Professor Pamela E. George
Marital Property - Spring 1999
I. REIMBURSEMENT FOR IMPROVEMENTS
A. Anderson v. Gilliland, 684 S.W.2d 673, (Tex. 1985).
Prior to this case, a battle raged in the Texas appellate courts as to whether the measure of reimbursement should be the cost of improvement, enhancement to property, or the lesser of the two. The court in Anderson v. Gilliland held that a claim for reimbursement for funds expended by an estate for improvements to another estate is to be measured by the enhancement in value to the benefitted estate. The court reasoned that this rule is more likely to ensure equitable treatment of both the contributing and benefitted estates in most situations.
B. Heggen v. Pemelton, 836 S.W.2d 145, (Tex. 1992).
In this case, the Supreme Court made it clear that when dividing marital property on divorce, trial courts may impose equitable liens on one spouse's separate real property to secure the other spouse's right of reimbursement for community improvements to that property. Although recognizing that courts may impress equitable liens on separate real property to secure reimbursement rights, the Court clearly established that a trial court may not impress such liens, absent any compensable reimbursement interest, simply to ensure a just and right division. Consistent with the Constitution, the Court recognized that any imposition of a lien must fit within the categories allowed by the Constitution; for example: a tax lien, a purchase money lien, or an improvement lien.
II. BEGINNING BALANCE REIMBURSEMENT
A. Schmidt v. Huppman, 73 Tex. 112, 11 S.W. 175 (1889).
Oftentimes, a spouse will enter into a marriage with a substantial separate estate which will provide the base for the later success of the community. If that monied spouse cannot specifically trace those funds, reimbursement may offer some relief. In 1889, beginning balance reimbursement was recognized in the case of Schmidt v. Huppman. In Schmidt, the husband owned prior to marriage a stock of merchandise. Upon his wife's death, the husband could not trace the specific articles that made up the original stock. Nonetheless, the husband was not left without remedy. The court stated, "Where it satisfactorily appears, as in the case, that one spouse brought into the partnership separate funds invested in a particular business, which business was carried on and the profits arising therefrom used in creating and building the community estate, and the separate funds are employed in the same business at the dissolution of the partnership, upon settlement with the community estate, we think that the spouse furnishing such separate funds is entitled to be reimbursed therefore."
In considering this opinion it is significant that at the time the marriage was dissolved, no part of the stock of merchandise owned by husband at the time of marriage was found in specie. In addition, the Court notes that at no time during the marriage was the stock reduced below its value at the time of marriage, but was gradually increased from that time until the death of the wife. Because tracing could not be utilized, this Court allowed reimbursement based on the beginning balance.
B. Horlock v. Horlock, 533 S.W.2d 52 (Tex. Civ. App. - Houston [14th Dist.] 1975, writ dism'd).
In the Horlock case, husband owned nearly a million dollars worth of property prior to marriage. During marriage, husband sold that property and collected $921,000.00. The husband admitted that he co-mingled the proceeds of the sale of his separate property with the community property and made no attempt to trace the proceeds of the sale of his separate property into any other transactions because he was unable to. In this instance, the appellate court held that the trial court was justified in awarding the husband a separate estate reimbursement because the husband's separate estate served as a strong foundation upon which the community's wealth was built. Specifically, the husband utilized his separate foundation to provide for the wife and to establish a 3 - 4 million dollar estate.
III. REIMBURSEMENT FOR TIME, TOIL AND EFFORT
A. Vallone v. Vallone, 644 S.W.2d 455 (Tex. 1982).
In the Vallone case the court recognized that a spouse may expend a reasonable amount of talent or labor in the management and preservation of his or her separate estate without impressing a community character upon that estate. However, when the community time, talent or labor expended appears to surpass that reasonable amount, then the right of reimbursement come into play. The court recognizes the rule of reimbursement is purely an equitable one, not an interest in property or an enforceable debt, but simply an equitable right which arises upon dissolution of a marriage. The court specifically held that the right of reimbursement arises when community time, talent and labor are utilized to benefit and enhance a spouse's separate estate beyond whatever care, attention, and expenditure are necessary for the proper maintenance and preservation of the separate estate, without the community receiving adequate compensation. However, the wife in the case of Vallone v. Vallone didn't properly plead for reimbursement for time, talent, or labor, and thus, her claim could not be sustained as it was waived. Nevertheless the Vallone case is significant for recognizing the equitable right to reimbursement for the expenditure of community time, toil, and effort.
