San Joaquin College of Law

Community Property--3/94 / Cartier

Buck, a free lance writer, met Penny, at the Deli-diner in Detroit where Penny worked as a waitress. Buck and Penny married in Michigan in March 1982. Earlier that year, Buck sold a manuscript titled "The Gerald Ford Era" for $120,000. He spent $100,000 of these proceeds to purchase the Deli-diner. After the wedding, he put the remaining $20,000 down on a house in Detroit purchased for $100,000. Although Buck alone signed the loan documents for this house, title was taken by Buck and Penny, as tenants by the enirety.

Thereafter Penny managed the Deli-diner. The income from the restaurant provided the couple a very comfortable living. While Buck filled in as maitre d' on an as needed basis, he devoted his principal efforts to his writing. Over the years he worked on various projects. In 1985, he sold "Reagan in the Rose Garden--the Second Term," for $30,000, that was used to remodel the kitchen at the Deli-diner. In 1986, he penned the infamous "Will there be a New Bush in the Rose Garden?" for which Buck received $50,000. He used this money as a down payment on a $150,000 cottage near Hollister. California, so he could be close to the San Andreas fault as part of his research on natural disasters that he began in 1972. Although he believed the Hollister house was his, title was taken by Buck and Penny as joint tenants.

In 1987, inspired by the San Francisco earthquake and lured by adventure, Buck packed up Penny, left Michigan and moved into the Hollister house. Buck rented the Detroit house to his brother and sold the Deli-diner for $300,000. After the parties moved to California, the proceeds from the Deli-diner were used to purchase an eating emporium in Hollister called "Shake Shack." While Penny successfully operated (and continues to operate) this business that has increased in value $1,000 each month, she does not want to be a California mover and shaker. In March 1992, she filed for a dissolution of marriage in California. That same month Buck sold his piece on natural disasters for $500,000. In February 1994, Buck's publisher, impressed by the sincerity and depth of Buck's previous work, sent Buck $100,000 as an advance for a significant manuscript on civil unrest.

What interest, if any, does Penny have in the following assets:

             1.          the Detroit house (fmv $200,000 - $50,000 debt t)? DISCUSS.

             2.          the Hollister House, (fmv $100,000 - $90,000)? DISCUSS.

             3.          the Shake Shack, valued at $380,000? DISCUSS.

             4.          the $500,000 payment for the natural disaster work? DISCUSS.

             5.          the $100,000 advance for the civil unrest work? DISCUSS.

Answer according to California law.

San Joaquin College of Law

Community Property--Interim Exam Sketch Answer 3/94 / Cartier

For the purpose of dividing property in a California dissolution of marriage action, this state treats "quasi community property" (property which would have been community had the parties lived in California when the item or its source was acquired) as community property.

1. THE DETROIT HOUSE was acquired during marriage while the parties lived in Michigan. Property is characterized at the time of acquisition. The fact that title is in Buck's name gives rise to no title presumption and so the general community property presumption applies. This gcp, that all property acquired during marriage is cp (qcp), can be rebutted by tracing to a separate property source. Buck will have no difficulty in tracing the $20,000 down payment to his premarital earnings (sp) but the loan is another matter. Property acquired on credit during marriage is also presumed community property. This presumption can be rebutted by showing the intent of the lender to rely on separate property at the time of extending the credit. Another question that affects the characterization of this asset is the characterization of the income derived from the Deli-diner purchased before marriage (Buck's sp).

             If Buck successfully asserts that the loan for the Detroit house is his separate property and that the income from the Deli-diner used to make the payments on the house is his separate property, these assertions, together with the fact that the down payment was made with his separate property, will rebut the presumption that the house is cp. The house and the rents thereon will be Buck's separate property.

             Even if Buck establishes that the down payment and/or the loan were separate property, if it is shown that some portion of the funds used to make payment on residence were community proerty, the community will acquire a pro rata ownership interest in the property (IRMO Moore). Rents on the property would also be apportioned to reflect the pro rata ownership interests.

             Note: An argument that the house is cp subject to a tracing right to reimbursement could be raised but it should fail since there is no specific title presumption affecting this asset.

2. THE HOLLISTER HOUSE was acquired by the parties while domiciled in Michigan and is thus qcp. Since title was taken in joint tenancy, the presumtion that all jointly held property is cp, absent a writing, controls. Buck's undisclosed belief is not suffient to rebut this title presumption. It appears that the down payment for this asset was from Buck's earnings during marriage (qcp). If, however, Buck has contributed any separate property toward the cost of acquisition of this asset, he will be entitled to dollar for dollar reimbursement with no interest or appreciation.

3. SHAKE SHACK was acquired during marriage and as such is presumed cp (qcp). Buck will assert that he purchased Shake with funds from the Deli-diner which was his separate property. (The character of the source determines the character of the ultimate asset). Two factors may alter this characterization: 1. community efforts expended to enhance the value of Deli-diner and/or Shake, and 2. the use of $30,000 to remodel the kitchen.

             COMMUNITY EFFORTS TO ENHANCE VALUE: Where one spouse uses more that de minimis effort during marriage (a community asset) to enhance the value of his separate property, the community receives an ownership interest in the asset. The measure of this interest is generally computed in accordance with the formulae in Pereira and VanCamp. Under Pereira, the owner spouse is afforded his separate property contribution plus a fair rate of return on that "investment;" the residue is treated as community property. Under VanCamp, the community is compensated for the value of the effort expended by the owner spouse in managing the separate property business. The court determines a fair salary and then subtract the amount the community has already enjoyed. Any deficiency is owing to the community; the residue is the owner's separate property.

             In the facts, Buck's efforts appear to be de minimis ("fill-in maitre d"). To this point appellate law has not extended the Pereira/VanCamp allocations to the efforts of nonowner spouses. I suggest that since the businesses afforded the parties a comfortable living, the community has been fully compensated, at least for services rendered during the marriage. According to the traditional law, Penny's efforts are considered a gift. Based on this analysis, the pro rata argument re the Detroit house or for Shake is weakened.

             As regards Peggy's efforts in continuing to manage Shake after separation, the notion of her making a gift of her efforts is less compelling. In accord with the rationale of IRMO Imperato, Peggy should receive compensation for her post-separation efforts (her sp). A reverse VanCamp application would give Penny the fair value of her post-separation efforts, less what she has already recieved.

             $30,000 TO IMPROVE ASSET: Where a spouse uses community funds (earnings during marriage) to improve his separate property, the community is entitled to the amount expended or the value added, whichever is greater. On this basis, the community appears to have had at least a $30,000 interest in the Deli-diner. When the Deli was sold for $300,000, the community interest at that time was at least 10%, plus the apportioned share that resulted from any payments with community funds. Upon the acquisition of Shake with the proceeds from the sale of the Deli, the community appears to have obtained a pro rata ownership interest in Shake. [Two other arguments might be advanced: 1. that Shake was sp, subject only to the community's claim for $30,000, OR 2. that because of the gcp and the commingling of funds, Shake should be characterized entirely as community property, subject to a tracing right to reimbursement according to proof (Hicks/Mix/See).]

4. $500,000 was received for work performed over 20 years (10 years sp; 10 years cp). The community has a pro rata interest in this asset based on either the "time rule" (1/2 of the $500,000 is cp) or based on an actual accounting of hours expended during the marriage/the total hours devoted to the project.

5. $100,000 received as an advance after separation for work to be performed after separation appears to be Buck's separate property. If, however, the "advance" is viewed as compensation for past service or as an indication of good will in this writer's career, the community may have a claim to some part of the $100,000, based on the rationale of IRMO Hug.