Opinion ID: 1786539
Heading Depth: 1
Heading Rank: 1

Heading: application of the trustee

Text: The trustee brings fifteen points of error to this court. Basically he asserts error on the part of the court of civil appeals in not subjecting the whole 320-acre tract and all of the community property to the claims of the bankruptcy creditors, and in relegating those creditors to an inferior position with regard to priority. His initial contention is that the entire 320-acre tract was community property. Alternatively he argues that even if an undivided one-half interest in the 320-acre tract is the husband's separate property, the husband made a gift of one-half of his separate property interest to his wife. The trustee further argues that even if some part of the property is the separate property of the husband, it is nevertheless liable for the debts incurred in the operation of the dress shop. The 320-Acre Tract as Community or Separate Property. When the Cockerhams were married on May 16, 1949, the husband, E. A. Cockerham, owned an undivided one-half interest in the 320-acre tract and his brother, Herman Cockerham, owned the other undivided one-half. The brothers conducted a farming and cattle raising operation on this property. A number of years later, in 1955, Herman Cockerham wanted to sell his undivided one-half interest in the 320 acres and his brother, E. A. Cockerham, wanted to buy him out. However, E. A. Cockerham had to get a loan on the property in order to pay his brother for his half. In order to accomplish these things, the two brothers went to a lawyer who filed a partition suit on behalf of E. A. and wife against Herman and wife and secured the court appointment of receiver. The receiver thereupon sold the 320-acre tract to E. A. and Dorothy Cockerham at private sale under the orders of the district court. The receiver's deed indicates a total consideration of $22,700, of which $11,400 cash was recited to have been paid by E. A. and Dorothy Cockerham and $11,300 cash furnished by John Hancock Mutual Life Insurance Company, who reserved a vendor's lien on the land. It was undisputed, however, that E. A. and Dorothy Cockerham actually made no cash payment at all. It is also undisputed that the amount recited to have been paid in cash by E. A. Cockerham in this transaction ($11,400) was approximately the value of his undivided one-half interest in the property. The receiver's deed was a conveyance to E. A. and Dorothy Cockerham, in both names as grantees. All Dorothy seemed to know about this transaction was that her husband was buying his brother out of the 320-acre tract. The trial court held that these facts were sufficient to establish that an undivided one-half of the 320-acre tract was separate property of E. A. Cockerham by reason of his ownership to an undivided one-half interest thereof prior to his marriage. The court of civil appeals affirmed, holding that there was a tenancy in common between the separate property of E. A. Cockerham and the community property. The trustee attacks this holding, asserting that the evidence is insufficient to support the conclusion of the court of civil appeals that E. A. Cockerham adequately traced his prior separate property ownership in the 320-acre tract. Property possessed by either spouse during or on dissolution of marriage is presumed to be community property. Section 5.02. [3] In order to overcome this presumption, the party asserting separate ownership must clearly trace the original separate property into the particular assets on hand during the marriage. E.g., McKinley v. McKinley, 496 S.W.2d 540, 543 (Tex.1973); Tarver v. Tarver, 394 S.W.2d 780 (Tex. 1965). See Comment, The Commingling of Separate and Community Funds: The Requirement of Tracing in Texas, 6 St. Mary's L.J. 234 (1974). In the instant case it was undisputed that the husband owned an undivided one-half interest in identifiable real property prior to marriage. The partition suit and sale was, as found by the trial court, only a means of convenience provided by law to complete the purchase of the whole and secure a loan thereon. In addition, the cash consideration ($11,400) recited to have been paid by E. A. Cockerham in this transaction was the approximate value of his prior undivided interest in the property. No cash, however, actually changed hands. These facts are sufficient to justify the trial court in finding that E. A. Cockerham put up the interest he owned prior to marriage as partial consideration for the purchase. Since the interest he owned prior to marriage was an undivided one-half of the 320-acre tract, such undivided one-half interest remained his separate property. The trustee alternatively contends that if the husband had a separate property interest in the 320 acres the record shows he made a gift of an undivided one-half of such separate property interest to his wife. In support of this position the trustee points out that title to the whole 320 acres was taken in the name of E. A. Cockerham and wife, Dorothy Cockerham, and asserts that it is well established that when a husband uses