I.
Introduction A. Definitions 1. Separate property a) all property owned by the person before marriage b) all property acquired by the person after marriage by gift or inheritance. c) the rents and other profits of separate property d) earnings while living separate and apart 2. Community property - everything else. a) all property gained by the use of the spouse’s energy, skill and time during the marriage is community property. 3. The Exchange Rule - separate property may be exchanged for other property, and it still keeps its separate property nature. Same is true of community property. a) ex: in George v. Ransom, the court held that dividends from stock bought with separate property are separate property tracing principle 4. husband and wife occupy a fiduciary relationship to each other based on a confidential relationship a) requires the utmost in good faith and fair dealing b) same as unmarried business partners c) detailed books are not required to be kept, but are clearly suggested B. Prenuptial Agreements/Contractual Modification of Comm. Prop. Rights 1. Requirements - Uniform Prenuptial Agreement Act - 1/1/86 (not retroactive) a) must be in writing and signed by both parties (1) note that for transmutation, only the party whose interest is adversely affected must sign (2) however, if there are equitable factors such as detrimental reliance, partial or whole performance, or action by the parties recognizing the existence of the contract, then an oral agreement may be enforced. Hall v. Hall b) no consideration is required c) parties must be competent to contract (1) California will recognize agreements made by minors who are emancipated, or made out of state by minors who are legally competent to contract in their home state. d) must be in anticipation of marriage
1
2.
not enforceable as a prenuptial if the parties are only planning on living together, but may be enforceable under contract (See Marvin below). e) must be voluntary f) must not be unconscionable (1) must fairly disclose existing property at the time of agreement (2) there was no waiver of right to disclosure (3) spouse did not have reason to know about existing property (4) two prong test: (a) procedural fairness - was the execution of the document fair? (i) ex: if the prenuptial is forced on the spouse at the wedding ceremony, it may be invalid due to duress (b) economic fairness - is the agreement lopsided? (i) can not say what husband earns will be separate property but what wife earns will be community property (5) unconscionability is judged as of the time of the execution of the document (a) ex: if B/A is agreed to be separate property and at the time of execution it is worth $5k doesn’t matter if it later strikes oil. g) real property rights must be recorded to be binding on a third party BFP (but is enforceable against spouse) (1) personal property rights need not be recorded to be binding on a third party BFP. h) can not adversely affect child support i) advise that both parties retain separate counsel j) must not encourage divorce (also judged at time of execution) (1) ex: a prenuptial agreement that provides for the wife (who has no other income or separate property) to get a huge sum of money upon divorce is contrary to public policy - Noghrey (2) a property settlement in anticipation of divorce does not encourage divorce because the couple has already decided to divorce. k) amendments to prenuptial agreements must be in writing and signed by both parties Proper Subject matter for prenuptial agreement: 2
(1)
C.
property rights property division at death or divorce or any other event (1) ex: our property is separate now but becomes community property after the birth of a child. c) choice of law d) anything not in violation of public policy or involving criminal activity (1) ex: a prenuptial agreeing to raise the children in a particular religion is void as against public policy due to the constitutional freedom to educate your child as you wish (2) ex: prenuptial based on a promise to take care of the spouse during his dying years is unenforceable as against public policy because wife already has duty to care for husband. - Borelli v. Brusseau (3) the intent of the parties is not controlling, the effect of the agreement is what the court will look at 3. Practical advice in drafting: a) document all your advice to your client b) always state the circumstances under which the agreement was drafted, c) put in an express expiration of 2 years which will force them to renegotiate and update it, d) draft a balanced agreement e) avoid terms that promote divorce f) include full disclosure of assets and liabilities, g) do not attempt to waive or limit spousal support h) include a severability clause Transmutations 1. the contractual changing of community property into separate property. a) however, separate property contributions to pay community expenses is generally presumed to be a gift. 2. After 1/1/85 it must be in writing and signed by the spouse whose interest is adversely affected (prior to 1/1/85, oral transmutations were allowed). a) the writing must contain an express declaration that you are giving up your community property interest. -MacDonald (1) ex: a simple note saying “I bought this computer for you” might not be enough because it may not clearly indicate that you are giving up ownership (also is not signed), but it might fall under the personal property exception (below). 3
a) b)
II.
