Filed 10/30/19

CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

In re the Marriage of ROSALINDA and

GEORGE DELUCA.

D071379

ROSALINDA DELUCA,

Appellant, (Super. Ct. No. D533280)

v.

GEORGE DELUCA,

Appellant.

APPEALS from a judgment of the Superior Court of San Diego County, Lisa C.

Schall, Judge. Affirmed in part, reversed in part, and remanded with directions.

Higgs, Fletcher & Mack, John Morris and Rachel E. Moffitt for Appellant

Rosalinda Deluca.

Stephen W. Hogan for Appellant George Deluca.

In this marital dissolution action between Rosalinda Deluca and George Deluca,

both parties appeal from a judgment determining the division of property and other matters, including spousal support.1 During the marriage, George's sister transferred to

him title to an apartment complex referred to in this case as the Florida Street property.

Rosalinda contends the trial court erred in ruling the Florida Street property was George's

separate property rather than community property. George has custody of the parties' two

children and contends the court erred by awarding Rosalinda spousal support in an

amount greater than his total net income available to support the children. Specifically,

he asserts the court erred by including the amount of monthly loan principal payments he

is required to make on his income-producing properties as income available for spousal

support.

We reverse the portion of the judgment awarding the Florida Street property to

George as his separate property and remand with directions to characterize that property

as community property and determine the amount of reimbursement to which George is

entitled for his separate property contributions to the acquisition of the property under

Family Code section 2640.2 We also reverse the spousal support award and direct the

trial court to reconsider spousal support after determining the extent to which George's

loan principal payments reasonably and legitimately reduce his income for purposes of

support. We otherwise affirm the judgment.

1 As is customary in family law cases, we will refer to the parties by their first names for convenience and clarity, intending no disrespect.

2 All subsequent statutory references are to the Family Code unless otherwise specified.

2

FACTUAL AND PROCEDURAL BACKGROUND

A. Background Facts

George and Rosalinda were married on September 7, 1996, and separated 15 years

and two months later, on November 21, 2011. They had two children during the

marriage—one born in 1998, and the other in 2003. At the time judgment was entered,

George had sole physical custody of the children.3

Before and during the marriage, George owned and operated an insurance agency.

He also owned and managed several income-producing rental properties that the court

found to be his separate property. Rosalinda has a bachelor's degree in political science

and a paralegal certificate. She worked as a legal secretary for over 26 years, including

throughout the marriage.

B. The Deluca Properties Trust Litigation

Before George's father died in 1990, he acquired multiple parcels of real property

that he held in various trusts, including the Deluca Properties Trust that contained the

Florida Street property. George, his brother Sylvester, and his sister Rosalie were the

beneficiaries of the Deluca Properties Trust. After their father's death, disputes over his

trusts led to four and one-half years of litigation between George and his siblings.

On October 25, 1996, just after George married Rosalinda, the three siblings

entered into a written agreement (the settlement agreement) to resolve their litigation over

the family properties. The settlement agreement noted the existence of "claims, demands

3 The parties' oldest child turned 18 years old and was emancipated in July 2016.

3 and differences" between the parties relating to the ownership and management of the

subject properties and the administration of the Deluca Properties Trust, and stated the

parties had "settled all of these claims, demands, differences and disputes . . . ."

Under the settlement agreement, George received title to three properties: (1) a

commercial property in Santee (referred to as the Santee Property); (2) a commercial

property in Encinitas (referred to as the Encinitas Property); and (3) a commercial

property on Orange Avenue in San Diego (referred to as the Orange Property). Rosalie

received title to the Florida Street property and a promissory note from George in the

amount of $75,000. The note was to be secured by a first priority deed of trust

encumbering the Orange Property. Sylvester agreed to forgive an outstanding debt

Rosalie owed him in the amount of $32,000. Sylvester received title to a property on

West Palm Street in San Diego and a promissory note from George in the amount of

$250,000. The note was to be secured by a third priority deed of trust encumbering both

the Santee Property and the Encinitas Property.

The settlement agreement provided that "[i]n exchange for receiving the Santee,

Encinitas and Orange Properties, GEORGE relinquishes his right to receive or claim an

interest in any of the assets of the [Deluca Properties] Trust, and expressly agrees that he

is no longer a beneficiary of the Trust[,]" and that "all assets of the Trust belong solely to

ROSALIE and SYLVESTER . . . ." The settlement agreement also provided: "This

agreement may be amended only by a written agreement executed by all the Parties."

4 C. George's Later Acquisition of the Florida Street Property

At trial, George testified that Rosalie never wanted the Florida Street property. So

in September 1997, roughly one year after the original settlement agreement, George and

Rosalie signed another agreement under which Rosalie transferred title to the Florida

Street property to George. This second agreement, labeled "AMENDMENT TO

SETTLEMENT AGREEMENT AND MUTUAL RELEASE," states that it amends "that

Agreement of Settlement and Mutual Release . . . executed October 25, 1996, by and

between Rosalie . . . George . . . and Silvester [sic]. . . . This amendment does not in any

way [affect] the terms of the original settlement with respect to George . . . and

Silvester . . . or as between Rosalie . . . and Silvester . . . , and makes no other changes or

modification, other than those set forth herein."

The "amendment" to the settlement agreement provided that Rosalie would

transfer the Florida Street property to George by grant deed, and George would execute a

promissory note to Rosalie in the amount of $164,700, secured by the Florida Street

property. George would "have the option to assume the first deed of trust on [the]

property, in the approximate amount of $235,300 or continue making the monthly

payments on [the] first deed of trust." George would also pay $20,000 in cash to Rosalie

at the close of escrow. Thus, what George referred to at trial as the "transfer price" of the

Florida Street property was $420,000 ($164,700 + $235,300 + $20,000), which was the

value of the property when it was appraised in 1995, in connection with the original

settlement agreement.

5 The amendment to the settlement agreement stated: "It is expressly agreed

between the Parties that this exchange and transfer of ownership to the Florida Street

property is an extension of and modification of the Parties' original settlement

agreement . . . , and the Parties' express intent herein is to redistribute trust assets." It also

stated: "Except as expressly stated herein, all other terms and provisions of the original

settlement agreement remain in full force and effect, without modification or change."

George and Rosalie signed the amendment; Sylvester did not sign it.

At trial, George testified that he had many conversations with Rosalinda about the

Deluca properties and that as "my fiancée, my wife, my confidant, [Rosalinda] was aware

of everything that was happening in the litigation [with his siblings] so I'm sure she had a

chance to see [the settlement agreement] numerous times if she wanted to or she glanced

at it. It was available for her." He also testified that he provided Rosalinda a copy of the

trust that was the subject of the litigation.

George testified that he told Rosalinda his sister was transferring the Florida Street

property to him and the property was his inheritance. He explained that the Florida Street

property had been part of his family trust, his parents had built the apartment building on

the property, and it was to remain his separate property. He gave Rosalinda a copy of the

amendment to the settlement agreement before the close of escrow on Rosalie's transfer

of the Florida Street property to him, and he discussed the terms of the amendment with

her. When asked if Rosalinda "[made] any reply" to him about the terms of the

amendment, George testified, "She thought it was good."

