Must a Virginia divorce court judge divide a home worth less than the mortgage balance?

Must a Virginia divorce court judge divide a home worth less than the mortgage balance?

No, as explained by the Virginia Court of Appeals in the case of Fox v. Fox, Record No: 0643-12-1 (Va. Ct. Appeals, 2012), a judge conducting equitable distribution under Virginia Code Section 20-107.3 in a divorce case is not required to include property with negative equity or no value in equitable distribution.

In the Adam H. Fox v. Jessica C. Fox case, the husband and wife had been married for more than nine years when wife filed for a divorce in the Circuit Court of the City of Suffolk, Virginia.  The husband responded with an answer and cross bill.  Both parties requested equitable distribution, the process available in a Virginia divorce in which the divorce court judge can divide up the parties’ property and debts.  In Fox, the husband and wife owned real property in Virginia and in Florida.  Neither property had equity; each was worth less than what was owed on the mortgage.  In addition, the rent from either property was not sufficient to cover the mortgage payments on that parcel.  Further, the parties did not agree on the disposition of the properties in the divorce:  the husband wanted to keep both parties and equally divide the monthly deficit, while the wife wanted to sell both properties and equally divide the shortfall from the sales.

At the equitable distribution hearing, the Virginia trial court found that both properties were underwater, with negative equity reflecting the fact that the mortgage balances exceeded the fair market value of each.  The husband testified that he was not able to refinance the mortgages by himself.  The Virginia Circuit Court judge trying the divorce case consequently decided that he would not divide the properties in equitable distribution, but would allow the husband and wife, upon entry of the final decree of divorce, to become tenants in common (with the termination of the right of survivorship in the tenancy by the entirety, as provided in Virginia Code §20-111), subject to a foreclosure or sale by the parties.  The husband made a motion to rehear and the court affirmed its ruling, but allowed the parties to present an alternate proposal.  None was forthcoming and the husband appealed the decision.

On appeal, the Virginia Court of Appeals first acknowledged that Virginia’s equitable distribution scheme found in Va. Code § 20-107.3 mandated that the divorce judge “determine legal title, ownership, value, whether property is marital or separate, and shall determine the nature of all debts, separate or marital.”  The court recited the three step process the judge is required to follow in equitable distribution: 1. Classify the property as separate, marital or hybrid (part separate and part marital); 2.  Assign a value to the property based on evidence provided by the parties; and 3.  Distribute the property to the parties, taking into consideration, the following factors set forth in Section 20-107.3(E) of the Code of Virginia:

“1. The contributions, monetary and nonmonetary, of each party to the well-being of the family;

2. The contributions, monetary and nonmonetary, of each party in the acquisition and care and maintenance of such marital property of the parties;

3. The duration of the marriage;

4. The ages and physical and mental condition of the parties;

5. The circumstances and factors which contributed to the dissolution of the marriage, specifically including any ground for divorce under the provisions of subdivisions (1), (3) or (6) of § 20-91 or § 20-95;

6. How and when specific items of such marital property were acquired;

7. The debts and liabilities of each spouse, the basis for such debts and liabilities, and the property which may serve as security for such debts and liabilities;

8. The liquid or nonliquid character of all marital property;

9. The tax consequences to each party;

10. The use or expenditure of marital property by either of the parties for a nonmarital separate purpose or the dissipation of such funds, when such was done in anticipation of divorce or separation or after the last separation of the parties; and

11. Such other factors as the court deems necessary or appropriate to consider in order to arrive at a fair and equitable monetary award.”

The Virginia Court of Appeals held that the trial court judge clearly considered factors numbered 7 and 8 above in deciding that the properties had negative equity.  The Court of Appeals further noted that the trial court judge’s options with respect to the disposition of joint property subject to equitable distribution is set forth in Virginia Code Section 20-107.3(C), which provides as follows:

“C. Except as provided in subsection G, the court shall have no authority to order the division or transfer of separate property or marital property, or separate or marital debt, which is not jointly owned or owed. The court may, based upon the factors listed in subsection E, divide or transfer or order the division or transfer, or both, of jointly owned marital property, jointly owed marital debt, or any part thereof. The court shall also have the authority to apportion and order the payment of the debts of the parties, or either of them, that are incurred prior to the dissolution of the marriage, based upon the factors listed in subsection E.”

Thus, the Virginia divorce court judge may transfer or order the transfer of jointly held property to one of the parties, or allow one to purchase the other’s interest and direct the allocation of the proceeds, or order a private or public sale.

In analyzing precedent, the court ruled that the case of Shaughnessy v. Shaughnessy, 1 Va. App. 136, 336 S.E.2d 166 (1985), cited by the husband was inapposite, as that divorce case concerned a situation where the trial court judge did not perform its duties under Section 20-107.3(E), but instead encourage the parties to resolve equitable distribution by themselves.  The court noted that its decision Alphin v. Alphin, 15 Va. App. 395, 424 S.E.2d 572 (1992), established that the “may” language of subsection (C) of Virginia Code Section 20-107.3 indicates that the judge’s three options are permissive, not mandatory, and only when those options are feasible.

The Virginia Court of Appeals upheld the trial court’s exercise of discretion and ruled that the court was not required to divide the two properties.

You should consult with your attorney or Richmond Divorce Lawyer James H. Wilson, Jr., concerning the possible disposition of your jointly owned real property in a Virginia divorce case.

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