Opinion
B154240.
9-30-2003
In re Marriage of RICHARD M. and CYNTHIA CARLOMANGO GRITZ. RICHARD M. GRITZ, Respondent, v. CYNTHIA CARLOMANGO GRITZ, Appellant.
Keith Clemens, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.) Affirmed in part; reversed in part and remanded. Kaufman, Young, Spiegel, Robinson & Kenerson, Lance S. Spiegel and Elizabeth R. Potter for Appellant. David S. Karton for Respondent.
Cynthia Carlomagno Gritz (Wife) appeals from the trial courts calculation of the reimbursement rights of respondent Richard M. Gritz (Husband) under Family Code section 2640 and the trial courts reimbursement to Husband of post-separation separate property payments pursuant to Family Code section 2626. Wife claims that Husbands separate property equity should be reduced by the value of the original, now-destroyed house in Topanga Canyon and that he should not have received the section 2626 credits for post-separation on property that was treated primarily as his separate property for section 2640 purposes. Husband owned the property before marriage; after transferring the property to the community and refinancing, the parties remodeled the residence with community funds. Husband continued to make payments on the property following separation, living in the remodeled residence and eventually being awarded the property. We shall affirm the section 2640 reimbursement for the land and residence but shall reverse the section 2626 decision by which Husband was reimbursed all post-separation payments in excess of fair rental value, and we shall remand for reallocation of community property rights in light thereof.
Family Code section 2640 provides: "(a) `Contributions to the acquisition of the property, as used in this section, include downpayments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property. [¶] (b) In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the partys contributions to the acquisition of the property to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and shall not exceed the net value of the property at the time of the division."
Family Code section 2626 provides: "The court has jurisdiction to order reimbursement in cases it deems appropriate for debts paid after separation but before trial."
Unless otherwise indicated, all further statutory references are to the Family Code.
PROCEDURAL HISTORY AND STATEMENT OF FACTS
Although litigated thoroughly and at length in the trial court, the relevant facts are not in dispute for purposes of appeal. Husband and Wife married in September 1990 and separated in September 1995. Husband owned the subject property prior to marriage and transferred it to the parties jointly in 1992 when the property was refinanced. A massive remodeling job began which consumed years of time and community expense. From 1992 to 1995, the parties spent $1.2 million remodeling the residence. In the course of remodeling, much of the residences original structure, worth $240,000, was demolished. The trial court found Husbands separate property contributions to the remodeling of the Topanga home was $388,000, the difference between the value of the property at the time of the transfer and the encumbrance. Whether he should receive credit for the entire $388,000, as ordered by the trial court, or only the value of the land is at issue on appeal.
Other issues relating to allocation between separate and community property interests involved Wifes residence in Marin County, which she had owned with her former husband; Husbands pension; Husbands medical practice, and other assets. The only issues on appeal relate to the Topanga property.
Husband filed a petition for dissolution on July 18, 1996. Wife responded on December 6, 1996. Husband had exclusive use and possession of the residence following separation in September 1995 through the time of trial almost five years later. From September 1995 through December 1999, Husband paid trust deed, taxes and maintenance expenses for the residence; the allocation of credit for those payments are at issue in this appeal.
Husband sought bifurcation of various property issues in April 1998. He requested confirmation there is no community property equity in the residence and confirmation that any equity is his separate property. At the initial hearing on valuation of the subject property in May 1999, it was clear that Wife could not afford to handle the financial obligations of the house; her counsel thought the issue was whether Husband was going to have the house awarded to him or it would be listed and sold. Husbands counsel stated that "Dr. Gritz wanted to own this house" and that "the house was going to be awarded to Dr. Gritz" and the issue was "pricing it at what value."
The trial court valued the property at $1.1 million and the encumbrance at $669,000. The court found $388,000 of the equity was subject to Husbands Family Code section 2640 reimbursement claim and rejected Wifes contention that his separate property equity should be reduced by the value of the original structure that had been destroyed during the construction project. Thus, the court decided the net community equity was $43,000.
Wifes expert testified the property was worth $1,250,000. Husbands expert initially evaluated the property at $925,000, but later testified as to an increased evaluation of $1.1 million at the time of trial in May 1999.
