Answers to Summer 2011
California Bar Exam Questions

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Summer 2011 Bar Question 6

Community Property

In 2003, Wendy and Hank were engaged to be married. They discovered that the $10,000 monthly income Wendy derived from a trust fund would terminate upon her marriage or upon her reaching the age of 25, whichever came first. Therefore, they decided to postpone their wedding until Wendy’s 25th birthday, in 2006, and instead began to live together.

Also in 2003, Wendy and Hank agreed that Wendy would pursue a master’s degree in education and that Hank would quit his job and stay home, taking care of the household chores. Wendy opened a checking account in both of their names, into which she deposited her $10,000 monthly trust income. Wendy used funds in the checking account to pay living expenses for Hank and herself. Wendy also used funds in the checking account to buy a new car. She put title to the car in both of their names.

In 2006, Wendy and Hank married. Wendy’s $10,000 monthly trust income terminated. Afterwards, Wendy began teaching at a local college.

In 2008, Wendy learned that her compensation was less than that of her male counterparts and made a claim against the college.

In 2009, Wendy separated from Hank and filed an action for dissolution of marriage. Shortly afterwards, she settled her claim against the college in return for additional salary in the amount of $10,000 per year for the next three years.

Unbeknownst to Wendy, Hank had run up a gambling debt to a casino during their marriage. At the time of their separation, Hank owed the casino $50,000.

Upon dissolution of marriage, what are Wendy’s and Hank’s rights and liabilities with respect to:

1. The car? Discuss.

2. The $30,000 in additional salary under the settlement? Discuss.

3. The $50,000 owed to the casino? Discuss.

Answer according to California law.

All questions © 2011 California State Bar Exam. All rights reserved

Community Property
Question 6, Summer 2011

1. THE CAR.
What was H and W’s relationship 2003-2006?
To analyze the rights to the car at dissolution, it is necessary to determine the status of H and W’s relationship from 2003 to 2006.

Theory 1: Separate property.
In general, California law requires that parties must be formally married in order for the courts to treat their property under community property law.

Here, H and W were not formally married in 2003-2006. Therefore, under Theory 1, all of W’s property is her separate property.

Theory 2: Implied contract.
There are several exceptions to California’s formal marriage rule.

A. Common law marriage. While other states permit co-habitation for a defined period of time to create a common-law marriage, California does not.

B. Putative spouse. California extends the protection of community property treatment of property where at least one of the parties to a relationship believed in good faith that the couple was validly married. Here, H and W agreed not to marry in order to preserve W’s trust fund. Both of them were aware that they were not married.

C. Contract. Where parties expressly agree to treat their property as if they are married, the courts may find that a contract exists and the courts will refer to community property law to interpret the intent of the parties under the conract.

Here, H and W did not expressly agree to treat their property as if they were married, so far as we are told. In the absence of an express agreement and in light of California’s reluctance to extend marital treatment without the formalities of marriage, a court may refuse to find a contract.

Executed agreement. However, where an implied agreement is executed, the courts may find sufficient certainty that a contract was formed. Here, in 2003, H and W found it financially beneficial not to marry in order to continue receiving $10,000 a month in trust payments. H and W lived together, and W placed the $10,000 a month in a joint checking account. She paid all household bills out of the joint account. All H and W’s actions are consistent with an agreement to treat their relationship as a community. Therefore, the court may find an implied contract and refer to community property principles to interpret the intent of the parties.

Detrimental reliance. Further, where there is detrimental reliance on the part of one of the parties, the other party to the implied agreement may be estopped from denying the existence of an implied contract. In that case, the court may use equitable principles to impose a contract.

Here, in 2003, H and W further agreed that W should pursue her education, a master’s degree. H agreed to quit his job and to maintain the household. H gave up his paying job in order to serve the joint interests of H and W by permitting her to get an advanced degree. H’s sacrifice of his income could be see as detrimental reliance, thus estopping W from denying that she intended to form a community.

Under an executed oral contract and detrimental reliance principles, a court may find that H and W entered into an implied contract to treat their property as if they were married and community property law would apply to interpret their contract.

The bank account.
Title theory.
The money for the car came from the bank account. The question is what was the character of those funds?
Theory 1. Under a separate property theory, an asset taken in a joint form of title would be held as tenancy in common. Each party would have ownership and control over half of the asset. Here, W opened a bank account “in both their names.” A court may be persuaded that the appropriate treatment of this is as a tenancy in common.

Theory 2. Under a contract-Community Property theory, when a married person titles an account in a joint form, the law transmutes the title to community property. Here, W titled the account “in both their names.” A court interpreting their agreement might find the bank account is co-owned, with each having equal management and control over the entirety, as it would be if it were in community property title.

The trust.
Source theory.
What was the character of the funds in the bank account?
Theory 1. The trust is W’s separate property.
Theory 2. All property acquired during marriage is community property, except bequests. Here, W was the beneficiary of a trust. A trust is a testamentary instrument, under California probate code. The income from the trust is W’s separate property, even if it is received during “marriage.”

