California Family Law Attorney
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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

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?

Art, Anza Borrego, CA


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)

What Are 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 mortgage 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 gardener and a pool man 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 transactions. 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 gardener and pool man 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 common 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 discretion 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 bluffing, 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.

Author: Thurman W. Arnold




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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

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 Epstein's - the next blog deals specifically 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 by crediting them on the community property 'balance sheet' for their contribution of post-separation earnings, or other separate funds (loans from parents or inheritances), made 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 spouse pays after. Epstein's don't apply to new debt on an old credit card account that was run up after separation. Depending upon the parties' financial circumstances, it therefore can make the "date of separation" a more important disputed issue than elsewise. This rule is not limited to credit cards but applies to almost any class of debt.

Courts may be unwilling to order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement. In almost any conversation you might have with an opposing lawyer, they will back down on demanding the offset UNLESS you derived some beneficial use from it.

If there was an agreement that a party would not be reimbursed for these payments, or if the paying spouse intended the payment as a gift, or if the payment is made on account of a debt for an asset that the paying spouse was or is exclusively enjoying, and the amount was not substantially in excess of the value of that use, the Court may decline to order reimbursement.

This idea of the value of use of some item of property that was acquired through a debt that continues to exist after the date of 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. Few family court judges will want to hear testimony about what the portions were that were paid towards interest after the DOS, as opposed to principal, on the debt. You are pretty much stuck with the principal amount due at separation as the credit you can claim, even if principal plus interest for monthly payments over that time period amounts to more - at least unless these relative numbers are large. This creates unfair results in cases that take years to resolve, but arguably the parties should have moved the case to conclusion sooner.

So, Epstein's are almost always granted as to post-separation payments for expenses, for 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 Epstein's 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 pool man or gardener as well.

Please continue on to the next blog for detailed information 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 egregious. 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 of 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 between 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.



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May 11, 2010
  What are EPSTEIN REIMBURSEMENTS?
Posted By Thurman Arnold

Q. My wife and I are getting our divorce with the assistance of a paralegal. That person has prepared a Marital Settlement Agreement. The paralegal says she cannot give us legal advice. There is a phrase in the agreement that says something about each of us waiving Epstein reimbursements. I have no idea what this means.


"Epstein reimbursements" deal with the question: "How do we divide debts that we incurred during the marriage, where one of us made payments after we separated and up to the time of divorce?" The best family lawyers know the answer - but most don't.

A common situation is that parties have credit card debt that needs to be divided in the divorce. Say there was a balance of $10,000 owing to American Express on December 31st, the day before your wife drank too much at the office New Year's celebration and had an unfortunate tryst with her boss - this isn't the first time this has happened, and your New Year's resolution is to move out (sorry, I am just trying to be colorful), and so you do move out the next day. Her reaction is to file for divorce, because her boss looks way more interesting to her than you do these days.

Under this example January 1 is your date of separation. From the date of separation on, the earnings of either spouse are no longer community property, or joint earnings, but instead these earnings belong to each of you separately. Family Code section 771.

Often where a credit card is in the name of one person alone, the other spouse or domestic partner doesn't contribute to the payments after separation - sometimes because they won't and sometimes because they can't. But as between the two of you, the $10,000 is jointly owed to American Express, even if the other spouse did not sign the credit card application or is not named on the card, or on the statement. This is also true whether or not both parties directly benefited from the use of the credit card - for instance, maybe the $10,000 was charged by your wife to buy shoes over the course of the past year to help make herself feel better about the fact that you never have intimate conversations with her any more (or for any other reason), or perhaps you charged the card to add more chrome to your Harley Davidson Fat-Boy because your hairline is receding.

If the card is not paid, American Express can pursue collection either against the spouse who is the account holder, or against the community property of both spouses. Family Code section 910. If the credit card is in your name alone, it will be your credit that might be ruined if the monthly installments are missed.

Now again, as between you and your wife, the general rule is that each of you owe one-half of the credit card debt which means that all other things being equal, in a property settlement or if a Judge is forced to divide your property and estate, if one party is assigned 100% of the debt the other owes a reimbursement of $5,000. Lawyers and Judges speak of assigning the debt to one party or the other on the "marital balance sheet" which implies a corresponding credit or right of set-off against the division of some other item of property.