B. Jensen v. Jensen, 665 S.W.2d 107 (Tex. 1984).
In the Jensen case, the court in its third Jensen opinion - the other two having been withdrawn - applies the Vallone reimbursement theory when community time and effort are expended to enhance the separate estate of either spouse. In Jensen, the court reconsidered whether a community ownership theory or a reimbursement theory applied to such facts. The reimbursement theory was applied based upon the reasoning that the separate stock, as it appreciates, remains the separate property of the owner spouse; but the community is entitled to reimbursement for the reasonable value of the time and effort of both or either spouses which contributed to the increase of the stock. The court determined that such rule is a reasonable means that the community will be fully reimbursed for the value of community assets; that is, time and effort expended, while at the same time providing the property interest of the separate estate is protected and preserved.
Thus, a court must determine the reasonable value of the time, toil, and talent expended on the separate property and from that reasonable value subtract the compensation paid for such time, toil, and talent in the form of salary, bonuses, dividends and other fringe benefits. The court determined that any remainder would be the reimbursement due the community and such shall be distributed by the trial court. While the enhanced value of the stock is considered at the very most as a guide as to the amount of reimbursement, it is not a factor in the reimbursement equation. Query: Are dividends properly considered part of compensation?
C. Trawick v. Trawick, 671 S.W.2d 105 (Tex. App. - El Paso, 1984, no writ).
In this case, the Court of Appeals in El Paso, provides some guidance as to how to utilize the Supreme Court's Jensen opinion. Although not part of the reimbursement formula, as a threshold issue, the increase in husband's separate property stock was first considered. What is most interesting about this is the fact that the increase was limited to the stock husband owned and to that proportion of the increase which was attributable to husband's time, toil and effort. The attributable increase in value, however, is not part of the reimbursement formula, and in fact a formula utilizing increase in value was specifically rejected by this El Paso court. However, attributable increase in value must be determined to see if the reimbursement claim is actually worth pursuing, and, arguably the increase can be used as a ceiling for the reimbursement claim.
In obtaining figures for the proper reimbursement formula, and in compliance with the opinion in Jensen, the court first determined what would be the reasonable value of the time, talent and effort expended. In determining the reasonable value of the effort expended, the court realized that there would be a range depending upon expert testimony. In Trawick, the testimony established that reasonable compensation, in addition to fringe benefits, would be $60,000 - $100,000 a year and for the four years of marriage husband's reasonable compensation should have been between $240,000 and $400,000.
The next issue was the actual remuneration received by husband. The court considered the husband's salary of $2,000 a month and determined that he had earned $96,000 over the four years of marriage. Thus, subtracting $96,000 from $240,000 and $400,000, the reimbursement range would be anywhere from $144,000 to $304,000. What is interesting in the court's opinion is that the court considered and identified certain fringe benefits would be included in the actual remuneration. This would include payment for life insurance, club membership dues, use of a new automobile, and death benefits. Not included, however, would be rental income which husband received during the marriage. Although rent was paid to husband by the corporation, it was not paid for husband's labor or efforts, but was income from a distinct non-labor separate asset. In addition, any monies paid to the wife by the corporation for her labor would not be considered as part of the husband's compensation, unless her employment was a complete sham. This case provides the factors which can be considered in determining actual remuneration. The Trawick case is a practical application of Jensen.
IV. REIMBURSEMENT FOR PURCHASE MONEY
A. Bazile v. Bazile, (Tex. Civ. App. - Houston [1st Dist.] 1971) writ dism'd)
Very often, marital partners enter a marriage relationship owning certain properties the purchase price of which has not yet been fully paid. Community monies are often used to pay off those separate properties - that is, community funds are used as purchase money for property which is a separate property of one spouse. In the case of Bazile, the court recognized that the non-owning spouse is entitled to reimbursement for their share of the community funds paid. However, in the Bazile case, the trial court did not address the offset of any of the benefits received by the community. Thus, the Bazile case is just an introduction to the genesis of purchase money reimbursement.
