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Recent Posts in Separate Property Category
| August 15, 2011 |
| IRMO MARGULIS - Managing Spouse Has BURDEN OF PROOF To Explain MISSING ASSETS |
| Posted By Thurman Arnold |
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Marriage of Margulis (8/11/2011) 198 Cal.App.4th 277
Part One
I am always pleased to report cutting edge rulings by our appellate courts, and this is one of the most important decisions in recent years affecting who has the burden of proof to explain what happens to assets that disappear after marriage partners separate, and what the consequences are for managing "in-spouses" who cannot explain what happened to liquid (or other assets) that existed at separation but seem to have evaporated in the meantime. While upon reflection it is hard to imagine how this decision could be news because it makes such perfect sense, the Fourth Appellate District's pronouncements (by the Honorable J. Aronson) are indeed a new extension of existing law - which is why the trial court in this case was reversed.
Special kudos to Attorneys Stephen Temko and Dawn Gray on behalf of the Association of Certified Law Specialists (an organization serving the public interest that I am proud to be a member of) for weighing in with amicus curiae briefs that probably helped to inform the appellate justices in positive ways.
Because this case is important I am going to help it be digested in two gulps - this is Part I.
The root holding of IRMO Margulis is this: Once a nonmanaging spouse makes a prima facie showing concerning the existence and value of community assets in the control of the other spouse postseparation, the burden of proof shifts to the managing spouse to rebut the showing or prove the proper disposition or lesser value of these assets. It is now clear that managing spouses have the burden of proof to account for missing assets that they controlled.
Family Code section 1100 states that "either spouse has the [right of] management and control of the community personal property, ..., as the spouse has of the separate estate of the spouse."
But when parties separate the more empowered partner often grabs or already manages all the marbles, and then enjoys the advantage of continuing to carry those marbles around and even spending them down until the community property pot is ultimately divided. Without accountability this frequently led to abuses and misappropriations that - in the absence of this new rule - favored that party and facilitates their practical ability to defraud the community property estate, notwithstanding a legal duty per Family Code section 721(b) to account for what went where. Until now. The
Margulis rule is necessary to protect the rights of an "out-spouse" as a matter of basic fiduciary protections.
The facts of the case as set forth in the appellate decision are these (and are reminiscent of the facts of the Davenport decision): Alan and Elaine separated after 33 years of marriage in August, 1996. Alan moved out of the parties' Irvine home and moved to Chicago to start a new job. Elaine remained in the family residence. They owned a home in Palm Desert, California.The marriage yielded two children who are now adults.
During the marriage Alan was the sole working spouse and exercised "complete control" of the couple's finances - sound familiar? This included retirement, bank, and investment account personal property assets. Although Alan moved out in 1996, Elaine did not file for divorce for another six years - in 2002. Five more years passed before Alan even filed a response in those proceedings. Throughout this period Alan paid Elaine just enough, evidently, for her to be satisfied with the financial status quo so that she undertook no steps to move the divorce towards a conclusion. I can only speculate what psychological and emotional dynamics were at play in these people's lives, but infer that Elaine trusted Alan enough that she did not perceive that she needed to take vigorous steps to protect herself. Which gave him free reign for a long, long time.
Once the case did begin to move forward, as often happens when there is a significant power imbalance in relationship, it began to move quickly and that pace certainly further advantaged the husband. Commonly it is the in-spouse who is rushing the case to trial while the out-spouse plays catch-up and the parties, or the in-spouse, play discovery games and hide and seek with assets, disclosures, and backup. Bank accounts are easily susceptible to this type of abuse because they are document intensive, and expensive to evaluate. In and out transactions (deposits in, transfers out) must each be traced in order for forensic experts and the court to know how to characterize and characterize transactions and the flow of cash. Here Alan filed his Response to Elaine's 2002 Petition on February 21, 2007, and the parties found themselves in a pre-trial Mandatory Settlement Conference only six months later. This means that Elaine's team had very little time to prepare since Alan knew where the marbles were but elected not to share their identity and location.
There was a single "smoking gun" in the case which consisted of what became at trial "Exhibit 18." This was a two-page document that was entitled "confidential personal financial statement" for "Alan/Elaine Margulis," dated February 1, 1999. It reflected total assets of $1,305,500. The liquid (i.e., cash) portion amounted to more than half of that number.
At trial Elaine testified that, as the nonmanaging spouse, she had no personal knowledge or records of the value of the accounts at any time. This was the sole extent of her evidence at trial about the status of the assets near the date of separation, and essentially Alan's attorneys argued that this proved nothing. Elaine's attorney responded insightfully that the effect of this document was to shift the burden of proof to Alan to explain and show that he had properly disposed of those assets, or that the stock holdings lost their value as a result of market conditions - as opposed to them having been withdrawn or mismanaged by him or for his sole benefit. But the trial judge disagreed, which set up this reversal in favor of Elaine.
The trial court explained "I don't believe it supports, standing alone [that] your assets listed did, in fact, exist." Wife had no other evidence to prove that they did - hence, without the rule established by Justice Aronson in this case, she would be out of luck. Her proof would have failed on the contested issues, and it did fail at the trial court level. Before this decision the trial court's perspective was a bit shallow but not surprising. It takes bold judges with considerable family law experience to read the sub-text.
Who has the burden of proof on a topic is often key to which party wins or loses on a given issue. This is why Marulis is important to control of asset cases.
Shifting the Burden of Proof
There are two common principles linked to the concept of the "burden of proof." One is the burden of persuasion and the other is the burden of producing evidence. Often if a party cannot produce evidence on a subject that the law imposes a burden upon them to produce in order to prevail, they lose. Irmo Margulis has implications beyond family law.
The Margulis decision observes: "the trial court concluded that Elaine, the nonmanaging spouse who lacked both personal knowledge and records concerning the assets listed on exhibit 18, failed to meet the difficult burden of proving these now missing assets had existed....
The trial court's failure to place the burden of the duty on Alan relieved him of the duty to account for his postseparation management of these assets. Thus, Alan did not have to prove the
amounts
that had been in these accounts or that he had properly disposed of those sums. This lack of accountability poses a risk of abuse and runs afoul of the statutory scheme imposing broad fiduciary duties of disclosure and accounting on a managing spouse." [Emphasis added].
It continued: "Given that 'bedrock concerns' of 'policy and fairness' drive the analysis [citation omitted]
, it is not surprising that a common trigger for burden-shifting is 'when the parties have unequal access to evidence necessary to prove a disputed issue. 'Where the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim.'....
