THE EFFECT OF FAMILY CODE SECTION 2640 ON CMPAL ACCOUNTS -- A SUPRISING DISCOVERY

INTRODUCTION

While the authors of the Rutter Group Family Law Practice guide mention the apparent conflict (See, Rutter Group Family Law Practice Guide, Paragraph 8:384, et. seq.), they offer no explanation or guidance. Accordingly, the research and analysis that follows is "from scratch." The end result is of great importance to the family law bench and bar because the end result is counter-intuitive.

I. DEFINITION OF "ACCOUNT"

"5100. This part may be cited as the California Multiple-Party Accounts Law." (Hereafter "CMPAL").

Only "accounts" are subject to the CMPAL, and thus the first question to be resolved is: "what is an account?" The answer is found in §5122.

"§ 5122. Account

(a) "Account" means a contract of deposit of funds between a depositor and a financial institution, and includes a checking account, savings account, certificate of deposit, share account, and other like arrangement.

(b) "Account" does not include:

(1) An account established for deposit of funds of a partnership, joint venture, or other association for business purposes.

(2) An account controlled by one or more persons as the duly authorized agent or trustee for a corporation, unincorporated association, or charitable or civic organization.

(3) A regular fiduciary or trust account where the relationship is established other than by deposit agreement.

(4) An account established for the deposit of funds of the estate of a ward, conservatee, or decedent." [Italics supplied for emphasis].

Subsection (a) above further narrows the definition by limiting the scope to a deposit of funds between the depositor and a "financial institution," which necessitates further inquiry as to the definition of "financial institution." That definition is found in §40.

"§ 40. Financial institution 'Financial institution' means a state or national bank, state or federal savings and loan association or credit union, or like organization."

Based upon the above definitions, it will be important in every situation to conduct an analysis to determine whether the "candidate account" will in fact fall within the ambit of CMPAL. For example, is a brokerage account at Morgan Stanley an "account?" I am not sure that it is because the purchase of stock is probably not a "contract of deposit of funds," and Morgan Stanley is not a "state or national bank, state or federal savings and loan association or credit union" and probably would not be considered a "like organization."

II. PRESUMPTIONS ARISING FROM JOINT TITLE

Once the account has passed muster under the above test, the next step is to examine the presumptions that arise in each milieu based upon the account's joint form of title.

A. CMPAL

The basic rule under CMPAL, (which will become very important later in this analysis) is that the equity interests in the account are based upon "net contributions" as set forth in Probate Code §5301:

"5301. Lifetime ownership

(a) An account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent." [Italics supplied for emphasis].

This interpretation is clearly endorsed by the court in the recent decision in Lee v. Yang (2003) 111 Cal.App.4th 481, which dealt with an unmarried couple:

"Section 5301, subdivision (a) delineates a rule of ownership of an account based on a party's net contribution to the 'sums on deposit.' An account is nothing more than a contract of deposit of funds between a depositor and a financial institution. (§ 5122, subd.(a).) The term 'sums on deposit' refers to the balance payable on the account plus any life insurance proceeds added because of the death of a party. (§ 5150, subds.(a), (b).) Thus, at any point in time the sums on deposit in an account belong to a party in proportion to his or her net contribution." Id., at p. 490.

However, as is so often the case, for every basic rule, there is an exception! Here, the exception concerns married parties. Probate Code §5305(a) provides that in the case of married couples, "net contribution" is presumed to be community property, which of course would give each a 50% interest, irrespective of the actual contributions of each.

"§ 5305. Married parties; community property; presumption; rebuttal; change of survivorship right, beneficiary, or payee by will

(a) Notwithstanding Sections 5301 to 5303, inclusive, if parties to an account are married to each other, whether or not they are so described in the deposit agreement, their net contribution to the account is presumed to be and remain their community property." [Italics added for emphasis].

B. Family Code

In the case of the Family Code, the community property presumption arising from joint ownership is essentially the same as that arising from Probate Code §5305(a).

"§ 2581. Division of property; presumptions

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."

III. CRITERIA REQUIRED TO OVERCOME PRESUMPTIONS

At this juncture, the analysis has reached the point where the account under scrutiny is presumed to be community property under each statutory scheme. Thus the next step is to inquire as to the criteria each requires to rebut the presumption.

A. CMPAL

The Probate Code criteria are found in subsection (b) of §5305:

"§5305

(b) Notwithstanding Sections 2581 and 2640 of the Family Code, the presumption established by this section is a presumption affecting the burden of proof and may be rebutted by proof of either of the following:

(1) The sums on deposit that are claimed to be separate property can be traced from separate property unless it is proved that the married persons made a written agreement that expressed their clear intent that the sums be their community property.

(2) The married persons made a written agreement, separate from the deposit agreement, that expressly provided that the sums on deposit, claimed not to be community property, were not to be community property."

B. Family Code

The Family Code provisions lie in §2640(b):

"§ 2640. Contribution to the acquisition of property of the community property estate; waivers; amount of reimbursement

(b) 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 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."

IV. EFFECT OF OVERCOMING PRESUMPTIONS

The analysis has now reached the point at which under either the Probate Code or the Family Code, the account under scrutiny is presumed to be community, which can be rebutted by tracing or a written agreement. In either situation, if the separate property proponent fails in his or her tracing attempt, the ball game is over; the account is community and each party has an equal share.

But, what happens when the tracing attempt is successful? This is the situation where there is a significant difference between the two systems. As explained below, CMPAL will allow for a pro rata share of increased value, whereas, the Family Code only allows reimbursement for the separate property contribution, with any increased value being credited in full to the community.

