WHAT EXACTLY DOES "TRACING" OF SEPARATE ASSETS MEAN?

The Virginia appellate courts have shown in a series of cases that they are aware of the source-of-funds statute, Code § 20-107.3A3, and they recognize the concept of tracing a piece of a particular marital asset back to an expenditure from a separate asset (or the other way around) and giving the proper "estate" some kind of credit for it.

The Court of Appeals has said some rather incredible things on this subject at times, but they have corrected their sometimes bewildering course and seem to be trying to decide these cases more or less the same way other states do, rather than developing case law solipsistically in the usual echo-chamber Virginia fashion. The Court of Appeals has found moneys traceable sometimes, and non-traceable at other times, but one question it has never answered is just what exactly a court does -- or is supposed to do -- when it holds that an expenditure going into a new asset is "traceable" to a prior asset. It has never discoursed upon what a judge is supposed to look for in tracing. Apparently in the decided and published cases "traceability" has been something like pornography: judges are supposed to know it when they see it.

Most Recent Cases

It's really not that simple. The matter is not at all free from difficulty, as I will explain below. The most recent "tracing" opinion from the Virginia Court of Appeals as of this writing is Moran v. Moran, 29 Va. App. 408, 512 S.E.2d 834, 13 VLW 1267 (3/30/99). In that case the Court of Appeals adhered to its extremely harsh requirement of "addition to value" as earlier set forth in Hart v. Hart, 27 Va. App. 46, 497 S.E.2d 496 (1998); and Martin v. Martin, 27 Va. App. 745, 501 S.E.2d 450 (1998); and found that the marital estate got no credit for the vast amounts of marital money expended on improvements that no one could deny had been made to a house which no one could deny had vastly appreciated in selling price. It also recognized that the marital estate should get credit for at least the principal-retirement portion of the large amount of marital funds that had been expended to pay off the mortgage on the wife's separate-property house, making it partially marital, a mixed asset. And the Court in Martin declared that the Brandenburg formula for crediting the appreciated separate-property portion of a mixed asset (i.e., establishing marital-separate percentage ratios as of the time of the contribution, and dividing the appreciated asset at time of trial in the same percentage proportions) is practically mandatory.

However, in these interesting source-of-funds cases, in which the jurisprudence seems to have been far more costly to marital than to separate estates, the issue of what kind of chain of evidence it takes to trace something was not really discoursed upon at all. The rather crazy requirement that you have to have an actual appraiser's appraisal as of the date of marriage, and as of every year (or perhaps it's every day) during the course of the marriage up to the time of trial, is a kind of comic-relief requirement, but that's not the kind of requirement we mean.

Supposing that it is a question of tracing separate interests out of marital, the question is what kind of nexus legally establishes the identification of this money with that money: just what exactly does "tracing" mean?

Our Unrevealing Cases

What law Virginia seems to have in this area is pretty much summed up in Rahbaran v. Rahbaran, 26 Va. App. 195, 494 S.E.2d 135 (1997), von Raab v. von Raab, 26 Va. App. 239, 494 S.E.2d 156 (1997), and Hurt v. Hurt, 16 Va. App. 792, 433 S.E.2d 493 (1993). These cases unfortunately don't give us very much to go on. The Virginia Court of Appeals's von Raab opinion said that it found tracing evidence sufficient in Rowe v. Rowe, 24 Va. App. 123, 136; 480 S.E.2d 760, 766, but that citation immediately followed a declaration that "we have heretofore said little about how separate property is traced ..."

Deciding just what exactly it takes to trace becomes particularly important in multiple-asset, multiple-destination, and of course multiple-asset/multiple-destination tracing, which happens more often than you would think. The kinds of married couples the courts are dealing with right now, with a few notable exceptions, just don't run their economic lives as a morganatic exercise in constant planning for divorce -- though doubtless the next generation will. Those whose cases are going through the appellate courts right now are ones who have done a lot of commingling. Multiple-asset/ multiple-destination, and the other two, are fully and lucidly explained in Brett Turner's Equitable Distribution of Property, 2d Edition (1994, with supplements), which used to be the Court of Appeals's favorite book, Golden on Equitable Distribution.

When you look at the concept of tracing, and you are looking, for instance, for ways to prove or disprove that the mortgage on a jointly-titled house was paid off with originally-separate-property money (or the down payment was made with such funds, etc.) and you are dealing with money flowing in and out of a joint bank account, or a commingled separately-titled bank account, you have a very familiar situation. Obviously you also have an ungodly mess. Fighting your way through what can be a jungle of deposits, checks, auto-deductions, loans, auto-credits, wire transfers, etc., you will look for landmarks, clues, and guideposts, links to identify this with that.

