All of us at NGS wish Rachel R. James, Esq., a divorce and family law lawyer with Nirenstein Garnice Soderquist PLC, well in her serving as the Chair of the Race Judicata Event sponsored by Maricopa County Bar Association (MCBA) this coming Sunday, October 3, 2010.

As mentioned yesterday in this blog, The Arizona Court of Appeals recently rendered a decision addressing a very common problem that many Arizonans are facing - a severe downturn in the real estate market.  The case, Valento v Valento, and the facts concerning the matter follow.

Facts

During the marriage, Husband and Wife (both realtors) acquired multiple properties, including the marital residence.  During the marriage, Husband signed a disclaimer deed recognizing that the marital residence was Wife's sole and separate property.

After trial, it was determined that an equitable lien of $200,000 attached to the marital residence.

Husband appealed because he did not agree with the trial court's determination as to the value of the lien imposed upon the marital residence, Wife cross-appealed arguing that no equitable lien should have existed. 

Disclaimer Deed; Sole and Separate Property?

Wife's position was that she purchased the marital residence in 2005 for $1.2M, and that she made a down-payment of $560K from her separate funds and mortgaged the remaining $650K.  She testified that during the marriage, both parties paid down the principle balance with approximately $200K of community funds.  According to Wife, the outstanding mortgage balance at trial was approximately $400K.

Husband however claimed that the lot upon which the marital residence was located was purchased for $384K, which was subject to the disclaimer deed, but that community funds were used to build the home and improve the property. Husband's position was that the property increased in value during the marriage, and stressed that the disclaimer deed he signed only dealt with any "past and present" interest, but not any future interest in the property.

Neither party submitted documentary evidence to support their positions.  (The Court of Appeals was not pleased with this, pointing out that it was particularly unusual since both parties were experienced realtors.)  As a result, the trial court refused to treat the land purchase and construction as separate transactions, and adopted Wife's position that the marital residence and its property was her sole and separate property.  The Court of Appeals agreed finding that the language contained in the disclaimer deed "defined the character of the interest in the entire property, including the house".

Valuation of Marital Residence.

At trial, Husband submitted a year-old appraisal that valued the property at $1.65M.  However, he admitted that since the time of the appraisal the real estate market had declined approximately 30%.  Husband suggested that the value should be fixed at the appraisal amount, plus the value of subsequent improvements less 30%.  According to his theory, the improvements were worth $100K and fair market value of the property was $1.225M -- approximately $15K more than the combined value of the mortgage and down payment.

Wife claimed the property was worth $800K based on comps, and as such, at trial market forces reduced the value by approximately $320K.  (Remember, we did say the Arizona real estate market was "severly" depressed!

With that said, the trial court made no determination as to the value of the property after trial.  It did however, conclude that there was a community lien based solely upon the reduction of principle from the contribution of community funds.  On appeal, Husband contended that the trial court undervalued the community lien; Wife contended that no lien could exist because the property did not appreciate during the marriage.

Finding

The Court of Appeals did not agree with Wife that there should be no equitable lien because the property decreased in value during the marriage.  The Court of Appeals also found that it was improper for the trial court not to have determined the value of the property at trial so that the value of the community lien could not be made.

The Court then reaffirmed the use of the Barnett formula when separate property depreciates but positive equity remains because "community contributions toward principle have increased equity dollar-for-dollar, and the presence of positive equity means that the owner-spouse can actually realize the benefit conferred by the community".  Further, the Court explained "[i]f the community contributions were not recognized in the form of a lien, the owner-spouse would receive a windfall from the community".  As a result, the Court rejected Wife's position that a decline in the market value automatically eliminates the community's interest in sole and separate property.

The Court also saw "no reason to deprive the community of the entire value of its contributions when separate property depreciates to the point that the owner-spouse has negative equity -- to the extent that the owner-spouse has received existing value from the community, the community's contributions must be recognized.  And, the Court indicated it would be illogical to hold that the community should receive the full benefit of its contributions to principal when a portion of the equity it created can no longer be realized."  As a result, the Court held that when equity is negative, the community lien can be valued as follows C - [C/B x D]; where D equals the depreciation in value of the property during marriage; B equals the value of the property on the date of marriage; and C equals community contributions to principal or market value.

To be continued . . .

Arizona Appellate Court issues new ruling -- case of first impression, i.e., to what extent can a marital community claim an equitable lien against a spouse’s sole and separate property when community funds have contributed to the equity in the property and declining market conditions have nonetheless reduced the property’s overall value?

The Court of Appeals held that community contributions to sole and separate property create equitable lien rights even in a declining market, and define below the method by which the value of the lien should be calculated.

Click here for the Opinion.  Further analysis to follow in subsequent blog entry.

WedLock is a new type of casualty insurance that gives the unhappily married policyholder a payout after he or she is unhitched. It costs about $16 a month for every $1,250 of coverage. But to discourage people from signing up just prior to their divorce, policyholders must ante up for four years before the policy will pay out. It adds a premium of $250 per unit for every year the marriage survives beyond four. So if a policyholder who bought 10 units got divorced after 10 years, he or she would have handed over $19,188 and would receive a payout of $27,500. It's probably not worth getting divorced for, but the lump sum might salve some wounds, whether through lawyers, vacations or subscriptions to the Rhapsody Book Club.

The idea bubbled up, as so many do, from the bottom of a financial pit. After John Logan watched his wealth follow his marriage down the drain, the Kernersville, N.C., entrepreneur figured there must be a market for those who want to hedge their marital bets. He won't reveal how many policies he's sold since the Aug. 5 launch of WedLockDivorceInsurance.com. But he's surprised at how much insurance his customers are buying: some of the premiums are more than $1,000 a month.
(Comment on this story.)
 

Not everybody thinks divorce insurance is prudent. "The best insurance against a painful, financially devastating divorce is to find a way to be happy in your marriage," says relationship coach Mimi Daniel. "Divorce insurance implies from the beginning that divorce is already an option."

On the other hand, unless you're Elin Nordegren, few things are as impoverishing as ending a marriage. Logan, who is recently engaged and, yes, is buying policies for himself and his betrothed, expects WedLock will become part of prenuptial agreements or be purchased for a bride or groom by relatives concerned about their loved one's choice of loved one. "Mom or Dad could buy this for their son or daughter without them knowing about it," he suggests. But the bride or groom has to be the beneficiary. Sorry, scheming mother-in-law, no windfall for you.

This article originally appeared in the Sept. 13, 2010, issue of TIME magazine.

Arizona Rule of Family Law Procedure 43(d)(6) now authorizes the Court, upon filing of a Family Court petition, to limit access to all court documents, records and evidence related to the petition for forty-five (45) days.

As a result, a new Administrative Order, No. 2010-092 has been issued which states: "all court documents, records and evidence in any Family Court action commenced with a Family Court case number not in existence before July 1, 2010 will be unavailable to the general public and will be accessible only by judicial officers, court and clerk’s office personnel, case parties and their associated attorneys of record, and law enforcement in the exercise of their official duties until forty-five (45) days have passed since filing the petition."
 

For further information on Arizona divorce and family law matters, contact Nirenstein Garnice Soderquist, PLC.