The 2005 amendment to Family Code section 2640

Recently, the ACFLS  listserv members discussed the 2005 amendment to Family Code section 2640 and the legislative intent behind that amendment.  Below is a review of the legislative intent and an attempt to answer questions about the amendment that have not been decided in case law.

Did the 2005 amendment to Family Code section 2640, subdivision (b) abrogate the “Identifiable Asset Rule” of Walrath?

Former Civil Code section 4800.2 (effective January 1, 1984) provided in relevant part:

In the division of community property under this part unless a party has made a written waiver of the right to reimbursement or signed a writing that has the effect of a waiver, the party shall be reimbursed for his or her contributions to the acquisition of the property to the extent the party traces the contributions to a separate property source. (Emphases added.)

In Marriage of Craig (1990) 219 Cal.App.3d 683, the husband argued that the use of the specific term “community property” in 4800.2 excluded quasi-community property from the code section. The court disagreed, finding that Section 4800.2 also applied to quasi-community property. In a marriage dissolution or legal separation proceeding, the quasi-community property is deemed part of the community estate and thus is divided exactly as if it were true community property pursuant to Family code section 2500, et seq. (Fam. Code § 63 – “community estate” includes both community property and quasi-community property”; and Fam. Code § 2502 – “separate property” does not include quasi-community property.)

In a dissolution or legal separation proceeding, the bundle of rights in quasi-community property is determined under California community property law (equal division, rights of reimbursement, etc.). “California’s marital property laws are designed to provide for uniform treatment of quasi-community and community property when the parties have changed their domicile to this State and seek to legally alter their marital status in a California court. (Marriage of Craig, supra at p. 686.)

In 1994, Section 4800.2 became Family Code section 2640, with a few changes. In Section 2640, subdivision (b), the term “community property” was replaced with the term “community estate.” The 1993 Law Revision Commission explained why this replacement was made:

In subdivision (b), “community estate” has been substituted for “community property” to codify case law holding that this provision applies to quasi-community property as well as to community property. See In re Marriage of Craig, 219 Cal. App. 3d 683, 268 Cal. Rptr 396 (1990).

In Marriage of Walrath (1998) 17 Cal.4th 907, the majority opinion found that the property from which a Section 2640, subdivision (b) reimbursement can be satisfied is the initial asset to which the contribution can be traced or a subsequent asset that was acquired using the sale proceeds of the initial asset (the “Identifiable Asset Rule”). The majority emphasized that the party seeking reimbursement cannot look to community assets that were not acquired with separate funds.

The dissenting opinion of Justice Baxter in Walrath took a different approach. This opinion ignored the fact that the 1993 change from “community property” to “community estate” was a minor clarification based on Craig, and instead insisted that the entire “community estate” was burdened by a reimbursement claim – every community asset could be used to reimburse the separate property contribution to the acquisition of just one asset.

In Marriage of Cross (2001) 94 Cal.App.4th 1143, the court correctly found that Section 2640 did not apply to reimbursement claims for separate property contributions of one spouse to the separate property estate of the other spouse. Case law offered no relief either, since such a contribution was presumed a gift.

In 2004, Senator Sheila J. Kuehl introduced Senate Bill 1407 (2003-2004) (“The Bill”), which targeted the Cross decision head-on. The Bill, as introduced, initially amended Section 2640 to add Subdivision (c), as follows:

(c) A party shall be reimbursed for any separate property contributions made to the separate property estate, including assets or debts, of the other spouse during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values. (Emphasis added.)

This provision would have created a sweeping change to existing law by requiring reimbursement not only for contributions to the acquisition of an asset, but also for the payments of a debt. This version of The Bill received substantial opposition.

The 2003-2004 Senate Judiciary Committee analysis report for the April 27, 2004 hearing on The Bill (the “Senate Judiciary Report”) noted the following opposition from the Family Law Section of the Los Angeles County Bar Association:

As presently drafted, SB 1407 grants too broad a right of reimbursement and would appear, for example, to permit reimbursement for separate property contributions for such expenses as interest, maintenance, insurance and taxes, items for which reimbursement is not currently allowed under Family Code Section 2640.

