Hani W Saba v. Sawsan Khoury

IN THE
SUPREME COURT OF THE STATE OF ARIZONA
HANI W. SABA,
Petitioner/Appellant/Cross-Appellee,
v.
SAWSAN KHOURY,
Respondent/Appellee/Cross-Appellant.
No. CV-21-0023-PR
Filed September 14, 2022
Appeal from the Superior Court in Maricopa County
The Honorable Melissa Iyer Julian, Judge
No. FC2017-052690
AFFIRMED
Opinion of the Court of Appeals, Division One
250 Ariz. 492 (App. 2021)
VACATED
COUNSEL:
Keith Berkshire (argued), Kristi A. Reardon, Erica Leavitt, Alexandra
Sandlin, Berkshire Law Office, PLLC, Tempe, Attorneys for Hani W. Saba
Sandra Burt, Burt Feldman & Grenier, Scottsdale; and Amy M. Hoffman
(argued), Jardine, Baker, Hickman & Houston, Phoenix, Attorneys for
Sawsan Khoury
CHIEF JUSTICE BRUTINEL authored the Opinion of the Court, in which
VICE CHIEF JUSTICE TIMMER and JUSTICES BOLICK, LOPEZ, BEENE
MONTGOMERY, and KING joined.
CHIEF JUSTICE BRUTINEL, Opinion of the Court:
SABA v. KHOURY
Opinion of the Court
¶1 In this marriage dissolution case, we are asked to determine
the appropriate method for establishing the marital community’s interest
in separate property. More specifically, we consider whether the formula
laid out in Drahos v. Rens, 149 Ariz. 248 (App. 1985), and refined in Barnett
v. Jedynak, 219 Ariz. 550 (App. 2009) (the “Drahos/Barnett formula”), is an
appropriate method of establishing the community’s equitable lien on a
spouse’s separate property, providing for a fair division of the separate
property’s increase in value proportionate to the amount the community
contributed to the property.
¶2 We hold that trial judges should begin by using the
Drahos/Barnett formula and should then adjust the calculation to account
for the community’s overall contribution of labor and funds to the separate
property along with the market appreciation of the property. In so holding,
we do not limit trial judges’ discretion to consider the value the
community’s contributions actually added to the value of the separate
property to fairly determine the amount to which the community is
entitled.
I. BACKGROUND
¶3 Hani Saba (“Husband”) and Sawsan Khoury (“Wife”)
married in 2009. In 2010, the couple purchased two Phoenix houses in
addition to their existing marital residence. They used community funds
to make the down payment on the home located on Leisure Lane (“Leisure
Lane”). The other home, located on 30th Way (“30th Way”), was purchased
using both community funds and Wife’s separate funds. Both properties
were titled in Wife’s name only, and Wife was the sole borrower on the
loans secured by the properties. Because Husband had poor credit, and
because Wife was the sole borrower on the loans, he signed disclaimer
deeds for both properties, disclaiming any “right, title, interest, [or] claim”
to either property.
¶4 Husband filed a petition for dissolution in April 2017. After
a two-day trial, the trial court, using the Drahos/Barnett formula, ordered
that the community be reimbursed for the full value of its contributions
reducing the principal balance of the mortgages, along with a share of the
increase in the value of each home proportionate to the percentage of the
principal balance of the mortgage the community paid. Specifically, the
court concluded that because the community paid 19.88% of the balance on
the Leisure Lane loan, it should receive 19.88% of the appreciation in the
home’s value that occurred during the marriage in addition to the
$39,741.29 it paid toward the principal, resulting in a lien in the amount of
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Opinion of the Court
$68,588.02. Similarly, the court calculated the community’s lien on
30th Way to be $47,539.25, reflecting the initial contribution ($25,176.70)
plus the proportionate share of appreciation (14.8% of $150,999).
¶5 Husband appealed, arguing the court’s application of the
Drahos/Barnett formula was improper. He claimed the community was
entitled to the total amount it contributed along with all market-based
appreciation proportionate to the percentage of funds contributed by the
community. Thus, he contended, because contributions to Leisure Lane
were 100% community funds, the community was entitled to 100% of the
appreciation, citing the court of appeals’ decision in Femiano v. Maust,
248 Ariz. 613 (App. 2020). The court of appeals disagreed and affirmed.
Saba v. Khoury, 250 Ariz. 492, 494 ¶ 1 (App. 2021). This petition followed.