Although Turner doesn't identify these concepts, the cases he discusses in his definitive and beautifully written treatise seem to show us examples of what I will call identity of time, identity of amount, and identity of intent (which perhaps should be called identity of mere alleged intent). Those seem to about sum up the kinds of "tracing" links you can have with money, since money is all green and superlatively fungible.

Trying The Nexus Issue

These are the concepts you might struggle with if you have a witness on the stand going over what you contend was a hopelessly commingled checking account and listening to her try to prove that everything in the marriage was really all hers. Let's say you represent the husband and the "marital estate" and are not about to help her along.

And suppose this is an account, in her name, in which there were considerable amounts of money flying in and flying out every day from marital and non-marital sources, and going out to destinations that were separate, marital and mixed, almost daily, with what looks like wild abandon. Money would come in from wife's separate-investment notes, her inheritance distributions, and her separate-stock dividends and capital gains from selling her appreciated investment holdings. But it would also come in from her marital paychecks and bonuses, the large regular checks from husband that she had demanded he fork over in order to fund the household, and the rentals of the jointly-titled real estate that she now claims was really separate. It would also come in from large loans which history showed got paid off from marital earnings (mostly his).

But wife has cleverly figured it all out, and is telling the court that each of those expenditures which "added to value" (such as down payment and early lump-sum mortgage payoff) came from her separate moneys - while the day-to-day living expenses, the taxes, the un-creditable improvements (which is all improvements under the Martin rule), and the interest component of periodic mortgage payments, all came from husband's funds.

The very substantial rents on marital real estate were coming into this account too, and vast sums were going out for expenditures on her expensive separate real properties in Virginia. But wife doesn't think that that commingled or tainted them so as to make them partially marital. She is going to prove that all the money going into them was her separate money too; or that if it was husband's money, that money was being spent on those things which under the Martin rule don't count.

Is Intent Enough?

Unlike your tabulations of her account, which show every deposit and every check, wife has her own tabulations of this account which are entirely selective, and show the deposits from separate-property sources, but no paychecks or bonuses. And they show only those expenditures on marital property which she feels she can link to the separate deposits. This of course is entirely arbitrary. It consists of things like showing a $4,041.00 separate-property deposit on say, April 3d and saying "See there? That has to be the source of the $3,000-money deposit on the down payment that was made on April 9," and ignoring the $3,219 paycheck on April 7, in between.

What wife is doing is seeking to establish tracing linkage by intent. In other words, this expenditure should be linked to this asset because she wanted to spend that theoretically greenish-pinkish money there, and not this bluish-green money over here. To an extent, she is also establishing identity of time, because if you ignore some intervening marital deposits hitting the account, you can see a proximity in time between the deposit and the expenditure. Also in some cases she has identity of amount, because she can show a nice round number like $70,000 hitting the account and a $70,000 payout, and you could perhaps rationalize ignoring marital income hitting the account before, after and in between these two money flows, because the amounts were the same. So wife is trying all of these three, and in a sense her argument seems also to be that there was enough separate money in her account to have paid for the marital investments, so the source of money must have been the separate one. (Actually this apparently isn't true, because her numbers do not add up. She would have to have acquired the marital property by spending several more hundred thousands in separate property than she ever claims to have had, but the theory is there nonetheless).

So what does the case law tell you about issues like this?

Helpful Rules Available?

The courts of some states have tried to untangle all of this with LIFO/FIFO sorts of rules like the Marital Purpose Rule (covered in Turner's § 5.23 and in Oldham's article on "Tracing, Commingling and Transmutation," at 23 Fam L Q 219, 224-26), which seems to be that we assume that everything marital was bought with marital.

Then whatever is left, the courts of states like Texas, Kentucky, Illinois, and North Carolina (see Brown v. Brown, 324 S.E.2d 287 (1985)) apparently say, must be separate, and will -- to the extent of that much value -- support the tracing of a separate asset. It's hard to say whether this rule was designed to benefit the marital estate or the separate, as it looks like it could work rather cruelly, if not unjustly or illogically, against each in certain situations. Perhaps there is indeed nothing jurisprudentially wrong with assuming that all the marital money was blown on the mere ephemeral expenditures of day-to-day living in this transitory earthly life while the finer and more enduring things represent separate-property investment. Perhaps the idea is that there should be darned little left to represent separate expenditure once we have accounted for all these marital expenses.

