Community Property Lecture[1]

Community Property I. Basic Principles A. Separate property (SP) Property owned by either spouse before marriage Property acquired during marriage by gift, will, or inheritance (but not if bequest was in consideration for community labor) Property acquired during marriage with the expenditure of separate funds Source rule Separate ownership established by tracing Rents, issue and profits (income and capital gain) from SP B. Community property (CP): property, other than SP, acquired by either spouse during marriage 1. Acquired from labor during marriage, regardless of whether the proceeds came after the marriage ended a. Salary or wages earned by either spouse (including compensatory bonuses) b. Income from community assets c. Prize money won on game show d. Copyright and royalties e. However, if royalty payments received during marriage were proceeds of pre-marriage labor, such payments would be SP even though received during marriage 2. Community presumption a. All assets acquired during marriage are presumptively CP b. Absent a showing of the parties’ agreement or that title was taken in a form that overcomes the community presumption, burden of proof that a particular asset is SP is on the party so contending 3. Registered domestic partners a. Effective January 1, 2005, CP system applies to registered domestic partners upon filing a Declaration of Domestic Partnership with the Secretary of State b. Available only to same-sex couples and elderly opposite-sex couples receiving Social Security benefits C. Common law tenancy by the entirety CA does not recognize the common law tenancy by entirety estate, and does not have an “elective share statute” (as in most non-CP states) Quasi-CP statute is a form of elective share statute that restricts acquiring spouse’s power of testation D. When the economic community ends 1. Permanent physical separation; AND 2. Intent not to resume marital relation (communicated to the other?) a. Whether there is an intent not to resume the marital relationship is a fact question b. If either spouse maintains the façade of marriage, then this does not show an intent not to resume the marriage c. There must be communication of intent not to resume E. Treatment of community property upon divorce 1. For CP not divided on divorce, court retains continuing jurisdiction to award CP that was not previously adjudicated a. On motion, omitted or unadjudicated CP will be divided 50-50 UNLESS b. Court finds that “the interests of justice require an unequal division” 2. Absent contrary property settlement agreement, all CP must be divided equally a. Generally, each and every community asset (and liability) must be divided equally UNLESS b. Economic circumstances warrant awarding certain assets wholly to one spouse; AND c. Each spouse still must end up with 50% of all CP in terms of total economic value d. Examples where the “economic circumstances” exception applies, warranting a non-pro rata division (giving a particular asset wholly to one spouse and “cashing out” the other spouse with other assets) Family residence when loss of family home would uproot couple’s minor children If all shares of a closely held corporation are CP and one spouse is CEO of the corporation Awarding all of H’s pension to H, other assets to W, so they can go their separate ways 3. Disparity in earning power can be considered only as to spousal support (alimony) and child support 4. Statutory exceptions to the “equal (50-50) division on divorce” rule, with one spouse ending up with more than 50% in total value II. One spouse misappropriates CP before or during divorce One spouse has incurred educational debts (treated same as separately incurred debt) One spouse incurred tort liability not based on activity for benefit of community Personal injury award is given to injured spouse (unless interests of justice require otherwise) “Negative community”: community liabilities exceed assets i. Relative ability of spouses to pay the debt is considered ii. Concern is to protect creditors F. Lifetime and testamentary gifts of CP 1. Neither spouse can make an intervivos gift of CP without the other spouse’s written consent a. If, during marriage, H transfers CP to a third person, W can set aside the gift in its entirety b. Alternatively, upon divorce, W can take equal offsetting CP assets to recover her ½ CP c. If W learns about the gift after H’s death, W can set aside the gift as to her ½ CP interest (if value of the gift goes up) i. W’s recovery will be from either the donee or H’s estate ii. If H was insured under a $100K CP life insurance policy and named a third party as beneficiary, W can recover her ½ CP ($50K) from either the beneficiary or H’s estate 2. Federal preemption overrides CA’s CP system a. Federal law governs the payment of U.S. government savings bonds, even if purchased with CP b. If W uses CP to purchase U.S. savings bonds payable to a third person, H cannot recover his ½ CP interest in the bonds unless purchase of the bonds was a fraud or breach of trust as to H 3. Each spouse has the power of testamentary disposition over all of his or her SP, but over only ½ of the CP a. If one spouse attempts to devise more than his or her ½ interest in CP, surviving spouse may either “take under the will” or “take against the will” by making a widow’s election b. Widow’s election i. If W elects to take under the will, W must allow decedent’s will to devise more than