Community Property for the California Bar Exam

  1. Basic Principles“CA is a community property state. In CA, there is a CP presumption that all assets acquired during the marriage are presumptively CP. There are some areas of SP: property owned by either spouse before marriage, property acquired during marriage by gift, will, or inheritance, property acquired during marriage with the expenditure of SP funds, and the rents, issue, and profits derived from SP.”

    1. Separate Property

      1. Property owned by either spouse b4 M; or

      2. Property acquired during M by gift, will, or inheritance; or

      3. Property acquired during M w/the expenditure of SP funds (“source rule” or “tracing”)

    1. Community Property – property, other than SP, acquired by either spouse during marriage

      1. Salary or wages earned by either spouse

      2. Income from community assets

    2. Community Presumption – all assets acquired during the marriage are presumptively CP – absent a showing of the parties’ agreement or that title was taken in a form that overcomes the CP presumption, the burden of proof that an asset is SP is on the party so contending

    3. Registered Domestic Partners – as of 2004, CP system applies to registered DPs, retroactive to 2000 – everything else the same except not labeled H&W

      1. Available to:

        1. Same sex couples

        2. Elderly opposite-sex couples receiving SS benefits

      2. Note – same sex-couples lawfully married after In re Marriage Cases (2008), but before the effective date of Prop 8 (Nov 2008) may claim CP rights as SPOUSES, not DPs

    4. End of the Economic Community

      1. Ends with:

        1. Permanent physical separation, AND

        2. Intent not to resume the marital relationship (only need intent of 1 spouse)

      2. For CP not divided on divorce, the court retains continuing jurisdiction to award CP and divide 50/50 unless the crt finds that the interests of justice require an unequal division

    5. Dividing CP at Divorce

      1. Absent a property settlement agreement, all CP must be divided equally

      2. Disparity in earning power can be considered only as to spousal/child support

      3. Each and every CP asset (and liability) must be divided 50/50

        1. Economic Circumstances Exception – can have a non-pro rata division, giving asset wholly to one spouse and “cash out” other spouse w/other assets (w/each spouse getting 50% of total value)

          1. Family Residence – loss of family home would uproot kids

          2. Closely Held Corp – all shares are CP, but W is the CEO

          3. Pension – awarding all of H’s pension to H, other assets to W, so they can go their separate ways

        2. Statutory Exceptions to 50/50 Rule

          1. Misappropriation – one spouse misappropriates CP before or during divorce

          2. Education Debts – one spouse has incurred edu. debts, treated as SP

          3. Tort Liability – one spouse incurred tort liability not based on activity for benefit of the com

          4. Personal Injury Award – award is CP, but on divorce, it is awarded to injured spouse

          5. Negative Community” – community liabilities exceed assets; relative ability of spouses to pay debt is considered (concern for creditors)

    6. Gifts to the Community

      1. Neither spouse can make a gift of CP w/o the other spouse’s written consent – non-consenting spouse may set aside the gift in its entirety

      2. The power to manage is NOT equal to the power to give away

      3. Alternatively, on divorce, non-consenting spouse can take equal offsetting CP assets to recover the ½ interest

      4. If non-consenting spouse learns of gift after spouse’s death, can recover ½ interest from either 3P donee or spouse’s estate

        1. Note – same results will apply if spouse was insured under 100k CP life insurance policy and names a 3rd party as the beneficiary w/o the other spouse’s consent – can recover either from the beneficiary or spouse’s estate

      5. U.S. Govt. Savings Bonds Exception – fed law trumps, non-consenting spouse cannot recover if spouse uses CP $ to buy bonds in the name of 3P

      6. Widow’s Election Will – spouse can elect to take under the will, but has to allow the will to operate or she can elect to take against the will and take everything through the CP system

    7. Acquisition of Credit During Marriage

      1. Community Credit Presumption – funds borrowed during M, and goods purchased during M, are presumptively community credit

        1. BUT – borrowed funds are classified according the primary intent of the lender – look at where the lender is looking for satisfaction of the debt