If SB 1407 as presently drafted indeed grants such a broad reimbursement right, it goes too far beyond the definition of “contributions to the acquisition of property” currently set forth in Family Code Section 2640(a) and would permit undeserved windfall reimbursements out of harmony with Family Code Section 2640 and current case law.

According to the Senate Judiciary Report, The Family Law Section of the Los Angeles County Bar Association stated that if The Bill were amended to limit the type of reimbursement permitted to be consistent with Family Code Section 2640 and current case law, it would withdraw its opposition and view The Bill . . .

. . . as a needed and appropriate logical extension of California’s current “right of reimbursement” law as represented by Family Code Section 2640 and the relatively recent cases of In re Marriage of Wolfe and In re Marriage of Allen . . . [holding the] community is entitled to reimbursements for community property funds used to make improvements on one spouse’s separate property . . . . [Citations omitted.]

As a practical matter, SB 1407 if amended as here recommended would close a hole in the area of “reimbursements” that has somehow not been previously clearly addressed by either statute or case law, and it would be a worthy statutory fix enabling some divorcing party to save the expense of having to establish by litigation the very same “reimbursement” result statutorily granted by SB 1407 amended as here recommended.

The Senate Judiciary Report further noted as follows:

SB 1407 appears to create a right to reimbursement for contributions from one spouse’s separate property to the other spouse’s separate asset or debt in the case when there is no community property or quasi-community property that could pay for the other spouse’s separate asset or debt, despite the fact that Family Code Section 4301 requires the expense from the one spouse’s separate property as an obligation and does not create a right to reimbursement.

The Senate Judiciary Report noted the following opposition from the California Judges Association:

Through a member judicial officer, CJA expressed concern that expanding the right to reimbursement beyond the circumstances presently permitted under the case law and Family Code Section 2640 could be inequitable and create hardship. For example, in a divorce involving no assets, only liabilities (which is common), if early in the marriage husband used separate property assets to pay pre-marriage consumer debt of wife totaling $10,000, and the couple divorces when both spouses are retired and living on limited income, wife would owe to husband $10,000 in addition to owing 50 percent of the community’s debts. Wife could be burdened with the debt with no source of income to repay husband.

Family Code Section 2640 limits the separate property reimbursement to amounts contributed to the acquisition of property, and caps reimbursement at the net value of the property at the time of division, ensures that there is a source for repayment of the contribution and protects the community from liability exceeding the net value of asset.

California Judges Association proposes that if the intent of the bill is to correct the problem stated in Marriage of Cross (which concerned husband’s separate property contribution for capital improvements to wife’s separate property house), Family Code Section 2640 should be extended:

i. only to allow reimbursement for payments made to reduce an encumbrance on the other spouse’s separate property and capital improvements to the other spouse’s separate property, but not payments made for taxes, interest, insurance or maintenance; and

ii. in addition to the amount reimbursed being without interest or adjustment for change in monetary values as stated in Family Code Section 2640(b) and SB 1407, reimbursement should only be available:

A. if the asset to which contributions were suggested by the Family Law made is still part of the other spouse’s separate property estate (in which case the amount reimbursed should not exceed the net value of the property at the time of the division), or

B. if the asset to which contributions were made is no longer part of the other spouse’s separate property estate but the proceeds of the asset are now traceable to some other asset of the other spouse’s separate property estate (in which case the amount reimbursed should not exceed the net value of that asset at the time of the division). (Emphases added.)

The California Judges Association made it clear that support would only be given to The Bill if it were redrafted and the Subdivision (b) Identifiable Asset Rule of Walrath were also applicable to Subdivision (c).

The Senate Judiciary Report noted the following, additional opposition to The Bill:

When the Conference of Delegates of California Bar Associations considered Resolution (8-05-2003), identical (after amended) to SB 1407, the Bar Association of Northern San Diego County stated as a counterargument to the Resolution:

This resolution attempts to create a category of rights and liabilities distinct from those common to marriage and existing domestic partnership by hand-picking certain privileges from both bodies of law and deleting basic liabilities common to both, such as a support obligation. Eliminating obligations would gut the domestic partnership laws and would leave the domestic partner with the least bargaining power unprotected.

