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Article for June 2003: Moore-Marsden and More
What the Hell is Moore/Marsden?
We have had
numerous requests for information relating to problems dealing with the Moore-Marsden
rules. Since we always try and give our readers what they want, we are
dedicating our article for June 2003 to this subject. Since June is the
traditional month to get married, we are even going to throw in a discussion of
the Van Camp and Pereira rules.
It just doesn't get any better than that. But before I do, I
must warn you this is a very dry subject. Unless it is your money that we
are discussing, this topic is as much fun as watching paint dry. With that
disclaimer, I would suggest that you brew an extra large pot of coffee and get
comfortable. We're going to be here awhile.
We must begin by
explaining that Moore/Marsden were the seminal cases that dealt with the problem
of resolving disputes over the allocation of community property payments for or
on a separate property asset. You need to understand that this is not a single
case dealing with a single problem. Rather this is a line of cases dealing with
the varied permutations of this problem.
In fact this rule
has been extended so many times by subsequent case law and changes to the Family
Code that you really must review a line of cases to pick out the rule that
applies to your particular case. For that reason you must think of Moore/Marsden
as the starting point and not as the final solution to the problem. It also
points out why I believe you need competent counsel to guide you through the
maze of cases. You will see what I mean as we go on.
The Rule:
The black letter
law of the Moore/Marsden rule is best defined as follows: "When
community property is used to reduce the principal balance of a mortgage on one
spouse's separate property, the community acquires a pro tanto interest in the
property." (In re Marriage of Moore (1980) 28
Cal.3d 366, 371-372; In re Marriage of Marsden (1982) 130
Cal.App.3d 426, 436-440.) In plain English,
the Moore/Marsden rules pertain to separate property acquisitions for which
community property assets are used to pay off a separate property obligation on one party's separate property asset.
In order for this rule to apply,
the separate property asset must have been purchased on time or credit prior to marriage.
At the time of marriage, one of the spouses must have previously acquired
an asset for which they were making payments in monthly installments with
community property funds. Got all that?
What this means is
basically this: For each payment from a community property source on a separate
property obligation secured by one party's separate property asset, the
community obtains a community property interest in that asset. In addition, the
community is entitled to reap the benefit of any pro rata appreciation in the
asset's value.
The Marsden Case:
In 1982, the Court
in deciding the Marsden case, adopted a specific method of calculating
the community property portion of this type of asset. This case presumes
that by making a payment on a separate property asset from community property
funds, the community obtains a certain community property interest in the asset.
In order to calculate the community property interest you take the actual amount
of the loan principal paid during the marriage, plus the marital
appreciation of the asset. The formula is expressed as follows:
Community Share of Asset = Actual loan amount
paid + Marital Appreciation
During marriage of Asset
What about Epstein, Watts, & Jefferies, and F.C.
§2640?
Notice that these
cases do not follow the reimbursement rule of Epstein, Watts, & Jefferies, and F.C.
§2640 et seq. Instead of merely allowing the
community to trace and recover the funds expended, the Court allows the
community to gain an interest in the property, albeit a small interest, however over
time this interest can be substantial. This is a substantial difference over the
other approach. For a more in depth discussion of the underlying rational, click
on "Epstein, Watts &
Jefferies" to read about these cases.
I hope you are
still with me on this. Basically in Epstein, Watts & Jefferies cases, a party
"invests" or "donates", (depending upon
your point of view) separate property or funds to purchase a community property
asset. The payments on the obligation are made from community funds during the
marriage. During a divorce, the non-donating party claims the money was a
"gift" to the community and the donating party claims that it is
a "loan" to the community. The usual outcome in those
cases, is that the court will allow the "donating" spouse
to trace and recover the payments made by that spouse. The
"donating" spouse is not entitled to collect any appreciation
of the asset's value in the intervening years. Which is sort of a segue
into the Moore case.
