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Successful Tracing Does Not Rebut the Community Property Presumption

Husband and Wife married on February 14, 1988. Husband and Wife were both officers in the armed services. After they were married, Husband and Wife bought a house in Elk Grove, California. During the marriage, Husband and Wife opened several joint investment accounts.

Husband and Wife separated on June 1, 2004. At that time, Husband was stationed in Hawaii. In 2005, Husband filed for divorce of the marriage in Hawaii. In 2006, Wife filed for divorce of the marriage in California. Because Husband’s Hawaii action was already pending, the California court stayed its divorce proceedings pending the outcome of the Hawaii action. Eventually, the Hawaii court dismissed Husband’s action for lack of jurisdiction, and, after an unsuccessful appealed by Husband’s divorce lawyer, the California divorce action proceeded in 2011.

In August of 2012, Husband and Wife stipulated that the family residence in Elk Grove would be awarded to Wife, that Wife would then pay Husband half of the home’s appraised value, and that the court would then reserve jurisdiction to determine whether Wife owed husband Watts charges1 for living in the house since the date of separation (June 1, 2004), and whether Wife was entitled to Epstein credits2 for repair and maintenance of the house.  As to the investment accounts, Husband and Wife stipulated that a neutral party would evaluate them, and then the court would divide them.

On October 3, 2012, the court entered a status-only divorce judgment, reserving jurisdiction over all other matters.

With regard to the reserved issues, Wife’s divorce attorney contended as follows: (1) she was entitled to reimbursement for the $40,000 down payment made on the family residence, alleging that the money came from her separate property; (2) she was entitled to Epstein credits for more than $38,000 that she spent on repair and maintenance of the family residence after the date of separation; (3) she denied that she owed any Watts charges for fair rental value of the family residence since Husband’s improper filing of a dissolution action in Hawaii caused a 6-year delay in the case, and Husband should not be allowed to profit from that delay via Watts charges.

Husband divorce lawyer contended as follows: (1) the investment accounts are community property since they were opened during marriage and held in joint form; (2) the family residence should be divided as per the parties’ 2012 stipulation; (3) the court should impose Watts charges for the entire time period after the date of separation because Wife also delayed the action; (4) although Wife was entitled to Epstein credits, the amount should be lowered.

In the divorce proceedings, Wife’s expert testified about the investment accounts into which Wife had deposited separate property and about the likely source of the separate property funds. The divorce court admitted into evidence a binder prepared by Wife’s expert that contained account statements and summaries of transaction histories. Wife testified that she deposited proceeds from the sale of her separate property house into three of the accounts. Wife also testified that she made the down payment on the family residence with her separate property investments. Wife submitted invoices and statements to support her request for Epstein credits, and opposed Husband’s divorce lawyer’s request for Watts charges because of Husband’s delay.

Husband, in turn, testified as to his opinion of value of the improvements and repairs, and his opinion as to the rental value of the family residence. Husband’s divorce lawyer argued that the family residence was community property, that the down payment was made from community property savings, thus, Wife should not be reimbursed for the down payment.

The divorce court held as follows: (1) the investment accounts were Wife’s separate property; (2) Wife was entitled to reimbursement of down payment on the family residence; (3) Wife was entitled to $36,000 in Epstein credits; and (4) Husband’s divorce lawyer request for Watts charges was denied on equitable grounds.

Husband’s divorce lawyer appealed the divorce court’s decision. The Court of Appeal for the Third District of California reversed and remanded the trial court’s decision.

First, with regard to the investment accounts, the Court of Appeal held that the divorce court erred by finding that the accounts were Wife’s separate property for 3 reasons: (1) under Family Code section 2581, those accounts were presumed to be community property3 (opened during marriage in joint title) absent clear and convincing evidence that parties intended them to be Wife’s separate property; (2) Wife failed to show any written agreement that the accounts were to be her separate property; and (3) tracing is not applicable to rebut the Family Code section 2581 presumption. The Court of Appeal, however, held that Wife may be reimbursed for her separate property contribution to the investment accounts under Family Code section 26404. The Court of Appeal explained that even if property held in joint tenancy loses its separate property characterization under Family Code section 2581, section 2640 provides Wife with a right to reimbursement absent a written waiver of the right of reimbursement. The Court of Appeal further held that the Wife’s and the expert’s testimony and documentary evidence (i.e., forensic tracing) supported the divorce court’s finding that the investment accounts were funded with Wife’s separate property, and that there was no evidence that Wife waived her right to reimbursement.

Second, as to Wife’s right of reimbursement as to the down payment on the family residence, the Court of Appeal held that the divorce court erred by awarding Wife reimbursement under Family Code section 2640 for the down payment because Wife failed to introduce direct written evidence to support her claim to reimbursement. The Court of Appeal agreed with husband’s divorce lawyer and held that wife’s oral testimony was insufficient to support Wife’s right of reimbursement.

Third, as to the issues of Epstein credits and Watts charges, the Court of Appeal held that the divorce court did not err by denying Watts charges for the 6-year time period when Husband’s Hawaii dissolution action was pending. However, the divorce court should have imposed Watts charges for the time period in which Wife had exclusive use of the family residence after the date of separation but before Husband filed the Hawaii divorce action and for the time period after the Hawaii divorce ended to the time of the California divorce trial. Furthermore, the Court of Appeal held that the divorce court should award Wife Epstein credits only for the period in which Wife owes Watts charges.

In summary, the Court of Appeal reversed the divorce court’s decision and remanded the matter back to the divorce court with instructions to: (1) characterize the investment accounts as community property; (2) reimburse Wife for her separate property contributions to the investment accounts; (3) order Wife to pay Watts charges for the monthly rental value of the family residence for the periods when she had exclusive use of the family residence after separation and before trial (but only for the time period when the Hawaii action was not pending); and (4) award Wife Epstein credit for the periods in which she owed the community Watts charges.

1 In a California dissolution case, Watts charges are charges against one spouse’s share of the community property made to reimburse the community for the value of that spouse’s exclusive use of the property after the date of separation.

2Epstein credits are a spouse’s reimbursement claims against the community property for the payment of community expenses or debt with that spouse’s separate assets.

3Family Code section 2581 provides, in relevant part: “…property acquired by the parties during marriage in joint form…is presumed to be community property. This presumption…may be rebutted by either of the following: (a) A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property [or] (b) Proof that the parties have made a written agreement that the property is separate property.”

4Family Code section 2640 provides, in relevant part: “(b) In the division of the community estate …, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source…”

In re Marriage of Cooper, 2016 WL 3138012