Recent Posts in Reimbursements Category

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. 

• If some or all of the funds on deposit you contend are your separate property can be traced from separate property (i.e., the inheritance) they will be confirmed to you unless your wife can establish you made a written agreement that expressed a clear intent that those sums would become community property (a transmutation)

• If the two of you made a written agreement, separate from the deposit agreement itself, that expressly provided that the deposited sums that are claimed not to be community property were in fact not to be community property then you will not be reimbursed.

Hence, you need the paper trail for the receipt of the inheritance monies into this joint account in order to establish they still belong to you as separate property.  As long as you do trace these funds, your wife's argument that you gifted the monies to her or the both of you by verbal agreement or by your conduct will not succeed. 

However, when monies are commingled over time this tracing becomes more difficult. Particularly in checking accounts, money comes in from other sources (like community earnings) and goes out (often to pay community expenses).  The question becomes which money is applied to what outflows?  
  
The law presumes that money that goes out of a commingled account is spent first on the community needs and expenses, meaning that what remains is more likely to be considered separate.  The law expects the community to pay community expenses, not that you first use your separate property - as long as their are sufficient community funds on hand.  If these community funds become exhausted then withdrawals of what is your separate remaining monies may be lost to the community.

In your situation you have a reimbursement claim for what she took and you should receive a credit on the marital balance sheet.  She may owe you 100% of the inheritance and 50% of the balance.  Your worst case is that she owes you half of what she took. Immediately begin to collect the needed bank and inheritance records to prove your claims.

Maintaining records during and after marriage is the most important thing you can do to preserve and protect your interests.  Unfortunately, few people realize this until after the horse has left the barn.

• The parties expressly agreed in writing to the contrary [FC §2641(e)]; or
• The contributions were for ordinary living expenses that would be incurred regardless of whether the spouse attended school, stayed home, or worked [Marriage of Watt (1989) 214 CA3d 340, 354].

If the loan is still outstanding at the time of dissolution, the balance is not divided but is instead assigned to the party who was educated or trained, except when the parties expressly agreed in writing to the contrary. [FC §2641(b)(2) (e).]

Nonetheless, the Court may reduce or modify the reimbursement and assignment of educational loans to the extent circumstances render such a disposition unjust, including the following [FC §2641(c)]:

• When the community substantially benefited from the education, training, or loan incurred for the education or training of the party. There is a rebuttable presumption affecting the burden of proof that the community has not substantially benefited from community contributions to the education or training made fewer than 10 years before the commencement of the proceeding. On the other hand, it is presumed that the community substantially benefited from community contributions to the education or training made more than 10 years before the commencement of the proceeding.
• The education or training received by the party is offset by the education or training received by the other party for which community contributions have been made.
• The education or training enables the party receiving the education or training to engage in gainful employment that substantially reduces the need of the party for support that would otherwise be required.

Professional licenses and education are not "property" that can be divided in divorce or legal separation in California.  Reimbursement for community contributions and assignment of loans under FC §2641 is the exclusive remedy of the community or a party for education or training costs and any resulting enhancement of a person's earning capacity.

However, importantly, the Court should consider the effect of the education, training, or enhancement, or the amount reimbursed, on the circumstances of the parties in ordering permanent spousal support pursuant to Family Code section 4320(b). [FC §2641(d).]

"(a) A premarital agreement is not enforceable if the party against whom enforcement is sought proves either of the following:
* * *
(c) For the purposes of subdivision (a), it shall be deemed that a premarital agreement was not executed voluntarily unless the court finds in writing or on the record all of the following:

(1) The party against whom enforcement is sought was represented by independent legal counsel at the time of signing the agreement or, after being advised to seek independent legal counsel, expressly waived, in a separate writing, representation by independent legal counsel.

(2) The party against whom enforcement is sought had not less than seven calendar days between the time that party was first presented with the agreement and advised to seek independent legal counsel and the time the agreement was signed.

(3) The party against whom enforcement is sought, if unrepresented by legal counsel, was fully informed of the terms and basic effect of the agreement as well as the rights and obligations he or she was giving up by signing the agreement, and was proficient in the language in which the explanation of the party's rights was conducted and in which the agreement was written. The explanation of the rights and obligations relinquished shall be memorialized in writing and delivered to the party prior to signing the agreement. The unrepresented party shall, on or before the signing of the premarital agreement, execute a document declaring that he or she received the information required by this paragraph and indicating who provided that information...."

