Opinion ID: 1427701
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Heading: Apportionment of community and separate property interests in the Wedekind Road residence.

Text: Both parties agree that the community and separate property interests are entitled to reimbursement to the extent that those interests actually contributed toward reduction of the principal on the mortgage for the Wedekind Road residence. Additionally, this court has recognized that the community is entitled to a pro rata ownership share in property which community funds have helped to acquire. Robison v. Robison, 100 Nev. 668, 670, 691 P.2d 451, 454 (1984). The question presented by Kenneth's appeal is precisely how to apportion the community and separate property shares in the appreciation of a separate property residence obtained with a separate property loan prior to marriage. Although we understand and respect the district court's approach to apportionment of these interests, we hereby adopt, with one modification, the mode of apportionment set forth in In re Marriage of Moore, 28 Cal.3d 366, 168 Cal. Rptr. 662, 618 P.2d 208 (1980). Without a presumptive approach to this apportionment problem, persons similarly situated may receive unequal distributions in different cases. We have full confidence that the district judges of this state can reach equitable distributions in particular cases. No matter how fair the result in individual cases, however, the aggregate result becomes unfair when similarly situated persons receive disparate returns on their home investments. We further note that the presumptive approach for apportionment of home equity adopted here in no way abrogates the rule of just and equitable distribution, which we recently enunciated in McNabney v. McNabney, 105 Nev. ___, 782 P.2d 1291 (1989). The modified Moore formulae simply establish the community interest in a residence. McNabney, in turn, governs how the court may actually divide that community interest between the parties. Moore generally grants the community a pro rata share in appreciation of a separate property residence according to the ratio that mortgage principal reduction attributable to community property payments bears to the original purchase price. See Moore, 168 Cal. Rptr. at 664-65, 618 P.2d at 210-11. More specifically, the community property appreciation share under Moore is the amount by which community property mortgage payments have reduced the mortgage principal, divided by the original contract purchase price of the residence. This fraction is multiplied by the total appreciation to yield the final community share in appreciation. Assuming the mortgage was originally a separate property loan, the separate property receives credit for the entire outstanding unpaid mortgage balance, plus the amount by which separate property mortgage payments reduced the mortgage principal; this sum is then divided by the original purchase price of the residence and multiplied by the total appreciation to yield the final separate property appreciation share. The Moore case presents an understandable and workable way to determine the separate and community interests in the appreciation of a residence. In accord with critics of the Moore decision, however, we adopt a different method for assigning credit for the unpaid mortgage balance. See Comment, The Division of the Family Residence Acquired with a Mixture of Separate and Community Funds, 70 Cal. L.Rev. 1263 (1982) (authored by Peter M. Moldave); Wagner, Apportionment of Home Equity in Marital Dissolutions Under California Community Property Law: Is the Current Approach Equitable?, Comm.Prop.L.J. (Winter 1982). We believe that neither the community or separate property should receive credit for the entire outstanding mortgage balance on the sole basis that the loan was originally a separate or community obligation. When, as here, the community has contributed substantially to principal reduction, assigning the separate property credit for the entire outstanding loan balance yields results which are inequitable to the community; (the result may be equally unfair to the separate property in cases involving a mortgage taken out by the community). Credit for the outstanding loan balance should be divided according to the number of monthly payments made by separate or community property. With a new long-term loan, a considerable number of monthly payments can be made without there being a significant reduction in principal. Moldave has stated an equitable and workable approach for assigning credit for the unpaid mortgage balance, and we hereby adopt this approach. The approach is essentially to assign credit for the unpaid mortgage balance according to a time rule. Moldave explains: The proposed method is to allocate the appreciation attributable to the loan proceeds to separate or community sources pro rata according to the total number of monthly payments made from separate or community sources... . The appreciation is shared according to the number of monthly payments, and not the amount of monthly principal payments, both for reasons of simplicity and fairness. Adding the varying principal payments is more complicated, but the more important objection is that it gives a windfall to the party making the later payments, because the principal portion of the monthly payment rises over the term of a fully amortized level payment loan. Counting only the number of payments avoids affecting the shares because of the timing factor. 