PROPERTY DIVISION AND CHARACTERIZATION OF ASSETS

Three Basic Steps In Dividing Property In A California Divorce Action:

There are three basic steps in dividing property in a divorce action:

Characterization: First it must be determined whether the property is "community property", "separate property", or "quasi-marital property.

Valuation: Next the property must be given a value either by agreement or appraisal.

Division: After the property has been characterized and valued, the goal of the court is to confirm separate property to the owner of that property and to evenly divide community property.

Characterization:

Separate Property - General Concepts: Property acquired before marriage is the acquiring spouse's separate property, as is property obtained during marriage that can be traced to a premarital acquisition. Like community property, separate property does not lose its character as such by a mere change in form or identity.

The court must therefore determine when the property was "acquired". For property characterization purposes, "acquired" contemplates the "inception of title" . . . generally meaning the time (before marriage, during marriage, or after separation) when the original property right arose, not the time when it subsequently matured into full legal title.

Property acquired during marriage by "gift, bequest, devise, or descent" (i.e., inter vivos or testamentary gift or intestate succession) is the acquiring spouse's separate property.

A spouse's "earnings and accumulations" after a judgment of legal separation are his or her separate property; and so are a spouse's "earnings and accumulations" while living separate and apart from the other spouse.

"Separation" requires more than a rift in the spouses' relationship. The date of "separation" occurs only when the parties have come to a parting of the ways with no present intent to resume their marriage and their conduct evidences a complete and final break in the marital relationship.

Community Property - General Concepts: All property acquired during marriage and before separation, other than by gift or inheritance, is presumptively community property.

Income derived from a spouse's labor, time or skill during marriage and prior to separation is community property. Such "earnings" includes any compensation for services, regardless of the form in which it is received. For example, to the extent it reflects employment during marriage, community "earnings" can include:

• Stock in lieu of salary.
• Employer contributions to an employee profit-sharing plan.
• Incentive stock options.
• A conveyance of real estate from the employer in the form of a gift, but which is in reality deferred compensation in lieu of a pension.
• Vacation pay, or the right to receive certain other financial benefits as deferred compensation upon termination of employment.
• Other employment fringe benefits based on a contract right to future benefits after separation (even though unvested and unmatured): To the extent "earned" during marriage, these interests are allocatable to the community.

Profits from a spouse's business (sole proprietorship, partnership or closely-held corporation) are "earnings" to the extent attributable to either spouse's participation in the business. Conversely, income and profits not reflective of either spouse's labor or skill are strictly a return on the capital investment, characterized in accordance with the separate or community property status of the original investment.

Transmutation: Both before and during marriage, spouses may agree to change the status of any or all of their property (presently owned or thereafter acquired); i.e., they can convert separate into community property, community into separate property, or separate property of one into separate property of the other. The process is commonly referred to as "transmutation."

"Quasi-Community Property": For purposes of a property division in marital actions or the rules governing marital property debt liability, "quasi-community property" is (i) real and personal property, wherever situated, which would have been community property had the owner spouse been domiciled in California at the time of acquisition, and (ii) any property acquired in exchange for such property.

The establishment of a California marital domicile may trigger California "quasi-community property" law, under which the parties' common law separate property will be treated as if it were community property for certain purposes.

Quasi-Marital Property: The characterization of "marital" acquisitions as community property necessarily assumes the parties were validly married. Nonetheless, in a nullity proceeding to terminate a void or voidable marriage, California "quasi-marital property" law recognizes normal community property rights in favor of a party who has "putative spouse" status (good faith belief in validity of marriage).

Valuation:

Absent an in-kind division or sale and division of proceeds, valuation of each item in the community estate is an essential prerequisite to the court's responsibility to effect a net equal division. Valuation is ultimately a question of fact, to be resolved in the exercise of the trial court's broad discretion based on the range of evidence presented. The trial court's determination will be upheld on appeal so long as supported by substantial evidence in the record.

Obligation To Disclose Value: Each spouse's fiduciary obligations in the management and control of the community estate include the duty (a) to fully disclose to the other spouse "all material facts and information regarding the existence, characterization and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable"; and (b) upon request, to "provide equal access to all information, records, and books that pertain to the value and character of those assets and debts.”

The Parties May Agree On Value: The parties are free to enter into an agreement concerning the value of community property and they are encouraged to do so by the court.

Fair Market Value: Unless the parties stipulate or agree to accept some other measure of value (e.g., cost or book value), an equal division of the community estate must be predicated on fair market value. For purposes of effecting an equal property division upon marriage dissolution or legal separation, "fair market value" of a marketable asset is the highest price on the valuation date that would be agreed to by (i) a seller, who is willing to sell but under no obligation "or urgent necessity to do so," and (ii) a buyer, who is ready, willing and able to buy but under "no particular necessity for so doing."

Date Of Valuation: With few exceptions, community assets and liabilities subject to the court's disposition ordinarily must be valued "as near as practicable to the time of trial."

