Contractual Conveyances Upon Divorce
© 2004 National Legal Research Group, Inc.
One of the most difficult areas of equitable distribution law is the effect of interspousal transactions upon the classification of property. Under the proper circumstances, an express or implied agreement or contract can change the classification of assets completely, converting separate property into marital property or even marital property into separate property. See generally Brett R. Turner, Equitable Distribution of Property 5.24 (2d ed. 1994 & Supp. 2004). But all conveyances of property do not constitute a contract or a gift, and all contractual transfers do not include a change in the classification of the transferred assets as an element of the contract. The end result of the cases therefore depends greatly on the facts.
This month's article will review case law involving one particular type of interspousal transaction: a contractual conveyance. A contractual conveyance is a conveyance made pursuant to the terms of an express or implied contract between the parties. The contract is not always written, but there is usually some form of writing associated with it, such as a deed or an assignment. If the intent of the parties to this sort of contract was to change the classification of property, the transaction can make powerful changes in the marital or separate nature of the assets at issue.
In particular, a contractual conveyance is one of the few ways in which marital property can become separate property during the marriage. Marital property can also become separate property through a gift from one spouse to the other spouse alone, but only in states which treat interspousal gifts as separate property. Since a majority of states treat interspousal gifts as marital property, id. 5.19, a contractual conveyance is the most common method for converting marital property into separate property in a majority of jurisdictions.
This article will not address the vast body of case law considering the most common type of interspousal property transaction: an express or implied gift. For coverage of that issue, see generally Turner, supra, 5.18-5.19, 5.24.
Burden of Proof
The burden of proving a contractual conveyance is always on the party who claims it. E.g., Shenk v. Shenk, 39 Va. App. 161, 170, 571 S.E.2d 896, 901 (2002) ("Wife had the burden to prove to the trial court that such an agreement existed"). This point is merely a specific application of the general contract-law rule that the party who seeks to enforce a contract bears the burden of proving that the contract exists. 17B C.J.S. Contracts 698(a) (Westlaw 2004). Because the claiming party bears the burden of proof, a contractual conveyance is not present merely because an interspousal transfer of title occurred during the marriage, even if the transfer was accomplished by formal deed or assignment. There must be some evidence apart from the transfer itself suggesting that both parties intended to change the classification of the assets conveyed.
Cases Finding A Contractual Conveyance
A good example of a contractual conveyance is McDavid v. McDavid, 19 Va. App. 406, 451 S.E.2d 713 (1994). In that case, the husband and wife jointly conveyed real estate and stock into the sole name of the husband. The real estate conveyance indicated that the property would be part of the husband's "separate and equitable estate." The court held that because the "separate" estate language was present, the transaction was essentially a form of midnuptial agreement to convert the conveyed asset into the husband's separate property. The real estate at issue was therefore classified as separate property.
Another asset at issue in McDavid was stock in a company called FEMCO. The stock was held by the parties jointly for a time, but the certificates were then assigned to the husband alone. The certificate of transfer "contained no language relating to the disposition of property upon separation or dissolution of the marriage." 451 S.E.2d at 713. Because of this fact, the court held that there was no contractual conveyance, and the stock remained marital property. In short, where the document referred to the conveyed property as part of the recipient's "separate" estate, a contractual conveyance was present; where the document was silent as to the classification of the property conveyed, a contractual conveyance was not present.
For additional case law holding that a contractual conveyance was present where marital rights were referred to in the conveyance, in other contemporaneous documents, or in the trial testimony of both parties, see Bliss v. Bliss, 127 Idaho 170, 898 P.2d 1081, 1085 (1995) (community asset conveyed to wife by deed which referred to the asset as "separate property"; asset became separate property); Fuqua v. Fuqua, 765 S.W.2d 640, 644 (Mo. Ct. App. 1989) (parties placed certain profits into two accounts, one in the name of each party, and "both parties testified that they considered the accounts as their own separate property"; "[m]arital property can be transmuted from marital to separate if there is clear and convincing evidence that both parties intended that the property be excluded from their marital property"; accounts were separate property); Roberts v. Roberts, 999 S.W.2d 424 (Tex. App. 1999) (where deed states that spouse takes title as separate property, the deed is controlling unless invalid).
