Community Property

Question 1

Essay Intro

Answer 1

1. California is a CP state
2. There is a community presumption. All assets acquired during the marriage are presumptively CP.
3. There are several areas of SP:
   - owned by either spouse before marriage
   - acquired by gift, will, or inheritance
   - acquired by expenditure of separate funds
   - rent issues and profits

Question 2

Marital Economic Community

Answer 2

CP can only be acquired during the existence of the marital economic community. It begins at marriage and ends at one spouse’s death or date of separation. Date of separation shown by:
1. Intent not to resume marital relation (by one party) and
2. Conduct consistent with that intent (permanent physical separation not required)

• Wages earned before marriage but received during marriage are SP

Question 3

How CP is handled on divorce

Answer 3

Court has power to divide all CP and jointly titled SP. Each spouse is entitled to a **one-half interest ** in every community asset. Each party has continuing duty to disclose all assets and liabilities

Economic Circumstances Exception: when circumstances warrant, the court may make a non-pro rata division when it deems proper to effect a substantially equal divion. Thus, court may give one asset wholly to one spouse and cash out other with other assets to reach 50% total value of CP. (Ex: family home, pension)

Other Exceptions:
- educational debts: treated as recipient’s separate debt and excluded
- tort liability: assigned to tortfeasor if not based on activity for benefit of community
- personal injury award: it is CP but on divorce is awarded to injured spouse unless interests of justice require otherwise

Question 4

Misappropriation

Answer 4

Each spouse has fiduciary duty to other spouse in management and control of CP. If one spouse deliberately misappropriates other spouse’s interest in CP or QCP (even with pending divorce) it may result in court award or offset against wrongdoer’s share.
- spouse with de facto control over community funds after separation will have to account for them if they disappeared

Question 5

Setting Aside CP Distributions

Answer 5

Either of 2 statutory schemes (CCP 473(b) and Family Code) may be used to set aside property distribution provisions, depending on how long after the judgment relief is sought and what grounds for relief are being claimed.

Question 6

Code of Civil Procedure Section 473(b)

Answer 6

Court may relieve party from judgment through their mistake, inadvertence, surprise, or excusable neglect.
- must be brought within 6 months
- Extrinsic fraud/mistake or duress may relieve a party even after 6 months (no time limit)

ET: Offers most liberal grounds for relief within 6 month period.

Question 7

Family Code Relief

Answer 7

Both varieties of fraud and mistake are sufficient to relieve a party rfom judgment under Family Code.
1. **actual fraud, perjury, or mistake ** must be brought within 1 year
2. duress or motion based on mental incapacity must be brought within 2 years
3. motion for failure to comply based on nondisclosure may be brought within 1 year after discovery

Question 8

Unauthorized IV Gift

Answer 8

One spouse may not make IV gift of CP without written consent of other spouse. Otherwise, gift is treated as transfer of donor’s 1/2 interest in CP.

Question 9

Testamentary Gifts of CP

Answer 9

Spouse may transfer 1/2 of CP and all SP by will. Surviving spouse is entitled to 1/2 of each item of CP.

Question 10

Survivor’s Duty to Elect

Answer 10

Testator may insert clause in will that spouse must elect to take under will or assert CP ownership rights.
- When there is no clause, spouse may assert both CP rights and rights under will, if this would not upset testamentary plan

Question 11

Widow’s Election

Answer 11

If will attempts to pass survivor’s 1/2 interest in CP, then surviving spouse must elect between will and their CP rights.

Question 12

Intestacy

Answer 12

All property not transferred by will or testamentary substitute passes by intestacy.

• CP/QCP: Decedent’s 1/2 of CP/QCP passes to surviving spouse (thus they own 100% of CP)
• SP: Passes to surviving spouse according to 3 statutory formulas:
  1. no surviving issue, parent, sibling, nieces, then all SP goes to surviving spouse
  2. 1 child, or issue of deceased child, or no children but leaves parent, sibling, or niece, then 1/2 to spouse
  3. more than 1 child, etc, then 1/3 goes to surviving spouse

Question 13

Character of Credit or Purchase Money Loan

Answer 13

Credit acquired by one spouse during marriage is presumptively community credit. But borrowed funds are ultimately classified according to lender’s primary intent

Question 14

Confidential Relationship Between Spouses

Answer 14

Each spouse must act in highest GF and fair dealing with respect to other spouse in management of CP. Thirs is a fiduciary relationship subject to same rights and duties as business partners.
- If one spouse gains advantage from transaction, presumption of undue influence arises (they have BOP)

Question 15

Duty of Managing Spouse

Answer 15

Deliberate dissipation of property is actionable. Grossly negligent and reckless investment of community funds is breach of spouse’s fiduciary duty.

