Characterization of Property Acquired with Loan Funds During Marriage

CHARACTERIZATION OF PROPERTY ACQUIRED WITH LOAN FUNDS DURING MARRIAGE

A question that invariably arises during divorce proceedings is whether assets are properly characterized as community or separate property. If property is characterized as community property, it must be divided between spouses equally upon dissolution of marriage. Fam. Code Sec. 2550. Under California community property principles, a general presumption exists that property acquired during marriage is community property. Fam. Code Sec. 760. This general presumption may be rebutted by tracing the property acquired during marriage to a “separate property” source. If the source of funds used to acquire property during marriage is separate property, the property acquired with those funds is characterized as separate. The foregoing rules often come into play in situations in which property is acquired during marriage, using funds obtained from a loan.

If the source of funds can be traced to a loan taken out during the marriage by one of the spouses, the character of the loan funds must be determined. If the loan funds are deemed to be separate, then the property acquired with those funds is considered separate. Conversely, if the loan funds are deemed to be community, the property acquired with those funds is considered community property.

This begs the question: how is the character of loan funds determined? In characterizing the loan as separate or community, an inquiry into the lender’s intent is made. There are no hard and fast rules regarding how to determine the lender’s intent—it is determined by an examination of the facts in each case. For example, if the lender relied on a spouse’s separate property as collateral for the loan, the loan proceeds are separate. If the lender relied on the other spouse’s credit worthiness in making the loan, the loan proceeds are community, because the spouse’s credit worthiness is considered to be a community asset.

The question as to the character of the loan becomes even more difficult to answer when the lender considers both separate and community assets in making a loan. For example, what if the lender accepts the separate property of one spouse as collateral and requires the other spouse to be a co-signer on the loan? The courts have applied two differing standards when confronted with this question. Under the “sole reliance” approach, property acquired during marriage in the above scenario would be considered community in that the lender did not solely rely on the separate property interests of the acquiring spouse. Under the “primary reliance” approach, the answer would hinge on the determination as to what the lender primarily relied on in making the loan. Using the above example, if the lender primarily relied on the separate property collateral in making the loan, then the property acquired using the loan funds would be considered separate. If the lender primarily relied on the credit worthiness of the other co-signing spouse, then the property would be characterized as community.

The determination of whether property is separate or community in the above scenario can often be complex. Accordingly, if you are contemplating a divorce and see the possibility of the above issue arising, it is strongly advised that you consult with an experience attorney.

Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does not create any attorney-client relationship between you and the Law Offices of Kenneth U. Reyes, P.C. This article is not a solicitation.

Attorney Kenneth Ursua Reyes was President of the Philippine American Bar Association for 2005. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. Mr. Reyes is a Certified Family Law Specialist. He is a graduate of Southwestern University Law School in Los Angeles and California State University, San Bernardino School of Business Administration. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 700, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail kureyeslaw@gmail.com; visit at www.kenreyeslaw.com

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