Such concepts might be gotten into if such a case goes to trial. Our hypothetical wife might find some case law supporting linkage by mere intent, but probably not from cases with fact patterns like ours. And the husband on the other hand might either (A) show the numerous other possible sources for the expenditures, or (B) succeed in getting the judge to throw up his hands at the prospect of unraveling an account that was hopelessly commingled.

Evidence In Virginia Cases

So what kinds of coincidences, parallels, linkages and identities have the Virginia cases focused upon? Fortunately or unfortunately, the fact situations presented to the Court of Appeals thus far have not really brought up this question which the Court of Appeals will inevitably face. Rahbaran corrected some rather wild reasoning that was abroad in this State that once there has been commingling, you can't have source-of-funds tracing. That strange thinking, which treated separate-property investments as mere 20-107.3E "contributions", and confused the classification and distribution phases of 20-107.3 property division, would simply have abolished the source-of-funds statute.

Rahbaran, however, acknowledged that commingling is the beginning, and not the end, of the tracing inquiry. It admitted that you only start tracing once you have a commingled asset, and tracing is the remedy for which commingling is the disease, or the answer to which commingling is the question. Rahbaran was also useful for establishing that there can be such a thing as hopeless commingling. However, the opinion is not as instructive as it could be, because the hopelessness there seems to have resulted from the husband's simply having no records at all to do the tracing by.

Obviously there can also be cases in which the commingling is hopeless even though there are records by the ton. Barker v. Barker, 27 Va. App. 519, 500 S.E.2d 240 (1998), a more instructive case, cited Minter v. Minter, 111 N.C. App. 321, 432 S.E.2d 720, 725 (1993) as an illustration of failure to accomplish multiple-destination tracing. But unfortunately Minter is even less instructive than Hurt or Rahbaran, because the North Carolina law is different, and because it was a case of a husband who simply acknowledged from the stand that he had no records, didn't know anything, and had no idea where he was getting his numbers from.

A Menu and a Checklist

Barker was a case that had nearly everything: initial separate contributions by both, a long chain of serial and overlapping investments as the couple moved around the world trading up, one big mixed bank account, some hopeless commingling, and yes, questions of evidentiary sufficiency. Still though, the appellate court didn't have to put its finger on the exact nature of tracing evidence, and the case is known only for the newsmaking part: a spectacularly awful ruling on alimony payment as dissipation (see the dissent) that must be one of a kind nationwide.

Actually, Barker had a lot to say about multiple-source and multiple-destination tracing, and cited much case law and even articles and treatises But the expert working-through of the tracing issue, with its definitive discussion, lucid explanation and economical writing, was not featured by the legal press and was virtually ignored in the headnote summary paragraph that is all that most lawyers have time to read anymore. Its references to the evidence that the Barkers didn't manage to marshal, though, supply a fairly good hint, if not exactly a guide, as to what you should make every effort to find and submit.

What Not To Do

After reciting how the trial judge at one point just had to stop giving credits and throw up his hands in the face of hopeless commingling, Section II of the Barker opinion speaks of "evidence establishing the identity of separate funds throughout the multiple investments and withdrawals" without which the asset stays marital, "whatever approach is used." It was significant to the Court of Appeals that when the funds being used to buy the real estate in question were placed in various accounts, the parties continued to deposit and withdraw. More to the point, there were "numerous gaps in recording the simultaneous and sequential uses of the funds ...". The opinion notes that marital paychecks were coming into the account at this time, and "The record does not reveal what proportion of the money in the account represented the proceeds of the Wheeling home, and what proportion represented the parties' paychecks."

From this point, in fact, it looked like the parties, as tracers anyway, did nothing right. They bought in Michigan, sojourned a while in London, came back and bought in Westport, Connecticut, and thence gravitated to home ownership in McLean, Virginia (meanwhile picking up another house in Michigan), but each time it wasn't possible to tell -- at least by the time the Court of Appeals had to untangle it -- what proportion of the account came from the last-sold house and what the various marital contributions then in the account added up to. By the time the opinion ended the husband, the wife, the trial judge and the Commissioner in Chancery had all had a chance to learn how they didn't do it right.

In the Anderson v. Anderson case, 29 Va. App. 673, 514 SE2d 369, 13 VLW 1457 (1999), a tracing problem was also discussed. The Court of Appeals upheld the trial court's finding that a husband had not sufficiently traced his separate interest in some presumptively marital funds, and it was all right to hold this all irretrievably marital property. The husband brought in flow charts to show where his separate-property money flowed into one account, and attempted to prove thereby the growth of his separate-property interest as a component by a Brandenburg-like analysis. However, although he showed what went in at the beginning, and what was left at the end, his tracing claim must fail. Why? Because he didn't establish the interest rate the bank was paying on his separate-property component and causing it to increase, and he did not put in bank statements that showed, along the way, what there was in the account over the years and months that growth of his funds went along. As to another fund, he did not prove to the Court of Appeals's satisfaction that he had kept his separate funds separate. Once again, he did not bring in all the bank statements to show just what money was where and when.