Notice how these provisions are almost shouting 'independent legal counsel.'  It is rare to see a phrase repeated so often within the same code section. 

So examine whether your agreement, and the required separate writing, seem to address these requirements.  Also, check to see whether the other conditions for enforceability are met.  There may be other reasons why your Prenup will not be enforced, as where undue influence was exerted to obtain your signature (notice the seven day waiting period, which is intended to overcome the social pressures where a wedding date is looming).  But you would be ill-advised to embark upon a challenge to the agreement without legal counsel this time around; don't compound the problem.

A final comment:  Setting aside the prenuptial agreement may only have a limited affect upon the status of the house.  For instance, the rules relating to transmutations and reimbursements still apply.  I have written about those elsewhere in this Blog, but if the house was acquired by your wife as her separate property independently of the Prenup it remains her separate property even if the agreement is voided.  However, if there was a mortgage and it was paid down with her earnings during marriage the cancelation of the Prenup may benefit you because the community will thereby gain a Moore Marsden reimbursement right in the principal pay down and appreciation.

Again, seek out an experienced family law attorney.  And, I always urge that people consider mediating these types of family law disputes.

T.W. Arnold
http://www.ThurmanArnold.com

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.

Q.     My husband won't stop gambling. Am I liable for his gambling debts?

A.  The community property that the two of you own is liable as to satisfy his gambling obligations, assuming there is any left.   Whether you are liable to the Indian Casino or Las Vegas hotel beyond your share of the community depends upon whether you have an independent contractual relationship with them - i.e., a line of credit in your name. 

As between you and your husband, unless you consented to his gambling he may owe you (if your separate property is somehow attached to satisfy the debt) or to the community estate a reimbursement or indemnification right.   

If he is a professional gambler and this is his "work" the outcome would be different.  The outcome may also depend on whether the community benefited from the gambling, i.e., if winnings were used to support the community, then a court may deem it fair to share the obligation as to "losings".  

This right of reimbursement would similarly exist if he squandered money on drugs, or prostitutes, and so on - assuming you can prove it and trace the money!  The question is whether you consented and ripens when you can establish that his conduct violated fiduciary duties owing you.  One never knows, however, how a judge will treat this on a case by case basis but the law if moving towards greater accountability.

If his gambling does amount to a breach of fiduciary duties owing you as a result of your marriage or domestic partnership, you have substantial remedies.  Try our search at the top right of the page to learn about those topics.

Thurman W. Arnold III

Q.     The district attorney's office intercepted our tax refund to pay past due child support.  If we divorce do I get any of this money back?

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?

Q.  Can you please help.  I understand a Moore-Marsden analysis needs to be performed on my house in my pending divorce, but I don't understand what it is my attorney is telling me. 

Frederic:

Here is an illustration of how the calculation works. Please see my FAQ on Moore Marsden generally. As you can see, it is complicated. You will need a forensic accountant and you may want a real estate expert because fair market values need to be fixed at various dates. Your situation is even more complicated because you placed her on title. The simplest Moore-Marsden situation deals with a property owned in the name of one spouse throughout the marriage, where marital earnings are used to pay the mortgage down - the fundamental concept is that the community should get some reimbursement for this, which comes back as a share in the appreciation and reduced principal obligation. 
 
You will need to get:

• the mortgage payoff balances on the date of marriage;
• the mortgage payoff balance on date of the transmutation (when your wife went on title)
• the payoff balance at date of separation
• and you will need a mortgage balance near the date of your trial

I want to mention that all transmutations that favor one spouse and disadvantage the other, like putting her on the deed on 1/1/02, are subject to a claim that they should be set aside. This is because there is a presumption that your Wife exerted undue influence upon you - please research my fiduciary duty blog articles using the on-site search engine if this interests you.

Therefore, one scenario is:

Assuming                                                                $   54,875     dowppayment
and                                                                                6,836     (paydown before M) 
(you will need the mortgage statements)                        25,125     appreciation before M 
and                                                                             (20,197)    principal reduction  during M

then:                                                                           $54,875 [DP] PLUS $89,803
[SP Loan of $110,000 minus $20,197 CP payments] 
 = $144,678 DIVIDED BY $164,875 [purchase price]
= 's a 87.75 SP Interest

and                                                

$20,197 divided by $164,875 =' a 12.25% CP interest