In re Marriage of Lafkas

Filed 6/16/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
In re Marriage of JOHN and JEAN B243635
LAFKAS.
(Los Angeles County Super. Ct.
No. GD017215)
JOHN LAFKAS,
Appellant,
v.
JEAN LAFKAS,
Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County, Louise
Halevy, Temporary Judge, and Dianna Gould-Saltman, Judge. Reversed in part and
affirmed in part.
Law Offices of Jeanne Collachia and Jeanne Collachia for Appellant.
Kearney ǀ Baker and Gary W. Kearney for Respondent.
________________________
Husband owned one-third of a real estate partnership for several years prior to
marrying wife. During the parties‟ marriage, the partnership modified the partnership
agreement. The modified agreement stated the names of each partner, including husband
and wife as owners of a one-third interest. Husband and wife filed for dissolution within
a year.
On appeal, husband contends the partnership interest is his separate property,
because the documents do not contain an express declaration transmuting the character of
the property interest as required under Family Code section 852.1 Wife asserts that the
partnership interest is community property under the joint title presumption of section
2581, which provides that property acquired during marriage in joint form is presumed to
be community property. We hold that when a spouse places separate property in joint
title form, the transmutation requirements of section 852 must be satisfied before the joint
title presumption of section 2581 applies. The documents in this case do not contain an
express transmutation of husband‟s separate property interest in the partnership, and
therefore, it remained husband‟s separate property.
We asked the parties for additional briefing on the character of loan proceeds
received by the partnership after the modification. We remand the matter for the trial
court to determine whether the lenders intended to rely on the parties‟ community
property to satisfy the loans. If so, the community acquired a proportionate share of
husband‟s interest in the partnership. Husband contends the trial court abused its
discretion by awarding excessive attorney fees to wife. The award of attorney fees to
wife must be reversed for a new determination in light of our opinion. We reverse and
remand for further proceedings.
1 All further statutory references are to the Family Code, unless otherwise stated.
2
FACTS
John Lafkas began working as a police officer in 1966. In 1971, Lafkas formed
Smile Enterprises to invest in real property with friends Eric Cleworth and Nicholas
Roberts. Each partner contributed $3,333 in exchange for one-third of the profits and
losses of the partnership. Other than occasional distributions to the partners, the profits
were reinvested in the partnership.
Lafkas married in 1972, had a daughter, and divorced in 1980. The partnership
agreement was extended at the end of its term. The statement of partnership recorded in
August 1982, listed the names of each partner of Smile Enterprises as follows: “John
Lafkas; an unmarried man, [¶] Eric Cleworth; a married man, and [¶] Nicholas P. and
Sylvia V. Roberts; husband and wife.”
In 1985, Smile Enterprises purchased property on Maple Avenue in Monrovia.
The income from rental units on the property was sufficient to meet all of the property‟s
expenses. Smile Enterprises‟ expenses were paid from profits held in its bank accounts.
Smile Enterprises purchased a property in Pasadena, and at some point, Eric Cleworth‟s
wife, Dorcas Cleworth, was added to the partnership.
On December 15, 1990, Lafkas married Jean Doane.2 Lafkas was 48 years old
and Doane was 36 years old at the time. Doane held a master‟s degree in educational
psychology, obtained a degree in education during the marriage, and began teaching
elementary school in 1992. Lafkas did not expend any money or effort on behalf of
Smile Enterprises.
In 1995, the partnership decided to exchange the Monrovia property through an
Internal Revenue Code section 1031 tax deferred exchange. (26 U.S.C. § 1031.) Smile
Enterprises entered into an agreement with a qualified intermediary which was signed by
the Robertses, the Cleworths, and Lafkas. They also entered into escrow instructions on
2Doane, formerly Jean Lafkas, will be referred to by her current name for ease of
reference.
3
behalf of Smile Enterprises. The partnership identified two properties on Harvill Lane in
Riverside, California, for the exchange. The total cost of the properties was more than
the amount held in escrow from the Monrovia property. In March 1995, the Robertses,
the Cleworths, and Lafkas applied for a loan to finance the balance of the purchase price
of the properties. Smile Enterprises‟ net worth at the time was between $500,000 and
$600,000.
Lafkas asked Doane to participate in the transaction. Lafkas testified at trial that
Smile Enterprises qualified for the loan based on its assets and the expected income from
the properties. After a discussion with the loan officer, he believed that because he was
married, the bank required the addition of Doane to the partnership and the loan
application. Doane testified at trial that her credit was necessary for the partnership to
qualify for the loan to purchase the Riverside properties.
A two page document was prepared entitled, “Modification and Extension of
General Partnership Agreement.” The first page states, in pertinent part, “Comes now
SMILE ENTERPRISES and files herewith a Modification and Extension of its General
Partnership Agreement of August 16, 1971 as follows: [¶] 1. Pursuant to the provisions
of the original General Partnership Agreement, the term of the partnership herewith is
extended and is to be in effect from August 16, 1981 continuing until December 31, 2026
. . . 3. The name of each of the partners is as follows: [¶] John and Jean Lafkas,
husband and wife, as to 1/3 interest [¶] Eric and Dorcas Cleworth, husband and wife, as
to 1/3 interest [¶] Nicholas P. Roberts . . . and Sylvia V. Roberts . . ., husband and wife,
as to 1/3 interest. [¶] 4. The above are all of the partners of said partnership. [¶] 5.