decedent’s ½ interest in CP ii. Alternatively, if W elects to take against the will by claiming her ½ CP interest, W must relinquish all testamentary gifts in her favor iii. If W elects to take against the will, decedent’s will is read as though W predeceased decedent G. Acquisitions on credit during marriage 1. Nationally, funds borrowed during marriage, and goods purchased on credit during marriage are presumptively on community credit 2. In CA, general test is “primary intent of the lender”: what was lender primarily looking to in satisfaction of the debt/as to source of payment? a. If payment for property was funded partly by CP and partly by loan proceeds, borrowed funds (and credit purchases) are classified according to primary intent of the lender b. If lender was primarily relying on either spouse’s general standing in the community, personal creditworthiness or reputation, the note would be CP obligation and purchased property would be CP c. If lender was primarily relying on one spouse’s SP for repayment, then the note would probably be a SP obligation and purchased property would be CP to the extent that CP funded the purchase and SP as to the rest H paid $50K for real property with $10K CP and $40K loan proceeds If loan was secured by a mortgage on H’s SP, note is probably H’s SP obligation Real property is 1/5 CP and 4/5 H’s SP at the time of acquisition H. Confidential relationship raises fiduciary duty Spouses are subject to fiduciary duties that arise from their confidential relationship, imposing a duty of the highest good faith and fair dealing with each other Presumption of undue influence: if one spouse gains an advantage from a transaction, a presumption of undue influence arises, and that spouse has burden of proof to show that he did not breach his fiduciary duty A grossly negligent or reckless investment of community funds is breach of a spouse’s fiduciary duty Altering the Character of Assets by Agreement A. CA allows parties to opt out of CP and SP characterizations by agreement, either as to particular assets or as to all acquisitions 2 a. b. c. d. e. 1. Agreements altering the character of assets can be made prior to marriage (premarital agreements) or during marriage (transmutations) 2. No consideration is required for either a premarital agreement or for transmutation during marriage B. Premarital agreements 1. Governed by Uniform Premarital Agreement Act 2. Premarital agreement must be in writing, signed by both parties (oral agreement invalid) 3. Exceptions to writing requirement a. Oral agreement is fully executed (fully performed) i. Marriage alone is not sufficient performance to take case out of the SOF because that would eliminate the writing requirement in every case (since every CP issue concerns married people) ii. W may present evidence to prove the existence of an oral agreement if H’s conduct tends to show that he acted pursuant to a promise to act in that way (H’s conduct is consistent with the existence of a contract). If there is conduct that is consistent with an oral agreement, then the case can be taken out of the realm of the SOF. b. Estoppel based on detrimental reliance i. H orally promises that if W marries him, H will not assert any claim against W’s estate at death ii. If W relies on H’s oral promise not to assert a claim for his intestate share under the CA omitted spouse statute, H is estopped to assert writing requirement iii. Oral premarital agreement is enforceable against H because W detrimentally relied by not changing W’s will 4. In a premarital agreement, parties can agree that a. After marriage, each party’s salary and wages shall be that party’s SP b. Neither will claim a family allowance in the other’s estate c. Agreement can govern the disposition of property on separation, divorce or death, including: i. Making of a will or trust ii. Disposition of life insurance policies d. Agreement can deal with any other matter including personal rights and obligations 5. However, a premarital agreement cannot limit either party’s obligation to furnish child support because such limitation is prohibited by statute as against public policy 6. ***2 defenses to enforcement of a premarital agreement a. Not signed voluntarily i. Prior to 2002  Marriage of Bonds: the day before the wedding, W signed an agreement drafted by H’s attorney without consulting independent counsel  A premarital agreement is enforceable if a party could have postponed an informal wedding or obtained an attorney if that party wanted to ii. As of 1/1/2002: a premarital agreement shall be deemed not signed voluntarily (and thus unenforceable) unless the court finds that the party against whom enforcement is sought (1) Was represented by independent legal counsel at time agreement was signed (or waived representation in a separate writing); (2) Was given at least 7 days to sign between being presented with the agreement (and advised to seek legal counsel) and the signing; AND (3) If not represented by independent counsel, was fully informed in writing (in a language in which the party was proficient) of the terms and basic effect of the agreement and what rights and obligations were being given up o Party must execute document declaring that he or she received this information and o Identifying who provided the information b. Unconscionable i. Unconscionability is a matter of law to be decided by the court, not a question for the jury ii. For all provisions in a premarital