SEPARATE PROPERTY TRACING

What Is The Clearing House Method of Tracing?

One method of overcoming the community property presumption set out in Section 5.02 of the Texas Family Code is by tracing specific deposits and withdrawals through bank accounts under what has been termed by lawyers as the "clearinghouse" method or "identical sum inference.” The clearinghouse method holds that, in the event a deposit is made at approximately the same time as a withdrawal of a similar sum, the withdrawn funds will be of the same character as the funds deposited. The theory applies to tracing the deposit of an identifiable sum of money into an account through a subsequent withdrawal into a purchase or payment to prove the character of that purchase or payment. The identical sum inference method is a refinement of the clearinghouse theory focusing on an individual matching deposits and withdrawals.

Both theories have their greatest application when a clearly identifiable sum of money, the character of which can be clearly identified, is deposited into a bank account and, within a short period of time, withdrawn to purchase an asset. Upon the dissolution of marriage by divorce or death, the proponent of the characterization of property as separate property can show that an asset is separate property if he or she can trace the deposit of clearly identifiable separate property sums into an account, and thereafter trace the withdrawal of those same funds to the purchase of an asset.

These theories rebut the community-out-first presumption applied in tracing costs. Although case law supports the application of these theories to trace separate property through bank accounts, the theories become less applicable when the deposits and withdrawals are not in exact amounts, when the transactions are separated by greater periods of time, and when the separate property proponent fails to clearly show that the money withdrawn from the account is the actual sum used to purchase the asset whose characterization is in question.

Case Analysis For Clearing House Methods of Tracing

Hanau v. Hanau, 730 S.W.2d 663 ( Tex. 1987).

In Hanau v. Hanau, the husband owned 200 shares of Texaco stock at the time of marriage. Several years after the marriage, the husband sold the Texaco shares for $5,755, and on the same day he bought 200 shares of City Investment stock for $5,634. The husband and wife moved to Texas a few years later. Shortly thereafter, the husband sold the City Investment stock for $6,021, and on the same day he purchased 200 shares of TransWorld stock for $6,170.

Upon the husband's death, his will left his separate property to his children by a prior marriage and his community property to his wife. The issue in Hanau was whether the TransWorld stock could be traced to the husband's separate estate. If so, the TransWorld stock would pass to the husband's children from a previous marriage. The court of appeals held that the shares of TransWorld stock were community property. In addition, the court of appeals held that the parties' stipulations that they had kept their respective stock funds in their own names and in separate accounts throughout their marriage did not overcome the community presumption. Further, the court of appeals stated that merely showing "that the separate funds could have been the source of a subsequent deposit of funds" was not sufficient to overcome the community property presumption.

The Texas Supreme Court reversed the court of appeals by holding that the account had not been commingled. The court based its decision on the parties' stipulation that the husband had always kept the property in his own name and that the wife had no power over the account. The court noted that the husband's children "ha(d) shown the chain of events leading from the Texaco stock to the TransWorld purchase and (had)shown that no other transactions occurred on the days in question, which would have planted the seeds of doubt upon the possible source of the funds used to buy the stocks."

This case presents a good example of the application of the clearinghouse theory. The husband's stock account served as a clearinghouse for several sales and subsequent purchases of stock, all of which were traced to the husband's separate property. Significantly, in both of the stock transactions, the amount of the proceeds received from the sale of stock was within approximately two hundred dollars of the purchase price of the new stock. Although the sums were not identical, the court inferred that, because the transactions occurred on the same day, the proceeds received from the sale of stock were the same proceeds used to purchase the new shares of stock. Again, the short proximity of time in which the transactions occurred appeared to be a controlling factor in the court's application of the clearinghouse tracing theory. In Hanau, it appears that the property was sufficiently traced by showing that the husband deposited the separate funds into an account and immediately withdrew the funds to pay for the other stock from the same account.

Skinner v. Skinner, 202 S.W.2d 318 (Tex. App.San Antonio 1947, no writ).

Skinner v. Skinner was a divorce case in which the trial court had found that the wife owned certain property, including a bank account, note receivable, automobile, house and lot, and a Bandera County Ranch as her separate property. The husband appealed the award of these properties to the wife as her separate property. Both parties suggested at trial that an audit of their property be received into evidence. This audit covered the duration of the marriage. The audit revealed deposits and withdrawals from various bank accounts maintained by both the husband and wife. Additionally, the audit disclosed deposits into an account generally used for the deposit of community property funds, which were undoubtedly the separate property of the wife.

Using this information, the court noted that although the parties had deposited certain separate funds in a bank account that was generally used for community funds, the community funds could be traced into and out of the bank account. Similarly, the community funds could be traced into and out of the account generally used to deposit separate funds. Thus, the court concluded that the parties "were endeavoring to maintain a distinction between community and separate funds and prevent commingling of a nature (that) would prevent a successful tracing of funds." The court also held that the wife had successfully traced approximately $20,000 of separate property funds that she had deposited in the account to the purchase of a home, an automobile, a loan to her son, and various other expenditures, while retaining a balance in the account that was also her separate property.

Although the court did not discuss it in great detail in the opinion, the bank account at issue acted as a clearinghouse for the deposit of separate funds and the subsequent withdrawal of those funds for purchases. Apparently, the court relied heavily on the audit to trace the separate funds of the wife into and out of the bank account. The audit supported the parties' endeavor to maintain a distinction between the community and separate funds.

