In re the Marriage of Jill VALENTO, 1 CA-CV 09-0273.

• Decision Date: 23 September 2010
• Docket Number: No. 1 CA-CV 09-0273.,1 CA-CV 09-0273.
• Parties: In re the Marriage of Jill VALENTO, Petitioner/Appellee/Cross Appellant, v. Marvin VALENTO, Respondent/Appellant/Cross Appellee.
• Court: Arizona Court of Appeals

225 Ariz. 477

240 P.3d 1239

In re the Marriage of Jill VALENTO, Petitioner/Appellee/Cross Appellant,

v.Marvin VALENTO, Respondent/Appellant/Cross Appellee.

No. 1 CA-CV 09-0273.

Court of Appeals of Arizona,Division 1, Department C.

Sept. 23, 2010.

COPYRIGHT MATERIAL OMITTED.

The Murray Law Offices, P.C. By Stanley D. Murray, Phoenix, Attorney for Petitioner/Appellee/Cross Appellant.

The Law Office of Carrie M. Wilcox By Carrie M. Wilcox, Phoenix, Attorney for Respondent/Appellant/Cross Appellee.

OPINION

SWANN, Judge.

¶ 1 This case presents a question of first impression: To what extent can a marital community claim an equitable lien against a spouse's sole and separate property when community funds have contributed to the equity in the property and declining market conditions have nonetheless reduced the property's overall value? We hold that community contributions to sole and separate property create equitable lien rights even in a declining market, and define below the method by which the value of the lien should be calculated.

FACTS AND PROCEDURAL HISTORY

¶ 2 Marvin Valento (“Husband”) and Jill Valento (“Wife”) married in 1999. During their marriage, the parties acquired multiple properties. ¹ The properties included the marital residence (the “27th Place property”), rental properties and a condominium in Minnesota (the “Minnesota property”). During the marriage, Husband signed a disclaimer deed that recognized the 27th Place property as Wife's sole and separate property. Three of the rental properties and the Minnesota property were titled jointly.

¶ 3 After a trial on Wife's September 2008 petition for dissolution, the superior court determined that an equitable lien of $200,000 attached to the 27th Place property. The court also determined the value of the rental properties, and used the results of its calculations in support of the final division of property. Finally, the court concluded that the Minnesota property was Husband's sole and separate property.

¶ 4 Wife's motion for new trial was denied. Husband appealed from the court's determination of the value of the lien against the 27th Place property and of the rental properties. Wife cross-appealed, arguing that no equitable lien existed against the 27th Place property and that the court should have divided the Minnesota property as a community asset. We have jurisdiction pursuant to A.R.S. § 12-2101(B) and (F)(1) (2003).

DISCUSSION

I. EQUITABLE LIEN

¶ 5 Despite the parties' expertise in real estate transactions, the evidence presented to the superior court concerning the initial cost, sources of funds and market value of the 27th Place property was both conflicting and sparse. At trial, Wife testified she purchased the 27th Place property in 2005 for $1.2 million. Wife made a $560,000 down payment from her separate funds and obtained a mortgage of $650,000. During the marriage, the parties paid down the principal balance on the mortgage with approximately $200,000 of community funds. According to Wife, the outstanding mortgage balance at the time of trial was approximately $400,000.

¶ 6 Husband characterized the transaction differently, testifying that the 27th Place property was purchased for $384,000 as a vacant lot subject to the disclaimer deed, but community funds were used to build the home and improve the property. According to Husband, the property increased in value during the marriage. Husband also stresses on appeal that the disclaimer deed he signed disavowed any “past and present,” but not future, interest in the property. ²

¶ 7 Neither party submitted documentary evidence in support of their respective characterizations of the transaction. Based on the record before it, the superior court declined to treat the land purchase and construction as two separate transactions, adopting instead Wife's view that the acquisition of the residence was a unitary transaction involving her sole and separate property. We do not disturb this finding. See Gutierrez v. Gutierrez, 193 Ariz. 343, 347, ¶ 13, 972 P.2d 676, 680 (App.1998) (we defer to the family court's determination of witness credibility). The disclaimer deed therefore defined the character of the interest in the entire property, including the house.

¶ 8 Making the superior court's task more difficult was the fact that neither party presented significant evidence concerning the property's value at the time of trial-a critical fact that the parties dispute and that the court ultimately did not determine. At trial, Husband submitted a year-old appraisal that valued the property at $1.65 million. He conceded, however, that since the time of the appraisal the real estate market had declined approximately thirty percent in value. Husband proposed that the value of the property should have been fixed at the appraisal amount plus the value of subsequent improvements, less thirty percent. According to Husband's theory, the improvements were worth $100,000 and the fair market value of the property was $1,225,000-approximately $15,000 more than the combined value of the mortgage and the down payment. ³ For her part, Wife opined that the property was worth approximately $880,000 at the time of trial based on the listing prices for comparable properties. According to Wife's theory, at the time of trial market forces had reduced the value of the property by approximately $320,000.