The court reached the $43,000 figure by deducting from the $1.1 million value of the property the $669,000 mortgage and the $388,000 separate property reimbursement to Husband.
For his use of the property after separation, Husband was charged with the reasonable rental value of the property, which the trial court found to be $4200 per month. Husband paid mortgage, property taxes, and maintenance at a post-separation average of $7109 per month. The excess of $2909 per month (difference between the rental value and Husbands payments on the property) was charged to Husbands reimbursable expenditures, and the court found the period in which Husband was entitled to Epstein reimbursement for the 51.5 months from separation in September through December 1999, the end of the month in which the issues on the property issues were submitted to the court. The court charged Wife with one-half of that $149,814 paid by Husband during the post-separation period. Wife claims that this decision eliminated her share in the equity in the residence and resulted in her owing Husband $53,407. Wife filed a timely appeal for the judgment on reserved issues.
CONTENTIONS ON APPEAL
Wife contends: 1. The trial court erroneously applied Family Code section 2640. 2. The trial court erroneously applied Family Code section 2626.
DISCUSSION
1. Family Code section 2640, right to reimbursement for separate property contributions to community acquisition.
Family Code section 2640, subdivision (b), provides: "In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the partys contributions to the acquisition of the property to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and shall not exceed the net value of the property at the time of the division." (Italics added.)
Wife contends that any value from the original structure was destroyed during the construction project and the trial court "improperly failed to give significance to the joint-decision to contribute the value of the original structure to the transaction." By "ignoring the impact of the destruction of the original structure," the court according to Wife "placed the parties in unequal positions with respect to their community investment." That is, Husband "was able to mitigate loss by asserting that his reimbursement included the pre-construction value of the property" while Wifes share of the community investment was not subject to the same hedge, creating an inequitable allocation of risks.
According to Wife, section 2640 entitles Husband only to reimbursement of separate property monies that actually contributed to the acquisition of property equity. In her view, it is appropriate to distinguish between the structure and the raw land (Bono v. Clark (2002) 103 Cal.App.4th 1409, 1415-16, 1425, 1423-27 ["in this case, there may be reason to consider the value of the acreage separately from that of the home, if the improvements enhanced only the residence"]), and demolition of the residence eliminated any equity in the residence and no new equity was ever created.
At a minimum, Wife contends that the separate property equity should participate in the risk of the loss on a proportionate basis. She calculates that the value of the structure ($264,000) and the community contribution ($1.2 million) total $1,464,000. The structure represented 18.33 percent of the investment so Husbands separate property equity should be reduced by 18.33% of $264,000, or by $48,391.20.
Wife further argues that she is in a worse position pursuant to section 2640 because her name had gone on the property. She contends that if community funds had been used to make improvements to Husbands separate property, the community would be entitled to reimbursement of the funds (In re Marriage of Allen (2002) 96 Cal.App.4th 497; In re Marriage of Wolfe (2001) 91 Cal.App.4th 962, 965-972), and Wife would be entitled to reimbursement of $600,000, her share of the $1.2 million. However, once her name was on the title, the communitys reimbursement rights were subordinated to Husbands separate property equity, including the value of the structure that had been demolished. She argues that the protection for separate property contribution after an asset depreciates (because of passive market factors) after conversion to community property is not appropriate where the value of the contribution has been reduced because of affirmative actions taken by the parties.
Wife hypothesizes that if, the day before transfer, the wrecking crews arrived and destroyed the structure, it would be clear that the separate property contribution would not include the value of the structure. Where, as she contends occurred here, the parties had already decided to destroy the structure, Husband should not be able to be credited with the structure as his separate property.
Husband counters that the very purpose of section 2640 is to reimburse the contributing spouse with the value of his or her separate property continued as "the seed corn for a community investment," that the value is determined as of the time it was contributed to the community, and that the value is not reduced when the spouses decide to tear down the structure and build a new residence.
Wifes policy arguments are not unreasonable. The question before us is not whether a court may under any circumstances consider the demolition of a structure that was once part of the separate property of a spouse, but whether the court must do so and eliminate the value of that structure from the calculation of separate property. In the case at bench, given the chronology of ownership and demolition, both section 2640 and In re Marriage of Walrath (1998) 17 Cal.4th 907, 915, 917, 923, 1134, the primary case on point, support the result reached by the trial court.