This comment appears to be related to the statutory spousal support duty under Family Code Sections 4300 and 4301: “Subject to this division [(Fam. Code Sec. 3500 et seq.)], a person shall support the other person’s spouse” [Fam. Code Sec. 4300]; and “ . . . a person shall support the person’s spouse while they are living together out of the separate property of the person when there is no community property or quasi-community property” [Fam. Code Sec. 4301].

SB 1407 appears to create a right to reimbursement for contributions from one spouse’s separate property to the other spouse’s separate asset or debt in the case when there is no community property or quasi-community property that could pay for the other spouse’s separate asset or debt, despite the fact that Family Code Section 4301 requires the expense from the one spouse’s separate property as an obligation and does not create a right to reimbursement.

(In contrast to Family Code Section 4301, Family Code Section 914(b) (liability of a spouse’s separate property for “necessaries of life” debts of the other spouse incurred during marriage) does not require the exhaustion of the community estate before the nondebtor spouse’s separate property may be reached by a third party creditor, and expressly permits reimbursement for separate property funds used only to the extent community or separate property of the debtor spouse was available but not used. Family Code Section 920(c) provides that a right of reimbursement provided by Part 3 (commencing with Section 900) is limited to a three-year enforceability period, or less if a dissolution occurs before the end of the three-year period. SB 1407 has no limitations period.)

On May 4, 2004, The Bill was amended to substantially change the proposed Subdivision (c) to conform with Subdivision (b), as follows:

(c) A party shall be reimbursed for any separate property the

party’s contributions made to the acquisition of property of the

other spouse’s separate property estate, including assets or debts,

of the other spouse during the marriage, unless there has been a

transmutation in writing pursuant to Chapter 5 (commencing with

Section 850) of Part 2 of Division 4, or a written waiver of the right

to reimbursement. The amount reimbursed shall be without

interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.

In that same amendment, a change was made to Subdivision (b) as well:

(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 party’s contributions

to the acquisition of the property of the community property estate

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 may not exceed the net value of the property at the time of the division.

This proposed change to Subdivision (b) mirrored the language in the proposed Subdivision (c). In each, the term “estate” is used in the reference to identifying the acquisition. However, it is clear from the record above that no one contemplated that the term “separate property estate” as used in the proposed Subdivision (c) would mean the reimbursement would come from any asset of the separate property estate, so why should the term “community property estate” have different treatment in Subdivision (b)?

On May 27, 2004, The Bill was further amended in a minor way, as follows:

(c) A party shall be reimbursed for the party’s separate property contributions to the acquisition of property of the other spouse’s separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.

Subdivision (b) became law effective January 1, 2005 as it reads in the May 4, 2004 amendment.

Subdivision (c) became law effective January 1, 2005 as it reads in the May 27, 2004 amendment.

The May 4, 2004 amendment to Subdivision (b) was consistent with the clarification made to Family Code 2640 in 1993. The 1993 Law Revision Commission wanted to clarify, based on Craig, that property of the “community estate” (community and quasi-community property) was subject to the reimbursement rule, not just community property itself.

Here, again, is the 1984 version of Subdivision (b):

In the division of community property under this part unless a party has made a written waiver of the right to reimbursement or signed a writing that has the effect of a waiver, the party shall be reimbursed for his or her contributions to the acquisition of the property . . . .

In the 1984 version, the term “the property” specifically refers to the preceding term “community property.”

Here, again, is the 1993 version of Subdivision (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 party’s contributions to the acquisition of the property . . . .

In the 1994 version, there is no preceding “property” reference to clarify the term “the property.” By changing the term in 2004 to “property of the community estate” the statute clarifies what property is subject to the reimbursement right. Not only was this clean up language that should have been inserted in 1993, it is also helpful in designating a source of reimbursement now that a separate estate reimbursement right was being created too.

The present version of Subdivision (b), and all those preceding it, states the rule that the reimbursement can “not exceed the net value of the property at the time of the division.” That is not an unclear statement; there is no ambiguity that could lead to a reasonable interpretation that the reimbursement can “not exceed the [net value of the community estate],” thus allowing for reimbursement to come from any community asset. If the Legislature had intended for the entire community estate to be reached, then this is where it would have been stated, but it was not.

