Except as otherwise provided by statute, all property, including real estate and personal property, acquired by a married person during the marriage while domiciled in California is community property. (Family Code section 760.) Separate property of a person includes all property owned by the person before marriage, all property acquired by the person during the marriage by gift, bequest (i.e., a gift of personal property in a will), devise (i.e., a gift of real estate in a will), or descent (i.e., received under the state laws of inheritance when no will exists), and the rents, issues, and profits of that property. (Family Code section 770(a).) The earnings and accumulations of a spouse after the date of separation are the separate property of that spouse. (Family Code section 771(a).)
In California divorce or legal separation proceedings, unless the parties agree otherwise, the trial court is required to divide the community property equally between the spouses. (Family Code section 2550.)
Whenever one spouse brings into the marriage a home used as collateral for a mortgage loan, and the spouses’ community funds are used to pay down the loan during the marriage, the community estate gains an increasing beneficial interest in the home as the loan’s principal balance is paid down with community funds and equity grows. California law provides a formula by which to apportion the property’s value between the legal titleholder’s separate estate and the community estate’s beneficial interest. This is known as the Moore/Marsden rule, which gives the community estate a pro tanto community property interest, which is at least an equitable interest if not a legal (title) interest.
Under Marriage of Moore (1980) 28 Cal.3d 366, the community estate is awarded at the time of the division of the spouses’ property a reimbursement in an amount equal to the community funds used to pay down the principal balance of the mortgage loan on property purchased by one spouse before the marriage. Additionally, the community estate is reimbursed for the pro tanto community property interest in the marital appreciation in value of the home, calculated by the fraction of the total loan principal pay down with community funds creating equity in the property as the numerator and the purchase price as the denominator.
Two years later, Marriage of Marsden (1982) 130 Cal.App.3d 426 changed the calculation of the reimbursement to award any premarital appreciation to the spouse who brought the property into the marriage but otherwise uses the same formula as did Marriage of Moore. The community estate is reimbursed for its share of the appreciated value from the date of marriage to or near the time of trial unless the trial court orders that an earlier date after the parties’ separation is to be used instead. (Family Code Section 2552.)
For this post, I consider the appellate opinion in Marriage of Mohler,* which addresses Husband Greg Mohler’s appeal from a creative argument brought at trial by Wife Jodie Mohler to increase the percentage of the community’s beneficial interest (and therefore Wife’s one-half share of that interest) in Husband’s home based on Husband’s payment of the mortgage loan for six years after the parties’ separated. The Riverside County trial court agreed with Wife’s argument.
Husband purchased the home for $168,000.00 before marriage. Because he purchased it before the marriage, it was his separate property during the marriage. At the time of marriage, the home was worth $185,000.00. The parties lived in Husband’s home for 12 years prior to their separation during which time they paid down the mortgage loan principal by $56,557.00 using community funds (meaning funds acquired during the marriage and not by way of gift or inheritance). Under the Moore/Marsden rule, this $56,557.00 had to be reimbursed to the community estate.
The mortgage loan paydown with community funds represented payment of 33.6 percent of the purchase price [56,557/168,000 = 0.336] during the 12 year marriage through the date of separation. The parties stipulated at trial that the community estate acquired a 33.6 percent interest in Husband’s home.
During the marriage through the date of trial, the fair market value of the home increased from $185,000.00 to $530,000.00 for an equity gain of $345,000.00. To complete the Moore/Marsden rule’s formula, added to the reimbursable $56,557.00 was the value of 33.6% of the $345,000.00 in appreciated value, or $116,127.00, for a total reimbursement of $172,684.00 owed by Husband to the community estate.
However, Husband continued to live in the home for another six years before their divorce proceedings were brought to trial, which would seem harmless enough. During this time, he paid the mortgage loan with his post-separation earnings, which were his separate property.
However, Wife argued at trial that the community estate’s beneficial interest had increased above the 33.6 percent based on the six years after their separation during which time Husband paid down the mortgage loan with his separate funds. Wife argued that because the community had acquired a 33.6 percent interest, that community interest should grow as the equity grew. This argument seems somewhat nonsensical because the Moore/Marsden rule is based on the beneficial increasing as community funds, as opposed to separate property funds, pay down principal balance. Husband continued to use his separate earnings pay down the mortgage loan’s principal balance by an additional $52,482.00 during the six years after the parties separated. According to Wife, after the parties’ separation, the community’s beneficial interest grew to 64.9 percent. The trial court agreed and awarded the community the sum of $223,905.00 [$345,000.00 x 0.649] as the community’s beneficial interest in the appreciated value.
