A very important part of the divorce process is getting educated on your rights and responsibilities so that a fair and reasonable resolution can be obtained. When you litigate your divorce you may count on the attorney you hired to carry the responsibility of seeing that you are treated fairly. When you mediate, part of the mediator’s role is to help get you educated so you can make well informed decisions as you resolve your divorce. A good mediator will help couples understand the basic tenets of the law, the nuances, as well as the intricate details of the law depending on the issues the couple needs to resolve. This week’s blog focuses on the unique situation where one spouse owns a home prior to marriage and the couple makes payments toward the mortgage and/or spends money earned during the marriage to make improvements on the separate home. This calls on gaining an understanding of some of the nuances and intricate details of the law pertaining to claims for reimbursement.
So here is the scenario. One party before marriage buys a home for $500,000, they put $100,000 as a down payment and finance $400,000. They immediately get married but keep the house in their separate name. The couple moves in together into the home and during the marriage they make the monthly payments due on the mortgage. When they separate they have paid down the mortgage so now only $300,000 is owing and the house has doubled in value to $1,000,000. The question at divorce is does the other spouse have any claim to the equity in the home?
In order to be eligible for a reimbursement claim in a California divorce there must be a statute or a case that establishes the right to reimbursement, otherwise the Court does not have the authority to grant such a claim. In the situation described above the right to reimbursement arises from two cases; Marriage of Moore which was decided in 1980 and Marriage of Marsden which was decided in 1982. These combined cases have established a right to reimbursement measured by two separate calculations. The first basic reimbursement entitlement is based on the amount that the community paid down the mortgage during the course of the marriage. The second, more complicated calculation, provides the community with an interest in the increase in equity from the date of marriage to the date of separation with the percentage interest being the amount of the mortgage paydown during marriage divided by the original purchase price. To illustrate the two reimbursements lets review the numbers from the example above.
The mortgage paydown is simply taking the mortgage balance owing at the time of marriage, $400,000 in our scenario, and subtracting the mortgage owing at time of separation, $300,000, which results in the community being entitled to a reimbursement for the $100,000 paydown during marriage.
The second part of the reimbursement claim requires a bit more calculating. The community interest in the increase in the equity during marriage is based on the percentage of the community mortgage paydown compared to the original purchase price. The paydown was $100,000 and the original purchase price was $500,000 so the community percentage is $100,000 over $500,000 or 20%. We next determine how much the equity of the residence has increased during the marriage. In our scenario the value increased from $500,000 to $1,000,000 for an equity increase during marriage of $500,000. The community is entitled to 20% of this increase or an additional $100,000.
Based on these figures the community Moore/Marsden claim would be the combination of the $100,000 paydown of the mortgage during marriage and the $100,000 (20% interest in the equity increase) for a combined community reimbursement of $200,000. This reimbursement is held by the community so each spouse is entitled to one-half of it so the non-owner spouse would be entitled to $100,000 and the remainder of the equity would belong to the original owner.
Figuring out a Moore/Marsden interest in a property can be complicated for a number of reasons. Resources may need to be expended to have a historical appraisal done to determine the house value at time of marriage as well as an appraisal to determine the current value. An amortization schedule may be needed to determine mortgage paydowns. There are often refinances that take place during marriage which further complicate the calculations and require that multiple Moore/Marsden type calculations be completed. Sometimes at the time of refinance the other spouse gets added to title resulting in the need to complete a Moore/Marsden analysis as well as considering other potential reimbursement claims, such as those set forth in Family Code 2640 which we will outline in next week’s blog.
When couples are able to work together to fashion their own divorce, they can agree to whatever terms they deem fair. When addressing reimbursement claims such as those arising under Moore/Marsden, they establish a method that the Court uses to quantify compensation for the community’s contributions toward one spouse’s separate property. It is an important part of the process for couples to be educated on how the Court determines these rights so that an informed decision can be made on whether or not the reimbursement claims will be asserted. It is invaluable for couples who are divorcing to work with professionals who will help them understand how these sometimes complicated claims work and how they fit into the overall puzzle that must be solved in fashioning an informed, fair and lasting resolution.