B. Penick v. Penick, 783 S.W.2d 194 (Tex. 1990).
The Penick case concerned the proper measure for reimbursement when community funds are used to pay a pre-nuptial purchase money debt. The Supreme Court held that the trial court properly considered offsetting benefits in determining the measure of reimbursement.
Specifically, the community estate had paid more than $100,000.00 to reduce the principal indebtedness on husband's separate real property. However, according to husband's testimony, the tax benefits to the community estate from the depreciation exceeded the $100,000.00 expended by the community to reduce his separate property debt. The Supreme Court specifically rejected the dollar-for-dollar reimbursement touted by the court of appeals, which held that community funds used to pay a purchase price or to discharge an encumbrance against separate property should be reimbursed without the necessity of proof that the expenditures exceeded benefits received by the community. The court, rejecting the traditional dichotomy between reimbursement claims for purchase money and capital improvements, embraced the trial court's discretion, and determined that tax benefits returned to the contributing community estate, and the effect of a depreciation deduction should be considered in determining any reimbursement claim. In Penick, the trial court considered the equities and denied reimbursement; this was upheld by the Supreme Court.
C. Zeiba v. Martin, 928 S.W.2d 782 (Tex. App. - Houston [14th Dist.] 1996, no writ).
The court, citing the case of Penick, recognized that enhancement value is the measure of reimbursement whether reimbursement is sought for a purchase money debt or for a capital improvement. That is, that the trier of fact should consider the benefits and detriments to each estate. The Zeiba court noted that a trial may not simply return to the contributing estate the actual amount advanced to reduce the principal indebtedness on the benefitted estate's property without regard to the benefits received in return for contributing estate. Thus, the trial court's refusal to reimburse the community for the full principal and interest paid on the purchase money note was proper and the attack on the trial court's refusal was unsupported by the evidence and could not be deemed an abuse of discretion.
V. REIMBURSEMENT FOR LIVING EXPENSES AND PREMARITAL DEBTS TO FORMER WIFE AND CHILDREN
A. Norris v. Vaughn, 152 Tex. 491, 260 S.W.2d 676 (1953).
In the case of Norris v. Vaughn, the husband was denied reimbursement for separate funds which he expended for community living expenses. The court, recognizing that it was husband's fundamental obligation to furnish for community living, held that if no community funds were available, he should use his separate funds and thus no reimbursement claim would be allowed. Today the spouses, not just the husband, have such an obligation.
B. Pelzig v. Berkebile, 931 S.W.2d 765 (Tex. App. - Corpus Christi 1998, no writ).
Claims have been made for living expenses paid by husbands to their former wives and children. Specifically, in the case of Pelzig v. Berkebile, wife sought reimbursement for child support, college expenses, and alimony payments made by her husband to wife and children of previous marriage. The court, finding that there was no evidence that wife ever sought to require her husband to meet these obligations out of his separate estate either during their marriage or in the form of prenuptial agreement, and that there was no evidence the expenses benefitted husband's separate estate, held that the trial court did not abuse its discretion in determining that no right of reimbursement attached to those payments. Wife also claimed reimbursement for husband's attorney's fees, which he acquired by virtue of a suit against his former spouse. The court found that those fees were acquired with wife's full knowledge and tacit consent and there was no evidence that this expenditure benefitted the husband and thus the denial of reimbursement was not an abuse of discretion.
C. Butler v. Butler, 975 S.W.2d 765 (Tex. App. - Corpus Christi 1998, no writ).
However, the same court which decided Pelzig v. Berkebile also decided the case of Butler v. Butler. In that case, the court recognized that no right of reimbursement attaches to expenditures for living expenses; however, they noted that this exception for living expenses only applies to living expenses of the marital family for which each spouse is obligated to provide, even from separate property if necessary. It found no authority for the contention that living expenses of a child born outside of a marriage are exempt from reimbursement and in fact determined that reimbursement to the community estate for funds expended to satisfy husband's individual child support obligation was justified. The court distinguished the Butler matter from Pelzig because husband in Pelzig had pre-existing and alimony obligations when he married for a second time and second wife had full knowledge of these obligations before or during the marriage. In the Butler case, the child support obligation did not materialize until after marriage commenced and husband hid the existence of the child from the wife and satisfied the support obligations out of community funds without his wife's knowledge. Reimbursement was upheld.
