PropertyAnne C. Kiley, CFLS

The FrameworkProperty

Community PropertyThe Framework

Community Property: Fam C 760 Presumption“Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property”

In re Marriage of Valli (2014) 58 Cal.4th 1396

Marriage of Valli (cont’d)

Marriage of Valli (cont’d)

Marriage of Valli (cont’d)

Fam C 2581 PresumptionFor the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property

Fam C 2581 Presumption (cont’d)This presumption is a presumption affecting the burden of proof and may be rebutted by either of the following:

Fam C 2581 Presumption (cont’d)(a) A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property.

(b) Proof that the parties have made a written agreement that the property is separate property.

Separate PropertyThe Framework

Separate Property: Fam C 770

Property owned before marriage

Property acquired after marriage by gift, bequest, devise, or descent

Rents, issues, and profits of the above

Fam C 771Earnings and accumulations after the date of separation

Code section revised 1-1-17: “the date of separation”

Quasi-Community PropertyThe Framework

Quasi-Community Property: Fam C 125[A]ll real or personal property, wherever situated, acquired before or after the operative date of this code in any of the following ways:

Fam C 125 (cont’d)(a) By either spouse while domiciled elsewhere which would have been community property if the spouse who acquired the property had been domiciled in this state at the time of its acquisition.

Fam C 125 (cont’d)(b) In exchange for real or personal property, wherever situated, which would have been community property if the spouse who acquired the property so exchanged had been domiciled in this state at the time of its acquisition.

Quasi-Marital PropertyThe Framework

Quasi-Marital Property: Fam C 2251If a determination is made that a marriage is void or voidable and the court finds that either party or both parties believed in good faith that the marriage was valid, the court shall:

(1) Declare the party or parties, who believed in good faith that the marriage was valid, to have the status of a putative spouse.

Fam C 2251 (cont’d)(2) If the division of property is in issue, divide, in accordance with Division 7 (commencing with Section 2500), that property acquired during the union that would have been community property or quasi-community property if the union had not been void or voidable, only upon request of a party who is declared a putative spouse under paragraph (1).

This property is known as “quasi-marital property.”

DebtThe Framework

Fam C 910(a) Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage.

(b) “During marriage” for purposes of this section does not include the period after the date of separation, as defined in Section 70, and before a judgment of dissolution of marriage or legal separation of the parties.

Fam C 911(a) The earnings of a married person during marriage are not liable for a debt incurred by the person's spouse before marriage.

After the earnings of the married person are paid, they remain not liable so long as they are held in a deposit account in which the person's spouse has no right of withdrawal and are uncommingled with other property in the community estate, except property insignificant in amount.

Fam C 913(a) The separate property of a married person is liable for a debt incurred by the person before or during marriage.

(b) Except as otherwise provided by statute:

(1) The separate property of a married person is not liable for a debt incurred by the person's spouse before or during marriage.

(2) The joinder or consent of a married person to an encumbrance of community estate property to secure payment of a debt incurred by the person's spouse does not subject the person's separate property to liability for the debt unless the person also incurred the debt.

Fam C 914(a)Notwithstanding Section 913, a married person is personally liable for the following debts incurred by the person's spouse during marriage:

1) A debt incurred for necessaries of life of the person's spouse before the date of separation of the spouses.

(2) Except as provided in Section 4302, a debt incurred for common necessaries of life of the person's spouse after the date of separation of the spouses.

[date of separation is defined in Fam C 70 – 914(c)]

Fam C 914(b)(b) The separate property of a married person may be applied to the satisfaction of a debt for which the person is personally liable pursuant to this section. If separate property is so applied at a time when nonexempt property in the community estate or separate property of the person's spouse is available but is not applied to the satisfaction of the debt, the married person is entitled to reimbursement to the extent such property was available.

Fam C 915(a): Liability for Support Obligation(a) For the purpose of this part, a child or spousal support obligation of a married person that does not arise out of the marriage shall be treated as a debt incurred before marriage, regardless of whether a court order for support is made or modified before or during marriage and regardless of whether any installment payment on the obligation accrues before or during marriage.

Fam C 915(b): Liability for Support Obligation(b) If property in the community estate is applied to the satisfaction of a child or spousal support obligation of a married person that does not arise out of the marriage, at a time when nonexempt separate income of the person is available but is not applied to the satisfaction of the obligation, the community estate is entitled to reimbursement from the person in the amount of the separate income, not exceeding the property in the community estate so applied.

Date of SeparationProperty

Fam C 70Date of Separation

SB 1255 Adds Fam C 70 (Stats 2016, Ch. 114) Eff. 1-1-17 (Moorlach)

Fam C 70

Date of Separation Issues

Analysis of Fam C 4Date of Separation Retroactivity

Fam C 4(a) New Law Defined

Fam C 4(b) Scope of Application

Fam C 4(c) New Law Governs All Matters

New Law Governs All Matters (cont‘d)

Fam C 4(d)

Fam C 4(e) Orders Before Operative Date

Fam C 4(f) Protects Prior Acts

Fam C 4(g) Safe Harbor

Fam C 4(h) Authority of the Court

Fam C 4(h) Authority of the Court

The Scope of Fam C 4(h)

By What Measure

Fiduciary Obligation

Case Law on RetroactivityDate of Separation Retroactivity

Addison v. Addison (1965) 62 Cal.2d 558

Marriage of Bouquet (1976) 16 Cal.3d 583

Bouquet Retroactivity Tests

Bouquet Retroactivity Tests (cont’d)

Marriage of Buol (1985) 39 Cal.3d 751

Marriage of Lachenmyer (1985) 174 Cal.App.3d 558

Marriage of Fabian (1986) 41 Cal.3d 440

Marriage of Heikes (1995) 10 Cal.4th 1211

Marriage of Fellows (2006) 39 Cal.4th 179

Marriage of Fellows (cont’d)

Which Rule Will Apply?

Marriage of DavisDate of Separation

In re Marriage of Davis (2015) 61 Cal.4th 846Parties continued to reside under the same roof together

But marital intimacy had ceased

Parties reached a financial accommodation concerning shared expenses

Parties continued to share residence for 2 yrs after W’s DOS

Remit iss 8-24-15

Marriage of Davis (cont’d)T/Ct ruled that DOS was the date selected by W (1-2-09)

H appeals

Court of Appeal affirmed

H appeals to CASCT

CASCT: REVERSES – REMANDS FOR FURTHER PROCEEDINGS

Remit iss 8-24-15

Fam C 771: Living Separate & Apart

Marriage of Davis (cont’d)Black’s Law Dictionary defines the phrase

As spouses residing in different places

And more recently as “living away from each other”

Remit iss 8-24-15

Under Marriage of Davis

Leaving the Door Open or Not?

