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Go on, Take the Money and Run! How to get the most out of reimbursement claims.
- 1. Jimmy Vaught Leigh de la Reza Kacy Dudley GO ON, TAKE THE MONEY AND RUN! HOW TO GET THE MOST OUT OF REIMBURSEMENT CLAIMS
- 3. “In adjusting the respective rights of the parties, the equities shall be balanced.” Dakan v. Dakan
- 4. Before Marriage = separate property After Marriage = community property Separate Property Acquired during marriage: Gifts Inheritance Personal Injury Money Inception of Title Rule
- 6. Increased Assets Reduced Debts 2 Basic Categories of Reimbursement Claims
- 7. REIMBURSEMENT CLAIMS INVOLVING THE REDUCTION OF DEBTS TFC 3.402 (a)(1) payment of unsecured liabilities (a)(3) reduction of principal amount of debt secured by lien on property owned prior to marriage (a)(4) reduction of principal amount of debt secured by lien received by gift, devise, or decent during marriage (a)(5) reduction of principal amount of debt incurred during marriage, secured by lien, and incurred for acquisition of or for capital improvements to property (a)(6) reduction of principal amount of debt incurred during marriage, secured by lien, for which creditor agreed to look solely to the separate marital estate of the spouse on whose property the lien is attached and incurred for the acquisition of or for capital improvements to property (a)(7) refinancing of principal amount described by (3)-(6) (a)(9) reduction of unsecured debt
- 8. §3.402(a)(1) payment by one marital estate of the unsecured liabilities of another marital estate. §3.402(a)(9) the reduction by the community property estate of an unsecured debt incurred by the separate estate of one of the spouses.
- 9. What to Prove 1) Payment made by one marital estate toward the unsecured liability of another 2) Payment was reimbursable 3) The value of the contribution
- 10. Defenses 1) Debt was secured 2) Contribution was for the payment of child support, alimony, spousal maintenance or living expense of a spouse or child 3) Contribution was nominal in value 3.409(4) 4) Contribution was for a student loan 5) Contribution was for community living expenses
- 11. §3.402(a)(3) the reduction of the principal amount of a debt secured by a lien on property owned before marriage, to the extent the debt existed at the time of marriage. §3.402(a)(4) the reduction of the principal amount a debt secured by a lien on property received by a spouse by gift, devise, or descent during a marriage, to the extent the debt existed at the time the property was received.
- 12. What to prove 1) Property was acquired prior to marriage or by gift, devise, or descent 2) Debt was in existence at time of marriage or when property was received 3) Debt was secured by lien on spouse’s separate property 4) Community estate (or spouse’s separate estate contributed to the reduction) 5) Proof of the exact amount of the funds expended
- 13. Defenses 1) Property is community 2) Offset for use and enjoyment—no offset for use of a primary or secondary residence 3) Proof that debt did not exist at time of marriage or when property was received 4) Debt was not secured by the property 5) Payments were nominal
- 14. §3.402(a)(5) the reduction of the principal amount of that part of a debt, including a home equity loan: a) incurred during the marriage; b) secured by a lien on property owned by a spouse; and c) incurred for the acquisition of, or capital improvements to property.
- 15. What to prove 1) Debt was incurred during the marriage 2) Debt was secured by a lien on property owned by a spouse 3) Debt was incurred for the acquisition of or for capital improvements to property 4) The value of the property unimproved 5) The value of the property improved 6) Cost of improvements 7) Improvements are capital improvements
- 16. Defenses 1)Proceeds from loan were not spent for acquisition of or capital improvements to property 2) Debt was not secured by a lien on spouse’s separate property 3) Offset for use and enjoyment (but not primary or secondary home) 4) Payments were nominal
- 17. §3.402(a)(6) the reduction of the principal amount of that part of a debt: a) incurred during a marriage; b) secured by a lien on property owned by a spouse; c) for which the creditor agreed to look solely to the separate marital estate of the spouse on whose property the lien attached; and d) incurred for the acquisition of, or for capital improvements to, property.
- 18. What to prove 1)Incurred during the marriage 2) Secured by a lien 3) Creditor agreed to look for repayment solely to the separate marital estate of the spouse whose property the lien attached 4) Incurred for the acquisition of or for capital improvements to property
- 19. Defenses 1)No proof that creditor agreed to look solely to the separate marital estate of a spouse 2) Community did not contribute to reduction in debt
- 20. §3.402(a)(7) the refinancing and reduction of the principal amount of debt described by subdivisions (3)-(6), the extent the refinancing reduces the principal amount in the manner described by the applicable subdivision.
