NY Case Unwittingly Creates Community Property State?

Before July 19, 1980, when New York's Equitable Distribution Law went into effect, New York was a common-law state, and the distribution of property in a divorce was strictly governed by title. (Under unusual circumstances, a constructive trust could be established which transferred the usufruct of the property to the other party. This was not a title transfer, however, and the strict conditions imposed upon constructive trusts made this occurrence rare. See Sharp v. Kosmalski' 40 NY2d 119, 123, 386 NYS2d 72 (1976).) The title-owning spouse kept whatever was in his or her name, and jointly held property was divided in accordance with the parties' respective ownership interests at common law. There was no equitable distribution, only alimony and child support. There was no concept in New York resembling marital property, and the titled spouse could do anything and everything to the property in his name without having to account to the other or to the court in any way.

New York's highest court, the Court of Appeals, has long and consistently held that divorce law is a purely statutory creature and that the courts lack the authority to add to or change what the Legislature has set forth. Pajak v. Pajak, 56 NY2d 394 (1982); Brady v. Brady, 64 NY2d 339 (1985). In fact, the courts have held that absent statutory authority, the court could not order a payor spouse to obtain insurance to secure alimony and child support payments against his death. Shier v. Shier, 450 NYS2d 225 (2nd Dept. 1982). To this day, no matter what a child's needs might be or however dire its situation, New York courts have consistently held that child support cannot be directed for even a day after age 21 because there is no statutory authority for it.

The 1980 equitable distribution statute changed none of that: It did not create an interest in either spouse's favor in the other's titled property. In O'Brien v. O'Brien, 66 NY2d 576 (1985), the Court of Appeals wrote:
” there is no common law property interest remotely resembling marital property. It is a statutory creature, is of no meaning during the normal course of a marriage and arises full-grown, like Athena, upon the signing of a Separation Agreement or the commencement of a divorce action.' (Id. at 583).

An Inchoate Right

Thus, the Court of Appeals has made it clear that until there is an action which potentially changes the marital status, equitable distribution is purely an inchoate right which has no existence before someone serves a summons. Indeed, if Mr. Chapin had not been divorced from Ms. Johnson, but had died, is there any question that she would have had no claim against his estate to recover the money he had spent? In fact, under controlling authority, if, after commencement of their divorce action but before entry of a judgment of divorce, Mr. Chapin had died, Ms. Johnson would have had no right to equitable distribution. Irrespective of whether the property would have been marital or separate if a divorce court had finished the case, Mr. Chapin's demise would have ended any possible claim to equitable distribution by Ms. Johnson, with respect to anything he owned ' and not just the recoupment that the First Department dealt with here.

It is clear that marital property does not exist at all (even as a concept) until there is a summons and after that it cannot be turned into a real interest ' until a judge grants a divorce during the parties' joint lifetime.

A court today, no more than one in the 1970s, cannot affect one spouse's use of his or her titled property until a matrimonial action is commenced. It can neither transfer nor enjoin the transfer of any asset.

There are no decisions where, absent a pending divorce action, one spouse has successfully sued the other to block a potentially improvident act by the titled party. This follows directly from the statutory definition and the Court of Appeal's decision in O'Brien.

In a more recent appellate case, Sinha v. Sinha, 285 AD2d 801, 727 NYS2d 537 (3d Dept. 2001), the court considered whether 'the equitable distribution claim created a dischargeable debt within the meaning of the Bankruptcy Code ” The court held: ” [T]he Equitable Distribution Law did not 'create any contingent or vested interests, legal or equitable, by virtue of the parties' marital status ' .” (Quoting Justice Sandra Day O'Connor's concurring opinion in Leibowits v. Leibowits, 93 AD2d 535, 462 NYS2d 469 (2nd Dept. 1983). The Sinha court went on to hold that '[a party] had no basis under New York law to assert a claim against the marital property prior to divorce' and that 'spouses' respective rights in marital property do not vest under New York law***[sic] until entry of a judgment dissolving the marriage. (Matter of Cole, 202 B.R. 356, 360 (1996).' [285 AD2d at 803-04, 727 NYS2d at 539-40]. See also, Wegman v. Wegman, 123 AD2d 220, 229, 509 NYS2d 342, 347 (2nd Dept. 1987), and McDermott v. McDermott' 119 AD2d 370, 378-79, 507 NYS2d 390, 397 (2nd Dept. 1986). [Both citing the quoted passage from O'Brien].

