COMMUNITY PROPERTY SEPARATION DATE IN CALIFORNIA

4 Comments

California is a community property state.  Basically, this means that all property acquired by the two parties of a marriage in California is considered to be community property.

This presumption of community property is based on the premise that each partner to a marriage contributes services of value to the whole, and, with certain limitations and exceptions, both parties share equally in the profits.  So long as a spouse or registered domestic partner is contributing his or her special services to the marital community he or she is entitled to share in its growth and prosperity.

This, in essence, is what the community property system is all about.  And remember that the parties’ respective contribution to the community is what justifies and forms the basis for their joint ownership of the fruits of their respective labors.

California and Washington are the only states in the union that terminate the marital period at the date of separation of the parties, as opposed to the termination of status as a married couple.  This is due to the fact that upon separation, the parties no longer make joint contributions to the community.

Family Code § 771 covers this area:  “…the earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, while living separate and apart from the other spouse are the separate property of the spouse.”  This means that a judgment of dissolution is not necessary to terminate the community.  California case law has defined ‘living separate and apart’ as the parties having come to a parting of their ways with no present intention of resuming their marriage.

Advertisements

DEBTOR COMMUNITY PROPERTY SUBJECT TO BANKRUPTCY AUTOMATIC STAY

Leave a comment

An interesting unpublished case has come down holding that the community property interests of the debtor and the debtor’s spouse are part of the bankrupt’s estate and are subject to an automatic stay.

Now it’s important to remember the California Rules of Court provide that “an opinion of a California Court of Appeal or superior court appellate division that is not certified for publication ordered published must not be cited or relied on by a court or a party in any other action.”  The only exceptions to this rule are when the unpublished opinion “is relevant under the doctrines of law of the case, res judicata, or collateral estoppel” or “is relevant to a criminal or disciplinary action because it states reasons for a decision affecting the same defendant or respondent in another such action.”

*Any violation of the rule against citing or relying upon an unpublished opinion may lead to monetary sanctions and striking of the brief.  All unpublished opinions, such as this one, should be used for educational purposes only, and should not be cited or relied upon except as permitted under the California Rules of Court.

IRMO Prestholt, an unpublished opinion of District 2, Division 7 (filed may 22, 2012), was a 2006 status-only judgment of dissolution that terminated the parties’ 14-year marriage.  In 2007, the trial court ordered Husband, an attorney, to pay to Wife $5,000 per month in spousal support, “subject to retroactive modification,” until further order of the court.  Due to the fact neither party had worked for at least a year, the court also ordered that certain assets would be refinanced or sold.

Husband filed for bankruptcy in 2009.  Wife moved for relief from the automatic stay to allow Husband’s children and spousal support obligation to be determined, to deal with his withdrawal of $50,000 from a 401(k), and to characterize an annuity.  The bankruptcy court authorized Wife to seek a ruling from the superior court on issues relating to the custody, visitation, and support as well as “to adjudicate the nature of her interest in all of property in the Debtor’s bankruptcy estate.”

In 2010, the bankruptcy court approved the sale of Husband and Wife’s home and the distribution of Husband’s homestead exemption.  In the same year, Wife’s superior court trial brief stated the only issues to be resolved were family support and attorney’s fees, arguing Husband’s separate property was within the jurisdiction of the bankruptcy court and the division of community property would be addressed there.

Husband countered that the bankruptcy court order required the superior court to determine Wife’s interest in the property in the bankruptcy estate.  Wife argued the bankruptcy court order permitted her to do so but that she chose instead to relinquish that right to negotiate a settlement with the bankruptcy trustee.

The superior court ruled the bankruptcy court order gave Wife a choice about how to proceed and that she properly elected to negotiate a settlement with the trustee of Husband’s bankruptcy estate that disposed of any claim she may have in the property.  The superior court also ruled that Husband’s post-petition claim against Wife for breach of fiduciary duty could not be pursued because he did not obtain relief from the automatic stay.

Later in 2010, notwithstanding the earlier ruling by the superior court that it was precluded from adjudicating property issues, the superior court entered a judgment that stated, “All community real property was sold through the bankruptcy court” with proceeds to be distributed through the bankruptcy court, “all community debts have been paid through bankruptcy or will be paid through the bankruptcy court”, and “all community personal property was abandoned by the bankruptcy court.”

Husband appealed, and the California appellate court affirmed in part and reversed in part.  According to 11 U.S.C. § 362, filing a bankruptcy petition triggers an automatic stay of actions against the debtor, the creation of an estate, and the appointment of a trustee.  The stay is one of the most important protections in bankruptcy law and its scope is broad and remains in effect “until such property is no longer property of the estate.”

