Chapter 1: The Texas Marital Property System

Introduction

Marital Property System: governs ownership, management, liability, and disposition of all property possessed during and upon dissolution of a marriage
§3.001 Separate Property: A spouse’s separate property consists of: (a) The property owned or claimed by the spouse before marriage; (b) The property acquired by the spouse during marriage by gift, devise, or descent; (c) The recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.
§3.002 Community Property: Community Property consists of the property, other than separate property, acquired by either spouse during marriage.
§3.003 Community Property Presumption: (a) Property possessed by either spouse during or on dissolution of marriage is presumed to be community property. (b) This presumption can only be rebutted by clear and convincing proof that the property in question is separate property.
Characterize: to determine whether marital property was acquired at a time or in a manner which would deem it separate property of a spouse.
Why does it make a difference? Only community property can be divided by the judge in a divorce.
Community property presumption: always begin with this. The person claiming separate property must rebut this presumption by clear and convincing evidence.
Three characterizations of property: (1) Community property, (2) Husband’s separate property, (3) Wife’s separate property
Management of property: 5 categories (1) H separate that he manages (2) W separate that she manages (3) Community property that H solely manages (4) Community property that W solely manages, (5) Community property that is jointly management

The Constitution of 1876

1876 Constitution’s Definition of Separate Property: All property, both real and personal of the wife, owned or claimed by her before marriage, and acquired afterward by gift, devise, or descent, shall be her separate property, and laws shall be passed more clearly defining the rights of the wife, in relation as well to her separate property as that held in common with her husband. Laws shall also be passed providing for the registration of the wife’s separate property.

i. Limited to gift, inheritance, or before marriage property.

ii. You couldn’t agree that something would be separate property.

iii. You couldn’t agree to split something so half would be his and half would be hers

iv. Single most limiting aspect of the definition of separate property: gender. The constitution does not define separate of men. The man manages the property, but the woman owns it

DeBlane v. Hugh Lynch: Judgment against H alone. Judgment levied against cotton, which was produced by slaves and land that are separate property of W. Crops produced on separate property land is community property. An increase in value of land that is separate property is separate property.

i. The definition of separate property includes the increase of all lands or slaves thus acquired.

ii. “Increase” means the increase in value. So if her separate property was worth $100 at the time of marriage and upon divorce it was worth $1000, that $900 is separate property. But growing crops or collecting rent on that separate property is community property.

iii. Note: keep this case in mind. The character of the crops will not change as time goes on in the course of the law, but what will change is whether or not the crops can be used to satisfy H’s debt.

Doctrine of Ownerous Title: Whatever is acquired by the joint effort of the spouses is community property.

i. Test: Was is acquired by the labor of spouses? If yes—C/P. If no—S/P.

ii. This principle lies at the foundation of the whole system of community property.

iii. Texas courts have adhered strictly to the doctrine that dividends, interests, rent, and other income derived from separate property of a spouse comprise community property.

iv. But see §3.005 Gifts Between Spouses: If one spouse makes a gift of property to the other spouse, the gift is presumed to include all the income and property that may arise from that property.

Stringfellow v. Sorrells: Judgment against H executed against W’s separate property mules. Are the mules, which H cared for during the marriage, still separate property of W? Yes. Offspring of livestock that is separate property of the wife is community property. The livestock remains separate property, despite any increase in the weight or value of such livestock during the marriage.

i. Offspring are community property. Increase in value is separate property.

ii. Remember, at this point in time, H controlled and managed all property, even separate property of the W, but H’s creditors cannot get at W’s separate property.

iii. Under the Texas statutes, as interpreted by early decisions, the husband possessed sole management powers over all the marital property, including the separate property of the wife, except that the wife’s joinder was required in deeds conveying real estate which was homestead or which was separate property of the wife. The husband’s creditors could reach the husband’s separate property, and the community property, but not the wife’s separate property.

Kellet v. Trice: W owned separate property; she was the bread winner. The couple had a volatile relationship, but her money kept them together, because if they divorced, she would keep all her separate property. H controls W’s property. H takes the bulk of her property, passed it to a trustee, who conveyed it back to the community… trying to turn it in to community property. Can the H, under his management and control powers of W’s separate property, have the leeway to do this? No. This is a mere agreement that would change the character of property, and character of property is set at the time of acquisition, and an agreement can not change what has been constitutionally defined… conveyance is ineffective. Character of property is set at the time of acquisition and an agreement cannot change what has been constitutionally defined.

i. W could have gifted the property to H, which would make it H’s separate property.

ii. What is the only way in which this property could be turned into separate property? Purchasing the property with community property funds. (Community pays her FMV so the land is community property and the money is separate property.)

1911: married woman could obtain an order of the district court to remove her disability of coverture.
1913: (1) wife has power to manage her separate property, (2) power of control, management and disposition of what was later termed the “special community property” consisting of the personal earnings of the wife, the rents from the wife’s real estate, the interest on bonds and notes belonging to her and dividends on stocks owned by her, (3) exemption from liability for debts contracted by the husband was extended to the wife’s special community property, as well as to her separate property.
1915: Property or money received as compensation for personal injuries sustained by the wife are her separate property, except those to pay for medical bills and other expenses that the husband paid.

i. This statute is later declared invalid.

1917: Rents and revenues derived from separate property of either spouse are separate property of that spouse.
Doctrine of Implied Exclusion: if the constitution says that this is the only way you can acquire a right in something, then anything not specifically listed is implied to be excluded.

i. Test: Was it acquired by gift, devise, or descent? If not—C/P. If so—S/P.

Arnold v. Leonard: Mr. Leonard incurred debts. His creditors tried to levy the rents and revenues of Mrs. Leonard’s separate rental property. W sought an injunction. Trial ct held for wife, as SP. Creditor appeals w/ an argument that the constitution doesn’t define CP, but Article 15, section 16 of The Texas Constitution, defines separate property, and made no mention of rents and revenues from separate property. (So they must be CP) Under the doctrine of implied exclusion, if it is not listed as separate property, it is community property. Mrs. Leonard argued that even if the property is community, they should be able to exempt the property from creditors based on statutes defining parameters of the wife’s liabilities.

i. Legislature cannot change the character of property. They cannot decide that rents and revenues produced by separate property are now separate property instead of community property.

ii. It’s community property, the Legislature doesn’t try to change the character, they just exempt it from liability from spouse’s creditors.

1. Why can they exempt it from creditors, but not change the character? The constitution specifically said in the definition of separate property: “and laws shall be passed more clearly defining the right of the wife, in relation as well to her separate property as that held in common with her husband.”

iii. So Legislature cannot change the character of property, but they can change the rights of control and power.

Northern Texas Traction v. Hill: W was passenger in ex-H’s car, when it was hit. W was injured and sued for negligence, and amended the petition to join her new husband. She was suing D for recovery of her personal injuries. She thinks ex-H should be responsible since part of the accident was his fault. Are her damages C/P or S/P? All property or moneys received as compensation for personal injuries sustained by the wife shall be her separate property, except such actual and necessary expenses as may have accumulated against the husband for hospital fees, medical bills, and all other expenses incident to the collection of said compensation.

i. Everything a W collects for personal injury is her S/P, except for money used for hospital bills, medical bills, and other expenses incident to the collection of the damages.

ii. What’s wrong with this? It conflicts with the constitution.

iii. What’s the rule to use here? Rule of Implied Exclusion… personal injuries are not gift, devise, descent… so they must be possessed before marriage, or else the damages are community property.

iv. What effect does this being C/P have on the H? He has an interest in half the property. Also, his negligence will mean no recovery (rule was at this time was “all or nothing”). Contributory negligence would have barred her entire cause of action. If he had no interest in the recovery, his contributory negligence would not bar her cause of action.

Gorman v. Gause: Doctrine of implied exclusion keeps two people from making an agreement to change the character of property. Doctrine of implied exclusion was applied to a prenuptial agreement, which had declared that no property acquired during the marriage would be community. The Court viewed this as an attempt by the parties to fix the character of marital property by means different from that recognized in the state constitution, and held the agreement to be void and unenforceable.
Strickland v. Webster: Wife had purchased property from her husband with money she earned as a school teacher. The couple had entered into an agreement that her personal earnings would be her separate property. While that agreement was found to be invalid, because community property law cannot be changed by contract, the deed executed by the husband conveying the property was effective as a gift.
King v. Bruce: A husband and wife attempted to partition their community property into the separate property of each via an elaborate series of transactions. The court held that the couple’s attempt was ineffective, as it was not recognized by the constitution as a means of acquiring separate property.

i. Article 16 was amended to include §15 after this case.

The Constitution as Amended in 1948

Article 16 §15: Separate and Community Property of Husband and Wife: All property, both real and personal, of the wife, owned or claimed by her before marriage, and that acquired afterward by gift, devise, or descent, shall be the separate property of the wife; and laws shall be passed more clearly defining the rights of the wife, in relation as well to her separate property as that held in common with her husband; provided that husband and wife, without prejudice to preexisting creditors, may from time to time by written instrument as if the wife were a feme sole partition between themselves in severalty or into equal undivided interests all or any part of their existing community property, or exchange between themselves the community interest of one spouse in any property for the community interest of the other spouse in other community property, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property of such spouse.

i. Partition… H and W hold Whiteacre as community property. They decide to split it and one half becomes H’s separate property and one half becomes W’s separate property.

ii. Exchange… H and W hold Greenacre and Blackacre as separate property. H exchanges his community property interest in Blackacre for W’s community property interest in Greenacre, and so then all of Greenacre is H’s separate property and all of Blackacre is W’s separate property.

These are two new ways to create separate property.
Creditors are protected in that if the partition or exchange that creates separate property prejudices creditors, it’s held invalid. Fact question.
These cannot be done in a prenuptial agreement… the couple must be married.
Must be done on existing community property

i. Can partition a bank account, but cannot partition future interest earned on it. Interest earned next year will be community and will have to be partitioned again.

ii. If they separated the accounts so each spouse had their own account, the interest earned will still be community property.

iii. What do you do to make the interest separate property? Do an exchange at the end of each year, after the interest has been earned.

Hilley v. Hilley: community property cannot be used to create a joint tenancy with right of survivorship between the spouses, because such a transaction was not an interspousal gift.

i. If you’re going to set up a joint tenancy with right of survivorship, so that on H’s death, H’s separate property becomes W’s separate property and vice versa, the couple MUST partition or exchange FIRST

Davis v. East Texas Savings and Loan: spouses could utilize separate property to create a valid joint tenancy with right of survivorship, with the spouses as joint tenants
Krueger v. Williams: a spouse, utilizing community property, could create a valid joint tenancy with right of survivorship with the spouse and a third party as joint tenants.
Williams v. McKnight: H went in with W to set up bank accounts in 3 different banks, setting up JTWROS. There was no partition at all. Under the probate code, H and W may by written agreement create JT, but this violates the constitution. Courts strictly read the constitution- up until 1988, JTWROS had to be made by partition. W argued that her husband set up bank accounts with their property as joint accounts with rights of survivorship, proven by the signature cards on the account. There can be no JTWROS arising from CP without partitioning it first.

i. Even today, crops grown on separate property land are considered to be community property

Jameson v. Bain: the partition/joint tenancy card was signed in the wrong order, so the spouses did not first partition the property, but did so after creating a joint tenancy… which was not valid due to the strict procedures in the constitution.
Few v. Charter Oak Fire Ins. Co: When a rule of the court conflicts with a legislative enactment, the rule yields. A wife does not have to join her husband in a suit for recovery of worker’s compensation benefits arising out of her own injuries. Worker’s compensation is community property, and her husband owns it jointly with her. But despite that joint ownership, he doesn’t have to be a party to the suit to recover them.

i. Court says, he can be joined because of his interest, but he is not an indispensable party.

ii. Worker’s compensation recover = lost wages, which is community property

iii. Statutes, created by legislature, trump rules, created by SCt.