¶6 We accepted review to consider how the marital community
should be reimbursed for its contributions to separate property during the
marriage, a question of statewide importance and likely to recur. We have
jurisdiction under article 6, section 5(3) of the Arizona Constitution.
II. DISCUSSION
¶7 We review the trial court’s distribution of property for an
abuse of discretion. See Barnett, 219 Ariz. at 553 ¶ 10. The determination of
the amount of the community interest in separate property resulting in an
equitable lien is a mixed question of fact and law, Valento v. Valento,
225 Ariz. 477, 481 ¶ 11 (App. 2010), so we defer to the trial court’s factual
findings but review legal conclusions de novo, see Helvetica Servicing, Inc. v.
Pasquan, 249 Ariz. 349, 352 ¶ 10 (2020). We view the evidence in the light
most favorable to upholding the trial court’s judgment. See Cooper v. Cooper,
130 Ariz. 257, 260 (1981).
A.
¶8 This Court has long recognized that a marital community is
entitled to reimbursement for its contributions to a spouse’s separate
property. See, e.g., Lawson v. Ridgeway, 72 Ariz. 253, 261 (1951). Such
reimbursement is secured by an equitable lien against the separate
property. See id. at 262; Hanrahan v. Sims, 20 Ariz. App. 313, 317 (1973). In
Lawson, this Court concluded that the way to determine the value of the lien
for real property is by measuring the separate property’s total increase in
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value resulting from the community’s contributions—the value-at-
dissolution approach. 1 72 Ariz. at 262.
¶9 It can be difficult, however, to determine whether a property’s
increase in value is due to the community’s contributions or to other causes
like simple market appreciation—a problem this Court faced in Cockrill v.
Cockrill, 124 Ariz. 50 (1979). There, the Court first affirmed that increases in
separate property’s value during the marriage are presumed to be the result
of the community’s contributions, absent clear and convincing evidence to
the contrary. Id. at 52. But in so holding, the Court acknowledged that
“[s]eldom will the . . . increase in value of separate property during
marriage be exclusively the product of the community’s effort or
exclusively the product of the inherent nature of the separate property.” Id.
at 53. For that reason, this Court abandoned the “all or none rule”
previously applied by courts, which classified the separate property’s
increase in value as either entirely community property or entirely separate
property. Id. at 53–54. Instead, the Court held that “profits, which result
from a combination of separate property and community labor, must be
apportioned accordingly.” Id. at 54. Acknowledging that various methods
of apportionment may be suitable depending on the circumstances of each
case, this Court directed trial courts to select “whichever will achieve
substantial justice between the parties.” Id.¶10 In Honnas v. Honnas, 133 Ariz. 39, 41 (1982), this Court
affirmed Lawson’s value-at-dissolution approach, see supra ¶ 8, to determine
the value of the community’s equitable lien on a spouse’s separate real
property. But this Court reiterated its conclusion in Cockrill recognizing
that property appreciation could be due to multiple factors, discarding the
“all or none rule,” and holding that “profits, which result from a
combination of separate property and community labor, must be
apportioned accordingly.” Id. at 40 (quoting Cockrill, 124 Ariz. at 54). The
Honnas Court went on to find that even where “much of the increase in
value [of the residence was] likely due to inflation,” the community was
“entitled to share in the enhanced value” of the separate property because
community funds and labor “were used for the benefit of the separate
property.” Id.¶11 Subsequently, in Drahos, the court of appeals considered how
mortgage payments paid by the community factor into the value-at-
1 The “amount-spent” approach, by contrast, measures the value of the
community’s lien based upon the amount the community contributed to
the separate property.
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Opinion of the Court
dissolution approach. See 149 Ariz. at 250. The marital community sought
reimbursement for mortgage payments and repairs made to the property,
but there was no evidence that the increased value of the residence was in
any way attributable to the community contribution. Id. Nonetheless, the
court read Honnas to hold that the community was entitled to share in the
equity simply “due to the expenditure of funds.” Id. (quoting Honnas,
133 Ariz. at 40). The court applied the formula from In re Marriage of
Marsden, 130 Cal. App. 3d 426, 438 (1982), which the court found
adequately apportioned to the community the increase in the property’s
value attributable to the community’s mortgage payments. Drahos,
149 Ariz. at 250. The Drahos court applied the formula as follows:
The separate property interest is determined by adding the
down payment to the product of the down payment plus
principal payments made with separate property divided by
the purchase price times the appreciation invalue [sic]. The
community property equitable lien interest is determined by
adding the principal balance paid by the community to the
product of the community property principal payments
divided by the purchase price times the appreciation in value.