Question 16

Duty to Account

Answer 16

Spouse must provide any information concerning the CP that is reasonably necessary for the exercise of the spouse’s rights.

Question 17

Duty to Secure Consent

Answer 17

Managing spouse must secure the consent of, or consult with nonmanaging spouse before:
1. making gift of CP
2. Conveying/encumbering community personal property used in family home
3. disposing of substantially all personal property used in CP business
4. conveying/encumbering community real property

Question 18

Breach of Duty by Managing Spouse

Answer 18

Nonmanaging spouse has claim if breach results in substantial impairment of nonmanager’s interest.
- nonmanager may seek order for accounting and reformation of title to reflect nonmanager’s interest.

Question 19

Altering the Character of Assets by Agreement

Answer 19

Parties can opt out of CP/SP characterizations by agreement prior or during marriage (no consideration required). When character is changed during marriage, it results in a transmutation.

Question 20

Premarital Agreements

Answer 20

Agreements require a writing signed by both parties. However, oral agreement may be enforced when:
1. executory promise was fully excuted or,
2. promissor is estopped to assert SOF

May be voided if:
- involuntary
1. represented by counsel or written waiver
2. 7 days to review/sign agreement, and
3. if unrepresented, was fully informed in writing

• unconscionable
  1. spousal support agreements (unrepresented or unconscionable)
  2. Other agreements (no full disclosure, disclosure not waived, party did not have adequate knowledge)

Question 21

Marital Agreements (Transmutations)

Answer 21

During marriage, spouses may change status of property (transmutation). To be valid, a transmutation must be made in writing and expressly declare that a change in ownership is being made (if after 1985).

Exception to writing requirement: gifts between spouses of items used principally by receiver of gift and not substantial in value, taking into account financial circumstances of marriage.

Question 22

Presumption of UI - Transmutation

Answer 22

A rebuttable presumption of UI arises when one spouse gains an advantage over the other in a property transaction. Advantaged spouse bears the burden of rebutting by preponderance of the evidence

Question 23

Jointly Titled Property

Answer 23

All property held by spouses in joint form is presumed CP. Presumption can be overcome only by a collateral written agreement or statement in documentary evidence of title that property is SP.

ET: Does not apply to joint bank accounts

Question 24

Marriage of Lucas (taking title as joint tenants)

Answer 24

Taking title as joint tenants means property is presumptively CP. Subjective intent is irrelevant.
- unless a contrary agreement is established, contributing spouse has no separate ownership interest and no claim for reimbursement

Cases involving death: Lucas is still law

Question 25

Lucas Cases Involving Divorce

Answer 25

CA passed 2 anti-Lucas statutes on ownership and reimbursement on divorce.

Ownership: CP presumption can be rebutted by:
- express statement in deed or isntrument of title that property is SP, or
- written agreement between parties that property is SP

Reimbursement: Spouse who made contributions of SP to CP is entitled to reimbursement without interest for contributinos to down payments, improvements or payments to principal (DIP).

Question 26

Installment Purchases: Proration Rule

Answer 26

When installment purchase (i.e., mortgage) made before marriage and CP funds are used to pay it off, then a proration rule applies. Community establishes a proportional ownership interest to the extent that community payments reduce the principal debt.
- Appreciation is allocated in proportion to each estate’s ownership interest.

Question 27

Life Insurance

Answer 27

Term insurance: Character of term policy determined by final premium rule. Estate that paid for most recent premium is owner.

Whole Life Insurance: proration rule applies. Current cash value is CP in proportion to percentage of premiums paid by CP.