- 21. What to prove 1)Same elements of proof as 3.402(a)(3)-(a)(6) Defenses 1)No reimbursement without a principal reduction--even if the refinance created a lower interest rate.
- 22. REIMBURSEMENT CLAIMS INVOLVING THE INCREASE OF ASSETS TFC 3.402 (a)(2) inadequate compensation for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of that spouse (a)(8) capital improvements to property other than by incurring debt
- 23. Common law Jensen Claim Inadequate compensation for time, toil, talent, & effort Enhancement of separate estate by virtue of time and effort TTT&E exceeded what was reasonably necessary to manage & preserve separate estate TFC §3.402(a)(2) Inadequate compensation for time, toil, talent, & effort Of a spouse by a business entity Under the direction of that spouse
- 24. §3.402(a)(8) Capital improvements to property other than by incurring debt
- 26. What to prove 1) One marital estate made capital improvements to another marital estate; and 2) Value of the property unimproved & Value of the property improved, 3) Cost of the improvements, 4) The improvements are capital improvements, and 5) No debt was incurred to make such improvements.
- 27. Defenses 1) The improvements made were not did not enhance the value 2) They were not capital improvements 3) Value of the property at the time the capital improvements were made is wrong 4) Offsetting benefits for use and enjoyment
- 29. SB 866 analysis: “Provides that, for purposes of this subchapter, a claim for reimbursement includes only certain types of claims…”
- 30. § 3.402(a) For purposes of this subchapter, a claim for reimbursement includes:
- 31. Common Law Jensen Claim Inadequate compensation to the community estate for a spouse’s time, toil, talent, and effort to enhance the spouse’s separate property resulted in a claim for reimbursement to the extent the contributing spouse’s time, toil, talent, and effort exceeded what was reasonably necessary to preserve and maintain his or her separate property of either spouse.
- 32. What to prove 1) The value of the time and effort expended by the spouse 2) The enhancement of separate estate by virtue of the time and effort 3)The time, toil, talent, and effort exceeded what is reasonably necessary to manage and preserve the separate estate
- 33. Defenses 1) No evidence on value of contribution 2) Compensation was adequate for the work performed 3) Any reimbursement that might be owed is less than the benefits received by the community
- 34. Contributions to Initial Purchase Price: The use of separate funds for the down payment for the purchase price of the community home. Garcia v. Garcia, 170 S.W.3d 644, 650
- 35. Gleich v. Bongio, 99 S.W.2d 881, 885 (Tx. 1937). Property purchased with part separate funds and part community funds creates a split title. 75% Separate Property 25% Community Property Ex: Property purchased with 75% SP funds and 25% CP funds
- 36. Decrease in property value—may be advantageous to use common law reimbursement claim in Garcia v. Garcia. Increase in property value—may be advantageous to use split title in Gleich v. Bongio.
- 37. Noncapital improvements that enhanced the value of the estate. Hailey v. Hailey, 176 S.W.3d 374, 384-85
- 38. Non-Reimbursable Claims 1) Payment of child support, alimony or spousal maintenance 2) Living expenses of a spouse or a child of spouse 3) Contributions of property of nominal value 4) The payment of a liability of a nominal amount 5) A student loan owed by a spouse
- 39. Fraud and Waste are not Reimbursement Claims
- 41. 1) identify the contributing and benefiting estates; 2) specify the contribution conferred; 3) ask that the contribution be reimbursed; and 4) request an equitable lien against the benefited property to secure the reimbursement award. Pleading should:
- 42. A Money judgment award Should be secured with an Equitable Lien
- 43. 1) Assert any claim for reimbursement the Respondent has in an answer or counterpetition 2) Assert that a claim is waived in a pre-marital or post-marital property agreement Respondent’s Pleading should:
- 44. Other Defenses: 1) Equitable defense—or “the spouse is a jerk defense.” 2) Offsetting benefits
- 45. “One should always play fairly when one has the winning cards.” - Oscar Wilde
Editor's Notes
- “It’s not fair!” How often do we hear that? Fairness is at the heart of understanding reimbursement claims and reimbursement defenses.
- This quote comes from an old case from 1935, and involved a spouse improving separate property with community funds—but this basic concept of “balancing the equities” is the foundation of reimbursement and it’s a good place to start when thinking about what sort of relief you should seek for your client or where there may be a place for a reimbursement claim, and also what defenses you might have if faced with a claim for reimbursement.