§3.001(3): the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage, is separate property.
Graham v. Franco: The recovery awarded for personal injuries sustained by either spouse during marriage is the separate property of that spouse except for any recovery for loss of earning capacity during marriage. The acts of negligence of the husband are not imputed to the wife so as to bar her recovery.

i. Separate property: damages for injury to her body, including disfigurement, loss, or impairment of the use of the body, and physical pain and suffering, both past and present.

ii. Community property: loss of earnings, medical expenses, and all other damages.

iii. Court says that when it is personal (pain, suffering, dismembering), the damages will be separate property.

iv. Other aspect of personal injury recovery: medical expenses (community property because burden is on community to pay the expenses), lost wages (community property because they would be earnings during the marriage).

v. Contributory Negligence

1. What effect does this have on wife’s recovery? No recovery by husband for his own wrong, and because he has an interest, no recovery for negligence.

2. But her personal injuries, she still has a claim for those.

vi. PERSONAL INJURY RECOVERY IS SEPARATE PROPERTY

vii. What day controls the characterization of property? The day the accident occurred.

viii. The person who was injured has sole management of personal injury recoveries, even if some of them are characterized as community property.

ix. Pain and suffering is separate

x. Medical expenses and lost wages are community property

Southwestern Bell v. Thomas: Wife’s recovery of damages for personal injuries is not barred by contributory negligence on husband’s part.
Schwing v. Bluebonnet Express: in a wrongful death action for the death of a wife, contributory negligence of the husband would be imputed to bar the husband’s cause of action, but that it would not serve as a bar to the cause of action of the children.
Wyly v. Commissioner: Three cases… Case 1: Husband made irrevocable trust funded by community property; trust income was to be distributed to wife and then to grandchildren upon her death. Case 2: Husband made gifts to his wife of one-half of his community interest in bonds. Case 3: Husband transferred his community property interests in certain assets to his wife. A gift of property from one spouse to the other or a gift of a spouse’s one-half community interest to the other spouse results in separate ownership in the donee.

i. Income from separate property becomes the community property of both spouses, and the only way to change it to separate property is to partition it after it comes into existence. But the spouse who owns the separate property has a “special community” or a “sole management community” interest in the income.

1. The other spouse has only “ownership” with no direct management rights. All that ownership means is that (1) they can complain that the spouse owning the community property made an excessive or capricious gift to a third party, or (2) they can demand an accounting on dissolution of the marriage or partition, alleging that the income was used to improve the other spouse’s separate property.

2. This “ownership” does not constitute a “right to the income,” because the interest is so limited, contingent, and expectant. Therefore it need not be included in giving spouse’s gross income for tax purposes.

ii. Is the interest from gratuitous transfers between spouses separate or community property? Community property.

iii. The gift was wife’s separate property, but the income from the property was community property.

iv. When there is a gratuitous transfer, does the donor spouse retain a possession of or right of enjoyment of the income from the gift? No. Because the gift and the income thereof is special community property, the donee retains the absolute right to manage it, and the donor has no possession or enjoyment of it.

v. In Texas, when does a person have a right to income arising from spouse’s separate property?

vi. Special community property: A spouse receiving income from his separate property holds what is known as “special community” or a “sole management community” interest.

1. A spouse has an absolute right to manage their special community property, as long as there is not a fraud on the community.

vii. Under Texas law, setting up a trust and retaining a reversionary interest means that the donor has NOT retained a right of possession and enjoyment, because the donor has given away as much as he can under the law.

viii. Wyly Amendment: If one spouse makes a gift of property to the other that gift is presumed to include all the income or property which might arise from that gift of property.

1. Note: this amendment applies to spouses only!

2. So, income from a rent house given to wife from her parents is community property.

ix. What if before marriage, you give your fiancée stock certificates as gifts that produced dividends before marriage? The stock is separate property. Any income from the stock before marriage is separate. Any income from the stock after the marriage is community.

Williams v. Williams: A premarital agreement can waive the constitutional and statutory rights of a surviving spouse to a homestead and other exempt property. Premarital agreements will be construed as broadly as possible in order to allow the parties as much flexibility to contract with respect to property. As long as the agreement does not violate constitutional and statutory definitions of separate and community property or the requirements of public policy.

i. The Texas Constitution was amended in 1980… the “Williams Amendment” is a result of this case.

ii. Can a couple agree in a prenuptial agreement that all income from separate property will be separate property? No. Such a clause is invalid because it is in violation of the Constitution.

iii. Homestead Right: the right of a surviving spouse to continue to occupy the marital home that is separate property of their dead spouse, until the surviving spouse either dies or abandons the home.

1. said that both spouses were older persons with adult children.

iv. Result of this case: it is possible to waive your homestead rights.

Interspousal Transfers

i. Either spouse possesses power to make a gift to the other spouse of his separate property or of his interest in community property, so that the property becomes the separate property of the donee spouse.

ii. While property purchased by the community estate from the separate estate of a spouse for a valuable consideration is community property, it is not possible for a gift to be made to the community estate, because of the constitutional definition.

iii. Problem with interspousal transfers: determining whether an effective gift has been made under the facts.

Equal Rights Amendment

i. Everything became genderless in 1972

ii. Art I §3a: Equality under the law shall not be denied or abridged because of sex, race, color, creed, or national origin.

Chapter 4 of the Family Code: Premarital and Marital Property Agreements
The Constitution as Amended in 1980, 1987, and 1999

Art XVI §15: (1) All property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise, or descent, shall be the separate property of that spouse, (2) and laws shall be passed more clearly defining the rights of the spouses, in relation to separate and community property, provided that persons about to marry and spouses, without the intention to defraud preexisting creditors, may by written instrument from time to time partition between themselves all or part of their property, then existing or to be acquired, or exchange between themselves the community interest of one spouse or future spouse in any other community property then existing or to be acquired, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property and estate of such spouse or future spouse; (3) and the spouses may from time to time, by written instrument, agree between themselves that the income of property from all or part of the separate property then owned by one of them, or which thereafter might be acquired, shall be the separate property of that spouse, (4) and if one spouse makes a gift of property to the other that gift is presumed to include all the income or property which might arise from that gift of property, (5) and spouses may agree in writing that all or part of their community property becomes the property of the surviving spouse on death of a spouse, (6) and spouses may agree in writing that all or part of the separate property owned by either or both of them shall be the spouses’ community property.

i. Wylie Amendment

ii. Williams Amendment

iii. Clause 1

1. Same basic definition of separate property is the same

2. Genderless

iv. Clause 2

1. Genderless

2. Now includes future spouses (“persons about to marry”)

3. As for to preexisting creditors, the statute has changed from “prejudice to” to “intent to defraud.”

4. Partitioning now includes future property and future spouses.

5. Exchanging now includes future property and future spouses.

6. Do the exchanges have to be equal or equal-ish value? No.

v. Clause 3

1. Completely new clause

2. Limited to spouses

3. Must be in writing

4. No partition or exchange needed, just a written agreement

5. Agreement can be made that income or property from separate property remains separate property of that spouse.

6. Can two spouses (a lawyer and a doctor) agreeing that the doctor’s salary would be his separate property and that the lawyer’s property will be her separate property?

a. They can’t agree to this. You can only agree to income from SEPARATE PROPERTY being separate property.

b. How could they accomplish this goal, though? They can partition or exchange it.

c. STRICT INTERPRETATION.

7. Can two spouses agree that income from property that was left to wife by her grandmother be separate property? Yes.

vi. Clause 4; Wyly v. Commissioner

1. Income follows a gift between spouses.

vii. Clause 5: McKnight v. McKnight; Hilley v. Hilley

1. This allows you to set up a joint tenancy with right of survivorship between spouses with community property

2. Limited to spouses

3. Must be in writing

viii. Clause 6: Kellate v. Trice

1. This lets you change the character of separate property into community property

2. Limited to spouses

3. Must be in writing

Prenuptial Agreements

i. Prior to 1980, prenuptial agreements were ineffective to the extent that they purported to change the character of property to be acquired after marriage.

ii. The 1980 amendments to the Constitution make it possible for persons about to marry, by written instrument to partition between themselves all or part of their property then existing or to be acquired, or to exchange between themselves the community interest of a future spouse in any property for the community property then existing or to be acquired.

Postnuptial Agreements

i. Spouses may enter into effective postnuptial agreements with respect to the same matters that might be the subjects of valid prenuptial agreements.

ii. Spouses, not persons about to marry, may make valid agreements, no partition or exchange necessary, that income or earnings from separate property shall be separate property of the spouse owning the property from which the income is derived.

iii. From 1/1/2000 on, spouses are able to agree that all or part of their separate property shall be the spouses’ community property. See §4.201 to 4.206.

iv. Can a prenuptial agreement be changed or revoked? Yes, but only in writing

v. Will Contracts

1. Since Weidner v. Crowther, 1957, it has been generally accepted that interspousal will contracts do not constitute a change in the constitutional definition of separate property

2. Probate Code §59A Contracts Concerning Succession: A contract to make a will or devise (or not to revoke a will or devise) can be established only by provisions of a will stating that a contract does exist and stating the material provisions of the contract. The execution of a joint will or reciprocal will does not by itself suffice as evidence of the existence of a contract.

3. Probate Code §37 Passage of Title Upon Intestacy and Under a Will: When a person dies with a will, the estate devised by the will shall vest immediately in the devisees. All the estate not devised shall vest immediately in the heirs of the deceased. If a person dies intestate, all of the estate vests immediately in his heirs.

4. Probate Code §38 Persons who take upon Intestacy: (a) If a person dies leaving no spouse, then his stuff passes as follows: (1) to children and descendants, (2) if no kids, then 50% to each parent. If only one parent survives, then 50% to that parent and 50% to siblings and descendants, (3) no parents, then all to siblings and descendants. (4) If none of them, then divided into two moieties. (b) If a person dies with a spouse, the separate estate goes to (1) 1/3 to spouse, and 2/3 to children or descendants, with a life estate in spouse, (2) If no kids, then 50% to spouse and 50% like above, except that if no parents or siblings, then surviving spouse gets 100%.

