Themis Essay Comm Prop

Question 1

Approach to Essays

Answer 1

*Introduce the general principles of community property (CP) law
*Discuss the status of parties (married, unmarried, putative spouse)
*Discuss any premarital agreements
*Address each item of property or debt presented in the question
*For each item of property, discuss:
o
Presumptions that apply
oThe source of the property; trace the source if necessary
oActions taken by either party to change the character of the property
oApply the rules for specific types of property
oExplain the distribution of the property upon divorce or death

*For each debt or liability presented in the question, discuss:
oLiability of CP and separate property (SP)
oRules for specific types of debt (child/spouse support and torts)

Question 2

Checklist of the Issues Tested

Answer 2

1. General Principles of Community Property Law
   oIf quasi community property is relevant, add in the rule for quasi community property here
2. Married and Unmarried Couples
   oMarried, Unmarried, Putative Spouses
3. Premarital Agreements
4. Source & Tracing
5. Presumptions
   oCP
   oSP
   oTitle
6. Actions
   oTransmutation
   oEqual Rights and Management
   ▪Gift or Sale to Third Party
   oFiduciary Duties
7. Specific Types of Property
   oSeparate property businesses
   oImprovements
   oCredit/Loans
   oBank accounts
   oEducational degrees
   oPersonal injury recovery
   oStock options
8. Distribution
   oDivorce
   oSeparation
   oDeath
9. Liability of Marital Property
   oLiability of CP
   oLiability of SP
   oReimbursement
   oRules for specific types of debt (Child/spouse support and torts)

Question 3

General Principles

Answer 3

California is a community property state. In a community property state, the marital economic community begins upon marriage and ends at divorce, death of a spouse, or a permanent physical separation with an intent not to resume marital relationship. Property, earnings, or debt acquired during marriage are presumed to be community property. Property acquired by either spouse before marriage; by gift or inheritance during marriage; or after divorce or a permanent separation is presumed to be separate property.

[Finally, property acquired by a married couple while living in a non-CP state that would be characterized as CP if the couple had been living in CA at the time of acquisition is called quasi-community property.]

Question 4

Unmarried Cohabitants

Answer 4

An unmarried couples’ property will be distributed based on contract principles. Express contracts setting forth the distribution of property will be enforced unless they are based upon meretricious sexual services (prostitution). If there is no express contract, a court will look for an implied contract or understanding. A court may also distribute property based on unjust enrichment and fairness principles.

Exam Tip 4: A recent CA bar question presented an unmarried couple that entered into an agreement about their property prior to marriage. Later, they married and eventually divorced. The property acquired before marriage would be distributed based on their agreement. The property acquired during marriage would be governed by community property principles.

Question 5

Putative Spouses

Answer 5

A putative marriage occurs when one or both spouses have a good faith belief that there is a valid marriage, but it is not a valid marriage. The spouse(s) who have a good faith belief in the validity of the marriage is a putative spouse.

1) Rights
A putative spouse may rely on community property principles and is entitled to a share of the community property upon death or divorce. However, the putative spouse’s rights stop accruing when he/she discovers the marriage is not valid.

2) Quasi-marital property
All property that would have been considered CP or Quasi-CP had the marriage been valid would is labeled “Quasi-marital property” and the putative spouse is entitled to 1/2 at the end of the putative marriage.

3) Separate property
A putative spouse has the same rights as a surviving spouse to the other spouse’s separate property.

4) Legal spouse and putative spouse
If a person has a legal spouse (valid marriage) and a putative spouse (not a valid marriage), the two spouses split the person’s estate.

Question 6

Premarital Agreements

Answer 6

A premarital agreement allows couples to avoid the California community property system. A premarital agreement must be in writing and signed by both parties. A premarital agreement can be invalidated if a party did not voluntarily sign it, or if the agreement was unconscionable at the time it was executed (e.g., the terms were so unfair).

Exam Tip 5: In past CA questions, it was not clear whether the premarital agreements were valid or not valid. In an essay, argue both sides and come to a conclusion. When analyzing the allocation of each asset, analyze the allocation both as if the premarital agreement was valid and if it was invalid.