Concerns over 'unequal access to evidence' [citations omitted]
are particularly pressing in the context of a marital dissolution where financial records can be crucial to ensuring the equal division of property required by Family Code section 2550.... Undoubtedly, in marriages and separations like the Margulis's where one spouse exercised exclusive control over community property, the parties will have vastly
unequal
access to evidence concerning the disposition of that property. When this occurs, fairness requires shifting to the managing spouse the burden of proof on missing assets. Moreover, ..., the statutory fiduciary duties of disclosure and accounting owed between spouses further justify that result."
The Appellate Court goes on to explain why this result is fair in light of the fiduciary obligations between spouses that I have written about so much over the past few years. I will separately blog that portion of the decision.
But as I have been trumpeting now for many months, the appellate courts are working overtime to save the existing California scheme of family law to ensure transparency - it is my opinion long overdue but much appreciated!
For those in-spouses who do act in good faith after separation and the pendency of the marital proceedings, Margulis is a cautionary tale - managing spouses had better keep records of transactions affecting the community property estate and make all required disclosures or find themselves assuming the risk of loss or diminution of the value of those assets.
Please note that the appellate Court's initial decision of August 11, 2011, was modified on August 26 and September 9, 2011. The citation to the modified opinion is Marriage of Prentis-Margulis v. Margulis (2011) 198 Cal.App.4th 1252. I have yet compare the differences in the two decisions.
Thurman W. Arnold, C.F.L.S. |
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| May 23, 2011 |
| FORM OF TITLE Trumps COMMUNITY PROPERTY PRESUMPTION Where Life Insurance Is An Asset in DIVORCE |
| Posted By Thurman Arnold, CFLS |
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Marriage of Valli, B222435
PLEASE NOTE - The California Supreme Court granted review of this decision on 8/24/11 and as a result the opinion reviewed below has been vacated.
8/26/11
TWA
The California Second Appellate District issued its ruling in Marriage of Valli on May 18, 2011, reversing a Los Angeles trial court that had found that a $3.75 million insurance policy purchased during marriage was the parties' community property. Instead Justice Stanley Mosk declared that the 'super-presumption' contained in Evidence Code section 662 trumps the more general presumption per
Family Code section 760 that property acquired during marriage is jointly owned. Interestingly, this was true even in the absence of direct evidence of the title to the policy itself; it was sufficient that the insurance agent who sold the policy testified the policy was issued in the name of the Wife and that he'd been told it was being purchased for the protection of the family.
At issue was who owned a 'blended universal life insurance contract' on Husband's life (this is THE singer Frankie Valli) bought some eighteen months before separation that had a cash surrender value of $365,032 by time of trial. Husband argued that since the policy was acquired during marriage and paid for with community funds, it belonged to the community and each party was therefore entitled to one-half. Wife contended that Husband had told her from the inception of the policy that she was to be the owner of the policy and its sole beneficiary, and this was not disputed. She introduced testimonial evidence that the policy listed her as its owner. The trial court sided with the Husband. The decision turns on legal and not factual issues, and I think it deserves mentioning that this appears to be a case that was ethically litigated - Mr. Valli was wholesomely honest and resisted the temptation to assert a version of what happened that included allegations of "pillowtalk" or other reassurances, for instance, from Wife that she had admitted the policy was joint because these did not occur (nor would they have been helpful) - something that is otherwise common in the "liar's contests" that many dissolutions devolve into.
Family Code section 2550 assigns trial courts a mandatory duty to value and divide equally the parties' community property estate. But what is community property? Generally, factors determinative of whether property is separate or community are the time of acquisition; operation of various presumptions, particularly those concerning the form of title; and whether the spouses have transmuted or converted the property from separate to community or vice versa ...." (In re Marriage of Haines (1995) 33 Cal.App.4th 277, 291).
Family Code section 760 states "[e]xcept as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." This is the "time of acquisition" rule, and it creates a rebuttable presumption in favor of the creation of CP. That presumption can be overcome by a "preponderance of the evidence" - that is by evidence that shows by a 51% likelihood that it is separate property. FC section 760 is the starting point for any analysis of assets and debts acquired during marriage for purposes of defining the marital balance sheet.
Evidence Code section 662 is an evidentiary presumption, found outside the California Family Code. It states "[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof." The "clear and convincing" standard of proof is considered to be a "super-presumption" exactly because of what it takes to overcome it. The public policy basis for this evidentiary presumption is to ensure the stability of titles to property and within the insurance context it is important that insurance companies have the ability to rely on their information of who holds title to a policy in paying out death benefits, and in not exposing themselves to multiple claims (and paying the wrong person or heir) upon death.
Hence, under some circumstances, when the general CP presumption and the form of title presumptions collide the form of title presumption trumps the more general presumption.
Here the evidence at trial was largely undisputed. A year before the parties separated crooner Valli was experiencing medical problems and told Wife that he wanted to buy a policy on his own life to make sure he took care of his family in the event he might die. He wanted to ensure the kids could go to college and that "there would be enough money for everybody." At that time the parties had no plans to split up.
Accordingly, he bought the policy from his insurance agent. Husband's business manager told Wife that they intended to make her the owner, and Husband himself testified that he "put everything in [Wife's] name, figuring she would take care and give to the kids what they might having coming." His insurance agent testified at trial the policy was issued in Wife's name. Of interest, however, the policy itself was never introduced into evidence.
Hence, on appeal Wife urged that "the act of taking title to property in the name of one spouse during marriage with the consent of the other spouse effectively removes that property from the general community property presumption. In that situation, the property is presumably the separate property of the spouse in whose name title is taken." Since Husband had failed to introduce "clear and convincing" proof that overcame the title presumption, the equity in the policy belonged to her. Nothing required that proof of the form of title be through documentary evidence where there was sufficient indirect testimony that the policy was titled in Wife's name.
The Second Appellate District Court agreed. "Frankie did not present evidence of an agreement or understanding with Randy [the Wife] that when the policy was placed solely in Randys name as owner, they intended title to the policy to be other than Randy's separate property. (In re Marriage of Brooks, supra, 169 Cal.App.4th at p. 189.) Likewise, Frankie did not present evidence that he was unaware that title to the policy was taken solely in Randys name. That Frankie knew the policy was taken solely in Randy's name is supported by substantial evidence. Frankie testified that he
put everything in Randy's name, and Randy testified that Frankie and Siegel told her that
they were going to make [her] the owner' of the policy."
