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California Family Law Report

 

 

Case of the Month (from CFLR Monthly)

August 2015
[Archive]

Trial court must also take another look at loan proceeds . . .

 

In partial reversal, Second District holds that trial court erred in determining that modified partnership agreement which changed designation of husband’s partnership interest from single man to husband and wife constituted valid transmutation; Fam C §852 requirements must be met before Fam C §2851 joint title presumption applies

 

In re Marriage of Lafkas

(June 16, 2015)

California Court of Appeal 2 Civil B243635 (Div 5) 237 Cal.App.4 th 921, 188 Cal.Rptr.3d 484, 2015 FA 1695, per Kriegler, J (Turner, PJ and Mosk, J, concurring). Los Angeles County: Halevy, Temp J, and Gould-Saltman, J, affirmed in part and reversed in part. For appellant: Jeanne Collachia, (818) 998-1983. For respondent: Gary Kearney, CFLS, (626) 796-9621. CFLP §J.48.5.

 

John Lafkas became a policeman in 1966. In 1971, he and two friends, Eric Cleworth and Nicholas Roberts, formed a partnership, Smile Enterprises, for the purpose of investing in real estate. Each partner contributed $3,333 and was to receive one-third of Smile’s profits and losses. The partners usually reinvested the profits in Smile, but sometimes paid out distributions to themselves. As of 1982, the partnership agreement listed John’s name as John Lafkas, an unmarried man, Eric’s as Eric Cleworth, a married man, and Nicholas’s as Nicholas P. and Sylvia V. Roberts, husband and wife.

 

In 1985, the partnership bought some rental property in Monrovia whose rental income met all the expenses of the property. Other partnership expenses were paid from the profits held in various bank accounts. John did not contribute any money or services to the partnership apart from his original investment. Later, the partnership bought some property in Pasadena. Some time after that, Eric’s wife, Dorcas, was added to the partnership. John married Jean Doane in December 1990.

 

In 1995, the partners decided to exchange the Monrovia property for two properties in Riverside, utilizing an IRC §1031 tax deferred exchange. However, the cost of the two Riverside properties was more than the amount in the escrow for the Monrovia property. The partners then applied for a loan to finance the additional cost. John asked Jean to participate in the transaction, but it would later be unclear as to whether the lender required her to join in or relied on her credit in determining whether to make the loan. The partners prepared a “ ‘Modification and Extension of General Partnership Agreement,’ ” which extended the term of the partnership to December 31, 2026, and which named John and Jean, husband and wife, as to a 1/3 interest among the list of Smile partners and verified that those listed were the sole partners of the partnership. Both John and Jean signed the modification agreement. The loan went through, and Smile was deeded the properties in Riverside. John did not invest any additional funds or services in the Riverside properties.

 

John and Jean separated on April 22, 1996, and John subsequently took service-related disability retirement, effective June 30 of that year. When he petitioned for a legal separation on May 14, 1996, Jean shot back a disso petition on May 31, 1996. The trial court granted their status-only disso judgment nunc pro tunc as of May 10, 2000. John then successfully moved for a separate trial on the issue of characterization of the partnership interest, which he claimed was his separate property. At trial, he contended that neither the modified partnership agreement nor any other document in the case transmuted his separate property interest in Smile Enterprises to the parties’ community property, as Jean asserted, and that he never intended to transmute his interest to community property. As for the loan, John testified that he believed that adding Jean to the documents was a requirement of the lender. Jean, on the other hand, testified that John had asked her to be a partner in Smile Enterprises and had told her that the partnership needed her salary and signature on the documents to qualify for the loan. When the testimony concluded, the trial court found that the modification agreement was a new agreement which converted John’s separate property share of Smile to a shared one-third interest of John and Jean. The lower court also determined that the agreement was a transmutation under Fam C §852(a) as to the properties held by Smile from and after June 12, 1995, the date on which the agreement was signed, but not as to John’s other separate properties independent of the partnership. The court also determined that John had a separate property interest in Smile as to prior rents collected before June 12, 1995, property values, and the value of the partnership’s holdings. After a further trial on the remaining issues, the trial court ordered John to pay $160,000 toward Jean’s attorney’s fees and costs.