The holding in Walrath, supra, 17 Cal.4th 907, 918, was that "the phrase `the property in section 2640 includes not only the specific community property to which the separate property was originally contributed, but also any other community property that is subsequently acquired from the proceeds of the initial property, and to which the separate property contribution can be traced."
Section 2640, formerly Civil Code section 4800.2, was the Legislatures reaction to In re Marriage of Lucas (1980) 27 Cal.3d 808 "`which precluded recognition of the separate property contribution of one of the parties to the acquisition of community property, unless the party could show an agreement between the spouses to the effect that the contribution was not intended to be a gift." (In re Marriage of Walrath (1998) 17 Cal.4th 907, 914; In re Marriage of Hebbring (1989) 207 Cal.App.3d 1260, 1269.) The legislative history of section 2640 reveals that the statue was intended to "`avoid the inequity that may result in a case where property taken in joint tenancy form is divided equally between the spouses despite a showing that one spouse contributed a substantial portion of separate funds to the acquisition. [Citation.]" (In re Marriage of Walrath, supra, 17 Cal.4th 907, 915.) Moreover, "In the normal reimbursement situation, the family residence was originally the separate property of one party only, and the measure of reimbursement is the fair value of the residence at the time of conversion to joint tenancy, less outstanding encumbrances and any non-gift community property contributions to principal before conversion." (In re Marriage of Rico (1992) 10 Cal.App.4th 706, 710; italics added.)
Wifes reliance on In re Marriage of Nicholson & Sparks (2002) 104 Cal.App.4th 289, 293-297 (Nicholson), is misplaced. Husband in Nicholson received gifts of $30,000 from his mother; those funds were used to pay credit card debts, which in turn allowed the spouses to purchase a residence. The court decided that the "payment of community credit card debt is not a contribution to the acquisition of property within the meaning of section 2640," id. at page 293, and "the payment of community debts prior to the acquisition of property, and unrelated to any improvement of the property does not, under any reasonable construction, convert the preseparation payment of community debts into a reimbursable contribution of separate property to the acquisition or improvement of community property pursuant to section 2640. If the Legislature intended such a result it would have had to enact a much broader statute providing for reimbursement of separate property used to pay community debts. It did not do so. Instead, in enacting section 2640 it limited reimbursement to the use of separate property for `acquisition or `improvement of community property." (Id. at p. 297.)
In the case at bench, the trial court did not err in finding the value of Husbands contribution of separate property to be the value of the house and the land. That was, in fact, his "contributions to the acquisition of the property to the extent the party traces the contributions to a separate property source." (Fam. Code, § 2640.) The entire property, land and residence, was Husbands separate property at the time of marriage and at the time of the community acquisition of the same property. The trial court merely followed the directive of the Legislature.
2. Family Code section 2626, courts ability to order appropriate reimbursement for post-separation payment of debts.
Husband paid mortgages, taxes, and other expenses related to the subject property after separation and has also lived on the premises years after the parties 1995 separation. The trial court charged him with the fair market value of the rental of the property and eventually credited him with all the excess post-separation expenditures, 51.5 months at $2,909, or $149,814. Wife argues that the trial court abused its discretion under section 2626 and that no case has held that reimbursement from the community is required for post-separation payments made to preserve an asset that is, as here, primarily the separate property of the payor.
In one of several prejudgment tentative opinions, the trial court acknowledged that, given Husbands continued occupancy of the Topanga property since separation and the award of that property to him, "it would be inequitable to impose Epstein reimbursement obligations on [Wife] that exceed the communitys interest in [that property.]" The court therefore initially found that the community owed Husband only $50,000 for reimbursement for post-separation payments of community obligations on [the Topanga property.] The court also imposed Watts charges of $1200 per month for Wifes use of the Topanga guest house from October 1996 through October 1997, or $15,600. In its final judgment the court ordered Wifes Watts obligations to the community for use of the guest house in the sum of $15,600 but, as explained above, credited Husband for Epstein reimbursement of $149,814.