Question 28

Community Funds Used to Improve Own SP (feathering own nest)

Answer 28

When feathering own nest, no gift is presumed. Expenditure of CP does not change ownership character of asset, but community is entitled to either reimbursement or increase in value, whichever is greater.
- when asset is realty, improvements are treated as fixtures and become part of property

Question 29

Community Funds Used to Improve Other Spouse’s SP

Answer 29

Tradtionally, a gift has been presumed and can only be overcome by agreement to reimburse.
- However, some jdxs reject the no-reimbursement rule even absent an agreement

Question 30

Spouse’s SP Used to Acquire or Improve Other Spouse’s SP

Answer 30

A spouse who makes an SP contributino to other spouse’s SP is entitled to reimbursement

Question 31

Reimbursement Rules Recap

Answer 31

• CP to improve own SP, community has reimbursement claim for cost or enhanced value
• CP to improve other SP, split of authority to reimburse
• SP to improve other SP, contributing spouse is entitled to reimbursement
• SP to improve CP, anti-Lucas statutes apply for divorce and Lucas applies for death

Question 32

Commingled Bank Accounts

Answer 32

Mere fact that SP funds are commingled with CP funds does not transform SP into CP.
- Family expenses are presumed to be made with CP
- A gift is presumed when separate funds are used to pay family expenses

Party must overcome these presumptions with accounting methods.

Question 33

Exhaustion Accounting Method

Answer 33

Requires showing that when asset was purchased, all communtiy funds in account had already been exhausted by payment of family expenses, thus asset must have been purchased with separate funds.

Question 34

Direct Tracing

Answer 34

Requires showing that when asset was purchased, there were separate funds available, and the spouse intended to use those separate funds to purchase an SP asset.
- quick in, quick out method - party deposited separate funds into account shortly before making specific payment (for similar or exact amount)

Question 35

Business Owner Before Marriage that increases in value

Answer 35

When a spouse brings a SP business into a marriage and devotes community labor to the business, and the value of the business has increased, Courts have developed 2 apportionment methods to divide the business between CP and SP. (These accounting methods also apply to investments)
- Pereira (personal skills) when spouse was primary cause
- VC (valuable company) when character of business is responsible

Question 36

Van Camp Accounting

Answer 36

The services of spouse are valued using the going market salary. Family expenses that were paid from business earnings are then subtracted from that amount. Remainder, if any, represents CP component of business. The rest of the business is SP.
- Used when spouse’s management was primary cause of growth of business

Question 37

Pereira Accounting

Answer 37

SP component consists of the separate capital plus a fair rate of return thereon (10% interest on principal x 10 years). The remainder is CP.
- family expenses paid from business earnings are not subtracted because method begins by calculating the value of SP. (residue already reduced by family expenses is CP).

Question 38

Pension Benefits

Answer 38

Both vested and unvested retirement pensions are CP to extent that benefits were earned during marriage.
- Courts apply a “time rule” to apportion. Numerator is years of employment while married and denominator is totaly years of employment before retirement.

Other spouse can take either when covered spouse receives benefits or cash out by awarding other assets of equal value.

Question 39

Disability Pay and Workers Comp

Answer 39

Disability pay and workers comp treated as wage replacement. Thus, benefits are classified according to when they are received (not earned).

Question 40

Severance Pay

Answer 40

Severance pay is generally understood to replace a worker’s earnings until they find a new job. There is a split of authority as to whether it is CP or SP.

Question 41

Stock Options

Answer 41

A stock optino is a form of compensation. If it vests during marriage, it is CP.
- However, if it is awarded during marriage but not exercisable until after the marital community ends, then the portion considered CP is determined using a proration rule based on the employer’s intent in granting that option (for past or future services).

Question 42

Stock Options as Award for Past Service (Marriage of Hug)

Answer 42

If awarded to reward for past services as form of deferred compensation, then court employ Marriage of Hug proration formula.
- Starting point is from date of employment

Question 43

Stock Options to Encourage Continued Employment: Marriage of Nelson

Answer 43

If awarded primarily to encourage the employee to remain, then court employs Marriage of Nelson proration formula.
- Starting point is the date the options are granted

Question 44

Goodwill of a Professional Practice

Answer 44

To the extent that goodwill is earned during marriage, CA treats it as CP.
- Goodwill is the qualities that generate income beyond labor and return on assets.
- Courts will use either market sales valuation or capitalization of past excess earnings

Question 45

Educational Expenses

Answer 45

Education is not treated as divisible property. Instead at divorce, unless the parties sign an agreement, there is an equitable right of reimbursement with itnerest to the community when:
1. Community funds used either to pay for education or used to repay loan, and
2. the education substantially enhances the earning capacity of the spouse.

