Winter 2016, Issue 1

A CHALLENGE TO LAFKAS

Lafkas in Brief

Two statutes were enjoying independent, peaceful lives, by legislative design, until the court in Lafkas chose to pit them against each other.1 There, husband acquired a 1/3rd interest in partnership before marriage. But after marriage, he consented to a written amendment to the partnership agreement, which provided: “The name of each of the partners is as follows: John and Jean Lafkas, husband and wife, as to 1/3 interest….”2 The trial court concluded that “the partnership was acquired in joint form as required by section 2581.”3

The Court of Appeal agreed that the property was acquired during marriage “in joint form,” but otherwise reversed because the case is governed by FC 852(a).4 At the heart of the reversal is the Court’s conclusion that FC 2581 and FC 852 “both evolved [legislatively] in response to In re Marriage of Lucas (1980) 27 Cal.3d 808 (Lucas).”5 From this minor conclusion, the Court jumped to its major conclusion, namely, that the Legislature unknowingly created conflict between the two statutes, which merits intervention by the judiciary to resolve the conflict in favor of one or the other.

More specifically: “We conclude that when the provisions of sections 2851 and 852 conflict, the transmutation requirements of section 852 must be met before the joint title presumption of section 2851 applies.”6 Accordingly, “when a spouse places separate property in joint title form, the transmutation requirements of section 852 must be satisfied before the joint title presumption of section 2581 applies. The documents in this case do not contain an express transmutation of husband’s separate property interest in the partnership, and therefore, it remained husband’s separate property.”7

The issue is whether the Legislature intended FC 2581 and FC 852 to exist independently of, but in harmony with, each other?

Challenge to Lafkas, in Brief

The Lafkas court’s conclusion that “the transmutation requirements of section 852 must be satisfied before the joint title presumption of section 2581 applies” is self-defeating on its face. If filtering the facts through the grid of FC 852 supports the conclusion that separate property has been transmuted to community, no need remains to filter this conclusion through the presumption of community property in FC 2581.

More positively, FC 2581 and FC 852 were enacted at different times, for different purposes, to serve different legal interests. These differences co-exist in harmony, as illustrated by contrasting two different fact patterns with each other. The first is Lafkas. The second fact pattern is that instead of amending the partnership agreement as in Lafkas, husband signed and authored the following writing: “I agree to change my 1/3rd interest in partnership that I owned before marriage to community property, to be shared equally, 50/50, with my wife.”

Both result in a change from separate to community, but for different reasons. The first is supported by the state of mind of the Legislature – a “compelling state interest exists to provide for uniform treatment of property … held in joint title ….”8 The second fact pattern is supported by the intention of husband, which satisfies the “express declaration” requirement of section 852(a).

This is the error of Lafkas at its core. The court failed to recognize that FC 2581 is anchored in a compelling state interest, independent of spousal intention, whereas FC 852 is rooted in spousal intention alone.

To begin, it is essential to have a foundational understanding of Lucas. From there, the discussion proceeds to how the Legislature’s response to Lucas (in enacting FC 2581 and FC 2640) was different than its response to the problem of “easy transmutation” (in enacting FC 852); next, how the Supreme Court responded to the Legislature; and finally, if in conflict, why FC 2581 prevails over FC 852.

Supreme Court’s Foundational Ruling in Lucas

Overview: On August 7, 1980, the Supreme Court in Lucas announced its rulings, both major and minor. The first involved the joint form presumption of community property (and the presumed absence of a right to reimbursement for separate property), whereas the second related to the principle of transmutation. Each ruling is independent of the other.

Main ruling: Husband and wife acquired during marriage a home, which they chose to title in joint tenancy. Wife contributed the down payment from her separate property.9 The Supreme Court was presented with two questions: First, what was the character of the jointly titled home? Secondly, if community property, how should wife’s separate property contribution be treated?

In response to the first question, the Court ruled that titling an asset during marriage in joint names triggers an elementary expectation of joint ownership. “The act of taking title in a joint and equal ownership form is inconsistent with an intention to preserve a separate property interest. Accordingly, the expectations of parties who take title jointly are best protected by presuming that the specified ownership interest is intended in the absence of an agreement or understanding to the contrary [Lucas #1].”10

To answer the second question, the Court ruled: “If on reconsideration the house is found to be entirely community in nature, Brenda would also be barred from reimbursement for the separate property funds she contributed in the absence of an agreement therefor. It is a well-settled rule that a ‘party who uses his separate property for community purposes is entitled to reimbursement from the community or separate property of the other only if there is an agreement between the parties to that effect [Lucas #2].’”11 While Lucas #1 and Lucas #2 are related to each other, neither has any relationship to Lucas #3.

