California Family Law Attorney
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September 24, 2010
Posted By Thurman Arnold

Q. I have been occupying the home after my wife left over a year ago. I pay all the interest-only mortgage, property taxes, and insurance with no help from her. Does she owe me half of any of this?

A. You may be owed you something, but not necessarily one-half of what you have paid out. This situation involves at least three potential legal issues:

  • Epstein Credits
  • Watts Credits
  • Jeffries Credits

This particular Blog addresses your question in terms of Epstein's - the next blog deals specifically with Watts and Jeffries credits.

Epstein Credits

I have described Epstein Reimbursements in another Blog. "Epstein credits" is a doctrine derived from the case of Marriage of Epstein (1979) 24 Cal.3d 76, 84-85. It holds that as a general rule, courts must reimburse one spouse by crediting them on the community property 'balance sheet' for their contribution of post-separation earnings, or other separate funds (loans from parents or inheritances), made after separation to pay pre-existing community obligations. This commonly occurs with credit cards where there was a balance remaining when the parties separated, that one or the other spouse pays after. Epstein's don't apply to new debt on an old credit card account that was run up after separation. Depending upon the parties' financial circumstances, it therefore can make the "date of separation" a more important disputed issue than elsewise. This rule is not limited to credit cards but applies to almost any class of debt.

Courts may be unwilling to order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement. In almost any conversation you might have with an opposing lawyer, they will back down on demanding the offset UNLESS you derived some beneficial use from it.

If there was an agreement that a party would not be reimbursed for these payments, or if the paying spouse intended the payment as a gift, or if the payment is made on account of a debt for an asset that the paying spouse was or is exclusively enjoying, and the amount was not substantially in excess of the value of that use, the Court may decline to order reimbursement.

This idea of the value of use of some item of property that was acquired through a debt that continues to exist after the date of separation underlies the concepts of Watts credits and Jeffries credits, and is obviously implicated in your question since you occupy the house for which you seek credits and reimbursements. Few family court judges will want to hear testimony about what the portions were that were paid towards interest after the DOS, as opposed to principal, on the debt. You are pretty much stuck with the principal amount due at separation as the credit you can claim, even if principal plus interest for monthly payments over that time period amounts to more - at least unless these relative numbers are large. This creates unfair results in cases that take years to resolve, but arguably the parties should have moved the case to conclusion sooner.

So, Epstein's are almost always granted as to post-separation payments for expenses, for goods and services, that didn't leave a tangible asset behind that is now being exclusively enjoyed by only one of the two spouses.

As an example of how this works if there is $15,000 owing Visa for that trip to Hawaii, some groceries, and a child's school tuition at the time of separation and one party pays it off or makes monthly installments on the debt with their earnings or other separate property after that date, a benefit has been conferred upon the community because a joint obligation has been extinguished or reduced. That benefit must be equalized by a payment to the payor of one-half the amount paid or a credit or set-off against other property that gets divided. One-half is paid because the paying spouse owed their half anyway. Any portion paid before the DOS (date of separation) ordinarily will not be reimbursed.

This is generally true even if only one of the parties actually took the trip to Hawaii, unless that trip was in breach of a marital or fiduciary duty (if the husband snuck off with his paramour to Hawaii, an argument exists that he should not be reimbursed for paying that portion of the debt over the wife's objection). Family Code section 2625 directs courts to award a debt incurred by one spouse to them alone if debt was not "incurred for the benefit of the community." Family Code section 2602 empowers courts to "award ... the amount the court determines to have been deliberately misappropriated by the party to the exclusion of the interest to any other party in the community estate." FC section 2625 is a powerful and much underused statute (many attorneys seem to be unaware of it or try to bluff as though it didn't exist).

Compare this with a situation where a credit card was used to buy a dishwasher that the paying spouse possesses or receives in the divorce - since they are retaining a tangible asset it may not be fair to allow them to both keep the asset and get reimbursed for one-half its costs. Applying Epstein's can become fairly fact specific.

In situations involving use of a family residence or other tangible assets that continue to exist after separation and which are used and enjoyed by only one of the spouses, an Epstein analysis provides only a part of the answer to the reimbursement question. In effect first the amount of the Epstein reimbursements are determined, and then the question requires a Watts analysis to determine under equitable principles whether it is fair to actually order reimbursement and, if so, in what amount.