agreement other than waiver of spousal support, agreement is unenforceable if it was “unconscionable when made” AND 3 III. (1) No fair, reasonable and full disclosure of the other party’s property or financial obligations (2) Right to disclosure was not waived in writing; and (3) Party seeking to avoid enforcement had no adequate knowledge of the other party’s property or financial obligations iii. Waiver of spousal support  Pendleton v. Fireman: right to spousal support can be waived or modified by premarital agreement  2001 statute enacted in response to Pendleton: provision in a premarital agreement waiving (or otherwise affecting) spousal support is unenforceable on one of two grounds (1) Unenforceable unless party against whom enforcement is sought was represented by independent legal counsel at time agreement was signed OR (2) Even if party was represented by independent legal counsel, provision regarding spousal support is unconscionable at time of enforcement (i.e. unenforceable provision regarding spousal support may not become enforceable solely because the party against whom enforcement is sought was represented by independent counsel) iv. Old cases (pre-Uniform Premarital Agreement Act) held that a premarital agreement is unenforceable if its terms tend to promote divorce  However, a post-UPAA case ruled that agreement to pay W $100,000 in the event of divorce did not violate the “no-promotion-of-divorce” restriction C. Marital agreements (transmutations) 1. When the character of an asset is changed from SP to CP, from CP to SP, or from one spouse’s SP to the other spouse’s SP during marriage, this results in a transmutation 2. Transmutation can be by gift or by agreement 3. Before 1985 a. Oral transmutations were permitted, whether based on express agreement or implied-in-fact b. Spouses could not be expected to act formally by reducing their express or implied agreements over the breakfast table (or pillow) into formal written contracts c. Problems with pre-1985 rule i. In a divorce proceeding, W would testify as to an alleged oral agreement that benefited W ii. H would deny the existence of any oral agreement adverse to H’s interest 4. As of 1/1/1985 a. Pursuant to Family Code §852, transmutations must be i. In writing ii. Signed by the spouse whose interest is adversely affected AND iii. Expressly state that a change in ownership is being made  Applies to all transmutations  SP into CP  CP into SP  One spouse’s SP into the other spouse’s SP by gift b. Exception: gifts of tangible property of a personal nature which are “not substantial in value taking into account the circumstances of the marriage” do not require a signed writing i. Family Code §852 does not apply to birthday/anniversary presents (e.g. clothing, jewelry, electronics) ii. When H uses CP to buy a watch for W’s birthday, the watch becomes W’s SP c. Wills i. In any proceeding commenced before the death of a testator, a statement in testator’s will as to the character of property is not admissible as written evidence of transmutation ii. Therefore, before H’s death, H’s will is not admissible in a divorce proceeding as evidence of a written transmutation agreement Effect of How Title is Taken A. Property acquired before 1975 4 1. Married Women’s Special Presumption: where written title to CP was taken in a married woman’s name before 1975, and title didn’t indicate whether CP or joint tenancy was intended, such property was presumptively wife’s SP a. Exception to general principle that the fact that an asset is titled in one spouse’s name alone does not overcome the community presumption b. Before 1975, except for W’s earnings H had sole management power over CP c. Thus if title was taken in W’s name, H was presumed to have intended a gift to W d. Presumption was irrebuttable as to a 3rd party BFP who bought an asset from W in reliance on the fact that it was titled in W’s name, and therefore must be W’s separate property e. Presumption was rebuttable as between H and W i. H could rebut the presumption by showing that he did not intend to make a gift to W, but had some other reason for taking title in her name ii. H was concerned about creditors’ claims or iii. W took title in her name without H’s knowledge or consent 2. Effect of Married Women’s Special Presumption on property acquired before 1975 a. Title is taken in the name of H and W as “husband and wife” or “Mr. and Mrs.” i. Married Women’s Special Presumption does not apply ii. Property is CP b. Title is taken in the name of H and W as joint tenants with right of survivorship i. Married Women’s Special Presumption does not apply ii. Property is a joint tenancy c. If title is taken in W’s name alone or as “W, a married woman,” property is W’s SP d. Title is taken in the name of W and W’s brother i. Each are tenants in common ii. W’s ½ interest is W’s SP e. Title is taken in the name of H and W with no reference to marital status i. Creates a tenancy in common ii. Because Married Women’s Special Presumption applies to W’s ½ interest, W’s ½ is SP while H’s ½ is CP iii. Therefore, W gets 75% and H gets 25% of the property upon divorce 3. Married Women’s Special Presumption applies in 3 situations a. Title taken in W’s name alone before 1975: property would be W’s SP b. Title in name of W and H before 1975, but not taken in joint tenancy form, or as “husband and wife,” or as “Mr. and Mrs.”: property would be ½ W’s SP and ½ CP c. Title in name of W and some