Marriage of Davis (cont’d)If policies suggest an alternative result, it is up to the Legislature to pass legislation

Living in separate residence is an indispensable threshold requirement

For a finding of living separate and apart under Fam C 771(a)

Remit iss 8-24-15

Footnote 7 & Concurring Opinion

Totality of CircumstancesDate of Separation

Overview of the Case Law

Makeig v. United Sec. Bank & Trust Co. (1931) 112 Cal.App. 138

Kerr v. Kerr (1960) 182 Cal.App.2d 12

Marriage of Hardin (1995) 38 Cal.App.4th 448

Marriage of Hardin (cont’d)

Marriage of Baragry (1977) 73 Cal.App.3d 444

Marriage of Marsden (1982) 130 Cal.App.3d 426

Marriage of Marsden (cont’d)

Marriage of Umphrey (1990) 218 Cal.App.3d 647

Marriage of Umphrey (cont’d)

Marriage of von der Nuell (1994) 23 Cal.App.4th 730

Marriage of Manfer (2006) 144 Cal.App.4th 925

CharacterProperty

Joint GiftsCharacter

Joint gifts

DamagesCharacter

Personal Injury damages

Fam C 780

Credit/Lender Intent

Character

Lender’s IntentCharacter of loan proceeds depends on intent of the lender

Marriage of Stoner (1983) 147 Cal.App.3d 858

Marriage of Aufmuth (1979) 89 Cal.App.3d 446

Lender’s Intent (cont’d)Proceeds of a loan made on faith of separate property are separate property

Proceeds of a loan are community property if credit was extended primarily in reliance on community assets

Marriage of Stoner

Bank of California v. Connolly (1973) 36 Cal.App.3d 350

Secured loansIndicate lenders intent to look primarily to the security for repayment rather than to the borrower’s earnings of other funds

Marriage of Brandes (2015) 239 Cal.App.4th 1461

Marriage of Branco (1996) 47 Cal.App.4th 1621

Lender’s IntentThe CP presumption applies to all property acquired by a married person during marriage, including loan proceeds

Gudelj v. Gudelj (1953) 41 Cal.2d 202: The burden is on the party seeking to establish a separate property interest in the proceeds to overcome the presumption

One method of doing so is by presenting evidence of the lender’s intent in extending credit

That is called the “lender intent doctrine” or “lender intent rule”

Lender’s Intent (cont’d)Under this rule, in order to overcome the CP presumption, a party must present proof that in making the loan the lender intended to rely on his SP for repayment

In Gudelj, CASCT departed from this test and there is, thus, room for argument that the test is “primary,” not “sole” reliance

“Sole” or “Primary” Reliance on SP

In Marriage of Grinius (1985) 166 Cal.App.3d 1179, 1188 the Fourth District held that the Gudelj court misstated the standard that had been consistently stated in all prior high Court cases when it qualified the phrase “relied upon” with the word “primarily”

“Sole” or “Primary” Reliance on SP (cont’d)(I)n early cases, the Supreme Court required a showing the lender relied entirely on the existing separate property of a spouse in extending the loan to characterize the loan proceeds as separate property. (Estate of Holbert (1881) 57 Cal.257, 259; Estate of Ellis (1928) 203 Cal. 414, 416)

Marriage of Grinius

“Sole” or “Primary” Reliance on SP (cont’d)The Marriage of Grinius court said that “(t)he Gudelj opinion cited no authority for this apparent change and had no opportunity to apply the standard since no evidence of lender reliance on separate property was proffered. Later cases have been decided on seemingly different standards”

“Sole” or “Primary” Reliance on SP (cont’d)After reviewing those cases, the Marriage of Grinius panel said that in all of them

“loan proceeds were characterized as a spouse’s property only when direct or circumstantial evidence indicated the lender relied solely on separate property in offering the loan. With the above review in mind, we restate the applicable standard: …

“Sole” or “Primary” Reliance on SP (cont’d)“Loan proceeds acquired during marriage are presumptively community property; however, this presumption may be overcome by showing the lender intended to rely solely upon a spouse’s separate property and did in fact do so. Without satisfactory evidence of the lender’s intent, the general presumption prevails” Marriage of Grinius

“Sole” or “Primary” Reliance on SP (cont’d)Nearly every case decided since Gudelj has used the standard applied by the Supreme Court prior to the Gudelj decision and restated in Marriage of Grinius

The Second District cited the Gudelj holding in Kenney v. Kenney (1954) 128 Cal.App.2d 128, to affirm the trial court’s determination that the loan proceeds at issue were community property

“Sole” or “Primary” Reliance on SP (cont’d)The same was true in Bank of California v. Connolly (1973) 36 Cal.App.3d 350, in which the Fourth District used it to affirm a T/Ct’s holding that H’s interest in parcels of real property was a community asset

“Sole” or “Primary” Reliance on SP (cont’d)It noted the lender’s testimony that in making the loan

It “primarily” relied on H’s general credit (which is a community asset)

“Sole” or “Primary” Reliance on SP (cont’d)“‘[i]n the absence of evidence tending to prove that the seller [in this case the lender] primarily relied upon the purchaser’s separate property in extending credit, the trial court must find in accordance with the presumption.’ (Gudelj v. Gudelj, 41 Cal.2d 202, 210 [259 P.2d 656].) Connolly, at 375, 376 (citation omitted).”

“Sole” or “Primary” Reliance on SP (cont’d)Later cases on the issue appear to consistently use the pre- and post-Gudelj requirement that the “separatizer” provide proof of “sole reliance” on the separate estate to overcome the community presumption – even while citing Gudelj

In Marriage of Aufmuth (1979) 89 Cal.App.3d 446, for example, the First District cited Gudelj and Ellis, for the statement that

“Sole” or “Primary” Reliance on SP (cont’d)“(t)he character of property acquired upon credit during marriage is determined according to the intent of the lender to rely upon the separate property of the purchaser or upon a community asset. There is a presumption that the proceeds of a loan acquired during marriage are community property. (Civ. Code §5110.) …”

“Sole” or “Primary” Reliance on SP (cont’d)“The presumption may be overcome only by a showing that the loan was extended on the faith of existing separate property belonging to the acquiring spouse. In the absence of evidence tending to show this, the trial court must find in accordance with the presumption.”

“Sole” or “Primary” Reliance on SP (cont’d)This statement in Aufmuth was cited by the Second District in Marriage of Stoner (1983) 147 Cal.App.3d 858, in which it also said that

“(a) presumption exists that the proceeds of a loan acquired during marriage are community property. …”

“Sole” or “Primary” Reliance on SP (cont’d)“Said presumption is rebuttable upon a showing that the loan was extended on the faith of existing property belonging to the acquiring spouse”

Stoner was in turn cited in Marriage of Stephenson (1984) 162 Cal.App.3d 1057

Notably, Marriage of Grinius and these three cases all applied the presumption to hold that the property at issue was a community asset

Direct Evidence of Lender Intent is Crucial

Direct Evidence of Lender Intent (cont’d)

Direct Evidence of Lender IntentIn Bank of California v. Connolly (1973) 36 Cal.App.3d 350, the court relied on testimony from the bank’s loan officer

The court was faced with a difficult issue

H received a loan that was secured by his separate Alta Loma real property

Direct Evidence of Lender Intent (cont’d)However, the loan officer testified that he relied on the general creditworthiness of H and taking the Alta Loma property as collateral was merely to comply with a banking regulation

“The Bank’s loan officer testified the additional security on the Alta Loma property was taken only to comply with banking regulations restricting banks to a loan of up to 60 percent of the appraised value of property given as security. …”

Direct Evidence of Lender Intent (cont’d)“However, the Loan officer testified that he relied on the general creditworthiness of husband and taking the Alta Loma property as collateral was merely to comply with a banking regulation.