A. CMPAL Recall that under CMPAL the basic rule is that an account "belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit…" [See II. A., above]. This means that even in a situation where the parties are married and the presumption of community property is applicable, if that presumption is successfully rebutted, the basic CMPAL rule will then apply and the parties will hold interests in proportion to "net contribution." This begs the question of what is included in the term "net contribution." The answer is set forth in Probate Code §5134:

"§ 5134. Net contribution

(a) 'Net contribution' of a party to an account as of any given time is the sum of all of the following:

(1) All deposits thereto made by or for the party, less all withdrawals made by or for the party that have not been paid to or applied to the use of any other party.

(2) A pro rata share of any interest or dividends earned, whether or not included in the current balance.

(3) Any proceeds of deposit life insurance added to the account by reason of the death of the party whose net contribution is in question." [Italics supplied for emphasis].

Clearly, subsection (2) includes interest and dividends in addition to actual contributions.

B. Family Code

In the Family Code milieu, even if the tracing is successful, interest and dividends would not be included as the following portion of §2640 indicates:

"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."

V. WHICH STATUTES CONTROL?

We have now reached the end of the analysis, which has shown that there is a meaningful conflict between the Probate Code and the Family Code when it comes to joint "accounts" in the names of married persons when the separate property proponent successfully traces or proves a written agreement. In the case of the former, increased value will be apportioned on a pro rata basis, while in the case of the latter, all increased value is allocated to the community. In this unique circumstance, which law prevails? The answer lies in the provisions of Probate Code §5305(b), which is set forth in part III. A., above. For convenience, it is set forth again here:

"§5305

(b) Notwithstanding Sections 2581 and 2640 of the Family Code, the presumption established by this section is a presumption affecting the burden of proof and may be rebutted by proof of either of the following:

(1) The sums on deposit that are claimed to be separate property can be traced from separate property unless it is proved that the married persons made a written agreement that expressed their clear intent that the sums be their community property.

(2) The married persons made a written agreement, separate from the deposit agreement, that expressly provided that the sums on deposit, claimed not to be community property, were not to be community property." [Italics supplied for emphasis]

The italicized language "[n]otwithstanding Sections 2581 and 2640 of the Family Code," strongly implies that the Legislature recognized the potential conflict established above, and decided that any time an "account" held jointly by a married couple was at issue, CMPAL rules would apply, rather than the corresponding Family Law rules. When the Legislature's official comment to Probate Code §5305 is considered, there is no doubt at all the CMPAL trumps the Family Code:

"1990 Enactment The introductory clause of subdivision (b) makes clear that the rule stated in subdivision (b) prevails over the rules stated in Civil Code Sections 4800.1 and 4800.2 [now Family Code §§2581 and 2640, respectively] with respect to the division of a joint account upon dissolution of marriage or legal separation as well as for all other purposes. Compare Section 5307 (account expressly described as "community property" account).

Paragraph (1) of subdivision (b) specifies one of the two methods of rebutting the presumption--the source-of-funds or tracing rule. If the person having the burden of proof can trace separate funds into a joint account, the presumption of community property is overcome and the funds retain their separate character. If separate funds have been commingled with community funds but remain ascertainable or traceable into a proportionate share of the account, the funds retain their separate character. On the other hand, if separate and community funds are so commingled that the party having the burden of proving that the funds are separate cannot meet that burden, then the entire account is treated as community property. See generally 7 B. Witkin, Summary of California Law Community Property §§ 33-34, at 5126-28 (8th ed. 1974). Even though the separate funds can still be traced, nothing prevents the married persons from making an agreement that expresses their clear intent that the funds be community property. If the person claiming that such an agreement was made proves that fact by a preponderance of the evidence, the agreement is given effect as provided in the last clause of paragraph (1)." [Italics supplied for emphasis].

Therefore, in any dissolution action where there is a joint "account" in the name of the parties, CMPAL rules will apply. However, as noted above, application of those rules will have the same effect as the Family Law rules with regard to the presumption of community property and criteria for rebutting the community presumption. Further, both systems are in accord if the separate property proponent fails in his or her tracing; the property will be deemed community. The only distinction will be when the presumption is successfully rebutted in which case CMPAL will give the separate property proponent a pro rata share of increased value based on her or her "net contribution."

VI. SOME EXAMPLES

1. $50,000 joint savings account, Husband contributing the entire $50,000. No further deposits. Account value now $75,000.

Answer: This is undoubtedly an "account." Therefore, as established above CMPAL rules will apply. The property is presumed community. Husband must trace. If he cannot, it is all community. If he can trace it is all his separate property because his "net contribution" is $50,000 (100%) and the increase in value will be 100% his too.

2. $50,000 joint savings account, Husband contributing $30,000 and community contributing remaining $20,000. No further deposits. Account value now $100,000.

Answer: As stated above, this is an "account." Therefore, as established above CMPAL rules will apply. The property is presumed community. Husband must trace. If he cannot, it is all community. If he can trace he will own $60,000 of the account based on his "net contribution" of 60%. The community will own $40,000 of the account based on its "net contribution" of 40%.

3. H purchases $100,000 of stock, which he deposits into a joint Schwab account. No community stock deposited. H buys and sells so that none of the original stock remains but value is now $150,000.

Answer: As discussed in Part I, above, I have serious doubts that this would qualify as an "account" within the ambit of CMPAL. In that case, it would be treated under the Family Law rules: Community Property if H cannot trace; if he can trace, §2640 reimbursement claim for $100,000, with the $50,000 increase being community. In the unlikely event that it could be deemed an "account" within the ambit of CMPAL, it would all be H's separate property for the same reasons set forth in #1, above. Note, however, that wife might be able to get some of the increase under another theory, to wit H's community effort expended in managing the stocks. See, Beam v. Bank of America (1971) 6 Cal.3rd 12