separate property consideration to pay for land acquired during the marriage and takes title to the land in the name of husband and wife, it is presumed he intended the interest placed in his wife to be a gift. Smith v. Strahan, 16 Tex. 314 (1856); Tucker v. Carr, 39 Tex. 98 (1873); Tate v. Tate, 299 S.W. 310 (Tex.Civ.App.Eastland 1927, no writ); Carriere v. Bodungen, 500 S.W.2d 692 (Tex.Civ.App.Corpus Christi 1973, no writ); Hampshire v. Hampshire, 485 S.W.2d 314 (Tex.Civ.App.Fort Worth 1972, writ); 1 McCormick & Ray, Texas Law of Evidence § 92 (2d ed. 1956). See Pomeroy's Equity Jurisprudence § Ray, Texas Law of presumption, however, can be rebutted by evidence clearly establishing there was no intention to make a gift. Smith v. Strahan, supra ; Dean v. Dean, 214 S.W. 505 (Tex. Civ.App.1919, no writ); Hampshire v. Hampshire, supra ; Patterson v. Metzing, 424 S.W.2d 255 (Tex.Civ.App.Corpus Christi 1967, no writ); 1 McCormick & Ray, supra. In the instant case Dorothy Cockerham testified she never paid any attention to the purchase of the 320 acres; in fact, she claimed she never even saw the deed to the property until the preparation for the instant litigation. Her attitude toward the 320-acre tract has, until the instant suit, been largely one of complete disinterest the 320 acres and the dairy business on it were her husband's business about which she paid little, if any, attention. She offered no testimony in support of the presumption that her husband meant to make a gift to her of part of his interest in the 320-acre tract. There is nothing in her testimony which would indicate any understanding that a gift had been made to her. The husband's testimony also tends to negate any idea that he intended a gift to his wife. The structure of the transaction whereby he bought his brother's interest in the 320-acre tract was of no concern to him; he left the transaction entirely to his lawyer. All he knew was that one day he went to the courthouse and then, I just owned 160 acres worth of land. At trial he took the position that the whole 320 acres had always been his land. Moreover, the husband's brother, Herman, from whom he bought the property corroborated the testimony that the purchase was structured as it was solely to enable the husband to buy the property. Based upon this evidence the trial court entered two findings of fact which relate to whether the husband intended a gift to the wife. First, the court found the method used to purchase the 320 acres was but a means of convenience to complete the purchase. Second, the court entered a finding that one-half [of the 320-acre tract] is community property and one-half the separate property of E. A. Cockerham. By entering these findings the court impliedly found that the presumption the husband intended a gift to the wife was sufficiently rebutted and that, in fact, there was no such intention. This finding must be upheld if it finds any support in the evidence. Langlotz v. Citizens Fidelity Insurance Company, 505 S.W.2d 249 (Tex. 1974); Butler v. Hanson, 455 S.W.2d 942 (Tex.1970). Considering the record before us, we are unable to say there is no evidence to uphold the implied finding of the trial court that E. A. Cockerham did not intend to make a gift to his wife. Since E. A. Cockerham adequately traced his prior separate interest in an undivided one-half of the 320-acre tract and sufficiently rebutted the presumption which arises from the fact that title was taken in the name of himself and his wife, a tenancy in common exists in the 320-acres tract between the undivided one-half separate property interest of E. A. Cockerham and the undivided one-half community property interest. Gleich v. Bongio, 128 Tex. 606, 99 S.W.2d 881 (1937). The Trustee's Claim Against the Community Property. As noted above, the community owned an undivided one-half interest in the 320-acre tract as tenant in common. In addition, the dairy business, which was purchased during marriage with community funds, is indisputedly community property. The trustee claims the community interest in the 320-acre tract and the community property dairy business is subject to the dress shop obligations, relying on Section 5.61, which is entitled Rules of Marital Property Liability and which provides: (a) A spouse's separate property is not subject to liabilities of the other spouse unless both spouses are liable by other rules of law. (b) Unless both spouses are liable by other rules of law, the community property subject to a spouse's sole management, control, and disposition is not subject to: (1) any liabilities that the other spouse incurred before marriage; or (2) any nontortious liabilities that the other spouse incurs during marriage. (c) The community property subject to a spouse's sole or joint management, control, and disposition is subject to the liabilities incurred by him or her before or during marriage. (d) All the community property is subject to tortious liability of either spouse incurred during marriage. The trustee argues, first, that the community property was subject to Joint management, control and disposition