5. Probate Code §45 Community Estate: (a) If one spouse to a marriage dies, the community property goes to the surviving spouse if (1) no child of the deceased survives or (2) all surviving children of the deceased spouse are also children of the surviving spouse. (b) On the intestate death of one spouse, if a child survives the deceased spouse and the child is not a child of the surviving spouse, 50% goes to kid, 50% goes to spouse.

vi. Joint Tenancy with Right of Survivorship

1. Prior to the adoption of the 1987 amendment to the constitutional definition, the spouses could not utilize community property in creating a joint tenancy with right of survivorship with the spouses as joint tenants.

2. Nor was it possible at that time for the spouses to partition or exchange the community property which was not in existence at the time of the partition or exchange, but which might be acquired in the future.

3. Since the 1980 amendment, it is now possible to partition of after-acquired community property. And since the 1987 amendment, a surviving spouse can own property once held jointly, if such agreement is in writing.

Separation Agreements

i. Note: in Texas there is no “legal separation.”

ii. Upon filing for divorce, a court may issue orders governing all aspects of the separation which precede the divorce. (See §6.501-6.506)

iii. A couple may change ownership of their community property during separation by a property partition and exchange agreement. This type of agreement is subject to particular enforceability statutes.

iv. A couple may also attempt to change management and control of community property, the requirements of and control of which are much less strict.

v. A couple may simply enter into an agreement in contemplation of divorce. This just needs to be just and right.

Statutes and Decisions, 1980 to Present

i. Patino v. Patino: The parties entered into a separation agreement that the parties were married but that differences had arisen and that they intended to live separate and apart for the rest of their lives. Husband contemporaneously executed a special warranty deed of the homestead to wife. No action was taken on his military retirement pay. The trial court set aside the agreement saying that it was not just and right. Trial court said the separation agreement was unjust and unfair, set aside, and did not divide military benefits (which was the law at the time). Husbands and wives can effect a division of their property on permanent separation, but such agreement must be fair and equal. §3.631 authorizes the parties to enter into a written agreement concerning the division of all their property and liabilities, and such terms will be held binding upon divorce unless the court finds it not just and right.

1. Note: no legal separation agreement in Texas. You can’t go into a court and ask the court to divide your property without filing for divorce.

2. The purpose of this case is to illustrate the difference between an agreement incident to divorce and a post-marital agreement and how courts can throw these agreements out.

3. The primary question in analyzing an agreement between spouses is to determine if it is an agreement incident to divorce or if it is a postnuptial agreement made for the purpose of changing the character of property.

ii. See chapter 4 of Family Code:

1. 4.003; compare to 4.102 and 4.103

a. The partition or exchange of property may include future income arising from the property, unless they agree it will be community property. So once you partition or exchange, the earnings are encompassed too.

b. Where can you do more? Pre or post? Post. Premaritally, future spouse can only partition and exchange.

c. Note: you can do the things in 4.003 for pre or post nups. But don’t forget the Constitution… make sure your pre or post nup is constitutional.

2. 4.006 = 4.105; enforcement is the same for pre and post nuptial agreements.

3. Enforcement

a. The first way to set aside an agreement is to show that it was not voluntarily signed, §4.105 and 4.006 section (a)(1).

b. That the agreement was unconscionable… which requires 3 elements be met.

c. Whether or not something is unconscionable is a question of law.

iii. Bradley v. Bradley: Prior to their marriage, the couple entered into a prenuptial agreement that said that their separate property and their income from that separate property would be their separate property. During the marriage, Husband had a medical practice and Wife stayed home. They never did the partitioning, so the community property is still community property. Their premarital agreement does not effect a partition or exchange, it just shows their intent to do so. If a premarital agreement does not actually partition and exchange the property, but just shows an intent to do so in the future, then the property has not been partitioned or exchanged, unless the parties actually did so later.

1. A trial court has broad discretion in dividing the property in a divorce and its division won’t be disturbed unless there was an abuse of discretion.

2. Two step process to reverse division of property cases on appeal. You must show two things:

a. That the property was wrongly characterized

b. That if it had been properly characterized, the court probably would have made a proper division.

3. There is one division of property that will get you an automatic reversal as a matter of law: awarding separate property of one spouse to the other spouse. The moment you divest separate property, there will be an automatic reversal.

a. Note: no reversal if the separate property of one spouse was called community property and it was awarded to that spouse. Why? No harm.

4. A court will not imply a partition or exchange… if the parties say they’re going to do it every year and their premarital agreement says what their intent is, and then they don’t do it, the partition or exchange WILL NOT BE IMPLIED! So even if there’s a huge agreement full of boilerplate agreement that talks about their intent, the agreement had better actually partition or exchange.

iv. Dewey v. Dewey: The parties entered into a premarital agreement which stated that all profits and income that accumulated after marriage from separate property would remain separate property. But the husband did not list his salary received from his corporation during marriage. And the agreement did not state that there would be no accumulation of the community estate. Since his income was not expressly listed in the premarital agreement and it was apparently acquired during marriage, it is community property. A premarital agreement should be interpreted according to the true intentions of the parties as expressed in the instrument. No single provision taken alone will be given controlling effect, rather, each provision must be considered with reference to the whole instrument.

1. An employee spouse’s accrued benefits in a retirement and pension plan which have been earned during marriage, but which have not vested and matured at the time of divorce, constitute a contingent interest in property and a community asset subject to division upon divorce.

2. The mere fact that the community estate is not divided equally does not constitute an abuse of discretion as long as there is a reasonable basis for that division. Factors to be considered are:

a. The relative earning capacity and business experience of the parties.

b. The educational background of the parties

c. The size of separate estates

d. The age, health, and physical condition of the parties

e. The fault in breaking up the marriage

f. The benefits the innocent spouse would have received had this marriage continued, ad

g. The probable need for future support

3. The premarital agreement said that income from separate property remained separate property.

4. The agreement said nothing about husband’s salary. So husband’s salary is community property. Since the income was not expressly listed, it was clearly community property.

5. Often times even an enforceable premarital agreement does not accomplish the goal of the proponent.

v. Collins v. Collins: When the couple got married, they each brought into the marriage a separate business and other significant separate property. During the marriage, the parties kept records in which they characterized the income from their separate property as separate property and carried forward such characterization into their joint income tax returns, all of which were signed by both parties. The court said that tax returns are not agreements to partition because they contain no language of agreement to partition. At best, they indicate a written memorandum of an oral or unstated agreement to partition. A joint income tax return signed by both spouses, in which the income of various assets is listed as separate and community, absent specific language indicating that the document is intended by the parties to constitute an agreement to partition, does not constitute a partition agreement in writing and signed by the parties as required by law.

1. These people said that they had a partition agreement which is evidenced by their tax returns.

2. Court said that tax returns are not agreements to partition, since they don’t contain the language of partition.

3. The family code requires an agreement in writing signed by both parties which contains the language of an agreement to partition.

4. Although tax treatment such might arguably be some evidence of the character, the state and federal courts look to Texas law for characterization, not to tax law.

vi. Daniels v. Daniels: A couple entered into an agreement after 5 years of marriage where each spouse agreed that all income on or after the date of agreement would be that spouse’s SP, all monies from spouse’s personal services are SP, and past distributions of trust will be SP. Both H and W had sizeable trusts, but the wife’s was huge. H wanted to break this postmarital agreement. This case never went to jury because H never raised a question of fact as to whether the agreement was valid. H claims on appeal that this agreement wasn’t valid (because there was no reasonable disclosure of her assets) and that the agreement was drafted when proponent (W) had the burden. The court looked at when they tried the case to determine that H (opponent) has the burden. The court directed verdict for Mrs. Daniels. The burden of proof fell on Mr. Daniel, which he failed to meet, because he failed to prove the agreement was unconscionable or that there was no disclosure; therefore, the agreement is valid. A postnuptial agreement will be treated the same as a partition and exchange of community property agreements. Courts impose the same duties of good faith and fair dealing on spouses as required of partners and other fiduciaries. When a spouse knowingly elects not to inquire into matters that affect his or her interest, they cannot later complain that they didn’t know the full circumstances of the transaction.

vii. Doctrine of Implied Validation: the legislature may impliedly validate an invalid statute by passing a constitutional amendment to cure it. This permits a constitutional amendment to impliedly validate a statute that was originally beyond the legislature’s power to enact if it does not impair the obligation of a contract or impair vested rights.

viii. Beck v. Beck: The couple entered into a premarital agreement in 1977 which said that all the income derived by separate property will remain separate property. Though the agreement was invalid per the constitution at the time, the legislature had adopted a constitutional amendment allowing future spouses to partition and exchange, and therefore the agreement was held valid.

1. Did Audrian have any vested rights? No.

2. So under the doctrine of implied validation, they’re going to apply the 1980 amendment to agreements that predate the amendment.

ix. Fanning v. Fanning: **IMPORTANT CASE** The Fannings, who were both lawyers, decided to divorce. The court awarded the majority of Fanning’s assets and custody of their children to the W upon divorce. A visiting judge gave W 100% of the CP. H sued. They had a premarital agreement enacted prior to 1980 amendment. There was an exchange in the premarital agreement where H kept his law practice and the money from his law practice and W kept her law firm and the salary from her law firm. The premarital agreement said that all income and revenue from separate property would be community property, but that if the constitutional amendment allowing for future spouses to partition and exchange is passed, then they agreed that the income and revenue would be separate property. The court said that the portion of the constitutional amendment validating the partition and exchange of property then existing or to be acquired applies to persons about to marry and spouses, the portion of the amendment validating written agreements concerning income or property derived from separate property applies only to spouses.

1. Fraud on the community

a. Gifts to girlfriend

b. Lots and lots of money of donations, that he couldn’t prove was from his separate property

c. Cayman Island account… but it came from the law firm, his separate property.

2. It is never duress to threaten to do what you have the lawful right to do.

Chapter 2: Characterization of Marital Property

The Community Property Presumption

Foster v. Christensen: Mr. Newgent was bankrupt. He had listed some lands as part of his assets, but as homestead. Homestead cannot be sold to satisfy creditors. Part of the land, however, was not used as homestead, so it was sold to Christensen. At a bankruptcy sale, you can only purchase what title the bankrupt person has. Foster is suing to set aside the sale, because they are the parents of Mrs. Newgent and claim that this land was given to her as separate property. The land is presumed to be separate. No evidence of the separate property character of the land was offered at the bankruptcy hearing, so it could not be brought up in court. The Court of Appeals affirmed saying that if they brought it up now, it would be a collateral attack. Since wife was not a party to the bankruptcy hearing, so any claims she had on the property could not be adjudicated. So she’s not bound by that outcome, and this is not actually a collateral attack. Judgment of foreclosure and sale in a suit against the husband when the land is the separate property of the wife does not affect her title.

i. The wife’s separate ownership of property, although standing in the name of her husband or appearing on record to be community property, may be proven as any other fact by any competent evidence, including parol evidence, surrounding circumstances, and declarations of the parties.

ii. Declaring land homestead has no bearing on whether or not the land is separate or community.

iii. Wife has the absolute right to rebut the community property presumption.

iv. Without any words clearly establishing that something is community property, it’s presumed community—no matter who’s name it’s listed in.