Husband also unsuccessfully argued that Family Code section 721 creates an additional presumption of undue influence where one party by taking title in their name solely gains an advantage over the other, and that given that presumption the EC section 662 super-presumption could not come into play. However, 721 applies in interspousal transactions and this was not a transaction between the two married persons but between one of them and the insurance agent. "Randy could not have owed a fiduciary duty to Frankie in a transaction in which she did not participate." Moreover, even if the presumption of undue influence did arise there was sufficient proof rebutting Husband's clear intention to make Wife the owner; Wife had no role in the transaction whatever.
Moreover, the justices noted that there was no evidence that the cash surrender value of the life insurance policy was intended to be a "savings device." Instead, Husband's intent at the policy inception was clear that it was for the benefit of the Wife.
Finally, they dismissed Husband's argument that there had not been a valid transmutation of the policy from community to Wife's separate property. "A 'transmutation' is an interspousal transaction or agreement that works to change the character of property the parties already own. By contrast, the initial acquisition of property from a third person does not constitute a transmutation and thus is not subject to the [Family Code section 852, subdivision (a)] transmutation requirements." Keep in mind that Husband had purchased the policy only 18 months before the parties separated. They had had a 20 year marriage. In order to amass $365,032 in policy equity over such a short period, the community had to have made quite substantial premium payments to fund it. Mr. Valli was 69 when he acquired the coverage, and the cost of the policy had to be exorbitant.
Normally one might reasonably think that the claim that the cash surrender value was now Wife's separate property would require proof of a transmutation from the community to separate property - this is what the trial court assumed to be the case when it found in favor of the Husband. However, Wife's counsel never claimed a transmutation, a wise strategic move.
While this outcome might, at least for Husband, seem unfair it illustrates that in the realm of community verses separate property, when form of title presumptions come into play, as a matter of public policy favoring the stability of financial transactions with third parties (and not just between the spouses alone), the manner in which title is taken controls unless rebutted by extremely compelling evidence. This is not intuitively or even rationally obvious. In California matrimonial law certain fictions may dictate the outcome. This decision is important for any lawyer or self-represented party where one asset acquired during marriage is a life insurance policy. Common sense, and even the expectations of people who are married until the day of separation comes, would seem to militate in favor of a different result.
In remanding the case to the trial court (i.e., sending it back with instructions to enter a new decision consistent with the appellate court's reasoning), the Valli opinion does "leave to the trial court any reallocation of assets or award of reimbursement in light of our holding." Presumably that reimbursement applies to premiums paid by Husband after the date of separation that increased the cash value of the life insurance policy, but does not form a basis for reimbursing what was paid before. Since the policy was acquired in 2003 but trial occurred five years later, this reimbursement is not insubstantial. Of course, Frankie is too old now to be able to acquire a new $3.75 million dollar policy and Wife will receive this money upon his passing if the policy remains in force.
Wife was represented by the divorce powerhouse Los Angeles law firm of Jaffe and Clemens and Husband's appellate team included the highly notable legal scholar Garrett C. Dailey.
Thurman W. Arnold, CFLS
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| December 19, 2010 |
| What Are TRACINGS In California DIVORCE Proceedings? Tossed Salad and Mixed Vegetables! |
| Posted By Thurman Arnold |
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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):
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!
Thurman W. Arnold III, CFLS
All Rights Reserved
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| October 22, 2010 |
| Are STOCK OPTIONS COMMUNITY PROPERTY? |
| Posted By Thurman Arnold, CFLS |
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Q. How are stock options treated if I decide to dissolve my domestic partnership?
A. Stock options are commonly used to attract or retain key employees with incentives outside the basic salary structure. Whether you are dissolving a marriage or a RDP (registered domestic partnership), valuing and dividing stock options can be tricky.
The simplest situation is where the stock options were earned before separation. In such cases they are clearly CP. But often there is a question of when these benefits were in fact "earned" because employee services that generate them are sometimes contributed over long periods. These may include a pre-marriage period (when time, skill, and efforts of either party are always SP) and they may extend for some time past the date of physical separation (and so be SP). The question when stock options were earned becomes quite fact specific and depends a lot on what the employer intended and what kind of options they are. In re Marriage of Hug (1984) 154 Cal.App.3d 780, 201 Cal.Rptr. 676.
Stock options that are earned during the marriage, but vest afterwards, generally belong to the community. They are treated as deferred compensation, like certain types of pensions. Usually an employee is granted the right to buy stock, now or in the future, at a fixed price. They may be forced to sell that stock back to the company if they leave. What controls whether the options are characterized as community or separate is when they are granted and when they vest. If they do not vest at all, as where a minimum number of years of service by the employee are required which is not met (even where the employee-spouse quits after separation and so blows them up), they are neither separate or community property - instead, they are not viewed as a property interest at all. In those cases they were a "mere expectancy" that never matured.
In cases where an employee must work for the company for a fixed number of years to be eligible, but the spouses or RDP's separate before those years have been served, the options have both community and SP attributes. To the extent that they result from post-separation efforts too, they must be apportioned between CP and SP. As with how interests in pensions are commonly evaluated, courts tend to follow a "time-rule". The time rule looks like this:
DOG to DOS
__________ X # of Shares Exercisable = C/P shares
DOG to DOV
DOG = Date of Grant
DOS = Date of Separation
DOV = Date of Vesting
Stock options that are granted after the DOS are usually treated as the separate property of the recipient, even where some of the employee's contributions occurred before. This is because of the importance of what the employer intended to the analysis.
This Blog is intended just to give you some sense of the law over these potentially complex questions. As with everything, different facts can lead to different outcomes and stock options are complicated financial devices.
Also, stock option disputes sometimes involve claims of fraud - as where a small closely held company or family business tries to funnel or manipulate how when the options are granted or vest in an effort to favor one spouse over another.
Perhaps the only practical way that a former spouse or partner may learn that stock options exist or when they vest or are exercised is by the self-disclosure of the employee. The law is clear that spouses and domestic partners are required by their fiduciary obligations to make these disclosures. Refusals to disclose can have severe consequences under
Family Code section 1101.
T. W. Arnold III
http://www.MindfulDivorces.com
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| October 11, 2010 |
| What does "COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP" Mean? |
| Posted By Thurman Arnold |
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Q. I am considering a divorce. I have found the deed to our home, and I see that the grant deed by which we took title is held like this "to Jim ... and Mary ..., husband and wife, as Community Property, with Right of Survivorship." What does this mean for me?