Any one partner may act on behalf of the partnership to carry out the business of the
partnership as specified in the original General Partnership Agreement.” The second
page contained the signatures of the individuals.
A statement of partnership was recorded that states, “The names of each of the
Partners are John Lafkas, Jean Lafkas, Eric Cleworth, Dorcas Cleworth, Nick Roberts,
aka Nicholas Roberts, aka, Nicholas P. Roberts, and Sylvia Roberts, aka Sylvia V.
Roberts pursuant to the extension and modification agreement of the Partnership
4
Agreement dated as of [August 16, 1971].” It stated that the signature of all partners was
required to execute any contracts of sale, notes, deeds or security agreements on behalf of
the partnership, but any other documents may be signed by any of the partners. Each of
the named individuals signed the statement in June 1995. Lafkas signed it on June 12,
1995.
The partnership paid $252,000 for each of the Riverside properties, a total of
$504,000, to Blythe Limited Partnership. The partnership provided deposits totaling
$108,646.16, which included $51,843.64 for one property and $56,802.52 for the other.
First and second deeds of trust were executed on behalf of the borrower Smile Enterprises
by each of the six individuals in their capacity as general partners. Home Savings loaned
$164,500 for each property, and Blythe took a second deed of trust for each property in
the amount of $37,500. The total amount borrowed was $404,000. The grant deeds
recorded in July 1995, reflect that Blythe granted the real property in Riverside to Smile
Enterprises.
Lafkas did not invest any further funds or effort in the Riverside properties. Ten
months later, on April 22, 1996, Lafkas and Doane separated. Lafkas took service-
connected disability retirement effective June 30, 1996.
PROCEDURAL HISTORY
Lafkas filed a petition for legal separation on May 14, 1996. Doane filed a
response requesting dissolution of the marriage on May 31, 1996. A judgment of
dissolution as to marital status only was entered nunc pro tunc as of May 10, 2000.
Lafkas moved for a separate trial of the interest in Smile Enterprises, which Lafkas
claimed was his separate property and Doane claimed was community property. A trial
was held before Commissioner Louise Halevy, Judge Pro Tem of the Los Angeles
Superior Court, on September 29, 2003; January 20, 2004; and May 19 and 20, 2005.
Lafkas argued that none of the documents in the case, including the modification
of the partnership agreement, contained an express declaration transmuting his separate
5
property interest in the partnership. Doane argued that the modification made her a
partner as to an undivided one-third interest under partnership law, and community
property law did not apply.
Lafkas testified to the following additional facts. He expected the rental income
from the Riverside properties would be sufficient to pay the mortgage and expenses of
the properties. If not, Smile Enterprises held retained earnings and profits in a
partnership savings account to be used for the expenses of operating the Riverside
properties. The Smile Enterprises partners qualified for the loan without Doane‟s
participation. Sylvia and Dorcas have their own businesses and were partners in Smile
Enterprises prior to the partnership‟s application for a loan to purchase the Riverside
properties. After speaking with the loan officer, however, Lafkas believed Doane had to
be included on the partnership agreement and the loan application because they were
married. He told Doane that she needed to be added to the documents in order to satisfy
the lender‟s requirements. He believes her credit was reviewed in connection with the
purchase.
Lafkas believed that he owned one-third of Smile Enterprises before and after the
modification. He did not believe that he had assigned any of his interest in Smile
Enterprises to Doane or made her a legal owner of Smile Enterprises. Lafkas told Doane
that she was being made a partner to facilitate the purchase of the properties and as long
as they were together, she would have a share. In other words, as long as they were
married, she would get what he got. He did not intend to change the character of his
partnership or convert his separate property interest in Smile Enterprises.
Doane testified to the following additional facts. She did not own any separate
real property, but Lafkas owned other real property that he had purchased before
marriage. They had discussed owning property together. He said Dorcas had found
properties in Riverside, and he asked her to become a partner in Smile Enterprises. He
said Smile Enterprises needed her salary to qualify for the loan for the properties and she
would be required to sign loan documents to purchase the properties. He said the
properties ran themselves. They discussed liability. When Lafkas refinanced other
6
properties that he owned, he asked her to sign quitclaim deeds. In at least one
transaction, she was placed on the title of the property to facilitate refinancing the loan,
then she quitclaimed her interest in the property. She signed the quitclaim deeds to be
relieved of liability for the property. She wanted to know why he would put her on a
partnership agreement that would increase her liability. He said it was a great
opportunity. She told him that she would not sign a quitclaim deed. He took her to see
the property. Two or three weeks later, she signed the modification of the partnership
agreement. She believed she became a partner when she signed the modification and she
believed she was liable for anything that might have occurred with respect to the
partnership and its assets since the partnership‟s inception in 1971. The partners went to
dinner and welcomed her to the partnership. She believed Dorcas became a partner at the
same time. She knew proceeds from the sale of the Monrovia property were going to be
used as part of the consideration for the Riverside properties.
In 2003, during trial, Smile Enterprises sold the Pasadena property. One of the
Riverside properties was sold in 2003 for $699,000, and the other in 2005 for $940,000.
The partnership was dissolved.
On December 15, 2005, Commissioner Halevy entered a further judgment on
bifurcated issues. The court found the modification amounted to a new partnership
agreement and the Riverside properties were property acquired during the marriage under
section 760. Lafkas had the use of Doane‟s name and credit until the sale of the
properties. The modification substituted Lafkas and Doane for a combined one-third
share in place of Lafkas‟s sole ownership of one-third share in the original agreement.