Hence, to resolve your issue you would begin by adding up the costs of everything related to the house that is spent to preserve or protect the asset. Property taxes are included, but utilities are not. The utilities you used after the physical separation are your obligation anyway, because they were not incurred during 'the marriage.' (Please see the Blog Category "Physical Separation.") Mortgage payments and insurance are considered, and probably the pool man or gardener as well.

Please continue on to the next blog for detailed information concerning Watts credits.

Epstein Credits and Fiduciary Duty Issues

Sometimes a spouse or domestic partner will raid the credit cards and take cash advances or buy a new wardrobe, or fix a car, during the weeks prior to separating. If it later appears that their intention was to stick the other spouse for one-half of this expense, the presumption that this is a community debt (because incurred during marriage) may be overcome and so it may be assigned to the one spouse alone. It is not fair to hold both parties responsible for debts incurred in anticipation of separation.

However, when one partner incurs a debt frivolously as opposed to recklessly before separation, in a situation not amounting to a breach of fiduciary duty - even over the prior objection of the other spouse - it is likely to be equally divided and Epstein reimbursements ordered. Both spouses have, under California law, equal rights of management and control of the community property and community credit.

Courts in my experience are reluctant to find breaches of fiduciary duty in Esptein situations unless the behavior was fairly egregious. Charging 10 pairs of shoes at Macy's a month before separation may not be viewed as a big deal. If the debt was incurred in pursuit of an illegal activity like supporting a drug habit or sex addiction, many judges are less reluctant to declare a breach.

To illustrate another twist, if the credit card was used to pay the spouse's tuition expense instead of a child's schooling, as in my example above, it may also be unfair to charge the non-schooled parent with one-half the tuition portion of the credit card balance. A court is likely to look at whether this schooling benefited the community in some way before splitting that debt between the parties - i.e., because of the schooling did the student spouse earn more money which was then contributed to the community standard of living and so confer a benefit on both? Pure student loans are usually awarded to the party who incurred the debt as their separate property obligation.

Continue reading "My Ex Has Been EXCLUSIVELY USING Our RESIDENCE - Is There an EPSTEIN CREDIT For This?" »

September 14, 2010
Posted By Thurman Arnold

Q. My husband completed his training as a doctor after we married. He incurred substantial educational loans which we paid off during the marriage. What rights to I have for recovering those costs?

The community estate is supposed to be reimbursed for community contributions to education or trainingof a spouse that substantially enhances that person's earning capacity. The amount reimbursed must include interest at the legal rate, accruing from the end of the calendar year in which the contributions were made. FC section 2641(b)(1); see FC section 2627.

Reimbursement is not appropriate in the following circumstances:

  • The parties expressly agreed in writing to the contrary [[FC section 2641(e)]; or
  • The contributions were for ordinary living expenses that would be incurred regardless of whether the spouse attended school, stayed home, or worked [Marriage of Watt (1989) 214 CA3d 340, 354].

If the loan is still outstanding at the time of dissolution, the balance is not divided but is instead assigned to the party who was educated or trained, except when the parties expressly agreed in writing to the contrary. FC section 2641(b)(2)(e).

Nonetheless, the Court may reduce or modify the reimbursement and assignment of educational loans to the extent circumstances render such a disposition unjust, including the following [FC section 2641(c)]:

  • When the community substantially benefited from the education, training, or loan incurred for the education or training of the party. There is a rebuttable presumption affecting the burden of proof that the community has not substantially benefited from community contributions to the education or training made fewer than 10 years before the commencement of the proceeding. On the other hand, it is presumed that the community substantially benefited from community contributions to the education or training made more than 10 years before the commencement of the proceeding.
  • The education or training received by the party is offset by the education or training received by the other party for which community contributions have been made.
  • The education or training enables the party receiving the education or training to engage in gainful employment that substantially reduces the need of the party for support that would otherwise be required.

Professional licenses and education are not "property" that can be divided in divorce or legal separation in California. Reimbursement for community contributions and assignment of loans under FC section 2641 is the exclusive remedy of the community or a party for education or training costs and any resulting enhancement of a person's earning capacity.

However, importantly, the Court should consider the effect of the education, training, or enhancement, or the amount reimbursed, on the circumstances of the parties in ordering permanent spousal support pursuant to Family Code section 4320(b). [FC §2641(d).]

Author: T.W. Arnold

Continue reading "How do CALIFORNIA COURTS divide EDUCATION LOANS?" »

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