- Under the inception of title rule, property takes its character as separate or community based on the time and manner in which the property was acquired. The court cannot divest a party of their separate property, and so at the end of the divorce, each party will take his or her separate property. However, the inception of title rule creates an inequity when one estate has contributed to another estate but has no property interest under the law. Reimbursement has historically been the tool to create a balance of property interests in divorce, annulment, and death.
- When one marital estate improves another without receiving a benefit—a claim for reimbursement may arise. A claim for reimbursement can arise from community to separate, from separate to community and from separate to separate estates.
- When you think about reimbursement there are really two broad categories of claims. Either one estate reduced the debt of another. Or One estate increased the assets of another. But they have to be different estates. A reduction of community debts by the community isn’t going qualify for a reimbursement claim.
- There are 9 specific statutory claims for reimbursement 7 out of the 9 claims deal with the reduction of a debt or liability of some sort, by one estate for the benefit of the other.
- 3.402 (a)(1) is the reduction of unsecured liabilities, and 3.402(a)(9) is the reduction of unsecured debt. Both of these provisions are similar and neither statute limits the reimbursement claim to principal reductions. A liability is going to be anything that takes money from your income, and a debt is a specific amount of money owed. A common example of this is the reduction of a spouses’ credit card debt that the spouse had prior to the marriage. There is a case, In re Marriage of Becerra, the court allowed the wife to recover on a reimbursement claim for using her credit card to pay $3000 towards her husband’s credit card.
- What do you need to prove? If you’re the movant then you’re going to need to show that one martial estate made a payment toward the unsecured liabilities of another marital estate. So look at the inception of title—is it a separate estate—and you may need to trace separate funds to prove that they were used to pay off the debts. Securing an expert and getting the necessary documents is going to be important. You need to show that it is a reimbursable claim And you need to show that the value of the contribution was more than just a nominal amount. No one cares if a spouse made his normal monthly payments on credit card debt—that’s expected. Look for the unexpected. What is “nominal” is not specified in the code, but remember, reimbursement is about equity, and what you’re looking to prove is that the value of the contribution wasn’t fair.
- If you’re defending against one of these claims, Then argue that the debt was secured. Your opposing counsel is going to have to show that the payment was reimbursable—so if the payment was to pay for the child support or spousal support or for the living expenses of the community then they can’t get reimbursement for that. Once again—payment of a nominal value is not going to count for this claim. Is it for student loans? It’s common to see people try to make a reimbursement claim for student loans because so many people are coming into a marriage with high debt. Student loans are not reimbursable under the family code.
- (a)(3)and (a)(4) are for the reduction of the principal amount of separate property debt— Under section 3.402(a)(3) the debt must exist at the time of marriage. Section 3.402(a)(4) requires that the debt existed when the property was received by gift, devise or descent. this is just for the principal amount and does not include taxes and insurance A practical example of this type of claim is for the reduction in principal for the mortgage of a home.
- You’ll need to prove that the property is separate property—either because the spouse had it at the time of marriage, or the spouse received it as a gift, devise or descent during the marriage. Then you need to show that the debt existed at the time of marriage or when the property was received And that the community contributed to the reduction—and how much was contributed. Only the principal can be reimbursed, so if you are looking at mortgage payments make sure that the reimbursement is not counting taxes and insurance.
- If the property is community then it won’t qualify under this provision. It has to be separate property that had a reduction in principal. A common defense is that the spouse had the use and enjoyment of the separate property. But that offset cannot be used for the primary or secondary residence—but it is available for rental property where income flowed to the community estate and tax savings from the property benefited the community. Proof that the debt did not exist at the time of marriage or when the property was received will rebut this claim because it won’t fit the elements of the claim. Likewise, if the debt was not secured by the property. You may have a different reimbursement claim, but it won’t fit this one. Once again—were the payments nominal in value
- (a)(5) is for the reduction of the principal amount of debt for capital improvements— Once again, you can only get the reduction of the principal amount of the debt. This will also apply to the reduction of the principal amount of a home equity loan
- The debt must have incurred during the marriage, It must be secured by a lien on the property Incurred for capital improvements to that property Then you need to show the value of the property unimproved and improved, and the cost of the improvements And the improvements need to be capital improvements.
- _________________________ Defending against a claim, you can show that the money was not spent for capital improvements to the property, Or the debt was not secured by a lien on the property, There is an offset for use and enjoyment—unless it is a primary or secondary home. Or the payments were nominal.
- 3.402(a)(6)– is for the reduction of debt that was incurred for capital improvements to property then the creditor agreed to look solely to the separate property for repayment.
