COURT REVERSES JUDGMENT IN DIVORCE CASE OF FIRST IMPRESSION!
COURT REVERSES JUDGMENT IN DIVORCE CASE OF FIRST IMPRESSION!
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COURT REVERSES JUDGMENT IN DIVORCE CASE OF FIRST IMPRESSION!

| Apr 14, 2020 | Firm News

When an individual enters a marriage owning a piece of real property, and the marital community pays the property’s mortgage during the marriage, California law provides a formula through which to apportion the property’s value upon the marriage’s end.

Known as the Moore/Marsden rule, the formula awards the marital community a growing interest in the otherwise separate property as community funds are used to increase the property’s equity.

In this dissolution case, the husband entered the marriage owning a home that the parties lived in as spouses for over 12 years. The parties agree that application of the Moore/Marsden rule through the date of their separation resulted in the community beneficially owning 33.66 percent of the property.

However, by the time of their dissolution trial, the husband had lived in the property for more than six years postseparation, paying the mortgage with his separate income.

At the wife’s request, the trial court found that the community’s interest in the property continued to increase throughout those years, just as if community funds had been used to pay the mortgage during that time, resulting in the community obtaining a 64.9 percent interest in the property.

The California Court of Appeal held that this was error.

The Moore/Marsden rule applies only insofar as community funds are used to build equity in an asset, a situation which often terminates, as it did here, upon separation.

Under California’s community property laws, property that a spouse acquires before the marriage, or during the marriage by way of gift or inheritance, is that spouse’s separate property. (Cal. Const., art. I, § 21; Fam. Code § 770.) On the other hand,  property acquired during the marriage due to the time, labor, or skill of a spouse is community property in which the spouses have an equal interest. (Fam. Code § 760.) Upon dissolution, community property is divided equally between spouses, and separate property is awarded to only the owner. (Fam. Code §§ 770, 2550.)

When one spouse enters the marriage owning the home in which the spouses are to live, it is not self-evident how to characterize the appreciation on that separate real property during the marriage, when, as is common, the marital community uses its funds to pay the loan on that separate asset. In In re Marriage of Moore (1980) 28 Cal.3d 366, 371-372 (Moore), our Supreme Court held that where community funds are used to pay down the principal owed on a loan on property purchased by one spouse before marriage, the community obtains “‘a pro tanto community property interest in such property in the ratio that the payments on the purchase price with community funds bear to the payments made with separate funds.’ [Citations.]” Thus, as the community makes payments during the marriage that reduce the principal owed on the separate property, the community acquires a beneficial interest in that property, even if title remains in the name of the original owner.

Moore chose a specific way to determine the community’s increasing interest in the property. It used the original purchase price as a reference point for a 100 percent interest in the property. As a marriage begins, Moore attributes the entire purchase-price value of the property to the separate owner. (Moore, supra, 28 Cal.3d at pp. 373-374.) After that point, the community’s interest in the property is determined by “dividing the amount by which community property payments reduced the principal by the purchase price.” (Id. at p. 374.) Thus, if the original purchase price of a property were $100,000, the community would obtain a constructive one percent interest in it for each $1,000 in principal on the loan that community assets paid down. The owning spouse’s separate ownership share would be reduced accordingly. In re Marriage of Marsden (1982) 130 Cal.App.3d 426, 437 (Marsden) supplemented Moore’s calculation by establishing that the owner of the separate property should be awarded the pre-marriage appreciation in the property’s value.

Nevertheless,  Marsden did not incorporate the pre-marital appreciation into Moore’s calculation of the respective separate and community interests in the property; that calculation remains tied by Moore to the amount of equity that the community has contributed to the property, as a percentage of the original purchase price. (Marsden, supra, 130 Cal.App.3d at pp. 437- 439.) Thus, as community funds are used to pay principal on the mortgage, the community acquires a constructive or beneficial equity interest in the property, but the appreciation prior to marriage remains with the separate property owner.

This ultimately means that the community’s share in the value of the property at the end of a marriage can be determined by adding together (a) the amount of capital appreciation during the marriage that is attributable to community funds under the Moore formula and (b) the principal payments made by the community funds, which are returned to the community. (In re Marriage of Frick (1986) 181 Cal.App.3d 997, 1008.)

Later cases have addressed more complicated aspects of the Moore/Marsden rule. For example, the community is entitled to an interest in the property when the spouses refinance a separate property and pay off the original mortgage with a new loan (In re Marriage of Branco (1996) 47 Cal.App.4th 1621, 1629), and the community is entitled to reimbursement when its funds are used for capital improvements to a separate property (In re Marriage of Allen (2002) 96 Cal.App.4th 497, 501). This case concerns only a straightforward Moore/Marsden calculation, where the community’s interest in the Lomello property can be calculated simply by dividing the amount of principal paid during the marriage by the original purchase price.

If the husband obtained a benefit from the community through living in the house beyond the parties’ separation date, the trial court may account for this through so-called Watts charges, a different legal concept than the Moore/Marsden rule. Watts charges equitably compensate the community for one spouse’s use of a community-owned home.

Family law courts are courts of equity. (In re Marriage of Boswell (2014) 225 Cal.App.4th 1172, 1174.) Watts charges are used to compensate the community when one spouse has the exclusive use of a community asset, most often the couple’s residence, between separation and trial. The spouse using the property is charged ‘“for the reasonable value of that use.”’ (In re Marriage of Falcone & Fyke (2012) 203 Cal.App.4th 964, 978.)  The trial court has discretion, based on equitable considerations, as to whether to impose Watts charges and in what amount. (See In re Marriage of Oliverez (2019) 33 Cal.App.5th 298, 318 [Epstein credits]; In re Marriage of Dellaria & Blickman-Dellaria (2009) 172 Cal.App.4th 196, 201 [review of orders dividing marital property].)

Family Code section 2555, however, permits use to revise the disposition of the community estate  “in all particulars, including those which are stated to be in the discretion of the court.” The California Court of Appeal concluded that ordering a revision is warranted here, where the trial court used an incorrect vehicle (Moore/Marsden) to account for a fact (post-separation occupation of the property) that could properly be the basis of Watts charges.

The California Court of Appeal held, as a matter of first impression, that Watts charges may be levied against a spouse for his or her post-separation occupation of a property where the property is not entirely community property, but rather is treated as partially community property due to the Moore/Marsden rule. We thus vacate the judgment and remand to the trial court for the proper application of Moore/Marsden and calculation of any Watts charges.

See In re the marriage of Mohler.

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