The logical but wrong way to divide transmuted property

How to “equitably” divide transmuted property–property that started out as non-marital but through commingling or use become property of the marriage and hence subject to equitable distribution by the court–is one of the most contentious issue in divorce cases.  Often spouses did not even consider their pre-marital or inherited property to be marital but failed to preserve a sufficient paper trail to establish its non-marital nature–and the burden is on the party seeking to establish property owned as of the date of filing isn’t marital.  Other times a party considered property to be partially marital and partially non-marital, such as when they contributed a non-marital down payment to a jointly-titled home.

That is why the idea of carving out a portion of transmuted property as non-marital and providing that party the non-marital portion as “special equity” makes conceptual sense.  If one spouse contributed a $50,000 down payment to the marital home, allowing that spouse to deduct out $50,000 before dividing the remaining equity seems just.  Yet South Carolina case law no longer supports this concept.  Instead, just as one cannot be a little bit pregnant, property cannot be a little bit transmuted.  Once property has become transmuted the whole property is marital.

The concept of “special equity” is reserved for when property is not transmuted, and remains non-marital, but it increased in value “result[ing] directly or indirectly from efforts of the other spouse during marriage.”  See S.C. Code § 20-3-630(A)(5).  Cases in which South Carolina appellate courts have awarded a spouse a special equity interest in non-marital property include Donahue v. Donahue, 299 S.C. 353, 384 S.E.2d 741 (1989), Cannon v. Cannon, 321 S.C. 44, 467 S.E.2d 132 (Ct.App. 1996), and Greene v. Greene, 351 S.C. 329, 569 S.E.2d 393 (Ct.App. 2002).

However once property is transmuted no special equity interest exists and the whole property is marital.  South Carolina’s appellate court reject claims of special equity in transmuted property and reverse family court judges who do so.  See Barrow v. Barrow, 394 S.C. 603, 716 S.E.2d 302 (Ct. App. 2011). and Dawkins v. Dawkins, 386 S.C. 169, 687 S.E.2d 52 (2010).

Prior to Dawkins case law appeared to allow this approach.  However Dawkins explicitly overruled Cooksey v. Cooksey, 280 S.C. 347, 312 S.E.2d 581 (Ct.App.1984) “to the extent it may be read to allow a family court to separate and subtract the inheritance amount from the marital estate and then award this ‘special equity’ to the inheritor in addition to his or her portion of the court-ordered division of the marital estate.”  This pre-Dawkins approach, however, is conceptually logical, and thus it is hard to get family court litigants to understand that it cannot be used.  Even to this day some family court attorneys suggest using this approach to divide transmuted property.

The problem with the post-Dawkins approach is that, once family court judges decide property is transmuted, the perceived path of least resistance (i.e., they are least likely to be overruled) is dividing that property on a (close to) 50/50 basis.  Such a division is not just, and the 50/50 division is not mandated by case law, but it is a rare case in which the appellate courts approve a division more extreme than 60/40.

Suggesting to clients who put $50,000 of pre-marital funds into a home with $80,000 of equity that getting 60% of the equity back in equitable distribution is a good scenario is never going to be easy to accept because it isn’t just.  It is, unfortunately, the current state of the law.

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