In re Marriage of Reilley (1987) 196 Cal.App.3d 1119, 1124, on which Wife relies, reversed an order crediting husband for all his payments in improving certain community property with his separate earnings after separation and remanded to the trial court to exercise its discretion in a redetermination of husbands entitlement to reimbursement, using such factors as increase in value to the community property; any agreement by the parties that the improvement be made; and necessity of the improvement to preserve the asset. The Reilley court recognized that the proper amount of reimbursement is "not necessarily the amount husband paid for the improvements made . . . [p]articularly when, as in this case, the result is substantial elimination of the community equity." (Id. at p. 1123.) As Husband notes, Reilley concerned reimbursement for improvements made post-separation, not payments of a pre-separation community debt.
Family Code section 2626 ["The court has jurisdiction to order reimbursement in cases it deems appropriate for debts paid after separation but before trial"] is the controlling section when separate property is used to pay a preexisting community obligation after separation. (See Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2003) § 8:844, p. 8-208; In re Marriage of Epstein (1979) 24 Cal.3d 76.)
"The general rule governing the right of reimbursement of one spouse for sums expended after separation to preserve and maintain the community property was reiterated in In re Marriage of Epstein (1979) 24 Cal.3d 76, 84 [154 Cal.Rptr. 413, 592 P.2d 1165], as follows: [¶] `"[A] spouse who, after separation of the parties, uses earnings or other separate funds to pay preexisting community obligations should be reimbursed therefor out of the community property upon dissolution." (Ibid., quoting In re Marriage of Smith (1978) 79 Cal.App.3d 725, 747 .) [¶] However, both In re Marriage of Smith, supra, and In re Marriage of Epstein, supra, 24 Cal.3d 76, recognize that there are a number of situations in which reimbursement is inappropriate. The Epstein court stated as follows: `"Reimbursement should not be ordered if payment was made under circumstances in which it would have been unreasonable to expect reimbursement, for example, . . . where the payment was made on account of a debt for the acquisition or preservation of an asset the paying spouse was using and the amount paid was not substantially in excess of the value of the use." (Id.at pp. 84-85, quoting In re Marriage of Smith, supra, 79 Cal.App.3d 725.)" (In re Marriage of Tucker (1983) 141 Cal.App.3d 128, 136; accord In re Marriage of Reilley, supra, 196 Cal.App.3d 1119, 1123; In re Marriage of Baltins (1989) 212 Cal.App.3d 66, 86.)
As explained in In re Marriage of Garcia (1990) 224 Cal.App.3d 885, 890-891: "Where one spouse has the exclusive use of a community asset during the period between separation and trial, that spouse may be required to compensate the community for the reasonable value of that use. (In re Marriage of Watts (1985) 171 Cal.App.3d 366, 372-374 ; In re Marriage of Tucker (1983) 141 Cal.App.3d 128, 136 ; Hogoboom & King, Cal.Practice Guide: Family Law (1990) 8:196.1.) A corollary of this principle is that where the asset is not owned outright by the community but is being financed, and the monthly payments equal or exceed the reasonable value of the assets use, the spouse may satisfy the duty to compensate the community for use of the asset by making the monthly finance payments from his or her separate property. [Citations.] [¶] This duty to compensate often is invoked to reject a claim by the paying spouse that the community should reimburse him or her for the monthly payments even though the spouse had the exclusive use of the asset. `Thus, reimbursement will usually not be ordered for payments on obligations on the family home made by the spouse remaining in the home, or for automobile payments made by the spouse using the vehicle between separation and trial. (Hebbring, supra, 207 Cal.App.3d at p. 1271, 255 Cal.Rptr. 488.)" (Italics added.) Moreover, "Epstein does not mandate full reimbursement in all cases, but allows the trial court discretion to order reimbursement in an amount that is equitable. (See, e.g., In re Marriage of Reilley, supra, 196 Cal.App.3d at pp. 1123-1124.)" (Hebbring v. Hebbring (1989) 207 Cal.App.3d 1260, 1272.)