He also testified that in making the loans the Bank relied primarily on the general credit of Kelber and Latimer and not on the additional security of the Alta Loma property.” [Connolly]

Direct Evidence of Lender Intent (cont’d)It is clear that the loan officer’s testimony as to the reliance on the general creditworthiness (a community asset) and taking the security of the Alta Loma property (H’s separate asset) to comply with regulations

Justified T/Ct’s holding that the loan proceeds were community

Direct Evidence of Lender Intent (cont’d)At first blush, the attorneys in Connolly could have seen that the loan was secured by H’s SP and merely classified the loan proceeds in accordance therewith

However, upon further investigation the loan officer made clear that the SP security was taken as a mere formality

This case nicely shows the importance of the lender’s testimony when litigating these issues

Circumstantial Evidence

Circumstantial Evidence (cont’d)

Circumstantial Evidence (cont’d)

Circumstantial Evidence (cont’d)“The evidence in the case at bar, which we have reviewed in its entirety, adequately supports an implied finding that the proceeds from the loans heretofore referred to were the separate property of the plaintiff. …The trial court was entitled to conclude that the original bank loans were made to the plaintiff on the credit of his separate property as, …”

Circumstantial Evidence (cont’d)“at the time they were obtained, he had been married less than a year and his community earnings were not then of paramount significance, whereas his separate property approximated $500,000 in value…Thee was evidence that the cost of construction of the subject residence was $70,000.…”

Circumstantial Evidence (cont’d)“On this basis it may be inferred that the value of the materials furnished by the “Supply Company” exceeded $40,000. It is not unreasonable to conclude that these materials were furnished to the plaintiff on the strength of his separate ownership of 98 percent of the stock in the company which furnished them.”

Circumstantial Evidence (cont’d)

Circumstantial Evidence (cont’d)“Although no testimony was presented concerning the intent of the real estate lender in extending credit to the parties, it is apparent that the credit was extended on the strength of the community earnings.…”

Circumstantial Evidence (cont’d)“Wife had no separate property other than the $16,500 before the purchase of the home, she was not employed, and she had no appreciable earnings. Husband was a practicing attorney at the time and his income was the sole source of support of the community.…”

Circumstantial Evidence (cont’d)“Under these circumstances, we decline to disturb the trial court’s implied finding in accordance with the presumption that the proceeds of the loan were community funds.” [Marriage of Aufmuth]

Circumstantial Evidence (cont’d)Marriage of Grinius is another case where the court looks to evidence other than the testimony of the lender in determining the character of loan proceeds

In that case, the T/Ct held that a piece of real property (with a CP restraint on it) was H’s SP

The appellate court reversed this decision holding that H did not present sufficient evidence to overcome the presumption that the real property was community

Circumstantial Evidence (cont’d)The purchase money for the property was obtained from two loans acquired during the marriage

(1) a $20,000 down payment from an $80,000 Small Business Administration (SBA) loan guaranty lent by California First Bank (hereafter referred to as SBA loan)

And (2) $40,000 loaned by Home Federal Savings and Loan

Circumstantial Evidence (cont’d)Although only H signed the SBA loan guaranty, both H and W signed the promissory note from California First Bank

H alone signed the Home Federal Savings and Loan promissory note

Without direct evidence of lender intent, the court determined that the SBA loan conditions outlined on the loan guaranty authorization did not support H’s contention that the loan was premised on his hypothecation of his SP

Circumstantial Evidence (cont’d)“Victor presented no direct evidence of lender intent and instead offered circumstantial evidence to prove lender reliance on his separate property…He argues the “SBA loan guaranty was premised solely on [his] posting of collateral consisting of his entire separate property.” However, a review of the SBA loan conditions outlined on the loan guaranty authorization refutes this contention.…”

Circumstantial Evidence (cont’d)“The SBA required nine separate conditions, only two of which necessitated hypothecation of Victor’s separate property…The primary collateral for the loan was the restaurant property. Alone, this hypothecation provides no inference of lender intent; to argue otherwise is to rely on circular reasoning. The requiring of Joyce’s signature on the note and instruments of hypothecation does suggest the lender did look towards community assets for security.…”

Circumstantial Evidence (cont’d)“However, Joyce’s signing of the documents, without more, does not compel a finding in favor of the community…Conditions three through five clearly suggest reliance on community interests…The SBA required nine separate conditions. Of importance to the lender, however, were those loan conditions that demonstrate the SBA’s concern about the operation and management of the community restaurant business.…”

Circumstantial Evidence (cont’d)“It was the policy of the SBA in extending these loans that: “No financial assistance shall be extended unless there exists reasonable assurance the loan can and will be repaid pursuant to its terms. Reasonable assurance of repayment will exist only where the past earnings record and future prospects indicate ability to repay the loan and other obligations.…”

Circumstantial Evidence (cont’d)“It will be deemed not to exist when the proposed loan is to accomplish an expansion which is

unwarranted in light of the applicant’s past experience and management ability, or when the effect of making the loan is to subsidize inferior management.” [Marriage of Grinius] [Emphasis added.]

Circumstantial Evidence (cont’d)

Analysis of Secured LoanIn the absence of such direct evidence, courts have developed rules which assist them in determining whether a lender intended to rely on either separate or community credit in making a loan, and which follow the general presumption that property acquired during marriage is community, including loan proceeds

Where direct evidence of intent regarding a secured loan is not presented, the court may infer lender intent and, thus, determine the character of the loan from examining the security

Analysis of Secured Loan (cont’d)

Analysis of Secured Loan (cont’d)

Analysis of Secured Loan (cont’d)

Analysis of Secured Loan (cont’d)W contended that the residence was her sole SP

H argued that some portion of the residence was CP

The court reversed the judgment as to allocation of community interest and otherwise affirmed the judgment since W had maintained the separate and sole obligation on the two notes

And the realty had been quitclaimed to W as SP, there was no proportionate community interest created in the property

Analysis of Secured Loan (cont’d)In conclusion, the first loan in the amount of $42,500 was characterized as community (until husband quitclaimed his interest in the residence) because it was secured by the CP salary of $1,750 per month

Further, the second loan in the amount of $15,000 was properly characterized as W’s SP because it was secured by her SP residence

Analysis of Secured Loan (cont’d)However, as seen in Connolly, even though a loan is extended on the hypothecation of SP, the loan proceeds are not always characterized as SP

In Connolly, the bank extended a loan to H based upon his general creditworthiness and also took security in his clearly SP “Alta Loma” real property

The loan officer testified that he looked primarily to the creditworthiness and only took Alta

Loma as security to comply with banking regulations

Analysis of Secured Loan (cont’d)

Circular ReasoningRather, where the issue is the character of the asset acquired with loan proceeds, the court must evaluate the character of those proceeds from evidence other than the character of that asset, and if there is no such evidence, the presumption prevails

Circular Reasoning (cont’d)Mr. Grinius asked the court to rely on the character of the security, which he claimed was SP, as indirect evidence of lender intent

He traced the source of the funds used to acquire the restaurant “to overcome the fundamental community presumption.…”

Circular Reasoning (cont’d)Specifically, he argues the purchase money loans were separate property and the restaurant real property, thus acquired, maintains the same character

He argued that the loan “was premised solely on [his] posting of collateral consisting of his entire separate property”

Circular Reasoning (cont’d)However, when the court analyzed what was actually pledged as security for the loan, it found that “(t)he primary collateral for the loan was the restaurant property,” the character of which was contested

Therefore, the court said that “(a)lone, this hypothecation provides no inference of lender intent; to argue otherwise is to rely on circular reasoning”

Circular Reasoning (cont’d)The result was that H could not use his position as to its character as indirect evidence of lender intent

Therefore, the court went on to examine the other assets pledged as security for the loan, excluding the security, and ultimately held that because the security for the loan was mixed, the CP presumption failed