By referring to the parties as “husband and wife,” the partnership was acquired in joint
form as required by section 2581. The creation of the modification agreement at Lafkas‟s
behest converted Lafkas‟s one-third interest under the prior agreement to a shared one-
third interest taken as “husband and wife,” which satisfied the requirement of an express
declaration under section 852, subdivision (a).
The trial court found it was not the parties‟ intent to wholly convert Lafkas‟s
holdings prior to June 12, 1995, to community property, however. The statement of
7
partnership, the executed and notarized modification agreement, and the taking of joint
property, show the parties intended to change the character of the partnership interest
from June 12, 1995, forward. The court found Lafkas and Doane took an undivided one-
third share of the partnership from the date of the modification forward. Lafkas
transmuted his one-third interest in Smile Enterprises and its holdings to community
property only from and after June 12, 1995.
He retained a separate property interest in Smile Enterprises. The separate
property component was: one-third of rents acquired prior to June 12, 1995, one-third of
rents after June 12, 1995, derived from property held prior to June 12, 1995, and one-
third of the value of property held by Smile Enterprises prior to June 12, 1995, and the
appreciation of the value of the partnership holdings from the inception of the partnership
until June 12, 1995, which was later determined to be $63,215. The remainder of the
partnership interest, including properties acquired by the partnership on and after June 12,
1995, and appreciation, was community property subject to equal division between the
parties.
Lafkas filed a notice of appeal from the further judgment on bifurcated issues on
February 10, 2006, but this appellate court held it was a nonappealable interlocutory
order and dismissed the appeal. (In re Marriage of Lafkas (2007) 153 Cal. App. 4th 1429,
1434.)
Trial was heard on remaining issues on September 17, 18, and 19, 2008;
November 6 and 10, 2008; December 16, 2008; January 7, 9, 12 and 13, 2009; February
5 and 6, 2009; and August 21 and 28, 2009. Commissioner Halevy presided over the
trial, but was unable to rule on the issues. Judge Dianna Gould-Saltman reviewed
reporter‟s transcripts of the proceedings and issued a tentative decision on November 15,
2011. On May 12, 2012, Judge Gould-Saltman issued a minute order ruling on attorney
fees. Judge Gould-Saltman ordered Lafkas to pay attorney fees and costs of $160,000
from his portion of the proceeds from the sale of the Riverside properties and an
additional $15,000 to Doane‟s appellate counsel. Lafkas had previously paid $20,000 to
Doane‟s trial counsel. The total attorney fees paid on Doane‟s behalf was $195,000.
8
Lafkas filed a notice of appeal on August 14, 2012, from the judgment.
DISCUSSION
General Characterization Principles and Standards of Review
“The character of property as separate or community is determined at the time of
its acquisition. [Citations.]” (See v. See (1966) 64 Cal. 2d 778, 783.) “Property that a
spouse acquired before the marriage is that spouse‟s separate property. (Fam. Code, §
770, subd. (a)(1).) Property that a spouse acquired during the marriage is community
property (id., § 760) unless it is (1) traceable to a separate property source [citations], (2)
acquired by gift or bequest (Fam. Code, § 770, subd. (a)(2)), or (3) earned or accumulated
while the spouses are living separate and apart (id., § 771, subd.(a)).” (In re Marriage of
Valli (2014) 58 Cal. 4th 1396, 1400 (Valli).)
The court‟s characterization of property as community or separate determines the
division of the property between spouses in a marital dissolution proceeding. (Valli,
supra, 58 Cal.4th at pp. 1399-1400.) In general, “[a]ppellate review of a trial court‟s
finding that a particular item is separate or community property is limited to a
determination of whether any substantial evidence supports the finding. [Citations.]” (In
re Marriage of Dekker (1993) 17 Cal. App. 4th 842, 849.)
When the trial court‟s construction of a written agreement is challenged on appeal,
however, and no extrinsic evidence is necessary to resolve any ambiguity or uncertainty,
interpretation of the contract is subject to de novo review. (Morgan v. City of Los
Angeles Bd. of Pension Comrs. (2000) 85 Cal. App. 4th 836, 843.) “Under statutory rules
of contract interpretation, the mutual intention of the parties at the time the contract is
formed governs interpretation. (Civ. Code, § 1636.) Such intent is to be inferred, if
possible, solely from the written provisions of the contract. (Id., § 1639.) The „clear and
explicit‟ meaning of these provisions, interpreted in their „ordinary and popular sense,‟
unless „used by the parties in a technical sense or a special meaning is given to them by
9
usage‟ (id., § 1644), controls judicial interpretation. (Id., § 1638.) Thus, if the meaning a
layperson would ascribe to contract language is not ambiguous, we apply that meaning.
[Citations.]” (AIU Ins. Co. v. Superior Court (1990) 51 Cal. 3d 807, 821-822.)
Similarly, “[i]n deciding whether a transmutation has occurred, we interpret the
written instruments independently, without resort to extrinsic evidence. [Citations.]
Under the circumstances, we are not bound by the interpretation given to the written
instruments by the trial court. [Citation.]” (In re Marriage of Starkman (2005) 129
Cal. App. 4th 659, 664.)