third party before 1975: W would be a tenant in common with third party 4. Property acquired with CP after 1975 a. Although Married Women’s Special Presumption does not apply, if CP is used to take title in W’s name alone, an inference arises that H intended a gift to W b. However, no inference of gift if H took title in W’s name to insulate home from corporate creditors B. Presumptions that arise from taking title in both spouses’ names (in “joint and equal form”) 1. Marriage of Lucas: if H and W took title to the family residence as joint tenants, the residence was presumptively CP even though W contributed W’s SP for part of the purchase price and for improvements a. Controlling factor was the affirmative act of specifying a form of ownership in the conveyance of title b. Taking title in a form that raised a presumption of community property was inconsistent with the idea that W intended to preserve a SP ownership interest c. Merely tracing a portion of the purchase price to W’s SP (the source rule) did not, by itself, overcome the presumption of community property d. Therefore, W’s subjective intent is immaterial e. Absent proof of an agreement that W was to have a SP interest, by taking title in CP form, W must have intended a gift to the community f. Unless such an agreement is established, W has no separate ownership interest, and has no claim for reimbursement 5 IV. 2. Upon divorce or legal separation, the legislature has modified the Lucas rule as it relates to reimbursement a. After 1984, H and W buy a house for $60K, using $15K of W’s separate funds and $45K of community funds i. Title is taken in the name of H and W “as joint tenants” ii. Thereafter, W contributes $10K of her separate funds for improvements iii. In a divorce action W seeks to trace the downpayment to show that the house is ¼ W’s SP iv. Also, W seeks reimbursement for improvements made with her SP v. Pursuant to anti-Lucas statutes, property is not part of W’s SP even though ¼ of the downpayment was from W’s SP b. 2 anti-Lucas statutes i. For purposes of division of property upon divorce or legal separation, property acquired during marriage in joint and equal form is presumptively CP and subject to equal (50-50) division upon divorce  Joint and equal form: o “H and W” o “H and W, husband and wife” o “Mr. and Mrs. H” or o “H and W as joint tenants”  CP presumption can be rebutted only by: o Express statement in the deed or other instrument of title that the property (or a portion thereof) is SP and not CP; or o Written agreement by the parties that the property (or a portion thereof) is SP and not CP ii. For purposes of division on divorce or legal separation, spouse who made post-1984 contributions of SP to the acquisition or improvement of CP is entitled to reimbursement without interest for contributions to downpayment, improvements, and principal payments on the mortgage (DIP)  But no reimbursement for SP used to pay interest on the mortgage, taxes, insurance, maintenance, etc.  Also, reimbursement cannot exceed net value of property c. However, if the deed names only W as grantee, the above statutes do not apply i. Under the source rule and tracing, the property is ¾ CP and ¼ W’s SP ii. Since title was not taken in joint and equal form, proof of part-SP and part-CP ownership by tracing is not inconsistent with the title form d. Anti-Lucas statutes do not apply if no title document is involved (e.g. personal property purchases) e. Upon death of one of the parties, reimbursement is still governed by Lucas (i.e. no reimbursement for DIP) 3. In the context of a deceased spouse’s estate, the following presumptions apply, regardless of the source of funds used in the acquisition a. If title is taken in joint and equal form, the asset is presumptively CP i. On H’s death, H’s ½ CP interest passes under his will ii. If H leaves no will, W succeeds to the entire CP by intestate succession iii. Presumption of CP can be overcome only by proof of an agreement that the spouse who contributed SP was to have a SP ownership interest b. If title is taken in the name of “John and Mary Smith as joint tenants,” the asset is presumptively held in a joint tenancy, and title passes to the survivor by right of survivorship c. If title is taken in the name of “John and Mary Smith as community property with right of survivorship,” the asset is CP, and title passes to the survivor by right of survivorship Effect of Parties’ Actions on Characterization of Assets A. Pro-ration (“buy-in”) rule applies to 1. Debt paid down with CP after marriage for a. Installment purchase by one spouse before marriage or b. During marriage, one spouse’s inheritance of land subject to mortgage 6 2. The community estate takes a pro rata portion of the property, measured by the amount (percentage) of principal debt reduction attributable to the expenditure of community funds a. (Principal debt reduction attributable to CP) / (purchase price) b. CP component is measured by the amount of principal debt reduction (not the dollars expended) attributable to community funds c. Only principal payments that reduce the debt trigger the buy-in rule d. Payments of mortgage interest, property taxes, insurance premiums, etc., are not counted 3. Life insurance policies: ownership determined by the “time rule” a. Whole (cash value) policies i. While single, H takes out a $100K whole (cash value) life insurance policy that names his mother as primary beneficiary ii. H