probably should say “I give my spouse all the interest that I may have in this item.” b) this prevents fraud on creditors caused by fictional oral transmutations between colluding spouses c) transmutations of real property must be recorded in order to be effective against third party BFPs. d) writing is not required for items of a personal nature such as clothing, jewelry and other gifts that are not of substantial value and are used principally by the receiving spouse. e) oral transmutations are not allowed under any circumstances (contrast with oral prenuptial agreements which may be enforced on equitable principles). Classification of Property A. Community Property - there is a weak general presumption that property acquired during marriage is community property 1. the longer the marriage, the stronger the presumption - Jolly a) the more likely the property was acquired with community funds; and b) the harder it would be to trace it back 2. Rebutting the weak general presumption a) direct tracing - tracing the source of the funds used to purchase the property to separate funds rebuts the weak general presumption of community property. (1) ex: a dollar that is used to buy a life insurance policy was traced to separate property, and thus the proceeds of the policy are separate property - Fidelity (2) ex: money in a checking account was traced to the sale of separate property land owned before marriage, so the checking account funds are separate property even though the account was in joint names (title is not controlling) because there was no evidence (writing) to support a transmutation - Freese v. Hibernius (3) ex: proceeds of a settlement in contest of a will are separate property because the right to contest the will is a separate property right (like inheritance). - Estate of Clark b) indirect tracing - showing that all community funds were exhausted, and therefore the purchase funds must have come from separate property. - Wilson (1) disfavored and difficult because you are trying to prove a negative.
(2)
4
B.
rules: community property is presumed to be used first in paying community debts. (3) ex: if wife did not work during marriage, and there is no evidence of other separate property, then the presumption is not rebutted - Jolly c) burden of proof: (1) the person rebutting the weak general presumption (i.e. the person claiming that it is separate property) has the burden of proof as to direct or indirect tracing. d) standard of proof - clear and convincing evidence Separate Property 1. Living Separate and Apart a) either spouse’s earnings while living separate and apart are considered separate property. (1) ex: if husband leaves wife with no intent to return, both his and her income thereafter become separate property. b) definition of separate and apart (1) a present intention to part ways and not resume marital relations - Baragry (a) ex: if the husband eats dinner at home several times a week, she does laundry, and they keep up appearances, then they are not living separate and apart. (b) ex: if husband puts gun to wife’s head and tells her to “get out” - Patillo (2) the parties conduct must indicate a complete and final break - Von Der Nuell (a) trial or conditional separation is not living separate and apart. (i) ex: if wife says “get out and don’t come back unless you go to AA”, that is only a conditional separation not permanent parting of the ways. (b) physical separation is not determinative, but it weighs heavily in the factual consideration of whether there was a permanent parting of the ways. (c) not necessary that both parties want to separate - even if one side wants to reconcile, it still might be a permanent parting of the ways if the other side does not want to reconcile.
(2)
5
2.
filing a petition for dissolution is not alone sufficient, but a declaration of legal separation is sufficient. (i) in Hardin, the wife filed for dissolution three times but never went through with it - not separate and apart. (e) a “clean break” is required - letting the spouse down easily is not rewarded. (f) once a reconciliation occurs, it negates all of the past actions of living separate and apart - i.e. can’t have successive periods of living separate and apart - Jaeschke c) burden of proof for living separate and apart is only preponderance of the evidence (contrast with clear and convincing evidence to rebut the weak general presumption of community property - above). Married Woman’s Separate Property Presumption a) strong presumption any acquisition by a married woman by an instrument in writing prior to 1/1/75 is presumed to be her separate property. (1) if the title is in the wife’s name only - it is presumed to be her separate property alone (a) ex: in 1914, husband made a gift of stock to the wife, putting title in her name only. It is presumed to be her separate property (today it would require a writing for transmutation). (2) if the title is in the wife’s name and a third party, they are presumed to be tenants in common (a) ex: title as “Glen and Mina Spearman” is presumed to be tenants in common, even though they may be married because it does not indicate that they are married (they may be mere relatives). (b) if husband and wife are judged tenants in common because the title does not show them as husband and wife, then the husband’s half is community property (acquired with his EST), and the wife’s half is her separate property (married woman’s presumption). - Dunn v. Mullen (3) if the title is in the husband and wife as husband and wife, then the presumption is community property.