¶ 9 Apart from paying down the mortgage, Husband argues that the community paid to improve the property. See Lawson v. Ridgeway, 72 Ariz. 253, 261, 233 P.2d 459, 464-65 (1951) (“[T]he separate estate of a member of the community must reimburse the community for any proper improvements made in good faith upon the separate estate with community funds.” (citation omitted)). The court found that “additional community funds were expended to enhance this property, although neither party presented evidence of the amount expended.” This finding is clearly erroneous because the record reveals testimony concerning substantial community expenditures on improvements to the property. The evidence did not, however, reveal the extent-if any-to which those improvements enhanced the market value of the property at the time of trial.

¶ 10 In the end, the trial court did not make any finding concerning the property's value at the time of trial. It concluded instead that there was a community lien based solely upon the reduction of principal resulting from the contribution of community funds. While Husband contends that the court undervalued the community lien, Wife contends that no lien could exist as a matter of law because the property did not appreciate in value during the marriage.

¶ 11 The existence and the value of an equitable lien present mixed questions of fact and law. See, e.g., Barnett v. Jedynak, 219 Ariz. 550, 555, ¶ 21, 200 P.3d 1047, 1052 (App.2009) (remanding to the family court with instructions to value an equitable lien); Bell-Kilbourn v. Bell-Kilbourn, 216 Ariz. 521, 524, ¶ 12, 169 P.3d 111, 114 (App.2007) (same); Drahos v. Rens, 149 Ariz. 248, 251, 717 P.2d 927, 930 (App.1985) (same). We will uphold the court's factual findings unless clearly erroneous or unsupported by any credible evidence. Hrudka v. Hrudka, 186 Ariz. 84, 91, 919 P.2d 179, 186 (App.1995). Nevertheless, we draw our own legal conclusions from the facts found or implied by the family court. McNutt v. McNutt, 203 Ariz. 28, 30, ¶ 6, 49 P.3d 300, 302 (App.2002). We review the court's apportionment of community property for abuse of discretion and consider the evidence in the light most favorable to upholding the judgment. Boncoskey v. Boncoskey, 216 Ariz. 448, 451, ¶ 13, 167 P.3d 705, 708 (App.2007).

¶ 12 The 27th Place property was Wife's separate property at the time of trial. See, e.g., Bell-Kilbourn, 216 Ariz. at 524, ¶¶ 10-11, 169 P.3d at 114 (a valid disclaimer deed rebuts the presumption that property acquired during marriage is community property). When the community contributes capital to separate property, it acquires an equitable lien against that property. See Tester v. Tester, 123 Ariz. 41, 43, 597 P.2d 194, 196 (App.1979) (“The community is entitled to reimbursement when community funds are spent to increase one spouse's equity in separate property.”); see also Drahos, 149 Ariz. at 249, 717 P.2d at 928; Honnas v. Honnas, 133 Ariz. 39, 40, 648 P.2d 1045, 1046 (1982). Wife contends that there should be no equitable lien on the 27th Place property because contrary to recent historical experience, the property decreased in value during the marriage. We disagree.

¶ 13 Generally, a “value-at-dissolution” approach is appropriate to value a community lien. In early Arizona cases, when community funds were used to make mortgage payments on separate property, the community was entitled only to the increased equity resulting from payments that reduced the mortgage principal. ⁴ Hanrahan v. Sims, 20 Ariz.App. 313, 317-18, 512 P.2d 617, 621-22 (1973); Barnett, 219 Ariz. at 554, ¶ 15, 200 P.3d at 1051. Honnas and Drahos, however, held that the community was also entitled to share in the enhanced value of the property even if the increased value was due only to general market conditions. Honnas, 133 Ariz. at 40, 648 P.2d at 1046; Drahos, 149 Ariz. at 250, 717 P.2d at 929. See also Bell-Kilbourn, 216 Ariz. at 524, ¶ 12, 169 P.3d at 114 (“[A]ny community funds expended to pay the mortgage or enhance the value of the house entitled the community to a share of any equity attributable to those efforts.”).

In Barnett, this court recently prescribed a formula for valuing the lien when the property appreciates during the marriage: C + [C/B x A]; where A = appreciation in value of the property during the marriage, B = value on the date of marriage, and C = community contributions to principal. ⁵ 219 Ariz. at 555, ¶ 21, 200 P.3d at 1052. ⁶

¶ 14 These cases assist in valuing the community's interest in appreciated separate property, but they...