6 At George's request in January 1998, Rosalinda signed a quitclaim deed

transferring any interest she had in the Florida Street property to George as his sole and

separate property. When George refinanced the property in 2002, Rosalinda signed a

"SPOUSAL ACKNOWLEDGEMENT" document stating that she claimed no ownership

rights in the Florida Street property.

Rosalinda testified at trial that when she and George were dating, he told her that

he was involved in litigation with his brother regarding the "trust for his inheritance," but

he did not tell her any details about his claims. He never provided her with a copy of any

of the family trusts, and he never discussed the details of the terms of the settlement

agreement between him and his siblings or the amendment to the settlement agreement

before or during the marriage. The first time she saw the settlement agreement and the

amendment to the settlement agreement was during the divorce proceedings, and George

did not tell her anything about terms of the amendment to the settlement agreement when

he asked her to sign the quitclaim deed to the Florida Street property. He told her the

Florida Street property was part of his inheritance and his sister was going to transfer it to

him as part of the inheritance because she was unable to manage the apartments. He

explained that his lender needed the quitclaim deed "to get everything through." She did

not seek legal advice before signing the quitclaim deed because she trusted her husband

and "just signed it."

Rosalinda's counsel argued at trial that the Florida Street property should be

divided as community property because George purchased it from his sister during the

marriage with community funds. Counsel further argued that George induced Rosalinda

7 to sign the quitclaim deed to the Florida Street property by undue influence in breach of

the fiduciary duty he owed her because she did not sign the quitclaim deed with full

knowledge of the material facts, her signing it unfairly advantaged George, she waived a

valuable right by signing it, and she received no consideration for signing it.

George's counsel argued that Rosalinda knew she had no interest in the Florida

Street property, knew it was part of George's inheritance, and knew the effect of the

quitclaim deed—i.e., she knew that if she had any interest in the property, she was

transmuting it. He argued that the presumption of undue influence had been rebutted by

evidence that Rosalinda "knew at all times that these properties were being handed down

through the family. Even if he had to make a payment to his siblings, the payment was

supported by the loans on the commercial properties and the loans on the commercial

properties were supported by the commercial properties themselves . . . ."

D. Statement of Decision and Judgment

1. Character of the Florida Street property

In its "Final Statement of Decision and Judgment," the trial court ruled that the

Santee Property, the Encinitas Property, and the Orange Property were George's separate

properties under section 770 "in that they were received through inheritance and

devise."4 The court relied on the fact that George acquired the properties through the

4 Section 770, subdivision (a) provides: "(a) Separate property of a married person includes all of the following: [¶] (1) All property owned by the person before marriage. [¶] (2) All property acquired by the person after marriage by gift, bequest, devise, or descent. [¶] (3) The rents, issues, and profits of the property described in this section."

8 settlement agreement between him and his siblings, which was reached before the

marriage but executed two months after the marriage. It found that all of the properties at

issue in the litigation between George and his siblings were "a direct result of an

inheritance received and an agreement devising the real properties at issue."

Regarding the Florida Street property, the court determined that George "met his

burden of proof to establish that the real property is his separate property . . . in that it

was received through inheritance and devise." His acquisition of the Florida Street

property was "memorialized" by the amendment to the settlement agreement, which

"provided for the same value of the property that existed at the time of the original

Settlement Agreement and Mutual Release . . . ." Rosalinda, in turn, "freely and

voluntarily executed a Quit Claim Deed at the time of the transfer of the property to

[George]." She testified that she read the quitclaim deed before she signed it and that

George did not threaten her to make her sign it. When George refinanced the property in

2002, Rosalinda "executed a spousal acknowledgement indicating that she claimed no

ownership interest in the property . . . ." Noting that the Florida Street property was

solely in George's name during the marriage, the court found that "[t]he community did

not acquire an interest in the property by way of pay down of principal (as established

through the tracing report of [George's expert witness, accountant Anna Addleman])."

The court ruled that George met his burden of proof by substantial evidence to

overcome any presumption of undue influence and unfair advantage in his relationship

with Rosalinda, and that Rosalinda did not present sufficient evidence to support a

finding of constructive fraud. Based on findings that Rosalinda had access to legal

9 advice because she worked in a law firm, and that George discussed the amendment to

the settlement agreement with her and informed her that his sister would transfer the

Florida Street property to him under the agreement, the court concluded Rosalinda

executed the quitclaim deed and spousal acknowledgment regarding the Florida Street

property "freely and voluntarily, and with full knowledge of all the facts, and with

understanding of the effect of the transfers."

The court found that Addleman's tracing report accurately traced the payments on

the Florida Street property, reflecting that $974 of community funds were used to pay

down the principal on the property, and that "the indirect tracing (Recapitulation/Family

Expense) by Ms. Addleman [was] accurate and properly provide[d] for tracing of

separate property. (See findings in (b) above)."5 Observing that the loans against the

property were solely in George's name, the court found "the lender relied upon the

rent/profitability of the property itself to underwrite the loan . . . ."

5 The "findings in (b) above" were the court's findings regarding the Santee, Encinitas, and Orange properties. In that section of its statement of decision and judgment, the court explained indirect tracing as follows: "Payments may be traced to a separate property source based upon a showing that the community income throughout the marriage was exhausted by family expenses, such that any sums devoted to separate property were necessarily separate in origin. This method is called the 'Recapitulation' or 'Family Expense' method. 'Under the "family living expense" or "recapitulation" method, it is assumed that family living expenses are paid out of community property funds. [Citations.] Payments may be traced to a separate property source by showing community income at the time of the payments or purchase was exhausted by family expense, so that the payments or purchase necessarily must have been made with separate property funds.' " (In re Marriage of Braud (1996) 45 Cal.App.4th 797, 823 (Braud).)

10 2. Income available for support

The court noted that George had self-employment income from his insurance

agency and rental income from his real property. It found George's monthly self-

employment income was $7,281, based on the "competing testimony" of George's expert

witness Addleman, and Rosalinda's expert witness, accountant Karen Kaseno.

According to Addleman's report, George's monthly average income was $25,332

before principal payments on the loans against his commercial and residential properties.

The court noted that Kaseno had testified it would not be appropriate to reduce George's

income available for support by the amount of his principal payments on his separate

property,6 and that Addleman's position was that if the court "set support without

consideration for the principal payments [George] would ultimately be unable to pay for

the real properties he needs to generate income and he would lose the properties

themselves." It concluded Addleman's reasoning was "flawed[,]" stating: "Payments

made to solely benefit the separate property of [George] cannot operate to reduce his

income available for support. If that were the case then any party could divert income to

the benefit of their separate property at the exclusion of being considered income

available for support." The court added that "[n]either party provided the Court with any

6 Rosalinda's expert Kaseno testified that she disagreed with Addleman's subtracting George's loan principal payments from his income available for support. She explained, "Payments of principal [are] not normally deducted from a party's income available for support. When you're paying off your principal, you're basically increasing your net worth. You are paying money that is paid down on your debt obligation. It's not an expense, an accounting term, and it's basically increasing your net worth."

11 case authority addressing this issue." Based on Addleman's report, it found George's

combined self-employment income and separate property rental income available for

support was $25,332. The court imputed annual income of $60,000 to Rosalinda ($5,000

per month) based on her earning capacity.