Maples v. Nimitz: Ruth and Frank were married in 1951. They both died without having had children of this marriage, but they both had children from prior marriages. Ruth’s daughter, Necil, and Frank’s son, Jack, are fighting over land owned by the couple upon their deaths. Necil said that the land was community property and so she has a one half interest in it. Jack says the land was Frank’s separate property and so he gets it all. The land was acquired by Frank in 1921, and was his separate property at the time of acquisition. In 1955, Frank conveyed the land to Jack. In 1972, it was conveyed back to Frank. Jack says the land was just being held in trust for Frank, and thus was still separate property. The court said that because Jack didn’t treat the land as a trustee would (he used it as collateral), he was not a trustee. As an alternative, Jack said that the land was gifted back to Frank, and thus is separate property. The Court said that because the land was transferred for valuable consideration, it was not a gift. The land is community property because it was re-acquired during marriage.

i. You can’t always depend on what land was at the time of acquisition… look at what happens to it over the years.

Kyles v. Kyles: During his marriage H was injured in a car accident. He filed a lawsuit alleging various damages from the accident including lost wages and lost earning capacity. He settled for $190K, and at the time of the divorce trial, he had $69K in his possession. So what is that $69K? H failed to show the court clear and convincing evidence to rebut the presumption that the settlement proceeds were community property. When a spouse receives a settlement from a lawsuit during marriage, some of which may be separate property and some of which may be community property, it is the spouse’s burden to demonstrate what portion of the settlement is his separate property. In the absence of evidence that none of the funds constitute payment for lost wages or lost earning capacity during marriage, the entire settlement proceeds are characterized as community property.
Osborn v. Osborn: Appellant was injured in 1992 and the parties filed a personal injury lawsuit. At the time of the divorce trial, the lawsuit had not yet been tried. There is no presumption that a potential recovery for personal injuries to the body of a spouse is community property. A recovery for personal injuries to the body of a spouse is separate property of that spouse.

i. To the extent the marital partnership was injured, the community estate is entitled to recover damages. The damages that belong to the community estate include lost wages of the injured spouse, damages for medical expenses, and other expenses associated with the injury to the community estate. To the extent the other spouse was injured by loss of consortium, those damages are the separate property of the other spouse.

ii. Opposite view from Kyles

iii. Husband had failed to show up for divorce. Sara was awarded 30% of any recovery from Lon’s pending personal injury suit.

iv. This is a decision of the 1st court of appeals in Houston, and has not been adopted by other courts.

The Doctrine of Inception of Title

Important doctrine
Test: When did the right incept against the world?
Know the difference between homestead inception of title vs. adverse possession inception of title
Homestead inception of title: when you have a homestead, you have a right against the world from the day you settle the property. This is a right superior to everyone else in the world.
Adverse possession inception of title: the minute you move on the land, you have no right, because the rightful owner can displace you up until the statute of limitations has run… your right arises when the statute runs.
Welder v. Lambert: A partition action was filed by two children from a grantee's first marriage (appellants) against their five siblings, children from the grantee's second marriage (appellees). The land had been granted to two impresarios, one being the grantee, to introduce colonists under a contract with the state. The contract was entered into in 1828. The actual grant took place six years later in 1834. During the interim, the grantee married his first wife. Subsequently, after her death, he married his second wife. Appellants argued that the land in question was community property of their father and his first wife, their mother, and they were thus entitled to one-half from their mother's estate and two-sevenths of the remaining one-half from their father. Appellees asserted that the land was the separate property of their father and as such, appellants were entitled to only two-sevenths of the whole. When the condition is accomplished, it refers back to the time of the making of the contract, and it is considered as made at that time; but if the condition be not duly accomplished, it is considered as never made.

i. Money, expended in improving property belonging to one of the spouses, belongs to the community, but gives the other no claims to the property itself.

ii. Improvements, such as buildings and the like, made upon the land of one of the consorts by the community must, upon partition, be credited to the community estate, and are made a charge upon the property.

Carter v. Carter: In 1974, H signed an earnest money K. (One month before marriage) He secured it with $1000 check from his separate account, but the deed didn’t pass until they were married. He says this is SP; she says it is CP. Ownership of real property is governed by the rule that the character of title to property as separate or community depends upon the existence or nonexistence of the marriage at the time of the incipiency of the right in virtue of which the title is finally extended, and that the title, when extended, relates back to that time. When a spouse uses separate property consideration to pay for land acquired during the marriage, and takes title to the land in the name of both husband and wife, it is presumed that the spouse intended the interest placed in the other to be a gift. However, this presumption is rebuttable, and parol evidence is admissible to show that a gift was not intended.

i. The separate or community nature of property is determined by the time and circumstances of its acquisition.

ii. When did Mr. Carter acquire the right to the home? Prior to marriage.

iii. The deed for the home named both Mr. and Mrs. Carter. Isn’t that prima facie proof of community property? No, it’s a presumption of gift.

iv. Presumption: When you have a conveyance between spouses, the presumption of gift arises.

v. You cannot make a gift to the community.

Brown v. Foster Lumber: In 1852, Dimon took survey. In 1866 Dimon transferred the land to Friedberger. Smith, by adverse possession, acquired property belonging to Friedberger. In 1875, Smith sold the prop to Mrs. Brown for $150 (paid out of her separate account). The Browns cultivated the property and lived on it for 12 years, when Freidberger came back on land and sued Mr. Brown to recover title. Mrs. Brown wasn’t a party to the suit at this time. Judgment was for Friedberger, who then sold the land to Foster Lumber Company. Mrs. Brown sues Foster for title to the property. Where the evidence shows that a deed to a married woman conveys the land to her in her separate right, and that the consideration for such conveyance is paid by her out of funds belonging to her separate estate, but the undisputed evidence further shows that her grantor has no title to the land, she therefore acquires none by said deed. The only title acquired by her is a limitation title which ripens under the adverse claim and possession of herself and husband, and it is clear that property so acquired is community. Until the 10 years' adverse claim and possession expires, the title remains in the record owner, and, when this possession ripens into title, it vests in the community, notwithstanding the fact that when such adverse possession begins, and during all of the 10 years of such possession, the married woman claims the land as her separate property under her deed.

i. Notwithstanding the fact that the property is the homestead, the wife is not a necessary party to a suit brought by an adverse claimant for its recovery. Her claim of homestead is no defense to the suit to recover community property, and for that reason it is unnecessary to make her a party to the suit, and she is bound by a judgment rendered against her husband.

ii. If an agreement by a husband to relinquish claims to homestead property is made in fraud of the homestead rights of his wife, or if the judgment is by mistake or fraud not entered in accordance with the true agreement made by the husband, it can only be set aside in a timely direct proceeding brought for that purpose.

iii. Why didn’t it matter that the purchase was made with Mrs. Brown’s separate funds? Because the only possible claim she has via adverse possession… community property.

iv. When and by what means did the right to the property possible incept? Adverse possession.

Strong v. Garrett: Mrs. James had 6 tracts of land. She conveyed to Strong property that described Tract #2 when the property she really owned was Tract #3. He lived on the land and cultivated it. Strong later married and lived with his W on this property and had 2 kids. After divorce, Strong got title to the property of Tract #2. He remarried a woman with a kid, and then died leaving property to his first 2 kids and his second W. The second W had life estate in 1/3 of the property, but she conveyed the entire tract to Garrett before she married him. She died and Garrett remarried. Garrett still has possession of lot #3. When one who acquires title by limitation enters upon land as a naked trespasser, without any property right therein, he has no basis for a claim of title until the full period of limitation has run. Property thus acquired by pure limitation, when the period began before marriage and ended during the marriage relation, is community property. When one who acquires title by limitation is not a trespasser but has a property right with respect to the land, although he has no record title thereto, and his title is ripened by limitation, still when that period of limitation expires his title takes character from his original claim, and the property becomes his separate estate.
McCurdy v. McCurdy: H had life insurance policies prior to marriage. He had paid for 1/3 of the premiums before marriage and the rest after marriage. The court found the proceeds were H’s SP. W argues pro-rata; i.e., that if H&W paid for 2/3 of the premiums after marriage, those proceeds are CP. However, this court disagrees with California’s pro rata law. Where a life insurance policy is acquired before marriage, payable to the insured husband's estate, under community property law the right to proceeds remains the insured's separate estate, as vested before marriage, notwithstanding part of the premiums are paid thereafter from the community.

i. If either spouse before marriage procures a policy of life insurance on his own or another's life, in his favor or in favor of his estate, the policy and its proceeds are his separate property. His rights to the proceeds date from the policy.

ii. See §3.401 et seq.

Parson v. US: H had lots of insurance policies. (One for $50,000 and 14 other policies, 12 of which were purchased in Arkansas.) H and W moved from a common law state, AK, to TX, a community property state. They divorced in TX and the issue of how the policies get divided up upon H’s death comes into play. In Texas we begin with the presumption that all the policies are community property. A husband may unconditionally make his wife the owner and beneficiary of an insurance policy on his life when it is issued, or later if he desires, so as to bar inclusion of it in his estate. Under Texas law, property acquired by a husband and wife in another state prior to their moving to Texas will retain the character of ownership it had in the state from which it was removed. Property which was characterized as separate at the time acquired remains separate, although subsequently paid for with community funds, subject to the community's right of reimbursement.

i. When a couple moves from a common law state, Texas law keeps the character the same as it would have been characterized in the other state.

ii. In the case of death, you characterize at the situs of acquisition… See §7.002.

Lewis v. Lewis: Before H married, he was injured on the job and permanently disabled. When the suit was settled, he was married and the compensation was deposited into W’s account. Half of that amount was used to purchase land. W filed for divorce and claimed that the land was CP, rather than H’s SP because H received the funds while married. W argues that H’s disability was permanent and continued through the marriage, so part of his benefits should compensate the CP for loss. Spouse’s SP includes the recovery for PI sustained by spouse during marriage, except any recovery for loss of earning during marriage. H’s loss didn’t occur during marriage. No further loss of earning capacity occurred during marriage.

i. A spouse's separate property includes the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage. The character of compensation benefits paid during marriage is determined not by when the injury occurred, but by when the loss of earning capacity occurred.

ii. A husband has a community interest in his wife's compensation benefits when her injury and disability occurs during marriage. A husband does not have a community interest in his wife's compensation benefits when her injury occurs during marriage but her disability does not begin until after divorce. When the loss of earning capacity occurs outside marriage, compensation is separate property.