Nor have New York courts amerced parties for what turned out to be improvident investments. For example, in T.F. v. N.F., 12 Misc3d 1176, (Sup. Ct. Suffolk Co. 2006), the court held that, 'Insofar as the Defendant seeks to financially punish the Plaintiff for the dissipation of the parties (sic) assets as a result of the failed Body Chef business, this court must note and draw a distinction between a spouse who undertakes a bona fide business venture with good, if misplaced, intentions to increase the couple's income and assets ” See also Kohl v. Kohl, 806 NYS2d 35, 37 (1st Dept. 2005), refusing to amerce the husband where there was no evidence that the husband's criminal acts were intended to deprive the wife of assets. [Kohl also held that a voluntary gift of marital property to a husband's first family did not constitute waste and denied reimbursement to the wife. The ambit of that decision is a major part of the differences between the majority and minority in Johnson v. Chapin.]

The dissent argued that it cannot possibly be the case that obeying a court order was wrong while a voluntary payment was not. The majority found the earlier decision distinguishable on several grounds, primarily relating to the fact that Mr. Chapin was using marital property to pay an antecedent debt. (There is no need to recreate here each side's arguments.) As there were two dissents on the law on this point, the Court of Appeals will get to weigh in on the subject and give New York practitioners the final determination. [Query: If Mr. Chapin had not paid his first wife and she had gotten a judgment against him, which she could have enforced against marital assets titled in his name, what result then? What if the targeted asset on that default was the country home, the appreciation of which was considered marital property?]

If, as a matter of jurisprudence, the Court of Appeals has held there is no marital property until an action is commenced, and courts have consistently held that there can be no actual determination of equitable distribution rights and transfers of property unless a divorce is granted, it is difficult to understand how marital property (which does not exist) can be wasted, or expended, or anything else ' at least until the action is close enough to the date of commencement to assert credibly that the transferring party's intention was to avoid or attenuate the equitable distribution.

Conceptual Difficulties

If marital property is viewed as actually existing prior to commencement, despite the statute and O'Brien, then where does that reasoning stop? The majority position in Johnson v. Chapin leads to serious conceptual difficulties. Suppose a party spent 'marital' property in the marriage to buy another asset, is he responsible if the new asset loses money? What if the 'expended marital property” would have lost even more money? How would the funds be traced? We would have to know, literally know, which assets (which would have been marital property) were once owned, when they were sold, what was bought with them, etc., and then track the value of each one. Suppose an investment of marital property had once appreciated significantly and was now worth less than its high water mark, was there some obligation to sell at the high point? Would there be some penalty for failure to do so? Where would, or could, it all end?

The situation would be even worse with stocks and other liquid investments. Would the ups and downs of their values have to be charted for every day they were owned during the marriage and those charts put into evidence? Would the reasonableness not only of buying or selling a particular stock have to be investigated and proved? Would the day-to-day reasonableness of continuing to hold a stock also have to be investigated and proved?

What about hobbies? If only one spouse indulged in a particular pastime, would that be a waste too? Should it not make a difference whether the spouse now charging the other with waste ever protested the expenditures or the hobbies? How would any of this be proved at all, and, particularly within any reasonable amount of time? See Bonnie B. v. Michael B., 6 Misc3d 1004, 800 NYS2d 343, (Supt. Ct. Suffolk Co. 2004) ['While it is true that the Defendant traded in those accounts on margin, which is risky, the Plaintiff understood what he was doing and authorized him to do so.'] and Sieger v. Sieger, 8 Misc3d 1029, 806 NYS2d 448, (Sup. Ct. Kings Co. 2005) [conduct on wife's part compels the conclusion she was a willing participant. See also, Thompson v. Pittman, 123 AD2d 683, 506 NYS2d 979, (2nd Dept. 1986), where the Second Department held that the nontitled spouse had no equitable distribution interest in separate property real estate which had depreciated during the course of the parties' marriage, even though the wife had contributed to the original premarital purchase of the property while the couple had been cohabiting for two years. (On the particular facts of that case, a constructive trust was available to the wife for her contribution to the premarital purchase.)

