Arizona Court of Appeals

Osborne v. Osborne

Summary

Osborne v. Osborne was an unpublished memorandum decision where the Arizona Court of Appeals affirmed the family court’s determination that a spouse gifted separate property to the community and its equitable division of real estate later purchased with those funds.

Background

When the parties married in 2011, Wife already owned “significant” assets, including real estate. After the marriage, the parties created separate limited liability companies (“LLC”) using separate property. They jointly formed another LLC called GPO Enterprise to manage joint endeavors to purchase investment properties. GPO’s articles of organization assigned fifty percent ownership to each spouse and the parties entered into an operating agreement.

After Husband helped Wife repair and remodel one of the properties she owned separately before the marriage, Wife sold the property and deposited its proceeds into the GPO account. GPO then purchased two more properties.

In 2017, Husband filed for divorce and argued in his pretrial statement that these two properties were community property subject to equitable division. Husband claimed that Wife made a gift to the community when she transferred separate funds into the GPO account.

Wife argued that she was wrongly coerced into transferring her separate funds to GPO. She also argued that the operating agreement functioned as a postnuptial agreement and alleged that Husband failed to prove the postnuptial agreement was fair and free of coercion or fraud.

Following an evidentiary hearing, the family court rejected Wife’s arguments and determined that the properties were community property subject to equal division.

Operating Agreement as Postnuptial Agreement

On appeal, Wife first argued that the family court erred when it declined to treat the GPO operating agreement as a postnuptial agreement. Had it done so, Wife argued Husband would have been unable to meet the burden to prove that the agreement was fair.

When it comes to the character of property as community property or separate property, there are often competing presumptions under Arizona law and the determination may depend on which burden of proof the family court applies.

Property takes its character at the time it is acquired. It is presumed that all property acquired during the marriage by either spouse is community property. Property acquired before the marriage is always separate property unless it is later transferred to the community (or “transmuted” as we call it). Depositing separate property into a joint account does not automatically change its character to community property, so long as the separate property remains identifiable. But when separate property is converted to jointly-owned property, a gift to the community is presumed.

Here, the initial deposit of Wife’s separate property (sale proceeds) into the GPO account did not automatically change the character of those funds. The presumption of gift arose when the parties used those proceeds to purchase real estate titled to GPO, a jointly-owned entity.

Because neither party disputed these facts, Wife challenged the validity of the operating agreement. If the operating agreement was invalid, the gift presumption would not automatically apply. Wife argued that the operating agreement functioned as a postnuptial agreement — defined as “an agreement entered into during marriage to define each spouse’s property rights in the event of death or divorce.”

This argument is not unprecedented. A 2015 decision held that operating agreements can function as postnuptial agreements. The significance of whether their operating agreement constituted a postnuptial agreement is it would effectively shift the burden of proof to Husband and require him to prove that the agreement was fair. When a postnuptial agreement converts separate property to community property and a spouse claims the agreement is unfair, the other spouse must prove its fairness by clear and convincing evidence.

The Court of Appeals rejected Wife’s argument and agreed with the family court. It found that the operating agreement in this case was created to facilitate real estate transactions, not as an estate planning device.

Full decision