- You need to show that the debt was incurred during the marriage That is was secured by a lien And that it was capital improvements Okay, but here comes the hard part: you have to show that the creditor agreed to look solely at the separate marital estate of the spouse. Debts contracted during the marriage are presumed to be on the credit of the community and are community obligations at divorce—unless you can show that the creditor agreed to look solely to the separate estate of the contracting spouse. The burden of proof is clear and convincing evidence that the creditor agreed to look solely to the separate estate of the contracting spouse.
- If there is no proof that the creditor agreed to look solely to the separate marital estate of a spouse then this reimbursement claim fails. Or if the community did not contribute to the reduction in the debt.
- If a spouse refinances separate property and there is a reduction of the principal amount of debt—then the refinancing may give rise to a reimbursement claim. Refinancing separate property will not create an ownership interest in the property because of inception of title. When the property was acquired, the character of the property was established.
- You’re going to need to show the same thing as a reduction of the principal amount of debt that is secured by a lien. You’ll show that the debt was reduced by the community By how much And you’ll look at the principal reduction If there is no reduction in the principal, but the interest was lowered then there is no reimbursement claim. You can only recover the reduction in principal.
- Let’s look at reimbursement claims for an increase in assets. There are two reimbursement claims for an increase in assets. The first is if a spouse was inadequately compensated for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of the spouse. This is very similar to the common law Jensen claims. The second is reimbursement for the Capital Improvements to property other than by incurring debt.
- Although the common law Jensen claim is similar to the statutory claim, there are some differences between the two. A Jensen claim required that the spouse’s separate estate was actually enhanced in order to prevail. Also, under Jensen you have to show that the time, toil, talent, and effort exceeded what is reasonably necessary to manage and preserve the estate. The statutory claim does not require a showing of enhancement value of the property—just uncompensated labor, but you will need to show the value of that uncompensated labor. And the statutory claim is specifically limited to a separate property business. Under the statutory claim, you’re going to look for situations in which a spouse owns their own business and instead of getting a good paycheck, they’re sheltering the money in the business.
- A contribution for capital improvements to property under this statute is measured by the enhancement in the value to the benefited estate. However, you don’t need mathematical precision in determining the amount of the value. And the party claiming the reimbursement the burden of proving the enhancement value of the estate.
- So what is enhancement value?
- Enhancement value is going to be the difference between the fair market value before and after any improvements made by the community during the marriage. You’ll want to present evidence of the value of the benefited estate immediately before the improvements were made compared to the value at the time the claim matures. When improvements are made during the marriage the presumption is that the funds expending on the improvements came from the community. To prove a reimbursement claim for capital improvements to property you’ll want to show: One marital estate made capital improvements to another marital estate; and Value of the property unimproved, Value of the property improved, Cost of the improvements; and The improvements are capital improvements, No debt was incurred to make such improvements. You may need to hire an expert to testify as to values of these improvements
- There are several possible defenses to the capital improvement claim, but it helps to think about what was actually changed about the property. Every change is not going to count under this provision and a new coat of paint, for example, is probably not going to amount to a “capital improvement.” Consider if the work was done professionally, and the quality of the improvement. Consider if it’s an improvement or a repair. So the defenses to this claim are that: The value of the property was not enhanced The improvements were not capital improvements The value used at the time the improvements were made is wrong Or there is an offset for use and enjoyment—remember, use and enjoyment cannot be offset on a primary or secondary home.
- Those are the statutory claims, and I know you’re thinking—what about a separate property down payment on a house, what about other Jensen claims. And there are several common law claims that were not codified in the rules—so do they still exist?
- In 2009, the legislature repealed economic contribution, and codified basic reimbursement rules under section 3.402. In the bill analysis for SB 866 it says that Section 3.402 provides that for purposes of this subchapter, a claim for reimbursement includes only certain types of claims… It appears that the legislative intent was to limit the claims for reimbursement to these 9 possible claims.
- A frequently seen common law claim is a Jensen claim—and we have discussed some of the differences between the common law claim and the statutory claim. But you may find a situation in which a spouse was inadequately compensated for efforts to maintain his separate property that doesn’t fit the statutory claim. There have been reimbursement claims for the restoration of a car, managing stock—and other types of separate property.
- In a common law Jensen claim, there needs to be a determination of reasonable compensation for the value of the services less the community effort. You need to show the enhancement of the separate estate by virtue of the time and effort—because you want to show the unfairness of the deal—Mr. Jensen was walking away with a separate property business that increased in value— Even though under the common law claim, you have to show the enhancement value, the spouse seeking reimbursement is not entitled to the enhanced value of the separate property, but only to the value of the uncompensated time and labor. And you need to show that the work exceeded what was reasonably necessary to maintain the property
- ______________________________________ The defenses to a common law Jensen claim are that: There is no evidence on the value of the contribution The compensation was adequate Any reimbursement that might be owed is actually less than the benefits the community already received.
