The Pitfall of Real Property Transfers In Divorce Proceedings

Community Property PitfallsThe pitfall of real property transfers in divorce proceedings. During a divorce proceeding, unwary parties erroneously believe that if they obtain a fully executed transfer deed from the other spouse, then based on this alone, the real property is now their separate property. This is the pitfall.

The division of community property arises in most divorce cases. In California, the parties to a dissolution proceeding have two options.

First, the parties can proceed down the statutory path provided under California Family Code, seek court intervention and the court will decide as to the equal division of their property. California Family Code Section 2550 provides that except upon the written agreement of the parties, or on oral stipulation of the parties in open court …, in a proceeding for dissolution of marriage or legal separation, the court shall, either in its judgment of dissolution or legal separation, or at a later time if it expressly reserves jurisdiction to make such a property division, divide the community estate of equally.

The second path the parties can take is to “opt out” of the system and resolve the division of their property by a Marital Settlement Agreement. A Marital Settlement Agreement (MSA) is a written agreement, signed by both parties that sets out the terms of a divorce settlement between the spouses. The MSA is incorporated into the final judgment issued by the judge and has the force of a court order. Settlement by MSA allows the parties much more control as to the division of their property because they are dictating the terms rather than the court. An MSA also allows for the division of the community estate to be something other than an equal one.

Problems occur when one spouse attempts to transfer community interests to the other during the pendency of a divorce proceeding. In Marriage of Dellaria, 172 Cal.App4th 196 (2009), the court held that Family Code Section 2550 requires the trial court to divide community property equally except on the written agreement of the parties or their oral stipulation in court as to an unequal division.

Parties who attempt to transfer real property by execution of a deed should be aware of this pitfall. Often one spouse will execute an Interspousal Transfer Deed to transfer the title of the family residence to the other spouse after the divorce proceeding has commenced. What we learn from Dellaria is that in such a piecemeal settlement, a transfer of real property by deed alone is not enforceable because it is not a writing signed by both parties. A deed contains the names of both spouses, but it is only signed by the spouse releasing his/her community property interest to the other spouse.

Under California law, to effectuate a valid, enforceable transfer of real property during a divorce proceeding, a deed must be accompanied by either a written Stipulation and Order, MSA or oral agreement in court. Dellaria teaches us further that even an oral agreement which is fully executed is not enforceable once the divorce proceeding begins. Enforceable oral agreements transmuting the character of community property to separate property of the spouses can only be had in court.