The court found that during the marriage the parties enjoyed an upper middle class

lifestyle, which "was in large part supplemented by the separate property income of

[George]." Rosalinda "had been living rent free for approximately the last three years[,]"

and George had been "living in a 2 million dollar plus residence in Point Loma." During

the marriage, the parties traveled to Europe each year, which "in large part was supported

by the separate property residence that [George] inherited from his mother." The court

noted that Rosalinda had been able to put money into a profit-sharing plan and a 401(k)

account when she was employed, the parties drove older vehicles, and the minor children

were enrolled in private schools.

The court ordered George to pay spousal support of $7,500 per month. The court

explained that although Rosalinda had made minimal efforts to become self-supporting

and had the ability to earn $60,000 per year, George's total income was $25,332 per

month and he lived with the children in a home valued in excess of $2 million.

Rosalinda, on the other hand, "live[d] with her sister's extended family and no longer

[had] any of the [lifestyle] comforts she once shared with [George]."

We will include additional relevant facts in our discussion of the legal issues.

12

DISCUSSION

A. Characterization of the Florida Street Property

Rosalinda contends the trial court erred in ruling the Florida Street property was

George's separate property. She correctly notes the Florida Street property is presumed

to be community property because it was acquired during marriage, and asserts that no

exception to the community property presumption applies. She further maintains that her

signing a quitclaim deed stating the property was George's sole and separate property was

ineffective to transmute the property from community property to George's separate

property because George did not rebut the presumption of undue influence as to that

transaction. As we will explain, we agree with these contentions. We further conclude

that George's tracing evidence was insufficient to rebut the community property

presumption because it did not establish that George's payments for the Florida Street

property from the date he acquired it in 1997 to 2001 were solely from his separate

property funds.

Section 760 provides that "[e]xcept as otherwise provided by statute, all property,

real or personal, wherever situated, acquired by a married person during the marriage

while domiciled in this state is community property." Commenting on this general rule,

the court in In re Marriage of Haines (1995) 33 Cal.App.4th 277 explained: "A basic

rule of a community property system is that all property acquired during marriage is

community property unless it comes within a specific exception; the major exceptions to

the basic community property rule are those relating to separate property. [Citation.]

Thus, there is a general presumption that property acquired during marriage by either

13 spouse other than by gift or inheritance is community property unless traceable to a

separate property source. [Citations.] This is a rebuttable presumption affecting the

burden of proof; hence it can be overcome by the party contesting community property

status. [Citation.] Since this general community property presumption is not a title

presumption, virtually any credible evidence may be used to overcome it, including

tracing the asset to a separate property source, showing an agreement or clear

understanding between parties regarding ownership status and presenting evidence the

item was acquired as a gift." (Id. at pp. 289-290, fn. omitted.) " 'The status of property

as community or separate is normally determined at the time of its acquisition.' " (In re

Marriage of Buol (1985) 39 Cal.3d 751, 757, quoting In re Marriage of Bouquet (1976)

16 Cal.3d 583, 591.)

In general, "factual findings that underpin the trial court's characterization of

property as separate or community property are reviewed for substantial evidence."

(In re Marriage of Rossin (2009) 172 Cal.App.4th 725, 734.) However, de novo review

is appropriate where " 'the determination in question amounts to the resolution of a mixed

question of law and fact that is predominantly one of law.' " (Ibid.)

1. George did not acquire the Florida Street property by inheritance or devise.

George starts by contending substantial evidence supports the court's finding that

he acquired the Florida Street property "through inheritance and devise." He maintains

the settlement agreement between him and his siblings established their respective

inheritances of the various family properties, including the Florida Street property, and

asserts he acquired the Florida Street property through the "amendment" of that

14 agreement. Essentially, George argues that the purported amendment to the settlement

agreement operated as an instrument of devise that changed the Florida Street property

from his sister's inherited property to his inherited property. We conclude otherwise,

holding that, as a matter of law, the amendment to the settlement agreement was a

contract by which George purchased the Florida Street property from his sister.

Accordingly, George did not acquire the Florida Street property through inheritance or

devise; he acquired it by purchase during marriage.

As previously noted, the settlement agreement between George and his siblings

provided that "[i]n exchange for receiving the Santee, Encinitas and Orange Properties,

GEORGE relinquishes his right to receive or claim an interest in any of the assets of the

[Deluca Properties] Trust, and expressly agrees that he is no longer a beneficiary of the

Trust." (Italics added.) The italicized language establishes that George's "inheritance" as

a trust beneficiary was fully and finally established by the settlement agreement and there

was no additional property he stood to acquire by "inheritance or devise" after the

agreement's execution and performance. George acknowledged that fact at trial when he

testified, in response to questioning by the court, that as of November 7, 1996 (the date a

grant deed was recorded showing title to the Florida Street property in the name of

George's sister Rosalie), the Florida Street property "was no longer part of any

inheritance that [he] had a legitimate right to . . . ."

Thus, Rosalie was the sole owner of the Florida Street property before George

acquired it from her. Being the property's sole owner, Rosalie was the only person who

could have transferred the Florida Street property to George or anyone else in 1997. The

15 written agreement (amendment to the settlement agreement) by which George acquired

the property from Rosalie was not a transfer of property by gift, bequest, devise, or

inheritance.

Black's Law Dictionary defines "inheritance" as "[p]roperty received from an

ancestor under the laws of intestacy" or "[p]roperty that a person receives by bequest or

devise." (Black's Law Dictionary (10th ed. 2014) p. 903, col. 1.) The definition of

"bequest" is "[t]he act of giving property . . . by will" or "[t]he money or other property

that a person arranges to give to someone or an organization upon death; esp.,

property . . . disposed of in a will." (Id. at p. 189, col. 2.) The four definitions of

"devise" are: "1. The act of giving property by will. . . . 2. The provision in a will

containing such a gift. 3. Property disposed of in a will. 4. A will disposing of property."

(Id. at p. 547, cols. 1-2.) The definition of "descent" is "[t]he acquisition of real property

by law, as by inheritance; the passing of intestate real property to heirs." (Id. at p. 539,

col. 1.)

The agreement by which Rosalie transferred the Florida Street property to George

does not fall within any of these definitions. George did not receive the property under

the laws of intestacy, by will or trust, or as a direct consequence of any person's death;

accordingly, he did not acquire it by inheritance or by "bequest, devise or descent" within

the meaning of section 770. George received the property under an agreement with

Rosalie by which she deeded the property to him in exchange for valuable consideration

16 in the form of cash, a promissory note, and George's assumption of the obligation to pay

off the existing loan on the property.7

In short, George purchased the Florida Street property from his sister. The

transaction falls squarely within Black's Law Dictionary's definition of "contract for

sale," which is: "A contract for the present transfer of property for a price." (Black's

Law Dictionary (10th ed. 2014), p. 392, col. 1.) Because uncontroverted evidence shows

that George acquired the Florida Street property through a purchase-sale contract, the

trial court erred in finding that the community property presumption was rebutted by

evidence that he acquired the property "through inheritance and devise."8

Even if the settlement agreement could have been amended one year later in a way

that effectively changed the siblings' inheritances, the amendment that George and

Rosalie executed was ineffective to do so because it was not signed by Sylvester, as the

settlement agreement expressly required. Although the absence of Sylvester's signature

on the amendment does not invalidate it as a purchase contract between George and

Rosalie, it does render it invalid as an amendment of the original settlement agreement.