A. There are several very important consequences that flow from this language. The way is which title is held (or "form of title") is also called "vesting." Everything I say here applies to title for any form of property - bank or brokerage accounts, for instance, as well as any kind of real estate and the types of personal property for which we use title documents.
First, a "right of survivorship" means that if one party dies - but only before a final judgment of termination of the marriage of domestic partnership, or where a termination of marital status or partnership status occurs before the rest of the case is resolved in judgment form, the party that survives them inherits 100% of the dying party's share of the community property. It does not matter that there exist a Will or Estate document that purports to create a different transfer upon death. Where a right of survivorship exists there is no need to probate an estate in order to obtain full title - all that is required is that a Affidavit of Death of Joint Tenant be recorded with the County Recorder for the County where the real property is located. A Death Certificate must be attached to it. The transfer is then complete.
For other forms of property, as with jointly held bank accounts, the same results occur. However instead of recording an Affidavit of Death with the County Recorder's Office, a Certified Copy of the Death Certificate is simply provided to the banking institution. As a practical matter vehicle titles are different in the sense (a) they are filed with any DMV office in California and (b) the title language rarely references "community property" or 'rights of survivorship', and instead titles the property to Jim "and" "or" Mary. I will have to discuss the rules relating to inheritances and surviving widows and widowers in a different blog.
Second, if a party dies after a Final Judgment dissolving a marriage or domestic partnership, or after a "status termination" before final judgment, but title to the property has never been changed for whatever reason then there is no automatic right of survivorship - in legal effect, the survivorship rights were terminated (severed) upon the by operation of law as a consequence of the Status Termination.
Likewise, if a party to a divorce proceeding dies before the termination of status then the survivorship right controls (see below). Since people don't expect this, something lawyers call a "Blair warning" based upon a particular appellate decision is set forth in the Family Law Summons Form FL-110 that no one ever seems to actually read (hopefully your lawyer told you about it).
This is one reason by marital bifurcations can have unforseen consequences and should be taken seriously when another spouse in the course of a divorce seeks to terminate status before the entire case is resolved by Final Judgment.
Third, in California when property is vested in both parties as "CP with right of survivorship" it is the equivalent of a "joint tenancy." All the same rules apply. Thus, what we are speaking to applies whether the "CP with right of survivorship" language was used for more common "to Jim and Mary as Joint Tenants is used."
Fourth, there does not need to be any reference to whether the parties are "husband and wife" for these rules to apply. Non-married people can be joint tenants as to any form of real (land) or personal property and the death of one vests the remaining title in the other - however, since there will be no termination of marital status since there is no marriage (assuming no domestic partnership either), there is only one way to destroy the right of survivorship: By transferring at least one party's interest as a "joint tenant" to themselves as a "tenant in common". The transfer of tenant in common interests after death follow the rules of testacy (a will exists and directs who gets what) and intestacy (no will exists, and specific legal rules declare who gets one depending upon their familial relationship to the decedent.
Fifth, many lawyers and savvy unrepresented parties will destroy the right of survivorship before the termination of marital status through the method outlined directly above. It only requires one party to accomplish this and it does not require the other party's consent. This has risks, however, since if you destroy a joint tenancy interest prematurely and other spouse dies then you will not inherit their interest but you will of course inherit you own 50%. If you are a child of a parent married to a nonparent or estranged parent and wish to protect your inheritance rights for an ailing father or mother - and they want you to inherit - you should consult a lawyer to assist in destroying the right of survivorship in a legally enforceable way. Note that a termination of this survivorship right violates the automatic temporary restraining orders that arise at the moment that every California dissolution or legal separation proceeding is filed, and that special rules exist for terminating joint tenancies which - if ignored - may not only render the attempt transfer void but further subject you to contempt or other penalties including attorney fees for trying to sever it improperly. Family Code section 2040(b)(c).
Sixth, and most important for the average divorce and in answer to your question, important legal presumptions arise from the Form of Title that have a huge impact on whether property is considered as community or separate. Way simply put, title held as you describe will almost certainly be declared community property for purposes of divorce and each spouse will be entitled to an equal one-half equity interest. However, that outcome does not require the "community property" language to be present in order to apply - any form of title acquired in joint names (tenancies in common, joint tenancies, tenancies by the entirety) triggers the presumption. The relevant Family Code section here is 2581.
Seventh and last for this Blog article, title presumptions are a kind of "super presumption" under the law in the sense that generally in order to rebut (disprove) them, the evidence that you submit must be "clear and convincing." A garden variety presumption in comparison is the rule that property acquired during marriage in whatever form (including title) is presumed to belong to the community. Family Code section 760.
Although FC section 760 doesn't use the word "presumption" that is what it means, and this presumption is the ordinary "by a preponderance of the evidence" presumption - meaning 51% likely or better. Clearing and convincing can be considered as 75% or better - although that is a simplification. Take a look at FC section 2581(a) and (b).
Unfortunately, that is not the end of the analysis because even where property is titled jointly, a party who can trace separate property contributions to its acquisition or certain improvements to it can recover those (Family Code section 2640) if they can follow the money through written records in a legally sufficient way in the event of a divorce. In the event of a death, these reimbursements are extinguished. I discuss "tracings" on this Blog.
Different but similar rules apply to Living Trusts which are beyond the subject of today's Blog. I can see this is a good topic and "I'll be back."
T. Wesley Arnold
http://www.ThurmanArnold.com
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| September 24, 2010 |
| I Have Been Paying the MORTGAGE Since SEPARATION - Am I Entitled to WATTS CREDITS? |
| Posted By Thurman Arnold |
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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.
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| September 24, 2010 |
| My Ex Has Been EXCLUSIVELY USING Our RESIDENCE - Is There an EPSTEIN CREDIT For This? |
| Posted By Thurman Arnold |
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Q. I have been occupying the home after 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.
This situation involves at least three potential legal issues:
- 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.
T. W. Arnold III
http://www.DesertFamilyMediationServices.com
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| September 16, 2010 |
| How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation? |
| Posted By Thurman Arnold |
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Q. My Wife removed all the money from our joint savings account immediately before filing for divorce. Some of that money included an inheritance from my grandmother. What are my rights to recover any of it?
