Epstein, Watts & Jefferies Credits:
After receiving many requests for
information relating to the Epstein, Watts & Jefferies cases, I decided to add
these sections as a permanent part of our website. Since this is a very large
area of law, I will be updating this page from time to time. So please bookmark
this site and come and visit us again.
Almost every
family law case
that comes up involves some sort of reimbursement or allocation issue. I
have seen people who were unaware of these laws become very angry when
they learned what these cases were going to do to their part of the booty from
their divorce. Most people don't understand that the basic rule regarding
these types of cases is that a post separation payment made on a community debt
or to support a community property asset, without a valid court order to do so,
is basically considered a gift and not subject to reimbursement. There are
exceptions to this axiom.
The only way to
understand these concepts is to discuss each case separately, although you will
quickly see that they are all interrelated to each other. In addition, you
have to keep in mind that these cases are seminal in nature, which means that
since these cases were decided, new statutes and cases have come down further
interpreting the application of these cases. Please remember that this
article is only a thumbnail sketch of these cases. The subject of reimbursements
is not limited only to Epstein, Watts, and Jefferies cases. The Family Code
contains numerous codes which deal with this subject. So before you make any
decision which may be impacted by these cases, you should retain the services of
a qualified family law attorney to examine your particular case.
EPSTEIN CREDITS:
The most important
date that you need to know in dealing with Epstein Credits, is the date of
separation. The reason for this is simple, Epstein basically deals with how
reimbursements claims are handled between divorcing parties. For this reason,
the date of separation is the benchmark. They also usually
involve separate property payments made, after separation, for or on behalf of
community obligations. The Court in the case, In re the Marriage of
Epstein (1979) 24 C3d 76, 84-85, 154 CR 413, 417-418, established
equitable decisional guidelines that must be applied in deciding reimbursement
claims in dissolution cases. Epstein guidelines basically helps you
understand when a
reimbursement is inappropriate. For example:
-
Reimbursement not appropriate where spouses agreed payment
would not be reimbursed;
-
Payment was truly intended as a gift, even if made
after separation;
-
Payment was made upon an account of a debt for the
acquisition or preservation of an asset the payor spouse was using , and the
amount paid was not substantially in excess of the value of the use.
I will give you
several real life examples which will help you understand this concept:
The last example
is why everyone should be aware of the concept that "there are no free
lunches." Many people have the mistaken belief that they are really
screwing their spouse, when the spouse is making all the payments on the
community property debt service and providing child, spousal or family
support. The reality is that your spouse, who is making those payments and
paying support, because he is paying you support that partially pays for those
payments. For that reason, in most cases delaying the sale of the family
residence makes no sense.
In fact in the
prior example, if the husband makes the house and other payments connected with
the residence, he probably may not have to pay any other support, because the
amounts that he pays are adjusted for the impact of maintaining the family
residence payments, IF there was a court order. The purpose
of such an order is to ensure that payments on key assets, such as the house, are kept up.
The general rule is that payments characterized as support are NOT
entitled to reimbursements.
In Epstein the
Court determined that the husband's temporary obligation to pay the mortgage in
which the Wife resides "in lieu of Spousal Support" would
not be reimbursable by the wife because it was construed to be a support
obligation and not reimbursable. When we examine the ruling in Jefferies,
we will see a different holding on what appears to be similar facts. In Jefferies the husband was awarded
Epstein credits because the Stipulated payments on the community property home
were also "in Lieu of Spousal Support" The reason for that
holding will become apparent when we discuss the Jefferies case.
So if there is no
temporary support order in place, then the court may restrict the husband's right of
reimbursement. The reason for this is commonly held to be because a spouse's support obligation is considered before
allowing that spouse's credit for post-separation payments on a community
obligation. This method allows the court to go back to the date of separation
and determine what your support obligation should have been and weighs that against the
Epstein credit request. As a practical matter, court try and balance things out
in a fashion that usually results in one item canceling out the other.
However there are exceptions to this, such as a temporary award of the family
home for the benefit of minors, in addition to child support. This is because
the Court's are mandated under Fam.C. §2550, which requires
that the NET community estate be divided equally between
the parties.
You
need to be aware that if they make these post separation separate property payments long enough, it is possible
that you may end up
owing them money or having your share debited down to almost nothing. That
is the no free lunch part. I would recommend that you always file an OSC for
temporary support and as part of that OSC, you ask the Court to make a
determination as who pays what debts prior to trial. In addition, request that
the Court determine what if any reimbursement rights shall exist to trial as a
result of those payments. This may result in an early settlement or in a
narrowing of issues to be tried by the Court.
WATTS CHARGES:
A Watts charge is
basically a claim that the community has as a result of one spouse's exclusive
use of a community property asset between the date of separation and the date on
which the community no longer has an interest in the property. That is what we
call a Watts charge. It is named after the case In Re the Marriage of
Watts (1985) 171 CA3d 366, 378, 217 CR 301, 306. Explaining this
case gets a little bit more complicated. So get a fresh cup of coffee and hunker
down.
The typical Watts
charge happens like this. One spouse (husband) is making payments on a community asset (family residence) in which the other spouse
(wife) is given the right to the exclusive possession of the asset pending
sale and division of the proceeds. Are you still with me? I certainly hope so.
The charge is for the wife's postseparation use of the husband's separate
property portion of the community estate. Since she benefits to his detriment,
the community is entitled to receive reimbursement prior to division of
the community estate.
