When it comes to 2021 appellate decisions, the Saba and Femiano drama deserves its own post . (Spoiler: the drama is still with the Arizona Supreme Court) These first two 2021 appellate decisions to be discussed actually started in 2020. Last year at this time, I reported this (below) about the Femiano (April 2020) opinion:
Femiano (4/23/2020) This case is a return to and clarification of Drahos calculations – and in December, the Arizona Supreme Court declined to review Femiano, so this Femiano COA opinion remains good law. Where a home was purchased during the marriage but established as the separate property of one spouse (by disclaimer deed), the community’s interest in that home needed to be calculated. The Drahos formula was an incorrect application, as Drahos involved a property acquired prior to marriage. If the community pays all costs associated with purchasing and improving a property acquired during the marriage, with no separate property contributions, and the property appreciates in value, the community is entitled to 100% of the increase in value, not just a portion.
(Note that in Femiano, ALL of the down payment and other monthly payments on the property came from community funds. This is important in light of Saba.
Femiano remained uncontroverted “good law” for a very short time, because in January 2021, the Saba opinion came out: Saba v. Khoury
Saba also involved a disclaimer deed executed during the marriage. Saba involved two properties, Leisure and 30th, , both purchased during the marriage. Wife took out financing for the properties and Husband signed disclaimer deeds to both properties. 100% community funds were used to purchase the Leisure property, with the loan in Wife’s name. Part community and part SP (Wife’s) were used to purchase the 30th property, with the loan in Wife’s name.
In Saba, Husband argued that a higher level of proof applies to disclaimer deeds signed during a marriage, and equated those deeds to post-nuptial agreements and trusts (see Harber and Austin cases). That argument was rejected by the Court of Appeals (and the Arizona Supreme Court is not going to review that argument). The standard and burden of proof to overcome a disclaimer deed is the same whether the parties are married or not: fraud or mistake must be shown by clear and convincing evidence. This is consistent with Femiano. Unless that burden of fraud or mistake can be met, disclaimer deeds are enforceable. Husband did not sustain a fraud or mistake argument regarding this disclaimer deed.
As the disclaimer deed was upheld, the community’s interest in these properties (held in Wife’s name) needs to be calculated. The properties increased in value during the marriage. The Saba court applied the Drahos calculation to determine the community lien on an appreciated property.
The difference between the lien calculation in Femiano and the lien calculation in Saba was how the property appreciation during the marriage was handled. In Femiano, 100% of the appreciation was allocated to the community as only community funds had been used to pay for/ improve the property. The Saba court didn’t do this, because to allocate all of the property appreciation to community property would ignore the disclaimer deed that unquestionably made the property the separate property of one spouse. The Saba court stated that the Drahos/ Barrett calculation of value which apportions increases in value between CP and SP was the accurate valuation method. Femiano had explicitly parted from the use of the Drahos calculation, finding it inequitable under those facts.
The Court of Appeals in Saba then recognized that the way the Femiano court had calculated the community lien had essentially made the disclaimer deed a legal nullity. So in Saba, the COA “parted” from Femiano. “Awarding the community Leisure Lane’s full appreciation ignores the reality of what the disclaimer deed represents. But for that disclaimer, Husband would be entitled to an equal interest in the full value of the Leisure Lane residence. And an award under Femiano [which would in essence give him an equal interest because only community funds were utilized] would ignore the fact that Wife remains solely liable for the outstanding loan balance. If the community were to receive 100% of the appreciation then Husband would be rewarded 50% of the property’s upside with none of the risk on the downside. This result is inequitable and unreasonable.”
So, Saba “parts with” Femiano but does not explicitly overrule it. The way the Saba COA calculates the community lien (i.e., the use of the Drahos formula) is under review by the Arizona Supreme Court, and was argued on 10-7-21. When the Supreme Court rules on this, Arizona trial courts should have guidance on exactly how to apply the Drahos formula to situations where a disclaimer deed was executed during the marriage and some community funds were contributed to the separate property real estate.
That’s way more than enough on those two 2021 Court of Appeals’ decisions, and as I mentioned, the Arizona Supreme Court should be resolving that issue, so more to come. More 2021 appellate decisions will follow in the next post.