Analysis of Unsecured Loan

Cases Involving Mixed SecurityThe CP presumption applies in cases involving mixed security

Not only did Gudelj not involve mixed security, but only one post-Gudelj case deals with a mixed

security fact pattern

That case, Marriage of Grinius, held that where the security is mixed, the court must characterize the loan proceeds as CP

Cases Involving Mixed Security (cont’d)If the evidence shows that the lender relied to any extent on CP in making the loan

Then the presumption will apply and all of the proceeds will be considered community

That has been the rule as a matter of law for over 20 years, since the Fourth District decided Marriage of Grinius and it has never been so much as questioned

Cases Involving Mixed Security (cont’d)In Gudelj, H has contributed $1,500 in SP funds to the acquisition of a ¼ interest in a dry cleaning business during marriage

And paid the balance of the $11,500 purchase price by executing a promissory note for that amount

The T/Ct held that the entire interest was his SP

Cases Involving Mixed Security (cont’d)

Cases Involving Mixed Security (cont’d)

Cases Involving Mixed Security (cont’d)

Cases Involving Mixed Security (cont’d)Thus, the Fourth District held as a matter of law that where security given for a loan extended during marriage has both community and separate elements

The court does not evaluate the quantum of proof but must find in accordance with the presumption

Cases Involving Mixed Security (cont’d)Marriage of Grinius is the only case to deal factually with the application of the CP presumption and the lender intent rule in a situation of mixed security

The panel mentioned the fact that prior cases had not actually had an opportunity to evaluate the quantum of proof in a mixed security situation

In coming to its conclusion, the Marriage of Grinius court followed the longstanding test of sole reliance on SP to overcome the presumption developed in single-character security cases and applied it to mixed-security cases

Cases Involving Mixed Security (cont’d)It clearly holds that where the security is mixed, the CP presumption applies to render all of the loan

proceeds as CP

Thus, to the extent that the separatizer cannot trace loan proceeds to a completely SP source, the court must hold that such proceeds were a community asset

Moore/Marsden/WalrathCharacter

Moore/MarsdenSP house

CP used to pay down principal of mortgage (and for improvements)

Community has a percentage interest in the increase in value of the property

Based upon the principal payments/improvements

Marriage of Moore (1980) 113 Cal.App.3d 22

Marriage of Marsden (1982) 130 Cal.App.3d 426

Moore/Marsden (cont’d)These cases held that when the community pays down principal, the community is not only entitled to a dollar for dollar reimbursement, but is entitled to a pro tanto share of the appreciation in the property from the date of marriage to the time of trial

Moore/Marsden (cont’d)To determine the community interest in the property

Step 1: The community receives a dollar for dollar reimbursement for pay down of principal

Step 2: In addition to the reimbursement listed in Step 1, the community gets a pro tanto share in the marital appreciation of the home

Moore/Marsden Rule(the actual formula is defined in the Marsden case)

Moore/Marsden Rule is not a rebuttable presumption but a rule to be applied to compute the community’s pro tanto interest in property where community funds were used to reduce the principal mortgage balance for one spouse’s separate property

Bono v. Clark (2002) 103 Cal.App.4th 1409

Marriage of Sherman (2005) 133 Cal.App.4th 795

Commercial Properties

Marriage of Nelson (2006) 139 Cal.App.4th 1546

Fam C 2640

Contributions to the Acquisition of Property

Not Payments

Fam C 2640In the division of the community estate under this division, unless there is a written waiver of the right to reimbursement the party shall be reimbursed… to the extent the party traces the contributions to a separate property source

Fam C 2640 (cont’d)[W]ithout interest…

may not exceed the net value of the property at the time of the division

Fam C 2640 (cont’d)Fam C 2640 (former CC 4800.2) reversed the holding in Marriage of Lucas (1980) 27 Cal.3d 808

Which stated absent agreement (written or oral) “a party who utilizes his separate property for community purposes intends a gift to the community”

Marriage of Walrath (1998) 17 Cal.4th 907Fam C 2640 applies not only to the original asset acquired with a SP contribution

But to all subsequently acquired property purchased with proceeds taken from that property

Marriage of Walrath (cont’d)[T]he phrase ‘property’ in section 2640 includes not only the specific community property to which the separate property was originally contributed, but also any other community property that is subsequently acquired from the proceeds of the initial property, and to which the separate property contribution can be traced

Marriage of Walrath (cont’d)If the original property to which the contribution is made is refinanced

The tracing that is involved is ascertaining what portion of the amount contributed was transferred to the new asset and what remains in the original asset

Marriage of Branco (1996) 47 Cal.App.4th 1621

Community Expenditures for Improvements to SPMarriage of Wolfe (2001) 91 Cal.App.4th 962

“Discarded” the gift presumption for such improvements

Community Expenditures for Improvements to SP (cont’d)“There is little logic in a rule that presumes an unconditional gift when one spouse uses community funds to improve the other spouse’s property”

“There is no reason to presume a gift when funds are applied to improve separate property”

Marriage of Wolfe

Community-Funded Improvements to SPIn re Marriage of Allen (2002) 96 Cal.App.4th 497

Court rejected the notion that “a wife’s consent to the use of community funds to improve her husband’s separate real property raises a presumption that the funds were a gift of the funds to the husband”

In re Marriage of Walker (2015) 240 Cal.App.4th 986 (CA-4(3))W files bankruptcy (BK) and she is relieved of obligation to State Farm on 2nd trust deed on home

T/Ct divides the property so that W gets a larger share of the proceeds based on BK discharging W from any obligation on 2nd trust deed

No pet f

Marriage of Walker (cont’d)H appeals the division of the house proceeds

CA-4(3): REVERSES

The BK relieved W of personal liability on the note

But the property remained subject to the perfected lien of the 1st and 2nd trust deed

No pet f

Marriage of Walker (cont’d)T/Ct duty to equally divide the interest in the residence based on this perfected lien

Meant that W and H divide equally the net equity after the liens of record and the cost of sale

No pet f

Marriage of Walker (cont’d)W obtained a discharge from her debts under 11 U.S.C. 727

The BK only discharged W from the loan but did not affect the lien in favor of the bank

Based on In re Cortez (9 Cir BAP) 191 B.R. 174

No pet f

Marriage of Walker (cont’d)This ruling is limited to secured debts not unsecured debts

T/Ct must distribute both the assets and the obligations of the community

So that the residual assets awarded to each party

After the deduction of the obligations are equal

Marriage of Walrath (1998) 17 Cal.4th 907

No pet f

Pereira, Van Camp, BrandesCharacter

Pereira/Van CampPereira is “typically applied where business profits are principally attributed to efforts of the community” [Pereira v. Pereira (1909) 156 Cal. 1]

Van Camp is applied “where community effort is more than minimally involved in a separate business, yet the business profits accrued are attributed to the character of the separate asset [Van Camp v. Van Camp (1921) 53 Cal.App. 17]

Marriage of Dekker (1993) 17 Cal.App.4th 842

There is No Bright Line Rule or Set StandardCourts “have endeavored to adopt that yardstick which is most appropriate and equitable in a particular situation… depending on whether the character of the capital investment in the separate property or the personal activity, ability and capacity of the spouse is the cheive contributing factor in the realization of income and profits”

Beam v. Bank of America (1971) 6 Cal.3d 12

In re Marriage of Brandes (2015) 239 Cal.App.4th 1461 (CA-4(1))Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)At the date of H’s marriage to W in August 1986, H owned 90% of Brandes Investment Partners (BIP)