The intent to treat the conveyed asset as separate property can also be inferred from the surrounding circumstances. In Shenk v. Shenk, 39 Va. App. 161, 571 S.E.2d 896 (2002), the husband abandoned the wife after a period of marital difficulty. He left her a letter stating that he was leaving her the parties' marital property business, and he subsequently signed a formal assignment of the business to her. The assignment gave the wife "all of his right, title, and interest" in the business. 39 Va. App. at 167, 571 S.E.2d at 899. The husband signed the formal assignment because the wife needed clear proof of ownership to allow her to borrow money in the name of the business. At the time the husband left, the business was in failing health. After separation, under the wife's sole management, the business began to prosper.
The trial court held that the assignment was a marital agreement which converted the business from marital property into separate property, and the appellate court affirmed. The court expressly held that a contractual conveyance need not expressly refer to "separate" property:
Husband argues marital rights were not included in "all" of the rights transferred by the agreement, because the "assignment" did not explicitly refer to those rights. . . .
While the "assignment" does not include the phrase, "marital rights," as used in McDavid, it does transfer "all right, title, and interest" to the businesses. We must "'give effect to all of the language of a contract.'"
"All" generally means the entirety. See Random House Webster's College Dictionary 34 (1997). As the trial court indicated, the "assignment" did not include a reservation of any right. Instead, the "assignment" effectively eliminated all connection between husband and the ownership and control of the businesses. To find the "assignment" transferred only legal title would require that we ignore its use of the word, "all," which modifies "right" and "interest."
39 Va. App. at 174-75, 571 S.E.2d at 903.
The court also held that the facts underlying the transaction showed that the husband actually intended to transfer away his marital property rights:
Husband relinquished all interest in the businesses to wife in a letter. The letter clearly expressed husband's intention to permanently leave his wife, children, and the businesses. He wrote, "I wish for you happiness, fulfillment, contentment, and to finally have a peace about who you are." He indicated he felt "like a hostage" with the children. He said, "As for the proceeds [of the businesses] . . . I leave it all." The "assignment" was signed eight months after husband left town. The trial court could properly infer from this letter, coupled with the assignment, that husband intended to divest himself of the marital relationship and the assets of that relationship.
39 Va. App. at 175, 571 S.E.2d at 904. Thus, the fact that the husband relinquished all interest in the business, at a time when it was failing and he was abandoning the wife, showed an intent that the business become the wife's separate property.
As Shenk suggests, the most common circumstance which tends to indicate a contractual conveyance are the facts that a transfer was made near the date of separation and that the spouse who conveyed the asset away acted as if he or she had no interest of any sort in the asset after the conveyance. For cases finding a contractual conveyance in this situation, see In re Marriage of Bartolo, 971 P.2d 699 (Colo. Ct. App. 1998) (in period of marital difficulties, husband quitclaimed marital home to wife under a deed as a gift, as an express condition upon reconciliation; home was the wife's separate property); Mica v. Mica, 275 A.D.2d 765, 713 N.Y.S.2d 545 (2000) (where parties informally divided savings account upon separation, funds so divided were not marital property); Perkins v. Perkins, 226 A.D.2d 610, 641 N.Y.S.2d 396 (1996) (parties informally divided certain joint property during marriage, and wife used her share to purchase a farm; husband denied any interest in the farm in an action brought against him by creditors; husband had no interest in the farm upon divorce); Barner v. Barner, 364 Pa. Super. 1, 527 A.2d 122 (1987) (during a period of marital difficulty, the wife stated that she did not want any of the husband's property, and three months later conveyed certain assets to him; finding an implied agreement that the assets constitute the husband's separate property); Manhart v. Manhart, 1986 OK 12, 725 P.2d 1234 (1986) (wife transferred stock in businesses to husband after separation, and had no further involvement with businesses after that point); and Troyer v. Troyer, 231 Va. 90, 341 S.E.2d 182 (1986) (verbal conveyance of land was contractual transfer; conveyance occurred while divorce was pending, and husband's statement that wife could sell home showed intent to convey equitable ownership; wife relied on finality of transfer by not seeking support).