Tracing

§3.003(b) says the degree of proof necessary to establish that property is separate property is clear and convincing evidence. This is when people use tracing to establish the separate character of property. When utilizing tracing, one must establish the time and/or means of acquiring the property currently possessed by the couple. Often times this will require tracing the current property into several previous owned properties, making it clear that the property has a separate origin.
Must show documentation making it clear that the property has a separate origin.
You can trace through bank accounts, joint bank accounts, etc.
Burden of proof to establish that prop is SP is by clear and convincing evidence.
Hardee v. Vincent: H owed a debt to Campbell Dry Goods and the company came after W’s SP. H had given W a store, merchandise, trade fixtures, and a capital account. The W ran the store, made profits, restocks, etc. The company’s objective was to levy against W’s merchandise. It was incumbent upon W to show that the money used to purchase merchandise came out of her SP. The wife couldn’t show that anything came from her separate account, so presumably, everything was purchased by the profits she made. W’s profits are CP; therefore reachable by H’s creditors. All property acquired by either husband or the wife during marriage by onerous title is community estate. The burden of proving that any portion thus acquired is the separate estate of the wife rests upon the party asserting that fact.

i. Inventory in a sole proprietorship is hard to establish as SP because it is hard to separate pre-marriage inventory from post-marriage inventory. (But the proprietor can ask for reimbursement.)

Sole Proprietorships: this leads to big problems when it comes to characterizing inventory. If a business was owned by a spouse before marriage, it is probable that the premarital inventory has been sold or simply cannot be identified. Accordingly, a spouse will probably not be able to establish that inventory as separate property but will be relegated to an equitable remedy—reimbursement.
Norris v. Vaughan: Mr. Vaughn married W in 1947. W died in 1947. She had a child from a previous marriage, Mrs. Norris. Norris is suing Mr. Vaughn for property she claims was community property of H and her mother. The property in dispute has to do with drilling wells that were owned by Mr. V prior to marriage. It consists of interests in 4 oil companies and their attributed oil wells. H claimed this was his SP. Daughter argues that as long as gas was in the ground it was Mr. V’s SP, but as soon as he took out of the ground it was CP. The Court says an oil lease is like an interest in property. When he purchased the lease it was his SP and because of the nature of the wells (non-renewable resource), they will eventually be exhausted. Mr. V owned gas before marriage and after marriage; it was still his. (This is unlike crops because they aren’t generally depleted.) Daughter argues there was so much labor that went into the well that it should be CP. Ct holds since Mr. V paid for expenses out his SP, he has a right to control it. (Reasonable control and management by the owning spouse is valid, when it becomes excessive –like working 18 hour days- the other spouse will be entitled to reimbursement.). The court holds that since there was not an expenditure of marital community funds or effort as to impress community character on the gas produced from the gas wells and the money received as profit, the gas produced and the proceeds therefrom remain separate property.

i. So long as separate marital property can be definitely traced and identified it remains separate property regardless of the fact that the separate property may undergo "mutations and changes."

ii. Reasonable control and management is necessary to preserve the separate estate and put it to productive use. Thus, community character would not be impressed upon the wells by means of respondent's activities in relation to production and maintenance.

iii. Any property or rights acquired by one of the spouses after marriage by toil, talent, industry or other productive faculty is community property.

iv. This is the seminal case on the tracing and characterization of income from separately owned oil properties. At the same time, the case is now wrong regarding the treatment of partnership property. It takes the aggregate approach, and now we take the entity approach.

v. “Petitioner’s burden to prove an expenditure of community effort so as to impress community character upon the separate asset.” (The Court leads you to believe that if you work enough, you can change the character…this is wrong! You can’t change character by virtue of how much you work; you could be reimbursed for excessive control and management, but the character of the property won’t change.)

h. Aggregate Theory of Partnership- if a partnership acquired property prior to marriage it is SP.

i. Today, we have the entity theory- the aggregate theory is no longer viable because of the Uniform Partnership Act.

j. Entity Theory- now we look at partnerships in terms of an entity. Once received as profits, it is considered CP.

k. TFC § 3.409 Nonreimbursable Claims: The court may not recognize a marital estate’s claim for reimbursement for:

i. The payment of child support, alimony, or spousal maintenance;

ii. The living expenses of a spouse or child of a spouse;

iii. Contributions of property of a nominal value;

iv. The payment of a liability of a nominal amount; or

v. A student loan owed by a spouse.

Marshall v. Marshall: Appellant wife and appellee husband remarried approximately five months after being divorced from their first marriage. A year later, both parties filed for a divorce from their second marriage. The suits were consolidated and the trial court entered a decree of divorce. Appellant wife sought review of the trial court's distribution of the parties' property because she claims there was fraud on the community. When there is constructive fraud, the burden is on the donor to prove that the gifts of his or her share of the community property are fair; otherwise the gift will be set aside. The courts consider three primary factors in determining whether a claim of constructive fraud exists: the size of the gift in relation to the total size of the community estate, the adequacy of the estate remaining to support the spouse in spite of the gift, and the relationship of the donor to the donee.

i. With the passage of the Texas Uniform Partnership Act (UPA) in 1961, Texas discarded the aggregate theory and adopted the entity theory of partnership. Under the UPA, partnership property is owned by the partnership itself and not by the individual partners. In the absence of fraud, such property is neither community nor separate property of the individual partners. A partner's partnership interest, the right to receive his share of the profits and surpluses from the business, is the only property right a partner has that is subject to a community or separate property characterization. Further, if the partner receives his share of profits during marriage, those profits are community property, regardless of whether the partner's interest in the partnership is separate or community in nature. The only partnership-related property a trial court can award upon dissolution of a partner's marriage is the partnership interest.

ii. Usufruct: a right to use another’s property for a time without damaging or diminishing it, although the property might naturally deteriorate over time.

1. Ex: the right of a surviving spouse to property owned by the deceased spouse.

Community Out First Rule: Where funds are commingled so as to prevent their proper identity as separate or community funds, they must be held to be community funds.

i. So… Community funds will be presumed to have been drawn out before separate funds from a joint bank account.

ii. Example: Wife’s grandmother gifted her $30,000 and told the wife to go out and get a new car. Wife deposits the $30,000 into the community’s joint checking account that holds $4,000 of community funds. The community funds will cover that month’s community bills. However, before the bills are paid, wife purchases a Toyota, spending $29,999. Should the first $4,000 expended on the car be considered community? Per the community out first rule, the first $4,000 is community.

iii. Professor George says to treat this more as a presumption than as a rule.

Clearing House Method: Look at the intent of each expenditure to determine if it came from separate funds or community funds

i. Example: Wife’s grandmother gifted her $30,000 and told the wife to go out and get a new car. Wife deposits the $30,000 into the community’s joint checking account that holds $4,000 of community funds. The community funds will cover that month’s community bills. However, before the bills are paid, wife purchases a Toyota, spending $29,999. Should the first $4,000 expended on the car be considered community? Per the clearing house method, the entire car is separate property.

Tarver v. Tarver: H married to woman who had 3 kids. One of them died. W died and they had a community estate of $335,000. H marries W2. Forty years later, W2 divorces him. At that time, their marital estate was $340,000. The two kids from the first marriage argue that they deserve ½ of the estate from the marriage and that H and W2 can split the other half. They had to trace and show that what was left from 2^nd estate actually came from the 1^st estate. Kids failed to meet this burden. A spouse, or one claiming through a spouse, must trace and clearly identify property claimed as separate property, and that when the evidence shows that separate and community property have been so commingled as to defy resegregation and identification, the burden is not discharged and the statutory presumption that the entire mass is community controls its disposition.

i. This case does away with perception that we just look at beginning and end balances when tracing, because, although the account values were almost the same, it was shown that at one point during the depression, the account was down to $50,000, and the 2^nd community rebuilt the funds

ii. The theory advanced by the children in this case is common. “I began this marriage with $500,000. I now have $200,000 after 2 years of marriage. Obviously the $200,000 is my money.” Beginning balance does not serve to characterize property at the time the marriage is dissolved. The $200K is presumed community. During the marriage, the $500K in separate property could have spent or lost and the $200K could have been built up through community time, toil, and effort, making the entire $200K community property. Beginning balance does not characterize ending balance.

McKinley v. McKinley: Injunction brought against stepson. H & W married in 1965. Prior to their marriage, H opened 2 savings accounts to produce savings certificates worth 26K. It is the general rule that to discharge the burden imposed by the statute a spouse, or one claiming through a spouse, must trace and clearly identify property claimed as separate property. It is further well settled that when the evidence shows that separate and community property have been so commingled as to defy resegregation and identification, the burden is not discharged and the statutory presumption prevails.
Latham v. Allison: Administrator of W’s estate failed to sustain burden of claiming SP. The Allison’s were married with no children but H had son that managed the estate. W let Latham manage the estate. There was an argument over shares of stock. Prior to marriage, W owned 144 shares; sold 66. H and W had a joint bank account. Latham argues the proceeds of the sale of the stocks were deposited into their joint bank account and proceeds were invested in savings certificates. Latham showed evidence of deposits and certificates but he failed to link anything. To discharge the burden imposed by the statute, a spouse, or one claiming through a spouse, must trace and clearly identify the property claimed as separate property. However, when the evidence shows that separate and community property have been so commingled so as to defy segregation and identification, the burden is not discharged and the statutory presumption prevails. When tracing separate property, it is not enough to show that separate funds could have been the source of a subsequent deposit of funds. Such conjecture does not constitute sufficient evidence to sustain appellant's burden of tracing to overcome the community property presumption of §3.003.

i. Level of proof needed to establish separate property through tracing: clear and convincing evidence.

Gibson v. Gibson: Divorce case where trial court characterized property (home and a car) as H’s SP. Prior to marriage, H purchased property in MO and after marriage, sold the property for 8K. $5500 was paid at closing which went into his personal account, along with $2500 from the sale of H’s truck. H and W transferred account in MO to a joint account in TX, which contained proceeds from both of their Social Security checks as well as some of W’s SP (life insurance). After the MO property was sold, they purchased a $9900 home in TX. W argues property was purchased with commingled funds and once they sold prop, they couldn’t decide what was SP or CP. A deed from a third party which is in the names of both husband and wife raises a community presumption which is rebuttable and operates only in the absence of satisfactory proof to the contrary.
Different modes of tracing

i. "Dollar for dollar" accounting of separate funds used to purchase an asset, the ownership of which is in dispute.

ii. One dollar has the same value as another and under the law there can be no commingling by the mixing of dollars when the number owned by the claimant is known.

iii. Spouses are permitted to distinguish their separate funds commingled in a bank account with community money by proving that community withdrawals, e.g. for living expenses, equaled or exceeded community deposits.

Snider v. Snider: Prior to marriage, balance of H’s acct was $27,642.45 (clearly, H’s SP). His acct dropped to 19K, without interest. He deposited 10K of SP, leaving 29K in the account as SP. Despite all withdraws and deposits, 19K remained intact- he never went below this amount. At time of H’s death, 35K was left in his account, leaving 6K as CP. If the account balance never dips below the amount of separate property, then the separate property is in tact, and the balance minus the amount of in tact separate property is the community property.

i. In tracing funds through a bank account, would you use the date the check was written or the date the check cleared? The day the check cleared because less manipulation can be done by the parties. And it’s the standard date used by accountants doing tracing.