BIP provided investment advisory services

Its managed assets were approximately $20M

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)After approximately 18 years of marriage, H and W separated in June 2004

During marriage, H had acquired the remaining 10% of BIP, and as a result, he owned 100% of BIP when the parties separated

BIP’s managed assets were $85 billion

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)H asserted that the vast majority of BIP’s growth during marriage was attributable to factors other than his personal efforts

T/Ct determined that between August 1986 and 1991, H’s personal efforts were the primary factor in BIP’s growth, and therefore used Pereira to calculate the community interest in the growth during that period

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)The facts included that between 1986 and 1989, H was the sole manager of the business, he established BIP’s investing philosophy, he was the central figure in business marketing, his “track record” attracted investors, and he hired employees, trained them, and directed their activities

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)T/Ct determined that between 1992 and the parties separation in June 2004, BIP’s growth was chiefly attributable to factors other than H’s personal efforts, and thus the Van Camp approach was the proper approach to use to determine the community interest in the growth during said period

Court found that there were internal and external factors that were the chief attributes of BIP’s growth between 1992 and 2004

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)The Court noted the internal factors included hiring a CEO and COO who convinced H to create a new type of fund, and hiring a person in 1991 to market the new fund to large brokerage firms

Also in 1991, an executive committee was formed for BIP “after which management decisions were made by the committee rather than ‘the dictates of Charles [H]’”

The external factors that drove BIP’s growth after 1991 included “bull markets and the popularity of foreign investing”

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)T/Ct found that 6,000 shares of BIP were H’s SP

Despite CP presumption and over W’s objection

Based on the lender's intent doctrine

W appeals property division

H appeals support order

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)CA-4(1): AFFIRMS in part – REVERSES in part

T/Ct properly valued BIP interests using a blended approach under Pereira & Van Camp at different times

On remand, T/Ct shall value the 6,000 shares in BIP

On remand, T/Ct shall consider the amount of SS based on the fact W prevailed on the BIP stock

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)Pereira approach

Need not limit the community interest

To a salary as reward for a spouse’s efforts

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)

To limit the community to compensation

Received by way of salary during the marriage

Would ignore California's egalitarian marriage model

And undercut the apportionment formula of Pereira

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)Van Camp is applied where community effort

Is more minimally involved in a separate business

So long as community is reasonably compensated

Apportion the remainder of increased value to the SP

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)T/Ct has discretion to fairly apportion the CP & SP interests under

Marriage of Lehman (1998) 18 Cal.4th 169

W’s dispute is in the characterization of BIP as H’s SP

Based on changes in the business model and operation

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)W argues that BIP should be treated as the dental lab in Mueller v. Mueller (1956) 144 Cal.App.2d 245

In Mueller, H purchased the lab for $6,500 nine years before marriage but admitted his entire assets totaled $7,000

Any business growth had been minimal

W also worked in the business during the marriage, argued the business was a community asset under commingling principles

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)

Substantial growth of a business alone does not change its character from SP to CP

The court rejected W’s argument that because the CP interest under the Pereira period

Was “invested” in the business the asset was a commingled asset

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)The panel rejected W’s argument under

Marriage of Moore (1980) 28 Cal.3d 366

And Marriage of Marsden (1982) 130 Cal.App.3d 426

The CP estate was not entitled to a shared appreciation in BIP during the Van Camp period

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)Under Patrick v. Alacer Corp. (2011) 201 Cal.App.4th 1326

So long as the CP obtained the increased value during the Pereira period

And adequate compensation during the Van Camp period

CP was not entitled to further shared appreciation

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)Ownership is not the same as equitable allocation under the CP scheme

H did not breach his fiduciary obligation to W

By continuing to work for BIP

Rather than creating a new entity

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)There was no constructive fraud

As in Vai v. Bank of America (1961) 56 Cal.2d 329

H did nothing furtive or self serving in his operation of BIP

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)The distribution of profits to H by way of his W-2

Did not transform their character as H’s SP despite the tax reporting methodology

Next the panel turned to the issue of 10,000 shares of BIP

Rehg den 9-9-15; rev den 11-24-15

The Share Acquisition

Marriage of Brandes (cont’d)The 4,000 shares are presumptively CP under Fam C 2581 based on the time of acquisition rule

Even though the money came from a joint account to SP funds to purchase the shares

H traced contributions to the account to his SP and rebutted the presumption under Prob C 5305

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)As to the 6,000 shares, these shares were acquired during the marriage

H made this purchase with $4.6M down payment from joint accounts and $18.6M note from the parties marital trust

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)T/Ct did not apply the lender intent doctrine established by numerous cases

Bank of California v. Connolly (1973) 36 Cal.App.3d 350 Gudelj v. Gudelj (1953) 41 Cal.2d 202 Marriage of Stoner (1983) 147 Cal.App.3d 858

The presumption is rebuttable upon a showing that the loan was extended on the faith of existing property belonging to the acquiring spouse

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)H failed to rebut this presumption that the lender relied on the CP estate in extending the credit

It was H’s burden to show lender relied on something other than CP in extending the credit on the $18.6M note

H did present evidence that he had made payments on the note from distributions from BIP

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)On remand, T/Ct shall determine the CP and SP interests in the 6,000 shares

H did not breach his fiduciary duty to W

W is not entitled to pre-judgment interest against the CP interest in BIP as she did not raise the issue at trial

Rehg den 9-9-15; rev den 11-24-15

Marriage of Brandes (cont’d)T/Ct shall conduct further proceedings on the CP interest in the 6,000 shares

And on remand, T/Ct shall consider whether the award of $450K/mo. in SS was proper if any of the 6,000 shares are CP

Rehg den 9-9-15; rev den 11-24-15

Marriage of LafkasCharacter

In re Marriage of Lafkas (2015) 237 Cal.App.4th 921 (CA-2(5))Prior to marriage H formed partnership

As an investment vehicle for purchase of real estate

H took title in his name alone

As an unmarried man

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)During marriage the partnership agreement was modified to list title as

H & W, husband and wife, as to 1/3 interest in the partnership

Parties gave conflicting testimony about reasoning for the change in the partnership documents

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)

T/Ct #1 found the modification amounted to a new partnership agreement

And qualified as a transmutation under Fam C 852(a)

The Riverside property was acquired during marriage under Fam C 760

Becoming a jointly held asset under Fam C 2581

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)T/Ct # 1 found W’s credit and name were used to acquire the Riverside property

T/Ct found that H’s SP interest in the partnership

As of the date of the partnership modification (July 1995) was protected

Rehg den 7-1-15; rev den 9-9-15

Trial Court Findings as to H’s SP

Trial Court Findings as to H’s SP (cont’d)

Marriage of Lafkas (cont’d)T/Ct #2 ruled on the issue of fees

Ordering H to pay a total of $195,000 in fees

H appeals

CA-2(5): REVERSES in part and remands – otherwise AFFIRMS

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)Property is characterized as SP or CP based on the time of acquisition rule

Fam C 760 Fam C 771 See v. See (1966) 64 Cal.2d 778 Marriage of Valli (2014) 58 Cal.4th 1396

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)T/Ct characterization of property is reviewed under substantial evidence test

Marriage of Dekker (1993) 17 Cal.App.4th 842

Transmutations are reviewed de novo and independently

Marriage of Starkman (2005) 129 Cal.App.4th 659

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)There is no dispute that H owned his 1/3 interest