Question 7

CP Presumption

Answer 7

Any asset acquired (other than by gift, bequest, devise, or descent) or income earned by a married person while living with his/her spouse in California is presumptively CP.

Question 8

SP Presumption

Answer 8

Property acquired by either spouse before marriage; by gift or inheritance during marriage; or after divorce or a permanent separation is presumed to be separate property.

Question 9

Special CP Presumption

Answer 9

Applies only at divorce and presumes that jointly held property is CP. See below for the current law under “Anti-Lucas” legislation.

1) Anti-Lucas Legislation (after January 1, 1984)
As of 1987, all jointly held property (joint tenancy, tenancy in common, tenancy by the entirety) acquired during marriage is presumed to be CP upon divorce. This presumption can be rebutted by an express writing evidencing the spouses’ intent to hold the property as SP. If a spouse contributes SP to the purchase of the property, she/he has a right to reimbursement for the amount of contribution (but not any increase in value).

2) Lucas (before January 1, 1984)
Property taken in joint form (joint tenancy, tenancy in common, tenancy by the entirety) was presumed to be CP upon divorce. This presumption could be rebutted by evidence that the spouses did not intend to hold the property as CP. Any SP used to purchase the property was presumed to be gift and there was no right to reimbursement (unless there was an agreement).

Question 10

Source and Tracing

Answer 10

When discussing the characterization of an item of property, start with the source of the item. Then, trace the source if it changes form or identity. An item of property may go through several changes in form or identity. To earn full credit, you should analyze each change in form or identity.

Question 11

Transmutation

Answer 11

A transmutation refers to changing the nature of property from SP to CP; CP to SP; or SP of one spouse to the SP of the other spouse. Prior to January 1, 1985, oral agreements were sufficient to transmute property as long as there was evidence to support the transmutation (express or implied agreements were acceptable). Under the current law, to be valid, a transmutation must be in writing, and contain language expressly stating that ownership of property is being changed by the spouse whose interest is adversely affected.

1) Gift exception
Gifts between spouses may constitute transmutations despite the absence of a written statement. This is limited to personal, tangible gifts such as clothing and jewelry. However, if the gift is substantial in value (considering the financial circumstances of the marriage), a transmutation will only occur if there is a writing.

Exam Tip 6: Transmutation is a frequently tested issue on the bar. You should discuss the issue even if there is no writing to support the change and the argument for transmutation will ultimately fail. You will miss easy points if you omit the analysis of the transmutation.

Question 12

Title in one spouse’s name

Answer 12

If a spouse takes title to an asset in his/her name alone, this will not change the nature of the property if the source was community property.

Exam Tip 7: The bar examiners will frequently present facts where a spouse takes title to an asset (bank account, house, stock) in her name alone. If the source of the asset is CP, the asset will be CP, regardless of the title.

Question 13

Equal Rights and Management over CP

Answer 13

Each spouse has equal management and control over CP. Both spouses must participate in decisions regarding CP personal and real property. If a spouse gifts personal property that is CP or sells/leases real property that is CP, there are specific rules that apply.

1) Gifts to third parties
If one spouse gifts or otherwise disposes of personal CP for less than fair/reasonable value without the other spouse’s written consent, the non-consenting spouse can ratify (affirm/approve) the gift or revoke the gift and sue to recover the gift.

2) Sale or lease of CP real property
Both spouses must participate in the sale or lease of real property for more than one year. If title to the CP real property is held in one spouse’s name only and an innocent party does not know of the other spouse, the innocent party’s purchase of the property will be presumed valid. The innocent spouse has one year to file an action to void the transfer.

Question 14

Fiduciary Duties

Answer 14

Each spouse owes the other a duty to act in the highest of good faith with respect to the other spouse in management and control of the CP. Failure of a spouse to obtain the consent of the other spouse when making gifts or selling/leasing property, gives rise to a breach of duty. The innocent spouse can seek a greater share of CP due to the breach of fiduciary duty.

Exam Tip 8: When you discuss the issue of equal rights of management in an essay, you always want to then discuss fiduciary duties under a separate heading. Remember to mention that the innocent party can ask for a greater share of community property due to the other side’s breach.

