San Joaquin College of Law
Community Property – Interim Exam March 05 / Cartier
TIME: 1 hour 30 minutes
The following events took place in California.
Prior to their marriage, H & W executed a premarital agreement providing that property owned by each of them at the time would remain their separate property but that one-half of the profits from H’s equipment rental business would be community property. Immediately after they married in February 1983, H and W purchased a home with title taken by “H&W, as joint tenants.” H used $40,000 of his premarital savings for the down payment. In 1993, W obtained a $30,000 inheritance from her father. This money was used to remodel the kitchen in the home ($25,000) and to paint the home ($5,000).
Throughout the marriage H devoted substantial time to his equipment rental business. H’s salary and all profits from the business were deposited in H’s checking account. . In 2000, H used money from this checking account to install a video security system at the business. This business has significantly increased in value during the marriage. Throughout the marriage, the couple’s living expenses, including the monthly loan payments on the home, were made from H’s checking account.
For their twentieth wedding anniversary, H gave W a very special, though not very expensive, piece of jewelry that had belonged to H’s mother. When W learned H was having an affair, she used the jewelry as collateral for a loan at a local pawn shop. She took the loan proceeds, bought some lottery tickets and won $5,000. H reclaimed the jewelry using funds from his checking account.
W recently filed a petition for dissolution of marriage. H seeks your advice concerning what community and/or separate property interests exist in each of the following assets:
1. The home? DISCUSS.
2. The equipment rental business? DISCUSS.
3. The lottery winnings? DISCUSS.
4. The jewelry? DISCUSS.
Answer according to California law.
San Joaquin College of Law
Community Property – Sketch Answer Mar 2005 / Cartier
1. THE HOME. All jointly held property acquired during marriage is presumed community property upon dissolution of marriage (absent a writing post-1984 and absent an agreement or understanding pre- 84). Here the home was acquired by H & W in 1983 and is presumed community property for purposes of dividing the property at dissolution. These is no evidence of any contrary agreement or understanding. Husband put $40,000 of his premarital saving (sp since acquired before marriage) for the down payment. The current statute provides for a tracing right to reimbursement for separate property contributed toward the cost of acquisition of a community asset unless the right is waived in a writing. The statute would give H the right to receive his $40,000 back without interest or appreciation. Prior to 1984, however, the use of one’s separate property to pay for community property was deemed a gift to the community absent an agreement or understanding. The gift of separate property created a vested property right in the community. To afford H reimbursement now (because the was no written waiver) would impair a vested property right (and in this context the current statute is unconstitutional). Wife inherited $30,000 during marriage. Inheritances are separate property. She used this money to remodel the kitchen and to paint the home. As noted above, post 1984, when a spouse applies separate property toward the cost of acquisition of a community asset, there is a tracing right to reimbursement. Cost of acquisition includes the down payment, principal pay down and improvements – those items that add equity value. It appears W will have a tracing right to reimbursement for $25,000 – the amount expended for the kitchen remodel since this certainly added value to the home. If the paint job is viewed a merely maintenance, W’s contribution of $5,000 would be a gift.
2. BUSINESS. The business was owned pre-marriage and is originally characterized as H’s separate property. The facts say the value was enhanced during marriage and that husband devoted substantial time to the business. When the value of a separate property is enhanced in value during marriage by the effort, skill and industry of a spouse, the community acquires a right to reimbursement. Under the Pereira formula, the sp capital investment plus a reasonable rate of return is the sp interest and the residue value of the business is cp. Under Van Camp, the community is afforded the fair value of the community services render (- less any amount the community has received) as cp and the residue is sp. If the greater factor in the increase is labor, courts tend to use the Pereira formula. If the greater factor is market conditions, courts tend to use Van Camp. Here, H also used funds from the checking account to install a video surveillance system at the business. It appears the checking account contained both community and separate property funds since all business profits were put into the account. The parties had a written premarital agreement that one-half of the business profits would be community property. Separate funds do not lose their character so long as they can be identified and traced (Hicks). Two methods of tracing are available: 1. Direct tracing – showing sp funds were available + the intent to use these funds (Mix), and 2. Exhaustion of funds – showing that at the time of acquisition, all cp funds were expended paying community bills (See). Contemporaneous records are generally required. Note that the payments on the home were made from this account. These payments would be presumptively made with community funds. If H used sp to improve or maintain his sp, there is no problem. If he used co to improve or maintain his sp, the traditional rule is that he breached a duty of trust. W can recover the greater of 1) the amount expended OR 2) the value added. Recent case suggest a right to reimbursement (if maintenance) and a pro rata ownership (if improvement). The formula to determine the pro rata interest is (cp/ total purchase x appreciation during the marriage) + the cp contribution.
3. LOTTERY WINNINGS. The lottery tickets were acquired during marriage and are presumed to be community property. This general community property presumption – that all property acquired during marriage is community property – can be rebutted by tracing to a separate property source or by an agreement in the form required by law. The tickets were purchase with proceeds form a loan. Property acquired during marriage on credit is also presumed community property. This presumption can be rebutted by showing that, at the time of extending credit, the lender relied primarily (Gudelg) or solely (Grinius) on separate property as security for the loan. Clearly the lender relied on the jewelry as the only security for this loan. The jewelry, that originally belonged to H’s mother, was likely his separate property. Wife will assert H gave the jewelry to her as an anniversary present in 2003. After 1985 gifts between spouses must be evidenced by a writing signed by the party whose interest is adversely affected UNLESS the item is 1) an item of a personal nature (jewelry qualifies), 2) intended for the use of the recipient, and 3) is not consequential in value taking into account the economic circumstances of the marriage. Here the ring was not very expensive notwithstanding its sentimental value to H. If the item was intended for W’s use, the ring would be her sp, the loan would be secured solely by sp and the lottery winnings would be her separate property. If the gift fails, the ring would remain H’s separate property and the winnings would be his.
4. THE JEWELRY. H’s reclaiming the property is an acquisition during marriage so that the general community property presumption applies. Again, this presumption can be rebutted by tracing to separate property funds (as discussed under Hicks, Mix and See above). If H can establish he repurchased the jewelry with separate funds in the account, he can rebut the general community property presumption so the item will be his separate property. If he is unable to trace, the jewelry will be community property.