have been occupying our family home alone since my wife left over a year ago.  I pay all the interest only mortgage, property taxes, and insurance with no help from her.  Does she owe me half of any of this?

A.  You may be owed you something, but not necessarily one-half of what you have paid out, and different categories of expenses may be treated differently.

This situation involves at least three potential legal concepts:

    * Epstein Credits (Payment of CP Debts Reimbursed)
    * Watts Credits (Reimbursement for Exclusive Use of CP)
    * Jeffries Credits (Combination of Epstein and Watts Reimbursements)

Epstein Credits

"Epstein credits" is a doctrine that holds that as a general rule courts must reimburse one spouse who uses earnings or other separate funds after separation to pay pre-existing community estate obligations.  Courts may not order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement.  Where payments are made on account of a debt for an asset that the paying spouse was or is using and the amount was not substantially in excess of the value of the use, the Court may decline to order reimbursement.  This Blog addresses your question in terms of Watts and Jeffries credits that may be owing you upon divorce or legal separation - the prior blog details Epstein credits.  

Watts and Jeffries Credits

We speak in terms of "Watts credits" when one party has the exclusive beneficial use of community property.  When money is owed on that asset, "Jeffries" reimbursements or set-offs for the payment of that debt also come into play. On the one hand you are enjoying the use of a valuable jointly owned asset and should reimburse the community for that use; on the other you are paying something to a creditor for that use, and that amount should be deducted from what you owe the community.  Watts is a calculation for the value of what should be charged for an exclusive enjoyment of community property by one spouse; Jeffries combines the value of that use with reimbursements under an Epstein analysis.  Marriage of Watts (1985) 171 Cal.App.3d 366, 373-374; Marriage of Jeffries (1991) 228 Cal.App. 3d 548, 552-553. 

Family lawyers most often see Watts and Jeffries issues arise in disputes over residences occupied by one spouse alone.  In practice none of these concepts are typically applied to automobiles, although in theory they should be, or other consumer goods.  

While Epstein credits are generally viewed by trial judges to be mandatory reimbursements, allowing Watts and Jeffries credits is discretionary.  Having a working knowledge of your local judicial bench officer's attitude on these subjects is an important bit of information for you to obtain.

Watts credits and Jeffries credits are obviously implicated in your question since you occupy the house for which you seek mortgate and other payment credits and reimbursements. 

This is how Watts Credit issues typically arise - you and  your wife jointly own a home, and both of you are obligated on the mortgage.  Assume the monthly mortgage payment is $3,200 (interest only in your case), the taxes average $400/month, and insurance costs $1,200/year.  Mortgage payments are made on the 15th of the month, and she moves out on January 14, 2009.  You were unable to make the payment on December 15, 2008, so there are two payments due on January 15.  On January 15 you make these two payments, and then continue to make all these payments until the present time or the date of settlement or trial.  You occupy the residence the entire time.  You also incur charges for water for the landscaping, etc., along with the cable bill, electricity, phone and trash.  You have a gardner and a poolman that together amount to $250/month.

Hence, you are spending $3,700 on the mortgage, taxes, and insurance plus the $250 for upkeep, along with whatever you pay for utilities each month.  Over time this amount can grow to a considerable number. 

Assume you had to borrow the money to pay December late from your mother.  This is your separate property debt to Mom if borrowed after separation.  But because your wife lived at the house up until the day she moved which include all of January, you are entitled to the equivalent of an Epstein reimbursement.  Watts and Jeffries don't yet apply.  The obligation existed before separation, was paid after separation, and the source of payment was your separate property.  The community estate owed the payment, which means you owed one-half too (she also owes one-half the utilities charged during the same period as well that were paid with your separate property).

Watts and Jeffries credits answer questions how to deal with expenses you paid after she left where you had use of the home during some some of or the entire period.  Watts credits deal with the value of that use, and Jeffries deal with the value of the use less a reimbursement claim for the cost to you of that use.  Both parties can have these claims for the same property at different times, or one party may assert these reimbursements as against one property while the other may assert them as to another. 

What if instead of you living in the home after separation, it was rented to others but the rent didn't cover all the house related debt service?  The rents are deducted from the total and you each owe one-half of the shortfall.  If you advanced the difference, you are entitled to one-half back from your wife.