The bankruptcy court has exclusive jurisdiction to determine the scope and applicability of the automatic stay.  But notwithstanding the breadth of the automatic stay, several types of actions and proceedings are exempted.  In family law, the filing of a bankruptcy petition does not stay commencement or continuation of proceedings to establish or modify an order for “domestic support obligations.”

It also does not stay proceedings concerning child custody or visitation.  But proceedings to determine the division of community property that is property of the bankruptcy estate are not exempted from the automatic stay.

Community property interests of the debtor and the debtor’s spouse at the commencement of the bankruptcy case must be transferred to the estate and bankruptcy courts must then look to state property law to determine the separate or community property character of the property and what is and is not to be included in the bankruptcy estate.  Due to the fact property acquired in joint form during marriage is presumed to be community property, all such property not yet divided by the state court at the time of the bankruptcy filing is property of the bankruptcy estate.

The state court is permitted, however, to divide exempt community property interests or property abandoned by the trustee.  But if a dispute about marital property is to proceed in state court, the non-bankrupt spouse must file a motion with the bankruptcy court to lift the stay for cause.  Because state courts have expertise in family law matters, such a petition is frequently granted.

PURCHASE OF MILITARY SERVICE CREDITS DEEMED COMMUNITY PROPERTY

Leave a comment

In a very recent case handed down, entitled IRMO Green (2012)__Cal.App.4th__(CA 1/4 –Opinion filed May 16, 2012, a California appeals court decided that a husband’s use of community funds during the marriage to purchase military service credit in CalPERS makes the service credit community property even though husband’s military service was completed before the parties married.

In the case, Husband served in the U.S. Air Force for four years ending in 1986.  In 1989, Husband began working as a firefighter in Dublin.  The department was a participant in CalPERS.  Husband then married wife in 1992.

In 2002, Husband exercised his right to buy four years of PERS service credits for his military service.  Husband elected to pay for credits through monthly installment payments over fifteen (15) years.   $11,462 was spend in community earnings to purchase the military credits prior to the parties separating in 2007.

The parties litigated the issue regarding how to characterize Husband’s military service credit.  Husband contended that because his right to purchase military service credit arose prior to the parties’ marriage, all four years of the credit were his separate property.  He acknowledged that the money used to pay for the purchase before the parties’ separation was community property but contended the community was entitled to nothing more than reimbursement.

Wife argued the military service credits were community property and urged the court to place them in a separate account for her benefit through PERS.  A court-appointed expert proposed awarding a pro rata share of the purchased service credit to Wife, representing the percentage of payments toward the military service credit made with community funds.

The family law trial court concluded that the military service credit portion of the CalPERS pension was Husband’s separate property and awarded it to him.  Husband was ordered to pay Wife $6,699.54, which represented half of the installment payments made with community funds during the marriage plus interest at six percent.  Wife appealed, and the trial court decision was reversed.

COMMUNITY PROPERTY INTEREST IN MILITARY SERVICE CREDIT

The appellate court agreed that it was error for the trial court to characterize Husband’s military serviced credit as separate property.  The appellate court stated that in determining whether the community has an interest in pension rights, courts look to when a party acquired a property interest in them.  In other words, when did the pension right become more than an “expectancy”?

Although Husband completed his military service before his marriage to Wife, when he left the military he had no property interest whatsoever in the CalPERS retirement plan because he did not begin working for the CalPERS participant until three years later.  Even after Husband started working for a CalPERS participant, his right to a military service credit was simply an “expectancy”.

The appellate court determined that the military service credit was indisputably purchased during the marriage with community funds.  Thus, the contractual right to receive four additional years of retirement credit based on premarital military service was obtained during the marriage and it was stamped a community asset from then on.

DIVIDING DEBTS DURING DIVORCE

Leave a comment

In California, when dividing property during a divorce, both parties need to be aware of the fact that all debts that were incurred during the marriage are presumed to be community property.  The only debts which would normally not be considered community property are debts which are deemed completely unrelated to the community.  This might include:

  • a debt related to one person’s separate property
  • support obligations
  • gifts or expenses related to a romantic relationship other than the marriage, or
  • criminal acts which did not have financial benefit to the community.

This means that a spouse could incur a debt for a purpose the other spouse does not approve and it would still be considered a community debt.

Debts that have been incurred before the marriage remain the responsibility of the person who originally incurred them.  If community funds are used to pay these debts, sometimes there is a right of reimbursement for the community and sometimes not.  Special rules apply depending upon the type of debt and other assets/income which were available to pay it.

