By Honorable Kenneth A. Abraham

A significant area of litigation in domestic relations law centers around the commingling of marital and non-marital property. This article will discuss the development of the law of transmutation in Illinois and close with practical tips based upon an analysis of recent case law.

Contribution results from the addition of marital or non-marital property to property owned by the other spouse. The product of this contribution is commingled property. An example is taking money earned from employment during the by one spouse. Under Illinois law, the property contributed may be transmuted (or converted) to the estate of the property which receives the contribution. Thus, in the above example, the marital money is transmuted to non-marital property. Under certain circumstances, the contributing estate may be reimbursed for that contribution.

Prior to October of 1981, the concept of transmutation existed solely through appellate court decision. On October 21, 1981 the Supreme Court’s decision in the case of Irmo Smith, 86 Ill.2d 518, was announced. The mandate of that case may remain as precedent for a certain set of facts.

In Smith, the parties had been married for approximately 22 years at the time of trial. The husband owned a non-marital office/rental property. It was acquired for $45,000 and the source of the purchase price was an inheritance. The wife’s name was never placed on title. However, $3,800 of marital monies were used for improvements. The trial court took a somewhat innovative approach and said that he property was non-marital, save for those improvements, which were marital. The Supreme Court disagreed and held that the non-marital property was transmuted to marital property, thus formalizing what has been viewed as an "all or nothing" characterization. Specifically the Supreme Court said:

"…Where a spouse who holds non-marital property causes it to be a commingled with marital property or with non-marital property of the other, we hold that the commingled property is presumed to be marital property". (427 N.E.2d 1239, 1244)

This decision appears to have been firmly founded on the stated legislative pronouncement that marriage under the Illinois marriage and dissolution of marriage act ("IMDMA") is a partnership and that money put into the partnership as well as assets acquired through partnership participation should be divided. The real fear of Smith is that a minor amount of contribution could result in a windfall.

Two caveats are appropriate in analyzing Smith. First, it is just a presumption. Second, the Supreme Court left open a door by stating that the trail court could consider the contribution of the husband in equitably dividing this and other assets. That consideration could come about by 503 (D), of the IMDMA. Under section 503 (D), contribution is the first of twelve factors that the court must consider when apportioning property. Specifically section 503 (D) requires the court to consider "The contribution of each party to the acquisition, preservation, or increase or decrease in value of the marital or non-marital property, including the contribution of a spouse as a homemaker or to the family unit."

The Adoption of Public Act 83-129 introduced the concept of transmutation into the lexicon of the IMDMA through the adoption of Section 503 (C). I suggest that the impact of Section 503 (C) is:

A. To establish a legislative presumption of transmutation;

B. To change the Smith result by holding that the transmuted property is characterized according to the property receiving the commingled property except if the commingling results in acquisition of new property (in which case it is characterized as marital);

C. To establish a method a reimbursement to the contributing Estate on a dollar-for-dollar basis (under Section 503 (D) contribution is only a general consideration and the court may reimburse anywhere between all or none of the amount contributed); and

D. To place the burden on the party seeking reimbursement, and to set the standard of proof as clear and convincing; I suggest that a thorough understanding of Section 503 (C) can best be achieved by a review of recent case law.

I. Commingling

What is commingling? Certainly it is clear that, if someone places non-marital funds (E.G. Inheritance) into a joint account the property is commingled. (IRMO Vehlein, 265 Ill. App.3d1080, (1st Dist., 1994). In so doing, the money deposited lost its identity. That is the key to determining if there is commingling. The mere mixing of marital and non-marital property may not be enough to constitute commingling. For example, where monies from a non-marital partnership are deposited into a common cash account consisting of several sub accounts, one of which was the vessel into which marital income was deposited, the Appellate Court has held that there is no loss of identity and therefore no isue of commingling (IRMO Landfield, 209 Ill.App.3d 678, (1st Dist., 1991).

When a new asset is acquired through a combination of marital and non-marital property, there is a loss of identity and the property will be treated as marital. In IRMO Patrick, 599 N.E.2d 119 (4th Dist., 1992) the husband solely owned certain farm equipment acquired before the marriage. After the marriage he contributed some of that equipment plus marital money in order to purchase of new equipment. Therefore, the equipment acquired became marital.

Is there commingling when stock held in an investment account titled solely in the name of the husband also contains stocks purchased with marital monies? In IRMO Davis, 215 Ill.App.3d 763 (1st Dist., 1991), Mr. Davis commingled non-marital monies with marital funds to acquire stock. He argued that since shares of stock are separately identifiable, there was no commingling. The proofs, however, did not substantiate a nexus between one estate of property and the acquisition of specific stock. Since there was no proper tracing, there was commingling and all the stocks were considered marital.