Watts' Analysis

So, where one party enjoys exclusive use of a CP asset how is the reimbursement calculated?

As a pure Watts credit analysis, assume a community property house is free and clear other than upkeep and utilities and that you lived there for a time - effectively rent free since there is no mortgage.  You can imagine how it might be unfair for you to receive this benefit without paying for it.  The amount of reimbursement you owe the community depends upon the property's fair rental value.  Fair rental value (FRV) is what you would expect to pay monthly to rent the same or a similar property on the open market in an arm's length tranactions.  It is usually proven by expert broker or appraiser testimony, but as an owner of property you are free to testify to what you think its fair rental value is (as is the other spouse).  Whether your opinion is believed or given weight by the court depends upon the assumptions you make in arriving at your opinion of FRV (as well as perceived credibility).  

If the FRV is $3,000/month, and you reside in the house for 15 months from date of separation to time of trial, the total value of your use is $45,000.  From this you would deduct fixed expenses like taxes ($400/month) and insurance ($100/month).  You would therefore owe the community $2,500 x 15 = $37,500, but since you own half the community the net reimbursement to the other party is one-half that amount.  You may also be able to deduct the gardner and poolman particularly where those payments help to maintain the asset itself.  You might even deduct repairs depending upon the circumstances (installing a solid gold toilet wouldn't qualify). 

All of these reimbursements are "Watts charges" to you.  They are "Watts credits" to the party to be reimbursed. 

Jeffries' Analysis

The more commmon situation is that some mortgage debt for the house you occupy is being paid monthly.  Assume it to be $2,000 combined (including mortgage, taxes, and insurance).  If the FRV is $3,000/month but you pay $2,000 monthly then the net benefit to you is $1,000 each month or $15,000 total.  You would owe a Watts reimbursement of one-half that sum, or $7,500, on the marital balance sheet or as a direct payment to your spouse.

This is a Jeffries situation.  Note that it assumes that these costs to you were paid by your separate property.  If instead you used community monies remaining in a bank account after the DOS to pay this debt (or CP funds from some other source) then you do not subtract that from the fair rental value because the community estate has already been charged.  
 
BTW, an interesting twist on this question these days involves what happens when there is a mortgage but the party in possession fails or refuses to pay it.  They are living there at no effective charge while the other spouse may be actually paying rent elsewhere.  In that case you should not receive a credit for one-half the debt you did not actually pay, but it is difficult to predict how a judge will handle this.  After all, you may continue to owe the money and have to repay it later.  Now what happens if you then decide to file a bankruptcy, so then never have to pay it because the debt is discharged?  That bankruptcy if properly drafted should also destroy any reimbursement claims of your spouse altogether.  Great unfairness can occur in these situations.  In my experience many of the legal rules for these reimbursement claims developed in a completely different economy and fairness and common sense is struggling to keep up with the new world order.

These days with the mortgage and real estate bust another situation frequently arises:  The amount a spouse pays to maintain the mortgage and related asset expenses may exceed the FRV of the property.  Should the other spouse be charged with half of this net loss, and so forced to underwrite some of it?

Assume in the illustration above that the costs remain the same, but the mortgage is $4,000/month.  Since FRV is $3,000, you are overpaying by $1,000.  Are you entitled to a credit back for one-half of the net loss?  In my experience most courts won't give it to you but make the argument anyway.  Courts seem to feel that if you choose to live in a place that you want the other side to help underwrite, when cheaper alternate arrangements are available, then your choice to stay there should not bind the other person.  The court cannot tell you what choices to make, but it can refuse to let you benefit unfairly by them.

This makes sense on at least one level - imagine that you have a large, beautiful, expensive home that is way under water, and that your estranged wife insists on continuing to live in it despite the fact that the costs to keep it are far in excess of what comparable lodgings would cost.  Naturally she wants you to absorb as much of this to whatever extent possible which lowers her incentive to move.  If she was allowed to stay and charge you for one-half the difference between a $10,000 mortgage and its $5,000 rental value, she might continue to reside in this losing, nonproductive asset if she effectively only paid $7,500/month after credit for your $2,500.

