Moore/Marsden Calculations

moore-marsden-home-improvements

Previously, we discussed the basics of the Moore/Marsden calculations, which is how the Court determines the community interest in the home when community funds pay down mortgage principal of a separate property home. The Moore/Marsden formula provides for the community to receive not only a reimbursement for principal paydown, but an interest in the appreciation of the home as well.

What happens when instead of paying down mortgage principal, community funds are used to improve the home? That was the question in the Bono v. Clarke case and the Sherman case. Both cases found that improvements to the home should be treated similarly to mortgage principal paydown, but these cases also had some important differences.

How are Bono v. Clark and Sherman different?

Bono v. Clark held that not only does the Separatizer (the party who owned the home before marriage) get a dollar for dollar reimbursement for all appreciation before marriage but equated the appreciation to separate pay down of principal in the Moore/Marsden calculation. In a typical Moore/Marsden calculation, the premarital appreciation does not appear in the numerator for the Separatizer. This has the effect of being very beneficial to the Separatizer.

Sherman found that there should not be such a modification to the Moore/Marsdsen formula, because, in that case, the first community contributions to the home began 20 months after the marriage, not 17 years after the marriage like in Bono. Also, Bono v. Clark did not value the home as of the date of trial, but valued it as of the date of separation, which was also beneficial to the Separatizer. Sherman, which was a family law case rather than a probate case, applied Family Code section 2552 and held the valuation should be made as of the date of trial. Most family law commentators think that Sherman was right and Bono was wrong on both of these issues. Also, the California Supreme Court’s decision to publish Sherman (it was originally unpublished) is taken as a sign that Sherman is preferable to Bono.

What was the formula used in Sherman?

Sherman does not actually illustrate a formula, like Bono. The Court wrote that there should not be any substantial modification to the Moore/Marsdsen formulas in improvement cases, and that the date of trial was the proper date of valuation.

The Sherman formula can be deduced to be as follows:

Step 1: The community receives a dollar for dollar reimbursement for pay down of principal and payments for all improvements, whether or not they improve the value of the home. (See Marriage of Wolfe, Marriage of Bono, and Marriage of Allen for the proposition that the community is entitled to a reimbursement regardless of whether or not the improvement increases the value of the home)

Step 2: In addition to the reimbursements listed in Step 1, the community gets a pro tanto share in the marital appreciation of the home calculated as follows:

The appreciation of the home between the date of marriage and the date of trial,* multiplied by the following fraction:

Numerator = Community property payments of principal + Community property improvements that increased the value of the home.

Denominator: Purchase price of the home + CP improvements that increased the value of the home + SP improvements that increase the value of the home**

Adding Step 1 plus Step 2 = the money owed to the community

There is also a direct way to calculate the separate interest in the home. This should be done, typically, because it’s a way to double check your math. If the CP reimbursement and the SP interest do not add up to the equity of the home, there was almost certainly a mistake in the calculation. The only instances where the CP reimbursement plus the SP interest should not be equal to the equity are when there are community reimbursements that do not improve the value of the home. In this case, the CP reimbursement and SP interest, when combined, should exceed the equity by an amount equal to the CP improvements that do not improve the value of the home. This is because the CP that does not improve the value of the home, by definition, has no bearing on the equity or the value of the property, which is why it is not a part of the pro tanto calculation at all. This is simply a reimbursement owed to the community for the use of CP funds on a SP asset pursuant to Wolfe, Allen, and Bono and is consistent with the general community property principal that the community is entitled to restitution when its funds are appropriated for the improvement of separate property.

A complete formula for determining a separate property interest in a Moore/Marsdsen formula

The Separatizer’s formula:

Step 1: The Separatizer gets a dollar for dollar reimbursement of the down payment, all principal payments made from SP at any time, all premarital appreciation, and improvement payments made from SP but only to the extent the improvements increase the value of the home.

Step 2: In addition to the amount listed in Step 1, the Separatizer is entitled to the appreciation of the home, calculated as follows:

The appreciation of the home between the date of marriage and the date of trial,* multiplied by the following fraction:

Numerator = SP Payments of principal (including any down payment) +SP payments of improvements that increased the value of the home + the unpaid mortgage balance

Denominator: Purchase price of the home plus CP improvements that increased the value of the home + SP improvements that increased the value of the home.

Step 1 + Step 2 = the Separatizer’s interest in the home.

A hat tip to Ronald Granberg, whose extensive writings on Moore/Marsden were extraordinarily helpful.

* Ronald Granberg, opines that the cost of all improvements that increased the value of the home should be subtracted from the total appreciation number. Otherwise you are double counting the increase in value that results from the improvements. This makes sense. As an example, let’s imagine that a home is purchased for $100,000 before marriage. The parties get married the next day. Six months later, with the value of the home still at $100,000, the parties use $100,000 of community money to improve the home and this increases the value of the home from $100,000 to $200,000. If you include the value of the improvements in the appreciation number, the $100,000 community contribution instantly requires community reimbursement of $150,000 (Step 1 = $100,000 + Step 2 = $100,000 * 100,000/$200,000 = $150,000). Common sense dictates if the value of the home increased solely due to the improvements, the community should be entitled to a reimbursement equal to the value of the improvements only. In this case, that result only follows if the value of community improvements is not made part of the total appreciation number. Bono v. Clark seems to double count the cost of improvement in its calculation and the Sherman court was not called upon to address this question. This something that is likely to be addressed in a future case.

** There is no case law that states that the Separatizer gets to further share in marital appreciation by contributing to improvements that increase the value of the home during the marriage, but that has to be the case. Moore, Marsdsen, and Bono all held that “the community is entitled to a minimum interest in the property represented by the ratio of the community investment to the total separate investment.” If a community property improvement is considered an investment that is part of the pro tanto calculation, then so must a separate property improvement. Allen and Bono v. Clark also say “the Moore/Marsden rule…applies equally to the reduction of an encumbrance and to capital improvements,” leading to a “quasi-ownership stake in the property.” In the traditional Moore/Marsdsen calculation, the Separatizer does get to share in the marital appreciation to the extent the Separatizer paid down the encumbrance, so the Separatizer must also share in the increase in value caused by the improvement.

Moore/Marsdsen calculations can be very complicated. If, during the marriage, there was an improvement to the home, a change in title, and/or a refinance, it is likely that a simple application of the formula won’t help you. If you have questions about the division of a community estate, it is important that you discuss your rights with an experienced family law attorney.

Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.

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