Often one of the spouses is a shareholder in a business by which they are employed. Even though stocks are issued during the marriage and solely in the name of the employed spouse, they will be characterized as marital only if the consideration is, in toto or in part, the product of the efforts of the spouse. If, however, stock is issued by a corporation to an individual because of appreciation in value of non-marital shares (E.G. stock split), the shares issued are non-marital regardless of whether issued during the marriage. IRMO Jelinek, 244 Ill.App.3d 496 (1st Dist., 1993).

All of the cases cited in this article since Smith involve commingling of non-marital property and marital property. Does Section 503 (C) apply to a case where non-marital property of one party is commingled with non-marital property of the other? For example, if one party owned a non-marital residence prior to the marriage and, after the date of marriage their spouse contributed non-marital money to improve that property, is there a commingling under Section 503 (C)?

One Appellate District has held that Section 503(C) does apply. In IRMO SNOW, 277 Ill.App.3d 642 (4th Dist., 1996), the wife had contributed, according to her testimony, the sum of $12,000-$13,000 in non-marital monies towards improvements to the husband’s non-martial house. The husband testified that she only contributed $9,000. Apparently the Trial Court believed the husband’s version of the amount contributed and treated the commingled funds as if they were marital because it awarded 50% of the $9,000 to her. The Appellate Court stated that:

"Although Section 503 (C) (1) of the act refers to the commingling of marital and non-marital property, we see no reason why that section should not apply when one spouse’s non-marital funds are contributed to the other spouse’s non-marital funds are contributed to the other spouse’s non-marital property resulting in a loss of identity of the contributing funds"

(277 Ill.App.3rd Dist. 642, 645)

Therefore, the entire residence was presumed to be marital property.

Those opposing this view should not lose hope! The second district has not ruled on the commingling of non-marital property of one spouse with the non-marital property of the other. A strong argument can be made that Section 503 (C) (1) does not apply and that the holding in Smith (SUPRA) governs. First, Section 503 (C) begins with the following introduction:

"Commingled Marital and non-marital property shall be treated in the following manner, unless otherwise agreed to by the spouses:" (Emphasis Supplied)

Therefore, a literal reading would indicate that this section does not apply. Second, looking back at Smith, that court said:

"…Where a spouse who holds non-marital property causes it to be commingled with marital property or with non-marital property of the other, we hold that the commingled property is presumed to be marital property". 427 N.E.2d 1239, 1244 (Emphasis Supplied).

Third, since the historical and practice notes tell us that the legislature in adopting Section 503 (C) specifically had in mind remedying the holding in Smith, it follows that the change in wording from Smith to that of P.A. 83-129 must have been intentional. The result of applying Smith to the facts set forth in Snow would be the transmutation of the marital money, subject only to the general consideration contained in Section 503(D).

The next area of commingling that will be explored is the claim of undercompensation. One spouse often argues that the other has been paid as salary was reinvested in a non-marital business. In IRMO Werries, 247 Ill.App.3d 639 (4th Dist.,1993), the wife cited the vast increase in value of the non-marital business through the course of the marriage as evidence that her husband was underpaid and, therefore, it was really the marriage that invested in the business. Hence, the marriage should be reimbursed on the appreciated value of that business. The Appellate Court disagreed, holding that unless there is proof that the spouse was in fact underpaid, the marital estate was appropriately compensated through his income.

Finally, while all of the cases I have cited seal with a mixture of property and money I would be remiss if I didn’t discuss "Personal Efforts". Where one party contributes personal efforts during the marriage to improve non-marital property, they may be compensated under Section 503 (C) if the claimant shows that those efforts were substantial and that they resulted in substantial appreciation of the non-marital property. Further, the efforts must be related to the increase in value. Thus, the contribution of a spouse as a homemaker is unrelated to appreciation of the non-marital asset (E.G. the residence in which they reside during the marriage). IRMO Marthens, 215 Ill.App.3d 590 (3rd Dist., 1991). Proof of substantial efforts must be supported by facts contributed to the substantial increase in value of the non-marital property and that the increase was not due to some other cause. IRMO MORSE, 143 Ill.App.3d 849 (5th Dist., 1986).

As a reminder, proof of appreciation is only necessary if one seeks reimbursement for personal efforts. The commingling of marital money and non-marital real estate may be reimbursed regardless of whether the property increases in value. IRMO ADAMS, 183 Ill.App.3d 296 (4th Dist., 1989).

II. Transmutation

Section 503 is often misconstrued as mandating that whenever marital and non-marital property are commingled they transmute (or become) marital property. That is not the import of this section. Rather, property is transmutated to the receiving estate. If a spouse has a non-marital account and marital monies are added to the same account, the marital funds contributed are transmuted to the non-marital property of the owner of the account, subject to possible reimbursement. IRMO Phillips, 229 Ill.App.3d 809 (2nd Dist., 1992).