Effect of placing trust income into the joint account.
Commingling. When fungible assets of different character are placed together, the result is commingling. The entire asset is characterized as community property.

Here, W created a joint checking account in both H and W’s name. This would be community property. Yet, the funds in the account, the income from the trust, is separate property.
The account is commingled and it is entirely community property.

Tracing. Direct tracing permits identification of separate property back to its source so that it can be recharacterized as separate property when two things are present 1) the separate property funds are easily identifiable and 2) the party convinces the court that she intended to retain the asset as separate property.
1) Identified. Here, the only deposits in the bank account in 2003-6 were W’s trust income and that is a bequest and is her separate property. Therefore, the funds are easily identifiable.
2) Intent. It is presumed that funds used to pay CP expenses are CP. Here, W paid all their living expenses from the checking account which tends to show she thought of the funds as CP. W may have difficulty convincing a court her intent was to maintain the trust funds as separate property.

Conclusion. The court may allow tracing and treat the trust income as W’s separate property. IT is more likely the court would find it is commingled and that W’s intent was to treat it as “community property.”

Title to the car.
Theory 1. W used her separate funds to buy the car and titled it in both W and H’s names. A court would probably find the title to be tenancy in common. H has an undivided half interest in the auto.

Theory 2. Under community property law, the title to property is presumed to control its character, absent self-serving actions. Here, W took title in both their names. This was not self-serving, since she used “community property” and titled it jointly. Therefore, the car is a joint tenancy. A family law court treats all jointly titled property of married people as community property. Since H and W are not really married, it is not certain if a court would treat it as Community Property.

Conclusion, under either Theory 1 or Theory 2, H and W have an undivided half interest in the auto and has equal management and control over the entire auto.

2. ADDITIONAL SALARY SETTLEMENT
Generally, earnings is community property during marriage and separate property following permanent separation. Here, W will receive $10,000 a year more pay for the next three years, after H and W have permanently separated. An argument could be made that this is earnings W received after H and W permanently separated is income and therefore her separate property.

However, the additional income is due to a settlement for a sex discrimination claim that occurred during the marriage.

A settlement or judgment from a tort that occurred during marriage is community property. Here, the college paid W less than her male counterparts in 2006 through 2008, while H and W were married. Therefore the tort occurred during marriage.

Therefore, the settlement is community property.

3. GAMBLING DEBT
Generally, debts incurred during marriage are community property. Here, H acquired gambling debts during marriage of $50,000. Therefore, it would appear that this obligation is community property.

However, certain debts are the separate property of the acquiring spouse, even though they are incurred during marriage. Where the debt does not benefit the community and was incurred without knowledge of the other spouse, a court may find it to be a separate property debt. Here, H gambled and ran up $50,000 of debt. This activity does not benefit the community and in fact is harmful to the community since it drains its resources. H’s gambling was done without knowledge or consent of W. A court in this case is likely to term this obligation to be the separate debt of H.

A creditor can reach any property over which the debtor has management and control. Each spouse has equal management and control over his or her own separate property and over all of the community property. Here, a creditor can reach H’s separate property or the community property.

The car. If the car is community property, the creditor can reach the entire car. If the car is held as tenants in common, then the creditor could reach only that part over which H has management and control—half of the value of the auto.

The bank account. This is jointly titled and will be treated as either a joint tenancy or community property. In either case, the casino can reach all the assets in the bank account.

Bank account exception. When community property earnings are placed in a bank account held in the nondebtor’s name alone and the debtor spouse has no access to the account, the bank account is protected from the debtor’s creditors.

However, here W titled the account in both H and W’s names. Therefore, this exception would not apply to protect the account from the casino’s reach.

Therefore the creditors can most easily reach the bank account assets. It can also reach all or half the value of the car, depending on what its form of title is.

Can the community property be reimbursed for H’s gambling debts?

If the separate property debtor had separate assets out of which to pay the debts at the time they were incurred, then the court may order the separate property to reimburse the community for debts it paid.

Here, as far as we are told, H did not work from 2003 until the couple separated. It would be difficult to image that H had any separate resources from which to reimburse the community. However, if the title to the car is one half H’s separate property and one half W’s separate property, then half the value of the car at separation can be ordered to be paid to the community to satisfy part of the gambling debt.

If, on the other hand, the contract/CP theory applied
to the car, the entire care is already community property. However, if the court were to consider making an equitable award to H for his housekeeping services, it may label part of the community property as H’s reimbursement for services and then award it back to the community to satisfy part of the gambling debt.

Compensation for household work. Under a Marvin theory, H may make a claim to be reimbursed for the household services he provided from 2003-2006. If he is awarded any funds, they are another source of H’s separate property that could be used to reimburse the community property for some of his gambling debts.

Answers © 2012 Vivian Dempsey, The Writing Edge™ All rights reserved.

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