Conclusion

While Epstein reimbursements appear to be mandatory in dividing the community assets and liabilities, Watts and Jeffries credits are viewed as discretionary reimbursements.  Many judges don't favor these reimbursements and so exercise their disrection to deny them.  I tell my clients not to count on them in negotiating settlements, and many lawyers refuse to take the argument seriously when negotiating settlement.  Another reason why lawyers tend to treat them as inconsequential, besides bluffiing, is that they can be expensive to prove and so you are being tested as to whether you have the stamina or the money to assert these claims at trial.  After all, it is best to have forensic experts testify to them, and these individuals may include an accountant and a broker/appraiser.

One solution is to request the family court to bifurcate the issue so that a short, separate trial occurs on the Watts/Jeffries issues alone.  Once the amount of Watts or Jeffries credits is fixed by judicial decision you can now place it on the marital balance sheet in your settlement discussions on the remaining issues.

The success of a Watts or Jeffries claim are fact specific.  In doing justice and equally dividing the community estate, there is broad spectrum of fairness running from "its not big deal" to being "really unfair."  You will not get much traction where the consequence of not reimbursing Watts credits or imposing Watts charges is a small number.  But where one party enjoys the asset alone without paying creditors, a very strong argument exists in favor of finding reimbursements.

Finally, be sure to include reference to Esptein reimbursements and Watts and Jeffries in your Declarations of Disclosure to make it clear that you are asserting such a claim.  If you are the spouse in possession omit any reference to it.  It is not your job to assert that argument against yourself.

Thurman W. Arnold III
September 25, 2010
All Rights Reserved.

• Epstein Credits
• Watts Credits
• Jeffries Credits

This particular Blog addresses your question in terms of Epsteins - the next blog deals specificially with Watts and Jeffries credits. 

Epstein Credits

I have described Epstein Reimbursements in another Blog.  "Epstein credits" is a doctrine derived from the case of Marriage of Epstein (1979) 24 Cal.3d 76, 84-85.  It holds that as a general rule, courts must reimburse one spouse out of the community property who uses earnings or other separate funds after separation to pay pre-existing community obligations.  This commonly occurs with credit cards where there was a balance remaining when the parties separated that one or the other pays after that date.  Epsteins only apply to payments on the portion of a debt that existed at date of separation, and not new debt on an old card that was incurred afterwards.  The rule is not limited to credit cards but can apply to almost any class of debts.

Courts are required not to order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement.  If there was an agreement that a party would not be reimbursed, if the paying spouse intended the payment as a gift, or when the payment is made on account of a debt for an asset that the paying spouse was or is using and the amount was not substantially in excess of the value of the use, the Court may decline to order reimbursement.  This idea of the value of use of some property acquired through debt that continues to exist after separation underlies the concepts of Watts credits and Jeffries credits, and is obviously implicated in your question since you occupy the house for which you seek credits and reimbursements.

So, Epsteins are almost always granted as to post-separation payments for expenses, or goods and services, that didn't leave a tangible asset behind that is now being exclusively enjoyed by only one of the two spouses. 

As an example of how this works if there is $15,000 owing Visa for that trip to Hawaii, some groceries, and a child's school tuition at the time of separation and one party pays it off or makes monthly installments on the debt with their earnings or other separate property after that date, a benefit has been conferred upon the community because a joint obligation has been extinguished or reduced.  That benefit must be equalized by a payment to the payor of one-half the amount paid or a credit or set-off against other property that gets divided.  One-half is paid because the paying spouse owed their half anyway.  Any portion paid before the DOS (date of separation) ordinarily will not be reimbursed. 

This is generally true even if only one of the parties actually took the trip to Hawaii, unless that trip was in breach of a marital or fiduciary duty (if the husband snuck off with his paramour to Hawaii, an argument exists that he should not be reimbursed for paying that portion of the debt over the wife's objection).  Family Code section 2625 directs courts to award a debt incurred by one spouse to them alone if debt was not "incurred for the benefit of the community."  Family Code section 2602 empowers courts to "award ... the amount the court determines to have been deliberately misappropriated by the party to the exclusion of the interest to any other party in the community estate."  FC section 2625 is a powerful and much underused statute (many attorneys seem to be unaware of it or try to bluff as though it didn't exist).