and is thus liable for the debts incurred by Dorothy Cockerham in the operation of the dress shop under Section 5.61(c). Alternatively, the trustee contends that even if the dairy business was under the sole management of the husband within Section 5.61(b) the debts incurred in the operation of the dress shop are joint liabilities of the husband and wife and thus the dairy business is not insulated from liability by Section 5.61(b)(2), which protects sole management property only from nontortious liabilities incurred by the other spouse. Thus the trustee argues the dairy business would be subject to these joint liabilities under Section 5.61(c), which provides that property subject to the sole management of a spouse is subject to liabilities incurred by that spouse. [4] The Community Property as Joint or Sole Management Property. Resolution of the issue of whether community property is joint or sole management property depends upon the construction and interpretation of Section 5.22, which pertains to the management of community property. At the time this case was tried that section read as follows: (a) During marriage, each spouse has the sole management, control, and disposition of the community property that he or she would have owned if single, including but not limited to: (1) personal earnings; (2) revenue from separate property; (3) recoveries for personal injuries; and (4) the increase and mutations of, and the revenue from, all property subject to his or her sole management, control, and disposition. (b) If community property subject to the sole management, control, and disposition of one spouse is mixed or combined with community property subject to the sole management, control, and disposition of the other spouse, then the mixed or combined community property is subject to the joint management, control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney or other agreement in writing. (c) Except as provided in Subsection (a) of this section, the community property is subject to the joint management, control, and disposition of the husband and wife, unless the spouses provide otherwise by power of attorney or other agreement in writing. [5] The court of civil appeals pointed out that the dairy business on the 320-acre tract was operated solely by E. A. Cockerham; that it was near but not contiguous to the homestead tract; that it was in possession and control of the husband; that the wife took no part in its operation. Thus, reasoned the court of civil appeals, the community property dairy business along with the undivided one-half community property interest in the 320 acres upon which the business was located was under the sole management of E. A. Cockerham within the meaning of Section 5.22(a). The trustee disputes this holding, contending the dairy business does not fit into any of the specifically enumerated classifications of sole management property listed in Section 5.22(a). Since Section 5.22(c) provides that all property except property included in Subsection (a) is joint management property, the trustee reasons the dairy business and the community tract are thus subject to the joint management of the husband and wife. With regard to the 320-acre tract, the record reveals E. A. Cockerham and his wife in effect borrowed the cash necessary to purchase the community interest by giving a note secured by a deed of trust on the property in return. Title to the property was taken in the name of both husband and wife; both husband and wife were obligated on the note. Under virtually identical circumstances these facts were considered sufficient to establish that the community interest was subject to the joint management of the husband and wife in Cooper v. Texas Gulf Industries, Inc., 513 S.W.2d 200 (Tex.1974). We therefore hold that the community interest in the undivided one-half of the 320-acre tract was subject to the joint management of E. A. Cockerham and his wife. Section 5.22(c). The situation with respect to the dairy business is somewhat more complicated. As has been noted, the dairy is located on the 320-acre tract, which is one-half separate property of the husband and one-half community property. The dairy was acquired during the marriage when the husband converted his cattle operation into a dairy business. Over the years the proceeds from the business were invested in additional machinery and equipment causing the business to increase in size and worth. It is asserted the proceeds from the dairy business are personal earnings of the husband within Section 5.22(a)(1); that these earnings alone have caused the dairy business to grow and thus the business is the increase and mutation of the husband's personal earnings and is under the sole management of the husband. Section 5.22(a)(4). We do not agree. The income from the dairy business was produced not only by the labor of the husband but also by the use of capital improvements which were community property and by the use of the land on which the business was located. Personal earnings, on the other hand, are earnings solely by physical or mental labor, unaided