70 Cal.L.Rev. at 1288-89 (footnotes omitted) (emphasis in original). Modified slightly to incorporate Moldave's approach, the Moore formulae for determining the community and separate property interests in total home equity, including appreciation, can be stated arithmetically as follows: 1. SP = PD[sp] + [(PD[sp] + OL[sp]) X (A)]; and ________________ (PP) 2. CP = PD[cp] + [(PD[cp] + OL[cp]) X (A)], WHERE: ________________ (PP) (a) SP = total separate property interest in home equity; (b) CP = total community property interest in home equity; (c) PD[sp] = pay down attributable to separate property (i.e., the reduction in mortgage principal due to separate property payments, plus the separate property downpayment, if any); (d) PD[cp] = pay down attributable to community property (i.e., the reduction in mortgage principal due to community property mortgage payments, plus the community property downpayment, if any); (e) OL[sp] = portion of outstanding (unpaid) loan to be credited to separate property; (f) OL[cp] = portion of outstanding (unpaid) loan to be credited to community property; (g) PP = contract purchase price of the residence; (h) A = appreciation of the residence. Applying each of these equations yields the correct respective shares in most cases. [1] In the formulae, SP represents the final separate property interest in home equity, and CP represents the final community property share. If more than one spouse contributes separate property, then a third formula, identical to formula number one, may be used to calculate the second spouse's separate property interest. PD[sp] denotes the separate property pay down. The separate property pay down equals the actual reduction in mortgage principal attributable to separate property mortgage payments up to the time the house is divided, plus the down payment, if the down payment is made from separate property. PD[cp] denotes the community property pay down. If the down payment is made from community property, then the down payment becomes part of the community property pay down, not the separate property pay down. Neither community nor separate property pay down includes payments going towards mortgage interest or taxes, because taxes and interest payments do not directly increase the equity value of the property. Moore, 168 Cal. Rptr. at 664-65, 618 P.2d at 210-11. PP denotes the original contract purchase price of the residence or property. A generally denotes the appreciation of the house, measured by the difference between the market value at the time of trial and the contract purchase price. Upon sale, however, the net sale proceeds may differ from the estimated market value. Thus, when the residence is actually sold, district courts should use the actual net sale proceeds, instead of the estimated market value, in calculating appreciation. In re Marriage of Horowitz, 159 Cal. App.3d 368, 373, n. 4, 205 Cal. Rptr. 874, 878, n. 4 (1984). OL generally denotes the outstanding unpaid mortgage balance at the time of trial. OL[sp] and OL[cp] will denote the dollar amounts of the outstanding loan balance to be credited to separate and community property under Moldave's approach. For example, OL[sp] equals the percentage of the total number of monthly mortgage payments made with Kenneth's separate property, multiplied by the total outstanding mortgage balance. In order to prevent manipulation of this time rule, only routine monthly mortgage payments are considered. Moldave, supra, at 1288. Large, non-routine lump sum payments which reduce the principal must be credited to PD[sp] or PD[cp] but not toward OL[sp] or OL[cp]. Moldave suggests that courts should consider only payments made during the period between the time the loan is taken out and the time the parties separate. Id. (emphasis added). We believe, however, that the courts should consider all routine mortgage payments made after separation, up to the time of the final division at trial. If, as in the present case, the residence is set aside for the benefit of the children, the courts generally should give the spouse making routine separate property mortgage payments credit, under both PD[sp] and OL[sp], until such time as the residence is actually sold or divided. Having set forth the applicable principles of law, we turn to the facts of this case. Although the district court did not set forth its methodology, Kenneth appears to have ascertained the method the court employed in determining the parties' respective interests in the residence. The court established $103,407 as the property's total purchase price. It arrived at this figure by adding the initial purchase price ($36,500), the amount Kenneth paid for his former wife's interest ($4,200) and the cost of the improvements to the property ($62,707). The district court then determined Kenneth's separate property contribution by adding Kenneth's down payment ($2,500), the payment for his former wife's interest ($4,200) and the reduction in principal attributable to separate property loan payments before the marriage ($1,037), a total of $7,737. The court divided the total separate property contribution by the purchase price to reach the final separate property share in the property of 7.5%. The court determined the community property contribution by adding the cost of the improvements which the court classified as community property ($62,707) and the amount by which community property payments had reduced the mortgage principal ($14,463), a total of $77,020. The court divided the total community property contribution by the purchase price to reach the final community property share of 74.5%. The court finally divided the unpaid balance on the mortgage ($18,500) by the $103,407 purchase price, yielding a further 18% separate property share in the property; the court classified this 18% share as Kenneth's separate property since Kenneth was to continue to make the mortgage payments following divorce. The district court's method of apportionment deviated from our modified Moore approach in two principal ways. First, the district court should not have included as part of the purchase price the money paid by Kenneth to purchase his former wife's interest; the purchase price includes only the