The Moore Case:
A couple of years prior
to Marsden,
in 1980, the court decided in the Moore case, that amounts paid for
interest, taxes, and insurance on assets paid on time/credit are to be
disregarded when calculating ownership. In the Moore case the court took a small
step into the swamp. When they decided Marsden, they went in whole hog. In any
event to calculate the community share in an
asset purchased prior to marriage using the Moore/Marsden method is fairly
simple. Let me give you an example
The amount of the
loan "pay down" is easy to calculate, it is the actual
amount of the principal paid to the lender each month during the marriage
(in the Marsden case this amount was $9,200.00). In order to figure out the marital
appreciation, you must first determine the community interest in the
asset. In order to ascertain this number, you divide the payments made by the
community and divide that figure ($9,200.00) by the total purchase price of the
asset (in Marsden it was $38,300.00) If you do the math you will see that the
community interest is .2402 or 24.02%. Determining the appreciation of the asset
during marriage is basically straight forward. You subtract the fair market
value of the asset on the date of marriage ($65,000.00), from the current fair
market value ($182,500). The relevant formulas are expressed as follows:
Marital Appreciation =
Appreciation of Asset x Community Interest During Marriage
MA= FMV Separation Date: $
182,500; Principal Paid During Marriage $9,200
FMV Marriage Date: - 65,000 x $38,300
$ 117,500 @24.02% = $28,223.50
+ 9,200.00= The Total Community
Interest of $37,423.50
The appreciation
of the asset during the Marsden marriage was $117,500. The community share of
the marital appreciation therefore will be 24.02% of $117,500, or $28,223.50. So
the entire community share of the asset is $28,223.50 plus $9,200.00 or
$37,423.50. Each of the two parties is entitled to ½ of the community share.
Straight forward
and easy, right? The trick is in getting everyone to agree on the fair market
values on the key dates. This is usually done with expert witnesses, unless the
parties stipulate being bound by an "independent" appraiser. This is not always
a good idea.
Be Sure and Read FC§2581:
Another twist on
the Moore/Marsden rule is found in FC§2581. If the spouse who acquired the
asset before marriage subsequently transfers title into both his and his
spouse's name, then prior to application of any Moore/Marsden calculation, the
owner spouse would have to introduce evidence in writing showing that he/she was
supposed to maintain separate property interest. (Don't forget Epstein, Watts, &
Jefferies, and F.C. §2640). Not
easy is it?
The Van Camp and Pereira Rules.
Let's kick it up a notch
and present you with a twist on the facts. We will now examine the
so-called Van Camp and Pereira rules.
Nature abhors a vacuum and so do Courts. The following cases don't fit the
Moore/Marsden scenario because no community funds are used to make payments on
the assets. Instead we are going to analyze how the community gains an interest
in a separate property asset, where no community funds are used. Instead of cash
we will be dividing what I call sweat equity.
Pereira and Van Camp:
Stay with me now, because you aren't going to believe this. The Court
may determine that one spouse's use of community property assets (namely their
own time, energy, skill and labor) for the improvement of a separate
property asset creates a necessity to determine to what extent, if any, the
community obtains an interest in that asset as a result of that use. The "more
effort" on the part of the spouse that goes into an asset, "the more"
that asset belongs to the community arising out of the owner spouse's labor and
efforts. Following is the example of the application of this rule:
A husband has a stock portfolio worth $10,000 at the time of marriage. At the
time of separation, that stock portfolio is worth $100,000. This resulted in an
increase of $90,000 during the marriage. What part of that, if any, is
community property?
For assets increasing primarily due to labor and
efforts of the owner spouse, then the method employed by the court in the
Pereira case will be used. I call this the active participation method.
In the Pereira case, the court found that the principal source of gains was the
result of the skill and labor of the spouse. Therefore most of the gain is
community property.
Application of the Pereira Rule:
Using the Pereira
formula, the Court must first allocate a "fair rate of return"
on the separate property investment and call that "separate
property". The Court next presumes that any amount in excess
of this amount must, by the process of elimination, belong to the community as a
result of the owner party's community labor and efforts. Therefore if we
use the example stated above, we must assume the court finds that a
"fair rate of return" is 8.5% per year over a 3 year time for
a total of $10,000. The yearly "fair rate of return" would
be $2,770.00 per year.
If you do the math
you will find that there was a $90,000 increase in value. Of that amount, $2,770
would be classified as separate property, and the remaining $87,230 would be
characterized as community property. In addition the original $10,000 would also
remain separate property.
Let's review. Of
the $100,000.00 stock portfolio on the date of separation, $87,230.00 is
determined to be community property. The non-owner/wife can expect to be awarded
$43,615.00 as her half of the asset and the husband/owner can expect
to be awarded $43,615.00 as his half of the community property. In
addition he will receive $2,770.00as his "fair rate of return"
on the separate property asset at the time of the marriage and his original
investment of $10,000 for a total of $56,385. This amount is deducted from
the non-owner/wife's share and added to the owner/husband's distributed portion. Wishing to avoid such a
result you think, "Well I'll just let things go on their merry way and not be
too involved with the asset." That way, I can avoid the Pereira problem. Well
think again, let's see what happens if you do that.