As stated in Hogoboom, supra, § 8:844, The courts "broad discretion" is "to be exercised with regard to equitable considerations as developed by case law (`Epstein guidelines, below). [Marriage of Hebbring (1989) 207 Cal.App.3d 1260, 1272, 255 Cal.Rptr. 488, 495; see Marriage of Feldner [(1995)] 40 Cal.App.4th [617] 624-625 [](citing text)]."
Wife argues that reimbursement is thus subject to the courts discretion under section 2626 and no case has held that reimbursement from the community is required for post-separation payments made to preserve an asset that is, as here, primarily the separate property of the payor. Moreover, Wife contends that Husband "adamantly resisted all efforts to sell the property and then sought reimbursement for post-separation debt service that eliminated the communitys equity in the property." She argues that such reimbursement was inequitable in that the post-separation payments were for the benefit of Husbands separate property estate and not to preserve a community asset (In re Marriage of Feldner (1995) 40 Cal.App.4th 617, 625; In re Marriage of McNeill (1984) 160 Cal.App.3d 548, 563.)
Wife asserts that the ruling provides "an unconscionable windfall to [Husband], who refused to comply with previous orders to sell the property at an earlier date" and that, if Husband had not disregarded a stipulated order to list the property for sale, the Epstein issue would have been moot.
Wife argues that Husbands Epstein position creates a windfall by ignoring that 88% of the equity in the residence is his separate property as a result of the application of Family Code section 2640. (In re Marriage of Braud (1996) 45 Cal.App.4th 797, 820-821 [discussing valuation upon deferred sale of residence lived in by former wife and children, part of which residence was husbands separate property].)
The record seems to indicate that the trial court may have felt bound by the Epstein/Watts formula to credit Husband with his payments over the fair rental value of the property. The courts original tentative decision limited Husbands reimbursement claim for post-separation mortgage, property taxes and maintenance payments to $50,000. In its later tentative dated June 18, 2001, stating that Husbands expenditures for the mortgage, property taxes and maintenance that exceed fair rental value "were obligations of the community and should be paid by the community," the court gave Husband credit for all excess payments. According to Wife, the court ignored Wifes 1999 motion to compel listing the property, erred in concluding it had no discretion, and abused its discretion to the extent it was exercised.
Husband counters that In re Marriage of Epstein, supra, 24 Cal.3d 76, entitles Husband to reimbursement for post-separation payments of pre-existing community debts made by him from his separate property. He characterizes his payments as fulfilling the communitys legal obligation to pay the community debt, thus protecting both spouses credit ratings. Had he not made the payments, the full amount of the mortgage obligation would have been offset against community assets.
Husband argues that under In re Marriage of Epstein, supra, he is entitled to reimbursement of separate property amounts he paid after separation to satisfy community debt, no matter what the communitys equity in any particular asset or how the physical assets of the marital estate were divided. He asserts that Wife is attempting to add two new criteria to Epstein reimbursements: 1) who ends up with an asset and 2) how much community equity is left in an asset. (See In re Marriage of Rosen (2002) 105 Cal.App.4th 808, 828 [the trial court erred in failing to give husband credit for payment of debt service on a community loan created during the marriage where none of the Epstein exceptions applied].)
Here, the trial court credited the fair rental value to Husband and reimbursed him by the amount his payments exceeded the fair market rental value. Husband contends that Wifes argument would create a great inequity and that any delay was because of Wifes lack of candor with the court.
Given the particular facts in the record before us, we find that the trial court abused its discretion in reimbursing Husband all of the excess post-separation payments he made on the subject property. Husband remained in the property for years after separation, clearly intended to retain the property, knew his credit of separate property contribution if granted would amount to most of the equity in the property, did not want to sell the property, and was preserving what he intended to (and did) become his separate property. Rather than preserving a community asset, he was preserving what he knew would be his separate asset. Under these circumstances, the trial court abused its discretion in reimbursing all of the payments in excess of fair rental value to Husband.
DISPOSITION
The order reimbursing Husband $388,000 for his separate property contribution is affirmed. The order for reimbursement of Husbands excess post-separation payments on the Topanga property is reversed, and the matter is remanded for reallocation of the community property division in light of this opinion. Costs and attorneys fees on appeal are to be determined by the trial court.
We concur: RUBIN, J., BOLAND, J.