SEPARATE PROPERTY TRACING

What Is The Community Out First Rule?

The community-out-first theory was judicially developed over many years. It endures today as the primary method of tracing monies from commingled accounts back to their places of origin. When expenditures are made, community funds are exhausted before separate funds are reached. The following are the cases that have helped developed the community-out-first theory.

Case Analysis For Community Out First Rule

Sibley v. Sibley, 286 S.W.2d 657 (Tex. Civ. App.Dallas 1955, writ dism'd)

The Dallas Court of Appeals announced the community-out-first theory in the case of Sibley v. Sibley. In Sibley, a husband and wife shared a joint bank account comprised of  $1,698.34 in community funds. The couple deposited $3,566.68 of the wife's separate funds into the joint account, thus commingling the wife's separate funds with the community funds. The parties made a number of deposits and withdrawals to the account; however, the account never dropped below the sum of $3,566.68, the total of the wife's separate property funds, until the couple made a down payment on a farm with funds from this account. The concern was whether the farm was community property in nature, or whether it was separate, either in whole or in part, because the purchase sums were derived from the account.

The court applied a trust rule developed for the establishment and enforcements of trusts which provides that “Where trustee draws checks on a fund in which trust funds are mingled with those of trustee, trustee is presumed to have checked out his own money first.” In keeping with that analogous presumption, the court presumed that the community funds in the joint bank account were withdrawn first, before the wife's separate funds were withdrawn. The court held: “The community moneys in joint bank accounts of the parties are therefore presumed to have been drawn out first, before the separate moneys are withdrawn; and since there were sufficient funds in the bank, at all times material here, to cover appellee's separate estate balance at the time of the divorce, such balance will be presumed to be her separate funds.”

It is important to not that Sibley has been distinguished most recently by an unreported case In re Marriage of Smith, Not Reported in S.W. 3d, WL 22715581 (Tex.App.- Amariool, 2003): “Although Matthew acknowledged that community funds had been deposited into the account, in his brief, he bases his support of the findings of the trial court on Sibley v. Sibley, 286 S.W.2d 657 (Tex.Civ.App.-Dallas 1955, writ dism'd ) , which held that where an account contains community and separate funds, it is presumed the community funds are drawn first so that the balance in the account is presumed to be separate property. Although Sibley was a divorce case, it is not controlling here because it involved a "joint account," which is not presented here.”

Harris v. Ventura, 582 S.W.2d 853 (Tex. Civ. App.--Beaumont 1979, no writ)

In Harris, a surviving widow brought suit against the executrix of her deceased husband's estate to recover her community property share. The widow claimed certain bank accounts as her separate property, but the only evidence concerning the source of the funds was her testimony that "[s]ome was gifts and some may have been my social security checks, I don't remember." This evidence, which did not even purport to establish the separate character of all the funds on deposit, was obviously insufficient to overcome the presumption of community property.

An asset in question was a checking account containing $4,997.51. This accounts consisted of commingled funds of the husband's separate property, some community property, and funds of unknown origin. Upon final analysis, the trial court that he window did not overcome the community property presumption.

The appellate court commenced its review with the community property presumption and then held that the party claiming the property as separate property bears the burden to trace and clearly identify property claimed as separate property. The court stated that tracing showed that on April 12, 1974, the balance in the account was $460.15. This balance was presumptively community property. On April 16, the husband deposited the sum of $7,825.79 which constituted proceeds from the sale of his real estate acquired prior to marriage. These funds, therefore, were his separate property. On July 2, he deposited $1,174.62, of which, $878.63 was from the husband's inheritance. Between April 12, 1974 and   January 1, 1975, he made other deposits to the account, representing interest earned that was admittedly community property.

The aggregate of the community property deposits and the original balance was  $1,339.63. Separate property deposits totaled $8,704.42, or $7,825.79 plus $878.63 in interest. Withdrawals during the period totaled $5,046.54. The court of appeals concluded that the husband's heirs had traced $3,657.88 of the bank balance as the husband's separate property.