(d)
6
C.
ex: title as “Mr. and Mrs. Glen and Mina Spearman” is presumed to be community property. (4) if title is as joint tenants, then the presumption does not arise - title is controlling with respect to this presumption. b) rebuttal of the strong presumption (1) can be done only by asserting fraud, mistake or undue influence. - Donze (2) can NOT be rebutted by tracing. (3) if the wife sells the real property to a BFP before 1/1/75, then the presumption is conclusive (after 1/1/75, the separate property nature of the land would have to be recorded). - Ashodian (4) after 1/1/75, the presumption is rebuttable - depends on whether husband made a gift to the wife (transmutation requires a writing). Joint Tenancy 1. joint tenancy and community property can not exist in the same property at the same time, so there is a problem as to how to classify a house on death or divorce that was purchased with community funds, but takes title as “joint tenants.” a) if one spouse dies while they are married, it is treated as joint tenancy with right of survivorship to the surviving spouse. b) if there is a divorce, it is presumed to be community property. 2. three different time periods each have three different rules based on when the property was acquired: a) before 1/1/84 - Lucas applies: a house in joint tenancy is considered to be community property absent an oral or written agreement by the spouses that they retained a separate property interest, (1) but there is a pro rata apportionment of the equity in the home based on the contribution of separate property if there was an oral or written agreement. (2) the partners share in the equity if the value of the house increases. (3) Steps: determine the amount of capital appreciation (market value - purchase price). At the time the house is purchased, determine what percentage interest in the capital is community property vs. separate property. Pro rate the amount of appreciation as 7
(a)
III.
between separate and community property. Give the separate property down payment back. The rest is community property (in which both spouses have an interest). b) after 1/1/84 but before 1/1/87 - section 2581 and 2640 applies: a house held by husband and wife as joint tenants is presumed to be community property absent a written agreement otherwise. (1) 2640 - however, there is an automatic right of reimbursement (without any interest or inflation) of any separate property used to pay down the capital of the house (not the interest) or make capital improvements. (2) contribution of separate property to the house is an interest free loan to the community - there is no pro-rata share. (3) amount of reimbursement can not exceed the fair market value of the house. c) after 1/1/87 - section 2581 and 2640 apply to any form of joint title (not just joint tenancy). Treatment of Property A. Educational Benefits 1. The COMMUNITY is entitled to reimbursement (with legal interest from the end of the year of the contribution!) for expenses paid that substantially increase the earning capacity of one of the spouses. a) this does not apply to separate property that is used to pay for the other spouse’s education - that is presumed to be a gift. b) covers hard expenses (such as books, etc.) (1) argue that they may also cover living expenses if they can be proven - Watt (2) comfort, love and emotional support, child rearing, etc., are not reimbursable. c) if a loan is taken out with community funds, the spouse obtaining the education remains liable for the loan repayment unless it would be unjust (1) ex: if the other spouse is very wealthy, it would be unjust to require the poor one to repay the loan alone. d) there is no requirement that the educated spouse actually get a job and apply the education - the community is still entitled to reimbursement.
8
B.
if the contribution was over 10 years ago, there is a presumption that the community has already been reimbursed in the form of increased earnings. (1) the presumption can be rebutted by showing that the spouse did not actually use the education to increase earnings. f) the community has no entitlement to future earnings of the educated spouse, only reimbursement for the money invested in the education. g) also applies to “training” falling short of formal education: (1) ex: husband pays the neighbor $2,000 to learn how to trade coins. Husband executes promissory note for $1,000, and pays the other $1,000 out of community funds. On divorce, the community is entitled to $1,000 reimbursement, and the husband remains liable for the remainder of the $1,000 promissory note. h) if the husband and wife both get education, then there can be an offset as between them. Goodwill of a Business 1. professional goodwill of a ongoing business is recognized as a community asset a) it is the product of past actions (EST of the spouse = community property), even though it represents future earnings (which would otherwise be separate property of the spouse). b) valued as of the time of separation - forces the professional spouse to pay hard cash now for intangible future earnings. (1) ex: it does not matter if the business later dies or loses goodwill, the spouse can not go back and ask for reimbursement. c) if the professional spouse dies, then the goodwill dies with him. d) ex: if husband and wife are both attorneys, but husband is in-house counsel and wife is sole practitioner, then the community is entitled to the wife’s goodwill, but the husband’s practice has no goodwill. 2. ways to value goodwill: a) capitalization of earnings - take the net earnings from the past and multiply them by an industry standard factor. b) buy/sell agreements - since they are usually arm’s length transactions, they are a reasonable indication of the value of goodwill.
e)
9
(1) c) C.
however, these are not binding on the spouse who is not a party to the transaction fair market value - what would a willing buyer pay a willing seller for the goodwill.