Id. As the court explained, the formula divides the property’s appreciation
in value “in proportion to the contribution to [principal].” Id.¶12 The court of appeals modified that formula in Barnett. See
219 Ariz. at 555 ¶ 21. In Barnett, the court recognized that the Drahos
formula improperly awards the community pre-nuptial appreciation by
factoring in the total appreciation in the property’s value from the date of
purchase, rather than from the date of the marriage. Id. ¶¶ 20–21. It
adjusted the formula to account for only the post-marriage appreciation. Id.
¶ 21. The court’s modified formula can be summarized as follows:
C + (C/B x A)
Where “A” is appreciation in the separate property’s value
during the marriage.2
2 Appreciation is typically calculated by subtracting the value of the
property on the date of purchase from the appraised value on the date of
service of the petition for dissolution. However, in a case such as this one,
“A” should reflect the difference in the property’s appraised value at
service and the property’s value on the date the disclaimer deed took effect.
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Where “B” is the appraised value of the separate property as
of the date of the marriage.
Where “C” is the community’s contributions to principal.
Id.
¶13 Arizona courts have routinely applied the Drahos/Barnett
formula to measure the value of a community’s equitable lien when the
community makes some of the mortgage payments on a spouse’s separate
property. See, e.g., O’Brien v. O’Brien, No. 1 CA-CV-19-0268, 2020 WL
3970856, at *1 ¶ 4 (Ariz. App. July 14, 2020) (mem. decision). But until now,
this Court has never opined on the use of the Drahos/Barnett formula, its
application, or whether the community is entitled to a share of the equity
in the property even where the community contribution did not actually
enhance its value.
B.
¶14 We now hold that the Drahos/Barnett formula is an
appropriate starting point for courts to calculate a marital community’s
equitable lien on a spouse’s separate property. 3
¶15 When a marital community contributes its money or labor to
a spouse’s separate property, it “is entitled to share in the enhanced value
of [that] property.” Honnas, 133 Ariz. at 40. The marital community can
make improvements or additions to the home, and in such cases the
community is entitled to a fair return on its investment reflecting its
contribution to the increase in the property’s value. Id. Likewise, the
community can simply pay the mortgage payments, resulting in a
reduction of the mortgage’s principal balance, which, though not increasing
the property’s value, increases the separately owned equity in the property.
See Drahos, 149 Ariz. at 250 (concluding that the value-at-dissolution
formula applies “when community funds are used to benefit but not
necessarily improve separate property”). In our view, a fair return on the
amount paid to reduce the principal balance of the mortgage would be the
rate of return that money would have otherwise earned for the community
Likewise, “B” should reflect the appraised value of the property on either
the date of the marriage or the date the deed became effective, whichever is
later.
3 The question of whether and to what extent the formula applies in cases
where the separate property has depreciated in value is not before us, and
we do not decide it here.
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Opinion of the Court
and may be reimbursed by a share of the increase in the home’s value
proportionate to the amount paid to reduce the principal balance of the
mortgage. The Drahos/Barnett formula accounts for this return: it
reimburses the community for the contributions made and apportions a
share of the property’s increase in value based on those contributions. See
id.; Barnett, 219 Ariz. at 555 ¶ 21. The Drahos/Barnett formula therefore
properly recognizes the nature of the separate property as separate while
apportioning a fair and equitable reimbursement to the community. See
Bell-Kilbourn v. Bell-Kilbourn, 216 Ariz. 521, 524 ¶ 12 (App. 2007) (remanding
to trial court to calculate a reimbursement award that is “fair and equitable
under the circumstances”).