Bakken v. Bakken: Stocks were given to W from her father, characterizing it as SP. The court will characterize cashed dividends as CP, but here, there was a capital gain from W’s mutual fund. Mutual funds assets usually consist of the stocks, bonds and other securities of a number of other corporations. Their income is generally of two kinds: (1) cash dividends received from the corporations whose stock they own, and (2) the profit or gain realized from the sale of such stocks. When these cash dividends are passed on to married owners of mutual fund shares who hold them as separate property, there is no question that these dividends become community property of the spouses. The increases in the value of separate property arising from fortuitous causes such as market fluctuations or natural growth remain separate property.

i. Wife has gifts from dad… her separate property

ii. Quarterly cash dividends earned from stock à community property

iii. Profit or gain from selling that separate property stock à separate property

iv. It’s the same as if you separately owned 10 acres of property, it increased in value, and you sold it off.

v. Problem with mutual funds is that they are traded within themselves. You don’t have to trace each transaction, because courts look at stocks and mutual funds the same way

vi. Note: if you allow the dividends to be reinvested, you have to prove what was earned and then what was bought with the dividends. MESSY!

Carter v. Carter: Mutations of stocks are SP. H was given 150 share of MPI prior to marriage (obviously SP). H sold the shares and bought some different shares with the proceeds, which later split. (still SP) He eventually sold some of these shares as well. Part of the sales went to community estate debts and part went to buy a van. His remaining shares went into his separate brokerage account. W argues the proceeds to buy the van were CP and that H didn’t meet his tracing burden with clear and convincing evidence. Then there was a 2 for 1 stock split. What is the character? Separate. A stock split is another mutation. No change in ownership.

i. This is the same Carter v. Carter as earlier

ii. Prior to marriage, father of husband gifted him stock of father’s corp. Separate property.

iii. The father’s corporation was acquired by Stauffer. Son’s stock was mutated into Stauffer stock. What is the character of this stock? Separate. It’s a mutation and became the other stock.

Resulting Trusts and Significant Recitals

Resulting Trusts: when record title is conveyed to one or both of the spouses during marriage, the conveyance places legal title in the spouse or spouses named as grantee, and the equitable title is presumed to be in the community. However, other rules take over when it is proved that consideration has been paid from a spouse’s separate property.

i. Rest of Trusts §440: General Rule. Where a transfer of property is made to one person and the purchase price is paid by another, a resulting trust arises in favor of the person by whom the purchase price is paid.

2. Examples:

a. Total purchase price is $1000. A pays $500 and signs a note for $500 at the time title passes, but Y pays off the $500 note. What percentage represents A’s interest? How about Y’s interest? A=100%, Y=0%; because we look at the time title passes.

b. Total purchase price is $1000. A pays $500 and Y pays $500 at the time title passes. What’s Y’s interest? What’s A’s interest? A=50%; Y=50%.

ii. Rest of Trusts §441: Rebutting the Resulting Trust. A resulting Trust does not arise where a transfer of property is made to one person and the purchase price is paid by another, if the person by whom the purchase price is paid manifests an intention that no resulting trust should arise.

iii. Rest of Trusts §442: Purchase in the Name of a Relative. Where a transfer of property is made to one person and the purchase price is paid by another and the transferee is a wife, child, or other natural object of bounty of the person by whom the purchase price is paid, a resulting trust does not arise unless the latter manifests an intention that the transferee should not have the beneficial interest in the property.

2. Examples:

a. A, father to A Jr., pays total purchase price of $1000 and title passes to son, A Jr., at the time of payment. What is A’s interest? A=0%; A Jr.=100%.

b. What if father provides his son with a letter before title passes asking son to simply hold the property which will be passed to him? A=100%; A Jr.=0%.

iv. Rest of Trusts §443: Rebutting the Presumption of a Gift to a Relative. Where a transfer of property is made to one person and the purchase price is paid by another, and the transferee is a wife, child, or other natural object of bounty of the person by home the purchase price is paid, and the latter manifests an intention that the transferee should not have the beneficial interest in the property, a resulting trust arises.

v. Remember, the consideration must be paid by the beneficiary, or a legally binding commitment made for payment of the consideration made by him prior to or at the time the consideration passes.

vi. Parole evidence is admissible to rebut the presumption of the resulting trust

vii. Bybee v. Bybee: H purchased land for 28K. Paid as follows: 1K down payment by grandpa, 800 by himself, and 200 from future wife. He signed for 26K note; he was the only one obligate by the note. H and W agreed grandpa would have a ½ interest in this land. (Grandpa would only have a 1/28K interest if he was to prove he had no intent to make this gift to H.) If we had used explicit resulting trust law, grandpa, H, and future wife would be paying to X. The entirety of title passed to H. Look at everything at the time title passes. Ct awarded W 1/140 of the whole price. COA says she only should’ve received 1/140^th ($200/28K) of the whole. There is no issue of gift here. Beneficial trust arose in her favor but to the tune of 1/140. A trust must result, if at all, at the very time a deed is taken and the legal title vested in the grantee. No oral agreement before or after the deed is taken, and no payments made after the title is vested, will create a resulting trust, unless the payments are made in pursuance of an enforceable agreement upon the part of the beneficiary existing at the time the deed is executed. The trust must arise out of the transaction itself. The beneficial title follows the consideration, and unless the one claiming the trust has paid the consideration, or become bound for same, at the very time of the making of the deed, no trust is created.

Significant Recitals

i. Kinds of Significant Recitals

1. A recital in a deed is considered to be a significant recital if it states that the consideration is paid from the separate funds of a spouse

2. A recital that states that the property is conveyed to a spouse as his or her separate property

3. A recital also can be significant if it states a conveyance is made out of love and affection or as a gift

ii. What is a significant recital?

1. This is a significant recital: “To Mary Smith as her sole and separate property.”

2. If the spouse is in any way in privity with this, and there is no fraud or mistake, ten it cannot be changed.

3. Another example “To Mary Smith out of love and affection.”

iii. Significant recital can only be rebutted if there has been fraud or mistake.

iv. Significant recitals are unusual

v. When there is no significant recital, then the property is presumed community property, and the community property presumption can be rebutted by parol evidence.

1. Unless it’s between the spouses, and then there is a gift presumption… see p. 184 section b.

vi. Third Party Grantor: When the deed is from a third party as grantor to either spouse, or to both of the spouses, as grantee, and the conveyance does not contain a significant recital, the normal community property presumption can be rebutted by parol evidence that the consideration was paid from the separate funds of one of the spouses, so that a resulting trust arises in favor of the separate estate of that spouse.

vii. Spouse as Grantor—Presumption of Gift: when the deed is from the husband to the wife as grantee, and contains no significant recital, the normal community property presumption is replaced by the presumption that the husband is making a gift to the wife in the absence of parol evidence to rebut the presumption of gift.

viii. When you don’t have a significant recital, either H or W can come in and say it’s their separate property.

1. If it’s in one name, you can show it’s the other parties’ separate property.

2. If it’s in both names, either party can claim it’s their separate.

ix. With significant recital, there is a statement that shows that (1) consideration was paid from spouse’s separate property or (2) that the property was conveyed to the spouse for his separate property or (3) that the property was conveyed out of love and affection (a gift).

Smith v. Strahan: The husband and wife were married and had four children. One of the children married the individual and subsequently died. The deed to the land in question, which consisted of 400 acres of land, was taken in the name of the wife, who also later died. The individual commenced an action against the husband, and the heirs of the husband and the wife, for the partition of the land among the heirs, including the individual's deceased wife. The husband alleged that although the deed was taken in the name of his wife, he paid for the land out of his separate property. The trust of a legal estate, whether it is taken in the names of the purchaser and others jointly, or in the names of others without that of the purchaser, whether in one name or several, whether jointly or successively, results to the one who advances the purchase money.
Bogart v. Somer: The burden of proof in refuting a presumption of gift is by clear and convincing evidence.
Johnson v. Johnson: H paid his SP (earnest $ K) before and during marriage, but title goes into H and W’s name. Under § 442, there is a presumption that W has a ½ SP interest in the property as a gift. Ct says H rebutted the gift . W claimed no interest in real estate as her SP; H never told her he was making gift to her. W just assumed it was CP; but H paid for the property out of his SP, he was the sole purchaser, and H signed the contract before marriage. H didn’t see the deed before it was filed; the title company just put both of their names on the deed. H met his burden of proving by clear and convincing evidence that he did not make a gift of the property to his wife. Because the deed to property named husband and wife as grantees, a presumption arose that the husband intended to give his wife an undivided one-half interest in the residence.
Peterson v. Peterson: Married couple closed on a house 28 days after marriage. W told H she wouldn’t move into the house unless her name was on the deed, too. H puts her name on the deed (says he wasn’t making a gift) to satisfy her. Was this a gift? Nope. H overcame presumption of gift with clear evidence and that he had no intent to make the gift. H also overcame the CP presumption because he paid for the property with his SP. When a husband uses separate property consideration to pay for land acquired during the marriage and takes title to the land in the name of the husband and wife, it is presumed he intended the interest placed in the wife to be a gift. The presumption is rebuttable, and parol evidence is admissible to show that a gift is not intended.
Whorrall v. Whorrall: H and W bought house after marriage for 55K. H contributed $500 from his SP for the earnest money K, representing .9% overall. The initial down payment of 21K came from W’s SP, representing 37% overall. The remainder was paid by CP (a 35K note) representing 61% overall. The trial court gave W all the rights in the property. The court was divesting him of his .9% interest in the property. You can’t divest one of their SP, especially separate real estate!!! SP in a piece of real estate can’t be awarded to the other spouse, but you can negotiate a settlement. (Or the court can sell the property and H and W can split the money.)

i. Why did husband’s 0.9% interest result in reversal? Because court cannot give away separate property of one spouse to the other spouse.

ii. How could the trial court deal with a home in which each spouse has a separate property interest? Force a sale.

iii. This case illustrates the importance of making a separate property claim. Here, husband’s 0.9% interest means that wife can’t have the house.

iv. Remember: a district court cannot award separate property of one spouse to the other spouse, no matter now tiny the separate property is.

Messer v. Johnson: H and W married in 1930. A 3^rd party conveyed property to W for her separate use. A significant recital in the deed stated that the property was the SP of the wife for her sole and separate use. H was in privity to the deed. W dies, leaving her SP to her niece (Messer) but gave H a life estate and said could sell the property during his life if he needed money. H remarried and made a conveyance of this property to his new W. Ct found 1^st W held property as trustee for H’s benefit for CP and therefore, should not be passed to 2^nd W. H could sell or mortgage the property but couldn’t give it away. Without proof of fraud or mistake in the insertion of the recitals in the deed, parol evidence is not admissible to show that the maker of it does not intend to convey the property to his wife as her separate property, and this for the reason that the deed on its face clearly expresses such intent

i. McKivett v. McKivett: Parol evidence should not be admitted to prove that it was conveyed for a different purpose or use.

ii. Lindsay v. Clayman: an express or resulting trust in favor of the community may not be established by extrinsic evidence where property is conveyed by a third party to the wife as her separate estate and the husband participates in the transaction to such an extent that he should be regarded as a party to the instrument.

iii. When a significant recital exists, parol evidence to vary the deed is admissible in only the most specific circumstances: allegations or evidence of fraud, duress, or mistake

iv. When offered by a party to the transaction, or by one in privity with a party, parol evidence is not admissible to rebut a significant recital, in the absence of allegations entitling the party to equitable relief (fraud or mistake).

v. Privity: The non-grantee spouse is a party to the transaction if he:

1. Is a grantor,

2. If he signs the executory contract of sale, without joining in the deed,

3. If he signs the promissory note and deed of trust executed as part of the transaction

4. If he is merely present when the deed recitals are drafted

vi. When the non-grantee spouse is not a party to the transaction, he may offer parol evidence to contradict the recital, and such evidence is admissible.