DIVIDING ASSETS IN CALIFORNIA DIVORCE

2 Comments

One of the most important aspects of all divorces is the division of community property.  To do so in a fair and reasonable manner, it is important to begin with properly valuing a community’s income, debts, assets, and expenses.

Remember, California is a community property state.  This means all property acquired by a spouse during marriage while living in California is presumed to be community property.  Upon death or divorce, the value of all community assets is divided equally in terms of value between both spouses.

Both marital partners are equal agents of the partnership, and they are able to bind the partnership if acting within the scope of his or her authority, and if acting for the joint benefit of the family.  The California community property system adds to joint ownership the right of equal management and control.

All benefits which come from either spouse’s employment during the marriage are community property to the extent they are earned and/or accrued during the marriage.  This can include:

  • retirement benefits
  • pension, savings plans
  • stock purchase plans
  • 401k plans
  • sick and vacation pay, and
  • stock options.

If the benefits are not fully vested at the time of a separation, an allocation is made between the community and separate interests.

Separate property is property:

a)      owned before marriage

b)      acquired during marriage by gift or inheritance, or

c)      acquired after separation.

Earnings, income, or appreciation from separate property sources remain separate property.  If there is a dispute about when an asset is separate property, you must have proof that you acquired the separate property in one of these ways, and have documentation to trace the separate property back to the original source.

If you use separate property to acquire property in joint names during the marriage, you are only entitled to reimbursement for the amount of the separate property contribution (no interest or appreciation) and, again, you must be able to trace the contribution back to the separate property source.

If you own a business prior to marriage, the community may acquire an interest in the business if the business increases in value during the marriage, depending upon the reason for the increase in value.  If you own a home in your own name and community funds are used for mortgage payments or to pay down the principal on a loan, the community will acquire an interest in the appreciation in the value of the property, but only in the ratio that the amount paid on principal bears to the total purchase price.  The community will also be reimbursed for the amount paid down on principal.

The way you hold title to real property will affect disposition of property upon death of a spouse.  For example, property held as joint tenants will automatically become the property of the surviving spouse.  Property held as community property or tenants in common will be distributed according to the Will or Trust of the spouse, or according to the laws governing intestate succession in the absence of a Will or Trust.

WHAT TO DO WITH UPSIDE DOWN RESIDENCES

Leave a comment

When it comes to asset and property division, one of the key questions family law courts must deal with is: What to do with upside down residences?

With the economy struggling the way it is, many divorcing couples find themselves facing this very same issue, where they own a family residence with the total amount of encumbrances from secured loans exceeding the current fair market value of the residence itself.  The general rule the courts must follow can be found under Family Code Section 2550, which dictates that the court must achieve an equal division of the community property obligations and assets at the time of the judgment; or at a later time if it reserves jurisdiction over an asset in the community estate.

It is also important to note that the trial court’s division of the assets must comply with the statutory provision of the family law act that fairly and reasonably adjusts the relative contributions of the community and separate estates of the parties to achieve substantial justice between the parties under the circumstances.

In attempting to divide the community estate equally between the parties, the family law court has broad discretionary powers in determining the manner in which the community property is divided and the responsibility to affix values of the assets and liabilities to accomplish an equal division.  To comply with the requirements of an equal division of the estate, the court must add all the community assets, deduct all community obligations, and divide residual assets equally.  The whole idea is to establish a mathematically equal division of the community property.

The family law court maintains discretion to order the sale of the community property real estate to achieve an equal division of the community property estate.  The key issue the court faces in this scenario is whether it has the authority to order a sale when only a short sale is possible and in the absence of a short sale, the property will most probably be lost to foreclosure.  This issue can prove especially ticklish for the court when one of the parties requests the award of the property at the present negative value and proves the ability to keep the property out of foreclosure.

DEBT INCURRED DURING MARRIAGE IS COMMUNITY DEBT

Leave a comment

In California, when a debt is incurred during a marriage it is considered to be community debt.  Even if the credit account is not joint, if the debt is undertaken on the personal credit of one spouse, or if the debt is acquired during the marriage, it would normally be considered part of the community Family Code § 2581 and Family Code § 2625.  In a divorce, debt would be divided as a part of the marital estate if used to acquire property during the marriage.

Additionally, any loan proceeds that might be acquired by a spouse during a marriage are presumed to be community property.  Per Family Code §2581 and Gagan v. Gouyd (1999) 73 Cal.App.4th835, 843, any party claiming that the loan proceeds are separate property must establish their claim by “clear and convincing” evidence.