Question 46

Equitable Defenses to Reimbursement Duty for Education

Answer 46

Reimbursement may be reduced by any of the following:
1. community has already substantially benefitted from the education (rebuttable presumption if more than 10 years passed)
2. other spouse received community funded education
3. need for spousal support is reduced as a result of education

Question 47

Pesronal Injury Recovery

Answer 47

If CoA arises during marriage, recovery is CP.

Question 48

Tort Liability

Answer 48

A person is not personally liable for spouse’s torts except when they would be liable if marriage did not exist. However, CP is subject to tort liability of either spouse.
- If liability is based on act that occurred while spouse was performing activity for benefit of community, liability will first be satisfed from CP, then person’s SP.
- If not based on activity, then liability will first be satisfied from SP, and then from CP.

Question 49

Management Rights

Answer 49

Each spouse has exclusive management of SP (including QCP). However, each spouse has equal management and control of CP. Each spouse acting alone may buy, sell, spend, or encumber all CP.
- Spouse has fiduciary relationship requiring highest level of GF and fair dealing.

Question 50

Personal Property - Management Rights

Answer 50

One spouse cannot sell/encumber PP used in family dwelling without written consent.
- Nonconsenting spouse may void transfer during or after marriage and need not return purchase price.

Business Exception: Spouse operating business has primary control, thus may act alone but with notice.
- if notice not given and behavior has substantially impaired 1/2 interest, spouse has remedy.

Question 51

Real Property - Management Rights

Answer 51

Both spouses must join in sale of community real property. Generally, neither spouse can transfer interest in real CP.

Question 52

Creditors’ Rights

Answer 52

A creditor may reach any property over which debtor has legal right of management and control. Premarital debts can reach CP, however, earnings of nondebtor spouse cannot be reached for premarital debts if not commingled.

Exception - Doctrine of Necessities:
- Family Code provides that each spouse has duty to support, thus each spouse is personally liable for other spouse’s contracts for family expenses.

Question 53

Creditors’ Rights at Divorce

Answer 53

Each spouse is personally liable for debts they incurred. IF a debt was neither incurred nor assigned by the court to individual, that person is not personalyl liable.
- When spouse’s property is applied to satisfy debt assigned to other spouse, the paying spouse has a right to reimbursement of amount with interest.

Question 54

Creditors’ Rights at Death of Spouse

Answer 54

Probate - every debt of both spouses must first be characterized then allocated accordingly.
Nonprobate - Surviving spouse is personally liable for debts chargeable against CP, QCP and decedent’s SP that passes to spouse.

Question 55

Quasi-Community Property

Answer 55

Property acquired by married couple while domicile in non-CP state that otherwise would have been classified as CP is QCP. QCP retains its SP nature when parties become domiciled in CA.

Upon divorce, QCP is treated as CP, even if one spouse is not domiciled in CA.

Upon death, survivor has 1/2 interest in decedent’s QCP.

Question 56

Foreign Real Property

Answer 56

At Divorce:
- CA has power to distribute all CP and QCP foreign RP. CA will try to divide in way that avoids altering the nature of interests. Otherwise court will require parties to execute conveyances necessary to divide it, or grant party other CP that equals value.

At Death:
- foreign RP probated according to that state’s laws.

Question 57

Requirements for Lawful Marriage

Answer 57

CA requires both legal capacity and formal legal procedures. CA does not recognize common law marriages unles they were validly contracted in a jdx that does.

Question 58

Unmarried Cohabitants

Answer 58

CA applies general K principles to agreements between unmarried cohabitants (can’t be based solely on sex).
- Party may prove implied K based on behavior

Question 59

Putative Spouse

Answer 59

Not lawfully married, but has subjective GF basis. The putative spouse has almost the same property rights as a lawful spouse. Once individual learns marriage is invalid, they can no long accrue property rights.