Credit Transactions

Gleich v. Bongio: The former wife brought an action against the former husband, his brother and his brother's wife to recover an undivided interest in certain lots which had been purchased during the course of her marriage to the former husband partly with separate funds of the former husband and partly on the credit of the community. The trial court decreed that the former wife recover a 7/48 interest in three lots. The appellate court reversed and rendered judgment that the former wife recover nothing. The former wife appealed and the court reversed. The court held that the wife was entitled to recover a 7/40 interest in five lots. The court held that the portion of the property acquired on the credit of the community was community property and thus the community estate acquired a part interest in the lots. The court held that the acquisition created a tenancy in common between the separate and community estates, each owning an interest in the proportion that it supplied the consideration. The court held that if any community property was used to improve the lots, the community estate was entitled to an accounting, if such improvements enhanced the value of the property.

i. Money borrowed on a community obligation is community property. Similarly, property acquired on the credit of the community is community property.

ii. The mere intention of the husband and wife cannot convert property purchased with an obligation binding upon the community into the separate estate of either spouse. To accomplish that purpose the vendor must have agreed with the vendee to look only to his or her separate estate for the satisfaction of the deferred payments.

iii. See §9.201: If some property has not been divided in the divorce, you get to go back to court, and the court can make a just and right division of omitted property.

Broussard v. Tian: During marriage, H paid $480 down payment (for property) out of a total purchase price of $2,080. The remainder was covered by a $1600 loan. H had SP oil leases and royalties from that were SP…this is how H says he’ll pay for the loan. Does this make the loan his SP so that the whole property is H’s SP? No. Under loan agreement, bank didn’t limit themselves to going after H’s royalties as SP; they could go against the CP, which included H’s and W’s earnings during marriage. Therefore, this is a CP loan and W has a ½ interest in the property. H’s 1600/2080 loan interest reduces down to 10/13 →W takes ½ of this, or 5/13 of the property.

i. By what authority can ex-wives sue their ex-husbands? §9.201 et seq.

ii. What are the requisites for and limitations on filing such a suit? (1) undivided or unawarded property, (2) two year statute of limitations

Ray v. US: PROFESSOR LOVES THIS CASE!!! Decedent was diagnosed terminally ill on 9/26/67. H had no SP, but his business partner went to get a $1 million loan, and bank the agreed to secure it with H’s SP. H purchased flower bonds with the money. They had a FMV of $1Million and 23 years later they would mature and be worth $2 Million. The bonds are such that if decedent dies, you can use them at face value to pay estate taxes. Here, he died, paid back the $1 Million and receive gains from the bonds FMV. Finding the bonds were SP isn’t inconsistent with the TX Constitution. Property purchased on credit shall receive it’s characterization by which purchasing spouse agrees to repay the loan. This was H’s debt and H’s bonds.

i. Texas courts have recognized that when one spouse acquires property on credit with the creditor agreeing to look solely to the separate property of that spouse for compensation in the event of default, the spouse serving as the source of credit is considered the owner.

ii. In the absence of an explicit agreement between the debtor and the creditor to look only to the separate estate of one spouse for satisfaction of the indebtedness, property purchased on credit has been considered separate if it can be shown that the creditor expected payment from one spouse and that payment was actually made out of the separate estate.

iii. “Ray Debt”: debt in which a creditor has agreed to look only to the separate estate of a spouse for repayment. This means the community, any community, will not be liable for the debt.

1. Understand the difference between a separate debt (that spouse’s separate property is liable, the community is not) and sole community debt (debt taken by one spouse and so the other spouse’s separate property is not liable… the community property is liable)

Chapter 3: Claims for Economic Contribution and Reimbursement

Three marital estates: (1) wife’s separate, (2) husband’s separate, (3) community estate
Claims for reimbursement and economic contribution can flow between the three.
What’s the difference between reimbursement and economic contribution??? They apply at different times.
We still have reimbursement!
Reimbursement is used when §3.408(b)(1) and (2) say so.
Claims for reimbursement are subject to a just and right division
Claims for economic contribution are subject to a just and right division
See §3.401 to §3.410 and §7.007.
§3.402 Six possible claims for economic contribution:

The reduction of the principal amount of a debt secured by a lien on property owned before marriage to the extent such debt existed at the time of marriage
The reduction of the principal amount of debt secured by a lien on property received by a spouse by gift, devise, or descent during marriage to the extent such debt existed at the time when the property was received,
The reduction of the principal amount of that part of a debt, including a home equity loan: incurred during marriage, secured by a lien on the property, and incurred for the acquisition of or for capital improvements, to the property;
The reduction of the principal amount of that part of a debt: incurred during marriage, secured by a lien on property owned by a spouse for which the creditor agreed to look solely to the separate marital estate of the spouse in whose property such lien attached and was incurred for the acquisition of or for capital improvement to, such property
The refinancing of the principal amount described in 1-4 above to the extent such refinancing reduces the principal amount in a manner described above
Capital improvements to property other than by incurring debt

§3.408: a claim for economic contribution does not abrogate another claim for reimbursement in a circumstance not covered y the subchapter and that if there is a conflict between a claim for reimbursement and a claim for economic contribution, then the claim for economic contribution prevails.

So it seems that reimbursement is precluded for any of the possible claims for economic contribution in §3.402

§3.409: a court may not recognize a marital estate’s claim for reimbursement for

The payment of child support, alimony, or spousal maintenance
The living expenses of a spouse or child of a spouse
Contributions of property of nominal value
The payment of a liability of a nominal amount
A student loan owed by a spouse

Claims for reimbursement will be resolved by using equitable principles and they can be offset against one another
While a claim for economic contribution does not allow for use and enjoyment of property during the marriage to be offset against the economic contribution claim, a claim for reimbursement may be offset by the use and enjoyment of property.
§7.007 A court is mandated to

Determine the rights of both spouses in a claim for economic contribution
Divide a claim for economic contribution of the community marital estate to the separate marital estate of one of the spouses
If the claim is a separate estate against the community estate, the claim must be awarded to the contributing estate
If the claim is by a separate estate against the other spouse’s separate estate, the claim must be awarded to the contributing estate

Pelzig v. Berkebile: the wife sought reimbursement for child support, college expenses, and alimony payments made to husband’s child of a former marriage and the husband’s former spouse. The court, reasoning that the wife was not deceived by the obligations and did not seek to have husband pay for same out of his separate estate, determined wife should not be reimbursed.
Butler v. Butler: a wife was allowed to be reimbursed for community funds used by husband to pay for living expenses of a child born during husband and wife’s marriage to another woman. The reimbursement was deemed justified by the court.
Farish v. Farish: court ordered child support payments are not subject to a claim for reimbursement from the community estate.

Reimbursement for Time, Toil, and Effort

A claim for reimbursement exists when there has been inadequate compensation for the time, toil, and effort of a spouse by a business entity under the control and direction of that spouse (§3.408(b)(2)).
Vallone v. Vallone: Reimbursement for time, toil, and effort case…not for property or funds) H’s father had a restaurant where H worked. He gifted H the assets of the restaurant. H decided he wanted to establish another restaurant, i.e.; incorporate and move locations with 20K capital, which included equipment valued at 47% of initial capital. The remainder of capital came from H and W CP. In essence, H bought “stocks” in his restaurant: 47% from H’s SP and 53% from CP. H and W divorced and court divided property claiming the restaurant/stock was worth $1 million. 47% of initial capital was H’s SP ($470K) because increases to Sp stock are SP, and the remaining 53% was CP. W got 70% of the remaining 530K (CP). She claims the court didn’t consider time, toil, and effort. 47% of each hour H worked went to H’s SP (stock value) rather than CP (labor put in usually goes to CP). W wanted reimbursement from this labor as CP. The court of appeals says W pleaded for funds or property rather than the reasonable value of H’s time, toil, or effort so Sup Ct says there’s no abuse of discretion.

i. When community time, toil and effort benefit the SP of one spouse and the community hasn’t received reasonable compensation, CP can be reimbursed for that time, toil, and effort.

ii. It is fundamental that any property or rights acquired by one of the spouses after marriage by toil, talent, industry or other productive faculty belongs to the community estate. Nevertheless, the law contemplates 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.

iii. The rule of reimbursement is purely an equitable one. It obtains when the community estate in some way improves the separate estate of one of the spouses, or vice versa. The right of reimbursement is not an interest in property or an enforceable debt, per se, but an equitable right which arises upon dissolution of the marriage through death, divorce or annulment.

iv. What if Tony had not incorporated his restaurant? Then the increase would have been community

v. How would the busness had been characterized if operated as a sole proprietorship? Community

vi. If the court finds that the corporation is an alter ego, it’s the same result as if it were a sole proprietorship.

vii. What caused the value of the restaurant to increase? His labor.

viii. Wife didn’t ask reimbursement for time, toil, and effort, so she won’t get reimbursement.

ix. Value of time, toil, and effort ≠ the increase in the value of the property

x. How do you determine the value of time, toil, and effort? Determine what it would have taken to hire someone to do what Tony did without giving them an ownership interest. Experts needed!!!

xi. This is still the law! We still have reimbursement for time, toil, and effort.

Jensen v. Jensen: H & W married. Before marriage, H acquired RLJ corporation. H later (but before marriage) acquired NEI, a unique business opportunity responsible for the increase in the stock. (H earned this during marriage so it should be CP but really, it’s just an increase in value of SP.) H & W got divorced. At that time, the stock was worth many times what it previously had been. H was compensated $380,000 for his labor over the marriage. Upon divorce, H claimed the stock was worth 650 k; W claims the stock was worth $1,250,000. The Court came up with a formula for reimbursement. Court held that H had been reasonably compensated based on H’s stock ownership. (But the issue should be based on the value to be paid to someone on the open market.) The stock was SP and Mrs. Jenson could be reimbursed, but she failed to plead for reimbursement, so the court, in the interest of justice, remanded.

i. Time Toil and Effort Formula: The Community is entitled to reimbursement EQUAL TO Value of Time and Effort expended by a spouse to enhance the separate estate of the other (other than that reasonable necessary to manage and preserve the separate estate) MINUS Payment received for that time and effort in the form of salary, bonus, and other fringe benefits.

ii. 2 Theories of how to treat corporate stock owned by a spouse before marriage but which has increased in value during marriage due, at least in part, to the time and effort of either or both spouses:

1. Reimbursement Theory: Community should receive whatever remuneration [payment] is paid to a spouse for his time and effort because that time and effort belongs to the community. Stock 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 the spouse which contributed to the increase in the value of the stock.

a. Adopted by the Court

2. Community Ownership Theory: Community should receive whatever remuneration [payment] is paid to a spouse for his time and effort because that time and effort belongs to the community. Any increase in the value of the stock as a result of time and effort of the owner spouse becomes community property.

iii. How does one go about proving the factor of reasonable compensation? Show how much it would cost to hire someone to do the exact same job.

iv. If the separate property corporation does not appreciate, but the owning spouse worked day and night for little or no compensation, would there be a reimbursement claim? Yes, because it was time and effort beyond what he was reasonably compensated for.