 

John appealed, and the Second District affirmed in part, reversed in part, and remanded.

 

First things first . . .
The justices began by reciting the familiar rule that property acquired prior to marriage is the separate property of the acquiring party, while property acquired during marriage is community property unless it is either traceable to a separate property source, acquired while the spouses were living separate and apart, or acquired by gift or inheritance. Here, the panel noted, John acquired his one-third interest in Smile before he married Jean, thus it and his share of the partnership profits were his separate property. However, the modification agreement dissolved the existing partnership and created a new one in which John and Jean were presumed to have a joint one-third interest in Smile, per Fam C §2851 [property acquired during marriage is presumed to be CP on disso]. That would be true, the panel said, unless, as John contended at trial, Fam C §852 [transmutation statute] applied. That statute, the justices reasoned, provides that a transmutation of real or personal property is not valid unless it is made in a express written declaration that clearly provides for an intended change in the characterization or ownership of the property, and is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.

 

More to it than adding a name . . .
With those things in mind, the justices looked to see whether, as John argued, the partnership interest remained his separate property. They noted that the one-third partnership interest created by the new agreement was directly traceable to John’s separate property interest and he and Jean had not provided any additional consideration when Jean’s name was added to the list of partners. Thus, the interest would remain his separate property interest unless the new agreement met the requirements for a transmutation. The panel found that where, as here, the provisions of Fam C §2851 and Fam C §852 conflict, §2581 will not apply unless the transmutation requirements of §852 have been met. That was so, the justices said, because the provisions of §852 are more specific and also, more with the Legislature’s intent to make transmutation requirements more stringent. The new agreement simply added Jean’s name to the list of partners; it did not state that John intended to make a transmutation or to change the characterization of his partnership interest, or that he understood that he had done so. Accordingly, the panel held that the trial court erred by determining that John’s separate property interest in the partnership had been transmuted to community property, and that his interest remained his separate property. After receiving additional briefing regarding the characterization of the loan proceeds, the justices found that there might be an issue as to whether there was a community interest in them. Summing up, the panel reversed the trial court’s judgment as to the characterization and division of the property interest and as to the fee award and remanded for further proceedings re those issues, including the characterization of the loan proceeds.

 

 

Comment

  

This is an extremely important case because it sets out the rule that where one spouse places separate property in joint title form the Fam C §2581 presumption will not apply on divorce unless the transfer meets the requirements for a valid transmutation under Fam C §852. The justices first tell us that the modification agreement created a new partnership in which John and Jean held an interest in joint form. However, that form apparently has no meaning because John did not make a valid transmutation of his separate property interest. Jean has an interest in name only. And, this rule will apply to any separate property to which the owner-spouse adds the other spouse’s name in the title but fails to meet transmutation requirements. Adding the name, the justices tell us, is not enough. The justices cite Estate of Bibb (2001) 87 Cal.App.4 th 461, 104 Cal.Rptr.2d 415, 2001 CFLR 8693, 2001 FA 988, along with other cases, as an example of this. In that case, the appellate court held that registering a separate property automobile in the names of husband or wife was not a valid transmutation, but a grant deed placing the other spouse’s name as joint tenant in real property was a valid transmutation because it was signed by the adversely affected spouse and “grant” is a word historically used to transfer an interest in real property. We wonder if the latter will still be true after this opinion. The panel explains that its new rule “avoids the absurd consequence of treating Smile Enterprises as separate property if [John and Jean] remained married, but community property if they separated or the marriage was dissolved.” That’s true, but in avoiding that “absurd consequence” the justices have created another arguably absurd situation in which Jean is a named partner for partnership purposes, but not really a partner for disso purposes. That situation, however, seems to have been resolved, since the justices tell us that the partnership is now dissolved.

 

 

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