We also review the interpretation of a statute and its application to undisputed
facts de novo. (MacIsaac v. Waste Management Collection and Recycling, Inc. (2005)
134 Cal. App. 4th 1076, 1082.) “In interpreting the statutory language at issue, „[w]e
begin with the fundamental rule that our primary task is to determine the lawmakers‟
intent.‟ [Citation.] The process of interpreting the statute to ascertain that intent may
involve up to three steps. [Citations.] As other courts have noted, the key to statutory
interpretation is applying the rules of statutory construction in their proper sequence.
[Citations.] We have explained this three-step sequence as follows: „we first look to the
plain meaning of the statutory language, then to its legislative history and finally to the
reasonableness of a proposed construction.‟ [Citation.]” (Ibid.)
Nature of Partnership Interest at Time of Marriage
Lafkas acquired his one-third interest in Smile Enterprises prior to the parties‟
marriage, and it is undisputed that when the parties married, the partnership interest was
his separate property. We note that the applicable partnership law in this case is the
Uniform Partnership Act (UPA) (former Corp. Code, § 15001 et seq.). Effective January
1, 1997, the UPA was repealed and replaced with the Uniform Partnership Act of 1994
(UPA 1994) (Corp. Code, § 16100 et seq.), but the former act governs rights that accrued
or actions that commenced prior to January 1, 1997. (Corp. Code, § 16112.) The
property rights at issue in this case accrued prior to January 1, 1997, since the
10
modification agreement was signed in 1995 and the dissolution action filed in 1996, thus
the UPA applies.
A partner‟s interest in partnership profits is personal property under either act.
(Former Corp. Code, § 15026; Corp. Code, § 16502; Kenworthy v. Hadden (1978) 87
Cal. App. 3d 696, 701.) This personal property interest is distinguishable from rights in
specific partnership property. Under the UPA, partners co-owned specific partnership
property as tenants in partnership with the other partners (former Corp. Code, § 15025),
but a partner‟s interest in specific partnership assets was not community property
(former Corp. Code, § 15025, subd. (2)(e)). A partner‟s interest in partnership profits,
however, is separate or community property. (McCall v. McCall (1934) 2 Cal. App. 2d 92,
94.)3
Lafkas owned the one-third interest in the profits of Smile Enterprises as his
separate property prior to the execution of the modification agreement. His separate
property interest was in the partnership‟s profits and surplus, not in specific property held
by the partnership.
Effect of Modification Agreement
The modification agreement stated Lafkas and Doane, as husband and wife, own
an undivided one-third interest in the partnership. Lafkas contends the modification
3 In comparison, current partnership law provides: “A partnership is an entity
distinct from its partners.” (Corp. Code, § 16201.) “Property acquired by a partnership is
property of the partnership and not of the partners individually.” (Corp. Code, § 16203.)
A partner does not co-own partnership property and has no interest in partnership
property that can be transferred. (Corp. Code, § 16501.) “The only transferable interest
of a partner in the partnership is the partner‟s share of the profits and losses of the
partnership and the partner‟s right to receive distributions. The interest is personal
property.” (Corp. Code, § 16502.) “„Partnership interest‟ or „partner‟s interest in the
partnership‟ means all of a partner‟s interests in the partnership, including the partner‟s
transferable interest and all management and other rights.” (Corp. Code, § 16101, subd.
(12).)
11
agreement did not change the character of his separate property interest in the partnership
to joint ownership, because it did not satisfy the requirements of section 852 for a valid
transmutation. Doane contends that since the modification agreement provides for the
parties to hold title in joint form, the joint title presumption of section 2581 applies and
Lafkas is limited to reimbursement of his contribution under the provisions of section
2640. We conclude the transmutation requirements of section 852 must be satisfied
before the joint title presumption of section 2581 applies.
A. History of Family Code Sections 2851 and 852
Sections 2851 and 852 both evolved in response to In re Marriage of Lucas (1980)
27 Cal. 3d 808 (Lucas). In Lucas, a husband and wife purchased a home during marriage
for $23,300. Wife used $6,351.57 of her separate property for the down payment and
spent $2,962 of her separate property for improvements. They took title as “Gerald E.
Lucas and Brenda G. Lucas, Husband and Wife as Joint Tenants.” (Id. at p. 811.) At the
time of dissolution, the net equity in the home was approximately $41,650. (Id. at pp.
811-812.) During marriage, the couple also traded in a community property vehicle
toward the purchase of a motor home. Wife used her separate property to pay the
majority of the purchase price. The parties‟ intent was to use the motor home for their
family, and husband did not object to putting title in wife‟s name alone. (Id. at p. 817.)
The Lucas court noted that “where there is no written indication of ownership
interests between the spouses, the general presumption of community property may be
overcome simply by tracing the source of the funds used to acquire the property to
separate property. [Citations.]” (Lucas, supra, 27 Cal.3d at p. 815.) Before the law was
modified by statute in 1965, spouses could agree to alter the character of their property by
specifying a form of title, which raised a rebuttable presumption that the parties‟
ownership interests were as stated in the title. (Id. at p. 813; see, e.g., Socol v. King
(1950) 36 Cal. 2d 342, 345-346; Tomaier v. Tomaier (1944) 23 Cal. 2d 754, 757-759.)
12
The form of title presumption could be rebutted by evidence of a contrary agreement, but
not simply by tracing the source of the property. (Lucas, supra, at p. 813.)
