Changing Sole and Separate Property Into Community Property

The Arizona Court of Appeals ruled on the subject of sole and separate property contributed to marital property and how that property will be distributed in the case of Joseph B. Malecky v. Lana C. Malecky.

Shortly after the parties were married in 1978, they purchased a residence, for which Lana contributed a sum of money from her sole and separate funds. However, the title was taken only in Joseph’s name. Then, in 1979, the parties purchased a business franchise. Joseph partially repaid the loan for the business soon after.

During the divorce proceedings, evidence showed that Joseph executed the Deposit Receipt and Agreement in his name only for the residence, but Lana testified that she believed that she had a community interest in the home because of her contribution of her sole and separate property. The trial court construed the sum she granted as a loan from wife to husband. Therefore, they ruled the residence to be Joseph’s sole and separate property and granted Lana a lien in the sum of the amount she contributed from her sole and separate property.

The court also ordered the interest to accrue at the legal rate from the date of the decree, but declined to award interest prior to that date. In regards to the business franchise purchased by the parties, the court found the store to be community property and that Joseph did not intend his partial repayment of the loan as a gift to the community. They awarded the franchise to Joseph and valued Lana’s share at half the value of the business minus half of what Joseph invested in the loan, which he would be entitled to purchase from her.


Court of Appeals Ruling on the Issue

Lana appealed these decisions with the Arizona Court of Appeals arguing that her investment in the residential property was a liquidated claim and that she had a right under the law to receive prejudgment interest on that loan. The appeals court agreed with her, adding that when a party possesses and makes use of money belonging to another, equity requires that interest be paid on that sum.

Lana also maintained that she believed she had a community property interest in the home and did not consider her contribution to be a loan as she did not ask for repayment. Until the trial court ruled that the residence was Joseph’s separate property, she believed that she would receive a proportionate benefit from the appreciation of the property. The appeals court ruled that Joseph would keep ownership of the property, but the interest on her contribution would begin from the date the check was issued at the statutory rate.

The second issue she raised was the lien awarded to Joseph for their business. He argued that the funds he contributed were clearly traceable as his, so the trial court’s judgment should be affirmed. However, the appeals court stated that, in Arizona, when one spouse pays for real property that is in both spouses’ names, the presumption is that it was a gift to the community unless there is an express agreement that the spouse will be entitled to reimbursement.

In this case, there was no evidence of such an agreement and insufficient evidence to negate the presumption of a gift. Accordingly, the appeals court reversed the trial court’s decision to award Joseph a separate property lien for the amount he invested, giving Lana a full half of the value of the business.

It is important when purchasing property in a marriage to have a mutual understanding as to how the property will be deeded, whether as a separate or a community asset. Also, if a spouse invests in marital property it must be clear if it is a gift to the community or if they expect reimbursement for the investment. This case illustrates how unclear intentions surrounding these decisions can affect the outcome of the disbursement of property in divorce proceedings.