Recent Posts in Community Property Category

I have blogged separately about the very favorable changes to the California Family Code affecting disadvantaged spouse's ability to access funds to retain competent counsel in family law proceedings.

Another improvement is the revision of Family Code section 2034, which is that statute that allows a party to encumber equity in real property to ensure access to counsel. New FC § 2034 empowers courts to " determine whether the case involves complex or substantial issues of fact or law related to property rights, visitation, custody, or support. If the court finds that the case involves one or more of these complex or substantial issues, the court may determine the appropriate, equitable allocation of fees and costs as provided in subdivision (d) of Section 2032." 

This is called a "Family Law Attorney's Real Property Lien," or FLARPL.  A FLARPL is a security interest like a mortgage can be recorded against real property in order to encumber it in favor of one party's attorney, similar as if they took out a mortgage. There are limitations, however, in that they are subject to Court approval and are not beyond attack and challenge by the other party.  Most lawyers I know use them only as a last resort.

FLARPLs extend to the other party's separate property as well as to the community; in other words, they may be obtained against property owned solely by the other party, subject to the conditions of subsection (a) and the quoted language above. Whether courts will impose them on separate property more willingly, which they are characteristically reluctant to do, as a result of the new revisions remains to be seen. Without a doubt, however, this is a step forward in assuring the "out-spouse" equal access to justice. 

As always, for more relevant information try my search engine at the upper right corner. It crosses over to each of my four websites, which take together are hoped to create a valuable library of family information for your use!

If separate and community property or funds are commingled in such a manner that it is impossible to trace the source of the property or funds, the whole must be treated as community property. Marriage of Mix, supra.

If the title to the property was taken jointly, tracing cannot be used to overcome the presumption from the form of title. Marriage of Lucas (1980) 27 C3d 808, 813–814. 

Direct tracing and tracing through family expenses are two independent methods of tracing to establish that property purchased with commingled funds is separate property.

Direct Tracing

Separate funds do not lose their separate character when commingled with community funds in a bank account so long as the amount of separate funds can be ascertained. Marriage of Mix (1975) 14 C3d 604.

If money is withdrawn to purchase specific property, questions of fact that must be determined include (Marriage of Mix, supra):

• Whether separate funds continue to be on deposit; and

• Whether the drawer intended to withdraw separate funds.

The party seeking to establish a separate interest in presumptive community property must keep adequate records. The party must show the exact amount of money allocable to separate property and the exact amount of money allocable to community property before it can be said that the money allocable to separate property is not so commingled that all funds in the account are community property. Marriage of Frick (1986) 181 CA3d 997. If the payments claimed to be separate were made periodically, each payment must have been made when separate property funds were in the account and must have been accompanied by an intent to use those funds rather than community funds. Marriage of Higinbotham (1988) 203 CA3d 322, 329.

Tracing Through Family Expenses

The second method of tracing to establish that property purchased with commingled funds is separate property requires a consideration of family expenses. This tracing method is based on the presumption that family expenses are paid from community funds.

If at the time the property is acquired it can be shown that all community income in a commingled account was exhausted by family expenses, then all funds remaining in the account at the time the property was purchased were necessarily separate funds. Marriage of Mix, supra.

This method can be used only when, through no fault of the spouse claiming separate property, it is not possible to ascertain the balance of income and expenditures at the time property was acquired. See v See (1966) 64 C2d 778, 784.

The spouse claiming separate property must keep adequate records to overcome the presumption that property acquired during marriage is community property. See v See, supra. Most people don't.

If you are contemplating a divorce and have tracing issues, protect your records now so that they do not 'disappear.' It can be very expensive to obtain bank statements and canceled checks dating back years, and with all of the bank failures and mergers today these records may become impossible to obtain. If you cannot meet your tracing burden of proof, you lose on the particular reimbursement issue....

T.W. ARNOLD

www.ThurmanArnold.com 

 Thurman W. Arnold, CFLS

www.ThurmanArnold.com 

• Fair return on investment. This is called the Pereira approach to apportionment, after Pereria v. Pereira (1909) 156 Cal. 1, 103 P. 488, which involved a husband saloon owner. It apportions a "fair return" on the owning spouse's separate property investment in the business as separate property, then apportions any excess to the community property as arising from that spouse's efforts during marriage. 

• Reasonable compensation. This is the Van Camp apportionment method, which derives from Van Camp v. Van Camp (1921) 53 Cal.App. 17, 199 P. 885 (yes, seafood in Long Beach), which apportions the reasonable value of the spouse's services during marriage as community property, then treats the balance as sepearate property attributable to the normal earnings of the separate estate. Reasonable compensation is typically the analysis used in small business valuation cases, and is often found by looking at what other people in the same field performing the same functions tend to earn.

Either analysis is performed to determine the value of the premarital interest in separate property, or in deriving the community interest in what began as separate property. These methods deal with the first  half of your question - valuing the law practice (these analyses are more easlier demonstrated with businesses as opposed to professional practices) as of the date of separation. They have to be applied in reverse to back out the separate property contributions after the date of separation.

In achieving the apportionment between separate and community property the Court has discretion to decide which formula will achieve 'substantial justice' between the parties.

Pereira is commonly used when business profits are principally attributed to the community efforts (i.e., during marriage).  Van Camp is applied when the community efforts are more than minimally involved in a separate business, but the business profits that accrued are attributed to the character of the separate asset (Van Camp was turning out cans of tuna before marriage).

Under either analysis, once the community income has been determined, the community's living expenses must be deducted from the community income to determine the balance of the community property interest. This is called the "family expense" presumption, which is very important in all tracing and commingling and mixed asset cases. 

It is presumed that the expenses of the family are paid from community rather than separate funds and in the absence of evidence showing a different practice, the communitiy earnings are chargeable with those expenses.

A forensic accountant will almost certainly be required in dealing with any form of business.

I will have to blog the reverse Pereira and Van Camp issues another day.

Q.    I am not on title to a home my husband owned before we married but we paid the mortgage for 7 years. If we divorce, do I have any interest in it?

• what was the original purchase price
• what was the original mortgage and downpayment
• what was the property worth at the date of marriage (DOM)
• what was owed to the lender at that time
• what was the property worth at the date of separation
• what was owed at that time
• what is the property worth on the date of the calculation (i.e., the trial date) and
• what is the principal pay-off at that time?

This is an example of why family law and divorce cases can become complicated and expensive. Obtaining these records, particularly if you are the 'out spouse' can be difficult, and sometimes a forensic accountant is the best option for calculating these apportionments. You need an experienced family law attorney for these types of matters. 

In your case, with a lengthy marriage, you have significant Moore-Marsden entitlements. However,  these may be adversely affected by the crash in the real estate market since so much equity has evaporated.

T.W. Arnold, III CFLS