When spouses owned a residence in joint tenancy, it was presumed to be separate
property in which each spouse held one-half interest. (Lucas, supra, 27 Cal.3d at p. 813.)
In dissolution proceedings, the court could not award the residence to one spouse as a
family home unless the title presumption was rebutted by evidence of an agreement. (Id.
at pp. 813-814.) But spouses took title in joint tenancy primarily because real estate
professionals presented them with deeds in joint tenancy form, without understanding the
difference between joint tenancy and community property. (Id. at p. 814.)
In 1965, the Legislature added a provision to former Civil Code section 164 to
solve these problems in dissolution proceedings. (Lucas, supra, 27 Cal.3d at p. 814.) As
amended, Civil Code section 164 provided that a single family residence acquired by a
husband and wife during marriage as joint tenants was presumed to be community
property for the purposes of division of property at divorce. (Ibid.) Civil Code section
164 was replaced in 1969 with a nearly identical provision in former Civil Code section
5110. (Id. at p. 814, fn. 2.)
The Lucas court held, based on the form of title and Civil Code section 164, that
the house belonged entirely to the community, unless on remand the trial court found the
parties had an agreement or understanding that wife would retain a separate property
interest. (Lucas, supra, 27 Cal.3d at pp. 815-816.) The court reasoned, “To allow a
lesser showing could result in unfairness to the spouse who has not made the separate
property contribution. Unless the latter knows that the spouse contributing the separate
property expects to be reimbursed or to acquire a separate property interest, he or she has
no opportunity to attempt to preserve the joint ownership of the property by making other
financing arrangements. The act of taking title in a joint and equal ownership form is
inconsistent with an intention to preserve a separate property interest. Accordingly, the
expectations of parties who take title jointly are best protected by presuming that the
specified ownership interest is intended in the absence of an agreement or understanding
to the contrary.” (Id. at p. 815.)
13
The Lucas court noted that on remand, if the trial court found the house belonged
entirely to the community, wife would not be entitled to reimbursement of her separate
property contribution to the property unless the parties had agreed to reimbursement.
(Lucas, supra, 27 Cal.3d at p. 816.) It was well-established that a spouse who used
separate property for community purposes was deemed to be making a gift to the
community unless there was an agreement otherwise. (Ibid.) The Lucas court similarly
concluded there was substantial evidence to support the trial court‟s finding that husband
made a gift of his community property interest in the motor home to wife, because title to
the motor home was taken in wife‟s name alone, husband was aware of it, and he did not
object. (Id. at p. 818.)
B. Enactment of Joint Title and Reimbursement Statutes
The Legislature enacted several statutes in response to Lucas. In 1983, the
Legislature adopted provisions that are now codified as sections 2580, 2581, and 2640.
(Former Civ. Code, §§ 4800.1, subds. (a) & (b), 4800.2, respectively.)
Section 2581 provides that property acquired in joint title during marriage is
presumed to be community property upon dissolution.4 The presumption may be
rebutted only by a clear statement in the title document by which the property is acquired
that the property is separate and not community property, or proof of a written agreement
that the property is separate. (§ 2581.) Under section 2640, a party will be reimbursed
4 Section 2581 provides: “For the purpose of division of property on dissolution
of marriage or legal separation of the parties, property acquired by the parties during
marriage in joint form, including property held in tenancy in common, joint tenancy, or
tenancy by the entirety, or as community property, is presumed to be community
property. This presumption is a presumption affecting the burden of proof and may be
rebutted by either of the following: [¶] (a) A clear statement in the deed or other
documentary evidence of title by which the property is acquired that the property is
separate property and not community property. [¶] (b) Proof that the parties have made a
written agreement that the property is separate property.”
14
for contributions to the acquisition of community property to the extent the party traces
the contributions to a separate property source unless the party waived the right to
reimbursement in writing. (§ 2640.) The amount reimbursed does not include interest or
appreciation, and cannot exceed the property‟s net value. (Ibid.)
The California Law Revision Commission (the Commission) commented that
sections 4800.1 and 4800.2 were originally enacted to correct injustice under the former
law in two ways. (Cal. Law Revision Com. com., 29D West‟s Ann. Fam. Code (1994
ed.) foll. § 2580, p. 90-91.) First, the statutes were to reverse the Supreme Court‟s
holding in Lucas that separate funds used to acquire a community asset were a gift to the
community absent an express agreement otherwise. (Ibid.) “The Lucas decision was
widely considered to cause injustice to persons who contributed their separate funds for
use by the community and then lost the funds entirely to the community at dissolution of
marriage. Often the parties were unaware that taking title in joint tenancy had the effect
of making a gift of the separate property to the community.” (Id. at p. 91.)
Second, the legislation changed the rule that a spouse could rebut the community
property presumption for a joint tenancy residence with evidence of an oral agreement
that it was separate property. (Cal. Law Revision Com. com., 29D West‟s Ann. Fam.
Code (1994 ed.) foll. § 2580, p. 90-91.) “The requirement of a writing provides a reliable
test by which to determine the understanding of the parties. It seeks to prevent the abuses
and unpredictability that have resulted from the oral agreement standard.” (Id. at p. 91.)
The Commission noted, “The presumptions also govern property initially acquired
before marriage, the title to which is taken in joint form or as community property by the
spouses during marriage. The measure of the separate property contribution under
Section 2640 in such a case is the value of the property at the time of its conversion to
joint or community property form.” (Cal. Law Revision Com. com., 29D West‟s Ann.