          1. Lender relies on H’s general standing in the community or credit score: note is CP obligation, and house is CP

          2. Note is secured by H’s SP unrelated land elsewhere, the note would be a SP obligation

    8. Fiduciary Duty & Confidential Relationship

      1. Duty of good faith and fair dealing to each other

      2. If one spouse gains an advantage from a transaction, a presumption of undue influence arises – and the benefiting spouse has the burden to prove she did not breach her fiduciary duty

      3. Grossly negligent and reckless investment of CP funds is a breach of a spouse’s duty

  1. Altering the Character of Assets by Agreement – absent any contrary agreement, the statutory definitions of SP and CP control, but CA allows parties to opt out of the CP and SP characterizations by pre-marital agreement or agreement during M, either as to particular assets or as to all acquisitions – agreements to change prop during M are transmutations – can be by gift or agreement; no consideration is req.

    1. Pre-Marital Agreements – must be in writing, signed by both parties – oral agreements are invalid

      1. Any matter not in violation of public policy (cannot promote divorce)

      2. Exception – where oral agreement is fully performed, it is considered executed

        1. But marriage alone is not sufficient performance to make it an exception to the writing req. b/c that would eliminate the writing req. in every case

      3. Exception Estoppel based on detrimental reliance – evidence of an oral promise is admissible to prove agreement

      4. Child Support – parties cannot agree to limit either party’s contributions to furnish child support

      5. Defenses to Enforcement

        1. Not Signed Voluntarily – post 2001 response to Bonds, a premarital agreement shall be deemed involuntary and thus unenforceable unless crt finds that party challenging agreement:

          1. Was represented by ind legal counsel at time agreement signed(or waived in separate writing); AND

          2. Was given at least 7 days to sign; AND

          3. If not rep’d by ind counsel, was fully informed in writing (in language in which party proficient) of terms and basis effect of agreement – party must execute doc declaring that they received info and identifying who provided it

        2. Unconscionability – divided into 2 areas: spousal support and anything else

          1. Spousal Support – provision in premarital agreement re spousal support is unenforceable on one of two grounds:

            1. Party challenging was not rep’d by ind legal counsel at time signed; OR

            2. Provision is unconscionable @ time of enforcement (even if party rep’d by counsel)

          2. Anything Else – agreement unenforceable if unconscionable when made AND

            1. No full and fair disclosure of other party’s prop or financial obligations;

            2. Right to disclosure not waived in writing; AND

            3. Party challenging had ninadequate knowledge of other party’s prop or financial circumstances

          3. Note – by statute, unconscionability is a matter of law to be decided by the crt, not a question for the jury

    2. Marital Agreements (Transmutations)

      1. Before 1985 – oral transmutations were permitted, whether by express agreement or agreement-in-fact

      2. After 1985 – must be: (1) in writing, (2) signed by spouse whose interest is adversely affected; and (3) must explicitly state that a change in ownership is being made

        1. Applies to all transmutations: SP into CP; CP into SP; one spouse’s SP into other spouse’s SP

        2. Usual exceptions to the writing requirement (SOF, estoppel, partial performance) DO NOT apply

        3. Only Exception – gifts of tangible property of personal nature (e.g. inherited jewelry) which are not substantial in value taking into account the circumstances of the M

        4. Note – in any proceeding commenced before death of a person who made a will – a statement in a will as to the character of the property is inadmissible as evidence of transmutation – must follow 1-3 above

  2. Effect of How Title is Taken

    1. Property Acquired Before 1975: Married Woman’s Special Presumption

      1. Presumption – where CP was used to take written title in a married woman’s name before 1975, and the title did not indicate CP or JT was intended, the property is presumptively the W’s SP

      2. Rationale – paternalism, before 1975, except for W’s earnings, H had sole management of CP, so if title taken in W’s name, H must have intended gift

      3. Presumption is NOT rebuttable as b/n H&W but not against a BFP

      4. Rules:

        1. Title is taken in W’s name alone before 1975 – (prop is W’s SP)

        2. Title in name of W&H before 1975, but title is not taken in JT form, and not as “husband and wife” or “Mr. & Mrs.” – (prop is ½ W’s SP, ½ CP)