pays all annual premiums out of his salary iii. After making 6 annual premium payments, H marries W and then makes 4 additional premium payments iv. H dies 4 years after marrying W without changing beneficiary designation v. Life insurance policy is 60% SP and 40% CP vi. W gets $20K (W’s ½ CP property interest) vii. H’s mother gets $80K (H’s SP and ½ CP interest) b. Term policies: pure insurance with no investment feature and no cash surrender value i. While single, H takes out a $100K term insurance policy and pays annual premiums out of his salary or annual premiums are paid by H’s employer ii. After 6 years H marries W and continues to pay annual premiums out of H’s salary iii. Upon H’s death 4 years after marrying W, the term insurance policy is 100% CP and 0% SP iv. Because each annual premium buys 1 year of insurance, last premium payment determines the policy’s character (no investment feature) B. Community funds used to improve SP 1. When one spouse expends CP to improve his or her own SP a. CP expenditures for improvements to one spouse’s SP do not give the community a proportionate share of ownership in that spouse’s improved SP i. Law of fixtures: improvements become part of real property ii. Improvements do not change the character of ownership b. Community has reimbursement claim for greater of: i. Cost of improvements (amount of CP expended) or ii. Enhanced value of SP attributable to improvements paid from community funds 2. When one spouse expends CP to improve the other spouse’s SP (split of authority) a. No reimbursement claim because of presumption of gift i. Some courts have held that using CP to improve the other spouse’s SP gives rise to a presumption of gift to other spouse’s separate estate ii. Such presumption could be overcome only by evidence of an agreement to reimburse the community estate d. Other courts have rejected the presumption of gift and granted reimbursement to the community 3. Anti-Lucas reimbursement statute does not apply to CP expenditures on SP (only expenditures of SP on CP trigger anti-Lucas statutes) a. For purposes of division upon divorce or legal separation, spouse who contributed SP to the acquisition or improvement of CP is entitled to reimbursement without interest for contributions to DIP (downpayment, improvements, principal payments on mortgage) b. For purposes of distribution upon death of one of the spouses, Marriage of Lucas still applies: where title was taken in joint and equal form, no claim for reimbursement for expenditures of SP to improve CP unless there exists proof of an agreement to reimburse C. Commingled bank accounts Recapitulation accounting a. H owned substantial SP at the time of his marriage to W, including $200K in a savings account on which H was the only authorized signatory i. During marriage, H deposited salary checks and additional separate funds into the account 7 V. H routinely made withdrawals to pay family living expenses and to buy various assets, title to which was taken in H’s name alone iii. After 15 years of marriage, amount on deposit is $60K iv. Upon divorce, H seeks to prove that all assets purchased from the account are H’s SP by recapitulation accounting v. H totals all family living expenses over 15 years of marriage to show that family living expenses exceeded 15 years of community income by a substantial margin vi. H argues that all CP must have been exhausted, and therefore he must have used his SP to purchase the assets b. The mere fact that SP funds are commingled with CP funds does not transform or transmute the SP into CP c. However, burden of proof is on H to show that each asset was acquired with separate funds d. H has not proved that CP funds were unavailable when each asset was purchased Family expense presumption: expenditures for family expenses (food, housing, clothing, recreation, etc.) were made with community funds (to the extent available), even though it is known that separate funds also were available a. Because of commingling and inadequate records, some family expenses may have been paid with SP funds b. In which case, presumption arises that SP owner made a gift to the community with no reimbursement intended, absent contrary agreement Exhaustion method H’s records show that on 9/20/95 the account balance dropped to $3K H deposited $20K of his separate funds on that date On 9/22 H withdrew $5K to pay his daughter’s tuition (thereby exhausting the CP) On 9/24 Herb withdrew $10K to buy 200 shares of Motown common stock (therefore the stock must have been purchased with H’s SP) Direct tracing method a. 2 requirements: i. Sufficient separate funds were then available ii. Intent: H intended to use SP to purchase the asset b. Caveat: anti-Lucas statutes do not apply to joint bank accounts between H and W i. Anti-Lucas statutes are in the Family Code ii. Bank accounts are governed by the Probate Code, which is why tracing is permitted in cases involving bank accounts even though the account is titled in both spouses’ names ****Characterization Problems Raised by Certain Assets Business owned before marriage greatly increases in value during marriage 1. W owns a software company in San Jose, worth $100K at the time of her marriage to H, but worth $4M when the couple divorces 10 years later a. H contends that a substantial portion of the business is CP because W worked long hours, they rarely took vacations, H stayed home to watch their daughter, and W drew a modest salary b. Thus