Note, however, that when a conveyance is made at the time of separation or marital breakdown, but the facts do not suggest that the transfer was intended to give up the transferring spouse's marital property rights, decisions exist holding that a contractual transfer was not present. See Ross v. Ross, 638 N.E.2d 1301 (Ind. Ct. App. 1994) (transfer of home from tenancy by the entirety to wife's sole name during closing days of marriage had no effect on equitable distribution; error to exclude home from divisible estate); Plitka v. Plitka, 714 A.2d 1067 (Pa. Super. Ct. 1998) (transfer of marital mobile home to wife just before separation; error to treat home as wife's separate property); Corbett v. Corbett, 313 S.C. 184, 437 S.E.2d 136 (Ct. App. 1993) (after separation, wife conveyed jointly titled home to husband; conveyance was a matter of legal title only, and, since title is irrelevant to equitable distribution, the home did not become separate property). These are important cases, for the parties will sometimes convey title on the eve of divorce for the purpose of ensuring that marital disputes do not interfere with the management of their property during the pendency of their divorce action. Since the inability of divorcing spouses to manage property jointly is well accepted, there are valid reasons why parties might transfer title on the eve of the divorce without intending to settle their marital rights in the assets involved.
Enforcement And Effect
If a contractual conveyance exists, it is enforceable only if it is valid as a contract, and if it satisfies any formalities (e.g., the presence of a writing) required of midnuptial agreements generally. See In re Marriage of Haines, 33 Cal. App. 4th 277, 39 Cal. Rptr. 2d 673 (1995) (wife's quitclaim deed did not convert property from separate into community; deed was invalid for undue influence and constructive fraud); In re Marriage of Steinberger, 91 Cal. App. 4th 1449, 111 Cal. Rptr. 2d 521 (2001) (ring given by husband to wife could not have become wife's separate property by agreement, as agreements to change the classification of property must be in writing, and no writing existed).
Where an enforceable contractual conveyance is present, it generally applies only to the property conveyed, and not to any additional property acquired after the conveyance was complete. See Kahn v. Kahn, 839 S.W.2d 327 (Mo. Ct. App. 1992) (where husband disclaimed any beneficial ownership of wife's stock, statement applied only to stock which existed at the time and not to stock acquired thereafter).
Cases Not Finding A Contractual Conveyance
A good example of a court refusing to find a contractual conveyance is the very recent decision in Selby v. Selby, 2004 WL 2282151 (Mo. Ct. App. 2004). Early in their marriage, the parties in Selby established revocable trusts as estate planning devices. There were two such trusts, each in the name of one spouse alone, with the other listed as the beneficiary.
The most significant asset at issue in Selby was a 446-acre farm. The farm was initially owned by a partnership in which the husband participated. When the partnership dissolved, the asset was conveyed to the husband. Missouri law required the wife to sign a Farm Exchange Agreement in connection with the dissolution. The attorney who handled the transaction explained:
Mr. Fay testified that under Missouri law, when property is taken out of a partnership, the spouses of the partners must sign a document stating that they are releasing their marital rights. He testified that Ms. Selby signed the agreement to consent to her marital interests being transferred in the exchange agreement. Ms. Selby testified that she did not understand this to mean that she had no marital interest in property that Mr. Selby acquired during marriage if their marriage was to terminate. She also testified that she signed the agreement because she felt that she was half owner of the land and that she was agreeing to an exchange of the farmland. Mr. Fay was not able to remember whether he explained to Ms. Selby that by signing the various agreements she was giving up her right to any marital interest in the property if the parties were to divorce.