Trawick v. Trawick: Company was founded in 1968 and incorporated in 1976. Later that year, H & W married. 4yrs later, H died. H owned ¾ of the corporation, which made his increase in entirety 375k. (75% of corporation’s entire increase) (Threshold issue: the corporation’s entire increase at the end of marriage from the start of the corporation was 505k). W sues executrix for her time, toil, and effort. Jury found 55% of his increase was contributed to H efforts (208k) during the marriage. The rest of the increase would be due to the market/consumer demand. Total enhanced value may equal or exceed the demonstrated value of a SP asset and will not attempt to suggest the outcome of such a conflict. One spouse can impose some form of community interest on the increased value of the other spouse's separate property where the increase is due to a manipulation of what would have been a reasonable flow of community income derived from the separate property.

i. The appropriate computation of a surviving spouse's interests in the increased value of separate property is to determine the discrepancy between the reasonable value of the effort expended and the actual compensation received and then look to the enhanced value of the separate estate to satisfy that discrepancy.

Beginning Balance Requirement

Not precluded by the current economic contribution statutes.
Used when a spouse enters into a marriage with a substantial separate estate which will provide the base for the later economic success of the community. If that monied spouse cannot specifically trace those funds, reimbursement may help him out.
Horlock v. Horlock: H married to W and had 3 kids, but W died and gave H her estate but left nothing to the kids. H started the marriage with $1Million and this was the foundation upon which the CP was built. He commingled all the money and could not trace anything. H then married W2 and had 1 kid. They divorced. Once again, he commingled all the money and could not trace anything. Reimbursement will not be allowed when the husband commingles his separate estate with the community estate.

i. To sustain a cause of action for actual fraud, the appellant has the burden of showing that the gifts were made with the primary purpose of depriving her from having the use and enjoyment of the assets comprising the gifts. Actual fraud involves dishonesty of purpose or intent to deceive.

Purchase Money Reimbursement—Equitable Offsets

Economic contribution does not include the dollar amount of expenditures for ordinary maintenance and repair or for taxes, interest, and insurance.
Use and enjoyment of property during a marriage for which a claim for economic contribution to the property exists does not create a claim of an offsetting benefit against the claim.
Penick v. Penick: H had rental property, all SP. During the marriage, H used rents and revenues to pay mortgages but also used the properties for depreciation during the marriage and had huge tax savings on joint returns each year. Court weighed the community benefit against what was put into it and denied reimbursement. Although H’s SP enhanced SP, W can’t be reimbursed for the CP contribution to the properties because that contribution was not greater than the tax savings of owning the properties.

i. An equitable claim for reimbursement is not merely a balancing of the ledgers between the marital estates.

ii. The discretion to be exercised in evaluating a claim for reimbursement is equally as broad as that discretion exercised by the trial court in making a just and right division of the community property.

Availability of Reimbursement for Retained Earnings, Reimbursement for Use of Community Credit

Thomas v. Thomas: H and W were married for 15yrs in TX. H had inherited Coca-Cola out of Louisiana but worked full time for Procter and Gamble, making over 100k a year. H brought W to places he had traveled with work. During the marriage, 500k in Coke dividends was received. Upon divorce, W claims reimbursement for her time, toil, and effort during marriage. W argues that because CP paid these corporate taxes for his earnings, the earnings are CP. (For all earnings in an S corporation, shareholders are taxed on them.) Ct says this wasn’t CP nor SP… Subchapter S earnings are corporate property until distributed so it doesn’t get divided, and if it was distributed after marriage, it would remain H’s SP. Next, W argues it should be treated as a partnership because they both paid taxes on it and earnings should’ve been reimbursed, but court says this doesn’t make a difference. It would be considered partnership property until distributed (Marshall). W also claims use of community credit should be reimbursed. H and W were both personal guarantors on the loan. The corporation was worth more than the debt, so the creditors would never look to H and W individually, so they didn’t pay off the bonds. Unless the corporation is a spouse's alter ego, a court upon divorce may award only shares of stock, and not corporate assets. Moreover, a court may not divest a spouse of separate property corporate stock and award it to the other spouse. Corporate earnings remain corporate property until distributed and, therefore, are not divisible on divorce.

Economic Contribution

Equitable Reimbursement- courts can do what is just and right by looking at the totality of circumstances; unless dividing the equities is an abuse of discretion, it’s not touched on appeal.

i. Principle reductions of purchase $debts are claims for reimbursement but you must look at offsetting benefits- depreciations (Penick)

ii. Payment of other estate’s unsecured debts are claims for reimbursement and courts don’t have to look @ offsetting benefits (ie: wanting reimbursement for community time, toil, efforts put into the SP)

iii. Capital improvements to other estate then the value is based not on dollar for dollar cost of improvement but on enhanced value; this is the measure for reimbursements

iv. These claims can be asserted for:

1. Payment by 1 marital estate of unsecured liabilities of another marital estate

2. Inadequate compensation for time, toil, effort by a “business entity” controlled by the other spouse

v. Burden of Proof: If community if contributing estate then burden of proof is preponderance of evidence to show that amt of $ used came f/ SP.

Non-Economic Reimbursements:

i. No reimbursement for payment of child support, alimony, spousal maintenance, student loans owed by spouse, living expenses of spouse, child

ii. Wasting of assets (ie: boyfriend spent 10k on his girl on vacations and wants to be reimbursed for it) isn’t a claim for reimbursement but could be a claim for “recoupment”

iii. Is spouse precluded by making a claim for reimbursement for payments of maintenance and repair for taxes, interests? There’s a possible claim for this, but maintenance will most likely fall into the living expenses category and won’t get reimbursed for it

Economic Contribution- $ amt of debt reduction on prop secured by lien:

i. Must have owned prop b/f marriage

ii. Entitled to make a claim if debt was incurred during marriage or have refinanced original mortgage

iii. Made capital improvements, other than debt

iv. This claim may end up being less than total amt of econom contribution but contributing estate will NEVER owe funds to benefited estate

v. The claim can’t exceed equity in prop on date of divorce, death, or disposition

vi. Timing of Economic Contribution Claims:

1. Date of claim arises on date of marriage or date of 1^st econ contribution payment

2. Date claim matures is at dissolution of marriage or death of either spouse

vii. Burden of Proof: clear and convincing on the SP…have to show $ used on reduction of debt came f/ separate funds

Non-Economic Contribution:

i. $ Amount of expenditures for ordinary maintenance and repair or for taxes, interest OR

ii. $ Amount of contribution by spouse of time, toil, effort during marriage

Langston v. Langston: The husband neither filed an answer nor appeared in court. After taking testimony from the wife, the trial court issued its final order which, in addition to other provisions, granted the wife sole ownership of a home which the husband had owned as separate property before the marriage. The parties had obtained a home equity loan on the property during the marriage to re-finance the property. The husband had not kept up the loan payments or insurance on the property, and property taxes were due. The lender had contacted the wife regarding the delinquency as the wife was jointly liable on the debt. The appellate court held that, although the wife was entitled to a lien against the property to secure the value of her contribution toward the value of the property during the marriage, the trial court's action in divesting the husband of his separate property constituted the taking of the husband's separate property without due process, in violation of Tex. Const. art. I, § 15.

i. In making a just and right division of property upon divorce, a trial court may be required to make a division of a claim for economic contribution of the community marital estate in the separate marital estate of a spouse. In making this division upon termination of the marriage, the court shall impose an equitable lien on property of a marital estate to secure a claim for economic contribution in that property by another marital estate.

ii. A spouse seeking to impose a lien on the other spouse's separate property to secure a claim for economic contribution would necessarily have to bring forth sufficient evidence for the fact finder to determine the enhancement value to the separate property.

Chapter 4: Management and Liability of Property during the Marriage

General Concepts

The power to manage includes power to (1) Transfer title to a third person for consideration, (2) Gift, (3) Devise, (4) Litigate, (5) Incur obligations, contractual or tortuous
See 3.101, 3.102, 3.103, 3.301-3.309, 4.204
5 categories of marital property

i. Separate property of the wife

ii. Sole management community property of the wife

iii. Joint management community property

iv. Sole management community property of the husband

v. Separate property of the husband

Liability

i. Analysis: (1) characterize the property or debt, (2) establish management

ii. Why figure out characterization and management of liability? To help determine what marital property can be reached by a third party for satisfaction of an obligation

iii. See §3.202, §3.203, §4.206

iv. Analysis:

1. Is the liability the sole liability of one spouse or the joint liability of both spouses?

2. If sole liability, is the liability a separate liability or a sole community liability?

3. Was the sole liability incurred by one of the spouses before or after marriage?

4. Is the sole liability tortious or nontortious?

5. Do other rules of law apply?

Diagram of Marital Property Liability

	Husband’s Separate Property	Husband’s Sole Mgmt Community Property	Joint Mgmt Community Property	Wife’s Sole Mgmt Community Property	Wife’s Separate Property
Husband’s Separate Property Debt	X
Husband’s Pre-Marital Liabilities	X	X	X
Husband’s Non-Tortious Liabilities During Marriage	X	X	X
Husband’s Tortious Liabilities During Marriage	X	X	X	X
Wife’s Tortious Liabilities During Marriage		X	X	X	X
Wife’s Non-Tortious Liabilities During Marriage			X	X	X
Wife’s Pre-Marital Liabilities			X	X	X
Wife’s Separate Property Debt					X
Joint Liabilities of Spouses	X	X	X	X	X

Cockerham v. Cockerham: A dress shop W owned went bankrupt and creditors go after both H and W for debts owed. Property at issue: 320 acres: a 198 lot, a dairy lot, and a dairy business (the building). W argues this is W’s sole management, non-tortious liability during marriage. H must show that it was joint management to get the acreage he wanted. H also said W drained the community by making gifts to Mr. Houston. H and his brother inherited the 320 acre tract. Brother wasn’t interested in his ½, so they set up a sham transaction and transferred it to a trustee. The H purchased all the land back during marriage. (But ½ of it was already his!) The other ½ is where the dairy business lies. The dairy business was considered to be CP with joint management and control because it was purchased during marriage with CP funds. H owned ½ of the 320 acre tract as SP (160 acre interest); the