Compare this with a situation where a credit card was used to buy a dishwasher that the paying spouse possesses or receives in the divorce - since they are retaining a tangible asset it may not be fair to allow them to both keep the asset and get reimbursed for one-half its costs.  Applying Epsteins can become fairly fact specific.

In situations involving use of a family residence or other tangible assets that continue to exist after separation and which are used and enjoyed by only one of the spouses, an Epstein analysis provides only a part of the answer to the reimbursement question.  In effect first the amount of the Epstein reimbursements are determined, and then the question requires a Watts analysis to determine under equitable principles whether it is fair to actually order reimbursement and, if so, in what amount.

Hence, to resolve your issue you would begin by adding up the costs of everything related to the house that is spent to preserve or protect the asset.  Property taxes are included, but utilities are not.  The utilities you used after the physical separation are your obligation anyway, because they were not incurred during 'the marriage.'  (Please see the Blog Category "Physical Separation.")  Mortgage payments and insurance are considered, and probably the poolman or gardner as well.

Please continue on to the next blog for detailed infomation concerning Watts credits.

Epstein Credits and Fiduciary Duty Issues

Sometimes a spouse or domestic partner will raid the credit cards and take cash advances or buy a new wardrobe, or fix a car, during the weeks prior to separating.  If it later appears that their intention was to stick the other spouse for one-half of this expense, the presumption that this is a community debt (because incurred during marriage) may be overcome and so it may be assigned to the one spouse alone.  It is not fair to hold both parties responsible for debts incurred in anticipation of separation.

However, when one partner incurs a debt frivolously as opposed to recklessly before separation, in a situation not amounting to a breach of fiduciary duty - even over the prior objection of the other spouse - it is likely to be equally divided and Epstein reimbursements ordered.  Both spouses have, under California law, equal rights of management and control of the community property and community credit.

Courts in my experience are reluctant to find breaches of fiduciary duty in Esptein situations unless the behavior was fairly eggregious.  Charging 10 pairs of shoes at Macy's a month before separation may not be viewed as a big deal.  If the debt was incurred in pursuit of an illegal activity like supporting a drug habit or sex addiction, many judges are less reluctant to declare a breach. 

To illustrate another twist, if the credit card was used to pay the spouse's tuition expense instead a child's schooling as in my example above, it may also be unfair to charge the non-schooled parent with one-half the tuition portion of the credit card balance.  A court is likely to look at whether this schooling benefited the community in some way before splitting that debt betwen the parties - i.e., because of the schooling did the student spouse earn more money which was then contributed to the community standard of living and so confer a benefit on both?  Pure student loans are usually awarded to the party who incurred the debt as their separate property obligation. 

A "deferred sale of home order" means an order that temporarily delays the sale and awards the temporary exclusive use and possession of the family home to the custodial parent of a minor child or child for whom support is authorized under FC §§3900 and 3901 or under FC §3910. It is authorized whether or not the custodial parent has sole or joint custody. Such an order is made to minimize the adverse impact of dissolution of marriage or legal separation on the welfare of the child.[FC §3800(b)].

If one of the parties requests a deferred sale of home order, the judge must first determine whether it is economically feasible to maintain [FC §3801(a)]:

• The payments of any note secured by a deed of trust, property taxes, and insurance for the home during the period the sale of the home is deferred; and
• The condition of the home comparable to that at the time of trial.

In making this determination, the court must consider all of the following[FC §3801(b)]:

• The resident parent's income;
• The availability of spousal support, child support, or both spousal and child support; and
• Any other sources of funds available to make those payments.

The legislative intent behind these determinations include [FC §3801(c)]:

• Avoiding the likelihood of possible defaults on the payments of notes and resulting foreclosures,
• Avoiding inadequate insurance coverage,
• Preventing deterioration of the condition of the familyhome, and
• Preventing any other circumstance that would jeopardize both parents' equity in the home.

