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Property Purchased During Marriage Is Community Property Despite Wife Signing a Deed and Husbandís Payment of Loans on Investment Properties Cannot Be Considered as Income Available for Spousal Support

Posted By Anthony P. Azemika, Esq.   |   Comments (0)
Alimony, Family Law, Community & Separate Property, Divorce, Legal Cases,

 

 

Before his death in 1990, Father’s father held “multiple parcels of real property” in “various trusts,” one of which was the Deluca Properties Trust (DPT). One of the properties in DPT was the Florida Street property (an apartment complex). After Father’s father died, Father, his sister (Sister), and their brother (Brother) engaged in years of litigation over their father’s trusts. Meanwhile, Father married Mother on September 7, 1996.

On October 25, 1996, Father, Sister, and Brother reached a settlement agreement to resolve the trust litigation, which included the usual release of claims. Father received commercial properties in Santee, Encinitas, and San Diego; Sister received the Florida Street property and a $75,000 promissory note from Father secured by a first deed of trust on the San Diego property, along with a $32,000 forgiveness of debt from Brother. Brother received title to another San Diego property and a $250,000 promissory note from Father, secured by a third-priority deed of trust on the Santee and Encinitas properties. The agreement also provided that Father relinquished his status as a trust beneficiary and agreed that the trust assets belonged solely to Sister and Brother, and that the agreement could be amended only by a written agreement signed by all the parties.

In September of 1997, as Father would later testify, he and Sister signed a second agreement (Amendment to Settlement Agreement and Mutual Release), which provided that Sister would transfer the Florida Street property to Father by grant deed in exchange for a promissory note of $164,700, secured by the property. Father was to have the option of assuming the first deed of trust of $235,300, or continuing to make the monthly payments on that deed of trust. Father would also pay $20,000 to Sister. The agreement expressly stated that it was intended to be a redistribution of trust assets and not to change any of the provisions of the original agreement, except as stated. Father and Sister signed the agreement; Brother did not.

In January of 1998, at Father’s request, Mother signed a quitclaim deed transferring any interest she had in the Florida Street property to Father as his separate property. In 2002, she signed a spousal acknowledgment that she had no interest in the property in conjunction with a refinance on it.

Mother and Father separated on November 21, 2011. In subsequent proceedings, Father was awarded sole custody of their two children. In the divorce papers, Father stated that he owned and operated an insurance agency, and also owned and managed several income-producing rental properties. Mother, who had a B.A. and a paralegal certificate, had worked as a legal secretary all during their marriage. At trial, Mother claimed that the Florida Street property was community property, but Father maintained it was his separate property. Father claimed that the property was part of his inheritance, while Mother contended that he acquired it during their marriage by a sale between him and Sister. Accountants for both parties testified about the methods each used to calculate Father’s income and determine whether Father had used community property funds to acquire the Florida Street property.

When the trial concluded, Trial Court found, among other things, that the Florida Street property was Father’s separate property, that Father had overcome the presumption of undue influence regarding Mother’s signing the quitclaim deed and spousal acknowledgment, and that tracing method used by Father’s accountant was accurate. Trial Court also included the payments on principal Father made to service loans on his income producing properties as income available for spousal support and ordered Father to pay $7,500 per month to Mother for spousal support.

Mother appealed Trial Court’s determination that the Florida Street property was Father’s separate property and Father appealed the spousal support order. Now, a California Court of Appeals has affirmed Trial Court’s decision in part and has reversed the decision in part.

With respect to the characterization of Florida Street property, the Appellate Court has ruled that Trial Court was wrong in determining that the Florida Street property was Father’s separate property because (a) Father acquired it from Sister by purchasing it, not by inheritance, (b) the amended settlement agreement was not valid because Brother did not sign it,(c) Father’s inception of title argument is unpersuasive, (d) Father’s accountant’s tracing evidence was insufficient to show that he acquired the property solely with separate funds, and (e) Mother’s signing quitclaim deed and spousal acknowledgment did not constitute valid transmutation because Mother lacked full knowledge of the facts and the documents did not contain statutorily required language regarding the change in ownership and characterization of the property. Appellate Court also ruled that Father is entitled to California Family Code Section 2640 reimbursement on showing of his separate property contributions.

With respect to the issue of spousal support, the Appellate Court has ruled that Trial Court was also wrong by including the payments Father made on the property loans as income available for spousal support. Finding guidance in a Wyoming Supreme Court case (Fleenor v. Fleenor (Wyo.1999) 992 P.2d. 1065), the Appellate Court states the general rule that the principal portion of a business mortgage payment may be deductible from income available for spousal support if Trial Court determines that the payment reasonably and legitimately reduces net income for support under the relevant circumstances (ordinary and necessary business expense versus substantial hardship to payor).

The Appellate Court reverses Trial Court’s orders regarding the Florida Street property and spousal support payments and sends the case back to Trial Court for further proceedings, but affirms all other provisions of the divorce judgment.

 

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