the great increase in business was from W’s labor, a community asset c. W contends that the increase in value stemmed from incredibly good fortune and timing and that only an idiot couldn’t have made a fortune when the computer software business exploded in San Jose in the 1990s d. W attributes the growth of the business to bright, devoted and underpaid employees e. W further contends that the salary she drew was substantially far above the going rate for similar positions f. Since the business was W’s SP at the time of the marriage, W argues that the business is still entirely her SP 2. Pereira: personal skills and effort a. Pereira formula: pay simple interest (at legal rate of 10% per annum) on value of the business at the time of marriage i. If H and W were married for 10 years, W is entitled to the initial $100K value at the time of the marriage, plus 10% simple interest 8 ii. ii. 10 x $10K (interest at 10%) = $100K, for a total of $200K iii. Therefore, the business is 5% W’s SP (200,000/4,000,000), and the balance (95%) is CP b. Use Pereira formula where spouse’s time, skill and effort are major factors in growth of business c. Pereira tends to favor the CP estate, because spouse gets only interest on initial value of business d. Factors: i. Spouse possesses unique skills, contributes creative ideas or develops new manufacturing techniques ii. Spouse works long hours iii. Spouse draws modest salary 3. Van Camp: valuable company or asset a. Van Camp formula: value community labor, the rest is SP i. Start with value of spouse’s services at market rate (i.e. not what W actually received, but what executives in similar positions would receive as compensation) ii. Minus family expenses paid from community funds (minus family expenses paid by the business) iii. = CP component iv. The balance is SP  H and W were married for 10 years, market rate for executives in comparable positions was $100K/year, and family living expenses were $80K/year  Value of CP component: $1M (value of community labor) – $800K (family expenses paid from CP) = $200K  The business would be 5% CP (200,000/4,000,000), and the balance (95%) would be W’s SP b. Use Van Camp where capital investment was the major factor in growth of business, and spouse’s skills and efforts were less of a factor c. Van Camp formula tends to favor spouse’s SP d. Factors: i. Spouse was paid substantial salary and drew large bonuses (thus the community was handsomely compensated) ii. Spouse was a passive investor 4. Reversal of Pereira/Van Camp accounting a. W manages CP business b. After the economic community has ended but before divorce, W continues to work in the business, which increases in value c. Formulas are same, but benefited marital estates are reversed d. If personal skills and effort are the key factor (Pereira), pay interest on value of CP at time of separation  the rest is W’s SP e. If valuable company or asset is the key factor (Van Camp), determine W’s SP interest by deducting W’s living expenses during the separation from the value of W’s services at market rates  the rest is CP Pension benefits Employee retirement benefits accumulated during marriage, whether or not vested at time of divorce, are CP to the extent they were earned during marriage Pro-ration rule (“time rule”): (years of service while married) / (total years of employment to retirement) If H is not yet eligible for retirement at the time of the divorce action, a decree can award W her share of the benefit in 3 ways “When and if received” decree Cash out by awarding other assets of equal value Court can retain continuing jurisdiction If H is eligible for retirement at the time of the divorce action, W is entitled to seek a lump sum payment of her community share of H’s pension benefit even though H hasn’t actually retired a. Since H could have retired at the time of divorce, H’s retirement benefit had matured b. H’s election not to retire cannot defeat W’s present right to her ½ of the community component 9 If marriage ends by death rather than divorce, the nonparticipant spouse (“NPS”) does not have a devisable interest in a qualified plan if she predeceases the participant If NPS divorces participant spouse, her CP interest in a qualified pension plan is recognized Under federal law, NPS can get a qualified domestic relations order (QDRO) and receive payments from the plan However, under Boggs and federal preemption, the QDRO benefit expires on NPS’s death and she does not have a devisable interest in the remaining payments under the QDRO Therefore, due to federal preemption, W’s community interest in H’s pension benefit cannot pass under W’s will to her son Disability retirement payments and workman’s compensation benefits are treated as wage replacements Such payments are classified according to when received, not when earned After divorce, wage replacements replace post-divorce earnings and are thus SP Severance pay (split of authority) Some courts hold that severance pay is SP because it replaces lost earnings which, after the divorce or permanent separation, would be H’s SP Other courts hold that severance pay is CP because it arises from a collective bargaining agreement and thus is earned by employment during marriage If H could elect to take, at his option, either regular retirement benefits at $1,000/month or disability retirement at $900/month and chooses disability retirement, W has a CP interest in H’s disability retirement because H can’t elect