A judge asked to consider the issue will consider the following in determining whether a deferred sale is necessary to minimize the adverse impact of dissolution or legal separation on the child. [FC §3802(a).]  Factors considered in exercising discretion include all of the following [FC §3802(b)]:

• The length of time the child has resided in the home;
• The child's placement or grade in school;
• The accessibility and convenience of the home to the child's school and other services or facilities used by and available to the child, including child care;
• Whether the home has been adapted or modified to accommodate any physical disabilities of a child or a resident parent in a manner that a change in residence may adversely affect the ability of the resident parent to meet the needs of the child;
• The emotional detriment to the child associated with a change in residence;
• The extent to which the location of the home permits the resident parent to continue employment;
• The financial ability of each parent to obtain suitable housing;
• The tax consequences to the parents;
• The economic detriment to the nonresident parent of a deferred sale of home order; and
• Any other factors the court deems just and equitable.

Q.  I understand that Moore Marsden has something to do with reimbursing the community estate for the mortgage payments we made on the house my wife owned prior to our marriage, but we spent some the monies we saved during our marriage on improvements to the house.  Do I get any of this back?

A.  The Moore Marsden formula typically deals with what happens to the equity in property owned in the name of one spouse alone - in this case a house - where during marriage community property (i.e., either spouse's earnings) is used to make mortgage payments.  Where these mortgage payments are a combination of principal and interest, and not interest only, their net effect is to increase equity by reducing principal.  Over many years the amount of principal reduction can be substantial.  In effect the spouse who solely owns that residence is benefiting by the community's contribution.  This is potentially a kind of breach of fiduciary duty, giving rise to reimbursement rights.  Over time this right of reimbursement to the community grows, but it only applies to increases in equity.  There is no right to be reimbursed for interest, taxes and insurance payments.  I have given an example of how these Moore Marsden interests are calculated here.

Sometimes during marriage after a period of community payments on the separate property mortgage of one spouse, spouses or domestic partners transfer title to the property into joint names (often where there is a refinance and the lender requires it) so that now both spouses are on title to what was previously one spouse's separate property.  This is called a transmutation.  Under Family Code section 2581 the property is deemed "acquired" during marriage and so the house now presumptively becomes community property.  Use our search engine to find more information about transmutations.  Later, upon dissolution or legal separation these interests need to be separated out and accounted for.  In such cases several levels must be analyzed:

First, a transmutation (adding a spouse to title to what was previously separate property) must be free and voluntary, and there is a presumption that the spouse who comes onto title did so through some form of undue influence.  This may or may not at all be true, but it is the burden of the later titled spouse to establish the absence of undue influence.  If there was undue influence, then the title change can be set aside and the property remains separate.  If the title change is set aside, Moore Marsden applies because the property will be deemed to have always been the separate property of the first spouse but the community will still be entitled to a ratio of equity reimbursements. 

If there has been a valid transmutation, then the first spouse is still entitled to be reimbursed for the value of their separate property contribution to the community (absent an express written waiver of this right of reimbursement).  This is determined as of the date of the transmutation, and is governed by Family Code section 2640.  Moore Marsden may still apply to determining the amount of this 2640 reimbursement.  For example, say on the date of marriage Wife owned the property in her name and the mortgage owing is $100,000.  Assume at the date Husband is added to title the mortgage has been paid down to $80,000.   Also assume the value of the property remains the same at $200,000.  Here there has been an increase of $20,000 in equity and the community must be reimbursed. On the date Husband goes on title $100,000 of the equity is Wife's pure separate property - the house was worth $200,000 and the mortgage was then $100,000.  Wife is entitled to a 2640 reimbursement of $100,000.  However, both H and W have a community interest in that $20,000 of principal reduction.  Moore Marsden will be used to determine the value of each of their shares (often there has been a change of value between the two dates - assuming the house appreciated, then they also share in different proportions in the equity increase).  Wife's $100,000 2640 reimbursement will be increased by her share of the community increase.  If there has been appreciation, a ratio is determined that fixes the amount of community reimbursement due.

In contrast, if the mortgage had been interest only up to the date of the transfer (with no capital improvements), then as of the date of this transfer the community would have no Moore Marsden reimbursement and Wife's 2640 claim would be 100% of the home equity on that date.