        3. Title in name of W and some third party before 1975 (W would be tenant in common w/3rd party)

    2. Presumption of Taking Title Alone

      1. Not conclusive that it is SP usually CP b/c during marriage

      2. Counterargument – transmutation, CP gift to separate spouse

    3. Presumptions Arising from Title in “Joint & Equal Form”

      1. Joint & Equal Form – means that the title lists both spouses names

      2. Post 1974 – Marriage of Lucas – Law @ DEATH by taking title as JTs, property is presumptively CP even if a party used SP funds as down payment to purchase or used SP funds to improve property – taking title in a form that raised a CP presumption was inconsistent with idea that party intended to reserve a SP interest – subjective intent of spouse is irrelevant and crts assume that party must have intended gift to com – unless a contrary agreement is est., spouse has NO separate ownership interest and no claim for reimbursement for improvements

        1. AT DEATHLucas controls – contributing spouse has NO SP ownership interest unless agreement is est. – entire prop is CP

        2. AT DIVORCEanti-Lucas statutes control

          1. Ownership – for purposes of division of prop on divorce/separation, prop acquired during marriage in joint and equal form is presumptively CP and is subject to equal division on divorce, BUT CP presumption can be rebutted by:

            1. Express statement in the deed or other instrument of title that the property (or portion thereof) is SP; or

            2. Written agreement by the parties that the prop (or portion thereof) is SP

          2. Reimbursement – for purpose of division on divorce/separation, spouse who made contributions of SP to the acquisition or improvement of CP,

            1. Is entitled to reimbursement w/o interest for contributions for “DIP”

              1. Down Payments

              2. Improvements, or

              3. Principal Payments on Mortgage

            2. BUT NOT for: SP used to pay interest on mortgage, taxes, insurance, or maintenance

            3. Reimbursement cannot exceed value of prop

          3. Anti-Lucas statutes apply only when there is a deed/doc

  3. Effect of Parties’ Actions on Characterization of Assets

    1. Installment Purchase Pre-M; Debt Paid Down w/CP Post M

      1. Pro-Ration Rule – if installment purchase before M, then payment w/CP funds after M, the CP estate takes a pro rata portion of the prop, measured by the amount (%) of principal debt reduction attributable to the expenditure of CP funds

      2. Formula:

Numerator: Principal Debt Reduct. from CP

Denominator: Purchase Price

    1. Hypo – W, who is single buys house for 100k, paying 20k down and signing mortgage for 80k balance. W makes mortgage payments to reduce balance by 10k (to 70k). W marries H and continues to make mortgage payments out of her salary (CP) until the mortgage is paid in full. W dies leaving will that devises “all my prop to nephew.” The house is worth 500k.

Numerator: Principal Debt Reduct. from CP: $70,000

Denominator: Purchase Price: $100,000

        1. The house is 7/10 CP (350k), leaving 150k as W’s SP. Nephew will receive 325k (1/2 of W’s CP (175k) + W’s SP (150k)) H will receive 175k (his ½ of CP)

      1. Whole Life Insurance Policy (cash value representing savings w/investment feature) – treated as CP, pro-ration rule applies, CP receives proportion of % paid by CP funds

      2. Term Life Insurance Policy (pure insurance w/no cash value – premium covers no more than the risk of death) – last premium paid determines character – thus if final payment was paid w/CP funds, there is 0% SP even if earlier premiums were paid with SP funds

    1. Community Funds used to Improve SP

      1. Party uses CP to improve their own SP – absent a written agreement, the community is entitled to reimbursement for the greater of the money paid or the increased value of the prop

        1. If H owns SP house and uses his salary (CP funds) to make improvements on his SP house, the improvements become part of the house via property fixtures theory and expenditure of CP funds will not change the ownership character of the house

        2. W can bring a claim for reimbursement for the community and get the greater of the CP expenditure OR the increase in the property’s value

