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If a Spouse Sells Separate Property to the Community Estate, Is Reimbursement Possible at the Time of Divorce?


The short answer is no.  The reimbursement statute, Family Code section 2640, applies only to “contributions” to the community estate, and a “sale” is not a “contribution”.

This was the holding from a decision by the California Court of Appeal earlier this month entitled Motiska v. Ford (2023) 2023 DJDAR 10925.  In Motiska, the husband, Dale, sold a business that he acquired before marriage for the nominal amount of $1.00 during the marriage.  Specifically, the trial court found that a sole proprietorship Dale owned before his January 2001 marriage to the other spouse (“Caroline”), which was called Neon Palm, was sold to a community entity called Buxup.  This sale occurred in 2003.

The trial judge concluded Dale “did not have a clam for reimbursement under section 2640, because the asserted claim was based on (Dale’s) purported contribution of Neon Palm to Buxup, and the court had previously determined (Dale) sold Neon Palm to Buxup for $1.”  (Emphasis in original.)

The Court went on to explain, “[T]o me, Neon Palm was sold.  It was a sale.  It was a sale.  He received.  He set the value himself.  There was no undue influence.  There was no interference by (Caroline).  He set the value at a dollar.  He sold it for a dollar.  He received the dollar.  It is a sale.  It is done”.  Accordingly, the court ruled that Dale did not have a section 2640 claim.

The appeals court framed the issue as “whether the sale of Neon Palm to Buxup was a contribution triggering such a right” under section 2640.  (Emphasis in original.)  The justices first noted that low consideration (i.e., a nominal sales price) does not necessarily mean that there was no consideration”.  Thus, the justices held “the court correctly ruled (Dale’s) sale of Neon Palm to Buxup –at the sale price of $1 set at (Dale)—was not a contribution to the acquisition of property of the community estate that would entitle him to reimbursement under section 2640”.

The unanimous decision explained a sale of separate property to the community “differs from a freely given contribution that is subject to reimbursement under section 2640.  Beginning with the language of the statute, the phrase ‘contributions to the acquisition of property’ in section 2640, subdivision (b) – both its plain meaning and in light of the items identified as qualifying payments in section 2640, subdivision (a) (e.g., “downpayments” and “payments for improvements”) – suggests a voluntary transfer of funds or assets to benefit the community.  In contrast, a sale of property (i.e., the exchange of property for consideration) is not commonly viewed as a contribution by the seller to the buyer”.

Citing Supreme Court precedent from 1998, the appeals court noted that section 2640 allows parties to freely contribute their assets to the community estate, knowing that there is a mechanism –section 2640—that will allow for reimbursement should the marriage dissolve.  On the other hand, the Court of Appeal noted that “[a] spouse who decides to sell property to the community is electing not to contribute the property ‘freely and without reservation’ ‘to benefit the community’”.  (Emphasis in original.)  The justices added, “additional reimbursement for the transferred property, over and above the sale price, if the community dissolves”.  (Emphasis in original.)

Dale argued that his sale should be treated differently from other sales, because the $1 sale price he selected did not accurately reflect the value of Neon Palm.  Thus, his argument continued, the trial judge should have disregarded the sale price and treated the transaction as being “’akin to a gift to the community”.  Thus, he wanted the trial court to determine the actual value of Neon Palm and award that amount to him as reimbursement under section 2640.  But the appeals court rejected the idea that “the value parties placed on property in a sale should be subject to ad hoc reexamination”.  The Court added, “when a spouse transfers property to the community by sale, the price establishes its value”.

The appellate decision was authored by Justice Jon Streeter.  Because the decision was certified for publication, it is binding precedent on all trial courts in California.

The post If a Spouse Sells Separate Property to the Community Estate, Is Reimbursement Possible at the Time of Divorce? appeared first on Andy Cook Law.

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