Application of the Van Camp Rule:
Using the Van camp approach, if the increase in value
is the result of the natural tendency of the asset to increase by virtue of
circumstances outside of the control of the owner spouse, then the method
employed by the court in the Van Camp case is used.
Under the
Van Camp approach, the court will determine how much the owner spouse's effort
and labor was worth and assign that figure to the community property, with the
balance of the increase in value being characterized as separate property by
process of elimination.
Assuming the same
example once again, if the court determines that the owner spouse's efforts and
labor were worth $10,000.00 per year, then after three years, his efforts would
be worth $30,000.00. That amount is the community portion of the asset,
leaving the remaining $60,000 increase as separate property. While this
results in a substantial savings over the Pereira approach, it doesn't totally
eliminate the problem altogether.
Which Rule Do I Apply?
How do you know which method to use? Easy, you look at
who you represent. If it's the non-owner spouse then you are going to argue
Pereira approach. If you represent the owner spouse then you are going to argue
Van Camp. Each side will tailor their factual arguments to maximize their theory
of the case. On the other hand, the judge will try and ascertain what caused the
increase in value. If the increase is due mainly to the efforts of the
spouse while married, then the Pereira method is used. If on the other hand, it
would have increased anyway, whether he was married or not (like when the
increase is as a result of inflation, or a meteoric rise of the stock market, or
something outside of the owner spouse's control), then the Van Camp method is
used.
How Can I Avoid This Nightmare?
The answer to that question is fairly easy. You get a
prenuptial agreement. Yes that means you have to spend money on one of those
rascally lawyers. But in the long run, you will save more than it costs if you
end up divorcing. You shouldn't laugh this off as just another pitch for more
fees. Over one half of first time marriages end in divorce within five years.
The rate for second marriages is even higher. You do the math.
A prenuptial
agreement isn't sexy or romantic, it's just a practical way of avoiding the
whole problem. Especially if you were married before and have children from the
prior marriage. When these first became popular I didn't like them. I
always felt if you were that unsure about your prospective spouse, then don't
get married. Most people just ignored the problem and married. When they
divorced the person with the money went ballistic when he saw what he was going
to have to give up. At that point, I realized that maybe a Pre-nuptial wasn't as
crazy an idea as I first imagined. Just as a little aside, you can also
sign a post-nuptial agreement if you are already married. My advice is to
discuss you rights with a qualified family law attorney before you get
married. However, if you don't do that then read on and find out how they will
be divvying up your loot.
Methods of Dividing Property:
Once you determine what the
property is - Separate, Community or Mixed, you can divide it. Let's go back to
the examples that we have been using. The Owner/husband may not want to
physically split the stock because it dilutes the impact of larger amounts of
stock. He
may not be able to divide the stock because of restrictions on the stock
certificates. Maybe the non-owner/wife just wants money and not have to deal
with selling and dividing the physical stock. Finally there may be capital gains
or other tax issues. That being said, let's review the options that are
available to solve this problem.
1. Divide and Equalize:
In this scenario one spouse gets a particular asset
and the other spouse gets an asset of approximately the same value. When all the
assets have been assigned to one spouse or the other, then the difference is
made up with an equalizing payment or series of payments in the form of
interest-bearing-promissory notes.
2. In Kind Division:
This type of
division usually works best with stocks, cash, and cars. Basically the two
parties each get ½ of each type of asset. The same stock assets mentioned above,
if divided by the "In Kind" method of distribution would
award the husband one-half of the shares, and the wife the other half.
This assumes that the stock was determined to be entirely community in nature.
3. Tenants in Common:
Using this method of distributing the assets is really
more like changing the way an asset's title is held than it is redistributing
the asset. The stocks from our examples above. if determined to be
community property, would have been held by husband and wife as
joint tenants. As a result of the dissolution, the stock is a part of the
community estate, and must be equitably divided between the two spouses. If the
husband and wife like to vote as a block at the annual stockholder meetings,
they can still hold title to the same block of stock, by using this method.
The difference is
that the title to the stock would no longer be held by husband and wife, Joint
Tenants. It would now be held as husband and wife, Tenants-In-Common. This means
they each will have an undivided ½ interest in the assets, as opposed to an
undivided interest in the assets as a whole. Joint tenants have right of
survivorship. This means since they each hold an undivided interest in each of
the stocks, if the husband had died prior to filing for dissolution and the
assets were held as joint tenants, and then the wife would still have her
undivided interest in all the stocks. Each party is free to sell or will their
shares to whomever they would like.
