ANTHONY J. ROBINSON

        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 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.

        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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