Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, No. BD429291, Amy Pellman, Judge.
Law Offices of Gregory R. Ellis and Gregory R. Ellis for Appellant.
Darryl Franklin, in pro. per.; Keiser Family Law and Joe Keiser for Respondent.
ALDRICH, J.
Tracey Franklin (wife) appeals a marital dissolution judgment granting her former husband Darryl Franklin (husband) reimbursement under Family Code section 2640 for his separate property contribution to community property assets subsequently purchased during approximately 11 years of marriage. Wife contests the sufficiency of the evidence to support the trial court’s tracing of £128, 194, which husband invested before marriage in a residence in London, England (the Spencer property). We reverse, finding husband’s testimony of his intent to use separate property funds is insufficient evidence to trace his separate property interest to subsequently purchased community assets held at the time of dissolution.
All statutory references are to the Family Code unless otherwise stated. Section 2640, subdivision (b) provides in part: “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... acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.”
We use the currency as the parties and court did at trial based upon the country where the couple purchased the property.
FACTUAL AND PROCEDURAL BACKGROUND
Husband’s reimbursement claim relates to the Spencer property he purchased in 1994 prior to the marriage. Husband and wife married in May 1996. During their 11-year marriage, husband and wife engaged in several real estate transactions that husband contends were all funded by his separate property interest in the Spencer property. Thus, husband sought reimbursement based upon the equity in the couple’s two remaining community assets, the Ballina property and the Mammoth property.
Our recitation of the facts is presented in the light most favorable to the judgment. (In re Marriage of Nichols (1994) 27 Cal.App.4th 661, 670.)
1. Spencer Property Bought Before Marriage and Transmuted to Community
Husband bought the Spencer property in 1994 for approximately £211, 710. Husband paid £61, 710 as a downpayment plus transaction costs. The mortgage was £150, 000. Husband made improvements totaling £62, 781, and made loan payments of £3, 703.40 toward the principal. After marriage, husband and wife made loan payments of £6, 881.46 toward the principal.
Husband has no documents to support his oral testimony and contended the documents supporting this testimony were in the family residence. Husband moved for an evidentiary sanction against wife for failing to produce the documents. After hearing argument, the trial court precluded wife from relying on any documents related to their real estate transactions that had not been produced. Wife, however, maintained that she turned over all documents at the family residence that related to their real estate transactions.
In 1999, husband deeded the Spencer property to himself and wife as joint tenants. Husband and wife refinanced the Spencer property and assumed a mortgage of £330, 000 or £340, 000. Husband and wife took £150, 000 of equity out of the Spencer property in anticipation of their move to California.
In the absence of any records detailing these real property transactions, there are discrepancies in the record related to husband’s estimates. He later testified that following the Spencer refinance, the mortgage was approximately £300, 000.
Husband’s theory at trial was that at the time of transmutation, the equity in the Spencer property was £252, 267, and approximately £100, 000 to £125, 000 of equity remained after the couple refinanced and took £150, 000 out of the property. Husband testified that his separate property equity was used as the downpayment and/or toward improvements to community property assets subsequently acquired and sold during the marriage.
Additionally, husband contended that £18, 000 of his separate property, withdrawn from a savings plan, was used to purchase a London apartment referred to as the “Minster property.”
2. Downpayment to Purchase the Oporto Property
As noted, husband and wife took £150, 000 from the refinanced Spencer property, and deposited approximately $200,000 to $250,000, which was the conversion rate to dollars, into a joint bank account at Bank of America from husband’s “sole UK bank account” for a downpayment on a house in California. Husband testified that approximately $185,000 from their Bank of America account was used for the downpayment to purchase the Oporto property.
Husband sought reimbursement of the $185,000 downpayment. He testified that at the time they bought the Oporto property, the community did not have sufficient earnings to make that downpayment. Husband produced no records from the Bank of America account showing community assets were depleted. Husband acknowledged, however, that money from the sale of the community’s interest in an investment property in South London (Avonmore property) was deposited into the Bank of America account and also was used to purchase and improve the Oporto property.