contract purchase price. Second, the district court should not have included as part of the purchase price the cost of improvements made to the property. The question of improvements should be considered separately from the question of apportionment of appreciation. We will address the question of how to apportion improvements in Part III of this opinion. What follows is an example of how the district court should have applied the modified Moore formulae if the residence had been divided at the time of trial, rather than set aside for the children. Due to limitations in this record, we consider only the mortgage payments made up to the time of the parties' separation; normally, the district court should consider all routine mortgage payments made up to the time the residence is actually divided. The outstanding loan balance at the time of trial was $18,500. Kenneth acquired the home on June 26, 1967, making separate property mortgage payments from July 1967 through December 1970, when Kenneth and Nancy married. Kenneth thus made separate property mortgage payments for 41 months. The community made mortgage payments from January 1971 until the separation in March 1986, a total of 183 months. In all, there appear to have been 224 routine monthly mortgage payments between the date of acquisition of the residence and the date of separation. Kenneth made 41, or 18.30%, of the monthly payments. The community made 183, or 81.70%, of the monthly payments. OL[sp] therefore equals $3,386 (18.30% of the outstanding balance of $18,500) and OL[cp] equals $15,114 (81.70% of $18,500). The total pay down on purchase price attributable to Kenneth's separate property (PD[sp]) was the sum of his $2,500 down payment and the $1,037 by which Kenneth's payments reduced the principal before he married Nancy. This is a total of $3,537. To obtain Kenneth's percentage share in the appreciation, we add $3,537 (PD[sp]) to $3,386 (OL[sp]) and divide this sum by the original contract purchase price of $36,500. This yields a separate property appreciation share of 18.97%. The total pay down on the purchase price attributable to community property (PD[cp]) equals $14,463, the amount by which community payments actually reduced the mortgage principal. To obtain the community share in appreciation we add $14,463 (PD[cp]) to $15,114 (OL[cp]) and divide by the purchase price. This yields a community appreciation share of 81.03%. Subtracting the purchase price of $36,500 from the market value at time of trial of $215,000 yields a total appreciation of $178,500. Multiplying the respective final appreciation shares by this appreciation yields a community property appreciation share of $144,638.55 (81.03% X $178,500) and a separate property appreciation share of $33,861.45 (18.97% X $178,500). [2] We have now established the respective shares in appreciation. To establish the final equity interests of the community and of Kenneth's separate property we must add to the respective appreciation shares the respective pay downs attributable to separate and community property. This step represents simple reimbursement for actual contributions made toward the equity. This yields a final community property share in the equity value of the residence of $159,101.55 ($14,463 + $144,638.55) and a final separate property share of $37,398.45 ($3,537 + $33,861.45). Adding these final shares yields a total equity value in the residence of $196,500. This total equity value is less than the total market value by the amount of the outstanding mortgage balance, which was $18,500 at the time of divorce. The assignment of this outstanding mortgage as a debt in reaching an overall division of property is a separate issue from the allocation of home equity just discussed. After a district court calculates the final community interest according to the modified Moore formulae, the court still faces the separate problem of how to divide the community interest in a single residence. A good summary of the five principal methods of actually dividing the final community interest in a residence may be found in Horowitz, 205 Cal. Rptr. at 878-879. In the present case we recognize that the residence will actually be divided at a future date because the court awarded Nancy and the children temporary possession of the residence. This presents a special situation different from the more typical example given above. Ideally, in this situation the court can award the spouse who loses possession of the house other community assets to offset that spouse's interest in the house. If this is not possible, however, the parties must address the issue of apportioning their respective interests in the house at the time in the future when the residence is actually divided. If so, the respective interests should be calculated by reapplying the modified Moore formulae based on the appreciation of the house at the time the house is finally divided. Cf. Horowitz, supra (applying percentage interests established for a residence purchased with cash on the basis of appreciation which had occurred after the judgment of divorce during the time the house was set aside for the children). Kenneth should receive credit under the formulae for the mortgage payments the court ordered him to make during the time the residence is set aside for the children. To the extent that Kenneth's routine post-divorce mortgage payments further reduce the principal, Kenneth will receive credit according to the variable PD[sp]. As stated above, Kenneth also should receive credit for his continuing routine mortgage payments under the variable OL[sp]. Finally, in this case the application of the modified Moore formulae may differ from the example just given because this case involves improvements. Part IV of this opinion contains an example applying the modified Moore formulae after taking improvements into account.