A. When there is a joint bank account in the names of parties who are married, their net contributions to the account is presumed under the law to be and remain their community funds. This applies regardless whether the deposit agreement with the institution describes them as married. Probate Code section 5305(a).
Affected "accounts" mean a contract for deposit of funds between a depositor and a financial institution and includes a checking or savings account, a certificate of deposit, share account, and similar arrangements. Probate Code section 5122(a).
However, this presumption can be rebutted - as in the case of your inheritance contributions to the account if you can meet your burden of proof by either of the following:
- 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.
Thurman W. Arnold III
www.DesertFamilyMediationServices.com
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| July 16, 2010 |
| DISCOVERY in California Marital Proceedings - What Are Requests for Admission? |
| Posted By Thurman Arnold |
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Q. How do I use Requests for Admission in my dissolution proceeding?
A. Requests for Admission ("RFA's") can be a useful discovery tool in family law proceedings because they allow parties in divorce and partnership litigation to resolve issues one way or another so that no evidence need be introduced at trial by asking the other party to admit or deny something. This typically involves establishing that certain documents are genuine (i.e., a prenuptial agreement entered into before marriage or a transfer deed or promissory note or copies of documents where original are missing or destroyed). Once this document is admitted as genuine, no further foundational evidence needs to be offered to admit the item into evidence. Other uses include establishing that certain property belongs to the community estate, or that it is one party's separate property. In such situations no further evidence need be offered on the subject issue at any later hearing in order for the Family Court to take what was admitted to be established fact. Once something is established in this way, no contradicting evidence can be introduced to disprove it.
Requests for Admission are governed by California Code of Civil Procedure section 2033.010 and the statutes that follow with that code. We have provided some of the more important ones on our Family Code Statutes page.
You are entitled to ask a total of 35 RFA's as a matter of right. But you can ask as many as you need, as long as they are requested for a proper purpose, relevant, not overly burdensome, and you also have executed and supplied the Declaration for Additional Discovery required by CCP § 2033.050.
There is a Judicial Council form that you can use for RFA's, but it is not required. I will upload and link to that form shortly. I also intend to provide my own form that you can modify for your use on our California Family Law Form Library page.
Another important use for Admission's Requests is that you can combine them with Civil Form Interrogatories, Number 17.1, which requires the responding party to state all facts and evidence that they know of, and other relevant information, for each RFA which they refuse to admit. This can flesh out claims and defenses of the other party that you may be wondering about, and the evidence and witnesses which the other party claims will support them. The answers to these form interrogatories may also establish that a denial of an otherwise undisputed fact, or genuine document, was not in good faith.
One of the chief benefits of RFA's beyond putting to rest matters that are really not issues (and hence saving the time and money to otherwise prove or disprove them), is that a failure to admit them in good faith gives the Court discretion to award the asking party their legal expenses and costs in producing evidence on those same issues if the Court later decides at trial that they were not reasonably in dispute.
As with some other types of discovery (interrogatories and production requests) the responding party has thirty days to answer (plus five more if you serve them by mail). Make sure you always provide a proof of service signed by a nonparty with any type of discovery you serve.
If the other party fails to respond to your Requests for Admission, you are entitled to file a motion that the requests be deemed admitted. Other sanctions might be available, like a court finding no evidence challenging the proposed undisputed items may be offered by the other side in later proceedings.
The subject of objections to discovery is a complicated one for another day. Check our search engine to see if I 've written about it by the time you've landed here.
TWA
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| June 12, 2010 |
| Does MOORE MARSDEN appy to IMPROVEMENTS we made to our RESIDENCE during marriage? |
| Posted By Thurman Arnold |
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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.
Thurman Arnold
http://www.ThurmanArnold.com
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| April 07, 2010 |
| When I get MARRIED, how do I avoid my husband's DEBT? |
| Posted By Thurman Arnold |
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Q. If I marry is it possible to avoid any of my fiance's debt liability?
A. Yes. First, your separate property doesn't become liable for a spouse's premarital debt simply by marrying. But community property as it comes into being does.
Secondly, to the extent you or your spouse will incur debt during marriage, prior to marriage both can agree to eliminate or restrict the creation of community property as between you. This is accomplished through a prenuptial or premarital agreement. Essentially you agree to restrict or eliminate the creation of community property in the first instance, since that will remain liable for debts incurred prior to (with some exceptions) and during the marriage, and so you can ensure that your separate property remains protected.
None of this applies to debts you jointly incur - the joint credit card, the jointly purchased car, or the jointly refinanced home. This is why creditors try to insist that both spouses sign loans.
But you can modify your behavior in order to protect yourself by not signing. It is possible to enter a post-nuptial agreement which achieves substantially the same thing, although it won't necessarily change the character of debt incurred prior to its signing but it may nonetheless eliminate future community debt by eliminating community property. Remember, as between the two of you, you cannot affect third party's rights who are not parties to your post marital agreement, and to do so may be considered a fraud upon creditors which means the agreement may be set aside and voided.
Thurman W. Arnold III
Desert Cities Divorce |
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| April 07, 2010 |
| Am I LIABLE for my husband's NURSING HOME DEBT? |
| Posted By Thurman Arnold |
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Q. Am I liable for my husband's nursing home bills?
A. Yes, under most circumstances.
Community and both spouse's separate property is liable for the other spouse's "necessaries of life" while the spouses are living together, and even when they are living separately - unless they are living separately by agreement within the meaning of
Family Code section 4302. If this occurs at a time when there is no community property but the other spouse does have separate property, there is a right of reimbursement for a period of time (i.e., if the other spouse dies there is a time limit on seeking reimbursement).
Note that spouses each owe a duty to support the other out of their own separate property if there is no community property. Family Code section 4301.
"Necessaries of life" include food, shelter, clothing, and the expenses of a final illness.
Thurman W. Arnold III |
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| April 07, 2010 |
| Am I LIABLE for my husband's GAMBLING DEBTS? |
| Posted By Thurman Arnold |
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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 |
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| January 18, 2010 |
| If my Wife and I are separated, do I have to pay the CREDIT CARDS she ran up after leaving? |
| Posted By Thurman Arnold |
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Q. My Wife and I are separated. Am I liable for her debts she incurs once we split up?
A. If you are a co-signor on, for instance, a credit card account you are also liable to the credit card company. The fact of divorce or separation does not itself alter your obligations with third parties (since they are not allowed to participate in the divorce and they would be prejudiced s if you could unilaterally disavow liability because of divorce).
