California Family Law Attorney
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December 19, 2010
  What Are TRACINGS In California DIVORCE Proceedings? Tossed Salad and Mixed Vegetables!
Posted By Thurman Arnold

Q. My attorney has used the word "tracings" several times when talking about how to figure out my community interest in property in my divorce, and I really don't understand how this works. Can you give me a simple explanation?

A. Simple - unlikely. But here's a thorough explanation!

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

These include:

  • Determining the community verses separate property attributes of an asset that was acquired with funds contributed during marriage that were a combination of each (CP and SP). This is called "characterization" - does the asset belong in whole or in part to the community estate, or to one party's separate estate, or both in different degrees? The community component is sometimes earnings that were used to pay down secured debt each month when, for instance, a mortgage principal payment is made for a separate property asset (a Moore-Marsden situation). It can include one time downpayments from joint bank accounts that contain community income or earnings (or separate property accounts that may have been commingled with joint funds or not or community property accounts that include separate property components) further complicated in the case of a refinance, and more.
  • It is extremely common that a community property asset (acquired during marriage, possibly but not necessarily in joint names), or improvements to it, traces partly or 100% to a separate property source. Many parents 'gift' their child part or all of the downpayment for the couple's first home. Or, a separate property asset (acquired during marriage but titled in one spouse's name alone - usually seen with real estate) may be purchased using joint funds. In either event there is a tracing right of reimbursement per Family Code section 2640 to the respective community or separate property interests that bought it, in the event of a dissolution or legal separation. FC §2640 is in the top five of all California property division statutes and is critical for an understanding of what your legal interests are if either spouse has any colorable claims to separate property used during marriage. Many middle income and high asset property division cases are a puzzle map of assets that are not what they seem at first glance.
  • There are a number of situations where reimbursement claims arise from the payment of joint or separate debts using money that the other spouse had an interest in (whether community funds or separate). Under limited situations there may be a right for the community, or the other spouse's separate property, to be reimbursed, but you will be required to trace these funds to claim them.
  • Often intended or unintended transmutations have occurred. Family Code section 852 is the chief transmutation statute, and another of the top five California dissolution property statutes. Transmutations involve a change in the character of property, from community to separate or from separate to community or separate to the other party's separate property. These commonly require tracings in order to establish the FC § 2640 interest. For instance, husband and wife own a residence together in joint names. It was purchased during marriage. But there is need for a refinance, and one spouse's credit is bad. The parties agree that husband will borrow the money, and the lender requires that wife sign a quitclaim deed before escrow can close. Husband assures wife 'not to worry.' Wife signs the transfer deed and doesn't seek legal advice. She has unwittingly transmuted her community interest to husband's separate property. Years later the property has appreciated. What is Wife's interest? (Breach of fiduciary duty questions have to be the subject of a separate Blog but, again, please try our search engine for more information!)

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

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

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

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

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

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

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

Direct Tracing

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

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

  • Whether separate funds continue to be on deposit; and

  • Whether the drawer intended to withdraw separate funds.

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

Tracing Through Family Expenses

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

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

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

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

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

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

Thurman W. Arnold III

Continue reading "What Are TRACINGS In California DIVORCE Proceedings? Tossed Salad and Mixed Vegetables!" »

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September 24, 2010
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.

Continue reading "My Ex Has Been EXCLUSIVELY USING Our RESIDENCE - Is There an EPSTEIN CREDIT For This?" »

September 16, 2010
  How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation?
Posted By Thurman Arnold

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.

T.W. Arnold

Continue reading "How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation?" »

September 14, 2010
Posted By Thurman Arnold

Q. My husband completed his training as a doctor after we married. He incurred substantial educational loans which we paid off during the marriage. What rights to I have for recovering those costs?

The community estate is supposed to be reimbursed for community contributions to education or trainingof a spouse that substantially enhances that person's earning capacity. The amount reimbursed must include interest at the legal rate, accruing from the end of the calendar year in which the contributions were made. FC section 2641(b)(1); see FC section 2627.

Reimbursement is not appropriate in the following circumstances:

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

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

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

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

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

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

Author: T.W. Arnold

Continue reading "How do CALIFORNIA COURTS divide EDUCATION LOANS?" »

June 12, 2010
  Does MOORE MARSDEN appy to IMPROVEMENTS we made to our RESIDENCE during marriage?
Posted By Thurman Arnold

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?

What Is the Moore Marsden Formula?

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.

What About Transmutations?

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.

What to learn more about 2640 reimbursements?

What to learn more about transmutations?

Only Calculate the Moore Marsden Claim Up to Point of Transmutation

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 for mortgage debt payment - 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. It still apples to determining the other party's 2640 reimbursement at the time of transmutation.

Moore Marsden and Residence Improvements

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. If the source of the improvements are the community dime, rather than the owner's SP, the value of those improvements may need to be reimbursed.

However, they are not reimbursed as part of a Moore-Marsden calculation. Moore Marsden reimbursements are limited to issues relating to reduction of debt on real property (mortgages), but also include a share of appreciation, as part of the "acquisition" of that property. Capital improvements are not considered an "acquisition."

Instead, a separate line of cases empowers courts to reimburse the community estate (of which each party owns one-half) for at least the dollar-for-dollar value of the contributions (i.e., installing an irrigation ditch: Marriage of Wolf (2001) 91 Cal.App.4th 962), but possibly for the enhanced value to the property that the improvements create, if that sum is greater than the out of pocket costs (Marriage of Frick (1986) 181 Cal.App.3d 997). Thus, the extent of the reimbursement may turn 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). Many improvements (or repairs) 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.

What happens when one spouse's SP is used to make some form of payment on the other spouse's SP, whether for mortgage reduction or improvements? It may well be treated as a gift. Marriage of Camire (1980) 105 Cal.App.3d 859.

And, what happens where the CP improvements for which a reimbursement right does exists were made prior to a transmutation, i.e., before the other spouse comes to be added to title? In those situations, the party who owned the separate property is entitled to a Family Code section 2640 credit for their equity in the property on the date the other becomes a joint owner. That will require a Moore Marsden calculation as of the transmutation date, but it won't take the CP improvements into account. Whether these get reimbursed at all would seem to depend on whether the property has continued to increase in value after becoming joint. It will be within that increase that the prior-to-transmutation improvements get reimbursed. If there is no increase, or even a decrease, then the community ultimately made a bad investment. Remember, these types of reimbursements only come from the asset itself, and not from some other unrelated property or asset.

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.

Here is a link to more articles discussing Moore-Marsden claims!

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Author: Thurman Arnold
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May 11, 2010
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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January 18, 2010
  Am I LIABLE for my spouse's PREMARITAL DEBT?
Posted By Thurman Arnold

Q. Am I liable for my spouse'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.

Author: Thurman W. Arnold III

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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

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?

Howard, Seal Beach, CA

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.

Family Code Section 2640

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. However, she has the burden of proof and problems arise for her if the monies were commingled into a joint account. Does she have the necessary records? If this is a lengthy marriage, I'd bet not.

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 a Blog article 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.

Moore-Marsden Apportionments

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 a good 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.

Author: T.W. Arnold, III, CFLS

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