III. Tracing

Once property has been classified as martial or non-marital, one seeking reimbursement must trace the contribution. The tracing from one estate of property to another must be by clear and convincing evidence.

What is tracing? One definition is that "Tracing of funds is a procedure which allows that court to find that property which would otherwise fall within the definition of marital property is actually non-marital property under one of the situation exceptions". IRMO Jelinek, 613 N.E.2d 1284, 1290 (1st Dist., 1993). I suggest that a more useful definition is that "tracing of funds is a procedure which, determines the origin of commingled property". IRMO Guntren, 141 Ill.App.3d 1 (4th Dist., 1986).

IV. Reimbursement

Even if commingling has been proven and the amount traced, reimbursement is not required if there is a gift. Second, if the contribution is traced and proven by clear and convincing evidence, it is still necessary to establish the value of what is being sought. Please note that "value" is not necessarily equal to the amount contributed. Therefore, if the amount of the contribution increased through an increase in the asset, proper proofs may lead to a reimbursement for the increased amount. That may arise when monies are commingled in an account which earns interest.

In the event that the marital estate has already been compensated for its contribution to the non-marital estate no reimbursement will be ordered. If, for example marital money was invested in repairs or maintenance to a non-marital residence in which the parties resided, the court may treat the non-marital estate as having been reimbursed through the use of the property. Irmo Albrecht, 266.Ill. App.3d 399 (4th Dist. 1994).

Once common problem which faces practitioners is where mortgage payments on a non-marital residence in which the parties reside are made from marital funds. In Snow, Supra, the court held that the marriage had been compensated where both parties resided in the non-marital residence and $25,000 in mortgage payments were made from marital monies over a period of at least ten years. The counterpoint to that decision is found in Irmo Nelson, 297 Ill.App.3d 651 (3rd Dist., 1998). The parties had been married for six years. Five years prior to the marriage, the husband had purchased a residence from his mother. Although the exact amount of the contract payments made during the marriage was not specified, "several payments" had been made on the purchase contract. Without even commenting on the fact that the parties enjoyed the use of the residence during the marriage, the Appellate Court stated:

"While we recognize that the residence was anon-marital asset, Tracie’s contributions to the marital residence were significant. Tracie worked full time, provided health care benefits for the two children and completed household chores. Without these efforts, funds to pay the purchase contract of the non-marital asset may not have been available. Thus, reimbursement of the payments is not against the manifest weight of the evidence" (297 Ill.App.3d 651, 657).

This line of cases should not be confused with those which discuss the characterization of property. If a residence is acquired after the date of the marriage, even though the title was placed in the name of the one spouse there remains the presumption that the property is marital. That presumption is difficult to overcome (see Irmo Hegge, 285 Ill.App.3d 138 (2nd Dist., 1996)

When faced with commingled property, I suggest the following analysis:

1. When was the property acquired? If during the marriage, you may argue the presumption that the newly acquired property is marital (Hegge);

2. Has the property contributed lost its identity? (Landfield and David);

3. If the property or account is not newly acquired, which is the receiving estate?;

4. Be careful when you put your case together to maximize your alternatives. For example you might alternately take the position that a property is marital and should be divided between the parties while at the same time presenting a case that, even if the court finds that it is non-marital, the marital estate should be reimbursed);

5. Part of your task is to watch the burden as well as the shift of burden by determining whether the property was acquired before or after the marriage, the title to the account, etc. You may find the burden shifting along the way. Be prepared to meet the burden and remember the standard of "clear and convincing";

6. Remember the word "gift" as you prepare for depositions and trials. Often a statement made to or in front of a third party may be construed as either establishing a gift or rebutting the presumption of a gift (See Irmo Olson, 451 N.E.2d 825);

7. If your client opposes reimbursement, be prepared to present evidence that the marital estate has already been compensated (e.g. when parties reside in a non-marital residence);

8. If you oppose reimbursement, you may also be able to argue that there was no showing that there was a contribution because the money was for maintenance or repairs which did not constitute commingling;

9. In connection with both of the last two suggestions, don’t forget about the use of experts such as financial planners, accountants, etc. They may be of invaluable use in establishing and tracing martial contributions;

10. When in doubt argue that the court is a court of equity and equity demands that your clients position be incorporated into the judgment (particularly if you are in the Third District), and

11. Finally, preserve the record. Throughout my reading of cases, I continually came across references to an incomplete trial record.

Honorable Kenneth A. Abraham is a Presiding Judge in the Law Division. He received his Undergraduate Degree in 1967 from the University of Illinois-Urbana and his Law Degree in 1970 from DePaul University.