As between you and spouse, you may or may not be obligated for one-half the debt depending on when the other spouse incurred it - if after separation, generally speaking they owe it. If the debt was incurred before separation, sometimes the debt will be assigned to one party without offset depending upon what it was for and whether they have the use of that property that the debt acquired - for instance, the furniture charged on the credit card or those car lease payments. Family Code section 910(b). Keep in mind, however, that if you move back in together (reconcile) you may lose these protections. The surest way to establish that a separation has in fact occurred is through filing a proceeding or Judgment for Dissolution or Legal Separation, although separations are suspect where parties continue to live under the same roof.
The Court does have the power under Family Code section 2623 to divide post-separation debts for "necessaries of life of either spouse or the necessaries of life of the children of the marriage" as between the parties "according to the parties' respective needs and abilities to pay at the time the debt was incurred." This is a discretionary call for the judge, and generally debt is assigned to the party who incurs it - particularly if that party is already receiving court ordered or even voluntary child or spousal support. If the post-separation debt is not for a "necessary of life" it will assigned to the spouse who incurred the debt.
Once your divorce is final or a decree of legal separation has been entered, each spouse is solely liable for all debts incurred thereafter, including necessaries. A Judgment or Marital Termination Agreement is going to assign the debt existing as of that date as between the parties.
TWA
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| January 18, 2010 |
| Am I LIABLE for my spouse's PREMARITAL DEBT? |
| Posted By Thurman Arnold |
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Q. Am I liable for myspouse's pre-marital debt?
A. Yes, and no. Whether you are liable for debts of your spouse depends on what kind of property exists and is available to satisfy a debt. Community property is liable and therefore available to pay a debt either spouse incurs before marriage and during marriage, regardless which spouse controls that property. Family Code section 910. Community property is all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California. Family Code section 760.
Your separate property is generally not liable for a debt incurred by the other spouse before or during the marriage (your separate property is always liable for your own debts, regardless when incurred). Family Code section 913(b)(1). Separate property is all property you own before marriage and all property you acquire during marriage by gift or inheritance. Family Code section 770. Separate property also includes the rents, profits, and issues from your separate property (i.e., passive separate property increases) and "earnings and accumulations" while you are living apart. An exception to this rule limiting your separate property liability concerns "necessaries of life". Your separate property is liable for these necessaries (food, clothing, shelter, medical) for your spouse even if you are living apart, unless you are living apart under a written agreement that includes a provision for support.
It sometimes happens that a creditor manages to levy against the nondebtor spouse's separate property; if that occurs, the innocent spouse has a reimbursement claim against the community property estate, or, if there is no such estate then against the other spouse's separate property. This reimbursement right must be asserted, as mentioned below, or it evaporates. Also, if you consent to the payment from your separate property you may have made a gift of it for the benefit of the other spouse. Consent would include writing or signing the check to pay the debt from your separate property account. We are not talking here about using separate assets to acquire community property (as in making a mortgage payment); a difficult set of rules apply where property is being "acquired during marriage" which include reimbursement rights.
In order to be mostly protected you need to keep your separate property separate. If you commingle it with the other party's separate property, or with the community, a creditor cannot be expected to know what is yours verses what is both of yours. This separation of finances is always a good idea, and not just for debt purposes. As between you and your spouse if you commingle monies then you may have a right of reimbursement if you can trace the flow of funds.
The rules and consequences differ depending on whether we are talking about you versus a creditor, or you versus the spouse. Q. Is there a time limit on exercising my reimbursement rights?A. You have to seek reimbursement on the earlier date of (a) within 3 years of when you actually know your property was applied to satisfy the other spouse's debt or (b) during a pending dissolution or legal separation proceeding. Family Code section 920(c). Otherwise, reimbursement under these code sections is waived. Depending upon the facts, you may still have a breach of fiduciary duty claim against your spouse that survives up to the point of the dissolution.
Divorce Attorney Thurman W. Arnold III
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| January 17, 2010 |
| Why is the date of PHYSICAL SEPARATION legally important? |
| Posted By Thurman Arnold |
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Q. Why is the idea of 'physical separation' important in California?
A. The idea of "physical separation" is one of the most important concepts to California law. If you think that the presumption that all property acquired during marriage is significant, the notion of physical separation is every bit if not more important. This appears to be one of the best kept secrets of California family law.
Physical separation is the date that the marriage ends, for most practical purposes. The date of physical separation is the date that community property ceases to accumulate. Family Code section 771 states "The earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, while living separate and apart from the other spouse, are the separate property of the spouse."
Once spouses separate, all their earnings and everything that is acquired with those earnings are separate property of each spouse, respectively.
Similarly, upon separation each spouse is no longer liable for the debts of the other spouse. The community estate is liable for a debt incurred by either spouse "during marriage". During marriage "does not include the period during which the spouses are living separate and apart before a judgment of dissolution ... or legal separation...." FC section 910. An exception exists as to "necessaries" except to the extent that the parties are living separate by agreement and whether or not support is stipulated by that agreement. FC section 4302.
Separation is of critical importance to the expanding interpretation and growing field of the law of fiduciary duties. The duty of confidentiality that arises because of the marital relationship by legislative fiat ( Family Code section 721) and which gives rise to major exposure for the conduct of spouses with regard to property and money, ceases at separation - meaning spouses no longer have the expectation and right of relying upon one another as trusted partners. Fiduciary duties continue pursuant to FC sections 1100 et seq. and sections 2100 et seq. as to assets that already exist, or can be considered marital opportunities arising after separation, until the time each asset in question is divided by agreement or court adjudication. Fiduciary duties are land mines. A good example of the consequences for breach of fiduciary duty is the Rossi case, where a wife who won the lottery and then filed for divorce the next day claiming she and her husband had already separated. She fails to list the lottery winnings in her paperwork, and refused to disclose it to the husband later claiming, among other things, that she had been a victim of domestic violence. Because the husband had no idea about the lottery winnings, he did not dispute the divorce or wife's asserted date of separation until much later when one day he received a letter intended for the wife by a company offering to buy out the winnings. He called the State Lottery Board, and then filed a motion to set aside the divorce degree and for damages for wife's fraud and breach of fiduciary duty. The court ordered the wife to disgorge all her winnings (100%) and pay them over to the husband.