Husband and wife filed a lawsuit arising from the sale and purchase of the Oporto property. They settled the litigation and the settlement funds were deposited into a joint trust account referred to by husband as the “Hartford account.” Husband testified from “memory” that the couple netted $50,000 from the Oporto litigation, in excess of their original investment.
3. Downpayment and Improvements to the Ballina Property
Husband and wife sold the Oporto property and purchased the Ballina property. Wife testified the Oporto settlement funds were used for the downpayment to purchase the Ballina property. Husband maintained, however, that these funds were not sufficient for the downpayment but did not produce bank records to support this testimony.
Husband and wife made improvements to the Ballina property in two stages. The improvement funds came from a number of sources. Husband testified the couple refinanced the Spencer property again to obtain £40, 000. In addition, they used the Oporto settlement funds in the Hartford account, funds from their Bank of America account, and a $100,000 equity line from Chase Bank taken on the Ballina property.
Husband compiled a list of expenses for both stages of the Ballina property improvements, which included the payment source. The couple spent $168,833 on the first round of improvements, and $376,493 on the second round. The second round of improvements occurred, in part, after the couple sold the Spencer property. The compilation husband submitted at trial did not show husband’s separate property was used for these improvements.
4. Downpayment on Minster Property
In 2001, husband and wife purchased a 50 percent interest in the Minster property in London, England. The purchase price was £215, 000. Husband and wife made a downpayment of approximately £26, 000. Husband testified that £18, 000 came from his separate savings plan, and the remaining was community funds.
5. Sale of Spencer Property and Downpayment for the Mammoth Property
In 2002, husband and wife sold the Spencer property. The sale price was £595, 000, which was reported on the couple’s 2002 tax returns. Before taxes, the net sale proceeds were £265, 000. Husband testified that the proceeds were deposited into his sole UK account, and were transferred to the couple’s Bank of America account in California to make additional improvements on the Ballina property. Husband testified that approximately $103,000 was used as a downpayment for the Mammoth property. Husband sought section 2640 reimbursement, claiming it was his separate property.
In sum, husband’s reimbursement claim included:
$185,000 of his separate property taken from the Spencer property upon the first refinance and deposited into the joint Bank of America account for the downpayment of the Oporto property and, upon the sale of Oporto, reinvested in the Ballina property;
£40, 000 taken from the Spencer property in a second refinance after transmutation and used for improvements to the Ballina property;
£18, 000 taken from husband’s savings plan used as a downpayment for the Minster property; and
$103,000 taken from the net proceeds of the sale of the Spencer property and used as a downpayment for the Mammoth property.
6. Husband’s Expert Presents Conflicting Tracing Testimony
Husband’s expert was retained to determine his separate property equity at the time of transmutation, and whether his separate property was used for downpayments or improvements to the subsequently purchased community assets held at the time of dissolution.
a. Separate Property Equity in Spencer Property
Husband’s expert presented three alternative calculations of husband’s separate property equity in the Spencer property that varied from more than £250, 000 to approximately £163, 000. The high equity valuation was based upon husband’s estimate of the fair market value of the Spencer property at the date of transmutation, and the low equity valuation was based upon the expert’s use of Internet data. Husband estimated the fair market value of the Spencer property at £400, 000 on the date of transmutation, while the Internet data showed a fair market value of £311, 000. Additionally, part of the appreciation in the Spencer property occurred after marriage (1996) and before transmutation (1999), which was community property. Taking into account the community property interest, and using the Internet data, the expert concluded husband had £163, 371 in separate property equity, which was roughly $245,056. Using husband’s data, the expert concluded separate property equity was $378,401.