Sufficient Tracing

In Rowe v. Rowe, 24 Va App 123, 480 SE 2d 760, 766 (1997), the Court found that "it was evident" that the $82,000 from a separate-property house was "somehow" and "in some fashion" invested in the marital-property house, and that this is sufficient for tracing. It does not say anywhere why it was evident. The Court admitted that it didn't even know whether that money went into improvements or into mortgage paydown (but it could have been an inescapable fact that there was not any other way for the asset to have been paid for).

The Court in von Raab v. von Raab, 26 Va App 239, 494 SE 2d 156 (1997), recognized a transmutation by reason of wife's making significant contributions that increased the value of the separate property, and her signing on for liability when a loan was procured for investment in it. As the Court saw it, this destroyed husband's source-of-funds separate interest in the transmuted property. It should be noted that the Court of Appeals could have said, but did not, that wife could not prove the marital percentage of the asset.

Now in Hurt v. Hurt, the Court of Appeals actually found separate money maintained separate and so proved, and the marital presumption overcome, within one big, commingled account. Why? the husband swore he had a set of ledgers that showed what was really what. Would this work if you or I tried it? An idle question better not asked.

It would be interesting to know more about that "complex system of ledgers" that Mr. Hurt convinced the judge he had been keeping, which separated his one business-and-household bank account into numerous meticulously-kept sub-accounts for different purposes, known only to himself and his bookkeeper, who testified about them. (First off, as the opinion is not quite clear on this, were they written, or only in his and the bookkeeper's heads? Secondly, if written, were they in the courtroom? Were they put in evidence?) However, the opinion doesn't give us any detail at all: it just says that he told the trial judge that and the trial judge believed him, and that's not reversible error. Apparently the idea was that a course of separate-property investment that began and ended with separate property was kept sealed off in one of these entirely theoretical sub-accounts that existed on his private books unknown to the bank that had his money. A look at those ledgers would give attorneys what might be a useful concept of what you have to show, and be even more useful to divorce-planning spouses.

But the Court of Appeals has not been forced to look at, nor speak of, the linkage in time, in amount, intent or whatever, that separates one kind of green money from another shade of green money and gives you sufficient evidentiary establishment of tracing.

More Authority

Useless as it is to study unpublished opinions, it needs to be noted that Swisher, Diehl and Cottrel's treatise (Virginia Family Law, Theory and Practice, 2d Ed.(1997)) goes into tracing in its 1998 supplement, and cites several unpublished opinions that address in one way or another the sufficiency of tracing evidence. Insofar as their sensible holdings are not contradicted by published opinions, Pembleton v. Pembleton, No. 1531-96-2 (12/17/96); Clark v. Clark, No. 1531-97-2 (9/15/98), and Eisenberger v. Eisenberger, No. 2549-96-2 (11/19/96), are certainly worth taking a look at in that regard. An unpublished case appealed from Roanoke County, with facts very close to our hypothetical, finding that the bank documents did not begin to show the tracing backup that wife claimed they showed, is Blanding v. Blanding, No. 1103-98-3 (3/16/99), summarized at 13 VLW 1324.

Meanwhile, lawyers in the trial courts should be doing their best to establish any kind of tracing they can, and as many kinds as the evidence will let them show, while hoping and praying all the time that the cases will be almost as simple as the ones the Court of Appeals has already looked at, and will enable them to keep it simple.

Should you be using an expert to prove your points here? The use and non-use of forensic accountants in this business could certainly be looked at in two different ways. In the real case that partly inspired this article, counsel got together and decided neither was going to use one. Tracing facts are hardly a matter of opinion, except when you get to the ultimate issue -- an application of facts to Virginia statutory and case law that is strictly for the judge. A CPA could save you from a whole lot of boring simple addition and looking through checks -- after you had briefed him on what the law says to look for and until the moment when you have to go through everything and check his work anyway. Is the expert going to testify, "Looking at the period 1982 to 1992 I found 82 checks that I regarded as spending of marital funds on 'Property B,' and the check numbers, dates and payees were as follows ..." ? Yet this approach could well be wrong, and it is easy to see how counsel who see the issues differently would see this choice differently.