D.
Copyrights 1. the value of a copyright is community property to the extent that the work was created with the energy skill and time of the spouse while married. a) federal copyright law states that the copyright belongs solely to the creator, but can be transferred by contract, will, or operation of law - community property law is “operation of law.” - Marriage of Worth b) if the copyright is not issued until after separation, then apportion the value according to the extent to which the work was created during marriage. Pensions 1. In General a) pensions are considered deferred compensation, and as such are community property to the extent that they were earned by the spouse during marriage. b) three types of pensions (all are community property): (1) non-vested - person must continue to work before the pension benefits become a vested right (2) vested - the right to the future income stream presently exists, but money does not come until it matures. (3) matured - unconditional right to demand present payments 2. Rules for Apportionment of Pension Rights: a) time rule: the community interest in a pension is equal to the ratio of the time employed while married to the time employed while separate. (1) ex: husband works for 5 years while single, 10 years while married, 5 years while living separate and apart. Husband is entitled to 50% of the pension from time earned as separate property, plus 25% of the pension from his half of the community interest. (2) remember reconciliation destroys living separate and apart, so if the husband and wife reconciled at the end of the 5 years of living separate, then husband in entitled to 5/20 of the pension (from separate property acquired before marriage) plus half of 15/20 (community property). 10
E.
point rule: the community interest in a pension is equal to the ratio of retirement “points” earned while married to the number of retirement “points” earned while separate. Marriage of Pope c) after the pension has fully vested to its maximum benefit, no further employment time or points are considered in apportionment - no penalty for working past retirement age. - Hinkle (1) ex: husband works 26 years while single, and 6 years while married. If the maximum benefit is obtained at 30 years, the community interest is only 4/30, not 6/32 (last 2 years of work during marriage did not add to the value of the pension). 3. Liability for pension mismanagement: a) since spouses have a fiduciary duty to each other, the working spouse will be liable to the community for mismanagement of pension funds. 4. Ways to settle the pension benefits: a) working spouse may buy out the non-working spouse’s community interest in the pension at present value. (1) use actuarial tables - they may be different based on the sex of the spouse - Berlinde b) non-working spouse may serve a QDRO (qualified domestic relation order) on the pension company directing it to pay the non-working spouse’s interest directly to her. c) court can retain jurisdiction to divide the pension when it matures. Life Insurance 1. Whole Life Insurance - has a cash surrender value and is ongoing a) apportion between community property and separate property upon dissolution based on the percentage contribution to the premiums as between separate and community property. 2. Term Life Insurance - pure protection, has no accumulated value, renewed every term. a) characterize according to the nature of the funds used to pay the most recent premium (because any prior premiums have already served their contractual purpose). - Lorenz b) however, if the insured later becomes uninsurable, then the community may have an interest in the policy to the extent that it can not be replaced and the insured has a right to continue the existing policy (i.e., the right to be insured is the community property asset). Spengler 11
b)
IV.
ex: if the insured dies during the term paid for by community property, then the community gets all of the proceeds (even if they have divorced) because that is what it has bargained for. d) ex: if the insured dies during the term paid for by separate property then the spouse who paid the premium gets all of the proceeds (even after divorce) because that it what she bargained for. F. Fame - California does not recognize fame as a community asset. Treatment of Person within the System A. Validity of a Marriage 1. in order to have a valid marriage, two things must be present: a) a marriage license; and b) recording of the marriage certificate 2. CA does not recognize common law marriage, but will recognize marriages deemed valid in other states 3. second marriage is presumed to be valid until adjudged invalid. 4. there is NO COMMUNITY PROPERTY without a valid marriage. 5. Marriage induced by fraud is invalid - Johnston B. Putative Spouse 1. a person who has a good faith belief in the existence of the marriage is a putative spouse, and is entitled to be treated as if she were a legal spouse for the purpose of division of property on dissolution. a) the test for good faith is actual belief that is objectively reasonable under the circumstances. (1) a couple who intentionally lives together outside of marriage does not have the protection of the putative spouse quasi-marital property laws, but they may enforce their own implied in fact contracts under contract law as long as it is not based on sex - Marvin (2) ex: husband and wife are married by a minister who later sends them a letter telling them that he was not legally qualified to marry them at the time. (3) ex: a couple who has a “muta” marriage (religious marriage exchanging private vows) is not a putative spouse even if she believed in the validity of the marriage because it is not objectively reasonable to believe that a marriage performed in CA that does not comply with CA law is valid. - Verona b) either spouse may have the good faith belief in the existence of the marriage
c)
12
C.