7 " 'A valuable consideration means a pecuniary consideration.' " (Morse v. Wright (1882) 60 Cal. 260.)

8 George inadvertently acknowledged that he purchased the Florida Street property in the following exchange with the court during his trial testimony. The court asked George, "You had a conversation with [Rosalie] and she gave you an impression she was kind of forced into taking the Florida property. Is that what I'm hearing?" George replied, "Yes." The court asked, "You had a conversation with her. She said she didn't want it and she offered what, for you to buy it?" (Italics added.) George answered, "Yes, to amend the original settlement agreement and transfer it into my name."

17 Consequently, the amendment could not operate to change any of the three siblings'

respective inheritances established by the original settlement agreement.

2. The "inception of title" theory does not apply.

George also argues that the Florida Street property is his separate property under

the equitable theory of inception of title, citing In re Marriage of Joaquin (1987) 193

Cal.App.3d 1529 (Joaquin). The Joaquin court explained that under the inception of title

theory, the status of property as separate or community property "depends upon the

existence or nonexistence of the marriage at the time of the incipiency of the right by

virtue of which the title is finally extended and perfected; the title when so extended and

perfected relates back to that time." (Id. at p. 1533.) In other words, the character of a

property as separate or community depends on when the equitable right to the property

was acquired—i.e., whether the spouse who acquired the property was single or married

at the time of the inception of his or her equitable right to the property. "Under this rule,

property to which one spouse has acquired an equitable right before marriage is separate

property, though such right is not perfected until after marriage . . . ." (Ibid.) Thus,

property that a spouse purchased before marriage subject to a condition precedent

remains the spouse's separate property even though satisfaction of the condition resulting

in the spouse's acquisition or perfection of legal title occurs during marriage. (Ibid.) The

Joaquin court applied "principles respecting lease renewals/extensions/options, and

inception of title" (Id. at p. 1534), to conclude that where the husband in that case

acquired a leasehold with an option to renew the lease before marriage, remained in

continuous possession of the leasehold, and exercised his option to renew the leasehold

18 during marriage, the renewed leasehold remained his separate property because "once

exercised, the option . . . transfer[s] an equitable interest in the land relating back to the

time the option was given." (Id. at p. 1533.)

George contends, in his words, that he "acquired an equitable interest in all the

properties that he and his siblings inherited when their father died before this marriage."

He reasons that because he had some undetermined interest in and, therefore, an equitable

right to all of the family trust assets before marriage, his acquisition of the Florida Street

property from his sister in 1997 simply perfected his preexisting equitable right.

Accordingly, he claims, the trial court "achieved equity by characterizing the Florida

Street property as his separate property."

George's inception of title argument is unpersuasive. Although he had some

undetermined interest in some undetermined portion of the family trust assets before the

marriage and before he entered into the settlement agreement that fixed his interest, there

was no evidence that, before the marriage, he had an unperfected equitable right to

acquire the Florida Street property in particular as its sole owner under some condition

precedent that would later mature into full legal title. The inception of George's title to

the Florida Street property did not occur until he and Rosalie executed the "amendment"

to the settlement agreement effecting his purchase of the property from her. There was

no evidence of an inception of unperfected equitable title to the Florida Street property

solely in George's name before marriage. Accordingly, there was no equitable basis to

characterize the Florida Street property as George's separate property despite his

acquisition of the property during marriage.

19 3. George's tracing evidence was insufficient to show he acquired the Florida Street property solely with separate property funds.

George additionally contends that substantial evidence supports the court's

characterization of the Florida Street property as his separate property because his expert,

Anna Addleman, accurately traced the Florida Street property to George's separate funds.

Addleman concluded that in 15 years, George applied only $974 of community funds to

the Florida Street property. We conclude, however, that this tracing evidence does not

rebut the presumption that the Florida Street property was community property when

George acquired it because Addleman was unable to sufficiently establish the source of

funds paid on the property from the time George acquired it in 1997 through 2000.

Property acquired during marriage can be shown to be separate property by two

different tracing methods—direct tracing and indirect tracing. The focus of George's

argument here is indirect tracing, which "involves a consideration of family expenses.

It is based upon the presumption that family expenses are paid from community funds.

[Citations.] If at the time of the acquisition of the property in dispute, it can be shown

that all community income in the commingled account has been exhausted by family

expenses, then all funds remaining in the account at the time the property was purchased

were necessarily separate funds." (In re Marriage of Mix (1975) 14 Cal.3d 604, 612.)

Indirect tracing by this "family living expense" or "recapitulation" method allows

the tracing of payments "to a separate property source by showing community income at

the time of the payments or purchase was exhausted by family expense, so that the

payments or purchase necessarily must have been made with separate property funds.

20 [Citations.] The recapitulation must be sufficiently exhaustive to establish not only that

separate property funds were available to make the payments, but that they were actually

used. [Citation.] As with direct tracing, the record must demonstrate that community

income was depleted at the time the particular asset was acquired." (Braud, supra, 45

Cal.App.4th at pp. 823-824, italics added.) "If funds used for acquisitions during

marriage cannot otherwise be traced to their source and the [party] who has commingled

property is unable to establish that there was a deficit in the community accounts when

the assets were purchased, the presumption controls that property acquired by purchase

during marriage is community property." (See v. See (1966) 64 Cal.2d 778, 784.)

Thus, to establish through indirect tracing that the Florida Street property was

acquired solely with his separate property funds, George had to show that his $20,000

payment to his sister Rosalie when he acquired the property from her in 1997 and his

subsequent payments on the property were necessarily made with his separate property

funds because at the time he made them, all community income was exhausted by family

expenses. To make that showing, George relied on Addleman's written report and

testimony regarding her separate property tracing. Addleman reported that she performed

direct tracing by reviewing "various bank statements from approximately December 2000

through the date of separation" She performed indirect tracing based on her "review of

the parties' personal tax returns and [George's] Union Bank of California account ending

#9724 . . . to determine the character of funds used for transactions related to various

residential and commercial properties inherited and owned by [George]."

21 As noted, George acquired the Florida Street property from Rosalie in 1997.

Addleman conceded that for the period from 1996 through 2000, she lacked the

documentation regarding the parties' community expenses and income that she used to

perform tracing for the period of 2001 to the date of separation in 2011. She stated in her

written report: "Account statements were not received prior to 2001; therefore, we

reviewed the income reported on the parties' personal tax returns [for that period]. For

2001 through 2011, we analyzed the available community income from Farmers and

community expenses included in [George's] Union Bank account." [¶] The parties

reported income from various sources on the personal tax returns from 1996 through

2000. (Italics added.) She further stated: "At this time, documentation has not been

received to determine the community living expenses during 1996 through 2000. As

detailed above [in a breakdown of total annual income for the years 1996 through 2000],

minimal income was available to support the family's lifestyle." (Italics added.)

She summarized her indirect tracing as follows: "The indirect tracing concluded

the parties had minimal income available from 1996 through 2000 for payment of

community living expenses and that from 2001 through 2011, community expenses

exceeded Mr. DeLuca's community income. Therefore, there were no community funds

available to acquire a community interest in the real estate owned by [George]."

