Essay Question
Hank and Wendy are residents of California. Hank is a teacher and Wendy is an accountant.
In 2008, Hank and Wendy married. After their wedding, Wendy’s mother deeded them a house as joint tenants. They moved into the house and used their earnings to furnish it in a lavish style, including an antique mirror in the entryway. One day, Hank gave the mirror to a friend who had admired it on a visit to the house.
In 2012, Wendy purchased a small office building where she established her own accounting practice. She paid for the building with funds saved from her earnings during her marriage and took title in her name alone.
In 2013, Hank and Wendy separated. Hank told Wendy that the house was henceforth her separate property and she said, “O.K.”
After the separation, Wendy’s income from the accounting practice tripled and she remodeled the office building with her increased earnings. Without Hank’s knowledge, she then sold the building to Bob, who did not know that she was married.
In 2014, Wendy initiated dissolution proceedings.
2. What are Hank’s and Wendy’s rights, if any, as to the following:
a) The house? Discuss.
b) The accounting practice? Discuss.
c) The office building? Discuss.
Answer according to California law.
General Thoughts
As a reminder with community property questions, you are generally asked about each party's rights. Try to avoid just saying that something is community/separate property and spell it out (e.g., "X is community property, meaning H and W each have an interest in one-half the value of X.") This question was mostly straight-forward, but I was surprised to see the reverse Van Camp and reverse Periera methods show up. That was a bit of a twist. If this surprised you or flustered you, let it be a learning moment. If you were not sure of the reverse methods (or even if you were not sure of the Van Camp or Periera methods themselves), you could fall back on general community property principles. Where did the money come from (e.g., before/after marriage, inheritance, gift)? What seems fair? If you do not know the exact rule, fall back on general principles and make it up. You likely will not be far off from the right answer. It is better to get some points than none!
Sample Answer
Note: I tried to cover all of the issues that I saw in detail. I did not write this under testing conditions, so I do not mean to imply that this is a "passing" answer. This is just meant to help you see some of the issues and potential analysis. Anything that you think I missed? Reach any different conclusions? Please chime in with a comment.
Community Property Principles
California is a community property state. All property acquired during the course of marriage is presumed community property. All property acquired before marriage or after permanent separation is presumed to be separate property. In addition, any property acquired by gift, devise, or bequest is presumed to be separate property.
In order to determine the character of any asset, courts will trace back to the source of funds used to acquire the asset. A mere change in form of an asset does not change its characterization. With these basic principles in mind, we can now turn to the specific items of property involved in this instance.
(1) Antique Mirror
The Antique Mirror Was Community Property
First, we must determine the nature of the property - whether separate, community, or quasi-community property. In general, property acquired during the marriage would constitute community property unless an exception applied.
Here, Hank and Wendy used their earnings to furnish the home that had been deeded to them by Wendy's mother. They married in 2008, acquired and furnished the home after marriage, and separated in 2013. They purchased the antique mirror with their earnings. There is nothing indicating that the mirror was purchased with either party's earnings prior to marriage (i.e., separate property), so the antique mirror would be considered community property.
Therefore, the mirror was community property. It was acquired during marriage using earnings.
Hank Could Not Transfer the Mirror Without Wendy's Written Consent
In general, each spouse has exclusive management and control of his/her separate property and equal management and control of community property. However, there are specific exceptions to the rule (i.e., limitations on a spouses' management and control of certain types of community property). Household furnishings are one such exception. One spouse cannot transfer household furnishings without the written consent of the other spouse. The non-consenting spouse can void the transfer at any time during or after marriage and does not need to refund the purchase price to the transferee.
Here, Hank gave the mirror to a friend who had admired it on a visit to their house. It does not appear from the facts that Wendy gave her written consent. Hank gifted it to the friend without Wendy's written consent. It does not matter whether the friend knew that they were married or that it was gifted and not transferred for money.
Therefore, Hank made an unauthorized transfer of a home furnishing that was community property.
Conclusion
Wendy could either void the transfer to have the mirror returned (without owing the friend anything) or she could seek reimbursement for her share (one-half) of the value of the mirror from Hank.