We cannot reasonably expect spouses, while they are happily married, to keep close account of expenditures by the other spouse which either brought nothing in (the golf nut spouse) or resulted in losses (the investing spouse as in T.F., above.) A concern for placing this sort of burden on spouses while still happily married underlies the Court of Appeals' determination in Bloomfield v. Bloomfield, 97 NY2d 188 (2001), that the statute of limitations may be tolled during the happy portion of a marriage. Under what circumstances would those day-to-day inquiries be common and reasonable? That would be the norm in a community property state.

Conclusion

Johnson v. Chapin ' certainly with no intention of doing so ' inadvertently made New York a de facto community property jurisdiction. When judges and lawyers weigh and consider where to go from here, in following or refusing to follow the majority and dissent in that case, and in the likely decision by the Court of Appeals on this subject, they should take that this slippery and dangerous slope into serious consideration.

Leonard G. Florescue is a partner at Blank Rome. His firm used to represent Mr. Chapin, and he both argued the matter before the appellate court in November 2006 and wrote Mr. Chapin's briefs. The likelihood of the firm's further involvement in any possible appeal is nonexistent. E-mail:[email protected]. This article originally ran in the New York Law Journal, a sister publication of this newsletter.

A recent decision by a New York appellate court may have converted New York into a community property state. Johnson v. Chapin, 350749/01, NYLJ March 17, 2008, p. 25 col. 1.

Background

Mr. Chapin had been married previously. Pursuant to the settlement agreement with his first wife and the divorce judgment, he was obligated to make payments to the first wife during the course of his marriage to Ms. Johnson. Accordingly, Mr. Chapin paid almost $1.3 million to his first wife pursuant to that earlier divorce, and the trial court ordered that Ms. Johnson be credited for 50% of that amount, i.e., approximately $650,000.

Before July 19, 1980, when New York's Equitable Distribution Law went into effect, New York was a common-law state, and the distribution of property in a divorce was strictly governed by title. (Under unusual circumstances, a constructive trust could be established which transferred the usufruct of the property to the other party. This was not a title transfer, however, and the strict conditions imposed upon constructive trusts made this occurrence rare. See Sharp v. Kosmalski ' 40 NY2d 119, 123, 386 NYS2d 72 (1976).) The title-owning spouse kept whatever was in his or her name, and jointly held property was divided in accordance with the parties' respective ownership interests at common law. There was no equitable distribution, only alimony and child support. There was no concept in New York resembling marital property, and the titled spouse could do anything and everything to the property in his name without having to account to the other or to the court in any way.

New York's highest court, the Court of Appeals, has long and consistently held that divorce law is a purely statutory creature and that the courts lack the authority to add to or change what the Legislature has set forth. P ajak v. Pajak , 56 NY2d 394 (1982); Brady v. Brady , 64 NY2d 339 (1985). In fact, the courts have held that absent statutory authority, the court could not order a payor spouse to obtain insurance to secure alimony and child support payments against his death. Shier v. Shier , 450 NYS2d 225 (2nd Dept. 1982). To this day, no matter what a child's needs might be or however dire its situation, New York courts have consistently held that child support cannot be directed for even a day after age 21 because there is no statutory authority for it.

The 1980 equitable distribution statute changed none of that: It did not create an interest in either spouse's favor in the other's titled property. In O'Brien v. O'Brien , 66 NY2d 576 (1985), the Court of Appeals wrote:
” there is no common law property interest remotely resembling marital property. It is a statutory creature, is of no meaning during the normal course of a marriage and arises full-grown, like Athena, upon the signing of a Separation Agreement or the commencement of a divorce action.' (Id. at 583).