Fam. Code (1994 ed.) foll. § 2581, p. 92.)
15
C. Application of Family Code Section 2851
The modification agreement stated Lafkas and Doane, as husband and wife, own
one-third interest in the partnership. This is a joint form of title. According to the law
above, a partnership interest is considered to be “acquired during marriage in joint form”
for the purposes of section 2851 whether it is initially acquired in joint form or initially
acquired as separate property but placed in joint form during marriage. In this case, the
admission of a new partner caused the dissolution of the partnership under former
Corporations Code section 15031, subdivision (7), unless otherwise provided in writing
signed by all of the partners before admission. By operation of law, therefore, the
modification agreement dissolved the existing partnership and created a new partnership.
The new partnership interest was taken in joint form, and therefore is community
property at dissolution under section 2851, unless section 852 requires otherwise.
D. Enactment of Transmutation Requirements
In 1984, the Legislature adopted the transmutation statutes of former Civil Code
sections 5110.710 through 5110.740, now Family Code sections 850 through 853.
(Estate of MacDonald (1990) 51 Cal. 3d 262, 267-268.) The Commission reported that
existing law made it “quite easy for spouses to transmute both real and personal property;
a transmutation can be found based on oral statements or implications from the conduct
of the spouses.” (Recommendation Relating to Marital Property Presumptions and
Transmutations, 17 Cal. Law Revision Com. Rep. (1984) (Commission report) p. 213, fn.
omitted.) The rule allowing easy transformations reflected the convenience and
informality of interspousal transfers, but “generated extensive litigation in dissolution
proceedings. It encourages a spouse, after the marriage has ended, to transform a passing
comment into an „agreement‟ or even to commit perjury by manufacturing an oral or
implied transmutation.” (Id. at p. 214.)
16
To solve the problem of easily manipulated and unreliable evidence in
transmutation cases, the Legislature adopted former Civil Code section 5110.730, now
codified as Family Code section 852. (Estate of MacDonald, supra, 51 Cal.3d at pp. 268-
269; Valli, supra, 58 Cal.4th at p. 1401.) A married person may transmute the character
of property from separate to community or from community to separate by agreement or
transfer, with or without consideration. (§ 850.) However, the transmutation must meet
statutory requirements to be valid. (In re Marriage of Haines (1995) 33 Cal. App. 4th 277,
293.) “A transmutation of real or personal property is not valid unless made in writing by
an express declaration that is made, joined in, consented to, or accepted by the spouse
whose interest in the property is adversely affected.” (§ 852, subd. (a).)
The Commission‟s report states that the statute “imposes formalities on
interspousal transmutations for the purpose of increasing certainty in the determination
whether a transmutation has in fact occurred.” (Commission report, supra, at pp. 224-
225.) The transmutation statutes overruled case law inconsistent with the new
requirements, including the Lucas court‟s holding that husband made a gift of community
property by allowing title to be taken in wife‟s name alone. (Valli, supra, 58 Cal.4th at p.
1406, fn. 2.)5
5 The Commission also recommended the Legislature enact a new Civil Code
section 5110.630 as follows: “Except as otherwise provided by statute, the form of title
to property acquired by a married person during marriage does not create a presumption
or inference as to the character of the property, and is not in itself evidence sufficient to
rebut the presumptions established by this article.” (Commission report, supra, at p.
221.) Under the proposed section, the form of title may be evidence of an agreement, but
would not be sufficient to rebut the community property presumption for property
acquired during marriage. (Ibid.) The Commission noted that exceptions might exist:
“Section 4800.1, for example, creates a presumption for the purpose of division of
property at dissolution of marriage applicable to property acquired in joint tenancy form.”
(Id. at p. 222.)
“In 1984, legislation was introduced to enact section 5110.630 as proposed by the
Law Revision Commission, along with other recommended statutes regarding
transmutation of marital property. (Assem. Bill No. 2274 (1983–1984 Reg. Sess.) § 6.)
The Estate Planning, Trust and Probate Law Section of the State Bar of California
opposed the proposed elimination of the form of title presumption, stating „the form of
17
The transmutation statutes apply to property transactions between spouses, as well
as property purchased from third parties. (Valli, supra, 58 Cal.4th at pp. 1405-1406.) An
“express declaration” is a writing signed by the adversely affected spouse “which
expressly states that the characterization or ownership of the property is being changed.”
(Estate of MacDonald, supra, 51 Cal.3d at p. 272.) “An „express declaration‟ does not
require use of the terms „transmutation,‟ „community property,‟ „separate property,‟ or a
particular locution. [Citation.]” (In re Marriage of Starkman, supra, 129 Cal.App.4th at
p. 664.) “Though no particular terminology is required [citation], the writing must reflect
a transmutation on its face, and must eliminate the need to consider other evidence in
divining this intent. [Citation.]” (In re Marriage of Benson (2005) 36 Cal. 4th 1096,
1106-1107.) “The express declaration must unambiguously indicate a change in
character or ownership of property. [Citation.] A party does not „slip into a
transmutation by accident.‟ [Citation.]” (In re Marriage of Starkman, supra, at p. 664.)