(2)(a) House
The House Was Likely Acquired As Community Property
First we must look to the nature of the property when it was first acquired by Hank and Wendy. Property that is conveyed to a married couple is presumed to be community property of the conveyance took place after 1975. Each spouse owns an undivided one-half interest in the community property. There is no right of survivorship. In contrast with this general presumption, when property is conveyed to a married couple as joint tenants with right of survivorship, each spouse owns an undivided separate property interest in one-half of the property due to the "right of survivorship." The courts prefer community property to the separate property treatment of joint tenancy and will not find the title controlling unless the grantor's intention is clear (i.e., unless the title explicitly states "joint tenancy with right of survivorship."
Here, the house was deeded to Hank and Wendy by Wendy's mother after they married in 2008. It was deeded to them as joint tenants. It does not appear from the facts that the house was specifically deeded to them as "joint tenants with right of survivorship."
The Oral Agreement Was Unenforceable
The character of property (i.e., whether separate or community) can be changed by agreement, which is known as a transmutation. Oral transmutations made before January 1, 1985, are enforceable whether based on an expressed agreement or implied-in-fact from either party's behavior. After January 1, 1985, all transmutations must be in a writing that is signed by the spouse whose interest is adversely affected and that expressly states that a change in ownership is being made. The requirement of a writing applies to all transmutations with the only exception being for tangible gifts of a personal nature that are insubstantial in value (e.g., a gift purchased for one spouse by the other with community property).
Here, as noted above, the house was acquired as community property. When Hank and Wendy separated in 2013, Hand told Wendy that the house was henceforth her separate property to which she replied, "O.K." Hank and Wendy orally agreed that the house was Wendy's separate property, but this agreement was not in writing and is unenforceable.
Therefore, the agreement was not enforceable and the house remained community property.
Conclusion
The house was acquired by Hank and Wendy as community property. The agreement to treat it as Wendy's separate property is not enforceable, so the house remains community property. Hank and Wendy each own a one-half interest in the value of the house.
(2)(b) Accounting Practice
The Accounting Practice Constituted Community Property
In general, property acquired during the marriage would constitute community property unless an exception applied. This also applies to a business established during the course of a marriage.
When community property funds or labor enhance the value of a separate property business, courts will apply either the Van Camp or Periera method to calculate the portion of the business attributable to the community. The Van Camp method is used when the character of the business was the primary reason for its growth or productivity. Under the Van Camp method, the community's portion of the business is calculated by subtracting (A) the total family expenses paid from business earnings from (B) the total market salary of the managing spouse. This method favors the managing spouse's separate property estate. The Periera method is used when the personal skills and effort of the managing spouse increased the value of the business. Under the Periera method, the separate property portion of the business is calculated by adding (A) the value of the managing spouse's separate property business at marriage with (B) the fair rate of return (increase) on the value of the business (10% per annum) for the total period at issue. This method favors the community property estate.
Here, Wendy established her own accounting practice in 2012. After Hank and Wendy separated, Wendy's income from the accounting practice tripled. Wendy started the accounting practice during the marriage - she had not started it before the marriage and did not inherit it. From the facts it appears that the accounting practice was started with community funds. That is, the facts do not indicate that Wendy used separate property funds to start the practice. Additionally, Wendy's enthusiasm, skill, and labor during the marriage built the practice. These are all community sources so that the practice and goodwill of the practice should be valued and divided one-half to each spouse. Because all sources of labor and capital are community sources, the Van Camp and Periera methods of accounting do not apply.
The Community Is Entitled To Some Post-Separation Appreciation
While the accounting practice constituted community property during the marriage, it must also be analyzed post-separation to determine how to treat the post-separation. If the business was funded with one spouse's separate property, then the community has no claim to the appreciation of a business post-separation. However, if the community funded the business and one spouse continues the business post-separation, a portion of the appreciation can be attributed to the community property estate using either the reverse Van Camp or reverse Pereira method.
The reverse Van Camp method is used when the character of the business was the primary reason for its growth or productivity. Under the reverse Van Camp method, the community's portion of the appreciation is calculated by subtracting the total market salary of the managing spouse from the total amount of the appreciation. The reverse Periera method is used when the personal skills and effort of the managing spouse increased the value of the business. Under the reverse Periera method, the community's portion of the appreciation is calculated by adding (A) the value of the community property business at marriage with (B) the fair rate of return (increase) on the value of the business (10% per annum) for the total period at issue.