At trial, Addleman testified that she performed indirect tracing for two different

time periods: 1996 through 2000 and 2001 through 2011. She explained: "The first

time period I did not have bank statements so to prepare that indirect tracing I just relied

on the personal tax returns to review what community income would have been available

22 for community expenses. [¶] Based on my review of those tax returns, I found that there

was minimal community income available. Per my Exhibit K, which was provided at my

deposition, I determined that approximately $86,549 could have been deposited into the

Union Bank No. 9724 account that was used to pay the separate [sic] property

expenses.[9] [¶] Based on my understanding of the [parties'] lifestyle to meet that

income amount over a four year period was minimal that could have been available for

separate [sic] property expenses."10 She later added: "I just reviewed the personal tax

returns [for 1996 through 2000] and looked at the income that was reported by both

parties. I then understood that Ms. Deluca's income would be reported under the wages

9 Read in context, it appears Addleman meant to say that Union Bank account No. 9724 was used to pay the community expenses. She earlier testified that community property income from George's insurance agency went into that account. Exhibit K, attached to Addleman's written report, sets forth the parties' income from various sources and total annual income reported on their joint tax returns for 1996 through 2000 as follows: $53,398 (1996), $70,422 (1997), $86,963 (1998), $34,332 (1999), and $51,997 (2000.) It is unclear how Addleman determined from these amounts that the parties could have deposited only $86,549 over a four-year period to pay community expenses.

10 Although this sentence makes little sense structurally, presumably Addleman meant to say that the Union Bank account was used to pay the community property expenses and that over a four-year period, the amount of the parties' community income available to pay community property expenses was minimal.

23 [subtotal] for the tax returns and Mr. Deluca's income would be community

income . . . reported under the Schedule C income for his Farmers Insurance business."11

Addleman's tracing evidence is insufficient to rebut the community property

presumption as to the Florida Street property because it fails to establish that the source

of funds paid on the property from the time George acquired it in 1997 through 2000 was

necessarily George's separate property. The only documents Addleman reviewed for the

period of 1996 through 2000 were tax returns to ascertain community income. She noted

in her report that she lacked documentation "to determine the community living expenses

during 1996 through 2000." Based on George and Rosalinda's tax returns and her

"understanding of [their] lifestyle," Addleman surmised that community expenses

exceeded community income, stating "minimal income was available to support the

family's lifestyle."

The income information on the parties' tax returns alone is insufficient to

determine whether at the specific times that George acquired the Florida Street property

11 Addleman explained her indirect tracing for the period 2001 through 2011 as follows: "I reviewed the Farmers Insurance Group bank statements which was where all of the community income from George Deluca's Farmers Insurance business had been and I quantified the total amount of deposits that were deposited into the Union Bank account. [¶] Based on my, I believe Exhibit L, I quantified total deposits from 2001 through 2011 of $987,890 community deposits from Farmers Insurance Group. Based on my review of the bank statements, I went through and quantified all community expenses during that time period from 2001 through 2011 and determined that community expenses totaled $1,564,651. Therefore, the community expenses far exceeded the available community income of approximately $1 million. Based on that analysis, there would have been no community funds available to be used towards Mr. George Deluca's separate property."

24 in 1997 and made payments on the property through the year 2000, community income

was exhausted by family expenses such that the initial $20,000 cash payment and

subsequent loan payments on the property were necessarily made with George's separate

property funds. Addleman's summary of her indirect tracing in her written report is

telling. As noted, her report states: "The indirect tracing concluded the parties had

minimal income available from 1996 through 2000 for payment of community living

expenses and that from 2001 through 2011, community expenses exceeded Mr. DeLuca's

community income." (Italics added.) Thus, in the same sentence Addleman expressly

concluded that community expenses exceeded community income—the required

finding—from 2001 through 2011, but merely suggested the same was true for 1996

through 2000. This discrepancy between Addleman's indirect tracing for the two time

periods resulted from her lack of documentation of the parties' community expenses for

the period of 1996 through 2000.12

12 Rosalinda's expert Kaseno identified the flaw in Addleman's indirect tracing analysis, noting that she "did not do an analysis of living expenses of the parties during [1996 through 2000,] which is a crucial component of an indirect tracing." Kaseno observed that Addleman "attempted to use the data that she obtained by doing the work in 2001 through 2011 to say what expenses might have been during the 1996 through 2000 time period, but without doing a full analysis, you don't know what those expenses were. It's speculative." When asked whether it was important to analyze "community expenses based on their records" in doing indirect tracing, Kaseno answered, "Yes. To my understanding of an indirect tracing, that's the whole reason you do it, to show that there was a certain amount of community income and that all of that community income was exhausted. If you don't do a complete and accurate analysis of the actual expenses during that time period, you don't know for sure if that community income was exhausted."

25 Addleman's surmise that the parties during a particular time period had "minimal"

income available for community expenses falls short of the required showing that a

particular payment for acquisition of a property or payment on a loan against the property

was necessarily made with separate property funds. As noted, to rebut the community

property presumption by indirect tracing, the record must show that community income

was depleted when the asset in question was acquired, and that separate property funds

were actually used to make payments on the asset. (Braud, supra, 45 Cal.App.4th at

pp. 823-824.) Addleman's opinion that community income between 1996 and 2001 was

"minimal" is insufficient to satisfy George's burden of showing that when he paid the

$20,000 to his sister for the property and that when he made payments on the property

between 1997 and 2001, all community income was exhausted by family expenses.13

13 George testified that his $20,000 cash payment to Rosalie came from a Union Bank account that was solely in his name prior to his opening the Union Bank account numbered 9724, into which community funds were deposited. However, George's testimony does not establish that all the funds in that account were separate property funds when he made that payment to Rosalie. The fact that an account was solely in his name does not establish that funds deposited in the account during the marriage were separate rather than community funds.

26 4. Rosalinda's signing the quitclaim deed and spousal acknowledgement regarding the Florida Street property did not transmute the property to George's separate property.

On appeal, George contends that Rosalinda agreed the Florida Street property

would be George's separate property by signing the quitclaim deed and spousal

acknowledgement regarding the property. He claims substantial evidence supports the

court's finding that Rosalinda executed the quitclaim deed and spousal acknowledgment

"freely and voluntarily, and with full knowledge of all the facts, and with understanding

of the effect of the transfers."14 Rosalinda contends the court erred in making that

finding.

"In property-related transactions between spouses, . . . section 721, subdivision (b)

'imposes a duty of the highest good faith and fair dealing on each spouse . . . .' This duty

stems from the 'general rules governing fiduciary relationships which control the actions

of persons occupying confidential relations with each other,' prohibiting each spouse

from taking 'any unfair advantage of the other.' [Citation.] Thus, ' "[i]f one spouse

secures an advantage from the transaction, a statutory presumption arises under section

721 that the advantaged spouse exercised undue influence and the transaction will be set

aside." ' [Citation.] An advantage results to one spouse when that spouse gains or when

the other spouse is hurt by the transaction. [Citation.] A spouse obtains an advantage

14 George does not refer to Rosalinda's signing the quitclaim deed as a transmutation on appeal but, as noted, his counsel argued at trial that in signing the quitclaim deed, Rosalinda was "transmuting her interest." He also argued that in signing quitclaim deeds to various properties, Rosalinda "knew, if there were any interest, she was transmuting it, but she also knew she had no interest in those properties. None."