otherwise, the one with knowledge of its nullity could exploit the other’s energy skill and time. (2) however, the spouse that knew of the invalidity would be estopped from claiming that there was no putative marriage because he has enjoyed the benefit of the marriage. 2. The property in a putative marriage is quasi-marital property (not quasi-community property - see domicile section below). 3. putative spouse is treated as legal spouse for the purposes of intestate succession - Estate of Leslie a) as between two innocent putative spouses, the court may divide the intestate share equally. - Estate of Vargas b) as between an actual spouse living separate and apart from her husband, and a putative spouse, the court may divide the intestate share equally. - Estate of Hafner Domicile of the Spouses 1. In General a) classification of property is determined according to the law of the state of the marital domicile at the time acquired. (1) character of property does not change when the domicile changes - there must be some event (i.e. going to court) that changes the classification. b) distribution at death is governed by the law of the state in which the person was domiciled at death. c) definition of domicile - a physical presence with intent to remain indefinitely. (1) can only have one domicile at a time 2. Quasi-community property - property that would have been community property if the married couple had been domiciled in CA at the time of acquisition. a) treated the same as community property in CA if the court has personal jurisdiction over the parties by either of the parties submitting to general personal jurisdiction (for example, by seeking the assistance of the court for dissolution). - Addison (1) exception: Paley case (a) if the acquiring spouse of quasi-community property dies first, he can will away only ½ of the quasi-community property (even though it might be titled out of state as his separate property); and (b) if the non-acquiring spouse dies first, she can NOT will away any interest in the 13
(1)
b)
c)
quasi-community property (because this would take ½ of the acquiring spouse’s separate property without due process). (c) if the acquiring spouse dies first intestate, then the non-acquiring spouse gets all of the quasi-community property. (2) state has a compelling interest under the general police power and welfare power: (a) orderly division of marital property of its residents (b) making sure divorced spouses stay off welfare (c) providing stable transactions and credit if the court does not have jurisdiction over the out-of-state property: (1) court can always offset with in-state property to make the division equal; (2) court can exercise jurisdiction over the person to force the person to add a name to the title under penalty of perjury (3) court can ask the out of state court for full faith and credit. spouse can not sell off all out of state separate property just before divorcing to avoid CA community property laws court will use equity to require accounting to the community.
V.
Federal Preemption A. Federal Preemption applies to the following benefits: 1. National Service Life Insurance (Serviceman’s Group Life Insurance SGLI) - Wissner a) insured can name any person as beneficiary, and the spouse has no interest in the proceeds b) court can not even offset the insurance benefits against other property 2. U.S. Savings Bonds a) purchaser can name any person as the title holder and the spouse has no interest in the bond. b) TITLE controls even if community property was used to purchase it. c) spouse can assert fraud as the only way to get at the bonds. 3. Military disability pay 4. Social Security Benefits B. Normal Community Property Laws apply to the following benefits: 1. Railroad retirement benefits 14
VI.
2. Serviceman’s Pension benefits 3. Copyrights Problems in Classification of Property A. Commingling 1. In General - presumption of community property a) presumption that commingled separate property and community property is ALL community property b) can rebut by tracing (1) indirect tracing by recapitulation over the entire marriage is unacceptable - See c) presumption does not apply if the commingling is de minimis. - Cudworth 2. NO right to reimbursement of separate funds unless there is an agreement - See a) payment of community expenses with separate funds is presumed to be a gift to the community. b) even if there is an agreement, adequate records of the expenses must be kept to get reimbursed. - Flick c) if the community falls on hard times, each spouse has a reciprocal duty to use their separate funds to pay community expenses. 3. Exceptions: a) improvements to real property - automatic right of reimbursement - 2640 (see above). b) payment of community expenses while living separate and apart - right to reimbursement because it is not presumed to be a gift (1) ex: while living separate and apart, husband may choose to continue to pay the mortgage out of his separate property so that the house is not foreclosedruining his credit. B. Business Profits 1. Two main ways to classify the increase in value of a business: a) Perreira formula - use if the increase in value was mainly due to the EST of the spouse while married, or due to external factors if the couple is living separate and apart, then maximize the community property component (1) determine the separate property that can be traced (i.e., initial investment, or salary of separated spouse), apply reasonable interest to the initial investment, and the rest is community property. (2) define separate property specifically, and community property residually 15
b)
2.
