A recent California Court of Appeals case from the Second District has clarified when separate property becomes community property, and when the community can expect to receive a portion of that property. In the case titled In re Marriage of Lafkas, John Lafkas had been a founding member of a partnership that held several pieces of real estate in the Los Angeles area for a number of years before John met his future wife, Jean. The partnership, Smile Enterprises, was founded in 1971, and John and Jean married in 1990. When exchanging one of the properties owned by the partnership in 1995 as part of a tax-deferred exchange, the partnership required a loan for the difference between the exchanged properties’ prices. John, testifying that he believed the bank needed Jean to be added to the partnership now that he was married, asked Jean to participate in the loan application. However, Jean testified that the partnership needed her to participate in order to qualify for the loan because of her good credit. The parties created a document titled a “Modification and Extension of General Partnership Agreement,” naming her as a partner, and recorded a statement of partnership in June of 1995 listing Jean Lafkas as a partner to Smile Enterprises.
The parties separated in April of 1996 and filed for divorce that May. While a judgment of dissolution of the marital status only was entered in May of 2000, John later requested a separate trial regarding Smile Enterprises, seeking a judgment that, since no document expressly declared that his separate property interest was transmuted into a community property interest, Jean had no interest in the partnership. Jean argued that under partnership law, she had acquired an interest under the partnership modification. Jean testified to the fact that she had initially expressed concerns over being named a partner because she did not want to acquire any liability, but that John had shown her the property and convinced her that they would take care of themselves. She believed that her participation was necessary because of her income, and described how she had previously been listed on the title to property that John had refinanced, then signed quitclaim deeds to be relieved of liability for those properties. When she signed the partnership agreement, she believed she had acquired both an interest and liability for anything that might happen on the properties.
At trial, the judge determined that the requirements of Family Code section 852 requiring an express declaration to transmute separate property into community property had been met regarding the real estate acquired during John and Jean’s marriage. The modified partnership agreement referred to John and Jean as “husband and wife,” substituting the couple for John’s 1/3 interest, and the partnership had use of Jean’s name and credit for the purchase. The court determined that this community interest applied only to purchases and rent proceeds of the partnership after the modification was filed, and not to John’s interest in properties purchased by the partnership before June of 1995.
What’s in a name?
The Court of Appeal explained that, over the last two decades, the legislature has attempted to clarify the laws and rules on transmuting property, with the goal of requiring a clear writing stating that the party is intentionally transforming separate property into community property. The court ruled that more is required to transmute separate property into community property than simply naming one or both spouses in a title document. The court found that, since there was no clear statement in the modification that John understood and intended that his formerly separate property was becoming community property as required by Family Code section 852, the modification didn’t accomplish this. However, the court went on to state that this conclusion doesn’t rule out the possibility that the community had an interest in property acquired by the partnership after the marriage. Proceeds of a loan made based on one spouse’s creditworthiness become community property, and so the court requested information on whether the bank relied only on separate property or community property when issuing the loan. The Court of Appeal reversed the trial court’s determination that the property purchased after John and Jean were married was necessarily community property, but ruled that, if Jean’s credit was relied upon for the purchase of the property after the partnership was modified, she would have a proportionate share in the partnership.
Separating property after a divorce can be an arduous and complex process. Find an attorney whose experience and knowledge you can trust. For a free consultation on your divorce or other family law issues, contact the Law Offices of Andy Cook, at 619-515-9900.