- Contributions to the initial purchase price is another common law claim. In Garcia v. Garcia the court found that there was sufficient evidence to award a common law reimbursement claim for the separate property down payment on a marital home. The court reasoned if you can find reimbursement for improvements to property measured by the enhancement value then you can use that measurement and apply it to a claim for reimbursement based on funds expended for payment of a purchase money debt. The contributing estate can recover a dollar for dollar amount and basically pull out the separate property down payment prior to dividing the property.
- However, under Gleich v. Bongio, if property is bought using partly separate property and partly community property then the separate estate owns a proportionate amount of the property and the community owns a proportionate amount. So, for example, if you were to put in 75% of the purchase price from your separate property inheritance, then you own 75% of the property under Gleich v. Bongio. And the community owns 25%.
- If the property has decreased in value then you may want to make a reimbursement claim because you can get dollar for dollar on the contribution made toward the initial purchase price. But if the property has increased in value then it may be better to claim split title under Gleich v. Bongio and claim a percentage of the property is separate property.
- There is a common law reimbursement claim for noncapital improvements if it enhanced the value of the estate. You can’t get the enhancement value—but you can get a dollar for dollar amount for the improvements. In Hailey v. Hailey, the court allowed the wife to recover for new paint, a new roof, new flooring. But these improvements have to enhance the value of the estate. So it’s not a repair—it’s an improvement.
- The Texas Family Code prevents a claim for reimbursement for these 5 things. Child support, alimony and spousal maintenance is not reimbursable because it is not a debt—It’s considered a legal duty. Living expenses for the spouse or a child of a spouse are not reimbursable and generally constitute a gift. If the contribution or payment of the liability is nominal—it’s not going to count either. And student loan payments are not reimbursable. The court has recognized that it’s not fair for one spouse to support another through professional school without reimbursement— --but the court reasoned that the trial court has wide discretion in dividing the estate and can consider factors including the difference in earning capacity, education and ability of the parties, etc-- So school loans are not reimbursable. Spousal gifts, and market increases are also not grounds for reimbursement.
- Fraud and waste do not give rise to a claim for reimbursement. They give rise to a claim for fraud or waste and you may need to calculate and divide a reconstituted estate. Try not to get these confused with reimbursement
- So, what do you plead? A claim for reimbursement should be affirmatively asserted in a petition for divorce or annulment. If you fail to plead it—then the recovery is waived. And the recovery of reimbursement without any form of pleading has been found to constitute reversible error. However, if you forgot to plead it until the day of trial, you could cite Rogers v. Rogers—a case in which the court allowed a party to amend answer to plead for reimbursement after the trial finished. If you are defending against a claim, make sure to object to the lack of pleading or else you may be trying it by consent.
- The pleading should: Identify the contributing and benefiting estates Specify the contribution conferred Ask that the contribution be reimbursed and Request an equitable lien against the benefited property to secure the reimbursement award.
- A court can grant a money judgment on a claim for reimbursement. And if a money judgment is granted, then that judgment can be secured by an equitable lien. An equitable lien can only attach to property that was benefited by the reimbursement contribution. And if it attaches to a homestead, then the reimbursement award has to represent the payment of a debt that is constitutionally permitted.
- The respondent can assert any claim he may have in an answer or a counterpetition And assert if the claim is waived under a premarital or postmarital agreement.
- Under the family code the court can resolve a claim for reimbursement using equitable principles. And in McShane v. McShane, the court found that equity did not favor the husband who had subjected is daughter to abuse, threatened to kill her and misused community funds even though he apparently had a legitimate reimbursement claim. Reimbursement claims can be offset against each other—so if the petitioner and the respondent both have legitimate reimbursement claims the court can offset the claims. And in some cases, claims can be offset by the use and enjoyment of the property as long as it’s not a primary or secondary residence. Tax benefits, rents and royalties can also be used to offset a claim.
- I wanted to end with a picture of my own children—because no one can argue unfairness like a child. If you only take one thing away from this, remember that reimbursement is about seeking equity and fairness. That concept is the cornerstone of reimbursement claims and is the best place to start whether you are pursuing a reimbursement claim or defending against it. Thank you for allowing me the opportunity to speak to you today, if you have any questions I will be available.