McKinley v. McKinley, 496 S.W.2d 540 ( Tex. 1973).

Prior to the marriage in McKinley v. McKinley, the husband opened two savings accounts which were the source of funds used to purchase certificates of deposit at question in the trial. Between the date of marriage and the husband's death, numerous deposits and withdrawals were made in both accounts, including withdrawals from both accounts used to purchase the savings certificates at issue.

The husband's executor "filed an inventory and appraisement which listed the two savings certificates as the separate personal property (of the husband)." The wife initiated suit against the executor praying for a declaratory judgment that the two savings certificates were part of the couple's community estate. The trial court concluded that the certificates that totaled $26,400 were the couple's community property and not the separate property of the husband.

On appeal, the court of civil appeals discussed the evidence presented at the trial court. The two savings certificates were in the amounts of $10,400 and $16,000. Both certificates were purchased from savings and loan associations with funds from savings accounts in those institutions. The tracing of the $10,400 account began when the husband had $9,500 on deposit in the savings and loan savings account. The wife did not dispute that this $9,500 was the husband's separate property. The $9,500 originally deposited remained in the account and earned interest until December 31, 1967, when the account balance reached $10,453.81. During this time, neither party made withdrawals from the account, nor all deposits were shown to be interest income. The couple withdrew $10,400 from the savings account on January 2, 1968 and used it to purchase the $10,400 savings certificate. The Supreme Court easily traced the $10,400 savings certificate from the $9,500 originally on deposit with the savings and loan into the savings certificate of $10,400, thus clearly identifying $9,500 of the certificate as separate property.

The $16,000 certificate was actually a "consolidation of three smaller certificates in the amount of $10,000, $4,000 and $2,000." Although the court traced the funds used to purchase the $4,000 and $2,000 certificates to community property accounts, it could not easily trace the character of the $10,000 certificates. The court began the tracing by noting that the husband had an account with a balance of $9,570.27 at a savings and loan. This sum was indisputably the husband's separate property. The parties, however, made numerous deposits and withdrawals between the date of marriage and the date the husband withdrew the $10,000 in question to purchase the savings certificate. The couple deposited $7,740.34 during this period, $1,140.34 of which was interest earned on the account. The court could not identify the source of the remaining $6,600. Additionally, the couple made two withdrawals during this period, one for $437.99 and another for $4,985.91. When the husband finally withdrew the $10,000 used to purchase the certificate, a balance of $1,886.71 remained in the account.

The court determined that the husband did not attempt to trace any of the separate funds in the savings account to the certificate. Therefore, the evidence was "wholly inconclusive as to the nature of funds deposited or withdrawn. To come to any conclusion about the property status of the $16,000 certificate would require surmise and speculation." The court applied an identical sum inference, rather than a clearinghouse theory, to the facts of McKinley. The court was able to clearly determine that the original $9,500 was the separate property of the husband. Additionally, the court identified the increase in value of the account from $9,500 to $10,453.81 as community property interest income. Thus, the court segregated the original $9,500 as the husband's separate property, because the amount of withdrawal was identical to the amount originally in the account.

The identical sum theory was well suited to the tracing of this certificate because no withdrawals were made other than clearly identified community interest income. Also, there was a close proximity of time (the same day) between the withdrawal of the separate property funds from the savings account and the purchase of the savings certificate with the funds. Conversely, the clearinghouse or identical sum inference theory did not apply to the $16,000 savings certificate because the husband made no effort to trace the specific funds from savings and loan association account into the savings certificate. The holding of this case suggests that courts will apply these theories only in a narrow range of facts.

Peterson v. Peterson, 595 S.W.2d 889 (Tex. Civ. App.--Austin 1980, writ dism'd)

In Peterson v. Peterson, the husband entered into a sales contract with a construction company for the construction of a home for the couple. He issued a check for $2,000 as earnest money. The transaction closed approximately one month after the parties' marriage, at which time the husband wrote a check for $32,973.64, the balance of the purchase price. The deed named the husband and wife as co-grantees.

On appeal, the wife contended that the husband had failed to produce any evidence to overcome the community property presumption. However, the husband had "testified that he paid the balance of the purchase price from his personal account, and that the check was drawn against a deposit in excess of $35,000 representing the proceeds from the sale of property which he had inherited from his mother." Relying upon McKinley v. McKinley, the court held that the husband overcame the community presumption by tracing the entire purchase price to his separate funds. The court further stated that it had found the evidence presented during trial sufficient to support the trial court's judgment. Specifically, the Petersons had been married less than one month when Mr. Peterson made the payment from his personal account. Additionally, Mrs. Peterson admitted during trial that her only financial interest in the house was maintaining the home, such as landscaping and furniture.

Unlike the cases previously discussed, the Peterson court tied the purchase money withdrawal to the specific separate property funds in the account without knowledge of what deposits and withdrawals had been made between the date of the marriage and the purchase of the house. The wife contended that the husband's failure to fully document all transactions during this period defeated his attempt to rebut the community property presumption. However, the court apparently gave credence to the fact that the parties were married less than one month when the husband made the payment from his account.

In sum, the court apparently reached its decision on an equitable basis, rather than upon any clear and definite tracing principles. The identical sum inference theory does not apply to this case because there was no identical deposit and withdrawal. Instead, this case is perhaps the strongest example of a court's application of a clearinghouse theory. Here, the court held that husband adequately traced the separate property character of the deposit without exploring whether any intervening deposits and withdrawals changed the mixture of separate and community property in the account.

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