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Real Estate Finance
South Texas College of Law Houston
Musselman, James L.

I.     The Texas marital Property System
A.    Introduction
1.     Three TX Property States
a.     Community Property
b.     Husband’s Separate Property
c.     Wife’s Separate Property
2.     Determine ownership by characterizing property as CP or SP
a.     If the property is characterized as SP, they are treated as if they were never married. 
b.     Characterization is driven by the Texas constitution.
3.     The Community Property Presumption
a.     § 3.003(a): Property possessed by either spouse during or on dissolution of marriage is presumed to be community property.
b.     Clear and convincing evidence is required to rebut the presumption
B.    The Constitution of 1876
1.     All property, both real and personal of W, owned or claimed by her before marriage, and acquired afterward by gift, devise, or descent shall be her S/P.
a.     Only applies to wife because assumes all other property belongs to the husband
b.     Passed to allow the wife to inherit family property and ensure the property stayed in family
2.     Statutes and Decisions, 1845-1947
a.     DeBlane v. Hugh Lynch & Co. – Property rights in cotton grown on separate property
i.      Dividends, interest, rent, and other income derived from separate property of a spouse comprise community property.
¨       Crops produced on wife’s SP are CP
¨       Crops that are depleting to the property (timber) are actually SP
¨       Progeny or offspring of SP livestock is CP
ii.     Exception
¨       Interspousal Gifts – If one spouse makes a gift of property to the other spouse, a gift is presumed to include all the income and property that may arise from that property. 
iii.    “Doctrine of Onerous Title” – whatever is acquired by the joint efforts of the husband and wife, shall be their common property
¨       Musselman doesn’t know how you can adopt the doctrine of onerous title under Texas Constitution. 
b.     Stringfellow v. Sorrells – Increase in value of SP characterization and livestock
i.      Mere increases in or fluctuation in value of property does not change the character of the property.
¨       SP mules increased in value during the marriage. That increase is SP.
¨       However, offspring of the mules would be income and therefore be C/P.
ii.     “Inception of Title Doctrine” – characterization occurs when property is first acquired and never changes
iii.    “Equitable Reimbursement” – If the community estate spends money to increase the value of SP, the community gets reimbursed for the amount spent upon divorce or death.
¨       Reimbursement doesn’t apply in debtor-creditor cases.
c.     Kellet v. Trice – attempt to convert separate property into community property by conveyance
i.      Converting Separate To Community
¨       Old Rule – You cannot change the character of separate property by mere agreement
¨       New Rule (case overruled by constitutional amendment in 1999) – a spouse may convert separate into community at any time by an agreement that satisfies the requirements for the writing and the enforcement listed under the modern Constitutional Provisions (discussed later)
3.     Statutory Changes, 1911 – 1917
a.     Rule: a statue cannot designate certain property as SP because the Constitution defines SP.
b.     Arnold v. Leonard – Ability of the Legislature to change the character of property
i.      Doctrine of Implied Exclusion – Separate property is specifically defined in the TX Constitution, any statute defining separate property as something more or less than the Constitutional provision is impliedly unconstitutional.
¨       A statute cannot designate certain property as SP because the Constitution defines SP.
¨       Example: A statute stating rents/revenues from SP constitute SP violates the Constitution because the Constitution limits SP to property owned before marriage or acquired by gift, devise, or inheritance.
ii.     A statute stating rents from SP cannot be seized to pay community debts does NOT violate the constitution because it doesn’t attempt to change the definition of SP.
¨       Legislature can’t change the character of the property by statute or act
¨       Legislature can change management, control, or liability without affecting character.
¨       Issue of characterization is wholly separate from who has management control and whether the property is exempt from debts.
¨       Tex. Fam. Code §§ 3.101 – 3.309 – govern management of property
c.     Northern Texas Traction Co. v. Hill – Property Rights in Cause of Action for damages
i.      No longer stands for good law – personal injury recovery is separate property because that’s the body the spouse brought into the marriage
ii.     Appears to be an expansion of the constitution’s definition of separate property.
iii.    § 3.001. A spouse’s separate property consists of:
¨       The property owned or claimed by the spouse before marriage;
¨       The property acquired by the spouse during marriage by gift, devise, or descent.
¨       The recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.  
C.    1948 Constitution
1.     Constitution – Spouses may convert community into separate property in two ways:
a.    Partition
i.      Allows the division of CP into equal shares of SP for each spouse
ii.     Each spouse gets ½ SP interest
b.    Exchange
i.      Created when W gives up her interest in the CP (becoming H’s) and H give us his interest in the CP (becoming W’s)
ii.     Exchanges did not have to be equal
c.     Partitions and exchanges had to be without prejudice to creditors

   All property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise or descent, shall be the separate property of that spouse
¨       Gender Neutral
b.    Clause 2 – Partition and Exchange Extended to Spouses & Future Spouses
i.      And laws shall be passed more clearly defining the rights of the spouses, in relation to separate and community property, provided that persons about to marry and spouses, without the intention to defraud pre-existing creditors, may by written instrument from time to time
¨       Partition: partition between themselves all or part of their property, than existing or to be acquired, or
o    Premaritally – partition means you decide that separate property will remain separate after marriage – there is no community property to make separate
¨       Exchange: exchange between themselves the community interest of one spouse or future spouse in any other community property then existing or to be acquired,
o    Effect of Exchange: whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property and estate of such spouse or future spouse
·         Premarital agreements seeking to characterize property as separate must actually partition or exchange – mere agreement to retain as separate without partition or exchange will not be sufficient
¨       Without Intention to Defraud – Prejudice used to be the burden, intent is harder for creditors
¨       Big Changes:
o    Spouses and future spouses
o    CP in existence or property to be acquired – allows recharacterization of future property
o    Earnings not arising from separate property: you must have a partition or exchange
¨       You can partition or exchange anything, premaritally or postmaritally. And the exchange does not have to be equal, can be totally unfair to one spouse
¨       Instrument Formalities (Premarital – § 4.002 / Postmarital § 4.104)
o    Must be in writing
o    Signed by both parties
o    Is binding without consideration
¨       Issue on whether clause 2 includes future income from property because clause 3 covers income from separate property. People think clause 2 is broad enough to include income from future property.