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TRANSMUTED AND COMMINGLED PROPERTY TRACING A SEPARATE PROPERTY INTEREST
© 1998 National Legal Research Group, Inc.
VIRGINIA: von Robb v. von Robb, 26 Va. App. 239, 494 S.E.2d 156 (1997).
The parties' jointly titled residence was marital property in its entirety because the husband's original separate property interest in the home was not retraceable in view of intervening loan transactions.
VIRGINIA: Rahbaran v. Rahbaran, 26 Va. App. 195, 494 S.E.2d 135 (1997).
The husband failed to trace any portion of his existing business interests back to separate property. This pair of Virginia cases sheds light on the process of tracing transmuted or commingled property back to a separate property interest.
Tracing a Separate Property Interest in Transmuted Property. In von Robb v. von Robb, the husband owned a home in which he had equity of $115,000 at the time of the parties' marriage in 1980. The parties improved the property and used it as the marital residence. In 1990, the husband used his equity in the home to borrow $150,000 from a bank on a short-term basis to loan to a friend whose business was in trouble. The friend failed to repay the husband and, in 1993, the husband arranged long-term financing for his debt to the bank. As part of that refinancing transaction, the marital home was transferred into a tenancy by the entirety, and the husband and the wife obligated themselves jointly for the mortgage debt.
The trial court classified the home as marital property and awarded the wife one-half of the parties' equity in the home, without giving the husband any credit for his premarital equity in the property. Affirming, the Virginia Court of Appeals held that the home was transmuted to marital property and that the husband's original separate interest in the home was not retraceable.
The record established that, during the marriage and before the retitling of the property, the wife made significant monetary and nonmonetary contributions to the maintenance and renovation of the property, the court observed. The increase in value attributable to these contributions was marital property under the Virginia equitable distribution statute, the court said. Any remaining separate interest which the husband had in the home was transmuted to marital property when he retitled the property to himself and his wife as part of the refinancing transaction.
Under the Virginia equitable distribution statute, the court continued, separate property which is retitled in the spouses' joint names becomes marital except to the extent that it is "retraceable by the preponderance of the evidence and was not a gift." Va. Code Ann. 20-107.3(A)(3)(f). This statutory language made it necessary to examine how to trace separate property, the court found.
The goal of the tracing process is to link a transmuted asset to its primary source, which is either separate property or marital property, the court said. Whether a transmuted asset can be traced back to a separate property interest is determined by the circumstances of each case, including the value and identity of the separate interest at the time of the transmutation. Because all property acquired by either spouse during the marriage and before the parties' final separation is presumed to be marital property, the party claiming a separate interest in transmuted property bears the burden of proving retraceability. If the party claiming the separate interest proves retraceability, the burden shifts to the other party to prove that the transmutation of the separate property resulted from a gift.
Here, the court decided, the husband's initial separate interest in the home was no longer retraceable from the current joint title. The wife assumed liability in the refinancing transaction to ensure that the bank would not foreclose on what was both the husband's separate property and the marital home. The combination of the husband's initial leverage of his separate interest in the home and the wife's intervention to secure the parties' uninterrupted possession of the marital home "effectively severed any link between husband's prior separate interest and the transmuted marital property." von Robb v. von Robb, 494 S.E.2d at 161. Accordingly, the trial court did not err when it classified the entire property as marital.
Tracing a Separate Property Interest in Commingled Property. In Rahbaran v. Rahbaran, the Virginia Court of Appeals addressed a related issue how to trace a separate property interest in commingled separate and marital property.
The court noted that Virginia's equitable distribution statute provides that when marital and separate property are commingled into newly acquired property "resulting in the loss of identity of the contributing properties," the commingled property is marital, except that the contributed property retains its original classification to the extent that it is "retraceable by a preponderance of the evidence and was not a gift." Va. Code Ann. 20-107.3(A)(3)(e), (f). This provision does not require that a party segregate property claimed to be separate, the court held. The separate property portion of hybrid property can be traceable even if the marital property and separate property have not been segregated, it declared. A segregation requirement would make little sense in the context of the statutory scheme, because the very concept of hybrid property which is by definition part marital and part separate presupposes that separate property has been combined with marital property, the court explained. Construing the statute to contain a segregation requirement would make tracing a classic Catch-22: The statute would only allow tracing of the separate portion of hybrid property if the property were commingled, but commingling would violate the segregation requirement and would prevent tracing.
But the absence of a segregation requirement does not mean that contributions of separate property are automatically classified as separate upon divorce, the court continued. In order to trace the separate portion of hybrid property, a party must prove that the claimed separate portion is identifiably derived from a separate asset. This process involves two steps: (1) establishing the identity of a portion of hybrid property, and (2) directly tracing that portion to a separate asset.
If the spouse commingled nonmarital and marital funds to the point that direct tracing is impossible, the claimed separate property would lose its separate status, the court elaborated. Even if a party can prove that some part of an asset is separate, if the court cannot determine the separate amount, then the unknown amount contributed from the separate source transmutes by commingling and becomes marital property.
In summary, "separate property does not become untraceable merely because it is mixed with marital property in the same asset. As long as the respective marital and separate contribution to the new asset can be identified, the court can compute the ratio and trace both interests, " Rahbaran v. Rahbaran, 494 S.E.2d at 141-42 (quoting Brett R. Turner, Equitable Distribution of Property 266 n.591 (1994)).
Applying these principles, the court examined the husband's claim that wire transfer funds received from his father in 1983 could be traced. Although the husband used the funds to start a business before the parties' marriage, his failure to keep the wired funds separate from marital funds did not preclude him from attempting to trace existing property back to those funds, the court held. It noted, however, that the husband testified that he freely commingled money from his business with his personal funds, and the wire transfer funds were also commingled with marital funds when the husband started another business during the parties' marriage. The record did not establish that any funds in either business were identifiable as funds from the 1983 wire transfer, the court decided.
The husband also claimed a separate property interest in the second business based on other wire transfer funds received from his father during the marriage. But the evidence did not establish that these funds were a gift rather than an investment or a loan, the court decided. Therefore, the husband was unable to trace a separate property interest in the business.
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