¶16 To be clear, by approving the use of the Drahos/Barnett
formula we are not mandating that courts apply it in every case, nor must
courts strictly adhere to the formula and ignore additional factors unique
to each case. Neither Drahos, Barnett, nor any other case requires such a
result. In fact, our caselaw is clear that trial courts are “not bound by any
one method, but may select whichever will achieve substantial justice
between the parties.” Cockrill, 124 Ariz. at 54. We therefore agree with
Husband’s assertion that the uniqueness of each circumstance cuts against
strict adherence to any one formula. Cf. Toth v. Toth, 190 Ariz. 218, 221
(1977) (stating the legislature intended that trial courts have broad
discretion in deciding what is equitable in dissolution cases). But the
Drahos/Barnett formula is useful insofar as it provides trial courts with a
consistent starting point. The formula is a baseline from which courts can
evaluate whether the facts of a specific case warrant a modification of or
departure from that formula.4 If the equities do warrant such a departure,
the trial court may measure the lien using a different method, but only if
the equitable lien amount reflects—at a minimum—the amount of the
community contribution and a division of equity reflecting the increase in
value due to the community contribution consistent with a market rate of
return on that contribution.
¶17 Husband’s primary objection to the Drahos/Barnett formula is
that it does not—in most cases and especially this one—“divide the
community [property] . . . equitably” as required by A.R.S. § 25-318(A). But
4 For example, when dealing with a community’s improvements to the
separate property, a fair return may be more accurately calculated by
appraising the increase in the value of the home immediately before and
after the improvements. Under today’s decision, courts remain free to use
other methods of valuing such improvements and modify the value
generated by the Drahos/Barnett formula to account for such variances.
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Opinion of the Court
that objection begins with an erroneous premise. Section 25-318(A) governs
division of community property at dissolution; it does not apply to
reimbursement of the community’s contributions to separate property,
which is the issue here. We are concerned only with calculating the amount
of the community’s lien to be placed on Wife’s separate property. See
§ 25-318(E). We agree with Husband that the valuation we arrive at should
be fair and equitable, see Bell-Kilbourn, 216 Ariz. at 524 ¶ 12, but Husband
has not shown how the Drahos/Barnett formula is inequitable generally or
as applied here.
¶18 Husband cites to the court of appeals’ reasoning and
conclusion in Femiano to illustrate why the Drahos/Barnett formula does not
generate a fair reimbursement in this case. The Femiano court rejected the
trial court’s reliance on the Drahos/Barnett formula under a set of facts
much like the facts here. 248 Ariz. at 614–15 ¶ 1. The husband and wife in
Femiano, during the marriage, took out a mortgage on property to which
the wife later disclaimed her interest via disclaimer deed. Id. at 615 ¶ 3.
Though the property was the husband’s separate property, the community
made the down payment and all of the payments on the mortgage until the
marriage’s dissolution. Id. The Femiano court concluded that, as to assets
purchased during marriage solely with community funds, the
Drahos/Barnett formula should not apply. Id. at 617 ¶ 21. It reasoned that
“when the community pays all costs associated with purchasing and
improving the separate property, any appreciation in value and the
resulting increase in equity is fully attributable to the community, and the
community is thus entitled to an equitable lien for the full increase in
equity.” Id.
¶19 We disagree with the Femiano court’s analysis and its
conclusion. The formula it introduces effectively treats separate property
as community property, giving no credit for the separate ownership of the
property. Again, the object is a fair reimbursement of community funds, not
an equitable division of property. The holding in Femiano assumes that the
community’s contributions are the sole cause of the property’s increase in
value and fails to credit the separate property owner with any increase in
value due to simple market appreciation.5 We disapprove Femiano.
5The court of appeals in this case correctly noted that the Femiano court also
neglected to account for the fact that the owner spouse is still liable for the
balance on the loan after dissolution. See Saba, 250 Ariz. at 497 ¶ 17 (App.
2021). This mistakenly allocated all the benefit from the purchase of the
property to the community but none of the risk.
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Opinion of the Court
¶20 We conclude the trial court did not err by using the
Drahos/Barnett formula to calculate the community’s reimbursement. The
trial court, by its application of the formula, credited to the community its
contributions to the properties along with the proportional appreciation in
property value resulting therefrom. Husband fails to point to any evidence
in the record showing the trial court refused to consider the value of his
improvements to the rental properties. To the contrary, the trial court
considered Husband’s expert testimony regarding the value of his
improvements to Leisure Lane but ultimately rejected Husband’s claimed
improvement expenses. This demonstrates the court did not apply the
formula so rigidly as to discount other important factors.
III. CONCLUSION
¶21 We vacate the court of appeals’ opinion and affirm the trial
court’s judgment. In our discretion, we decline to award attorney fees to
either party.
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