        3. Note – the anti-Lucas statutes do not apply b/c only expenditures of SP on CP trigger anti-Lucas

      2. Party uses CP to improve other spouse’s SP

        1. If W owns SP house and H spends his salary (CP funds) to make improvements on her SP house – in divorce proceeding, there is a split of authority:

        2. No Reimbursement – presumption of gift to W’s SP estate; presumption can be overcome only by evidence of an agreement to reimburse the CP estate

        3. Reimbursement – other cases reject presumption of gift and grant reimbursement

      3. Party Expends his SP on CP House – If title is held in joint form in CP and H spends SP $ improving house and the improvements increase the house’s value, in a DIVORCE proceeding, H is entitled to reimbursement – anti-Lucas statutes control

        1. NOTE – if issue arises on DEATH, Lucas controls and there would be no claim for reimbursement unless there was proof of an agreement to reimburse

    2. Commingled Bank Accounts

      1. Recapitulation Theory – party seeks to prove that all assets purchased from account are his SP by totaling all family living expenses and showing that family expenses exceed community income by a substantial margin and argues that all CP must have been exhausted and he must have used SP to purchase assets

        1. Crts reject – mere fact that SP funds are commingled w/CP funds does not transform or transmute the SP into CP, but the burden of proof is on H to show that each asset was purchased w/SP funds

        2. Recapitulation does not show that CP funds were unavailable when each asset was purchased

      2. Family Expense Presumption – it is presumed that expenditures for family expenses (food, housing, clothing, etc.) were made w/com funds (to the extent that they were available) even though sep funds were available

        1. BUT b/c of commingling and inadequate records, some family expenses may have been paid w/SP funds, in which case the presumption is of a gift to the comm. w/no reimbursement intended

        2. To defeat presumption, H would need agreement to reimburse

      3. To Satisfy Burden, H can use:

        1. Exhaustion Method – If P can show that at the time of the transaction, there were no CP funds available, then the purchase is separate property

          1. Example – on 9/20, account had balance of 3k and H deposited 20k check of his SP funds, on 9/22 H wrote a 5k check to pay his daughter’s tuition bill (exhausting CP), and on 9/24 H withdrew 10k to buy 200 shares of stock

        2. Direct Tracing – quick in, quick out, H must show there were sufficient SP funds available and that he intended to use SP funds to buy the asset

          1. Example – 15k in account, H deposits 12k of SP funds, 2 days later he writes check for 12k to buy 200 shares of stock

  1. Characterization Problems Raised by Certain Assets

    1. Businesses Owned Before Marriage that Increase in Value

      1. Pereira – personal skills and effect – use where spouse’s time, skill, and effort are major factors in growth of business – where spouse contributed creative ideas or developed new techniques, and/or worked long hours and only drew a modest salary

        1. Formula – pay reasonable rate of return on SP investment + original principal, the rest is CP. Pay interest at legal rate of 10% on value of the business at the time of marriage

          1. Example – business worth 100k at marriage, couple married for 10 yrs, at divorce prop worth 4m. H gets 100k (original value) + 100k in interest (10k/yr times 10 yrs) = 200k is SP, rest is CP (3.8mil)

      2. Van Camp – value company or asset – use where capital investment was the major factor in the business’s growth, and spouse’s skills and efforts were less of a factor – where spouse was paid substantial salary and large bonuses (meaning the community was already compensated)

        1. Formula – value of spouse’s services at market rate over # of yrs MINUS family expenses paid from community funds = community component, balance is SP

          1. Example – couple married for 10 yrs, market rate for executives is 100k/yr and living expenses were 80k per yr:

$100,000 x 10 years = $1,000,000 value of com labor

– 80,000 x 10 years = $ 800,000 family ex paid from CP

Com Component: $200,000, rest is SP

    1. Pension Benefits – employee retirement benefits accumulated during marriage, whether or not vested at time of divorce are CP

      1. Time Rule applies

      2. Formula: CP =

Numerator: years employed while married

Denominator: total yrs employed until retirement

    1. Not Vested – If pension rights have not vested on divorce, W has two options:

      1. “If and when received decree” – if and when received, she gets her share

      2. Cash Her Out – by awarding other assets of equal value

    2. Vested – If pension rights have vested on divorce, but H has not retired, W can seek payment immediately since H could have retired at the time of divorce and his benefit had matured

