In Valento v. Valento, the Arizona Court of Appeals held that the marital community contributions to sole and separate property create an equitable lien even when the market value of the property declined.

During the parties’ marriage, they acquired multiple properties including a marital residence, a vacation home, and rental properties. Husband signed a disclaimer deed that acknowledged the marital residence to be Wife’s sole and separate property.

At trial, the family court calculated Husband’s community lien interest in the marital residence, divided the value of the parties’ rental properties, and awarded the vacation property to Husband as his sole and separate property. Both parties appealed.

On appeal, Wife argued that Husband was entitled to no community lien and that the vacation property was a community asset. Husband appealed the family court’s valuation of the community lien.

A community lien is created whenever a married couple uses community funds, usually including income earned during the marriage by either spouse, to pay for or improve a spouse’s sole and separate property. The community is entitled to reimbursement of a portion of those funds, according to a specific formula, based on the community contributions to principal and any appreciation to the property during the marriage.

Wife argued, however, that because the separate property value depreciated during the marriage, no community lien exists.

The Court of Appeals rejected Wife’s argument and held that a community lien still applies. It reasoned that even when a property value diminishes, the community contributions still increased the owning spouse’s equity position, a benefit he or she can realize.

The Court further established the formula that should be used to calculate the community lien under these circumstances:

C – [C / B x D] where

D = Depreciation during marriage to value of property;

B = Value of property on date of marriage;

C = Community contributions to principal or market value

The value of the community lien was remanded to family court to recalculate using this formula.

The Court of Appeals next addressed the family court’s decision to award the vacation property as Husband’s sole and separate property.

In Arizona, property acquired by either spouse during the marriage is presumed to be community property. An exception that can rebut the presumption of community property is when property is “[a]cquired by gift, devise or descent.”

Husband’s parents in this case gifted the vacation property to Husband and Wife, as joint tenants. In the divorce, Husband successfully argued that the gift was intended for him only. On appeal, Wife argued that the language of the deed gifting the property to both parties, as joint tenants, was unambiguous and therefore cannot be contradicted by Husband’s testimony. This is what is known as the parol evidence rule which prohibits the admission of extrinsic evidence to contradict terms of a written contract.

Based on the language of the deed, the Court of Appeals held the property was clearly gifted to both spouses, though as separate equal interests, not community interests. This legal distinction is important primarily to understand application of the “gift” exception to community property. Because each party was gifted a presumptive one-half interest in the vacation property, those interests were characterized as separate property interests.