An Inchoate Right

Thus, the Court of Appeals has made it clear that until there is an action which potentially changes the marital status, equitable distribution is purely an inchoate right which has no existence before someone serves a summons. Indeed, if Mr. Chapin had not been divorced from Ms. Johnson, but had died, is there any question that she would have had no claim against his estate to recover the money he had spent? In fact, under controlling authority, if, after commencement of their divorce action but before entry of a judgment of divorce, Mr. Chapin had died, Ms. Johnson would have had no right to equitable distribution. Irrespective of whether the property would have been marital or separate if a divorce court had finished the case, Mr. Chapin's demise would have ended any possible claim to equitable distribution by Ms. Johnson, with respect to anything he owned ' and not just the recoupment that the First Department dealt with here.

It is clear that marital property does not exist at all (even as a concept) until there is a summons and after that it cannot be turned into a real interest ' until a judge grants a divorce during the parties' joint lifetime.

A court today, no more than one in the 1970s, cannot affect one spouse's use of his or her titled property until a matrimonial action is commenced. It can neither transfer nor enjoin the transfer of any asset.

There are no decisions where, absent a pending divorce action, one spouse has successfully sued the other to block a potentially improvident act by the titled party. This follows directly from the statutory definition and the Court of Appeal's decision in O'Brien.

In a more recent appellate case, Sinha v. Sinha , 285 AD2d 801, 727 NYS2d 537 (3d Dept. 2001), the court considered whether 'the equitable distribution claim created a dischargeable debt within the meaning of the Bankruptcy Code ” The court held: ” [T]he Equitable Distribution Law did not 'create any contingent or vested interests, legal or equitable, by virtue of the parties' marital status ' .” (Quoting Justice Sandra Day O'Connor's concurring opinion in Leibowits v. Leibowits , 93 AD2d 535, 462 NYS2d 469 (2nd Dept. 1983). The Sinha court went on to hold that '[a party] had no basis under New York law to assert a claim against the marital property prior to divorce' and that 'spouses' respective rights in marital property do not vest under New York law***[sic] until entry of a judgment dissolving the marriage. (Matter of Cole, 202 B.R. 356, 360 (1996).' [285 AD2d at 803-04, 727 NYS2d at 539-40]. See also, Wegman v. Wegman , 123 AD2d 220, 229, 509 NYS2d 342, 347 (2nd Dept. 1987), and McDermott v. McDermott ' 119 AD2d 370, 378-79, 507 NYS2d 390, 397 (2nd Dept. 1986). [Both citing the quoted passage from O'Brien ].

Nor have New York courts amerced parties for what turned out to be improvident investments. For example, in T.F. v. N.F. , 12 Misc3d 1176, (Sup. Ct. Suffolk Co. 2006), the court held that, 'Insofar as the Defendant seeks to financially punish the Plaintiff for the dissipation of the parties (sic) assets as a result of the failed Body Chef business, this court must note and draw a distinction between a spouse who undertakes a bona fide business venture with good, if misplaced, intentions to increase the couple's income and assets ” See also Kohl v. Kohl , 806 NYS2d 35, 37 (1st Dept. 2005), refusing to amerce the husband where there was no evidence that the husband's criminal acts were intended to deprive the wife of assets. [ Kohl also held that a voluntary gift of marital property to a husband's first family did not constitute waste and denied reimbursement to the wife. The ambit of that decision is a major part of the differences between the majority and minority in Johnson v. Chapin.]

The dissent argued that it cannot possibly be the case that obeying a court order was wrong while a voluntary payment was not. The majority found the earlier decision distinguishable on several grounds, primarily relating to the fact that Mr. Chapin was using marital property to pay an antecedent debt. (There is no need to recreate here each side's arguments.) As there were two dissents on the law on this point, the Court of Appeals will get to weigh in on the subject and give New York practitioners the final determination. [Query: If Mr. Chapin had not paid his first wife and she had gotten a judgment against him, which she could have enforced against marital assets titled in his name, what result then? What if the targeted asset on that default was the country home, the appreciation of which was considered marital property?]