Van Camp formula - use if the increase in value was mainly due to outside factors, or due to the energy skill and time of a separated spouse, then maximize the separate property component: (1) determine the reasonable value of the community property (salary of married spouse, or ), and deduct any community expenses paid with business funds, and the rest is separate property. (2) define community property specifically and separate property residually. Special Considerations a) if you hire someone else to run the business: (1) if paid out of separate property, then the community does not have an interest in his EST (2) if paid out of community property, then the community does have an interest in the third party’s EST because he is just a substitute for a spouse’s EST.
C.
Loans 1. General Rule - to classify property purchased with the proceeds of a loan, look to the primary security of the lender. - Gudelj a) if the lender was relying primarily on community property for security (i.e. the husband’s salary), then the loan property is community property. (1) ex: unsecured loans (signature loans) are typically community property because they are looking towards the borrower’s salary (EST) for repayment. (2) personal reputation, personal credit are community assets. -Connelly b) if the lender was relying primarily on separate property for security (i.e. real property purchased before marriage), then the loan property is separate property. (1) ex: husband buys house before marriage. Separate property used for down payment. Lender looking to house for collateral, and it is separate property. (2) however, if the community pays the mortgage after they are married, then the community gets an apportionment according to the ratio that they paid down the capital loan balance. - Moore (buying into title). (3) all appreciation before marriage is separate property Frick 2. There is no apportionment between separate and community property - all or nothing. 16
3.
D.
E.
The lender’s intent may be self-serving a) if the lender was the mother, she might testify that she was only looking to her son’s separate property for repayment b) no lender looks only at one thing so it is not conclusive that both parties signed the promissory note. Improvements to Property 1. In general - two approaches (see above): a) before 1/1/84, any improvements were presumed to be gift no right of reimbursement absent an agreement b) after 1/1/84, section 2640 applies: (1) for separate property used to improve community property - automatic right of reimbursement for the cost of capital improvements (but not taxes, interest, etc.). (2) for community property used to improve separate property - presumed to be a gift in the absence of a written agreement (transmutation doctrine) unless it is to the spouse’s own separate property, in which case the community is automatically entitled to reimbursement of either the contribution or the increase in value, whichever is greater. 2. Fixtures Doctrine a) any improvements to real property take on the characterization of the property - they do not change the classification - Shaw (1) ex: if a vacant lot is separate property, and a house is built on it using community funds, the house is still separate property, with the community entitled to reimbursement at best. Personal Injury Damages 1. In CA - characterization depends on the date of injury. a) if the injury occurred (or the cause of action arose) before marriage, or while living separate and apart, then the damages are ALL separate property. b) if the injury occurred (or the cause of action arose) during marriage, then the damages are ALL community property. c) however, on dissolution, all the damages go to the injured spouse unless it would be unjust (i.e., injured spouse is rich), and even then, the injured spouse must get at least 50%. (1) rationale: if the damages were treated as community property, and they were used to buy a prosthetic limb, then the ex-spouse would still have an interest in the limb after divorce - ridiculous. 17
F.