In the partnership as SP based on the premarital acquisition

Post Marriage of Lucas (1980) 27 Cal.3d 808

Legislature enacted important changes to Family Code

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)The partnership modification document

Does not qualify as an express declaration

As required by Fam C 852 as discussed in Estate of MacDonald and Marriage of Valli

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)Based on Marriage of Valli

Transmutation requires something more than simply adding a person’s name to title

Credit acquisitions are determined by lender intent

Marriage of Grinius (1985) 166 Cal.App.3d 1179

Rehg den 7-1-15; rev den 9-9-15

Marriage of Lafkas (cont’d)The Judgment is reversed on the characterization and division of the partnership

The attorney fee award must be reversed and remanded for further determination

Rehg den 7-1-15; rev den 9-9-15

Marriage of BonvinoCharacter

In re Marriage of Bonvino (2015) 241 Cal.App.4th 1411 (CA-2(5))

H took title to home in his name only with SP down payment

Loan issued in his name only

Title is taken as married man as sole and separate property

No pet f

Marriage of Bonvino (cont’d)15 months later H sold SP home and used the proceeds to retire loan on new home

T/Ct found home was CP and ordered reimbursement to H under Fam C 2640

H appeals

No pet f

Marriage of Bonvino (cont’d)CA-2(5): REVERSES as to ownership of home

Characterization of property is reviewed under the substantial evidence standard

Marriage of Valli (2014) 58 Cal.4th 1396

Substantial evidence does not support the T/Ct determination that the home is CP

No pet f

Marriage of Bonvino (cont’d)The requirements of the transmutation statute must be met

Before the reimbursement provisions of Fam C 2640 apply

Property purchased with SP continues to be SP

Thomasset v. Thomasset (1953) 122 Cal.App.2d 116

No pet f

Marriage of Bonvino (cont’d)The loan on the home was a CP obligation

H failed to rebut the presumption

Marriage of Grinius (1985) 166 Cal.App.3d 1179

Transmutation law governs the characterization of the home

Fam C 850 et seq. Estate of MacDonald (1990) 51 Cal.3d 262

No pet f

Marriage of Bonvino (cont’d)Grant deeds satisfy the requirements of a transmutation

Estate of Bibb (2001) 87 Cal.App.4th 461

If the form of title does not change the character of the property without meeting the requirements of Fam C 852

The title presumption of Ev C 662 does not apply

No pet f

Marriage of Bonvino (cont’d)Because the T/Ct separately set aside a QCD from W to H

None of the remaining documents satisfied the statutory requirements to transmute W’s CP interest in the home to H’s SP

No pet f

Marriage of Bonvino (cont’d)H’s pay off of the loan was made with SP funds

None of the documents he signed converted his SP funds into CP when he paid off the loan

On remand, T/Ct must calculate the SP and CP interest in the home

Included in the calculation is an apportionment of the closing costs and prepaid items

No pet f

Marriage of Bonvino (cont’d)The CP interest in this property should be very negligible

The facts show that H paid off the loan with SP shortly after the purchase

At most the CP has a Moore-Marsden claim for a few dollars of principal pay down and shared appreciation thereon

No pet f

TracingProperty

Tracing: FoundationTracing

Tracing is Art and Science “Forest + Trees” (in that order) is the key concept

The expert and counsel must present the big picture while maintaining minute data and not drowning the court in details

Counsel must lead the charge by knowing what their expert did and why by knowing the “Basis of Presentation”

Tracing is Art and Science (cont’d) Planning: The tracing testimony must demonstrate thorough planning and execution throughout the analysis

Consistency: The expert should be consistent within the tracing analysis and not contradict other matter projects and conclusions

Different Reasons for “Tracing”The character of the valuable thing

Separate v. community Moore/Marsden Van Camp v. Van Camp and Pereira v. Pereira

Different Reasons for “Tracing” (cont’d)Reimbursement during marriage

Using CP for SP purposes Using SP for CP purposes

Postseparation accountings

The Law on TracingTracing

Tracing Rules: “Adequate” Tracing?Substantial evidence rule is key

When is a tracing adequate?

In California, the court decides if a tracing is adequate and, if found, will be upheld on appeal if supported by substantial evidence (see Marriage of Higinbotham (1988) 203 Cal.App.3d 322)

“The Burden”

Who has the “burden” – what is the “standard of proof”

California family law says assets acquired during the marriage are presumptively CP

Party claiming SP usually has the “burden” to prove or trace his/her SP (the exception may be certain family expense tracings)

Failure to meet the burden results in

Failed SP claim on an asset Assets acquired during marriage = CP

Case LawProperty acquired during marriage is presumed CP (in California and other CP states)

The Separatizer is the party claiming an asset acquired during marriage is just “his” or “hers” (not theirs)

The Separatizer must gather the records and hire an expert to trace the asset(s) or present the tracing without an expert

This burden can be too heavy if the cost to benefit to risk ratio does not work

Case Law (cont’d)Commingling not fatal to SP per se

Mere commingling of SP moneys into a CP bank/investment account is not fatal to the SP if the account can be adequately traced

Cases

Marriage of Mix (1975) 14 Cal.3d 604 And Tassi v. Tassi (1958) 160 Cal.App.2d 680

Case Law (cont’d)Failure to trace is fatal to SP

However, if the SP and CP moneys have been commingled

Such that SP can no longer be clearly identified Then the CP presumption prevails Marriage of Braud (1996) 45 Cal.App.4th 797; Mason v. Mason (1960) 186 Cal.App.2d

209

“Intent”Who gets to buy “The Valuable Thing” (TVT): Must the separatizer have “intent” to invest his/her money in TVT?

“Intent” tracing cases

Marriage of Mix Hicks v. Hicks (1962) 211 Cal.App.2d 144

Marriage of Frick (1986) 181 Cal.App.3d 997 See v. See (1966) 64 Cal.2d 778

Intent: Summary of the LawIntent to use separate funds must be proven

Funds + Intent required: In addition to showing the availability of SP funds in the account from which the payment was made, the tracing party must also establish the intent to use those separate funds in purchasing the disputed asset [Marriage of Higinbotham, Marriage of Johnson (1983) 143 Cal.App.3d 57]

The “INTENT” burden is usually carried by testimony of Separatizer re her/his intention [Marriage of Higinbotham, Marriage of Johnson, and Marriage of Mix]

Intent: Summary of the Law (cont’d)Intent to separatize must be proven

Fiduciary Duty: The concept of fiduciary duty on spouses during the marriage has come to fore

Some lawyers hold that the Separatizer must “offer” his/her spouse (the community) the investment opportunity before investing (the opportunity doctrine)

A Related Problem

Separatizing is Not a CrimeThe inverse of CP to CP is SP to SP

This concept is that SP moneys in a commingled traced account should be used for SP disbursements first (then CP if necessary)

Separatizing is Not a Crime (cont’d)SP to CP living expenses? It’s “Bye Bye Birdie” as SP moneys into CP living expenses are usually deemed a “gift” to CP, and no reimbursement is allowed

Separatizing is Not a Crime (cont’d)Its okay to keep separate investments

The California cases saying its okay for a spouse to use community funds for community expenses and keep his/her separate estate intact

See, Estate of Cudworth (1901) 133 Cal. 462, and Morris v. Berman (1958) 159 Cal.App.2d 770

Record KeepingCalifornia law: Requirement for keeping adequate records

Just don’t do it! A spouse may protect the character of his or her SP by not commingling it

Once an account is commingled with SP and CP, the burden of keeping adequate records to trace belongs to the Separatizer

The act of commingling is the “trigger” for the record keeping burden on the Separatizer per Marriage of Ficke

Record Keeping (cont’d)“The Hammer” (pre-Marriage of Ficke?)