by capital, except insofar as may be necessary to supply the means of such labor as, for example, the ax of a woodcutter or the pen and paper of a writer. First Nat. Bank v. Davis, 5 S.W.2d 753 (Tex.Com.App.1928, holding approved); 1 Speer's Marital Rights in Texas § 421 at 625 (4th ed. 1961). We conclude the income produced by the dairy business was not personal earnings of the husband within Section 5.22(a)(1). The husband has not shown that this is property which he would have owned if single. Section 5.22(a). The use of community assets was an integral part of the dairy business. We therefore hold the dairy business was thus under the joint management, control and disposition of the husband and wife under Section 5.22(c). Since both the community interest in the 320-acre tract and the community dairy business were under the joint management of both E. A. Cockerham and his wife, they will be liable for the dress shop debts whether those debts are considered obligations of only the husband, of only the wife or joint obligations of both the husband and wife. Section 5.61(c). The Trustee's Claim Against the Husband's Separate Property. The trustee also seeks to hold the husband's separate property interest in an undivided one-half of the 320-acre tract liable for the dress shop debts. He argues that Section 5.61(a) does not insulate the husband's separate property from liability for the dress shop debts. He contends, first, that the dress shop debts are joint liabilities for which both spouses are liable. Alternatively, he claims that even if the dress shop debts are liabilities of the other spouse (wife) within Section 5.61, the husband is nevertheless also liable under other rules of law within the meaning of that statute. We sustain the trustee's first contention and thus find it unnecessary to consider his alternative argument. The Character of the Dress Shop Debts. In 1969 Dorothy Cockerham opened a dress shop in Hurst, Texas. The evidence is conflicting as to E. A. Cockerham's attitude toward this enterpriseshe claimed he urged her to open the shop; he claimed he opposed the move but realized that not allowing her to open the shop would cause a divorce. Notwithstanding his alleged opposition, however, the wife did, in fact, open the shop using approximately $4,000 which was advanced to her by the husband. Dorothy had financial difficulties from the beginning and in 1970 she moved the shop to Burleson, Texas in an attempt to improve sales. The business continued to flounder, however, and eventually resulted in bankruptcy. The debts asserted by the trustee represent, primarily, credit purchases of inventory for the store. E. A. Cockerham never took part in the conduct or operation of the dress shop and all purchases for the shop were made by Dorothy. The husband claims this fact alone establishes that the debts incurred were solely those of his wife. The fact of physical operation of a business, however, is not wholly determinative of the character, as sole or joint, of the debts incurred in its operation. This is especially true since both husband and wife now have full capacity to contract. Section 4.03. To determine whether a debt is only that of the contracting party or if it is instead that of both the husband and wife, it is necessary to examine the totality of the circumstances in which the debt arose. Of particular importance in the instant case is the consideration of implied assent to the debt by the noncontracting party, the husband. The debts in the instant case arose, of course, during marriage. It is well established that debts contracted during marriage are presumed to be on the credit of the community and thus are joint community obligations, unless it is shown the creditor agreed to look solely to the separate estate of the contracting spouse for satisfaction. Broussard v. Tian, 156 Tex. 371, 295 S.W.2d 405 (1956); Gleich v. Bongio, supra . There is no evidence the parties who extended Dorothy Cockerham credit agreed to look solely to her separate estate for satisfaction, and thus, there are no facts to rebut the presumption these debts are community liabilities. Though this would establish the community character of the debts, the fact that the debts are community liabilities would not, without more, necessarily lead to the conclusion they were joint liabilities. Characterization of the debts as community liabilities is only one aspect of the circumstances to be considered in determining whether the debts are joint. In the instant case the record is replete with factors which point to the conclusion that the dress shop debts were joint liabilities of both the husband and the wife. For example, it was the husband who advanced the wife the necessary capital to pay for the initial inventory of the store. In addition, it was the wife's practice, acquiesced in by her husband, to write checks for personal and family expenses on his personal checking account by signing his name rather than hers; this was done because the parties did not have a joint account. Their bank knew of this practice and honored the checks written