however, if the damages are commingled beyond recognition with community property funds, then they lose their PI nature and are split 50%. (a) but if you can trace the funds to PI recovery, then the any property purchased with the PI recovery funds is also given to the injured spouse. (3) there is no offset with other community property. 2. there is no imputed negligence to the spouse. a) community property may not be used to discharge the liability of the tortfeasor spouse. b) however, an injured spouse may still sue the other spouse. c) other spouse must pay the judgment first out of his separate property, and only the remainder out of community property - and the injured spouse gets all as her separate property. d) insurance will always pay first regardless of whether it was purchased with separate or community funds. 3. Special Exception for medical expenses: a) if the injured spouse’s recovery is separate property, and the non-injured spouse (or the community) pays the medical bills, then there is no gift presumption, and the non-injured spouse (or the community) is entitled to reimbursement. (1) policy: don’t want spouses hesitating to pay medical expenses. 4. Uninsured motorist recovery - treated the same as personal injury recovery. - Jackson Employment Benefits 1. Retirement Benefits a) two types: (1) defined contribution plan - a separate account is maintained for each employee into which the employee and the employer make contributions (ex: 401K) (a) easy to determine the value of the benefits and apportion (2) defined benefit plans - a single pension fund from which all retirees are paid (a) harder to determine the present value because it requires actuarial tables. b) general rule - apportion the retirement benefits between the community and separate interests
(2)
18
2.
3.
4.
cash out - can divide by the time rule or by actual contributions made. (2) court may also divide “in kind” - wait until the benefits start paying, and then apportion. c) matured retirement benefits - the employed spouse can not continue to work just to avoid paying matured benefits to the wife - must make a Gillmore election: (1) the employed spouse can either give the other spouse monthly payments equal to her interest, or (2) the employed spouse can buy out her entire interest at present value. - Gillmore (3) spouse may not, by a condition solely within their own control, defeat the other spouse’s interest. Stock Options a) general rule - purpose analysis - to the extent that stock options represent compensation for services rendered during the marriage, they are community property. Marriage of Hug b) look to the intent of the grantor - was he rewarding past performance, or guaranteeing future performance, or both. Disability Benefits a) general rule - purpose analysis - to the extent that disability benefits represent a substitute for the EST of the spouse while married, they are a community asset. (1) ex: in Saslow, the husband had mental problems so he took out many disability policies. Some of the policies were a substitute for wages - they are all community property. Other proceeds were substitutes for pension benefits - they must be apportioned according to the time rule. (2) however, in general disability payments during marriage are going to be community property and those after marriage will be separate property because they are usually in lieu of wages. Severance Pay a) general rule - purpose analysis - to the extent that it represents lost wages during marriage, it is community property. b) Factors to consider: (1) is the right to receive the termination pay absolute based on an employment contract? - if so, then it the community has an interest in the employment contract rights 19
(1)
(2) 5.
was it to replace lost future earnings, or retirement pay, or for past performance.
VII.
Vacation Pay a) split of authority (1) Lorenz court held that it could not be valued, so it was not a community asset. (2) Gonzales court held that it was a community asset to the extent that it was earned during marriage. b) probably best to argue that it is community property, and then award the vacation to the employee and offset with other community property of equal value to the other spouse. Management and Control of Community Property A. Statutes 1. Section 721 - fiduciary duty between married partners a) if you don’t opt out of the community property laws contractually, then you have the same fiduciary duty to your spouse as non-married business partners - utmost good faith and loyalty arising out of a confidential relationship. b) no duty to keep detailed records c) if you transact community funds without the other’s consent: (1) if you lose money, you may be liable to the community for the loss if it was an unreasonable investment (fiduciary duty). (2) if you gain money, you hold all gains in trust for the community (3) ex: if husband uses community funds to gamble, then he is liable for losses and gains. 2. Section 1100 - you may control community property as if it were your separate property except: a) a gift made without the other spouse’s written consent is voidable by the injured spouse (1) this includes disposing of property for less than fair market value (a) ex: can’t sell $10,000 car to son by previous marriage for $5,000 without present spouse’s consent. (2) does not apply to gifts mutually given, or gifts between spouses. (a) ex: if both spouses sign the gift card, it may be mutually given.
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3.