Courts have adhered closely to these requirements and declined to find a valid
transmutation without a clear understanding in writing that the document changes the
character or ownership of specific property. (In re Marriage of Starkman, supra, 129
Cal.App.4th at pp. 663-665 [trust language stating any property transferred to the trust
was community property unless identified as separate property did not unambiguously
establish spouse was effecting a change of ownership of separate property]; In re
title should create a presumption as to the character of the property. When property, for
example, is taken in the name of a wife as her sole and separate property, it is the intent
for the parties that it be so treated.‟ (Estate Planning, Trust and Probate Law Section,
State Bar of Cal., letter to Assemblyman Alister McAlister, Feb. 28, 1984, p. 4.) Citing
this opposition and other comments to the proposed statute, the Law Revision
Commission requested that the bill be amended to omit section 5110.630. (Cal. Law
Revision Com., letter to Assemblyman Alister McAlister, Mar. 22, 1984.)” (In re
Marriage of Brooks (2008) 169 Cal. App. 4th 176, 189, overruled on another issue in
Valli, supra, 58 Cal.4th at p. 1405.) The legislation was amended as requested and the
remaining transmutation statutes enacted. (Ibid.)
18
Marriage of Barneson (1999) 69 Cal. App. 4th 583, 589-590 [written instructions to
“transfer” stock to spouse‟s name, and form stating the undersigned hereby sells, assigns
and transfers unspecified shares of stock to spouse, did not expressly state the
characterization or ownership of the property was being changed]; Estate of Bibb (2001)
87 Cal. App. 4th 461, 468-470 [registration of separate property automobile in the name of
husband “or” wife was not a valid transmutation, because DMV printout was not signed
by adversely affected spouse and did not contain clear and unambiguous expression of
intent to change character, but deed granting property from husband to husband and wife
as joint tenants was a valid transmutation, because it was signed by the adversely affected
spouse and “grant” is the word historically used to transfer an interest in real property]; In
re Marriage of Leni (2006) 144 Cal. App. 4th 1087, 1096 [escrow instructions to split
proceeds from sale of community property “50/50” did not satisfy transmutation
requirements, because there was no express declaration that the character of the property
was being changed]; compare In re Marriage of Holtemann (2008) 166 Cal. App. 4th
1166, 1172-1173 [“Transmutation Agreement” stating character of listed property was
transmuted from husband‟s separate property to community property of both spouses was
a valid transmutation]; In re Marriage of Lund (2009) 174 Cal. App. 4th 40, 51-52
[agreement stating husband‟s separate property “is hereby converted to community
property of Husband and Wife” was a valid transmutation].)
E. Application of Family Code Section 852
The modification agreement provides Lafkas and Doane with an undivided one-
third interest as husband and wife. The one-third interest in the new partnership is
traceable directly from Lafkas‟s one-third interest in the prior partnership. The parties
did not provide any additional consideration to the partnership. The addition of Doane to
the partnership did not reduce the ownership interest of any partner other than Lafkas.
The clear intent of the modification agreement was to add Doane as a co-owner of the
interest formerly held by Lafkas as his separate property.
19
The modification agreement does not meet the requirements for a valid
transmutation of Lafkas‟s separate property to community property under section 852,
because it does not contain any express declaration that the characterization or ownership
of the property is being changed. The modification signed by Lafkas simply adds
Doane‟s name as owner of an undivided one-third interest as husband and wife. A valid
transmutation requires more than simply naming one or both spouses as the owner in a
title document. (Valli, supra, 58 Cal.4th at pp. 1399, 1406.) Additional language is
required to show that the adversely affected party understands the character of his or her
property is being changed. The language of the modification agreement is not sufficient
to meet the requirements of an express declaration under section 852.
We do not look to extrinsic evidence to determine whether a writing meets the
transmutation requirements. However, our determination that the modification
agreement does not contain an express declaration changing the character of the property
is reflected in the trial court‟s finding that there was no intent to transmute Lafkas‟s
separate property interest in profits from property acquired prior to the date of the
modification agreement.
F. Priority of Family Code Section 852
We conclude that when the provisions of sections 2851 and 852 conflict, the
transmutation requirements of section 852 must be met before the joint title presumption
of section 2851 applies.
“It is a fundamental rule of statutory construction that a court „should ascertain the
intent of the Legislature so as to effectuate the purpose of the law.‟ [Citation.] In
determining such intent „[t]he court turns first to the words themselves for the answer.‟
[Citation.]” (Estate of MacDonald, supra, 51 Cal.3d at p. 268.) “„“We must select the
construction that comports most closely with the apparent intent of the Legislature, with a
view to promoting rather than defeating the general purpose of the statute, and avoid an
interpretation that would lead to absurd consequences.”‟ [Citation.]” (In re Marriage of
20
Walrath (1998) 17 Cal. 4th 907, 918.) Canons of statutory construction may assist in
determining legislative intent, including “the duty to harmonize statutes on the same
subject if possible, the presumption against implied repeals, and the rule that a specific
statute prevails over a general one.” (Medical Bd. of California v. Superior Court (2001)
88 Cal. App. 4th 1001, 1013, fns. omitted.)
Interpreting the statutory scheme to require compliance with the transmutation
requirements, where applicable, before the joint title presumption applies is consistent
with the legislative intent of the statutes. Section 852 states that a transmutation of
personal property is not valid unless made in an express writing. Both statutes were
enacted, at least in part, to prevent spouses from making unintentional gifts of property.