by the wife on her husband's account. After the wife opened the dress shop she continued to write checks on her husband's account and often paid for merchandise for the store in this manner. The husband never forbade her to do so nor did he stop payment on any of the checks. On one occasion, as the business began to encounter difficulties, he borrowed $5,000 to pay off some of the dress shop debts because, in his words, ... I have always paid my debts. It is clear that he recognized these as his obligations. Though the husband now claims he did not authorize the dress shop liabilities, his actions were consistent with an implied assent to their establishment. In addition, there is some evidence of an expressed assent in that there was at least one instance in which he himself signed a check in the sum of $1,400 which was used to pay operational expenses of the dress shop. Moreover, the joint income tax returns of Dorothy and her husband for the years Dorothy had the dress shop reveal they took depreciation deductions on the dress shop equipment and wrote off substantial losses because of the dress shop operation. Because of this the Cockerhams paid very little, and in some years no, federal income tax even though the husband had a substantial income from his dairy business. In view of the record presented to this court, we hold the dress shop debts are joint liabilities of both the husband and the wife. Since they are not liabilities of the other spouse, Section 5.61(a) does not insulate the husband's separate property from liability for these debts. A joint liability is an obligation of both parties; the husband's separate property is therefore subject to the dress shop debts. See, e.g., 4 Corbin on Contracts § 928 (1951). The Trustee's Claim for Equality in Priority. The order of the trial court, which was affirmed by the court of civil appeals, provided that the community debts would be paid out of the community estate and that the balance of the community property would be divided equally between the husband and wife, except for the payment to the husband, out of the wife's share, of $9,658.57, representing his share of community property allegedly disposed of in fraud of his rights. The wife's bankruptcy debts were to be satisfied out of the wife's share of the community property after payment of the $9,658.57 to the husband. The trustee argues first that the courts below erred in allowing the community creditors to be satisfied out of the community property before the bankruptcy creditors. The trustee claims all of the unsecured creditors, including the bankruptcy creditors, had an equal right to be paid out of the community property. We have determined that the debts asserted by the bankruptcy creditors are joint liabilities of the husband and the wife; they therefore have an equal right to be paid out of the community property and also may be satisfied out of the separate property of the husband. The second argument of the trustee is that the courts below erred in subordinating the rights of the bankruptcy creditors to the claim of the husband against the wife. Any distribution of community property between the husband and wife, contends the trustee, must be done in subordination to the rights of creditors. See 3 Speer's Marital Rights in Texas § 840 (4th ed. 1961). We agree that the courts below erred in allowing the claim of the husband to be paid before the claim of the trustee. We reach this conclusion, however, upon a determination that the award to the husband was improper. As noted above, the trial court found that Dorothy Cockerham had fraudulently taken community property and made gifts to DeRay Houston. This finding was in disregard of the jury's refusal to find that Dorothy had made such fraudulent gifts. As recognized by the court of civil appeals, the testimony was sharply conflicting on this issue and there was certainly at least some evidence to support the jury's answer. The court of civil appeals, however, held that the trial court had the power to disregard the jury's answer because answers of the jury regarding disposition of property are advisory only. Though the trial court has wide discretion in dividing the property of the spouses as it feels just and in disregarding advisory answers of the jury, it may not ignore the jury's answers which extend to issues of fact from which the status of property is determined. Stafford v. Stafford, 41 Tex. 111 (1874); Rice v. Rice, 21 Tex. 58 (1858); Baker v. Baker, 104 S.W.2d 531 (Tex.Civ.App.San Antonio 1936, no writ). This is particularly true when the disposition of the property to the husband or wife is based solely on its status. In the instant case the award of part of the wife's share of community property to the husband was based only on the findings of the trial court that the property was property which had been fraudulently disposed of by the wife. This was directly related to the status of the property. The action of the trial court in disregarding the jury's answer regarding the status of the property was error. There was no basis for the award to the husband.