A Closer Look at In re Marriage of Lafkas

Leena Hingnikar, CFLS

Editor's Note: Leena S. Hingnikar is a Certified Family Law Specialist and is an associate with Walzer Melcher, LLP in Woodland Hills, California. Leena is also a member of the Family Law Executive Committee for the Los Angeles County Bar Association

There are two disparate cases on the issue of whether loan proceeds, borrowed during marriage, were considered community property or separate property - Gudelj v. Gudelj ((1953) (41 Cal.2d 202, 259 P.2d 656) and In re Marriage of Grinius ((1985) 166 Cal.App.3d 1179, 212 Cal.Rptr. 803). The recent decision in In re Marriage of Lafkas ([Lafkas II] (2015) 237 Cal.App.4th 921, 188 Cal.Rptr.3d 484) does not resolve the disparate case law but it does provide us with some factors to look at when determining how loan proceeds should be characterized.

Gudelj was a Supreme Court case which states that for the proceeds of a loan taken during marriage to be deemed separate property, the lender must reply primarily on the separate property of the borrowing spouse. Grinius was an appellate court decision held that for loan proceeds to be deemed separate property, the lender had to rely solely on the separate property of the borrower. Grinius was a much tougher standard to meet for the separatizer spouse who was trying to have the court determine that the proceeds of the loan was separate property. Lafkas completely ignored Gudelj and used the Grinius standard to send the issue of whether the lender intended to rely solely on spouse's separate partnership property to satisfy the loan debt rather than on both spouse's income and credit back to the trial court.

In Lafkas, husband had a partnership prior to marriage. During marriage, the partnership wanted to exchange one of the properties it owned through an Internal Revenue Code 1031 tax deferred exchange for two other properties. The partnership had to take out a loan to cover the cost of the properties. Husband, wife, and the other partners and their spouses applied for a loan to finance the balance of the purchase price of the properties. Husband claimed that the bank told him that wife needed to be added to the partnership and the loan application. A two page document entitled Modification and Extension of General Partnership Agreement for the partnership was prepared. A first and second deed of trust were prepared for the partnership and signed by husband, wife, the other partners and their spouses. Wife claimed that the loan proceeds were community property because the bank relied on her income and credit history. The trail court determined that the agreement was a transmutation under Fam C §852(a) as to the properties held by the partnership from and after the date on which the agreement was signed, but not as to husband's other separate properties independent of the partnership. Husband appealed.

The following factors were used to determine that the issue should be sent back to the trial court because it is likely that the lender relied on partnership property (separate property of husband) rather than husband and wife's community property income and credit.

  • The loans were taken in the name of the partnership and secured by partnership property

  • The income from the partnership property would be sufficient to pay its expenses.

  • The partnership had funds in bank accounts to cover any shortfall and the partnership owned other properties.

  • The loans were secured by the value of the partnership properties and the partnership had enough assets to repay the loans.

  • The partners signed documents to purchase the additional property as partners of the partnership, not as individuals.

  • Husband had other separate property assets to cover the loans but the parties had no community property.

Although there is still no bright line rule as to which standard controls when determining the characterization of loan proceeds, Lafkas gives us some more direction in determining which factors the Court should look at when determining the intent of the lender. Perhaps it also gives us some insight that courts are leaning more towards the stricter Grinius standard.

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