Separatizer’s records must be sufficient to establish either the direct tracing or the balance of community income and expenditures at the time an asset is acquired with commingled property

California cases: Estate of Murphy (1979) 92 Cal.App.3d 413, Marriage of Higinbotham, Marriage of Braud, See and White v. White (1938) 26 Cal.App.2d 524

Marriage of Ficke (2013) 217 Cal.App.4th 10

What About Missing Records?

In re Marriage of McLain (2017) 7 Cal.App.5th 262 (CA-4(2))T/Ct determined

H had not adequately traced his SP so his request for Fam C 2640 reimbursement was denied [$412K]

H appeals

CA-4(2): AFFIRMS

Marriage of McLain (cont’d)Fam C 2640(b) permits reimbursement of a SP contribution

To overcome the presumption of CP in a commingled account

The burden of proof is on the party claiming reimbursement

Marriage of McLain (cont’d)Where the SP is commingled with CP, the party claiming SP

Assumes the burden of keeping adequate records

To establish community income and expenditures

At the time the asset is acquired with commingled property

See v. See (1966) 64 Cal.2d 778

Marriage of McLain (cont’d)W stipulated that H’s handwritten note could be received into evidence

But this stipulation did not amount to a concession that H had adequately traced his SP in the commingled account

Simply because there is admissible evidence does not mean a party has carried their burden of proof

Marriage of McLain (cont’d)Merely because W testified that some of the money from the refinances

May have been used to complete the construction does not satisfy H’s burden of proof

It was unclear what amount of money from the sale of H’s SP was used to pay for construction

Marriage of Cochran (2001) 87 Cal.App.4th 1050

Tracing MethodsTracing

Methods of Tracing re CharacterizationThe choices are

Direct (include See) Recapitulation marital period (See killed) Annual* family expense tracing (FET) recapitulation

o The hybrid of See’s daily tracing and the marital period recapitulation?

Direct Tracing v. Exhaustion“Direct tracing” (the simple and most common approach)

“Easy Peasy” See tracings (not “Easy Peasy”)

“Recapitulation” approaches (simple and cheap)

Marital period recapitulation Annual FET

Direct TracingThe requirements for direct tracing are

The tracing spouse must have specific records [Marriage of Marsden] The records must establish that, on the date that the separate expenditure was made, there

were separate funds available in account to make the purchase [Marriage of Higinbotham] Intent : The tracing spouse had the intent to utilize separate funds to make the purchase

[Estate of Murphy; Marriage of Frick]

Direct Tracing (cont’d)Easy-Peasy: The direct tracing method

Direct tracing can be easy when a withdrawal from the commingled account that is used to acquire the disputed asset can be traced to a specific SP deposit or deposits into the account

Example: Aunt Lettie gives H $5K to help buy the happy couple’s new house

H holds the check until escrow is closing, deposits to bank and writes check to escrow company for $5K that same day (Swan calls this a “lump-lump” tracing)

Direct Tracing (cont’d)Direct tracing is typically performed with a combination of documents reflecting the source and destination of moneys used to acquire an asset with one party’s SP

The documents may include

Escrow statements Wills and estate documents Bank statements Correspondence

Direct tracings are, in essence, a slice, snapshot, or window of time depicting one or more transactions involving SP

Tracing Species: ExhaustionSee tracing is primarily a bank and investment account analysis performed by accounting experts

Tracing expert utilizes a variety of documents to track SP and CP in various accounts simultaneously, usually for a number of years

Direct Tracing Exhaustion: CP FundsThe “exhaustion” concept drives See tracings because, if the CP funds in the traced commingled account are “exhausted” (gone), then SP moneys available in the traced account, by default, go to buy the valuable asset

No “intent” is required by SP when CP is zeroed-out (exhausted)

RecapitulationRecapitulation is almost always inadequate

An annual recapitulation is simply showing the CP’s annual “income” is less than CP “expenses”

The conclusion is that CP had no money the day the valuable asset was purchased, so why trace?

Usually the Separatizer cannot meet the tracing burden by annual recapitulations [Marriage of Higinbotham, Marriage of Marsden, and See]

Recapitulation and See

Recapitulation & See Loophole

Marital Period RecapitulationRecapitulation/family expense tracing is based on the big picture of the community’s finances during

marriage to show CP could not have invested because CP moneys “were exhausted”: Recapitulation of the marriage (See killed this approach)

Reimbursements/DebtProperty

Reimbursement to CPReimbursement for one spouse’s payments on general SP debt (such as consumer and mortgage debt) with community funds

IRMO Walter (1976) 57 Cal.App.3d 802: H claimed he was legally entitled to use CP funds – court agreed, but W can still claim reimbursement of her share; H used community funds to pay taxes and make mortgage payments on his SP debt, therefore community gets reimbursed

Say the same thing: IRMO Lister (transfer of CP house to pay H’s SP debt) and IRMO Frick (CP used to pay SP tax obligation)

Reimbursement for Carrying Costs on SPLong line of cases say community is entitled to reimbursement for SP carrying costs

Estate of Turner (1939) 35 Cal.App.2d 576 (CP funds used to pay H’s SP real property taxes) Somps v. Somps (1967) 250 Cal.App.2d 328 (CP funds used to pay H’s SP real property

“taxes, incidental expenses … and the like”)

Reimbursement for Carrying Costs on SP (cont’d)Long line of cases say community is entitled to reimbursement for SP carrying costs (cont’d)

IRMO Epstein (1979) 24 Cal.3d 76 (CP funds used to pay H’s SP income taxes) IRMO Frick (CP funds used to discharge H’s SP premarital debt and postmarital consumer

loan used to pay H’s SP debt) IRMO Beltran (1986) 183 Cal.App.3d 292

Reimbursement for Carrying Costs on SP (cont’d)Case law has only provided dollar-for-dollar reimbursement as opposed to pro tanto interest

However, see IRMO Wolfe (2001) 91 Cal.App.4th 962 where the court struck down T/Ct reimbursement order because “tax payments do not come within the rule established by Moore.”

Not generally recognized by bench and bar

Carrying costs (mortgage interest, property taxes, and insurance) are improper in a Moore/Marsden formula

Reimbursement for Carrying Costs on SP (cont’d)IRMO Wolfe, is not a scholarly treatment of the issue and makes no sense in light of the long line of cases authorizing reimbursement

Holding in IRMO Epstein, is in direct conflict with IRMO Wolfe (reimbursement of income taxes was the issue)

Turner, Somps, and IRMO Frick (decided six years after Moore) clearly mandate the reimbursement of property taxes

Reimbursement for Carrying Costs on SP (cont’d)When there is a split of opinion on an issue in the Appellate Courts

T/Ct must follow the decision that it feels is better reasoned [Auto Equity Sales v. Superior Court (1962) 57 Cal.2d 450]

Review of Case Law Related to ReimbursementReimbursements/Debts

Statute of Limitations

Statute of Limitations (cont’d)Fam C 920 states that a right of reimbursement provided by this part is subject to the following provisions

“(c) The right shall be exercised not later than the earlier of the following times: 

(1) Within three years after the spouse in whose favor the right arises has actual knowledge of the application of the property to the satisfaction of the debt”

