Literally one day before the parties were married, Mr. Drahos purchased a home and took title solely in his name. For additional context, the property was purchased for $21,000.
Almost thirty years later, the parties filed for divorce. By this time, the property was worth approximately $80,000. As part of the proceedings, Ms. Drahos alleged that the parties used community property to pay for the property during the marriage. Ultimately, the family court awarded 50% of the value of the home to Mrs. Drahos.
Mr. Drahos appealed.
Calculating equitable or community liens
Under Arizona law, property acquired by either spouse prior to marriage is separate property. While separate property is awarded to the owning spouse in the event of divorce or legal separation, this does not mean that the non-owning spouse has no interest in that property or, more specifically, its value.
When community funds or other efforts, including labor, are used during the marriage to increase the property’s value, it creates an equitable interest commonly referred to as a community lien. This occurs quite frequently in Arizona as lenders often encourage or require married couples to execute disclaimer deeds during the financing process.
In this case, Mrs. Drahos testified that community funds were used for mortgage payments and repairs. This established the community lien and the Court of Appeals looked to California, another community property state, for how to calculate the value the community added to Mr. Drahos' separate property.
Borrowing from a California case, the Court of Appeals established the following formula to calculate the value of community liens:
C + [ (C/B) * A ]
C = Community contribution toward principal
B = Purchase price
A = Appreciation
While the record was unclear and there was some dispute regarding the exact amount of community contributions, the Court of Appeals reversed the family court’s decision to award Mrs. Drahos half of the property’s value.
Update: Recent appellate decisions, including a case decided by the Arizona Supreme Court, have established that the Drahos formula is merely the starting point for family courts. This means that family courts have discretion to deviate from its calculation when determining the value of a community lien, if it would be unfair given the specific circumstances of the case.
Additionally, a slightly modified version of the Drahos formula is used if the separate property appreciated prior to the marriage.
Conclusion
It has been nearly forty years since this case established the formula to calculate community liens. Yet many attorneys and courts, including different panels of the Court of Appeals, still reach very inconsistent results.
There are two critical takeaways: (1) this formula is just the starting point for calculating liens—the individual circumstances of a case may make it unjust or unfair, in which case the family court has discretion to use a different method; and (2) calculating the community lien is just the first step, family courts are not required to divide community property equally.
So if your case involves a community lien or disputed interest in community/separate property, you should take advantage of a free consultation with an experienced divorce lawyer. This can be a complex issue, even for other divorce lawyers, so it is not something you want to do yourself.