Minor ruling: “The purchase contract [for the motorhome] was made out in the name of Gerald alone, but title and registration were taken in Brenda’s name only. Brenda wished to have title in her name alone, and Gerald did not object. The motorhome was purchased for family use and was referred to and used by the parties as a ‘family vehicle.’”12 The Supreme Court affirmed trial court ruling that husband transmuted the motorhome from community property to wife’s separate property [Lucas #3].

In response to Lucas, the Legislature affirmed Lucas #1 by enacting FC 2581 (and overturned Lucas #2 by enacting FC 2640).13 On the other hand, FC 852 is a different legislative response at a different time to an entirely different concern, namely, the problem of “easy transmutation,” as illustrated by Lucas #3, amongst other cases. Thus, whereas FC 2581 is a direct response to Lucas, FC 852 is an indirect response.

Legislature’s Responses to Lucas

Different times: In 1983, the Legislature enacted sections 2581 and 2640 in “Stats. 1983, ch. 342, §§ 1-4.)”14The Legislature later clarified that “those sections apply to all proceedings commenced on or after January 1, 1984.”15 In 1986, the Legislature further expanded the reach of the presumption of community property to include all property acquired during marriage “in joint form.”16

In 1984, the Legislature enacted section 852, in “Stats. 1984, ch. 1733, § 3, p. 6302.”17 Section 852’s effective date is “January 1, 1985.”18 Both statutes were also enacted for different purposes.

Different purposes: “The legislative history [of Assembly Bill No. 26, which contained both 2581 and 2640] reveals two concerns: the need for a community property presumption affecting joint tenancy property to aid the courts in the division of marital property [Lucas #1], and an unexplained desire to abrogate the rule, attributed solely to Lucas, supra, 27 Cal.3d 808, that ‘precluded recognition of the separate property contribution of one of the parties to the acquisition of community property [Lucas #2].’ (citation omitted.)”19

Thus, the Legislature’s clear intention was to codify the substance of Lucas #1 in section 2581 and to abrogate Lucas #2 in section 2640. But this intention is entirely divorced from the Legislature’s intent in enacting FC 852, which was to remedy the problem of “easy transmutations,” of which Lucas #3 is one of many examples.

“It thus appears from an examination of the Commission report that section [852] was intended to remedy problems which arose when courts found transmutations on the basis of evidence the Legislature considered unreliable. To remedy these problems the Legislature decided that proof of transmutation should henceforth be in writing, and therefore enacted the writing requirement of section [852].”20These “unreliable” transmutation cases are also referred to as the “easy transmutation” cases. “[S]ome of the ‘easy transmutation’ cases which section [852] was intended to overturn involved non-oral conduct or signed writings.”21 Lucas #3 was cited as one example amongst many that section 852 was intended to overturn.22 FC 2581 and FC 852 additionally serve different legal interests.

Different legal interests: The Lucas presumption of community property is grounded in common “expectations” that property titled during marriage in joint names is equally owned.23 In enacting FC 2581, the Legislature more than honored these “expectations.” It flanked them with the protection of “public policy” on one side, and “a compelling state interest” on the other side.

The Legislature hereby finds and declares as follows:
(a) It is the public policy of this state to provide uniformly and consistently for the standard of proof in establishing the character of property acquired by spouses during marriage in joint title form ….
(b) The methods provided by case and statutory law have not resulted in consistency … but rather, have created confusion … and, as a result, spouses cannot have reliable expectations as to the characterization of their property ….
(c) Therefore, a compelling state interest exists to provide for uniform treatment of property. Thus, … Sections 2581 and 2640 … apply to all property held in joint title …. 24

In fact, the state interest is so compelling that FC 2581 applies even if husband “did not realize wife was added to the title.”25 “More significantly … the general consensus is that §2581 applies to property ‘initially acquired before marriage, the title to which is taken in joint form by the spouses during marriage.’”26 The transfer of an asset owned before marriage to joint names during marriage is not subject to the protection of FC 852, but it is protected by two other statutes.27

While FC 2581 is intent neutral, FC 852 is intent active. “[W]e conclude that a writing signed by the adversely affected spouse is not an ‘express declaration’ for the purposes of section [852(a)] unless it contains language which expressly states that the characterization or ownership of the property is being changed.”28 “[T]he writing must reflect a transmutation on its face, and must eliminate the need to consider other evidence in divining this intent.”29 For example, “[o]ur close review of the record reveals that no substantial evidence supported the finding that Margery intended a transmutation…. In fact, there is absolutely no record evidence relating to Margery’s intentions or state of mind when she signed the adoption agreements.”30 Both statutes enjoy other differences that allow them to live harmoniously with each other.

Different legal effects: FC 2581 triggers one process – a presumption of community property. Oppositely, FC 852 mandates three possible outcomes – a change in character from separate to separate, from community to separate, or from separate to community.