The separation date is crucial to understanding reimbursement claims relating to payment on joint and separate debts, or in fixing rights to real property. For instance, California law provides that the community has an interest in the appreciation of a residence which is owned, meaning title is held, in one spouse's name alone where principal on a mortgage is being paid down. This is called the Moore-Marsden approach to equitable reimbursement. If the house appreciates after separation, the titled spouse may want to argue that all that appreciation belongs to them. Date of separation becomes important to the date of valuing the real estate and determining the relative principal loan amounts.
It is crucial where businesses are involved, regardless whether they are corporations, mom and pop shops, or sole proprietorships. For instance, what happens when a spouse who controls or who is the business, which was established before or during the marriage, continues to derive income from it after the parties separate? Maybe the business goes up in value. Perhaps it goes down in value through market factors, or maybe even the spouse intentionally drives it into the ground in order to reduce the amount that will be ordered to buy out the other spouse's interest. In all these situations a date of separation determination is crucial.
Another common area where it comes up in with regard to pensions, whether they be defined benefit plans or contributive benefit plans. Whatever accrues to the spouse who holds the pension by way of his post-separation contributions belongs to them.
Date of separation is also critical to determining the length of the marriage for purposes of spousal support or alimony rights. It is a snapshot in time with huge ramifications, including how long a spousal support obligation may continue and when it might be terminated.
It is critical that you hire an attorney who understands how to litigate and present the facts of physical separation.
Thurman W. Arnold III,
California Divorce Lawyer
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| January 17, 2010 |
| What Is a LEGAL SEPARATION in California? |
| Posted By Thurman Arnold |
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Q. What is meant by separation in California?
A. There are two contexts in which the word separation is used in divorce and family law in California: (1) Legal Separation and (2) physical separation. Both are important, but in practice the concept of physical separation has a far huger impact on people's lives.
A Decree of Legal Separation in California is identical for all purposes to a Decree of Dissolution of marriage, with one critical distinction: A judgment for legal separation leaves the marriage (and the marital "bonds") intact. The parties remain married, and so neither can remarry. But for all other purposes, the marriage is effectively dissolved.
There are religious and personal reasons why two people might want to do this, and there are some practical reasons involving most notably health insurance but sometimes job related benefits why two married persons might choose this over divorce.
A decree of legal separation cuts off the creation of community property thereafter, which includes liability for community debts as well. It is possible to divide all property between the parties, to fix all rights and entitlements to spousal support, and to deal with custody, visitation, and child support issues, and yet remain legally married. It requires the consent of both parties, because if either party objects to a legal separation or seeks a dissolution instead, a Judgment of Legal Separation cannot be granted. Even if the parties are in agreement concerning a legal separation, neither is precluded from later seeking to terminate marital status through a subsequent dissolution action. If the parties have reached a legal separation agreement, or if the Court enters a Judgment of Legal Separation, a subsequent action does not undo any of that.
This is a fairly unusual outcome. In my substantial experience, very few parties have been in agreement on this way of resolving their joint affairs and it doesn't usually make sense unless there are unique health, insurance, or religious or familial reasons for not dissolving the marriage.
TWA |
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| January 17, 2010 |
| What are interspousal FIDUCIARY DUTIES? |
| Posted By Thurman Arnold |
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Q. I keep hearing the phrase "interspousal fiduciary duties". What does it mean?
A. Few areas of California divorce and family law is changing as rapidly, or is having as great an impact upon property division and support obligations, as is interspousal fiduciary duties.
Until the mid-1970s lesser "good faith" standards were imposed upon married persons which had consequences to usually only in extreme situations of self-dealing by one spouse or domestic partner. These standards have since morphed into much higher level "confidential duty" and "fiduciary duty" standards.
On January 1, 1994 Family Code section 721 became operative. That was revolutionary, but widely not understand, for the next 10 years. Section 721 has since been revised, extended, and expanded by statutory amendments and judicial decisions, and this continues.
The penalties for violating a fiduciary duty can be severe. Many attorneys, and some judges, are behind the curve in understanding the nuances of the obligations imposed by FC section 721 and related statutes. This ignorance places clients at financial risk in the course of dissolution or legal separation litigation. Indeed, it opens the door to the litigation continuing or re-emerging long after Judgment if breaches of fiduciary duty are discovered or alleged downstream. Having a lawyer who understands this developing area of the law will make or break some litigants, today and for years to come.
Fiduciary duty rules help to balance economic power in marriage and divorce. One reason people roll our eyes when the topic of "divorce" comes up is who doesn't know someone who out cheated, or got cheated by the other spouse, in matters of support or property division? There are lawyers who pander to clients who want to cheat their spouse or domestic partner. Americans share a cultural mythology that these attorneys charge the highest fees and if they can out-cheat the other spouse and their attorney, they deserve them.
The accountability that the law of fiduciary duties add to the dissolution mix is a useful tool for combating marriage fraud by the other spouse. If society favors the party with more money or power over the weaker party, it will become increasingly unglued.
Fiduciary Duties Described
In financial and property transactions with third parties and each other, spouses owe one another important statutory duties that create huge responsibilities and pitfalls. As between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other. "This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other." Family Code section 721(b).
The essence of the "fiduciary relationship" is that the parties are treated under the law as though they do not deal with each other on equal terms because one person (typically the managing spouse) in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert influence over the dependent party. A presumption of undue influence arises whenever either party benefits from the transaction over the other, however innocuous the circumstances may seem. Breach of fiduciary duty is to some extent a strict liability offense, meaning if it occurs consequences may be set in motion that run the course to an expensive end.
In 2002 Family Code section 721 was amended to expand this confidential fiduciary relationship and impose the same rights and duties as applies to nonmarital business partners under the California Corporations Code, and includes but is not limited to:
(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying;
(2) Rendering upon request true and full information of all things affecting any transaction which concerns the community property.
(3) Accounting to the spouse, and holding as trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property (i.e., all property acquired by a married person during the marriage).
While Section 721 does not mention Registered Domestic Partners, it applies to them as well.
One major consequence is that transactions which benefit only one spouse may be set aside by the other, either before or during a divorce proceedings.
