The rule in legal separation is that the spouse at fault shall have no right to any share of the net profits earned by the couple’s common property during the marriage. His or her share of the net profits is forfeited in favor of the children or the innocent spouse.
What does net profits mean? What does the spouse at fault actually forfeit?
What are net profits?
Net profits are the increase in value between the market value of the community property at the time of the celebration of the marriage and the market value at the time of its dissolution. This is the doctrine from Quiao vs. Quaio (2012).
Quiao was a case for legal separation filed by the wife against the husband. The spouses had no assets when they married in 1977. By the time of the legal separation, they had numerous valuable properties (land, several mills and a factory).
Legal separation was granted in 2005, with the Trial Court finding that the husband was at fault. The husband, therefore, was held not entitled to any share of the net profits of the conjugal property.
The husband asked the Trial Court to clarify what net profits meant. The Trial Court ruled that, since the spouses had no assets when they married in 1977, this meant that all the assets inventoried in 2005 were deemed net profits to which the husband had forfeited his share.
The husband appealed the case to the Supreme Court. The Supreme Court upheld the Trial Court.
The Supreme Court ruling explained how net profits were computed. The procedure depended on whether the marriage regime was one of absolute community or of conjugal partnership of gains.
(Conjugal partnership of gains governed marriages under the Civil Code. Absolute community has been the default setting for marriages since the Family Code came into effect in 1988.)
If the Quiao marriage were a regime of absolute community, net profits would be computed as follows:
(a) According to the trial court’s finding of facts, both husband and wife have no separate properties, thus, the remaining properties in the list above are all part of the absolute community. And its market value at the time of the dissolution of the absolute community constitutes the market value at dissolution.
(b) Thus, when the petitioner and the respondent finally were legally separated, all the properties which remained will be liable for the debts and obligations of the community. Such debts and obligations will be subtracted from the market value at dissolution.
(c) What remains after the debts and obligations have been paid from the total assets of the absolute community constitutes the net remainder or net asset. And from such net asset/remainder of the petitioner and respondent’s remaining properties, the market value at the time of marriage will be subtracted and the resulting totality constitutes the net profits.
(d) Since both husband and wife have no separate properties, and nothing would be returned to each of them, what will be divided equally between them is simply the net profits. However, in the Decision dated October 10, 2005, the trial court forfeited the half-share of the petitioner in favor of his children. Thus, if we use Article 102 in the instant case (which should not be the case), nothing is left to the petitioner since both parties entered into their marriage without bringing with them any property.
In this case, however, the Quiaos had gotten married in 1977. Therefore, the marriage was one of conjugal partnership of gains.
In a conjugal partnership of gains, husband and wife has his and her own property and debts. The law does not intend to effect a mixture or merger of those debts or properties between the spouses. It establishes a complete separation of capitals.
Instead, upon their marriage, the husband and the wife place in common fund the fruits of their separate property and income. They divide equally the net gains or benefits obtained by either spouse during the marriage partnership.
In Quiao, the Supreme Court ruled that net profits in a conjugal partnership of gains would be computed as follows:
(a) An inventory of all the actual properties shall be made, separately listing the couple’s conjugal properties and their separate properties. In the instant case, the trial court found that the couple has no separate properties when they married. Rather, the trial court identified the following conjugal properties, to wit:
- coffee mill in Balongagan, Las Nieves, Agusan del Norte;
- coffee mill in Durian, Las Nieves, Agusan del Norte;
- corn mill in Casiklan, Las Nieves, Agusan del Norte;
- coffee mill in Esperanza, Agusan del Sur;
- a parcel of land with an area of 1,200 square meters located in Tungao, Butuan City;
- a parcel of agricultural land with an area of 5 hectares located in Manila de Bugabos, Butuan City;
- a parcel of land with an area of 84 square meters located in Tungao, Butuan City;
- Bashier Bon Factory located in Tungao, Butuan City.
(b) Ordinarily, the benefit received by a spouse from the conjugal partnership during the marriage is returned in equal amount to the assets of the conjugal partnership; and if the community is enriched at the expense of the separate properties of either spouse, a restitution of the value of such properties to their respective owners shall be made.
(c) Subsequently, the couple’s conjugal partnership shall pay the debts of the conjugal partnership; while the debts and obligation of each of the spouses shall be paid from their respective separate properties. But if the conjugal partnership is not sufficient to pay all its debts and obligations, the spouses with their separate properties shall be solidarily liable.
(d) Now, what remains of the separate or exclusive properties of the husband and of the wife shall be returned to each of them. In [Quiao], since it was already established by the trial court that the spouses have no separate properties, there is nothing to return to any of them. The listed properties above are considered part of the conjugal partnership. Thus, ordinarily, what remains in the above-listed properties should be divided equally between the spouses and/or their respective heirs. However, since the trial court found the petitioner the guilty party, his share from the net profits of the conjugal partnership is forfeited in favor of the common children, pursuant to Article 63(2) of the Family Code. Again, lest we be confused, like in the absolute community regime, nothing will be returned to the guilty party in the conjugal partnership regime, because there is no separate property which may be accounted for in the guilty party’s favor.
In conclusion, nothing was left to the husband of the numerous properties acquired during the marriage because:
1) There had been no assets at the start of the marriage; and,
2) He was the guilty party entitled to no part of the net profits at the dissolution of the property regime.
It’s quite draconian, but this 2012 doctrine has not been overturned.