California’s community property system generally works like this: any property owned by one spouse before a couple marries is separate, and any property obtained by one or both spouses during the marriage is community property (with some exceptions) to be split evenly between them upon divorce. But what happens when a spouse is listed as co-owner of separate property during the course of the marriage? Is that enough to make it community property? California’s Second District Court of Appeals recently took up this question. The answer: it depends.
Husband was working as a police officer in 1971 when he and two friends created a partnership to invest in property. He kicked in a little more than $3,000, and the partnership used revenue to acquire more property and pay expenses. He married Wife in 1990. When the partnership sought a loan to complete a tax-deferred exchange deal in 1995, Husband asked Wife to sign on. He later said he believed that the bank would require him to have Wife sign the loan because he was married at the time. Wife, however, said that her credit was used to help secure the loan. The partnership executed an extension of their agreement in which Husband and Wife were listed as 1/3 owners of the entity. They also signed a statement of partnership with Husband and Wife listed as joint owners.
Husband and Wife separated 10 months later. In 2003, the partnership sold its two remaining properties for more than $1.6 million and was dissolved. A trial judge ultimately ruled that the partnership interest became community property when Husband and Wife signed the amended partnership agreement. As a result, the judge said Wife was entitled to a piece of any rents from and appreciation by all properties obtained by the partnership after that time.
Reversing the decision on appeal, however, the Second District said the modification agreement wasn’t enough to convert Husband’s separate property interest in the partnership to a community property interest. That’s because it didn’t qualify as a valid “transmutation” of property under Section 852 of the California Family Code. The statute requires a writing to expressly declare that a property interest is being changed from separate to community in order for it to be enforceable. “Though no particular terminology is required, the writing must reflect a transmutation on its face, and must eliminate the need to consider other evidence in divining this intent,” the Court said. Here, the court found no such language in the partnership modification agreement. As a result, the Court said Husband retained his separate property interest in the partnership.
If you’re considering a divorce in California, it’s important to seek the counsel of an experienced family law attorney. Contact San Jose family law lawyer John S. Yohanan. With more than 30 years of experience, Mr. Yohanan is an accomplished family law attorney who has helped a number of clients resolve a property disposition and a wide variety of other issues on optimal terms. Call our office at (408) 297-0700 or contact us online to schedule a consultation.
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