Id. at *3. The farmland which the husband received from the partnership was initially placed into his revocable trust. It was then withdrawn from the trust and placed into the joint names of the parties individually. The parties and their attorney explained the purpose of the revocable trusts as follows:
Ms. Selby testified that she never had an understanding that the way that the property was divided between the trusts would affect the division of property if the parties were to divorce. Ms. Selby's understanding was that any joint property would be described in only one trust, generally Mr. Selby's, in order to save them money. Mr. Elton Fay (their local attorney) testified that he put Mr. Selby's property into his trust and put Ms. Selby's property into hers because both provided that whenever one of them died, the survivor got the benefit and then the principal would go to their respective children. Mr. Fay also testified that he did not know of any tax advantage that would be derived from any particular division of property between the trusts.
Id. at *1.
Upon divorce, without stating its reasoning in detail, the trial court classified the 446-acre farm as the husband's separate property. The appellate court reversed and remanded for additional findings.
The central issue regarding the farm on appeal was the effect of the Farm Exchange Agreement. The husband argued that the agreement was a contractual conveyance which waived the wife's rights in the entire farm. The appellate court held that the wife consented only to the transfer itself, without agreeing that the transfer should have any particular effect upon the classification of property:
[I]n reading the agreement in its entirety, we do not think that she relinquished her marital interest by signing the agreement. The spouses of the Selby siblings "consent[ed] to their marital interests, if any, being transferred in the exchange agreement." Mr. Selby claims that this means that Ms. Selby relinquished her interest in any of the land being exchanged. But the agreement does not say that. "Transfer" and "relinquish" are not synonymous. Mr. Fay testified that these releases were required under Missouri law because property was being taken out of a partnership. No one has presented us with any law stating that by agreeing to property being transferred, the spouse has relinquished all claims to marital property to which the spouse would otherwise have a legitimate claim. Ms. Selby was simply agreeing to having her interest moved around in order to effect the dissolution of the partnership, resulting in each person taking the property finally received free and clear of any claims from the other siblings and their spouses. Her interest, like Mr. Selby's interest, simply transferred to the property that they ended up with after the exchange.
Id. at *12.
The husband also argued that the transfer of the property into his revocable trust was a contractual conveyance. Again, the appellate court disagreed:
Mr. Selby also argues that Ms. Selby lost any interest in the farm because she agreed to place the whole farm into Mr. Selby's trust. He appears to be claiming that this trust triggers the section 452.330.2(4) exception to marital property: "[p]roperty excluded by valid written agreement of the parties." But nowhere in the trust documents is there any discussion of the status of the property placed in the trusts, let alone a clear intention to exclude that property from being marital property. . . .
Furthermore, these trusts were clearly set up only to deal with the parties' property after death, not divorce. Ms. Selby testified that the trusts were part of estate planning and that there was no contemplation of divorce when they were written. They both had children from prior marriages and were specifying how their property should be divided after their deaths. Mr. Fay also testified that he set up the trusts for estate planning purposes and that divorce was never discussed. In reading through the trusts, we find it clear that the parties intended to provide for one another, not take away interests.
Id. at *13. The court added:
Finally, we believe that it would be against public policy to hold that when married couples place property into a trust in one name that property automatically becomes separate property and the other spouse loses the marital interest. Families, particularly in the case of second marriages, often use trusts as a part of estate planning. Testamentary trusts, such as these, are not created to change the character of the property or to prepare for divorce. We are not going to create a rule that complicates estate planning goals by suddenly declaring that such trusts destroy marital interests. And we have found no law that directs us to do otherwise.
Id. at *14. Since various marital contributions were made to the 446 acres, and the final transfer into joint title created a presumption of a gift to the marital estate which the trial court had not considered, the case was remanded with instructions to determine the amount of the marital interest.