C. Farish v. Farish, 982 S.W.2d 623 (Tex. App. - Houston [1st Dist.] 1998, no writ).
In the more recent case of Farish v. Farish, the court considered husband's claim that the trial court erred in granting a right of reimbursement to the community estate for funds he expended to satisfy his court ordered support obligations to the children of his previous marriage. The trial court determined that the community estate had a claim for reimbursement in the amount of $429,750.00 and although the trial court did not order reimbursement of that amount, it considered the claim when it divided the community estate.
The Houston court considered the Pelzig case, and the Butler case, and the case of Zeiba v. Martin. The court in Farish focused on the nature of a child support debt and distinguished between familial obligations and traditional third party debts. Looking to the Supreme Court and quoting, the court recognized that "the obligation which the law imposes to support one another and on parents to support their children is not considered a debt within Article 1 § 18 of the Texas Constitution, but a legal duty arising out of the status of the parties." The court further recognized that the duty to support a minor child is not limited to a parent's ability to pay from current earnings, but extends to the financial ability to pay from any and all sources that might be available. The court specifically disagreed with the Corpus Christi Court's holding in Butler that the exception of living expenses from equitable right of reimbursement applies only to living expenses of the marital family. The court noted that a child's right to be supported by his or her parents is a moral and legal right, the nature of which does change upon remarriage by one or both parents. In balancing the child's right against the equitable right reimbursement, the Houston court held that court held child support payments are not subject to a claim to reimbursement by the community estate. The court further found support for this decision in the strong long-standing policy of the state to protect the interest of its children. Thus, the trial court erred in factoring in the reimbursement claim for $429,750.00 when it divided the community estate.
VI. OTHER REIMBURSEMENT ISSUES
A. Specificity in Pleading
Many spouses have waived their right to reimbursement by not specifically pleading their reimbursement claim. In Lindsay v. Clayman, 254 S.W.2d 777 (Tex. 1952) the Supreme Court held that there can be no recovery for reimbursement of community funds expended in making improvement upon land which is the separate property of the wife, unless enhancement has been pleaded and proved. Likewise, in the case of Burton v. Bell, 380 S.W.2d 561 (Tex. 1964), no claim for reimbursement could be found in wife's third amended original petition, the pleadings on which she went to trial and thus she could not recover for expenditures for improvements made on husband's separate property. In the case of Vallone v. Vallone, the wife pleaded for equitable reimbursement if community funds or property were used to benefit the separate estate of her husband; this was not specific enough to sustain reimbursement for the time, toil and effort husband expended on his separate estate. Although the specificity requirement seems somewhat relaxed in the case of Jensen v. Jensen - the wife did obtain a remand - one should not depend upon such and should specifically plead reimbursement issues.
B. Reimbursement in Kind
In the case of Hilton v. Hilton, 678 S.W.2d 645 (Tex. App. - Houston [14th Dist.] 1984, no writ), a husband was reimbursed in stock. He sold separate stock to retire a community debt. The community held the exact type of stock that he had sold. Husband was reimbursed with the community stock; although such was unusual, it was upheld.
C. No Reimbursement for Retained Earnings
In the case of Thomas v. Thomas, 738 S.W.2d 342 (Tex. App. - Houston [1st Dist.] 1987, writ denied), wife sought to be reimbursed for earnings that had been retained by a subchapter S corporation in which husband held a separate property interest. The community had paid the taxes on those retained earnings. Wife, however, had no right of reimbursement for those retained earnings; rather, the court concluded that while the corporation retained some earnings as "previously taxed income" of the shareholders, the earnings remained the corporation's exclusive property and never belonged to wife or to the marital estate. The court held that previously taxed and retained earnings of the subchapter S corporation are corporate assets and are neither the community or separate property of the shareholder and no reimbursement claim could be sustained on such facts.
D. Reimbursement as Part of a Just and Right Division
Remember, the court does not have to order a money judgment to satisfy a reimbursement claim. As in the case of Horlock v. Horlock, the exact amount of reimbursement need not be determined, but the right to reimbursement may be considered in the just and right division.