If, as a matter of jurisprudence, the Court of Appeals has held there is no marital property until an action is commenced, and courts have consistently held that there can be no actual determination of equitable distribution rights and transfers of property unless a divorce is granted, it is difficult to understand how marital property (which does not exist) can be wasted, or expended, or anything else ' at least until the action is close enough to the date of commencement to assert credibly that the transferring party's intention was to avoid or attenuate the equitable distribution.

Conceptual Difficulties

If marital property is viewed as actually existing prior to commencement, despite the statute and O'Brien, then where does that reasoning stop? The majority position in Johnson v. Chapin leads to serious conceptual difficulties. Suppose a party spent 'marital' property in the marriage to buy another asset, is he responsible if the new asset loses money? What if the 'expended marital property” would have lost even more money? How would the funds be traced? We would have to know, literally know, which assets (which would have been marital property) were once owned, when they were sold, what was bought with them, etc., and then track the value of each one. Suppose an investment of marital property had once appreciated significantly and was now worth less than its high water mark, was there some obligation to sell at the high point? Would there be some penalty for failure to do so? Where would, or could, it all end?

The situation would be even worse with stocks and other liquid investments. Would the ups and downs of their values have to be charted for every day they were owned during the marriage and those charts put into evidence? Would the reasonableness not only of buying or selling a particular stock have to be investigated and proved? Would the day-to-day reasonableness of continuing to hold a stock also have to be investigated and proved?

What about hobbies? If only one spouse indulged in a particular pastime, would that be a waste too? Should it not make a difference whether the spouse now charging the other with waste ever protested the expenditures or the hobbies? How would any of this be proved at all, and, particularly within any reasonable amount of time? See Bonnie B. v. Michael B . , 6 Misc3d 1004, 800 NYS2d 343, (Supt. Ct. Suffolk Co. 2004) ['While it is true that the Defendant traded in those accounts on margin, which is risky, the Plaintiff understood what he was doing and authorized him to do so.'] and Sieger v. Sieger , 8 Misc3d 1029, 806 NYS2d 448, (Sup. Ct. Kings Co. 2005) [conduct on wife's part compels the conclusion she was a willing participant. See also, Thompson v. Pittman , 123 AD2d 683, 506 NYS2d 979, (2nd Dept. 1986), where the Second Department held that the nontitled spouse had no equitable distribution interest in separate property real estate which had depreciated during the course of the parties' marriage, even though the wife had contributed to the original premarital purchase of the property while the couple had been cohabiting for two years. (On the particular facts of that case, a constructive trust was available to the wife for her contribution to the premarital purchase.)

We cannot reasonably expect spouses, while they are happily married, to keep close account of expenditures by the other spouse which either brought nothing in (the golf nut spouse) or resulted in losses (the investing spouse as in T.F., above.) A concern for placing this sort of burden on spouses while still happily married underlies the Court of Appeals' determination in Bloomfield v. Bloomfield , 97 NY2d 188 (2001), that the statute of limitations may be tolled during the happy portion of a marriage. Under what circumstances would those day-to-day inquiries be common and reasonable? That would be the norm in a community property state.

Conclusion

Johnson v. Chapin ' certainly with no intention of doing so ' inadvertently made New York a de facto community property jurisdiction. When judges and lawyers weigh and consider where to go from here, in following or refusing to follow the majority and dissent in that case, and in the likely decision by the Court of Appeals on this subject, they should take that this slippery and dangerous slope into serious consideration.

Leonard G. Florescue is a partner at Blank Rome. His firm used to represent Mr. Chapin, and he both argued the matter before the appellate court in November 2006 and wrote Mr. Chapin's briefs. The likelihood of the firm's further involvement in any possible appeal is nonexistent. E-mail:[email protected]. This article originally ran in the New York Law Journal, a sister publication of this newsletter.