For example, Husband inherits a separate property home with equity of $400,000 and he immediately places Wife on title. At trial, several months later, the home is worth only $100,000 because of market conditions. Did the legislature intend, without saying so or any discussion, to accept the dissenting Justice Baxter opinion? Would the Husband have a claim of $300,000 against the rest of the community estate?

The 2004 amendment to Subdivision (b) should not be construed as creating a radical departure from the Walrath Identifiable Asset Rule for two reasons:

1. The Identifiable Asset Rule, let alone Walrath, was never discussed as part of the legislative record in relation to Subdivision (b); and

2. The Identifiable Asset Rule was specifically discussed in amending the proposed Subdivision (c) with the intent that it be applied to Subdivision (c).

As to the first reason, there are a myriad of rules of statutory interpretation. For each rule, there is an exception or a contrary rule for application. While it is true that the Legislature is presumed to have knowledge of case law, the Legislature is not presumed to make sweeping changes of law or policy without clearly indicating an intent to do so within the statute. When an ambiguity within a statute can be interpreted to abridge long-held rights or make a large policy change, courts will not interpret the statute to make the change unless the Legislature clearly stated it. This rule is based on the assumption that the Legislature would not make major changes in a vague or unclear way, and to ensure that voters are able to hold the appropriate legislators responsible for the modification.

Here, in the context of the May 4, 2004 amendment to Subdivision (b), there was no legislative record to indicate that the Legislature intended to abrogate the California Supreme Court’s Identifiable Asset Rule of Walrath, and for a new reimbursement scheme to be set in place. To find that Walrath was abrogated would be a substantial change to existing law that is unsupported by any record that it was so intended. The stated purpose of The Bill was to abrogate the ruling in Cross, so the legislature could have easily named Walrath as well, but it did not.

As to the second reason, the tracing principles known under pre-2004 Subdivision (b) (which includes Walrath) were suggested to apply to Subdivision (c). Recall that the California Judges Association’s suggested that there should be a separate property reimbursement “if the asset to which contributions were made is no longer part of the other spouse’s separate property estate but the proceeds of the asset are now traceable to some other asset of the other spouse’s separate property estate (in which case the amount reimbursed should not exceed the net value of that asset at the time of the division).” This suggestion is in accord with Walrath and contributed to the reworking of the proposed Subdivision (c) into the final version, which is similar to Subdivision (b). The intent was to make Subdivision (c) conform with the then-existing Subdivision (b), thus, as envisioned by the California Judges Association, Walrath would be alive and well and applicable to both community and separate property contributions.

Is Section 2640, subdivision (c) retroactive?

Family Code section 4, subdivision (c) establishes that amendments to the California Family Code apply retroactively unless otherwise provided by law. However, notwithstanding legislative statement of intent to the contrary, a law cannot be retroactively applied if it violates due process.

In Marriage of Fabian (1986) 41 Cal.3d 440, the California Supreme Court found that that original version of Section 2640 (fmr. Civ. Code § 4800.2) could not be retroactively applied to pre-1984 transactions. The reasoning is that prior to 1984 a separate property contribution to the acquisition of community property amounted to an unconditional gift to the community, thus conferring upon the other spouse a vested property right. That vested property right could not be taken away by the mere passage of a retroactive law.

In Marriage of Craig (1990) 219 Cal.App.3d 683, the court followed the Fabian due process analysis in respect to quasi-community property and would not retroactively apply Section 2640.

In Marriage of Cross (2001) 94 Cal.App.4th 1143, the court found that there was no reimbursement for the contribution of separate funds by one spouse to the other spouses’ separate estate, either under Section 2640 or case law. Cross was to Subdivision (c) what Lucas was to Subdivision (b) – an observer of the state of the law and an initiator of change.

Prior to 2005, as noted in Cross, there was no right to reimbursement, thus the spouse who received separate funds from the other had a vested right in those funds. The retroactive application of Subdivision (c) would create the same due process problem addressed in Fabian.

Does Section 2640, subdivision (c) apply outside the context of the division of the community estate in a dissolution or separation proceeding?

The following is a summary of the statutory organization of Section 2640, subdivision (c):

1. In a dissolution or legal separation proceeding, the court must divide community property equally, except if one of the following special rules applies. (Fam. Code § 2550.)