Once both parties jointly own the property, Moore Marsden will not apply to the increases or contributions that occur thereafter (unless there is a future transmutation back to one party or the other alone) although it may later be used as illustrated above to determine 2640 credits on the date the other spouse goes on the deed.  This is because the formula is only used to value reimbursements to the community where community money improves or increases the value of one spouse's separate property - once parties are on title, the residence becomes community property subject to a separate property reimbursement instead of separate property subject to a community reimbursement.

A common situation occurs when one spouse holds property in their name alone but the spouses together, or the other spouse, contributes monies to remodels or improvements.  The value of those improvements may need to be reimbursed - either to the community (where the improvements were paid by both from earnings and accumulations during marriage) or to other spouse (where the untitled spouse pays for the improvements from their own separate property, i.e., premarital savings).

Whether or not there is an actual right of reimbursement to the community improvements depends first on whether those improvements actually increased the value of the home. If community funds are used to buy a solid gold toilet, that toilet may have little impact on the value of the home per se (the toilet is still worth whatever it is worth).  Some improvements don't increase value.  Another example might be an improvement that loses value over time, like new carpeting.  This is to be compared with adding more square footage by enlarging the house. Expert testimony may be required to prove the improvements increased value and to what extent.

But the reimbursement for capital improvements is not dollar for dollar.  Instead a modified Moore Marsden analysis must be performed which determines the community property interest in the equity appreciation during marriage, taking into consideration the extent to which the improvements increased value.

Incidentally, when there is a 2640 reimbursement to the first spouse, this comes off the top from any equity in the house - which means there is there no equity remaining after this reimbursement, there is not community equity left to reimburse.

Complicated?  You bet.  There are so many possible scenarios and it is hard to speak to these concepts except in generalities.  Often a forensic accountant with Moore Marsden experience will need to be engaged.  Since the fair market value of property may need to be determined at various points of time (for instance, the date of marriage, the date the new spouse comes on title, and the date of division), expert opinions of value of the real estate may also be required.  It may be problematic to value property as of some long ago date.

My hope is here is to introduce you to the concepts so that you may be somewhat conversant with them.  Find an experienced family lawyer to assist you!  They will know local experts who can help with the analysis.

• Evaluating sales proceeds

• Comparables

         The specific asset is valued based upon the actual sales of similar assets or properties with actual sales that can be tracked.  With professional practices, this is common with dental businesses which are commonly bought and sold, and so numbers from the sales of other dental practices may be persuasive to a court.  Whether this method is useful depends very much on the nature of the business - sometimes there is nothing comparable or little published information about comparable sales.   Comparables are also considering in setting the value of real estate. 

• Liquidation value

Sometimes businesses will be cut up into parts that are sold separately.  Sometimes the business is valued in terms of what these parts would sell for.  It is rarely used except when the parties intend to actually liquidate the company.  Liquidation value does not generally include valuing goodwill (because the assumption is there will be no on-going concern).  Goodwill is the nightmare component to valuing businesses.  Many people in divorce who manage the business believe strongly this is how businesses should be valued (in part because in the absence of an actual sale, it is a fiction to say what a buyer might pay when no such buyers as a practical matter exist).

• Book Value

This relies upon the company records to determine what 'retained value' is.  It is rarely used, because it is more a statement of how the company perceives itself, or structured (or even 'cooked') its books, than any objective indication of value.

• Adjusted book value

This is performed through a forensic audit.  Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.

• Going concern value

This describes a method that includes valuing the business as greater than the sum of its parts.  There are a number of factors that are used.

• Capitalized earnings

This is the most common method for valuing businesses used in California because courts find it to be most reliable.  If you hope to use a different method, you will need to justify why that method is fairer to the out-spouse. This method requires expensive forensics. 



It is not uncommon to bifurcate the question of business valuations to try them separately because often this is the thorniest issue to be decided in a dissolution or legal separation proceeding.  



The law of business valuations is extremely complex and even contradictory.  The purpose of this blog is merely to introduce the concepts.  I will develop these themes in more detail in additional family law blogs. 


Thurman W. Arnold III 

http://www.ThurmanArnold.com

Q.  My wife and I separated in June 2009. When we purchased our home in March of 1998 (married December 1994), she used part of an inheritance from her grandmother to help with the down payment. I have been paying the mortgage since we bought it. Will she get her inheritance back in our divorce? What would I get?