Anyway, the effect
of this case is that the trial court may award the paying spouse Epstein credits
for his separate property payments on the house and charge the occupant with the
full Watts postseparation use value. The effect is that the Epstein credits are
paid from the community and the Watts charges are paid to the community.
Theoretically this should yield an equal sharing of Epstein credits by both
parties and an equal bearing of Watts charges by both parties. In
effect this is what Jefferies authorizes. Once again the real world effect is
probably to cancel out each other. Lets examine an example to demonstrate how
this works.
Let's presume that
in the property division portion of a judgment, the husband makes
$9,000.00 of post separation separate property payments on the community
home in which the wife has the exclusive post separation right of
occupancy. The value of her post separation use is $21,000.00. In order to
effect a NET EQUAL community property division, the Court
will probably do the following in allocating Epstein credits and Watts
charges:
Allocate Epstein
Credits to the Husband by Subtracting $9,000.00 from the overall value of the
portion of the community estate awarded to him as his separate property before
equalizing payments are made. The effect is the same as if no Epstein credits
had been allowed and the overall value of the community estate awarded to
husband exceeded the overall value of the community estate awarded to his wife
by $9,000.00; in such a case, husband would have to make a $4,500.00 equalizing
payment to wife. Instead husband is allocated the full $9,000.00 Epstein
credits, the overall value of his share of the community estate is reduced by
$9,000.00 and thus will be equal to that share of the community estate awarded
to his wife. Since the overall value of the two estate are equal, there is no
need for him to make an equalizing payment to her.
Let's examine the
net effect of this. The next fiscal effect of receiving $9,000.00 of Epstein
credits is that he is credited by $4,500.00 and the wife's share is
debited by an equal amount had the Epstein credits not been allowed. The husband
receives his credits from the community and property in which they both had an
equal share. Did you follow all that? I certainly hope so because this is only
half of the analysis. The Watts charges complete the equation.
The wife is
charged with Watts charges by adding the $21,000.00 to the overall value of the
community estate awarded to her as her separate property. The net fiscal impact
is the same as if no Watts charges had been allocated and the overall value of
the community estate awarded to the husband was $21,000.00 more than that of the
community estate awarded to the wife; in such a case the husband would
ordinarily be required to make a $10,500 equalizing payment to the wife.
When the wife is allocated $21,000.00 of Watts charges, the overall value of her
share of the community estate is increased by $21,000.00 and thus will be equal
to the share of the community estate awarded to the husband. Not to mention that
in this scenario, the husband doesn't have to make an equalizing payment to her
because they cancel out.
The net impact of
charging the wife with $21,000.00 in Watts charges is that the husband is
$10,500.00 richer and the wife is $10,500.00 poorer than they would have been
had those charges not been assessed against the wife. This outcome is consistent
with the concept of reimbursing the community estate , in which the husband and
wife both had an equal interest, from the wife's separate property award for the
reasonable rental value of her exclusive use of the marital residence after her
separation from her husband.
As I
said before, you
need to be aware that if you are the wife in this example and stay in the
residence for any length of time his portion increases and your decreases. If
the value of the residence increases at the same or better rate, then you can do
this. In most cases, selling the family residence is in your best interests.
Living in the family residence after separation for any longer than it takes to
sell, could result in you owing a great deal of money to the other party.
Once again, in
order to avoid a Jefferies allocation of Epstein credits and Watts charges, I
would recommend that you always file an OSC for temporary support and as part of
that OSC, you ask the Court to make a determination as who pays what debts prior
to trial. In addition, request that the Court determine what if any
reimbursement rights shall exist to trial as a result of those payments. This
may result in an early settlement or in a narrowing of issues to be tried by the
Court.
Another twist on
this problem is governed by Fam. C §915(b). In this scenario,
if community assets were used to pay a spouse's support obligation from a prior
marriage and at that time the obligor spouse had nonexempt separate income
available, then the community is entitled to a reimbursement.
JEFFERIES ELECTION:
The Jefferies case
basically deals with an interesting scenario, in which the court allocates
Epstein credits against Watts Charges. Thereby completing the calculations
mandates by Fam.C. §2550, which requires
that the NET community estate be divided equally between
the parties. In order to carry out the mandate, the credits and charges must be
applied to one another. Jefferies allows the court to do this. The Court is also
mandated to examine any agreement the divorcing couple may have made and
makes a determination as to how to apply the Epstein and Watts cases.
Specifically the
Court looks for reasons to consider payments gifts, or otherwise find them to
not be reimbursable. I personally believe that the Court does this to prevent
much shift of money away from an equal split and toward favoring one party over
the other. In many cases, doing this in and of itself, results in
unfairness usually to the party who is making the payments and asserting the
claims. To do the opposite allows angry spouses to beat each other up
litigating these charges and credits.
The main lesson to
take from these cases is that you should always set an initial OSC and have the
court make a temporary order for support and payment of community debts or to
support a community asset. As part of that OSC, either party should ask the
court to make a determination if any part of the support award is going to be
subject to Epstein credits or Watts charges. Most of the time you can craft
support orders that will avoid this situation entirely.
In addition to
these situations, the legislature overhauled the family code and has set up
several statutes which deal with credits and charges not covered by these cases
directly. One example is where one party makes a down payment on a community
property house with separate property funds. Is that party entitled to a
reimbursement? and if so how much? The answer to that conundrum, I will
reserve for another day.
The one thing I
want everyone to know is to always check with a qualified family law
attorney before committing yourself to any agreement. Especially those
agreements which allow the primary custodial parent exclusive use and possession
of the former family residence and the non-custodial parent is paying support.
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