*DRAHOS UPDATE SEPTEMBER 2022*
In September 2022, the Drahos Calculation was updated by the Arizona Supreme Court.
The Court considered whether the Drahos calculation should remain as the standard in Arizona for determining the value of one spouse’s sole and separate house. The Arizona Supreme Court vacated both Court of AppealsThis is the Court that hears appeals and special actions from the decisions made by the superior court. A panel of three judges reviews each appeal and issues a ruling. The Arizona Supreme Court is the only state court higher than the Court of Appeals.Read more about Court of Appeals opinions for Saba and Femiano. We, therefore, now have a clearer picture of what happens when the community pays the down payment, the mortgage payments, and all other payments: In that situation, the Court still applies Drahos unless another approach would yield a fairer result.
The Arizona Supreme Court approved the Drahos formula and installed it as the “starting point” for calculating the equitable LienA legal claim made against a debtor's property. Generally, this comes in the form of a judgment that is then recorded on property the debtor owns. For example, if a judgment creditor gets a judgment of $10,000.00 in child support arrearages, and the judgment debtor owns a home…Read more about Lien. But where appropriate, the Court can consider other formulas or calculations. The ultimate aim of the Court is to “achieve substantial justice” between the parties.
Read More About the Updated Drahos Calculation
Original Post Published 2021:
One of the biggest financial risks people take during a marriage is done unwittingly—and sometimes even unknowingly—financing the marital home in the one spouse’s name alone. During the marriage, it may make sense; but it isn’t without risk. Below is a BriefThese are the documents that each party files to make their case to the Court of Appeals. These tend to be lengthy, well-researched, heavily cited documents. The parts of a Brief include the Title Page, Table of Contents, Table of Authorities, Statement of the Case, Background…Read more about Brief overview of how Disclaimer Deeds are handled during a divorce and how the court calculates how much is spouse is owed.
What is a Disclaimer Deed?
A Disclaimer DeedA legal document that once signed at the time of purchase by a party waiving all interest to real property current or future. This is commonly signed in a marriage when the parties buy or refinance a home and take the loan out in just one spouse’s name because the other spouse…Read more about Disclaimer Deed is a document that waives ownership interest in a property, most commonly, the marital home.
Purpose of a Disclaimer Deed
When financing a home in only one spouse’s name, the lending company requires a Disclaimer DeedA legal document that once signed at the time of purchase by a party waiving all interest to real property current or future. This is commonly signed in a marriage when the parties buy or refinance a home and take the loan out in just one spouse’s name because the other spouse…Read more about Disclaimer Deed from the other spouse. This Deed means that only the financing spouse owns the home because they agreed to the mortgage contract.
Lack of understanding is not a defense.
Many people sign the Disclaimer Deed without understanding what it means. Unfortunately, that doesn’t matter. They are legally binding documents and if you signed it, you agreed to give up your claim to the property.
Dividing a house in a divorce with a signed Disclaimer Deed
Just because there is a Disclaimer Deed, it doesn’t mean that one spouse gets to keep 100% of the house. Because after signing the Disclaimer Deed, Community FundsMoney belonging to the marital community, or, more generally, any money either party earned during the marriage. The community funds can refer to the parties’ cash on hand or the funds used to purchase or pay on particular item. When community funds are used to purchase…Read more about Community Funds were likely used to pay the mortgage and/or make improvements on the home. And because divorce courts are “courts of EquityEquity is a principle that permits the Court to apply certain principles in order to achieve a just and fair result. The applications the Court may employ are called equitable defenses. Arizona’s family law courts are courts of equity. Atkinson v. Atkinson, 405 P.2d 919, 921…Read more about Equity”; meaning, they try to do what is fair, the courts created a concept called a “Community LienWhen community funds are used to pay for an asset, its loan/mortgage installments, or improvements on one spouse’s sole and separate asset, the marital community has a lien on the property. The spouse who owns that property must reimburse the other spouse one-half the amount of…Read more about Community Lien.”
What is a “Community Lien”?
A “community lien” is when community funds (or other efforts, including labor) are used to improve or pay for an asset (like a house). The money, efforts, and labor spent on the property benefited both spouses, not just the spouse who owns the home. And since it benefitted both spouses, it should be divided equitably during divorce.
Drahos Calculation – How the court calculates the value of a community lien
As of December 2021, the Drahos CalculationThis is a formula used to calculate a community lien on a property. The calculation is C + [(C/B) x A] where C = contributions to principal, B = purchase price, and A = appreciation. Each spouse is entitled to half of the resulting calculation. Put another way: it requires the…Read more about Drahos Calculation is being reviewed by the Arizona Supreme Court. For now, the Court uses what is called the Drahos calculation. It is an imperfect formula designed to account for the ContributionThe name for the type of legal action (i.e., lawsuit) that gets filed when a creditor has come after one spouse for the full amount owed on a community debt, even though the Decree assigns some or all of that debt to the other spouse. Generally, both spouses are jointly liable…Read more about Contribution of both spouses to the property.
Community LienWhen community funds are used to pay for an asset, its loan/mortgage installments, or improvements on one spouse’s sole and separate asset, the marital community has a lien on the property. The spouse who owns that property must reimburse the other spouse one-half the amount of…Read more about Community Lien = Contributions (mortgage payments, labor, improvements) + (Contributions/Purchase Price) x Appreciation.
Essentially, it requires the property-owning spouse to pay the other spouse half the mortgage and improvement contributions plus a portion of the appreciation
Example of how Drahos works
This example is a simplification for illustrative purposes only. There are many other factors that can be considered.
If during marriage, one spouse purchased a home, and the other spouse signed a Disclaimer Deed and:
- Home Purchase Price: $400k
- Mortgage Payments to Principal: $100k
- Appreciation: $200k
The calculation would look like this: $100k + [($100k/$400k) x $200k = $150k
The community interest is $150k. Both spouses are entitled to half of the community interest.
That means, the spouse who signed the disclaimer deed will receive $75k in equity for the house.
What happens if the community paid everything?
That’s a good question because, again, as of this writing, that question is in front of the Arizona Supreme Court because the Arizona Court of Appeals split on this.
In one case, Femiano v. Maust, the Arizona Court of AppealsThis is the Court that hears appeals and special actions from the decisions made by the superior court. A panel of three judges reviews each appeal and issues a ruling. The Arizona Supreme Court is the only state court higher than the Court of Appeals.Read more about Court of Appeals divided all of it 50-50. In the other case, Saba v. Khoury, another panel at the Court of Appeals wrote that it disagreed with the Femiano ruling because a disclaimer deed must have meaning; otherwise, the PartyAn individual, entity, or the state that either brings the lawsuit or is required to respond to the lawsuit. See ARFLP Rule 3(f).Read more about Party taking out the financing is taking all the risk.
Conclusion
Be careful when signing a Disclaimer Deed to property during marriage. It may make sense at the time, but it could cost you significant money down the road. We will keep you updated when the Drahos ruling is made by the Arizona Supreme Court.
