QUESTION ANALYSIS
All of the following events occurred in California. (No QCP issue)
HOUSE
Shortly after he graduated from college in 1957, Harry purchased a home for $40,000, taking title in his name. (Before marriage and SP, title presumption) Harry's father gave him the $10,000 down payment and Harry borrowed the balance of the purchase price on a note secured by a 30-year mortgage for the remainder. A month later, Harry married Wilma (Marital economic community begins.) and began work for ABDO Corporation. Harry rnade all mortgage payments from his ABDO earnings. (The earnings are CP and the CP contributed to mortgage payments)The house is now worth $500,000. (Moore rule: CP gets pro rata interest in the appreciation of the house)
W'S EDUCATION
A homemaker until their children were grown (W's earning capacity was probably low), Wilma enrolled in a local public university and in 1983 earned a professional credential in landscape architecture. (Education and Training is not CP) Her tuition and other educational costs were paid by Harry from his ABDO earnings. (CP gets reimbursed for the expenses)
FLORA INC.
In 1984, using a $50,000 inheritance from her father,(traced to W's SP) Wilma established a remarkably successful landscape business, (Substantially enhanced W's earning capacity) Flora, Inc. In 1990, Wilma was offered $600,000 for Flora even though the physical assets were worth only $50,000. (SP enhanced by community labor, Full Pereira and Van Camp analysis) Wilma rejected the offer.
CORPORATE STOCK
In 1990, Harry was permanently and totally disabled in a hunting accident. In satisfaction of his claim for personal injuries, he received a $400,000 settlement, which he used to purchase a portfolio of corporate stocks now worth $600,000.
DISABILITY PAYMENT
Harry can no longer work at ABDO because of his disability. He now receives ABDO disability benefits, which provide two-thirds of his monthly pre-injury salary. (Disability payment is CP if it intended to replace marital earnings; It is CP until separation)
FUTURE RETIREMENT BENEFITS
The disability payments will continue until 1995 when Harry turns 60. He will then receive ABDO early retirement benefits, which will be three-fourths of his pre-injury monthly salary.(CP as long as it is earned during marriage. Time rule for apportionment)
Harry and Wilma have decided to obtain a dissolution of their marriage. (Marital economic community ends.)
1. How should the following assets be classified and distributed on dissolution:
a. The house? Discuss.
b. Flora, Inc.? Discuss.
c. The corporate stocks? Discuss.
d. The ABDO disability payments? Discuss.
e. The future ABDO retirement benefit payments? Discuss.
2. Should any adjustment in the distribution be made in order to reflect the cost and value of Wilma's education? Discuss.
General Presumptions
Community property
CP is property, other than separate property acquired by either spouse during marriage. All assets acquired during marriage are presumptively CP.
Separate property
All property acquired before or after marriage or after permanent separation, or by gift, devise, or bequest, is presumed to be SP.
1.a The house
SP- see supra.
House is presumed to be SP because H purchased it prior to marriage.
CP pays off SP (Moore)
When CP pays off the purchase price of SP the community is entitled to reimbursement as follows: Amount principal reduced/Original amount = CP interest. The court can deviate from this and award entire house to one of the parties and give the other spouse other community assets to compensate for their share.
Here, the community helped to pay off H's house which is his SP because H had a 30-yr. mortgage to pay down $30,000 of the house, and he paid all mortgage payments from his ABDO earnings, which are CP. Since it has been more than 30 years and his earnings paid off "all" mortgage payments, the community should be compensated for its interest as follows:
30000/40000 = 3/4 CP interest: the SP paid 10,000/40,000 = 1/4 SP interest.
Since the house is now worth $500,000, 1/4 of it ($125,000) will be H's SP and 3/4 of it will be CP ($375,000).
H gets $125k + 1/2 of $375; W gets 1/2 of $375k.
1b. Flora, Inc.
SP see supra.
Since W started Flora, Inc. with money she inherited from her father, it is a SP business.
SP enhanced by CP.
Pereira: tends to favor community; use when spouse's management and skills are primary reason for growth of business.
Van Camp: tends to favor separate estate; use when character of business is the primary reason for the growth.
Here, if W's expertise in landscaping is the reason for the growth of the business, the court will use Pereira. This is likely the case since assets are only worth $50k, meaning goodwill likely responsible for other $550k- W's efforts thus community labor. Court likely to use Pereira with H receiving $260k and W $340k.
1c. Corp Stocks
CP See above.
Since the stocks were acquired during marriage they are presumptively CP unless a special classification alters this.
Personal injury
If COA arose during marriage; if COA arose before or after marriage: SP.
On divorce: injured spouse's SP unless the interests of justice require otherwise, but community entitled to reimbursement.
Here, the injury seems to have occurred during marriage, making the settlement CP. Since H and W are getting divorced, the settlement (traceable to the stocks) will become his SP, but the community is entitled to reimbursement for any expenses it paid for his injury.
H gets stocks worth $600k but community may be reimbursed if it spent money on injury.
1d. ABDO Disability
CP
See above.
Disability during marriage so CP unless special classification.
Disability pay
Classification as SP or CP depends on what it is intended to replace (it does not matter when it is earned)
Here, the disability pay is intended to replace earnings since H was totally and permanently disabled and can no longer work and the disability provides 2/3 of his monthly pre-injury salary; thus, payments during marriage are CP and alter divorce are H's SP. During marriage, CP; after marriage, H's SP.
1e. Future ABDO Retirement
CP and SP
See above
Total pension/stock X # years of marriage while pension earned/Total # years pension earned = CP
The court can retain jx until 1995 and distribute the retirement then or deviate from the time rule and assign the entire pension to the earnings spouse and another community asset of equal value to the other spouse.
H worked for ABDO for all 33 years of marriage (assuming dissolution in 1990) making this entire amount CP, but if he continues to accrue the benefits from 1990 to 1995 then this portion will be his SP.
Total retirement x 33/38 = CP and then /38 would be H's SP.
Mostly CP but part SP if still accrues after marriage but before 1995.
2. W's education
Education
Education is never CP. The community is entitled to reimbursement if it paid for the education and the education substantially enhanced the earning capacity of the educated spouse.
Defenses to reimbursement could be denied or simply reduced.
1. Community already substantially benefited from the education (presumed if >10 years since education obtained)
2. Other spouse also received a community funded education/training, or
3. Education reduced the need for spousal support for the educated spouse
Here, W's professional credential is landscaping and is her Sp.
The community may be entitled to reimbursement because it paid for the education from H's ABDO earnings and the education likely enhanced her earning capacity since she was a homemaker previously and now is able to earn money by opening her own landscaping business.
Defenses:
1. If 1990 is year of dissolution, the education was only obtained 7 years ago but the community may have already substantially benefited because her business shaw been successful over the pas 6 years, as indicated by the $600,000 offer.
2. Not applicable.
3. Need for spousal support likely reduced since she can now support herself with her successful business.
W's SP but community may be reimbursed, but unlikely since strong defenses for reimbursement.