      1. H’s election to retire cannot defeat W’s present rights

      2. Rights Survive Death – a former spouses CP interest in a pension survives the post-divorce death of either spouse – thus unless otherwise prohibited by law (ERISA), the nonemployee spouse is entitled to her fractional share of the death benefit should the worker spouse die first

    3. Federal LawQualified Domestic Relations Order (QDRO) – if a nonparticipant spouse in a qualified pension plan divorces a participant spouse, her CP interest is recognized under fed law and she can get a QDRO and receive payments from the plan

      1. If the marriage is ended by death rather than divorce, the nonparticipant spouse DOES NOT have an interest if she predeceases the participant, her interest is terminated

      2. Disability Retirement Benefits & Worker’s Comp –characterized as CP or SP depending on what the wages they are designed to replace.

        1. If the payments are designed to replace marital earnings, the disability pay is CP.

        2. If the payments are designed to replace separate post-divorce earnings, the disability pay is SP.

        3. It is immaterial that the right to receive the payments was earned during the course of the marriage

        4. BUT – if H is given election to take regular retirement or disability, W has claim to disability b/c He cannot elect to defeat her CP interest

    4. Severance Pay split of authority

      1. Theory 1 – severance pay is SP b/c it replaced lost earnings which after a divorce would be H’s SP

      2. Theory 2 – severance pay is CP b/c it resembles pension and it arises from collective bargaining agreement and thus was earned by employment during marriage

  1. Stock Options – proration formula used depends on the primary intent of the employer

    1. Marriage of Hug Proration – used when stock options were awarded primarily to reward H for his past services as a form of deferred compensation

      1. Formula – starting point for both the numerator and denominator of the fraction is the date of employment and the fraction is then multiplied by the number of shares of stock that can be purchased under the options:

Yrs from date of employment until divorce

Yrs from date of employment until options become exercisable

    1. Marriage of Nelson Proration – used when stock options were awarded primarily to encourage H to remain w/the company

      1. Formula – starting point for both the numerator and denominator of the fraction is the date the options are granted and the fraction is then multiplied by the number of shares of stock that can be purchased under the options:

Yrs from date options are granted until divorce

Yrs from date options are granted until options become exercisable

    1. Goodwill of a Professional Practiceis CP

      1. Qualities that generate income beyond that derived from the professional’s labor and reason return on capital and physical assets

      2. Goodwill is primarily est. by expert witness testimony as to its value:

        1. Market Sales Valuation – price goodwill would command in a sale of the biz or practice

        2. Capitalization Valuation – determines amount that goodwill acq. during M will generate biz for practice in the future

    2. Educational Expenses – professional degree is NOT property of the community subject to division at divorce

      1. Reimbursement:

        1. Allowed for the cost of edu if the edu enhances H’s earning capacity

        2. Allowed for edu expenses incurred before marriage if the loans were paid off using com funds during marriage

      2. Defenses to Reimbursement:

        1. Com has already substantially benefited from the earnings of the edu spouse – if more than 10 yrs have elapsed, presumption is that the comm. has substantially benefited, no reimbursement

        2. If other spouse also received a CP-funded education

        3. Increases earning potential – reduces the need for spousal support

      3. Student Loans – assigned solely to party who incurred the debt

  1. Tort & Contract Liability; Management Problems

    1. Tort Awards

      1. Where the other spouse was a tortfeasor, the tort recovery is SP (otherwise he would benefit from his wrongful act)

      2. Where damages are recovered from a third party, the tort recovery is CP

        1. At divorce, treated as SP, personal injury award goes to injured spouse in full so long as it can be traced and was not already spent unless the interest of justice, including economic need, require otherwise

        2. At death, treated as CP

    2. Liabilities

      1. Tort Liabilities

        1. CP is subject to the tort liability of either spouse, judgment creditor can reach it

        2. Order of Recovery

          1. If W was performing an act for the benefit of the comm. (driving to work or driving kids to school), the liability is first satisfied from CP then from W’s SP

