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