b. Expert Identifies Husband’s Separate Property Contribution to the Downpayment for the Oporto and Mammoth Properties
Husband’s expert acknowledged that her section 2640 reimbursement analysis did not trace any separate property contribution to a community asset held at the time of dissolution. The expert, however, did “identify where the monies and the funds could be” despite the absence of records to support direct tracing. She concluded that based upon the closing statement from the Oporto property, and the Mammoth property downpayment, there was “hard cash for $311,000. And I know that he has at a minimum a $245,000 [section] 2640 reimbursement.”
c. Expert Changes Reimbursement Analysis and Traces Husband’s Separate Property Interest Upon the Sale of the Spencer Property
On cross-examination, some months later after further settlement discussions and discussions with wife’s expert, husband’s expert revised her reimbursement analysis, claiming the Oporto downpayment was irrelevant. The expert now believed the £150, 000 initially withdrawn from the Spencer property was community property, and husband’s separate property remained in the Spencer property until it was sold in 2002. Thus, the reimbursement claim was a question of whether husband’s separate property in the Spencer property could be traced after the sale in 2002 to further improvements on the Ballina property, and to the purchase of the Mammoth property. Based upon husband’s spreadsheets and the couple’s 2002 tax return, the expert testified the couple spent an additional $100,000 on improvements to the Ballina property after the sale of the Spencer property. In addition, the expert testified the downpayment for the Mammoth property came directly from the sale of the Spencer property and was husband’s separate property.
7. Trial Court Awards Husband Initial Investment in the Spencer Property
The trial court rejected as speculative and lacking credibility the testimony that husband had between $378,401 and $245,056 of separate property equity in the Spencer property at the time of transmutation. The trial court concluded the expert’s use of Internet data was not reliable evidence, and the court was “unwilling to speculate as to the extent of appreciation prior to marriage.” Thus, the trial court limited husband’s reimbursement to the downpayment (£61, 710) and improvements (£62, 781) to the Spencer property, along with loan payments toward the principal loan balance before marriage (£3, 703) for a total award of £128, 194.
In making this award, the trial court also rejected the expert’s alternative theory that husband’s separate property interest remained in the Spencer property until it was sold. Instead, the trial court concluded husband’s separate property contribution could be traced to the downpayment on the Oporto property, and then to the Ballina property. The trial court further concluded that a separate property interest remained in the Spencer property, and a portion of the sale proceeds could be traced to the downpayment for the Mammoth property. There was sufficient equity in both remaining community property assets to reimburse husband.
As noted, husband did not offer any bank records to trace the expenditure of these separate funds into or out of any given account. Nevertheless, the trial court found him credible and noted the absence of evidence “likely was destroyed or lost through inadvertence, mistake or neglect.”
Following the trial court’s tentative decision, wife filed a statement of controverted issues and proposals. The trial court issued a minute order denying wife’s objections and ordered husband to prepare the judgment. Thus, by denying the objections, the trial court’s tentative decision became its final statement of decision. Wife timely filed a notice of appeal.
Wife filed two notices of appeal, one following the September 23, 2009 judgment after the reimbursement trial, and another following the judgment of dissolution on December 7, 2009. These appeals have been consolidated.
DISCUSSION
Wife challenges the trial court’s conclusion that husband traced his separate property interest (down payment [£61, 710], improvements [£62, 781], and loan payments to reduce the principal [£3, 703]) in the Spencer property to the subsequently acquired community assets held at the time of dissolution. Wife contends husband’s testimony was not sufficient to establish tracing, and his testimony does not add up because his reimbursement claim is based upon the separate property equity he claimed to have in the Spencer property at the time of transmutation, not his initial separate property investment in the Spencer property, which is the basis for the trial court’s award.
On appeal, wife has the burden of establishing error. (In re Marriage of Cochran (2001) 87 Cal.App.4th 1050, 1056.) Whether husband has adequately traced a community asset to a separate property source is a question of fact for the trial court, and its finding must be upheld if supported by substantial evidence. (In re Marriage of Braud (1996) 45 Cal.App.4th 797, 823.) We must determine whether there is substantial evidence to support the trial court’s determination that husband has traced his initial separate property investment in the Spencer property to two community assets held at the time of dissolution.