this is a different requirement than transmutations which require a writing by the giving spouse, rather than the receiving spouse. (3) ex: wife uses community funds to pay for her sister’s surgery. Community is entitled to reimbursement unless husband consented (silence is probably insufficient to show consent). (4) however, injured spouse can later ratify a gift, making it valid. b) you can not sell or encumber personal property used as a family dwelling (1) ex: can not sell or encumber the motorhome, furniture, clothing. (2) ex: husband buys fur coat for wife (transmutation of comm. prop. to wife’s separate property). They get into a fight, and husband pawns the coat. Husband has breached his fiduciary duty to wife. c) may not sell or encumber substantially all of the community assets without written notice to the other spouse. (1) however, failure to obtain written consent does not void the transaction with respect to a BFP - it is presumed to be valid unless rebutted. d) the spouse who manages a community property business has primary control of the business property. (1) can make day to day decisions affecting the community business without other party’s express consent. (2) ex: wife wants to give an employee a bonus, and husband objects. Arguable both ways. Husband argues it is a gift without consent because there is no obligation to give the bonus. Wife argues normal business decision. Section 1100- Remedies for breach of fiduciary duty to spouse a) the breach must impair the spouse’s rights in the community property - no harm no foul. b) accounting (1) if the breach is due to negligence, the injured spouse is entitled to at least 50% (2) if the breach is due to intentional fraud, the injured spouse is entitled to 100%
(b)
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VIII.
add a name - if one spouse has property (i.e., bank account or home) titled in his name only, but it is really community property, then court can add other spouse’s name to the title. d) statute of limitations - 3 years from the date of discovery of the breach. (1) this only applies during marriage - must sue within 3 years of discovery if you are going to remain married after the suit. (2) there is no statute of limitations for bringing an action for mismanagement during a divorce or separation proceeding. e) equitable defenses (1) laches - if the injured spouse waits to bring the action, to the detriment of the defendant spouse. (a) laches may apply even if the 3 year statute of limitations has not yet run (2) estoppel f) the court may dispense with the consent requirement if: (1) the transaction was in the best interest of the community; and (2) consent was arbitrarily refused or can not be obtained. (a) ex: other spouse is incompetent or on safari. 4. Section 1102 - real property a) may not lease real property for more than one year term. (1) ex: if the lease is for a two-year term, renewable monthly, it may or may not require consent. b) valid transfer presumption (1) sale to a BFP is valid if: (a) real property title in name of one spouse only (b) if BFP records real property transaction, statute of limitations is 1 year from recordation to recover the land. (c) must not be any fraud or knowledge by BFP of the marital relationship. (d) must be for consideration (2) injured spouse can overcome presumption by showing: (a) the real property was community property (b) there was no consent (c) the action was brought within the 1 year statute of limitations from recordation. Creditor’s Rights 22
c)
A.
Four Questions to ask: 1. who incurred the debt 2. when was the debt incurred (before, during or after marriage) a) general rule - community is liable for the premarital debts of either spouse, or those incurred during the marriage. b) for contract, the debt is incurred at the time the contract is made c) for tort, the liability is incurred on the date of the tort d) for others, the debt is incurred when the obligation to repay arises. 3. what kind of property is the creditor trying to reach (community property or separate property of the non-debtor spouse) a) general rule - the earnings of the non-debtor spouse are not liable for the premarital debts of the debtor spouse if they are maintained in a separate account over which the debtor spouse has no rights of withdrawal b) only the debtor spouse’s separate property is always liable for debtor spouse’s debts. (1) but non-debtor spouse’s separate property may be liable for necessities of life while living together or common necessities while living separately. c) if both spouses sign a promissory note, then their separate property is not liable unless they agree to be personally liable. (1) ex: wife hires an attorney, and husband signs trust deed to secure the note for attorney’s fees. If the attorney’s fee document stated that the spouses are personally liable, then husband’s separate property is liable. d) however, if one spouse is merely acting as the agent for the other spouse, then his separate property may be liable. 4. what is the nature of the debt a) necessities of life (during marriage) (1) depends on the parties’ lifestyle (2) arises from duty to support the other spouse (3) ex: husband’s separate property may be liable for attorney’s fees for criminal defense of innocent wife. b) common necessity (after parties are living separately) (1) covers food, clothing, basic medical expenses (2) things which sustain life. (3) ex: husband’s separate property is not liable for wife’s cosmetic surgery while living separately from his wife. 23
B.
C.
Reimbursement 1. in general there is an automatic right of reimbursement regardless of who pays the debt, or whether it was voluntary or involuntarily incurred. 2. spouse can seek reimbursement up to three years after date of discovery, or seven years in the case of torts. 3. reimbursement is without interest. Torts 1. pecking order of liability depends on whether the spouse was engaged in the tortious activity for the benefit of the community: a) if so, then community property pays before the tortfeasor spouse’s separate property b) ex: husband is on the way to bank to deposit his paycheck when he accidentally hits a pedestrian - community property funds pay before the husband’s separate property funds.
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