Circumstances When Not Entitled to Epsteins

There are, of course, exceptions. These exceptions frequently include (a) situations where a debt was incurred in breach of a fiduciary obligation owing the community estate or to the other spouse and (b) where one party retains the benefit of the property that the credit card was used to acquire (believe it or not, I am frequently asked about breast augmentations or other cosmetic surgeries - except in extreme cases, courts do not charge one party for these). For example, if when you learned of your wife's affair your reaction included flying to Las Vegas and having a wild weekend and you recklessly charged the $10,000 at the casino, this might be considered a breach of fiduciary duty and result in the entire $10,000 being your responsibility even though the two of you had yet to physically separate. Or, if instead you spent the $10,000 buying more chrome for your Harley and you expect to keep it in the divorce, then even though the $10,000 was otherwise a community obligation equitable considerations may result in the debt being assigned to you. If in the divorce the two of you decide to sell the Harley but the chrome you spent $10,000 buying adds only $2,000 in value to the sale's price, in that case the $10,000 remains a joint obligation because you neither breached a fiduciary duty nor retained a sufficient benefit that the law would charge you for it and the asset is being divided. Another common situation is where one spouse retains the furniture or refrigerator charged at Lowe's - in that case more of the debt may be assigned to that party.

Assuming you continue to make monthly payments of principal and interest on the credit card up to the point of dividing the debt in a marital settlement agreement (MSA), or if a judge makes the call for you both after a trial, as a general proposition your wife owes you one-half of all those payments. These are called Epstein credits or Epstein reimbursements in California, and many other community property states have similar rules. These are also called equitable reimbursements, meaning that the right to be reimbursed is not absolute and certain but that the court has wide discretion to grant the reimbursement or not depending upon fairness. Typically California family law courts do grant the reimbursement so long as the parties benefited equally (or the money was equally wasted).

The principle in California was first set forth in the case of Marriage of Epstein (1979) 24 Cal.3d 76. It is to be distinguished from the rule that the debt itself, if community, must be divided equally between parties in divorce. Family Code § 2550. It covers reimbursements rights that accrue between physical separation and the date of ultimate division of the liability.

So, the agreement the paralegal has prepared includes an agreement each of you is giving up any right to be reimbursed for debt related payments made after separation. You are not being asked to waive your credit for $5,000 if the $10,000 debt is assigned to you (unless there is a separate provision assigning the credit card balance to you completely). You are being asked to waive all the debt maintenance up to this point. It is not an unusual clause in an MSA, but it may or may not be in your best interests to agree to it.

Epstein credits take a variety of forms, and are not limited to credit card debt. The Epstein case itself involved a husband who voluntarily made the mortgage, insurance, and tax payments on the family residence during the separation period. Wife and their son occupied the home. Up to that point the law was that if one party used separate property (earnings after separation) to pay community debt (the mortgage, etc., on the residence), there was a presumption that this was intended to be a gift to the community unless an agreement could be proved that it was not to be a gift.

Each party may have separate Epstein claims as to different items of debt.

Upon separating, it is a smart idea to get and keep copies of credit card statements and statements for all liability accounts as of the date of separation. From an accounting point of view, the date of separation is a critical snapshot of a point in time. It is essential that the parties maintain these records as proof of what the numbers were, and of what payments were made afterwards.

Whether or not you should waive the Epstein reimbursements that might be owing you is part of the give and take of negotiating a divorce settlement. These are usually simple accounting issues, but not always.

If your Wife gets an attorney that attorney might try to convince you to waive the Espteins, or hope that you don't understand the concept or have it independently explained to you. In my experience where we are speaking in terms of vanilla debt (meaning there is no questionable conduct and the charges were incurred in the normal course), your wife's lawyer would also agree that you are entitled to these reimbursements without a fight if you know enough to insist.

There is an important flip side and hybrid of the Epstein reimbursement concept - that of Watts charges and credits. The deal generally with who pays for the beneficial use of community property (i.e., the home) during the separation period, once the divorce is finalized.

To learn more about Epstein reimbursements in California divorces, visit us here!

I address Watts issues separately.

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Author: Thurman W. Arnold


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