1. Insufficient Evidence to Reimburse Husband for $185,000 Downpayment
Husband sought reimbursement for his separate property interest of $185,000 taken from the Spencer property and commingled into the couple’s Bank of America account, which he testified was used for the downpayment on the Oporto property and later for the downpayment on the Ballina property. Husband is entitled to reimbursement for any separate property contributions to a property acquired for the community estate, which includes downpayments, payments for improvements, and payments that reduce the principal of the loan (§ 2640, subds. (a), (b)) to the extent that he can trace the contributions to his separate property source. (In re Marriage of Braud, supra, 45 Cal.App.4th at p. 822.) Husband failed to meet his tracing burden.
Generally, where the family residence was originally the separate property of one party only, and converted to joint tenancy during marriage, the measure of reimbursement is the fair value of the residence at the time of conversion, less outstanding encumbrances and any nongift community property contributions to principal before conversion. (In re Marriage of Walrath (1998) 17 Cal.4th 907, 920-921, fn. 5.) In In re Marriage of Walrath, the Supreme Court held that a section 2640 reimbursement claim includes not only the specific community property to which the separate property was originally contributed, but also any other community property that is subsequently acquired from the proceeds of the initial property, and to which the separate property contribution can be traced. (In re Marriage of Walrath, at pp. 918-919.)
The Walrath court also determined the method to trace separate property contributions through multiple properties. (In re Marriage of Walrath, supra, 17 Cal.4th at p. 921.) The Walrath tracing method was not used here because the trial court assumed that the £150, 000 withdrawn from the Spencer property after refinancing was husband’s separate property, and unlike Walrath, these funds were commingled with community funds in the couple’s Bank of America account. (Id. at pp. 920-921, fn. 5.) Commingling does not alter the status of the separate property interest despite the presumption that property acquired during the marriage is community property (§ 760) as long as the contribution can be traced to a separate property source. (In re Marriage of Cochran, supra, 87 Cal.App.4th at pp. 1057-1058.) The spouse claiming the separate property interest must prove that he or she used separate property funds to purchase the community asset. If the spouse cannot make that showing, the property is characterized as community property because it was acquired during the marriage. (§ 760.)
While the general rule is that the testimony of a single witness is sufficient to support a finding, there is a heightened evidentiary standard to rebut the presumption that property acquired during marriage is presumed to be community property. (In re Marriage of Mix (1975) 14 Cal.3d 604, 610-611, 613-614.) When a spouse has commingled separate property funds with community property funds, and at dissolution the spouse seeks to trace a particular expenditure to the separate property funds, the courts require more than the spouse’s testimony that he or she intended to use the separate property funds in the commingled account for the expenditure. (Id. at p. 614.) The spouse is required to present the court with evidence (apart from a mere statement of intent to use separate property funds).
Courts recognize either direct or family expense tracing methods to ascertain whether a party’s contribution was derived from a separate property source. (See In re Marriage of Walrath, supra, 17 Cal.4th at pp. 920-921, fn. 5; In re Marriage of Mix, supra, 14 Cal.3d at p. 612.) Under the “direct tracing” method, the disputed asset is traced to the withdrawal of separate property funds from the commingled account. (In re Marriage of Braud, supra, 45 Cal.App.4th at p. 823.) “This method requires specific records reconstructing each separate and community property deposit, and each separate and community property payment as it occurs.” (Ibid.) Separate property status cannot be established by “mere oral testimony of intent” or by “records that simply total up all separate property funds available during the relevant period and all separate expenditures during the period[.]” (Ibid.) Using the “family expense” method, the records must show the community income was exhausted by family expenses, leaving only separate property funds available to make the payments. (In re Marriage of Cochran, supra, 87 Cal.App.4th at pp. 1058, 1059.) Estimates are not sufficient to meet this burden. Although the trial court relied on In re Marriage of Stoll (1998) 63 Cal.App.4th 837 to relax the tracing requirements, that case holds a party may estimate the value of real separate property later transmuted into community property, not a party may estimate his or her separate property funds in a commingled account for purposes of tracing. (Id. at p. 843.)
