Case of the Month Archive

In a matter of first impression, husband's sale of separate property to marital community for nominal amount is not a contribution to the acquisition of community asset requiring reimbursement. . .

In affirmance, the First District held husband's sale of his business to the marital community for the nominal amount of $1 does not constitute a de facto gift and, thus, does not trigger a right of reimbursement under Fam C §2640 [reimbursement for traceable separate property contributions to acquisition of community property absent written waiver].

In January 2001, Dale Motiska and Caroline Ford married. They separated in 2011 and later a dissolution action was filed.

Prior to his marriage to Caroline, Dale owned a nursery business named Neon Palm Nursey (Neon Palm), a sole proprietorship that Dale had operated since 1983. Shortly after his marriage to Caroline in 2001, Dale formed Buxup Corporation (Buxup). In December 2003, Neon Palm ceased doing business and was sold to Buxup for $1.

In April 2018, Dale and Caroline entered into a stipulation, which the trial court approved as an order, that a trial would first be held on the characterization of Buxup. The stipulation further provided that the trial court would retain jurisdiction over certain issues related to the characterization of Buxup, including (1) "'In the event the Court finds that the business is presumptively community property, any rebuttal of the community property presumption via tracing of the acquisition of the business to [Dale's] separate property,'" and (2) "'Any Family Code section 2640 claims related to the business.'"

The trial court first held a five-day trial that occurred between February 2019 and December 2019 addressing whether the creation of Buxup was an acquisition during marriage that would give rise to a presumption that it was community property under Fam C §760 [property acquired during marriage is presumed to be community property]. The trial court issued a statement of decision on January 16, 2020. The trial court found that Buxup was "'a new and distinct business acquired during the marriage,'" thereby giving rise to the presumption that it was a community property asset. The trial court further found that the sale of Neon Palm occurred in 2003.

The trial court held another trial over three days in February 2021 and March 2021 giving Dale the opportunity to rebut the presumption that Buxup was community property. The trial court issued a statement of decision on May 28, 2021, finding that Dale failed to meet his burden of proof and did not rebut the presumption.

After a subsequent trial was held, the trial court (Solano County's Rios) issued a written order on October 27, 2022, reaffirming its previous finding that Dale sold Neon Palm to Buxup for $1. The trial court ruled that Dale did not have a Fam C §2640 claim and would not be allowed to present evidence to substantiate such a claim. Dale appealed, but the First District affirmed.

On appeal, Dale argued that the trial court erred by ruling he had no reimbursement claim under Fam C §2640. More specifically, Dale argued that his sale of Neon Palm to Buxup for the nominal amount of $1 was a de facto gift that triggered a right to reimbursement under the statute. The panel disagreed, noting the issue was one of first impression.

Doctrine of implied findings applies. . .
The justices first noted that Dale failed to raise an objection at trial to the trial court's findings that Neon Palm was sold, not donated, to Buxup. As such, under the doctrine of implied findings and CCP §634, the justices were required to imply that the trial court's adverse findings in its statement of decision were supported by substantial evidence.

The sale of Dale's business for $1 fairly reflected its value to Dale. . .
Next, the justices concluded that substantial evidence supports the trial court's implied finding that the sale of Neon Palm "fairly reflected its value to [Dale] at the time of the sale." Without speculating into all of the specific reasons for Dale's chosen sale price, the justices noted that he may have had any number of reasons for selecting a nominal amount. For example, one known reason for the nominal sale price was Dale's desire to avoid business transfer taxes. The justices explained that low consideration is not the same as no consideration.

The justices then turned to the language of Fam C §2640, which provides "'In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party's contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source.'" The statute further provides non-exclusive examples of "contributions," including "downpayments" and "payments for improvements." The justices observed the statutory examples of contributions "suggests a voluntary transfer of funds or assets to benefit the community," whereas the sale of property to the community stands in stark contrast to these examples.

For further support of their interpretation, the justices turned to the California Supreme Court's decision in In re Marriage of Walrath (1998) 17 Cal.4th 907, 72 Cal.Rptr.2d 856. In Walrath, the Supreme Court expressed important policy considerations underlying reimbursement under Fam C §2640. First, "[i]t encourages married persons to freely and without reservation contribute their separate property assets to benefit the community." And second, it "protects the general expectations of most people in marriage, i.e., that spouses will be reimbursed for significant monetary contributions to the community should the community dissolve." The First District then observed that treating Dale's sale of Neon Palm to Buxup as a contribution to the acquisition of the marital community estate would not further either policy consideration. First, "[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.'" Second, most spouses do not hold the general expectation that "if they sell separate property to the community, they will nevertheless receive additional reimbursement for the transferred property, over and above the sale price if the community dissolves."

Trial court was not required to determine actual value of Neon Palm. . .
The justices also rejected Dale's argument that the $1 sale price does not accurately reflect the value of Neon Palm and, as such, the trial court erred by not determining its actual value. In support of his argument, Dale noted "'[a] sale for a nominal amount is akin to a gift.'" After noting the trial court was not required to determine the value of Neon Palm since its sale to Buxup was not a contribution to the community estate, the justices noted several reasons against recasting Dale's transaction from a sale to a gift. First, under established principles of contract law, "'consideration need not necessarily be useful, and there is no requirement of adequacy to make the contract enforceable.'" Second, in the case law that Dale relied on, nominal amounts did not generally invalidate the transactions at issue. And third, the justices identified a line-drawing problem with Dale's request. For example, even a sale for a substantial price could be revisited based on a claim that the price does not reflect the actual value of the property sold.

Finally, the justices rejected Dale's argument that, since the sale of Neon Palm to Buxup was a related-party transaction, the sale price was "'not indicative of value'" and other factors must be considered to determine value. Specifically, the justices observed that the cases that Dale relied on for this argument involved different circumstances in which there was a "heightened importance of objectively accurate asset values." These cases included accounting and tax contexts that were not implicated in this case.

Accordingly, the First District affirmed the trial court's order determining Dale has no Fam C §2640 claim pertaining to the sale of Neon Palm.