New York Divorce Lawyer & Attorney : Clement Law Firm : Family Law Serving Manhattan, Westchester County, Brooklyn, Queens, Bronx, New York City

The Appellate Division answered a common question- what happens when one spouse uses marital assets to pay a separate obligation.

It is quite common for the parties to enter the marriage with existing  financial obligations, whether it be student loans, credit card debt or even an obligation to pay child support  or maintenance from a prior marriage. It would be the norm to pay these financial obligations from current income. The problem is that the separate debt is being paid with marital assets, the current income.

In the fascinating case of Johnson v. Chapin, the husband used martial assets for his separate obligation to pay support to his former spouse. The Appellate Division pointed out this scenario gave  his second wife’ the right to recoup her share of the marital property used to pay the husband’s separate debt.

There is ample authority for the proposition that contribution to the separate assets and liabilities of a former spouse may be recouped in an award of equitable distribution. For example, in Lewis v Lewis (6 AD3d 837 [2004]) the Third Department upheld an equitable distribution award which allowed a plaintiff to recoup 50% of payments made during the marriage to reduce mortgage indebtedness on a residence deemed to be the defendant's separate property. Citing numerous cases, the Court emphatically reaffirmed the settled principle that:

" marital funds should not be used to pay off separate liabilities' and, whenever that occurs, the inequity may be remedied by permitting the injured spouse to recoup his or her equitable share of the marital funds so used. . .

Similarly, in Dewell v Dewell (288 AD2d 252 [2001]), the Second Department held that the plaintiff was entitled to recoup 50% of marital funds used to reduce a deb incurred to obtain a medical license which, in the circumstances of that case, was found to constitute the defendant's separate property. Applying this authority, the court properly held that plaintiff was entitled to recoup 50% of marital funds used to meet the husband's separate legal obligations to his former wife.

What this means is that husbands need inventory their wives’ separate debt and wives need inventory their husbands’ separate debt. To the extent that either’s separate debt has been reduced or eliminated during the marriage, the other may make a claim to recoup his/her equitable share.

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The Appellate Division in Mildy v. Mildy examined some of the factors considered in equitably distributing martial assets. In this case, the Court was confronted with the issues of equitably distributing the wife’s enhanced earning capacity and jointly held real property which was, in large part, paid for with the wife’s separate property.

The Wife earned a master's degree during the marriage.  Her enhanced earning capacity  was valued at $140,000. After trial the husband was awarded a half interest in the degree. The Appellate Court reduced the husband’s interest in the wife’s enhanced earning capacity to 25%, and provided the following reasoning:

While both parties agreed that they hired a babysitter to care for the child while the wife was in school, the husband testified that, although he continued to work full time while the wife was in school, he cared for the parties' child during the time when he was not working, relieved the wife of her household chores so that she could study, maintained the household, took the child to school and activities, and assisted the wife with her studies, as he had a similar background in special education. There was no evidence that the husband sacrificed any career opportunities during the time the wife was pursuing her degree. Under the circumstances of this case, we find that the husband's contributions did not warrant an award of 50% of the wife's enhanced earning capacity.

The parties purchased a vacation property in Florida in 1997 for the sum of $270,000, subject to a mortgage of $243,000. In 1998, the wife received $500,000 as a gift from her family, which was deposited in a joint account. The husband conceded that the money was her separate property. On February 2, 1998, the sum of $216,238.58 was withdrawn from the joint account to pay off the mortgage on the Florida property.

In equitably distributing the property, because the wife’s separate property contribution was traceable, the court granted the wife a credit equal to the $216,238.58 paid to satisfy the mortgage. The balance of the house proceeds were distributed equally between the parties.

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The Pennsylvania Family Law Blog poses the very practical question- what do to with a gift or inheritance received during a marriage? How can one insure that a gift to an adult child does not end up marital property subject to the other spouse’s claims?

As the blog post points out,

Generally, marital property means all property acquired by either party during the marriage, regardless of whose name it is in. An exception arises for property acquired by gift (except between spouses), such as an inheritance.

In New York, the same rule applies. Provided the gift remains in the sole name of the recipient of the gift, it will remain  that spouse’s separate  property. If the gift is put in joint names, the other spouse could claim that it is marital property and subject to equitable distribution. The burden shifts to the recipient spouse to prove that the property is and was separate property

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Thank you to the Prenuptial Agreement Blog for including me in the list of Top Family Law Blogs.

Speaking of prenuptial agreements, a couple of cases addressing prenuptial agreements have been decided by the Appellate Division in recent weeks. Thus, I begin a series of postings addressing these cases.

In the recent case of Selinger v. Selinger, the parties entered into a prenuptial agreement, in which they agreed “to waive any rights in and to the other's separate property, including gifts of land to the other as long as the gift was either evidenced in writing or "such records or the title of the donated property must have been changed into the name of the donee party."

During the course of the marriage, the parties sold a home that husband solely owned prior to the marriage, and purchased a house in Long Island with legal title to that house being placed solely in wife's name. When the home was sold, the sale proceeds, $3.4 million dollars were deposited in the wife’s separate bank account.

The Court ruled that the proceeds were the wife’s separate property.  “By deeding the house to defendant, plaintiff memorialized in writing a gift to his wife pursuant to the clear terms of the prenuptial agreement. . .”

The opinion hints that there was another, but unenforceable agreement executed between the parties, which I bet, obligated the wife to transfer the property or its proceeds back to the husband in the event of divorce.

There certainly was something improper going on that was not directly addressed in the opinion. I am guessing that the transfer to the wife was an attempt to protect the property from the creditors of the husband.

In any event, this case serves as a lesson that a prenuptial agreement will be upheld, even if it results in a wind-fall for one of the parties.

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