27 when the 'spouse's position is improved, he or she obtains a favorable opportunity, or

otherwise gains, benefits, or profits. [Citation.]' [Citation.] The presumption is

rebuttable; the spouse advantaged by the transaction must establish that the

disadvantaged spouse acted freely and voluntarily, with ' " ' "full knowledge of all the

facts, and with a complete understanding of the effect of" the transaction.' " ' " (Lintz v.

Lintz (2014) 222 Cal.App.4th 1346, 1353.)

Here, the statutory presumption of undue influence arises because Rosalinda's

signing the quitclaim deed and spousal acknowledgement regarding the Florida Street

property were transactions by which George sought to obtain an advantage. Specifically,

he sought to extinguish any community interest that his acquisition of the property may

have created and hold title as his sole and separate property. We conclude the evidence

does not support the court's finding that Rosalinda executed the quitclaim deed and

spousal acknowledgment with a complete understanding of the effect of those

transactions. Although there was evidence that George informed Rosalinda of the facts

and circumstances surrounding his acquisition of the Florida Street property from his

sister and that she knew the terms of the agreement by which George acquired the

property, it is undisputed that George told her the property was part of his inheritance,

and that he truly believed it was part of his inheritance when he acquired it and

throughout the marriage. Rosalinda's testimony that George told her his lender needed

the quitclaim deed "to get everything through" was uncontroverted, as was her testimony

that she did not seek legal advice before signing the quitclaim deed because she trusted

George and "just signed it."

28 Thus, the evidence showed Rosalinda signed the quitclaim deed and spousal

acknowledgement under a mistaken view of her rights and the legal effect of the

agreement, having accepted George's erroneous representation that the property was part

of his inheritance and therefore was his sole and separate property. There was no

evidence that she was aware the Florida Street property was presumptively community

property because George acquired it by purchase, or that she freely and voluntarily

intended to transmute any community interest in the property to George's sole and

separate property. Therefore, the trial court erred in finding George rebutted the

presumption that he exercised undue influence in obtaining Rosalinda's signature on the

quitclaim deed and spousal acknowledgment regarding the Florida Street property.

The quitclaim deed and spousal acknowledgement could not operate to transmute

Rosalinda's community property interest in the Florida Street property to George's

separate property because neither document satisfied the statutory requirements for a

transmutation. Under section 850, subdivision (a), "married persons may by agreement

or transfer, with or without consideration, . . . [¶] [t]ransmute community property to

separate property of either spouse." Section 852, subdivision (a), provides: "A

transmutation of real or personal property is not valid unless made in writing by an

express declaration that is made, joined in, consented to, or accepted by the spouse

whose interest in the property is adversely affected." (Italics added.)

"[A] writing satisfies the 'express declaration' requirement only if it states on its

face that a change in the character or ownership of the subject property is being made."

(In re Marriage of Benson (2005) 36 Cal.4th 1096, 1100, italics added.) "An 'express

29 declaration' does not require use of the terms 'transmutation,' 'community property,'

'separate property,' or a particular locution. [Citation.] . . . . [However, t]he express

declaration must unambiguously indicate a change in character or ownership of

property. [Citation.] A party does not 'slip into a transmutation by accident.' [Citation.]

[¶] In deciding whether a transmutation has occurred, we interpret the written

instruments independently, without resort to extrinsic evidence. [Citations.] . . . [W]e

are not bound by the interpretation given to the written instruments by the trial court."

(In re Marriage of Starkman (2005) 129 Cal.App.4th 659, 664.)

The quitclaim deed and spousal acknowledgement regarding the Florida Street

property do not satisfy the transmutation requirements of section 852 and related case law

because neither document contains language expressly stating that the characterization or

ownership of the Florida Street property was being changed from community property to

separate property. The quitclaim deed states, in relevant part that "for a valuable

consideration, receipt of which is hereby acknowledged, ROSALINDA DE LUCA,

spouse of [George does] hereby REMISE, RELEASE AND FOREVER QUITCLAIM to

GEORGE E. DE LUCA, a married man as his sole and separate property the [Florida

Street property.]" The spousal acknowledgement states, in relevant part: "[Rosalinda]

claims no ownership rights in the [Florida Street property.]" There is no express

reference in either document to a community property interest in the property or any

change in the character or ownership of the Florida Street property. Consequently,

neither document could effectively transmute Rosalinda's community property interest in

the Florida Street property.

30 The record contains no substantial evidence that Rosalinda intended a

transmutation of community property to separate property when she signed the quitclaim

deed and spousal acknowledgement regarding the Florida Street property.

Uncontroverted evidence showed that George believed the Florida Street property was

his separate property by inheritance, that Rosalinda accepted George's representations to

that effect, and that her understanding when she signed the quitclaim deed and spousal

acknowledgement was that she was merely signing documents required by a lender that

were not changing the character of the property. Rosalinda did not transmute her

community property interest in the Florida Street property to George's separate property

under section 852.

5. George is entitled to reimbursement under section 2640

Although George did not rebut the presumption that the Florida Street property is

community property, because there was substantial evidence that a substantial portion of

the payments on the property during marriage were made from George's separate

property funds, he is entitled to reimbursement of his separate property contributions

under section 2640.

Section 2640, subdivision (b) provides: "In the division of the community estate

under this division, unless a party has made a written waiver of the right to

reimbursement or has signed a writing that has the effect of a waiver, the party shall be

reimbursed for the party's contributions to the acquisition of property of the community

property estate to the extent the party traces the contributions to a separate property

source. The amount reimbursed shall be without interest or adjustment for change in

31 monetary values and may not exceed the net value of the property at the time of the

division." Section 2640, subdivision (a) provides: " 'Contributions to the acquisition of

property,' as used in this section, include downpayments, payments for improvements,

and payments that reduce the principal of a loan used to finance the purchase or

improvement of the property but do not include payments of interest on the loan or

payments made for maintenance, insurance, or taxation of the property."

"Under section 2640, [a party's] separate property contribution is reimbursed prior

to the division of community property. [Citations.] If there is insufficient equity at the

time of dissolution in the property to which the contribution was made to fully reimburse

the contribution, the entire asset is awarded to the contributing spouse." (In re Marriage

of Walrath (1998) 17 Cal.4th 907, 913 (Walrath).)15 Accordingly, we will remand for a

determination of the amount of reimbursement to which George is entitled for his

traceable separate property contributions to the Florida Street property. After George is

reimbursed for his separate property contributions to the property, the trial court will have

to determine the remaining community interest in the property and effectuate an equal

division of that interest.

15 "The effect of section 2640 was 'to overturn a long line of cases which had held that absent an agreement to the contrary, separate property contributions to the community were deemed to be gifts to the community.' " (Walrath, supra, 17 Cal.4th at p. 918.)

32 A. Spousal Support Award

George contends the court erred by failing to reduce his income available for

spousal support by the amount of monthly loan principal payments he is required to make

on his income-producing properties. He argues the court abused its discretion by

"imputing" the amount of his monthly loan payments to him as "phantom income" and

awarding Rosalinda monthly spousal support of $7,500, despite finding that the

maximum monthly income available to him to support the children after making his loan

payments was $7,281.