As a practical matter for divorcing couples, this means:
a) If one party has benefited over the other in a transaction involving money or property and thereby gained an advantage during the course of the marriage, the law presumes the advantage was gained through undue influence exerted on the part of the benefited party, and the transaction is presumed invalid and can be set-aside;
b) The burden of convincing a Court that a set-aside should not occur then shifts to the advantaged spouse;
c) All this can occur without regard to good or bad intent on the part of the advantaged spouse (i.e., actually intending to defraud as opposed to merely being sloppy). Either way the law declares the transaction to be the result of "constructive fraud". Once the Court finds constructive fraud the transactions can be set aside, the benefited party can be ordered to pay restitution to the other and to disgorge any profits they alone received, title may be reformed to include both parties' names, or the property may be held in trust for both on a present and go-forward basis rather than in the name of the one alone. If there is an actual fraudulent intent, the remedies to the injured spouse are more severe.
The fact that parties have separated or that a dissolution or legal separation is pending does not end the parties' fiduciary responsibilities. Family Code section 1100(e) continues those same duties "until such time as the assets and liabilities have been divided by the parties or by a court."
Remedies for breach of the fiduciary duty as described in Family Code section 721, and section 1100, include an amount equal to one-half of the value of any asset undisclosed or transferred in breach of fiduciary duty, plus attorneys fees. This includes inadvertent or unintentional violations. Family Code section 1101(g). Where a court comes to believe a spouse acted intentionally to defraud the other spouse, the Court "shall" award 100% of the value of what should have been disclosed, or what should not have been transferred, to the innocent spouse! FC section 1101(h).
If you have a business, or investments in real estate or simply a family residence, and certain transactions have occurred, you may have a problem. If you are a dependent spouse, regardless whether the other party intended to cheat you, you may have important entitlements and remedies.
This is one of the most complicated, emerging areas of California family law. Do not go it alone! In every dissolution and legal separation case, regardless whether either party has an attorney, each party must exchange a Preliminary Declaration of Disclosure, and unless expressly waived, a Final Declaration of Disclosure. If these documents contain errors, misinformation, or are incomplete the consequences can be financially devastating because an entire settlement or judgment may later be set aside. These documents sit as leverage tools and landmines for years to come.
TWA
http://www.ThurmanArnold.com
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| January 07, 2010 |
| My wife she used her INHERITANCE to buy our home. We are getting divorced. |
| Posted By Thurman Arnold, III |
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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?
A. Because I need more information and the answer to some questions and then to follow up questions, I can only give you a generalized response.
So long as your wife can trace the portion of her downpayment contribution to the inheritance, she is entitled to a Family Code section 2640 reimbursement in the amount that she proves by this tracing. She is not entitled to interest on grandma's gift to her, however, but only the principal. However, this assumes that the downpayment contribution always remained separate from any other money or bank assets that you had an interest in, or that the community had an interest in: If the inheritance monies were commingled with joint monies or your separate funds between the date she received them and the date they were used as part of the purchase price for the home, then a further tracing is required to establish that what money in the account at that time was her separate and what amount was something else.
Here is Blog that discusses tracing principles in more detail.
You don't report whether you were on title to the residence when escrow closed or at any later time. Whether or not you were on title when the property was purchased, it is presumed to be community property UNLESS you (a) deeded off when escrow closed or deeded off since that time or (b) consented to or are deemed to have consented to your Wife being the sole record title holder if at the close of escrow title issued in her name.
If you were on title at close of escrow and to the present day, the answer is easy - your Wife gets her traced inheritance money first, off the top, from any equity in the home. She does not get interest on the money. The remaining net equity, without other facts, belongs to the community so that each of you is entitled to one-half of what remains.
If you were not on title when escrow closed, and if you cannot rebut by clear and convincing evidence the legal presumption set forth in Evidence Code section 662 (based upon form of taking title in her name alone) that you consented to that outcome, then (a) your Wife still gets her downpayment back and (b) the community estate is entitled to be reimbursed for carrying the mortgage all those years and reducing the principal balance due the mortgage holder. It doesn't matter who paid the mortgage, so long as it was paid from community earnings during the marriage.
There is a very important reimbursement concept under California Law known as Moore-Marsden apportionment. It applies to a common situation where a home is acquired before marriage (or during marriage as separate property), title is in the name of the acquiring spouse alone, and during the marriage and up to separation or divorce and there is or was a mortgage that was paid during the marriage.
Where this occurs the community estate acquires a legal, reimbursable, interest in what would be otherwise be entirely the separate property of the titled spouse IF community funds (earnings of either spouse, for instance, or both) are used to make the mortgage payments. The idea is that joint funds are being used to benefit a separate property interest, i.e., the separate property equity. Many legal scholars consider this to be a breach of fiduciary duty - that whenever one or the other spouse's separate property interests are increased with community funds, or community time, skill, and efforts of either spouse during the marriage, the community is disadvantaged and that this disadvantage violates the statutory duties of the parties that place the party's joint interests above their separate interests.
The formula for apportionment is that the community acquires a pro tanto (dollar for dollar) interest in the ratio that principal payments on the purchase price made with community property bear to payments made with separate property. Hence, any increase in value (appreciation) must be apportioned accordingly between the separate property and the community property estates upon separation or dissolution.
Note that this only applies to separate property owned prior to marriage with a mortgage that was paid during marriage where an equity position has been increased. For instance, if a mortgage exists but it is an interest only, payments during marriage do not reduce principal. Therefore, the separate interest of the owner spouse is not improved because the debt remains exactly the same. As a general rule, the amounts paid for interest, taxes, and insurance on the house are disregarded since that portion does not to contribute to the capital investment.
Also, it assumes that the mortgage was paid with joint (community) funds, or that the funds used were so commingled that the "separatizer" is unable to trace them to a separate property source (meaning they don't have records showing where each payment was made or are unable to provide a recapitalization of the source of the funds). If your husband reduced the mortgage throughout the marriage but he did it with an account that was his separate property then the community would not have this reimbursement right.
The Moore Marsden formula requires a number of bits of information at important points in time to be properly calculated. These include: a) what was the original purchase price; b) what was the original mortgage and downpayment; c) what was the property worth at the date of marriage (DOM); d) what was owed to the lender at that time; e) what was the property worth at the date of separation; f) what was owed at that time; g) what is the property worth on the date of the calculation (i.e., the trial date); h) and what is the principal pay-off at that time?
This is agood example of why family law and divorce cases can become quite expensive. Obtaining these records, particularly if you are the 'out spouse' can be difficult, and sometimes a forensic accountant is the best option for calculating these apportionments. Find a local CPA with family law experience to help you trace the funds. You need an experienced family law attorney for these types of matters as well.
In your case, with a lengthy marriage and little owing, you have significant Moore Marsden entitlements.
T.W. Arnold |
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