Question 15

SP Business

Answer 15

▪Generally, income from a SP business is SP. However, if a spouse contributes labor (which is CP) to the SP business, a court must determine how much of the business is CP upon divorce and how much is SP.
▪Two different formulas are used to calculate the community interest in an SP business: the Van Camp and Pereira approach.

Exam Tip 9: Always discuss both formulas on the exam! To earn full credit, you must use the numbers (dollar amounts, years worked) provided in the fact pattern and explain the math for both formulas.

Question 16

Pereira Approach

Answer 16

*Used if the increase in value can be attributed to the personal skills and effort (which are CP) of the managing spouse. The formula for determining SP and CP is as follows:
*SP = value of SP business at time of marriage + (value at time of marriage × fair rate of return [use 10% on the exam for fair rate of return] × years of marriage)
*CP = The fair market value of the business at divorce – SP value as calculated above.

Question 17

Van Camp approach

Answer 17

*Used when the primary reason for the increase in value is a character of the separate property itself, rather than the labor of the spouse.
*CP = (reasonable value of services – annual family expenses) × years of marriage
*SP = The fair market value of the business at divorce – CP value as calculated above.

Question 18

Improvements

Answer 18

Since 2005, when a spouse uses her SP to improve the other spouse’s SP, she generally has a statutory right to be reimbursed for the contribution. Since 1984, a spouse using her own SP to improve CP is entitled to reimbursement for the funds expended. When a spouse uses CP to improve the other spouse’s SP, the community is entitled to either reimbursement for the funds expended or the enhanced value of the property, whichever is greater.

Question 19

Credits/Loans

Answer 19

In the absence of evidence that the seller relied “solely” on the purchaser’s SP in extending credit or a loan, the acquired property or loan will be characterized as community property.

Exam Tip 10: A recent CA bar essay tested the issues of Improvement and Credit/Loans. A married couple, H and W, were given a loan from a bank based on salaries of H and W. The bank also asked W to pledge her SP stock that she owned as collateral for the loan. Because the bank relied on the salaries of H and W (CP), the loan was considered to be CP. The loan money was then used to improve H’s SP. Upon divorce the community is entitled to reimbursement for the loan or the increased value of the property, whichever is greater.

Question 20

Commingled bank accounts

Answer 20

A commingled bank account occurs when the SP of one spouse is mixed or combined with the SP of the other spouse or with CP. If a spouse wants to claim that an asset purchased with funds from the account is his own SP, the burden is on him to trace the asset back to his SP funds in the account.
Exam Tip 11: To earn full credit, you must use the numbers (dollar amounts) provided in the fact pattern and explain the math for both methods.

1) Direct Tracing Method
The spouse proves that there were sufficient SP funds available at the time was asset was purchased and he intended to use his SP funds to purchase the asset.

2) Exhaustion Method
The spouse proves that CP funds in the account were already exhausted by the payment of family expenses at the time the asset was purchased (therefore only SP was in the account and SP was used to purchase the asset).

Question 21

Educational Degrees

Answer 21

Education degrees acquired during marriage are not treated as CP. The community is entitled to reimbursement if CP funds were used to pay for the education costs, the earning capacity of the educated spouse was substantially improved, and the married couple did not contractually waive the right of reimbursement.

The educated spouse can raise the following defenses to reimbursement: the divorce occurred more than 10 years after the education was received and the community substantially benefited from the education during that time, the other spouse also received an education paid for with CP funds during marriage, or the education reduced the need for spousal support upon divorce.

Question 22

Personal Injury Recovery

Answer 22

Personal injury recovery is SP if the injury is caused by a third-party tortfeasor before the marriage. During marriage or upon death, the tort recovery is characterized as CP. However, upon divorce, a court will generally award the tort recovery to the injured spouse as SP.

Question 23

Stock Options

Answer 23

To the extent that stock options are compensation for earnings during the marriage, the community has an apportioned interest in the value of the stocks. Courts apportion the CP interest as earned from the time when the employed spouse started working for the company and accruing stock option rights until separation or divorce. If the stock options replace earnings after divorce or separation, then the options are SP.