4. Liquidate and Split the Proceeds:
I like the liquidate and split the proceeds method because it
is the simplest. In this method of asset distribution, all of the stocks would
be sold, less the 10% sales commission to the brokerage house and the money
remaining would be split evenly between husband and wife to either repurchase
stock or purchase other stock or not to purchase stock at all, at their
discretion.
5. Reservation of Jurisdiction:
This method is the coward's way out. It is used by parties
who hope that somehow they will come to some agreement later on. From my
prospective, this is really the attorneys full employment act because it
guarantees future litigation and the fees that accompany any litigation.
It can be
legitimately used when the exact amount or nature of the asset cannot be
fully valued and/or divided at the time, then the court simply reserved
jurisdiction over the asset until such time as the asset is fully received.
Often times it is used when assigning future retirement benefits.
6. The Reverse Auction:
I also like this method because it really appeals to the
greed factor of people. Each party gets to pick an asset and make an offer to
the other party for their interest in the asset. In order to keep it fair, if
one party is bidding the asset up, the court can force that party to either
lower the price or purchase it at the same amount that they wanted the other
party to pay. I like this method because it forces the parties to be fair and
deal with each other.
Another version is
to have a gigantic yard sale and liquidate the assets and divide the proceeds.
The thought of some sentimental asset going to a complete stranger usually
brings people to their senses. Although not always.
O.K. you have ascertained the character of the property and
have roughly divided or worked out a method of dividing the assets. But what
about the Debts and Liabilities? Just like any other accounting problem, you
account for the assets first and then apply the debts or liabilities before you
divide what is left.
Dividing the Debts and Liabilities:
The
legislature has devised a series of statues that control how debts and
liabilities are divided. These include the following Statutes:
Family Code §§ 2620 through 2625 establish a system of
preference for allocating community debts. It is as follows:
F.C. § 2620
- Confirmation or Division of Community Estate Debts: These are defined
as the debts for which the community estate is liable which are unpaid at the
time of trial, or for which the community estate becomes liable after trial,
shall be confirmed or divided in the following manner:
-
F.C § 2621 - Debts Incurred Before Marriage:
Debts incurred by either spouse before the date of marriage shall be confirmed
without offset to the spouse who incurred the debt.
- F.C.§ 2622 - Debts Incurred After Marriage but Before Separation:
-
(a) Debts incurred by either spouse after the date of marriage but prior to the
date of separation shall be divided as set forth in § § 2550 to 2552, inclusive,
and §§ 2601 to 2604, inclusive
-
(b) To the extent that community debts exceed total community and quasi
community assets, the excess of debts shall be assigned, as the court deems just
and equitable, taking into account factors such as the parties' relative ability
to pay.
- F.C. § 2623 - Debts Incurred After Separation but Before Judgment:
Debts incurred by either spouse after the date of separation but before entry of
a judgment of dissolution or a legal separation shall be confirmed as follows:
-
(a) Debts incurred by either spouse for the common necessaries of life of either
spouse or the necessaries of life of the children of the marriage for whom
support may be ordered, in the absence of a court order or a written agreement
for support, or for the payment of these debts, shall be confirmed to either
spouse according to the parties' respective needs and abilities to pay at the
time the debt was incurred.
-
(b) Debts incurred by either spouse for non-necessaries of that spouse or
children of the marriage for whom support may be ordered shall be confirmed
without offset to the spouse who incurred the debt.
-
F.C. § 2624 - Debts Incurred After Entry of Judgment:
Debts incurred by either spouse after entry of a judgment of dissolution of
marriage but before termination of the parties' marital status or after entry of
a judgment of legal separation of the parties shall be confirmed without offset
to the spouse who incurred the debt.
-
F.C. § 2625 - Separate Debts:
Notwithstanding §§2620 to 2624, inclusive, all separate debts, including those
debts incurred by a spouse during marriage and before the date of separation
that were not incurred for the benefit of the community, shall be confirmed
without offset to the spouse who incurred the debt.
In my opinion,
this area of law is scary for most people who have separate property assets. You
have to understand that this area is a minefield for the unwary. You have to
know the rules and the realities. Otherwise you will find that you have been
creating a community property asset. Something that most people never intend to
do. This area of law has ensured the full employment of family law attorneys for
years to come. Don't be foolish, protect yourself.
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