Valento v. Valento (9/23/2010)

September 27, 2010

Arizona Court of Appeals Division One (1) Prescribes the Method for Calculating the Community’s Equitable Lien in Separate Property When Community Funds Have Reduced the Principal or Increased the Market Value of the Property but the Property’s Value Has Depreciated During Marriage, and (2) Concludes That Parol Evidence May Not Contradict the Unambiguous Language of a Deed Conveying Property Jointly to Spouses.

In 2008, Wife petitioned for dissolution after nine years of marriage.  Both Husband and Wife worked in the real estate profession, and they acquired several properties during their marriage, including their marital residence in Arizona and a condominium in Minnesota.  Husband signed a disclaimer deed during the marriage recognizing that the marital residence was Wife’s sole and separate property.  The Minnesota condo was a gift to Husband and Wife as joint tenants from Husband’s parents, who retained a life estate in the property.

At trial, the court determined that the community held a $200,000 equitable lien on the marital residence because community funds had reduced the principal balance on the mortgage in that amount.  The court also concluded that the Minnesota property was Husband’s sole and separate property because Husband’s parents intended that the condo be held for the parents’ benefit and passed to their grandchildren upon their death.

On appeal, Wife argued that there should be no equitable lien on the marital residence and that the court should have divided the Minnesota condo as a community asset.  Husband argued that the value of the lien on the marital residence was too low.

Deciding an issue of first impression in Arizona, the Court of Appeals determined that the trial court had not calculated properly the equitable lien on the marital residence and propounded the formula for calculating an equitable lien on sole and separate property when community funds have increased equity in the property but the overall value of the property has fallen during marriage.  The Court drew on its previous cases addressing community contributions to separate property, including Barnett v. Jedynak, which prescribed the formula for determining the community’s equitable lien on sole and separate property that appreciates in value during the marriage. 

First, the trial court must determine the value of the property on the date of trial.  Then, the court must determine whether positive equity remains in the property or whether the property has depreciated to a point where there is negative equity.  If positive equity remains, community contributions toward principal or market value create a dollar-for-dollar equitable lien because the owner spouse can still realize the benefit conferred by the community – if such a lien were not recognized, the owner-spouse would receive a windfall from the community.  But if the property has negative equity, the owner-spouse cannot realize the entire benefit conferred by the community.  In that situation, the community’s equitable lien is calculated by this formula:  C – [C/B × D], where B = the value of the property on the date of trial, C = community contributions to principal or market value, and D = depreciation in the value of the property during marriage.  In this case, the trial court had not determined the value of the property on the date of trial, so the Court of Appeals remanded with instructions to apply this opinion to determine the community’s equitable lien on the Valentos’ marital residence.

The Court also reversed the trial court’s determination that the Minnesota condo was Husband’s sole and separate property.  The trial court should not have considered Husband’s testimony about his parents’ intent because the deed’s language unambiguously conveyed the property to Husband and Wife jointly and Husband’s testimony was inadmissible parol evidence.  Under statute, property gifted to a spouse during marriage is that spouse’s separate property.  Therefore, the Court concluded, Husband and Wife held their interests in the condo jointly as separate property.  Also by statute, however, joint interests in property are divided equitably along with community property.  The Court, therefore, remanded the case to the trial court to divide the Valentos’ joint interests, including the Minnesota condo, equitably.

Judge Swann authored the court’s opinion; Judges Downie and Kessler concurred.