Different defaults: FC 2581 defaults to a change of character (from separate to community), unless the presumption is rebutted by a writing evidencing an intention not to change. FC 852 has a different default – there is no change in character (of any kind), “unless” there is a writing evidencing an intention to change.

Like the Legislature’s record of enactment, the Supreme Court’s following record of interpretation contains nothing to suggest a conflict between the two statutes under scrutiny.

Supreme Court’s Interpretation of Legislature’s Response

Since their enactments over 30-years ago, the Supreme Court has enjoyed several opportunities to interpret FC 2581 and FC 852.31 Like the Legislature’s enactment record, the Supreme Court’s interpretation record does not support the Lafkas court’s conclusion that “when a spouse places separate property in joint title form, the transmutation requirements of section 852 must be satisfied before the joint title presumption of section 2581 applies.”32

If In Conflict, FC 2581 Prevails Over FC 852

When two statutes conflict, the specific prevails over the general.33 FC 2581 is clearly more specific. It governs in one limited situation – acquiring property during marriage in joint form. On the other hand, section 852 governs in three situations – transmutations from community to separate, separate to community, and separate to separate.34 Moreover, FC 2581 is supported by the “expectations of the parties”, according to Lucas, and “public policy” and a “compelling state interest” in FC 2580, by the Legislature. FC 852 enjoys no such support. Finally, all joint form acquisitions during marriage are mitigated by FC 2640, but not all transmutations under FC 852 are mitigated by FC 2640.

Conclusion

The Legislature mandates that all property acquired during marriage in joint form must be treated uniformly as presumptively community property. The Lafkas court admits that the partnership was acquired during marriage in joint form. But the court failed to treat such property the same as all other property acquired during marriage in joint form. Therefore, Lafkas was wrongly reasoned and decided.


1 In re Marriage of Lafkas, 237 Cal.App.4th 921 (2015)

2 Id. at 927

3 Id. at 930. FC 2581(a) provides: “For the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property.” All references to FC 2581 include its predecessor, CC 4800.1.

4 FC 852(a) provides: “A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.” All references to FC 852 include its predecessor, CC 5110.730.

5 Lafkas, supra, 237 Cal.App.4th at 934

6 Id. at 940 [emphasis]

7 Id. at 926 [emphasis]

8 FC 2580(c)

9 Lucas, supra, 27 Cal.3d at 810-811

10 Id. at 815 [emphasis added]

11 Id. at 816

12 Id. at 817-18

13 FC 2640(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 party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source.” All references to FC 2640 include its predecessor, CC 4800.2.

14 In re Marriage of Buol, 39 Cal.3d 751, 755 (1985)

15 FC 2580 (c)

16 In re Marriage of Heikes, 10 Cal.4th 1211, 1216 n. 6 (1995)

17 Estate of MacDonald, 51 Cal.3d 262, 268 (1990)

18 FC 852 (e)

19 In re Marriage of Fabian, 41 Cal. 3d 440, 448-49 (1986)

20 MacDonald, supra, 51 Cal. 3d at 269

21 Id. at 270

22 Id. at 270, n. 6

23 Lucas, supra, 27 Cal.3d at 815

24 FC 2580 [emphasis added]

25 In re Marriage of Weaver, 127 Cal.App.4th 858, 865 (2005)

26 Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2015) ¶ 8:415, p. 8-147, and cases cited therein

27 The first protection is that all interspousal transactions that advantage one spouse are subject to scrutiny under Family Code section 721(a) – whether the circumstances are sufficiently pleasing to the fiduciary standard so as to render both spouses competent to transact with each other. See In re Marriage of Haines (1995) 33 Cal.App.4th 277 The second form of protection is that a FC 2581 transfer is subject to the mitigating influence of FC 2640, quoted in relevant part in endnote 13. This means that at the time of joint titling, there is no net change in either balance sheet – no addition of value to community and no subtraction of value from separate property. Thereafter, if market forces result in appreciation, the community is limited to sharing 50/50 in the increased value. Conversely, if market forces result in depreciation, the community value is zero (and separate property is lessened to the extent of the decrease in value from the time of joint titling).

28 MacDonald, supra, 51 Cal. 3d at 272

29 In re Marriage of Benson, 36 Cal.4th 1096, 1106–1107 [emphasis added] (2005)

30 MacDonald, supra, 51 Cal. 3d at 267 [emphasis]

31 For FC 2581, see In re Marriage of Hilke, 4 Cal.4th 215 (1992), In re Marriage of Fabian, 41 Cal.3d 440 (1986), and In re Marriage of Buol, 39 Cal.3d 751 (1985). For FC 852, see In re Marriage of Benson, 36 Cal.4th 1096 (2005) and Estate of MacDonald, 51 Cal.3d 262 (1990).

32 In re Marriage of Lafkas, supra, 237 Cal.App.4th at 926

33 In re Marriage of Haines, supra, 33 Cal.App.4th at 301

34 FC 850