a. Insufficient Evidence of Tracing from the Spencer Property to the Ballina Property
Husband testified he had a separate property interest of £128, 194 in the Spencer property before transmutation. When husband and wife refinanced, they presumably paid off the existing mortgage of £150, 000, and the community assumed the estimated £340, 000 mortgage. Husband testified the couple “took out” £150, 000 (more than his initial separate property investment) and deposited those funds into their Bank of America account.
As the trial court stated, there is no credible evidence of the fair market value of the Spencer property or equity interest when it was refinanced and transmuted to community property to establish husband’s separate property interest. We reasonably can infer from husband’s testimony that there was at least £150, 000 of equity, and husband testified he had invested £128, 194 before marriage. We cannot, however, fill the evidentiary gap giving rise to this dispute, that is, what, if any, of husband’s separate property went into the joint account and was used for the Oporto property downpayment. There are at least three possibilities: (1) all of husband’s separate property was withdrawn from the Spencer property and deposited into the couple’s Bank of America account; (2) some portion of the husband’s separate property interest remained in the Spencer property and a portion of community assets were deposited into the joint account and used to buy the Oporto property; or (3) all of husband’s separate property remained in the Spencer property until the property was sold and only community assets were used as the downpayment to purchase the Oporto property.
In the statement of decision, the trial court assumed that the entire £150, 000 withdrawn from the Spencer property was husband’s separate property, along with the additional £40, 000 after the second refinance of the Spencer property when the couple held the property as joint tenants. This is inconsistent with the order only awarding husband his initial investment (£128, 194) in the Spencer property.
Husband’s theory at trial was he had sufficient separate property equity to withdraw £150, 000 of his separate property and still have approximately £100, 000 to £125, 000 of separate property equity in the Spencer property when it was refinanced and then sold. But, as the trial court noted, there was no evidence to support this theory. Husband also presented no evidence to trace the downpayment to purchase the Oporto property to any separate property interest deposited in the couple’s Bank of America account. Even husband’s expert reversed course at trial and testified the Oporto transaction was irrelevant because husband’s separate property remained in the Spencer property until it was sold, opting for the third possibility described above. The absence of sufficient tracing evidence to establish, what, if any separate property was used for the downpayment to purchase the Oporto property or remained in the Spencer property made it impossible to establish husband’s reimbursement claim. (See In re Marriage of Geraci (2006) 144 Cal.App.4th 1278, 1287-1288.)
The trial court assumed that the Oporto downpayment was husband’s separate property and could be traced using the family expense method to the funds withdrawn from the Spencer property and deposited into the couple’s Bank of America account. But, the only cited evidence of tracing is husband’s testimony related to the couple’s earnings, not expenses. There was no evidence presented stating the balance in the Bank of America account before the £150, 000 deposit, no evidence that the entire amount deposited was husband’s separate property, and no evidence of the community income deposited in that account or the amounts withdrawn from the commingled account to cover family living expenses.