to defeat W’s CP interest. If he had an option then he can’t elect to defeat her interest. McCarty v. McCarty: under federal preemption, a spouse did not have any CP interest in a military retirement plan Congress responded by enacting the Uniformed Services Former Spouses’ Protection Act (USFSPA) As a result, spouses of military personnel do have CP rights in a military retirement plan Stock options Stock options awarded during marriage are CP because they are a form of incentive compensation earned during marriage (Years from date option awarded to date economic community ended) / (years from date option awarded to date option becomes exercisable) Goodwill of a professional practice Goodwill of a professional practice (to the extent acquired during marriage) is CP subject to division on divorce Goodwill: those qualities that generate income beyond that derived from professional’s labor and reasonable return on capital and physical assets (the factor that raises the expectation of continued patronage) Valuing goodwill Expert witness testimony as to goodwill’s value or Capitalization of excess earnings attributed to goodwill (Net annual return from practice) – (reasonable value of professional’s services) – (reasonable return on capital/physical assets) = excess earnings attributed to goodwill Excess earnings are then capitalized Discount value of excess earnings to present value and divide by 2 to determine spouse’s ½ CP interest in goodwill Buy-sell agreement is a factor but not conclusive as to value of goodwill Educational expenses One spouse’s professional degree earned during marriage is not property that is subject to division on divorce The community is entitled to reimbursement if education during marriage enhanced the educated spouse’s earning capacity Reimbursement is also available if educational expenses were incurred before marriage and educational loans were paid with community funds during marriage Defenses to reimbursement of community estate for educational expenses Community has already substantially benefited from the earnings of the educated spouse If more than 10 years have elapsed since the decree was awarded, presumption is that the community has substantially benefited 10 VI. Unless presumption is rebutted, no reimbursement Other spouse also received a CP-funded education Education was obtained by spouse seeking spousal support Education enabled that spouse to engage in employment that reduced the need she otherwise would have for spousal support Educational loans used to finance one spouse’s education are assigned solely to that spouse who incurred the educational debt Tort and Contract Liability Tort liability 1. Where the other spouse was the tortfeasor, tort recovery is injured spouse’s SP (otherwise, tortfeasor would benefit from his wrongful act) 2. When damages are recovered from a 3rd party, tort recovery is CP 3. However, in property division upon divorce or legal separation, tort recovery is awarded entirely to injured spouse so long has the recovery has not been expended or commingled with other community funds UNLESS interests of justice, including economic need, require otherwise (e.g. personal injury award is virtually the entire community estate) 4. On either spouse’s death, tort recovery will be treated as CP 5. CP is subject to tort liability of either spouse If tortfeasor was performing an act for the benefit of the community, tort liability is first satisfied from CP, and then from tortfeasor’s SP If tortfeasor was not performing an act on behalf of the community, tort liability is first satisfied from tortfeasor’s SP, and then from CP Judgment creditor cannot reach SP of non-negligent spouse because that spouse was not personally liable Management powers 1. General rule: equal management powers a. Each spouse has equal management and control over all CP b. Thus each spouse has full power to buy or sell CP and contract debts without the other spouse’s joinder or consent 2. Business exception: spouse who operates a business interest that is all or substantially all community personal property has primary management and control of the business a. While managing spouse can act alone in all transactions, he or she must give written notice to other spouse of any sale, lease, or encumbrance of all or substantially all of the personal property used in the business b. Failure to give written notice does not affect validity of transaction as to 3rd party, but other spouse has remedy against managing spouse if transaction has substantially impaired other spouse’s ½ interest in CP estate 3. Personal belongings exception: one spouse cannot sell or encumber personal property used in family dwelling (furniture, furnishings, etc.) or clothing without written consent of other spouse a. Transaction is voidable by the other spouse at any time b. No statute of limitations 4. Conveyances of CP real property: joinder of both spouses required a. Because statute protects CP that is real estate, non-consenting spouse may demand that transferee reconvey transferred property back to the community, even if transferee is a bona fide purchaser for value b. Non-consenting spouse must void transfer to BFP within 1 year statute of limitations c. If transferee was not a BFP (e.g. transferee knew that transferor was married), 1 year statute of limitations does not apply 5. Neither spouse can transfer or encumber “my ½ interest in CP” a. Only the entire interest in CP can be