At trial, George's expert Addleman testified that she determined the amount of

George's income "less the principal payments" he made on the loans against his rental

properties because "[t]he loans had been in place as of the date of marriage and prior to

the date of separation . . . ." If George had taken out the loans after the date of separation,

she would not have considered them, but the loans were "part of the [parties'] marital

lifestyle, how they operated." She testified that George's principal payments should not

be included in his income available for support because "[George] generates earnings

from rental properties . . . . That income is generated because loan payments are made

and that loan is in good standing. Should that property or loan be not in good standing

there is potential that that property could . . . be lost and, therefore, not generate the rental

income that it is generating. [¶] In order for [George] to continue to earn this . . . money,

those loans need to be serviced and payments need to be made."

Rosalinda's expert Kaseno disagreed with Addleman's subtracting George's loan

principal payments from his income available for support. She explained, "Payments of

33 principal [are] not normally deducted from a party's income available for support. When

you're paying off your principal, you're basically increasing your net worth. You are

paying money that is paid down on your debt obligation. It's not an expense, an

accounting term, and it's basically increasing your net worth."16 The court rejected

Addleman and George's position and included George's principal payments in his income

available for support.

"Permanent spousal support 'is governed by the statutory scheme set forth in

sections 4300 through 4360. Section 4330 authorizes the trial court to order a party to

pay spousal support in an amount, and for a period of time, that the court determines is

just and reasonable, based on the standard of living established during the marriage,

taking into consideration the circumstances set forth in section 4320.' [Citations.] The

statutory factors include the supporting spouse's ability to pay; the needs of each spouse

16 Kaseno further testified that George had increased his mortgage payments shortly before the date of separation by refinancing certain properties, stating: "There were several refinances that took place shortly before separation that went from longer term loans down to 15 year loans or seven year loans and what this does is it increases the amount of principal that is paid down with each payment so it increases the payment and increases the amount that is being paid down on principal." Kaseno was specifically questioned about the portion of Addleman's written report/declaration stating that George paid $2,035,000 in cash to purchase the family residential property on San Fernando Street in San Diego, referred to as the "San Fernando property," and that $485,000 of the purchase price came from his refinancing the Encinitas property. When the court asked why it was "a problem" to deduct George's principal payments on the Encinitas property from his income available for support, Kaseno testified: "We're reducing someone's income available for support so they're going to have less money to pay support because they purchased their residence for cash. I just don't think that's what we do is deduct what we're paying down on a loan on another property to lessen our income that we have to pay support."

34 based on the marital standard of living; the obligations and assets of each spouse,

including separate property; and any other factors pertinent to a just and equitable award.

(§ 4320, subds. (c)-(e), (n).) 'The trial court has broad discretion in balancing the

applicable statutory factors and determining the appropriate weight to accord to each, but

it may not be arbitrary and must both recognize and apply each applicable factor.' " (In

re Marriage of Blazer (2009) 176 Cal.App.4th 1438, 1442-1443 (Blazer).) Failure to

consider each applicable factor is reversible error. (In re Marriage of Cheriton (2001) 92

Cal.App.4th 269, 304 (Cheriton).)17

"As a general rule, we review spousal support orders under the deferential abuse of

discretion standard. [Citation.] We examine the challenged order for legal and factual

support. 'As long as the court exercised its discretion along legal lines, its decision will

be affirmed on appeal if there is substantial evidence to support it.' [Citations.] 'To the

extent that a trial court's exercise of discretion is based on the facts of the case, it will be

17 George contends the trial court committed reversible error because it failed to consider the factor set forth in section 4320, subdivision (e), which is "[t]he obligations and assets, including the separate property, of each party." We agree. George correctly notes that the court's final statement of decision and judgment lists and addresses each of the factors set forth in section 4320, and after listing the subdivision (e) factor, states: "(See discussion below)[.]" However, the remainder of the judgment/statement of decision does not address the "obligations and assets" factor, which is particularly important in this case because George's net worth is vastly greater than Rosalinda's, due largely to his real property assets. "Under [section 4320, subdivision (c)], a key factor is the supporting party's 'ability to pay,' which encompasses assets as well as income. [Citations.] Thus, it is 'proper for the court to look to assets controlled by husband, other than income, as a basis for the award [of spousal support].' " (Cheriton, supra, 92 Cal.App.4th at pp. 304-305.) We will direct the trial court on remand to consider all of the applicable factors specified in section 4320.

35 upheld "as long as its determination is within the range of the evidence presented." '

[Citation.] [¶] Where a question of law is presented on undisputed facts, appellate

review is de novo." (Blazer, supra, 176 Cal.App.4th at p. 1443.) "[W]e affirm the trial

court's decision if it is supported in fact and law." (Id. at p. 1447.)

The question raised by George's appeal is whether a trial court should deduct

principal payments a spouse makes on business loans—including loans secured by

income producing property—from income available for support. California case law

provides little help in addressing this issue.

George relies on Blazer in arguing it was an abuse of discretion to include his

principal payments as income available for support. In Blazer, the parties principal

marital asset was a company created by the husband and a partner. (Blazer, supra, 176

Cal.App.4th at p. 1441.) On appeal from her permanent spousal support award, the wife

contended the court abused its discretion by excluding from the husband's income

available for support a portion of his business income used to capitalize and vertically

integrate the business. (Id. at pp. 1441, 1444.) The trial court excluded that income

based on its finding that the business's need to maintain higher capitalization and

diversify its work were reasonable business expenses that " 'should be taken out of the

company before assessing what [the husband's] reasonable income [was] for purposes of

support.' " (Id. at p. 1444.) The Blazer court concluded, among other things, that there

was no abuse of discretion because the trial court's reasonable expense finding was

supported by substantial evidence. (Id. at p. 1447.)

36 Blazer supports the proposition that reasonable business expenses may be properly

excluded from a spouse's business income in determining income available for spousal

support. However, the deduction from income allowed in Blazer was business income

reinvested in the business; it was not income used for mortgage or business loan

payments that directly increased the payor spouse's net worth by decreasing debt. Thus,

Blazer does not specifically address the question of whether business income used to pay

down business debt should be included in or excluded from income available for support.

However, a number of out-of-state authorities provide guidance on this issue. Although

most of those cases address income available for child support and we recognize that

there are important differences between spousal support and child support, the analysis of

available income for child support provides useful guidance in resolving available-

income issues regarding spousal support.

Some decisions support a general rule that principal payments should be excluded

from income. Ohio courts generally view principal payments on business loans or

mortgages on income-producing properties as business expenses that should be excluded

from income available for support, particularly when the loan is an "acquisition" loan

rather than a refinancing or "equity" loan. (Orecchio v. Colantoni, 2010-Ohio-2849 ¶ 29

[2010 Ohio App. Lexis 2356, p. **11]);18 DeCapua v. DeCapua, (Ohio Ct.App., Jan. 8,

18 Rule 3.4 of the Ohio Supreme Court Rules for the Reporting of Opinions states: "All opinions of the courts of appeals issued after May 1, 2002 may be cited as legal authority and weighted as deemed appropriate by the courts without regard to whether the opinion was published or in what form it was published." (Ohio Rep.Op.R. 3.4.)