Both statutes require spouses to establish their intentions in writing to prevent abuses and
unpredictability. The writing requirement under section 852 is more specific than the
general presumption based on the form of title under section 2851, and is more consistent
with the legislative intent to require spouses to expressly acknowledge the change in
character beyond simply stating a form of title. To construe section 2851 to allow the
form of title to effect a transmutation at dissolution or separation would circumvent the
protections of section 852 for no apparent reason.
Our construction of the statutory scheme avoids the absurd consequence of
treating Smile Enterprises as separate property if Lafkas and Doane remained married but
community property if they separated or the marriage was dissolved. If section 2851
were to apply under the circumstances of this case without regard to the transmutation
requirements, Doane would have a community property interest at separation or
dissolution based on joint title. But if the parties stayed married and Lafkas arranged for
his daughter to inherit his separate property, the daughter would be entitled to the entire
partnership interest while Doane would have no interest because the modification
agreement was not a valid transmutation under section 852. We decline to interpret the
statutory scheme in a manner resulting in different characterizations of the ownership of
property based upon the fortuities of death, dissolution, or separation. We conclude
21
section 2851 applies at separation or dissolution to property that has been validly
transmuted to joint title under section 852.
In this case, the modification agreement unquestionably did not satisfy the
requirements of section 852 to effect a valid transmutation of Lafkas‟s separate property
interest in Smile Enterprises. The partnership interest remained Lafkas‟s separate
property under the new partnership agreement.
Loan Proceeds
Our conclusion that Lafkas owned a one-third interest in the partnership as his
separate property does not fully resolve whether the community had a claim to any share
of his interest. We requested additional briefing from the parties as to the character of the
loan proceeds received by Smile Enterprises for the purchase of the Riverside properties.
“[T]he character of credit acquisitions during marriage is „determined according to
the intent of the lender to rely upon the separate property of the purchaser or upon a
community asset. [Citations.]‟ [Citation.]” (In re Marriage of Grinius (1985) 166
Cal. App. 3d 1179, 1186.) The proceeds of a loan made on a spouse‟s personal credit are
considered community property. (Bank of California v. Connolly (1973) 36 Cal. App. 3d
350, 375.) “Ordinarily funds borrowed by hypothecation of a spouse‟s separate property
are also separate property. [Citation.]” (Ibid.) “Loan proceeds acquired during marriage
are presumptively community property; however, this presumption may be overcome by
showing the lender intended to rely solely upon a spouse‟s separate property and did in
fact do so. Without satisfactory evidence of the lender‟s intent, the general presumption
prevails.” (In re Marriage of Grinius, supra, at p. 1187.)
A spouse‟s signature on a note and mortgage does not compel finding that the
lender relied on the credit of the community. (Ford v. Ford (1969) 276 Cal. App. 2d 9,
13.) The Ford court noted, “The state of mind of the seller (or, as in this case, the lender)
is of course a question of fact. The circumstance that in this case the lender required
respondent‟s signature on the note and mortgage raises an inference that if she had not
22
been willing to execute the documents credit would not have been extended. That
inference is not unreasonable even though the substantial value of the two farms made
subject to the mortgage, as compared with the modest community estate and earning
capacity, might indicate that the security given on appellant‟s separate property was the
more weighty factor in inducing the Federal Land Bank to grant a loan. Nevertheless, it
might seem that these considerations all properly fell within the province of the trial court
in determining the question of fact which we have identified.” (Id. at p. 14.)
In this case, the partnership borrowed $404,000 to purchase the Riverside
properties. The loans were taken out in the name of the partnership and secured by
partnership property, which by statute is not community property. The parties anticipated
the income from the Riverside properties would be sufficient to pay its expenses. Smile
Enterprises had funds in bank accounts to cover any shortfall, and the partnership owned
other properties. Smile Enterprises‟ net worth at the time of the purchase was
approximately $500,000 or $600,000, which includes $108,646.16 used to purchase the
Riverside properties. As a result, the loans were secured by the value of partnership
properties and Smile Enterprises had a minimum of $400,000 in additional assets
available to repay the loans. The partners signed the documents for the purchase in their
capacities as general partners on behalf of Smile Enterprises, not as individuals. Lafkas
had other separate property assets available to satisfy creditors, and Lafkas and Doane did
not own any community real property. In light of the fact that Smile Enterprises had
sufficient assets to repay the loans twice over, a trier of fact could reasonably conclude
the lender intended to rely solely on partnership property to satisfy the debt, rather than
the individuals‟ salaries and personal credit.
On the other hand, a trier of fact may find a portion of the loan proceeds
constituted community property if the lender intended to look to the partners‟ community
property income or personal credit. It is true that the general partners assumed personal
liability for payment of the debt and the lender required Doane‟s participation in the
transaction. If a portion of the proceeds invested in the partnership were received based
23
on community credit, a proportionate share of Lafkas‟s partnership interest must be
allocated to the community.
Attorney Fees
In light of our conclusion that the judgment must be reversed as to the
characterization and division of the Smile Enterprises partnership, the award of attorney
fees to Doane must be reversed and remanded for a new determination.
DISPOSITION
The portion of the judgment dividing the interest in Smile Enterprises and
awarding attorney fees is reversed for further proceedings in accordance with this
opinion. In all other respects, the judgment is affirmed. Appellant John Lafkas is
awarded his costs on appeal.
KRIEGLER, J.
We concur:
TURNER, P. J.
MOSK, J.
24