During marriage, spouses frequently improve property of one character with funds of a different character. The traditional Texas remedy for such contributions was “reimbursement,” an equitable claim that arises at dissolution of the marriage. When substantial community funds were used to improve separate property, the amount of the community reimbursement claim was sometimes small under traditional Texas reimbursement rules. Because of the perceived unfairness of this result, about a decade ago the Texas Legislature created a new claim it labeled “economic contribution.” This experiment has ended; 2009 legislation reinstates “reimbursement” as the sole remedy when a spouse uses funds of one character to improve property of another character.1 However, the 2009 legislation and other recent legislative changes in this area create ambiguities in the rules that will govern various types of reimbursement claims.

II. The 2009 Statute
A. Summary of the Statute

B. Some Potential Ambiguities
1. Paying a Secured Debt

Perhaps the most common reimbursement claim in Texas divorces arises when spouses use community funds to make payments on a mortgage that one spouse took out before marriage to purchase a house. The traditional approach, before the experiment with economic contribution, was that all community funds allocated to the house payment created a reimbursement claim, which it then offset by the benefit incurred by the community arising from living in the house.2 The reduction could reduce the claim to zero if the community benefit exceeded the community funds spent.3 Some courts held that the benefit to the community amounted to the sum of the amount allocated to interest, insurance and taxes.4 In these instances, the net community reimbursement claim was the amount that the community funds reduced the principal balance during the marriage.5

The 2009 changes take a different route to arrive at a similar result. The 2009 changes limit a reimbursement claim arising from paying a secured debt to the amount the principal balance of the debt was reduced.6 The new section provides that, when considering a community reimbursement claim relating to a separate primary or secondary residence, there should be no reduction of the claim for use and enjoyment.7 So, the presumptive reimbursement claim now is only the amount the principal balance was reduced.

The statute bars offsetting benefit reductions for expenditures relating to “a primary or secondary residence” – terms the Legislature left undefined. Could spouses have more than one “primary” or “secondary” residence? If spouses live in a house for a period and then rent it to others, is it a “primary residence”? If a spouse bought a duplex before marriage, and during marriage the spouses live in one unit, how will the courts analyze that under the new law? The meaning of “secondary residence” is also unclear. If a spouse owns a vacation home in another location that is primarily rented to tenants, could the property be a secondary residence if the spouses sometimes use the vacation home for personal purposes?  

2. Capital Improvements
a. The Time to Measure the Claim

Before the 2009 changes, capital improvements created an economic contribution claim based on the amount of funds contributed. The new legislation changes the remedy to reimbursement,8 and the measure of reimbursement is not the amount of funds contributed, but the “enhancement” to the property.9

One basic question confronted when considering a future reimbursement claim for a capital improvement is when to measure the enhancement. For example, adding a swimming pool may have enhanced the value of the property $10,000 in 2000, when the pool was built, but might enhance the property $15,000 in 2010, when the parties divorce. Which figure should be used? The statute does not clarify this. Prior Texas case law has measured enhancement at the time the claim arose. For example, in Anderson v. Gilliland,10 the parties spent $20,237.89 of community funds building a home on the wife’s separate property land. The court found that, when the husband died, the house enhanced the value of the property by $54,000; it based the reimbursement award on this amount.11 This gives the community an inflation adjustment for its prior contribution.

b. The Offsetting Benefit Reduction

Before the advent of economic contribution, enhancement was the measure of reimbursement for a capital improvement, and a community claim for enhancement could be reduced by the value of the benefit the community enjoyed from the property.12 The new statute generally incorporates the concept of an offsetting benefit reduction,13 but states that it does not apply to a community “contribution” to a separate “primary or secondary” residence.14 This seems to mean that a court should not reduce a community reimbursement claim for a capital improvement to the family’s primary residence for any offsetting benefit. This interpretation of the statute differs from Texas reimbursement law as it existed before the creation of economic contribution.

3. Time, Toil and Talent

The contribution of both community funds and community efforts can give rise to a community property reimbursement claim. When the Texas Supreme Court belatedly confirmed this rule, the Court stated that when community efforts are contributed during marriage to benefit separate property, the community has a reimbursement claim for the value of those efforts over and above those necessary to maintain and preserve the property, unless the community has already received adequate compensation for those efforts.15

The 2009 statute includes the provision that had previously been added to § 3.408 to the effect that a reimbursement claim includes “inadequate compensation for the time, toil, talent and effort of a spouse by a business entity under the control . . . of that spouse.”16 This rule creates a number of ambiguities. Does the reimbursement right now arise for the value of ALL time, toil and talent contributed (with no offset for services needed to maintain the property)? This would change Texas law. For example, in Lifshutz v. Lifshutz,17 the court held that the community was not entitled to reimbursement when no evidence was presented regarding the value of the husband’s services needed to manage and preserve his separate estate. Secondly, can a time, toil and talent claim arise in connection with services contributed to anything other than a business (such as, say, stock investments or real estate)? Finally, what if the non-owner contributes services?18 The statute does not answer any of these questions. The Texas Supreme Court, in Jensen v. Jensen, announced the general rule that the community estate should be reimbursed for “the value of the time and effort expended by either or both spouses to enhance the separate estate of either . . . .”19 Because the new statute generally retains the “offsetting benefit” concept, any time, toil or talent claim should be reduced by any benefits the community received from the separate property involved.