Here, Wendy owned an accounting practice. There is nothing to indicate that something happened in the economy to cause growth in her business. An accounting practice is the type of stable business that is more likely affected by the personal skills and effort of the owner (Wendy). Thus, the reverse Periera method would be the more appropriate method for determining the community's portion of the post-separation appreciation of the business. Under the reverse Periera method, the community would be entitled to a 10% rate of return on the value of the business.
Therefore, the community would be entitled to the value of the community property business at marriage combined with a 10% rate of return on the value of the business. The remainder of the value of the appreciation would be Wendy's separate property. Of the community's portion of the appreciation, Hank would be entitled to one-half the value and Wendy would be entitled to the other half of the value.
Conclusion
The accounting practice constituted community property. Hank would be entitled to one-half the value and Wendy would be entitled to the other half. With regard to post-separation appreciation, the community would be entitled to a 10% rate of return on the value of the business during marriage. Hank would be entitled to one-half of this rate of return and Wendy would be entitled to the other half. The remainder of the value of the appreciation would be Wendy's separate property.
(2)(c) Office Building
The Office Building Was Acquired With Community Funds
The title in which property is held is not determinative - the court must look to the source of the funds used to acquire the property. In general, property acquired during the marriage would constitute community property unless an exception applied. One exception includes property acquired using separate property funds, which constitutes separate property.
Here, Wendy purchased the small office building in 2012. Hank and Wendy married in 2008. They did not separate until 2013. Wendy paid for the building with funds saved from her earnings during the marriage. Her earnings saved during the marriage constituted community funds. The office building was acquired with community funds. Although Wendy took title to the office building in her name alone, the title is not determinative. A court would look to the source of the funds that Wendy used to acquire the office building, which in this case were community property earnings.
Therefore, the office building constituted community property because Wendy acquired it with community funds.
The Married Woman's Special Presumption Does Not Apply
The Married Woman's Special Presumption applies to property acquired before 1975 if title was taken in the wife's name only, if husband and wife took title as tenants in common, or if title was taken in the wife and a third party's name only. When the presumption applies, the property is presumed to be the married woman's separate property.
Here, Wendy acquired title in her name alone while a married woman. However, the office building was acquired in 2012 - well after 1975. The Married Woman's Special Presumption would not apply.
Therefore, the office building constituted community property and the Married Woman's Special Presumption would not apply to characterize it as separate property.
Wendy Is Entitled To Reimbursement For The Improvements
When separate property funds are used to make improvements on community property, the spouse that contributed the separate property funds can be reimbursed for the improvements. However, the spouse will not be reimbursed for interest or appreciation.
Here, after the separation, Wendy remodeled the office building using post-separation earnings. Wendy's post-separation earnings were her separate property. She used her separate property to remodel the office building, which was community property.
Therefore, Wendy would be entitled to reimbursement (without interest or appreciation) for the separate property that she used to remodel the office building.
Hank Has One Year To Void The Sale
Both spouses must jointly execute a written instrument in order to validly convey real property owned by the community. When real property owned by the community but titled in only one spouse's name is sold to a bona fide purchaser and the spouse misrepresents his/her marital status, the non-consenting spouse has one year in which to void the transfer entirely. The non-consenting spouse must prove that he/she did not consent to the transfer in order to void it.
Here, after the separation, Wendy sold the office building to Bob without Hank's knowledge. Because Hank was unaware of the sale, we can assume that he did not consent to it. Bob did not know that Wendy was married. Because Bob did not know that Wendy was married, we can assume that Wendy misrepresented it to him.
Therefore, Hank has one year to void the transfer to Bob. In order to void it, he must prove that he did not consent to the transfer.
Conclusion
The office building constituted community property. Wendy could not sell the building to Bob without Hank's consent. Hank has one year to void the sale. Additionally, Hank could request reimbursement for his interest in the community property - one-half the value of the office building. Whether Hank voids the sale or seeks reimbursement, Wendy could request reimbursement for the separate property that she used to remodel the office building.
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