The court of appeals then reasoned that if $3,657.88 of the ending balance was separate property, then the community balance must have been $1,339.63 ($4,997.51 minus  $3,657.88). Applying the community-out-first rule, however, the initial community balance of $460.15 had been drawn out in the first withdrawal. Therefore, the trial court overstated the community balance by $460.15. Adding this amount to the previously determined separate property balance gave a new total ending balance of separate funds of $4,118.03. Subtracting $4,118.03 from the ending balance of $4,997.51 gave a community balance of $879.48. The wife owned half of this, or $439.74. Tracing failed as to the other accounts because the court of appears held that the community property presumption had not bee overcome. Without the evidence of traceability being adequately developed at trial, the burden could not be overcome. Venezia v. Venezia , 2000 WL 1273340, Tex App. – Beaumont 2000 Harris v. Ventura , supra.

In the instant case, the record reflects that on November 29, 1993, appellee withdrew  $12,199.19 cash from the parties' joint bank account and tendered it at the closing of the purchase of the Nottinghill community residence. The record also indicates that at the time of the $12,199.19 cash withdrawal, the total balance in the parties' bank account was $15,255.47. Of this total balance, appellee properly traced his separate sale proceeds previously deposited in the amount of $11,096.78. That would leave $4,158.69 as representing the community's cash on hand in the bank account at the time of the Nottinghill purchase. Under the community-out-first rule, the $4,158.69 must be subtracted from the $12,199.19 closing payment. The amount remaining, $8,040.50,

represents the proper reimbursement figure due appellee, not $10,473.98 as appears in the judgment.

The opinion does not contain enough information to determine exactly what process the court of appeals used in tracing the commingled bank account. However, it is apparent that the court accepted the proposition that by showing the character of each deposit, and presuming that community funds were drawn out first, a party can trace separate property funds that have been mixed with community funds in a bank account. The court traced the characterization of the husband's interest in the land owned through a conveyance and reconveyance of the note to and from a bank, back into the land, and finally into a new note and certificates of deposit. The court did not recognize any interest that may have accumulated on the original note prior to foreclosure or on the certificates of deposit.

Barrington v. Barrington , 290 S.W.2d 297, 298 (Tex. Civ. App.Texarkana 1956, no writ)

In Barrington v. Barrington, the divorce court adjudicated the parties' property rights  and partitioned their community property. One issue in the case involved the character of the earnings from the Barrington Tire Shop from March 31, 1954 to March 1, 1955. These earnings totaled $3,620.92, and the withdrawals during that period totaled $4,637.22. The trial court found that the couple had made these withdrawals for their support, maintenance, and pleasure, thus, the court concluded that the withdrawals were of "community funds for community purposes." The trial court also found that the earnings of the Barrington Tire Shop never equaled nor exceeded regular withdrawals at any time during the marriage. In fact, the trial court found that withdrawals during the marriage exceeded the earnings of the business by $1,140.41. Thus, the evidence supported the finding that no community funds had been invested in the tire shop business and that all of the stock and machinery used in operation of the business were the separate property of the husband. The Texarkana Court of Appeals therefore affirmed the trial court's judgment.

The appellate court noted that the real estate, the original tools, appliances, office furniture and other original items in the Barrington Tire Shop that Mr. Barrington had owned prior to the marriage had not changed their form and remained his separate property upon the dissolution of his marriage. The remaining property of the Barrington Tire Shop purchased with the bank account of Barrington Tire Shop during the marriage and the stock of tires on hand at the dissolution of the marriage were the separate property of the husband.

DePuy v. DePuy , 483 S.W.2d 883, 887 (Tex. Civ. App.Corpus Christi 1972, no writ).

The parties in DePuy v. DePuy had one checking account. Forty-eight days after marriage, the husband deposited an inheritance check for $66,647.01 in the account. The husband used the money to invest in an Austin duplex and to purchase stocks and furniture. On January 7, 1969, the account had a balance of $2,215.12.

The Corpus Christi Court of Appeals noted that "(i)t is apparent that the parties had net earnings which approximated their living expenses with only small amounts, if any, left over." Accordingly, the court found that the investments and property purchased with the inheritance money from the account could not have been made from community income because their living expenses roughly equaled their income. Approving the trial court's determinations, the court of appeals held "(the) separate funds were not so commingled... as to defy segregation. "

The unusual fact situation in this case allowed the court to deviate from the general rule. Here, the husband made a number of "honeymoon" (forty-eight days into the marriage) purchases with a $66,000 inheritance he had received from his grandfather. When the marriage terminated four years later, the courts allowed him to "trace" a large portion of the inherited funds into various investments that the courts deemed separate property.

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