4. Offsets to Separate Property Reimbursement Claims

The notion of an “offsetting benefit reduction” to a reimbursement claim derives from the “family expense doctrine,” the idea that it is fair to charge the community with all family living expenses during marriage. Under this doctrine, living expenses avoided due to separate property, e.g. rent, reduce the community property reimbursement claim by the amount the community estate would have spent.

There is no analogous rationale for reducing a separate property claim for reimbursement. It follows that there should be no offsetting benefit reduction for such claims. However, the current statute does not limit the offsetting benefit concept to community property claims.20 It is unclear how Texas courts will construe this provision regarding separate property reimbursement claims.

Indeed, the current Pattern Jury Charge seems quite confused. PJC 204.9B first asks the jury to determine the amount of the reimbursement claim proved either on behalf of the community estate against a separate estate, or a separate estate against another separate estate (but does not include, for whatever reason, the possibility of a claim by a separate estate against the community estate).21 Question 2 then asks the jury to determine the amount of the offset against the reimbursement claim due to the benefit received by a party’s SEPARATE estate. The answer to question 2 should always be $0 if there are no offsetting benefit reductions for such claims. In addition, for a community property claim, the question should be related to what the benefit was to the COMMUNITY estate; this possibility is not set forth as an option.

5. Does the New Statute Set Forth the Exhaustive List of Reimbursement Claims?

Texas Family Code section 3.408 (deleted by the 2009 legislation) set forth two instances where a reimbursement claim could arise. It stated that “a claim for reimbursement includes (1) payment by one marital estate of the unsecured liabilities of another marital estate; and (2) inadequate compensation for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of that spouse.”22 The new section 3.402 now sets forth nine instances where reimbursement claims can arise. Like the previous statute, the statute states that “a claim for reimbursement includes . . . .” and then lists various instances where a reimbursement claim arises. The language of the 2009 statute does not appear to reflect an intention that this constitutes an exhaustive list. Other situations not listed in the current statute have created common law reimbursement claims.23

6. The Meaning of Nominal Value

The new statute does not change section 3.409, which provides that there should be no reimbursement claims for contributions of “nominal value.”24 No Texas cases to date have clarified what this means. One dictionary states that “nominal” means trifling or insignificant.25

7. Offsets for Use and Enjoyment

The 2009 statute (new § 3.402) incorporates the portion of old § 3.408 that provided that the “benefits of use and enjoyment of property” can be offset against a claim for reimbursement.26 One commentator has wondered whether this somewhat different term has a different meaning from the traditionally utilized term “offsetting benefits.”27

III. Conclusion

The legislature has ended the Texas experiment with economic contribution. After September 1, 2009, the doctrine of reimbursement is now to be applied in all instances. However, the new statute appears to change the manner in which some aspects of Texas reimbursement rules have traditionally been applied, and leaves some other issues not resolved. Some appellate litigation or future legislative cleanup will be needed to resolve these matters.

J. Thomas Oldham is the John Freeman Professor of Law at the University of Houston Law Center.  The author would like to thank Kathryn McClain, a UH law student, for her assistance in connection with this article.

Endnotes

1. See Act of June 19, 2009, 81st Leg., R.S., ch. 768 (originally Senate Bill 866).   2. SeeHawkins v. Hawkins, 612 S.W.2d 683 (Tex. App.—El Paso 1981, no writ).   3. SeePenick v. Penick, 783 S.W.2d 194 (Tex. 1988).   4. See Hawkins, 612 S.W.2d at 683.   5. Id.   6. See Tex. Fam. Code § 3.402(a)(3).   7. Tex. Fam. Code § 3.402(c) provides that there should be no use and enjoyment offset for community “contributions.”   8. See Tex. Fam. Code § 3.402(a)(8).   9. See id. § 3.402(d).     10. 684 S.W.2d 673 (Tex. 1985).   11. Id.   12. SeePenick, 783 S.W.2d at 194.   13. See § 3.402(c).   14. Id.   15. SeeVallone v. Vallone, 644 S.W.2d 455, 459 (Tex. 1982).   16. See Tex. Fam. Code § 3.402(a)(2).   17. 199 S.W.3d 9 (Tex. App.—San Antonio 2006, pet. denied).   18. Cf. Gutierrez v. Gutierrez, 791 S.W.2d 659 (Tex. App.—San Antonio 1990, no writ).   19. 665 S.W.2d 107, 109 (Tex. 1984).   20. See Tex. Fam. Code § 3.402(c).   21. See Texas Pattern Jury Changes, Family (State Bar of Texas 2008) at page 74.   22. See Tex. Fam. Code § 3.408(b).   23. See Stewart Gagnon, The Conflicts between the New Statutory and Common Law Reimbursement, New Frontiers in Marital Property Law (Oct. 2006), ch. 2.3,  at 5-6. Bigelow v. Stephens, 286 S.W.3d 619 (Tex. App. – Beaumont 2009) holds that Family Code Section 3.408 did not set forth an exhaustive list of all situations in which a reimbursement claim could arise.   24. See Tex. Fam. Code § 3.409.   25. SeeWebster’s Third International Dictionary(Unabridged) 1534 (1986).   26. See Tex. Fam. Code § 3.402(c).   27. See Warren Cole et al., Digging Up Alcatraz, New Frontiers in Marital Property Law (Oct. 2006), ch. 4, at 9.