Both of the transfers at issue in Selby were made during the marriage, at a time when an imminent or even eventual divorce was not within the contemplation of the parties. There was no particular reason why either the Farm Exchange Agreement or the conveyance into the trust would have been intended to affect marital rights, and neither document expressly referred to rights upon divorce.
In addition, each document had a legitimate purpose far removed from changing the classification of property: removing the property from the partnership (for the Farm Exchange Agreement), and estate planning (for the conveyance into the trust). It is important not to overemphasize the importance of these purposes, for the burden of proof is always on the party who claims that a contract waives rights upon divorce, so a transfer for no apparent purpose at all should not immediately be deemed to change the classification of the property. But the presence of a positive purpose other than waiving rights upon divorce is strong evidence that the transaction has no effect upon those rights.
Selby was on particularly solid ground in holding that transfers of property into revocable living trusts are not contractual conveyances. A small but growing body of case law from other states reaches the exact same result. For example, in Kelln v. Kelln, 30 Va. App. 113, 515 S.E.2d 789 (1999), the court stressed not only the presence of estate planning as a divorce-neutral reason for the conveyance, but also the fact that a transfer into a revocable trust does not suggest an intent to make permanent changes in the classification of the property. "[T]he retention of the right to revoke the trust by each spouse supports the conclusion that neither had the requisite donative intent to transform marital property into separate, as was the case in McDavid. Retaining the right to revoke a trust is inconsistent with the notion that a grantor has relinquished all right and interest in the trust property." 30 Va. App. at 127, 515 S.E.2d at 796. The Kelln opinion contains a very perceptive discussion of contractual transfers generally. Accord In re Marriage of Fall, 593 N.W.2d 164 (Iowa Ct. App. 1999) (separate property conveyed into revocable living trust in names of both parties remained separate); see also Dorn v. Heritage Trust Co., 24 P.3d 886 (Okla. Ct. App. 2001) (transfer of marital property by quitclaim deed into irrevocable trust for wife, before the marital breakdown, did not change the conveyed asset into separate property).
For additional cases holding that a contractual transfer was not present on the facts, see Ex parte Miller, 2003 WL 164532 (Ala. 2003) (formal written waiver of rights "as a beneficiary" of certain trust waived only rights under the law of trusts, and not rights under the law of equitable distribution); In re Marriage of McCadam, 910 P.2d 98 (Colo. Ct. App. 1995) (on the facts, interspousal note was only a note and not an agreement to reclassify property for purposes of divorce); Bardino v. Bardino, 670 So. 2d 183 (Fla. Dist. Ct. App. 1996) (husband quitclaimed home to wife during marriage; home was nevertheless marital property); In re Marriage of Gurda, 304 Ill. App. 3d 1019, 711 N.E.2d 339, appeal denied, 185 Ill. 2d 624, 720 N.E.2d 1092 (1999) (IRA beneficiary designation which purported to waive community property interest did not waive classification as marital property; no evidence that parties contemplated any specific division of the property at divorce); Brady v. Brady, 39 S.W.3d 557 (Mo. Ct. App. 2001) (wife quitclaimed marital home to husband, but home had been acquired and improved with marital funds, wife claimed transfer was part of estate plan, and husband listed home as marital property on financial statement; trial court did not err by holding that home remained marital property); and Anderson v. Anderson, 286 A.D.2d 967, 731 N.Y.S.2d 108 (2001) (decision to take title in wife's name alone was not evidence of an agreement, where real estate in question was located in Italy, and could be owned only by an Italian citizen, and the husband was not such a citizen). In many of the above cases, there was a legitimate reason for the conveyance other than changing property rights upon a divorce, and none of the cases involved transfers made on the eve of the marital breakdown.
Contractual conveyance issues always raise difficult issues of fact. The court must determine in each case whether the conveyance was intended to create rights which would survive divorce, or whether it was intended as a mere divorce-neutral adjustment of the manner in which the parties held legal title to their assets. No easy rule can be created for making this determination; the answer in each case must necessarily depend on the evidence.
Classification of Assets Category