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DIVORCE AND BANKRUPTCY

 

Separate Property

This discussion of separate property is an excerpt from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners”

John McKindles

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Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

Mesa divorce and community property attorney John McKindlesLike community property, separate property in Arizona is also specifically addressed by statute (A.R.S. § 25-213). This statute essentially segregates as separate property any real and personal property owned by the spouse before marriage and acquired by a spouse during marriage by gift, devise or decent (and the increases, rents, issues and profits of that property). This is the obvious converse of A.R.S. §25-211. In 1998, the statute was amended to include property acquired by a spouse after service of a Petition for Dissolution of Marriage, Legal Separation or Annulment if the petition results in a Decree of Dissolution of Marriage, Legal Separation or Annulment. However, this statutory presumption can be altered by an agreement between the spouses. Sellers v. Allstate Ins. Co. (1976) 113 Ariz. 419, 555 P.2d 1113. Very often these assets which are separate when brought into the marriage appreciate over time due not only to market variations but also to the owner spouse’s efforts. The increase in value due to the efforts of the owner spouse would be considered community while the natural appreciation accruing outside the owner spouse’s efforts would continue to be deemed separate property. Everson v. Everson (App. Div.1 1975) 24 Ariz. App. 239, 537 P.2d 624. As one might imagine, such a segregation of appreciation between community effort and non-community factors lends itself less to a scientific analysis as it does to the Court’s version of equitable distribution.

An example is found in the 1979 case of Cockrill v. Cockrill (1979) 124 Ariz. 50, 601 P.2d 1334. Therein, the appellate court determined that the trial court was not bound by a single method of allocating between separate and community property the profits or appreciations in value of the separate property during the marriage, but was empowered to choose whatever method would achieve equity and justice between the parties.

Further, case law holds that the character of the property interest attaches at the time when the right to obtain title occurs, not the time when legal title actually conveys. Potthoff v. Potthoff (App. Div.1 1981) 128 Ariz. 557, 627 P.2d 708.

Moreover, the burden of proof is generally on the party seeking to prove a separate prop­erty interest or continuation thereof after marriage. When the value of a spouse’s separate prop­erty is increased, the burden of proof is on the spouse who asserts that the appreciation is also separate property. The test is actually whether the increase is the result of the work effort of the community, either spouse thereof, or other non-community factors, such as market trends. Cockrill, Id.

Interestingly, where the separate funds of a spouse has been used to purchase real prop­erty but title thereto was placed in joint tenancy, a presumption arises that a gift to the non-purchasing spouse was intended. The purchasing spouse has the burden of proof then to establish by clear and convincing evidence that a gift was not intended. Battist v. Battist (App. Div. 2 1983) 135 Ariz. 470, 662 P.2d 145. So the burden of proof is similar in gifting presumptions as it is in community presumptions.

The relatively recent case of State v. Wright (App. 2002) 202 Ariz. 255, 43 P.3d 203, addresses not so unusual circumstances involving a married couples’ modification of a premarital agreement to change the husband’s earnings from separate to community in an effort to protect future earnings from a creditor. Although the case did not involve a divorce, it did hold that the modification of the premarital agreement constituted a transfer under the Uniform Fraudulent Transfer Act, A.R.S. § 44-1001. In that case the creditors continuing garnishment lien against the husband’s earnings was affirmed.

An interesting question that arises is perhaps after the creditor is satisfied. What if the wife refuses to revisit the premarital agreement modification at that time? Since the parties’ ex­pressed intent was to convert the husband’s future earnings into community property, the wife might well successfully claim a community right to those future earnings until some change is made. This is so especially in light of Bender v. Bender (App. Div.1 1979) 123 Ariz. 90, 597 P.2d 993, which holds that married couples are free to decide at any time what the status of their property is to be as to separate or community, and may convey their separate or community property in­terest to one another freely.

Exchanged Property. Arizona case law has fairly uniformly ruled that property re­tains its status as either community or separate despite exchange during marriage for other property. Everson v. Everson (App. Div. I 1975) 24 Ariz. App. 239, 537 P.2d 624.

Interestingly, when separate funds are placed in a joint account no presumption arises that the depositor has intended a gift of one-half of the funds to the non-depositing spouse. Bowart v. Bowart (1980) 128 Ariz. 331, 625 P.2d 920. See also In re Marriage of Berger, (Ariz. App. Div I September 27, 1983) 140 Ariz. 156, 680 P.2d 1217.