Note 1: Other specific property rules to review in the outline: Goodwill, Retirement Pensions, Disability and Severance Pay, and Insurance.

Question 24

Distribution

Answer 24

Exam Tip 12: To earn full credit on the exam, you must explain the specific distribution of each item of property. For example, if a house is worth $1,000,000, and you determine that it is CP, you must clearly state that H receives 1/2 ($500,000) and W receives 1/2 ($500,000).

a. Division of Property at Divorce
There is an equal division of community property at divorce. Exceptions to this rule are when an asset is closely associated with one spouse, equal division would reduce value of property or one spouse’s earning capacity, or one spouse is better situated to bear an investment risk.

b. Separation
The earnings and accumulations of a spouse after permanent separation from the other spouse are the separate property of that spouse.

c. Division of Property at Death
At death, the character of property is presumptively as expressed in the title, in other words joint tenancy property is presumed to be joint tenancy and CP is presumed to be CP. A surviving spouse takes ½ of the CP and Quasi-CP, and the decedent spouse has no interest in any quasi-CP acquired by the surviving spouse.
1) Intestate
If a spouse dies without a will (intestate), the surviving spouse entitled to ½ of the CP as well as the other ½ that deceased spouse owned (100% of the CP). The surviving spouse is entitled to decedent’s entire SP if no other heirs, ½ of SP if decedent survived by one heir, and 1/3 of SP if decedent survived by more than one heir.

Question 25

Liability of Marital Property

Answer 25

Exam Tip 13: CA essay questions frequently ask you to discuss the allocation of assets as well as debts upon divorce or death. If the question presents debts or liabilities, be sure to thoroughly analyze which party(s) are responsible for payment.

a. Debt
A debt includes contract, tort, and other obligations, such as child or spousal support from a prior marriage.

1) CP Liability
The community (CP and QCP) is liable for debts incurred by either spouse before or during marriage. Liability does not extend to debts incurred after permanent separation or divorce. The non-debtor spouse can protect her CP earnings by depositing them in a separate bank account that is not accessible to the debtor spouse.

2) SP Liability
A spouse’s SP is liable for debts incurred before or during marriage, but not for the other spouse’s debts.

b. Reimbursement
The non-debtor spouse has three years to bring an action for reimbursement if debts/liabilities are paid from the community.

c. Divorce
Upon divorce, debts incurred before marriage will be assigned to spouse who incurred the debt. Debts incurred during the marriage that were not for the benefit of the community will be assigned as SP to the debtor spouse.

Exam Tip 14: In a past bar exam essay, a husband incurred gambling debt while married to his wife. During marriage, the CP and husband’s SP were liable for the debt. Upon divorce, the court would assign the debt to husband as his SP because his act of gambling was not for the benefit of the community.

Question 26

Special Rules

Answer 26

a. Necessaries of Life
o Necessaries of life are living costs including food, clothing, shelter, and medical expenses.
▪While living together and married, a spouse’s CP and SP are liable for the other spouse’s debts relating to necessaries for life. Upon divorce, the non-debtor spouse is no longer liable.
▪While living apart, a spouse’s CP and SP are still liable for the other spouse’s debts relating to expenses that are required to sustain life (essential expenses).

Exam Tip 15: In a past CA essay question, a husband and wife separated. During the separation, wife incurred a hospital bill. The hospital bill is an essential expense, so the hospital could recover from wife’s SP as well as the CP and husband’s SP.

b. Child and Spousal Support
A child or spousal support obligation from a previous relationship shall be treated as a debt incurred before marriage. The CP will be liable for the debt unless the non-debtor spouse places her earnings in a separate bank account that is not accessible to the debtor spouse. If the debtor spouse had SP to pay the obligation, but used CP, the non-debtor spouse can seek reimbursement to the CP.

c. Tort Obligations
If the spouse who committed the tort was acting for the benefit of the community (ex: taking the couple’s child to school), the liability must first be satisfied from the CP and then from the tortfeasor’s SP. If the tortfeasor spouse was not acting for the benefit of the community, the liability must first be satisfied from the tortfeasor’s SP and then the CP.