2. The following is a special rule. (Fam. Code § 2600.)

3. Family Code section 2640, subdivision (c)

Can this be read to mean that, since Family Code section 2640, subdivision (c) itself does not state it is a special rule, and itself does not state it only applies in a dissolution or legal separation proceeding, then Subdivision (c) could be applied in any proceeding (e.g., probate, bankruptcy, creditor’s suit)? This requires the first two statutory restrictors on the application of Section 2640 to be ignored.

Consider the following:

Sam Student reviews his school’s student handbook, which contains all the rules for all the classes.

The history class has the following pertinent rules in the student handbook:

1. All assignments must be turned in on time, except if one of the following special rules applies.

2. The following is a special rule.

3. Any essay assignment can be turned in up to two days late.

Sam Student looks at the rules for the English class, and finds there are no rules about when assignments must be turned in. Sam Student concludes that any essay assignment in his English can be turned in up to two days late because the history class rule number 3 does not say it is only for history class and there is no English class rule on point. Is Sam Student right?

The preamble of stated intent to The Bill is as follows:

Existing law regulates the division of property upon the dissolution of marriage or the legal separation of the parties. Existing law provides for reimbursement, as specified, of a party’s contributions to the acquisition of community property to the extent the party traces the contributions to a separate property source, unless the party has waived this right. Existing law, relating to the characterization of marital property, addresses the application of separate property for specified debts under certain circumstances, and establishes specific conditions governing the right of reimbursement in this regard. This bill would require, in connection with the division of property upon the dissolution of marriage, that a party shall be reimbursed for any separate property contributions made to the separate property estate, including assets or debts, of the other spouse during the marriage, unless there has been a transmutation in writing, as specified, or a written waiver of this right. The bill would require that the reimbursed amount be without interest or adjustment for change in monetary value. (Emphases added.)

The Legislative intent is clear: the new rule is to apply in the division of the community estate in a dissolution or legal separation proceeding. However, the new subsection does not state as much, so what other context clues could help resolve any perceived ambiguity?

With the passage of the Family Law Act, the Civil Code sections governing Family Law proceedings were renumbered. The relevant portions of former Civil Code section 4800 are now found in the Family Code under Division 7 entitled “Division of Property.”

Former Civil Code section 4800, subdivision (a) is now found in Family Code section 2550:

Except upon the written agreement of the parties, or on oral stipulation of the parties in open court, or as otherwise provided in [Family Code Division 7], in a proceeding for dissolution of marriage or for legal separation of the parties, the court shall, either in its judgment of dissolution of the marriage, in its judgment of legal separation of the parties, or at a later time if it expressly reserves jurisdiction to make such a property division, divide the community estate of the parties equally. (Emphasis supplied.)

Former Civil Code section 4800.2 is now found in Family Code section 2640 of Division 7, Part 4 of the Family Code, entitled “Special Rules for Division of Community Estate.” Part 4 begins with Family Code section 2600, which provides in pertinent part:

Notwithstanding Sections 2550 to 2552, inclusive, the court may divide the community estate as provided in this part.

The renumbering of Civil Code section 4800, and the reorganization of its parts, left the underlying statutory scheme predominantly intact. The Legislature, in organizing the Family Code, placed the special rule of Section 2640 in the division containing the rules of property division in a dissolution proceeding. There is no indication that the Legislature intended to apply the Part 4 “Special Rules for Division of Community Estate” in any other type of proceeding (e.g., a probate proceeding).

Statutory construction also lends to this conclusion. The meaning of a particular word or expression in one statute is by no means to be automatically carried over to use in another statute, which may present an entirely different set of considerations. The silence in Subdivision (c) as to what type of proceeding it applies to alone might give rise to an ambiguity. However, where different statutes relating to a subject are in pari materia, their meaning may be determined in relation to one another. Here, Section 2640 is organized in such a way that, when looking to the subject matter of the other statutes in Division 7 (division of property in a dissolution proceeding) any ambiguities can be resolved. Context clues indicate the Legislature intended Subdivision (c) to only apply in a dissolution or separation proceeding.

Justin M. O’Connell, Esq.