37 1992, No. 2651) 1992 Ohio App. Lexis 86, p. *8 [husband's principal payments on

business loans represented ordinary and necessary business expenses to be subtracted

from his income available for child support where the money borrowed was used for

fixtures, leasehold improvements, and operating expenses, and the husband did not

accelerate or prepay the principal on any of the loans, but rather paid the loans according

to their terms].) And in Betancourt v. Betancourt (Fla. 2010) 50 So.3d 768 (Betancourt),

the Florida appellate court concluded the "trial court erred in attributing to the [husband]

the gross rental income from a rental property without first deducting the mortgage

payment and other expenses associated with the property." (Betancourt, at p. 769;

accord, In re Albert (N.H. 2007) 922 A.2d 643, 645, 647 [Trial court erred by including

the husband's mortgage payments on two rental properties in determining his income

available for child support where statutory definition of "gross income" for purposes of

child support included "net rental income."].)

Other jurisdictions have taken a seemingly opposite approach, adopting a general

policy of including principal payments in income available for support either because

such payments are not considered to be ordinary and necessary business expenses or

because they benefit the payor spouse by increasing net worth. (See Lawrence v. Tise

(N.C. 1992) 419 S.E.2d 176, 182 [mortgage principal payments are not an ordinary and

necessary business expense within the meaning of state child support guidelines]; Campo

v. Roberts (La. 1996) 677 So.2d 1042 [same]; In re Marriage of Nikolaisen (Mont. 1993)

847 P.2d 287, 292 [principal payments that increased husband's net equity should not

have been deducted from his income available for child support]; In re Marriage of Dean

38 (Kan. 2018) 437 P.3d 46 [principal payments are not properly deducted from income for

purposes of support because they increase the payor's net worth].)

Noting different views articulated by courts on this issue, the Wyoming Supreme

Court has adopted a middle-ground approach we find both thoughtful and workable. In

Fleenor v. Fleenor (Wyo. 1999) 992 P.2d 1065 (Fleenor), the mother argued that the trial

court abused its discretion in deciding the father's principal payment on a business

mortgage was deductible from his income available for support as a reasonable

unreimbursed business expense. (Id. at p. 1069.) Highlighting a split of authority on the

issue of whether such principal payments are properly deducted from a parent's income in

determining support, the Fleenor court observed that North Carolina and Montana did not

allow principal payments to be deducted as a legitimate business expense, whereas

"Illinois, Indiana, Colorado, and Delaware appear to find it discretionary whether

principal payments should be deducted from net income for child support purposes."19

(Fleenor, at p. 1069.) Jurisdictions in this latter category have decided "that a parent's

ability to pay was directly connected to debt reduction expenses reasonably necessary for

the production of income. Rather than adopting a view that debt reduction represented

19 Courts in Utah and New Mexico have similarly ruled that trial courts have discretion to include or exclude principal payments based on the relevant circumstances. (See Bingham v. Bingham (Utah 1994) 872 P.2d 1065, 1067, fn. 2 ["deductibility of particular expenses poses a question of fact, turning on whether such expenses are necessary, and, if so, whether or not they exceed those required for the business's operation at a reasonable level"]; Klinksiek v. Klinksiek (N.M. 2004) 104 P.3d 559 [trial court erred in excluding payments that increased mother's equity in property from her income available for child support, although trial court on remand was to determine whether any portion of mother's rental income would properly be excluded as ordinary and necessary business expenses].) 39 increased net equity, these courts adopted the view that it is 'unsound to consider the cash

coming into the husband's business as flowing through to net income without deducting

(to the extent that they are reasonable) the items which must be taken from his cash flow

in order to maintain his business operations.' " (Ibid.) Fleenor explains that "[a] trial

court retains discretion concerning principal payments because it is recognized that

principal payments may be unreasonably excessive or because assets were acquired to

depress income to avoid support payments." (Ibid.)

The Wyoming high court ultimately concluded that "[t]he crux of this issue is

whether principal payments resulting in increased asset value but decreased cash flow

should be permitted to reduce a parent's income for purposes of child support. . . . [W]e

find that reasonable principal payments can be considered unreimbursed expenses

although, over time, net equity increases. Our review of the authorities persuades us that

we should establish as our general rule that the principal portion of a business mortgage

payment may be deductible if, in its discretion, the [trial] court determines that the

payment reasonably and legitimately reduces net income for child support purposes. The

[trial] court will retain the discretion to decide if the principal portion of business debt

reduction payments is excessive, or assets were acquired to reduce child support

payments, or [there are] other circumstances indicating the principal payments are not

reasonable, unreimbursed, or legitimate." (Fleenor, supra, 992 P.2d at p. 1070, italics

added.)

We conclude that the italicized language in Fleenor articulates a reasonable and

workable rule for trial courts faced with the issue of whether principal payments on loans

40 against income-producing properties or business debt in general should be deducted from

a party's income available for spousal or child support. Although such principal

payments may increase an obligor spouse's net worth, a trial court retains the discretion to

deduct a payment from income available for support if it finds, based on substantial

evidence, that the payment reasonably and legitimately reduces the spouse's net income

available for support, considering the totality of the relevant circumstances, including the

extent to which the payment constitutes an ordinary and necessary business expense and

whether disallowing the deduction would work a substantial hardship on the payor

spouse.20 The trial court also has discretion to disallow the deduction of principal

payments on business debt from a party's income available for support under appropriate

circumstances, such as where the court reasonably finds the principal payments are

excessive, the property encumbered by the loan in question was acquired for the purpose

of lowering income available for support, or the payments are unnecessary for the

operation of the business at a reasonable level. Accordingly, we will reverse the spousal

20 Section 4320, subdivision (k) requires the trial court to consider "[t]he balance of the hardships to each party" in determining spousal support.

41 support award and remand the matter for a redetermination of the support issue consistent

with the principles outlined in this opinion.21

21 We recognize that in In re Marriage of Brandes (2015) 239 Cal.App.4th 1461, this court declined to resolve a spousal support issue on appeal because the court's partial reversal of the judgment on a community property issue potentially rendered the support issue moot. The Brandes court noted that "[a]mong other key factors, in setting spousal support the court must consider the 'assets, including the separate property, of each party.' (§ 4320, subd. (e).) A spouse's share of community property are assets included in the equation." (Id. at p. 1490.) Although Rosalinda 's share of the community's interest in the Florida Street property will likely increase her separate estate for purposes of the court's spousal support determination under section 4320, we have decided George's appeal on the merits because George's income from his rental properties will be a substantial factor in the court's redetermination of spousal support, and the court will have to decide whether his principal payments on those properties, or some portion of those payments, should be included in his income available for support, notwithstanding any increase in Rosalinda's separate property estate.

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DISPOSITION

The portions of the judgment finding that the Florida Street property is George's

separate property, finding that George's monthly income available for support is $25,332,

and awarding Rosalinda monthly spousal support in the amount of $7,500 are reversed.

The matter is remanded to the trial court for further proceedings to: (1) determine the

amount of reimbursement to which George is entitled under section 2640 for his separate

property contributions to the acquisition of the Florida Street property; (2) determine the

community's remaining interest in the Florida Street property and divide that interest, if

any, between George and Rosalinda; and (3) reconsider the spousal support award in

accordance with the views expressed in this opinion and consideration of all of the

relevant factors under section 4320. In all other respects, the judgment is affirmed. The

parties are to bear their own costs on appeal.

DATO, J.

WE CONCUR:

McCONNELL, P. J.

BENKE, J.

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