transferred or encumbered b. Exception: family law attorney real property lien i. A spouse can unilaterally encumber her ½ CP interest in community real property to pay the family law attorney representing her in a divorce action, but not to pay any other creditor 6. Each spouse can incur community debt or obligation a. CP can be reached even if the debt was incurred before marriage 11 VII. b. Exception: earnings of non-debtor spouse cannot be reached for premarital debts if held in a separate account (in which the other spouse has no right of withdrawal) and not commingled with other CP funds c. Non-debtor spouse’s SP cannot be reached in satisfaction of debtor spouse’s debts because nondebtor spouse is not personally liable d. Duty to support: each spouse has the duty to support the other spouse and minor children of the marriage i. Each spouse is personally liable for other spouse’s contracts for necessaries during marriage  Each spouse’s SP can be reached in satisfaction of other spouse’s medical bills  If CP funds were available, spouse who paid community debts with SP funds can be reimbursed from the community estate ii. Each spouse’s SP can be reached in satisfaction of other spouse’s contracts for necessaries even if, when the debt was incurred, the spouses were separated and the economic community had ended (as long as spouses were still married). Duty to support terminates after the actual marriage terminates. 7. After divorce, a creditor cannot reach CP awarded to a spouse unless that spouse a. Incurred the debt OR b. Was assigned the debt by the court Quasi-CP: in spousal debt situations, quasi-CP is treated the same as CP 1. Tort liabilities 2. Contractual liabilities Multistate Problems A. Quasi-CP: property acquired while a couple was domiciled in a non-CP state that would have been classified as CP had it been acquired under the same circumstances in CA 1. On divorce, quasi-CP is treated the same as true CP (divided 50-50) a. If one spouse uses community funds to buy real estate in a non-CP state, that foreign real property is subject to equal division as CP upon divorce b. Foreign real property and the situs rule i. Award foreign real property to acquiring spouse and other assets of equal value to nonacquiring spouse OR ii. Require acquiring spouse to execute any conveyances that are necessary (i.e. rely on court’s personal jurisdiction over acquiring spouse, as it does not have in rem jurisdiction over foreign land) 2. On death of acquiring spouse, quasi-CP is treated the same as true CP a. Acquiring spouse can bequeath only his ½ interest in the quasi-CP b. However, foreign real property is controlled by the law of state where the real property is located for purposes of division on death (Situs Rule) i. Situs rule: disposition at death of title to land is governed by laws of state in which the land is located  In a common law state, how title is held determines ownership  Acquiring spouse may devise all foreign real property under his will ii. CA has no power over foreign real property upon acquiring spouse’s death iii. Non-acquiring spouse should seek a remedy recognizing her ½ ownership interest under a resulting trust or constructive trust 3. Quasi-CP statute does not give the non-acquiring spouse an ownership interest (that would be unconstitutional) a. Non-acquiring spouse does not have any power of disposition over quasi-CP if she predeceases the acquiring spouse b. By restricting the acquiring spouse’s power of disposition, the quasi-CP statute operates much like elective share statutes found in non-CP states c. Had H and W continued to reside in Kansas, on H’s death W would be protected against disinheritance by the Kansas elective share statute d. W lost that protection when they moved to CA e. Quasi-CP statute is designed to replace that protection 12 VIII. 4. For purposes of creditors’ claims, quasi-CP is treated the same as true CP B. Other CP states 1. Wisconsin 2. Louisiana 3. Texas 4. New Mexico 5. Arizona 6. Washington 7. Idaho 8. Nevada Property Acquisitions Outside the Marital Relation CA does not recognize common law marriages 1. Only legally married spouses and registered domestic partners can hold title as CP 2. If an unmarried couple takes title in both names “as husband and wife,” a tenancy in common is created 3. Exception: where common law marriage was validly contracted in another state (ID and TX) CA will recognize it 4. Property relationships between an unmarried couple can be governed by contract law, as long as the contract is not based solely on sexual services a. Contract can be express or implied from conduct b. Partnership or joint venture divided 50-50 Putative spouse: objectively reasonable and good faith belief that he or she was lawfully married Assets acquired during putative marriage are quasi-marital property When putative spouses separate, assets are divided 50-50 (same as CP) Split of authority Case law suggests that if a putative marriage is established, property acquired by either party is subject to equal division, even though one party was at fault in inducing the other to believe that they were married However, statutes by their terms appear to give a remedy only to the innocent party (guilty party should be estopped) Where both individuals are aware that they are not lawfully married a. Relationship is characterized as unmarried cohabitants b. Absent an agreement, each individual keeps any property that he or she acquired 13