Statute of Limitations (cont’d)“We believe the trial court acted properly in requiring Jerome to repay Hiroko the money. The statute of limitations does not bar the collection of a debt of this nature since the statute of limitations does not run as between a husband and wife during the continuance of the marital relationship. (Mergenthaler v. Mergenthaler (1945) 69 Cal.App.2d 525, 529; 3 Witkin, Cal. Procedure (3d ed. 1985) Actions, § 469, pp. 498-499; see also Linker v. Linker (1970) 28 Colo.App. 131.)” [IRMO Frick]

Statute of Limitations (cont’d)There is also authority for the argument that a spouse who holds or invests funds “in trust” for the other spouse

Which is always the case with CP as spouses are express trustees for each other with regard to community assets used without the consent of the other spouse

Statute of Limitations (cont’d)“Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property” [Fam C 721(b)(3)]

No limitations period runs until the spouse “repudiates” the trust, which in family law terms means, among other things, claiming that a community asset is SP

Statute of Limitations (cont’d)Thomson v. Thomson (1927) 81 Cal.App. 678

“[T]he authorities are uniform in holding that the statute of limitations does not begin to run in favor of such a trustee until there has been a repudiation of his trust.”

CMRE Financial Services, Inc. v. Parton (2010) 184 Cal.App.4th 263 (CA-4(1))2-2006: After separation, H hospitalized incurring substantial medical fees

5-17-2006: W files for disso which is granted; on Form FL-142, W asserts that H’s medical debt is his alone

9-26-2006: Disso judgment entered by T/Ct, does not assign H’s medical debt to W 

In 2008, CMRE Financial Services, Inc. (CMRE), sues both H and W for debt of $26,083, plus interest and atty fees

CMRE Financial Services, Inc. (cont’d)CMRE asserts that W is liable for H’s debts as “necessaries of life” under Fam C 914

CMRE further argues, notwithstanding Fam C 916, W not relieved of liability for debt of H not assigned to W in disso judgment

T/Ct agrees and enters judgment against W

W appeals and CA-4(1): REVERSES

CMRE Financial Services, Inc. (cont’d)W liable for the costs incurred by H for “necessaries of life,” including hospital and medical fees, under Fam C 914; however, that liability subject to provisions of Fam C 916

Under Fam C 916, nondebtor spouse is liable for debts incurred by former spouse during marriage if the debt is assigned to the nondebtor spouse by disso judgment

Therefore, T/Ct erred in entering judgment against wife for the hospital fees

Appellate Analysis

CMRE Financial Services, Inc. (cont’d)“Our conclusion a dissolution judgment relieves a spouse of liability imposed by section 914 is of course supported by the express terms of section 916, which make all other provisions of that chapter of the Family Code, including section 914, subject to the protection section 916 provides to former spouses following dissolution of a marriage.’

“It is also consistent with the manner in which our courts have given section 916.”

Appellate Analysis

CMRE Financial Services, Inc. (cont’d)“The only exception to application of section 916… is where a creditor alleges a marital settlement agreement violates the separate provisions of the Uniform Fraudulent Transfer Act… (UFTA). (See Mejia v. Reed, 31 Cal.4th 657.)”

“Moreover, any liability for support which arose during the parties’ separation ceases following dissolution of the marriage, unless the court orders it extended. (§916, subd. (a)(2).)”

Appellate Analysis

CMRE Financial Services, Inc. (cont’d)

Educational ExpensesReimbursements/Debts

Fam C 2641: Educational Expenses(a) Community contributions to education or training" as used in this section means payments made with community or quasi-community property for education or training or for the repayment of a loan incurred for education or training, whether the payments were made while the parties were resident in this state or resident outside this state

Fam C 2641: Educational Expenses (cont’d)(b) Subject to the limitations provided in this section, upon dissolution of marriage or legal separation of the parties:

(1) The community shall be reimbursed for community contributions to education or training of a party that substantially enhances the earning capacity of the party. The amount reimbursed shall be with interest at the legal rate, accruing from the end of the calendar year in which the contributions were made.

(2) A loan incurred during marriage for the education or training of a party shall not be included among the liabilities of the community for the purpose of division pursuant to this division but shall be assigned for payment by the party.

Fam C 2641: Educational Expenses (cont’d)(c) The reimbursement and assignment required by this section shall be reduced or modified to the extent circumstances render such a disposition unjust, including, but not limited to, any of the following

Fam C 2641: Educational Expenses (cont’d)(c)(1) The community has 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 less than 10 years before the commencement of the proceeding, and that the community has substantially benefited from community contributions to the education or training made more than 10 years before the commencement of the proceeding.

Fam C 2641: Educational Expenses (cont’d)(c)(2) 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.

(3) 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.

Fam C 2641: Educational Expenses (cont’d)(d) Reimbursement for community contributions and assignment of loans pursuant to this section is the exclusive remedy of the community or a party for the education or training and any resulting enhancement of the earning capacity of a party. However, nothing in this subdivision limits consideration of the effect of the education, training, or enhancement, or the amount reimbursed pursuant to this section, on the circumstances of the parties for the purpose of an order for support pursuant to Section 4320.

Personal InjuriesReimbursements/Debts

Fam C 780Except as provided in Section 781 and subject to the rules of allocation set forth in Section 2603, money and other property received or to be received by a married person in satisfaction of a judgment for damages for personal injuries, or pursuant to an agreement for the settlement or compromise of a claim for such damages, is community property if the cause of action for the damages arose during the marriage.

Fam C 781(a) Money or other property received or to be received by a married person in satisfaction of a judgment for damages for personal injuries, or pursuant to an agreement for the settlement or compromise of a claim for those damages, is the separate property of the injured person if the cause of action for the damages arose as follows:

(1) After the entry of a judgment of dissolution of a marriage or legal separation of the parties.

(2) While either spouse, if he or she is the injured person, is living separate from the other spouse.

Fam C 781 (cont’d)(b) Notwithstanding subdivision (a), if the spouse of the injured person has paid expenses by reason of the personal injuries from separate property or from the community property, the spouse is entitled

to reimbursement of the separate property or the community property for those expenses from the separate property received by the injured person under subdivision (a).

Fam C 781 (cont’d)(c) Notwithstanding subdivision (a), if one spouse has a cause of action against the other spouse which arose during the marriage of the parties, money or property paid or to be paid by or on behalf of a party to the party's spouse of that marriage in satisfaction of a judgment for damages for personal injuries to that spouse, or pursuant to an agreement for the settlement or compromise of a claim for the damages, is the separate property of the injured spouse.

Fam C 2603: Community Estate(a) "Community estate personal injury damages" as used in this section means all money or other property received or to be received by a person in satisfaction of a judgment for damages for the person's personal injuries or pursuant to an agreement for the settlement or compromise of a claim for the damages, if the cause of action for the damages arose during the marriage but is not separate property as described in Section 781, unless the money or other property has been commingled with other assets of the community estate.

Fam C 2603 (cont’d)(b) Community estate personal injury damages shall be assigned to the party who suffered the injuries unless the court, after taking into account the economic condition and needs of each party, the time that has elapsed since the recovery of the damages or the accrual of the cause of action, and all other facts of the case, determines that the interests of justice require another disposition. In such a case, the community estate personal injury damages shall be assigned to the respective parties in such proportions as the court determines to be just, except that at least one-half of the damages shall be assigned to the party who suffered the injuries.

EndThank you