Everyone loves a surprise ending, right? Maybe. Just don’t ask the spouse who owned a home prior to marriage, and expected she would be able to keep the home as her separate property in the divorce, only to find out that her husband has an interest in the value of the home that could force its sale. There are numerous ways in which separate property — for example, property owned prior to the marriage, property that is inherited or received by gift or from the proceeds of a personal injury award — can become marital property. The easiest way for property to lose its separate character is to add the spouse’s name to title. But when nothing was done to “transmutate” separate property, it should stay separate. At least, that’s what many people think.
Enter recoupment, an equitable principle by which marital monies that were spent during the marriage are recouped or paid back to a spouse in the divorce. This includes monies spent maintaining separating property. Historically, recoupment had been broadly applied in many contexts, but the recent decision by the New York Court of Appeals in Mahoney-Buntzman v. Buntzman took an ax to the recoupment doctrine and limited its application to cases involving the maintenance of separate property and to cases involving wasteful spending. Removed from the ranks of recoupment cases, are those in which marital monies were spent during the marriage on support and maintenance of prior children and former spouses.
When money earned during the marriage by either or both spouses is spent maintaining the separate property of one of the spouses, that money can be reclaimed, and a money judgment awarded for an equitable portion of those funds. This equitable portion is usually one-half of the monies paid. Incredibly, in the case of a long term mortgage that was taken out shortly before the marriage on a residence that was owned prior to the marriage, the total amount of the mortgage payments made during the marriage may be more than double the actual reduction in the principal balance of the mortgage, leading to a recovery by the non-titled spouse of the full reduction in principal mortgage balance during the marriage. The Mahoney-Buntzman case, citing to Micha v. Micha, an appellate division case from the Third Department, made clear that this expenditure of marital funds can still be recouped by the non-separate property owning spouse. Micha involved farm machinery owned by the farmer husband from prior to the marriage. The payment of marital money during the marriage towards secured loans (not unlike a home mortgage) on the farm machinery was recouped by the wife. So there is no confusion, “marital money” is money earned or acquired during the marriage that does not fit into a separate property category. In other words, money earned from employment during the marriage, spent on a separate property mortgage, can be recouped. The same is true of marital money spent on capital gains taxes payable for the sale of separate property, which was the holding in Carney v. Carney, another Third Department case also cited by the Court of Appeals in Mahoney-Buntzman as an example of what survives in the recoupment doctrine. In Carney v. Carney, the parties spent the proceeds of the sale of their jointly owned marital residence to pay the capital gains taxes incurred on the sale of the husband’s separate property building that had housed his separate property business. Although the proceeds from the sale of the separate property building remained the husband’s, he owed the wife one-half of the monies that were paid towards the capital gains taxes.
In addition to losing a portion of the value of separate property to recoupment, a portion of the appreciated value of separate property may be marital property that will be divided in a divorce. In such a case, it is the portion of the appreciation that is attributable to any improvements performed on the property that is divided. In other words, if the appreciation is more than the result of an “up” market, but can be specifically attributed to improvements performed on the property, that portion of the appreciation is marital property, and the non-titled spouse is entitled to an equitable portion. But at least the titled spouse, who spent marital money making visible and valuable improvements to her separate property, could see it coming. When she must also pay the recoupment claim of the other spouse, her separate property may not seem so separate any more.