Husband presented no documents related to the Bank of America account which is necessary under the family expense method of tracing to show community assets were depleted at the time the particular asset was acquired. (In re Marriage of Braud, supra, 45 Cal.App.4th at pp. 824-825; see also In re Marriage of Mix, supra, 14 Cal.3d at pp. 612-614; see Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2010) ¶¶ 8:529 to 8:531, pp. 8-146 to 8-147.) Even In re Marriage of Cochran, supra, 87 Cal.App.4th at page 1059, which did not require the submission of “detailed records, ” concluded the party seeking reimbursement must, at a minimum, introduce evidence to establish the portion of separate property deposited in the joint account. As noted, husband failed to make that showing.
b. No Exception Applies to Excuse Husband’s Tracing Burden
We reject husband’s contention that he should be excused from producing documentary evidence tracing his separate property interest because through no fault of his own his detailed records were destroyed. “A party who commingles his or her separate property with property of the community assumes the burden of keeping adequate records.” (See In re Marriage of Higinbotham (1988) 203 Cal.App.3d 322, 330.) Husband had access to all documents pertaining to the purchase of the Oporto property. Moreover, husband made no attempt to obtain copies of bank records from the couple’s Bank of America account to show the community funds were depleted when the couple purchased the Oporto property or to trace his separate property on deposit in that account.
Husband further contends that since his detailed records were lost or destroyed, the burden of proof should shift to wife to prove that community funds were used to acquire the Oporto property. A presumption exists that property acquired during marriage is community property. (§ 760.) Additionally, we decline to impose a sanction on wife; the trial court already accounted for the absence of documents through an appropriate sanction because the records of the couple’s real estate transactions were “likely... destroyed or lost through inadvertence, mistake or neglect.” Husband could have obtained duplicate bank records from the Bank of America account, but failed to do so. Husband’s claim for reimbursement fails because he did not trace his separate property to the downpayment used to purchase the Oporto property. Thus, husband cannot trace these funds through the Oporto property to the Ballina property, the existing community asset at the time of dissolution.
2. Insufficient Evidence to Reimburse £40, 000 for Ballina Property Improvements
Husband also sought reimbursement for £40, 000 taken from the second refinance of the Spencer property. As noted, there is no evidence in the record to support husband’s position that at least £40, 000 of his separate property remained in the Spencer property after the couple bought the Oporto property. The trial court did not reimburse husband for an additional £40, 000 above his initial investment of £128, 194 in the Spencer property.
3. Insufficient Evidence to Reimburse for £18, 000 Minster Downpayment
Husband presented no records to substantiate reimbursement of £18, 000 from his separate savings account. Thus, although the trial court’s decision appears to trace the £18, 000 contribution to the Spencer property, the trial court did not award these additional funds to husband.
4. Insufficient Evidence to Reimburse $103,000 for Mammoth Downpayment
Husband claimed he had separate property equity in the Spencer property at the time of its sale and sought reimbursement for approximately $103,000 used as a downpayment to purchase the Mammoth property. Husband’s expert revised her testimony, stating all of husband’s separate property remained in the Spencer property until the sale. Neither position is supported by substantial evidence.
Husband presented no credible evidence that any separate property interest remained in the Spencer property when it was sold. As previously noted, it is possible that husband withdrew all of his separate property when the couple refinanced the Spencer property, assumed a much larger mortgage, and used these funds to purchase the Oporto property.
Husband’s expert presented a “theory, ” not credible evidence of tracing, that husband’s separate property interest remained in the Spencer property until it was sold and purportedly traced the funds after the sale.
The trial court’s decision to limit reimbursement to husband’s initial investment in the Spencer property implicitly rejected both of these theories and reflects the confusing state of the record when tracing is from one spouse’s “memory.” In the end, the trial court relied on the presumption that husband’s undisputed initial separate property investment in the Spencer property did not just disappear after transmutation, and he intended to keep that investment separate based upon his undisputed and credible testimony. A section 2640 reimbursement, however, requires a heightened evidentiary standard to trace the separate property contribution through the subsequent transactions to a community asset at the time of dissolution. (In re Marriage of Walrath, supra, 17 Cal.4th at pp. 921-923.) Husband’s testimony of his intent fails to meet that heightened standard.
DISPOSITION
The judgment of the trial court awarding husband his section 2640 reimbursement of separate property is reversed. Wife is entitled to costs on appeal.
We concur: KLEIN, P. J., CROSKEY, J.