Equitable Distribution: Using Separate Property For A Marital Loan
When parties file a complaint for divorce, they often ask the court to determine a myriad of issues: spousal support, child support, child custody and visitation, and the division of property. In Virginia, courts will decide how to divide the parties’ property through a process called “equitable distribution.”
The first step in equitable distribution is to classify all property as separate, marital, or hybrid. Generally, marital property is any property that is acquired during the marriage, whereas separate property is any property that was acquired by a party (a) before the marriage, (b) after the parties separated or (c) during the marriage from an inheritance, gift from a third party, or other source outside the marriage. Hybrid property is a mixture of the two: it is separate property that has been commingled with marital property, making it part marital and part separate. Classifying property as marital or separate is often straightforward, but identifying hybrid property can be complex.
The classification phase is a critical first step in any equitable distribution case, as courts only have authority to divide property that is classified as marital or hybrid. (Each party is allowed to keep their own separate property).
The Virginia Court of Appeals recently clarified the classification of hybrid property, in Layman v. Layman, 62 Va. App. 134, 742 SE 2d 890 (2013). In this case, the husband inherited real estate from his father which was titled and remained solely in the husband’s name. As in inheritance, under Virginia law the property was presumed to be the husband’s separate property. However, during the parties’ marriage, husband used this separate property as collateral for a loan to build the parties’ marital residence. Throughout the marriage, the parties made payments on the loan from the marital funds in their joint bank account. These actions raised the question, when the parties separated and filed for divorce in 2010, whether the real estate remained the husband’s separate property, or had been converted into marital or hybrid property.
The trial court in Layman held that by using the inherited property as security for the marital loan and subsequently making payments on the loan out of marital funds, the husband had converted the real estate to hybrid property—subjecting it to division by the court. However, the Court of Appeals held otherwise. The appellate court overruled the trial court, finding that the loan payments did not increase the value of the real estate, and therefore did not convert the separate property to hybrid or marital property.
The Court of Appeals took the stance that the loan was derived from separate property and was a normal bailment, which had the inherent requirement that the amount of the loan be repaid to the husband. As such, the court held that the loan payments out of marital funds did not give the wife an interest in the real estate.
So, the appellate court held that the underlying real estate remained husband’s separate property, exempt from division in the divorce—although of course the marital residence which was built on the real estate was marital property, subject to equitable distribution in the divorce.
Although the Court of Appeals ultimately found that the husband’s separate property had remained separate, the Layman case illustrates the potential issues that may arise based on how a party uses separate property during their marriage.
If you are facing a divorce and you or your spouse have separate property which may have been converted to marital or hybrid property, consult with an experienced divorce attorney as soon as possible. Each case is different, and the classification of property is very fact-specific. The divorce attorneys at Livesay & Myers, P.C. have years of experience in representing individuals in cases involving equitable distribution and hybrid property classification in Northern Virginia. Contact us to schedule a consultation today.