Proof Of Value: Competent valuation evidence may be proffered by any of the following methods:

Opinion Testimony:

Expert Testimony: A qualified expert can testify as to value (e.g., appraisers, accountants, actuaries or real estate brokers/salespersons).

Owner's Testimony: The property owner or owner's spouse is competent to testify as to the value of his or her own property even though not qualified to testify as an expert.

Comparable Sales: A witness offering opinion testimony may take into account as the basis of his or her opinion evidence of the price paid for the property if recently purchased; or evidence of market prices or recent sale prices for comparable (similar) property. However, mere offers to buy or sell certain property are inadmissible to prove the property's value.

Buy-Sell Agreement: The agreed-upon buy-out price or buy-out formula for purchasing a business interest (e.g., shares of stock in a closely-held or professional corporation) as between the business principals is admissible on the question of value in a community property division proceeding between the spouses. However, such a buy-sell agreement is not conclusive. Based upon the evidence presented, the family law court has broad discretion to accept or reject the valuation formula in a business buy-out (or stock purchase) agreement.

Division:

Court's Broad Discretion: Generally, where the parties are unable to agree on a disposition of their community estate, trial courts have broad discretion to determine the manner of division in order to accomplish a net equal division.

General Approaches: Typically, the court will adopt one or more of the following approaches:

In-Kind Division: The Court divides fungible assets (bank accounts, shares of stock, etc.) in kind, whereby each spouse is awarded one-half.

Asset Distribution Or Cash-Out Division: The Court distributes one or more items to one spouse and items of equal value (which may include an equalizing promissory note) to the other.

Sale & Division Of Proceeds: The Court orders an asset sold, with the proceeds divided in proportions necessary to effect a net equal division of the overall community estate.

Deferred Partition By Conversion To Tenancy In Common: The Court awards each spouse an undivided one-half interest in certain items to hold as tenants in common (typically, the family home), deferring partition until feasible to effect a sale and division of the proceeds.

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Few areas of California divorce and family law is changing as rapidly, or is having as great an impact upon property division and support obligations, as is interspousal fiduciary duties.

Until the mid-1970’s lesser "good faith" standards were imposed upon married persons which had consequences to usually only in extreme situations of self-dealing by one spouse or domestic partner. These standards have since morphed into much higher level "confidential duty" and "fiduciary duty" standards.

The penalties for violating a fiduciary duty can be severe. Fiduciary duty rules help to balance economic power in marriage and divorce. The accountability that the law of fiduciary duties add to the dissolution mix is a useful tool for combating marriage fraud by the other spouse.

In financial and property transactions with third parties and each other, spouses owe one another important statutory duties that create huge responsibilities and pitfalls. As between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other. "This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other."

The essence of the "fiduciary relationship" is that the parties are treated under the law as though they do not deal with each other on equal terms because one person (typically the managing spouse) in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert influence over the dependent party. A presumption of undue influence arises whenever either party benefits from the transaction over the other, however innocuous the circumstances may seem.

In 2002 the Family Code was amended to expand this confidential fiduciary relationship and impose the same rights and duties as applies to non-marital business partners under the California Corporations Code, and includes but is not limited to:

1. Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying;
2. Rendering upon request true and full information of all things affecting any transaction which concerns the community property.
3. Accounting to the spouse, and holding as trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property (i.e., all property acquired by a married person during the marriage).

One major consequence is that transactions which benefit only one spouse may be set aside by the other, either before or during a divorce proceedings.

As a practical matter for divorcing couples, this means:

1. If one party has benefited over the other in a transaction involving money or property and thereby gained an advantage during the course of the marriage, the law presumes the advantage was gained through undue influence exerted on the part of the benefited party, and the transaction is presumed invalid and can be set-aside;
2. The burden of convincing a Court that a set-aside should not occur then shifts to the advantaged spouse;
3. All this can occur without regard to good or bad intent on the part of the advantaged spouse (i.e., actually intending to defraud as opposed to merely being sloppy). Either way the law declares the transaction to be the result of constructive fraud. Once the Court finds constructive fraud the transactions can be set aside, the benefited party can be ordered to pay restitution to the other and to disgorge any profits they alone received, title may be reformed to include both parties' names, or the property may be held in trust for both on a present and go-forward basis rather than in the name of the one alone. If there is an actual fraudulent intent, the remedies to the injured spouse are more severe.

Remedies for breach of the fiduciary duty include an amount equal to one-half of the value of any asset undisclosed or transferred in breach of fiduciary duty, plus attorneys fees. This includes inadvertent or unintentional violations. Where a court comes to believe a spouse acted intentionally to defraud the other spouse, the Court "shall" award 100% of the value of what should have been disclosed, or what should not have been transferred, to the innocent spouse!

If you feel that you may have a potential case pertaining to family law please call (805) 879-7523 or click here to email us and have an attorney contact you about your case.