          2. If W was NOT performing act on behalf of the comm., the liability is first satisfied from W’s SP and then from CP

        3. Judgment creditor CANNOT reach H’s SP – he is not personally liable, only his CP can be taken

      2. Child Support Liabilities

        1. If child is fathered prior the marriage, obligations to pay for are treated as debts incurred b4 M

          1. When debts are acquired b4 marriage, debtor spouse’s SP and CP may be reached, but not other spouse’s SP

    3. Management Rules each spouse has equal management and control over all CP, and thus has full power to buy or sell CP and contract debts w/o the other spouse’s joinder or consent

      1. Personal Belongings Exception – one spouse cannot sell or encumber personal prop used in family dwelling (furniture, clothing, etc.) w/o written consent of other spouse – transaction is voidable by other spouse at any time

      2. Business Exception – applies when a spouse operates a biz interest that is all or substantially all comm. personal prop and has primary mgmt/control – while the spouse can act alone in all transactions, if the spouse sells, leases, or otherwise encumbers substantially all of the personal prop used in the biz, must give written notice

      3. Voiding Transfers

        1. If BFP did not know grantor spouse was married, other spouse can void transfer up to 1 yr SOL

        2. If BFP knew or should have known grantor spouse was married, other spouse may void transfer at any time, no SOL

      4. Real Property – general rule, neither spouse can transfer or encumber their ½ interest in real CP – only entire interest can be transferred or encumbered

        1. Family Attorney Real Property Exception – a spouse can unilaterally encumber her ½ interest in real CP to pay the family atty representing her in a divorce action

      5. Creditor Rights – b/c spouses have equal management powers and either spouse can enter into contracts and/or incur debt, CP can be reached, also CP can be reached for SP debt prior to marriage

      6. Exception – Separate Account – non-debtor spouses M earnings are not liable for other spouse’s pre-M obligations so long as those earnings are held in a separate account that the other spouse cannot w/d from/coming

        1. SP of Non-Debtor spouse can never be reached

          1. Exception:Liability for Medical Bills – each spouse has a duty to support the other spouse and minor children – each spouse is personally liable for the other spouse’s contracts for necessities

              1. Creditors can reach CP funds and SP funds of either spouse

              2. Applies even when econ com has ended, b/c still married – spouse remains personally liable

        2. After divorce, a creditor cannot reach CP awarded to a spouse unless that spouse incurred the debt or was assigned the debt the crt

  2. Multistate Problems/Conflict of Law

    1. Quasi CPtreated as CP – property acquired while the couple was domiciled in a non-CP state, which would have been classified as CP had it been acquired in CA under the same circum is QCP

      1. Jxd Issues – not a problem, in making a 50/50 division, CA crt could award land to one spouse and other assets to the other, or req. spouse to execute any conveyance that are necessary

      2. At DEATH if a non-acquiring spouse predeceases spouse who acquired QCP, the non-acquiring spouse has NO interest in the prop acquired by the surviving spouse, treated as surviving spouses SP

      3. Move from CP State to CA – everything remains true CP

  3. Property Acquired Outside the Marital Relation

    1. CA does NOT recognize CL marriage – all prop is SP, if they take title together, they will be TIC

      1. Exception – CA will respect if CL marriage is validly contracted in another state

    2. Absent marriage, property relationships are governed by CONTRACT LAW, either express or implied by conduct

      1. As long as K is not based solely on sexual services

    3. Putative Spouses – if spouse had an objectively reasonable and good faith belief that they were legally married, the assets acquired by either spouse are quasi marital property will be divided 50/50

      1. Bad Faith Partners– one CA crt has held that if H acted in bad faith, and knew they were not married, but convinced W they were, he is not entitled to ½ of prop earned by W’s labor (which would otherwise be CP, subject to 50/50 split)

      2. Knowledge – if parties were aware they were not lawfully married, their relationship is characterized as unmarried cohabitants, absent a K, express or implied, H will keep what he acquired, and W will keep what she acquired

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