On Husband’s appeal, the appellate court disagreed. It held the trial court erred in using the Moore/Marsden rule to apportion the increased value from Husband’s separate property earnings reducing the principal balance and increasing the equity: only when community funds are used to build equity can the community’s beneficial interest grow. After separation, earnings and accumulations of a spouse are that spouse’s separate property. Wife’s argument was flawed because no community funds were used to pay down the principal balance after the parties’ separation. And just has Husband’s use of separate property funds before the marriage which reduced the principal balance and grew equity did not increase the community’s interest in his home, neither did his post-separation payments.
The appellate court’s decision is no surprise and is consistent with the Moore/Marsden rule. Wife had “confused” two separate legal concepts: the Moore/Marsden rule, which creates an equitable interest when “community property is being invested in . . . separate property by creating equity in it”; and, Watts charges, which may be assessed against a spouse who obtains a benefit from the use of a community property after the date of separation, a ruling enunciated in Marriage of Watts (1985) 171 Cal.App.3d 366.
The Mohler appellate court then held for the first time 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 due to the Moore/Marsden rule.” The appellate court rationalized its decision in this fashion: had Husband rented the home rather than lived in it for six years after the date of separation, the community would have been credited with a 33.6 percent share of the amount of the net rental profit after expenses. It should be no different when he lived there himself post-separation.
The appellate court then sent the case back to the trial court to determine the actual community beneficial interest (33.6 percent) and whether Watts charges should be assessed against Husband and in what amount.
This case interests me for several reasons. The mere fact that Wife change the law to her benefit, but not in the way she intended. The appellate court effectively ruled that Watts charges are now available whenever the community estate acquires any “constructive or beneficial equity interest” whatsoever as opposed to legal title. Wife used a creative argument for separate property rental payments to increase the community beneficial interest in the appreciated value of the home, and she ended up getting a reimbursable interest in rental value using the Moore/Marsden rule to calculate the community estate’s percentage in the net profit that would have occurred.
The appellate court quoted the language in Marriage of Moore: “Although the trial court designated the community’s interest as an ‘equitable charge on/right,’ it is clear under California law that the interest is properly characterized as a community property interest in the house. . . .”], meaning the community interest could be interpreted as not just a beneficial (reimbursement) interest but a legal one. The appellate court expressly stated it was not determining whether the community interest under the Moore/Marsden rule was just an equitable interest or a legal one, but then it decided Watts charges against Husband may be owed to the community estate using the Moore/Marsden formula, or 33.6 percent of the net rental profit of Husband’s use.
It seems that the appellate court determined the community interest is more than just an equitable one, one where rents must be apportioned between the owning spouse and the community but title remains in the owning spouse’s name. This ruling appears inconsistent with Family Code section 770 in that only the owning spouse of a separate property home is entitled to rents. Use of the Moore/Marsden rule should be limited to an equitable reimbursement interest where one spouse has always held legal title.
Imagine the unfairness to the legal titleholder of a home, here the husband, having to pay Watts charges to the community estate as a percentage of the home’s net rental value over the six-year period he lived in his own home!. In a footnote, the appellate court related that, under Marriage of Nelson (2006) 139 Cal.App.4th 1546, an owning spouse cannot receive credit for the fair rental value of the home’s use while spouses live there together because, under the Moore/Marsden rule, the community is limited to compensation for the equity built on paying down the mortgage loan principal and not “credit expenses” incurred while living there. But when one spouse lives in his or her own home post-separation, the community estate can now receive credit for a portion of the net rental profit using the Moore/Marsden rule. I do not yet understand the reasoning.
This case invites Watts charges whenever a party brings a home with a mortgage loan into the marriage.
*Some or all of the facts and analysis are paraphrased or my interpretation of this appellate opinion, and portions have been omitted or abbreviated. I did not participate nor did I represent any of the parties or witnesses in this case.