Absent unusual circumstances, most jurisdictions recognize that property acquired before marriage should remain the separate property of the party bringing the property into the marriage. But, if the asset appreciates during the marriage, does the appreciation become marital property? And is the total appreciation marital or only some part thereof? This article will look at how various courts have addressed the issue.
The “All or None” Approach
In Re Marriage of Metcalf v Metcalf, Wis: Court of Appeals, 4th Dist, 2008
Facts of the Case:The parties were married in 1988 and divorced in 2006. In 1993, during the marriage, Husband received a 20% interest in Metcalf Farms Partnership (MFP I), a family owned agricultural business. After the death of Husband’s father in 2004, MFP I was dissolved and Husband used his interest to form MFP II, a partnership with his mother.
Trial Court Ruling:The trial court ruled that Husband’s interest in MFP I was Husband’s separate property including any appreciation in value between the date of the gift in 1993 and the dissolution following the father’s death in 2004. Additionally, the court found that Husband’s interest in MFP II was also separate property as the progeny of MFP I. Wife appealed.
Appellate Court Ruling: The Court of Appeals affirmed in part, reversed in part, and remanded with instructions. As to Husband’s interest in MFP I, the Appellate Court affirmed the decision, finding that none of the appreciation from 1993 to 2004 was due to Husband’s efforts. Husband “provided only farming services for the business in the same manner as other non-owner farm workers.” With regard to MFP II, the court found that Husband was involved in the day-today operations, performed general labor, and made decisions previously made by his father. Thus, the case was remanded for reconsideration to determine the appreciation between the dissolution of MFP I in 2004 and the date of divorce. It is interesting to note that under Wisconsin law, appreciation of a separate asset during the marriage will be subject to division when the efforts of both the owner and non-owner spouse contribute to the increase. Thus, the trial was instructed to determine not only if Husband’s efforts contributed to the increase, if any, but also if Wife’s efforts, including homemaking, contributed to the increase.
Fleishhacker v Fleishhacker, 39 So. 3d 904 – Miss: Court of Appeals 2009
Facts of the Case: Husband held a 25% interest in Northeast Metal Processing (NMP) on the date of the parties’ marriage in 1983. Husband subsequently acquired the remaining 75% of the stock in NMP during the marriage. At issue was the amount, if any, of the stock in NMP should be considered Husband’s separate property.
Trial Court Ruling: The trial court determined that the 25% of the value of NMP as of June 22, 2004, the date an “Agreed Order on Temporary Features” was entered, remained Husband’s separate property. Wife appealed arguing first that the property had been commingled, thus losing its separate character and, second, that even if the property was separate, the proper valuation date was the date of marriage.
Appellate Court Ruling:The Court of Appeals affirmed in part and reversed in part. The court determined that the 25% interest at the date of marriage remained Husband’s separate. However, the court found that the increase in the value of NMP was due to the Husband’s managerial efforts and, thus, was marital property.
Henderson v Henderson, Mich: Court of Appeals 2011, No. 296765
Facts of the Case: Prior to the parties’ marriage in 1999, Husband had received a 20% interest in BNP Media (BNP), a family publishing company. During the marriage, Husband held several positions at BNP and in 2001 became co-CEO with his two brothers. The parties stipulated that the value of BNP increased by $8.2 million between the date of marriage and the date of trial due presumably in part to the acquisition of Ascend Media. Testimony was presented that Husband did not have any involvement with making decisions regarding growth, acquisitions, and expenditures.
Trial Court Ruling: The trial court held that the entire appreciation in the value of BNP was Husband’s separate property, reasoning that the appreciation was totally “passive”. The court found that “the appreciation in value was attributable to all of the company’s employees “of which [plaintiff] was only one. The court further emphasized the plaintiff did not have any special training and that he was co-CEO merely because he was a member of the family.”
Wife appealed the ruling, requesting a new trial.
Appellate Court Ruling: The Court of Appeals reversed the decision of the trial court finding that the mere fact that Husband’s position did not require him to make decisions regarding growth did not result in a conclusion that Husband played no role in the appreciation in value of BNP. Further, the court noted that even if Husband had established that the acquisition of Ascend Media was the sole source of the increase in value, it would still not conclude that the appreciation was passive.
The “Apportioned Approach”
Armstrong v Armstrong, 72 AD 3d 1409 – NY: Appellate Div., 3rd Dept. 2010
Facts of the Case: The parties were married in 1995 and divorced in January 2009. In 1998, Husband’s employment with Albany Molecular Research (AMR) was terminated and he received gross proceeds of approximately $10,000,000 attributable to stock and options as part of a severance package. At the time of his termination, Husband owned over 500,000 shares of AMR. Wife argued that the entire net proceeds should be considered marital property while Husband sought to retain the net proceeds as his separate property.
Trial Court Ruling:The court determined that 14,137 shares were marital, with the remaining shares having been acquired prior to the marriage. The court further found that 10% of the appreciation in the separate shares was attributable to the direct efforts of Husband and, thus, the proceeds therefrom constituted marital property. Both parties appealed.
Appellate Court Ruling: The Appellate Court affirmed the trial court decision based on Husband’s significant role in contributing to the success of the company during the parties’ marriage. The Court stated that it was satisfied with the trial court’s decision because the importance of Husband to the company’s success was confirmed by various proof, including testimony from AMR’s chief executive officer. The court did not comment on how the trial court calculated the 10% of the appreciation attributable to the efforts of Husband, but accepted the judgment of the trial court.
Baker v Baker, 753 NW 2d 644 – Minn: Supreme Court 2008
Facts of the Case:The parties stipulated that at the date of marriage, Husband’s retirement plan had a value of $957,743, $396,455 was contributed during the marriage (May 1990 – August 2003), and the total return on investment during the marriage was $1,734,144. During the marriage, Husband transferred funds into different accounts and hired a money manager. Both Husband and the investment manager had the power to direct investments. Husband argued that only $243,122 of the appreciation was attributable to the marital contributions and that the remaining appreciation of $1,491,022 was passive and should remain his separate property. Wife argued that all appreciation should be considered marital property subject to equitable distribution.
Trial Court Ruling: The trial court agreed with Husband that the appreciation of the premarital portion of the account was also non-marital. Wife appealed.
Appellate Court Ruling:The Court of Appeals reversed the trial court, finding that the investment return on Husband’s premarital funds “was not the result of mere market forces or conditions but rather the result of marital efforts in the form of entrepreneurial decision making.” This decision was based on two factors. First, the court determined that Husband expended enough personal effort to constitute active management of the overall portfolio and, second, found that the money manager’s actions were attributable to Husband under agency principles. Husband appealed.
Supreme Court Ruling: The Supreme Court reversed and remanded for further consideration. The court rejected the appellate court’s reasoning, finding that Husband’s minimal involvement in managing the accounts did not rise to the level of active management and further, disagreed that the efforts of the money manager were attributable to Husband under an agency principle. Of additional interest in this case is that the Supreme Court instructed the Court of Appeals to consider whether Husband sufficiently distinguished the appreciation on the premarital portion of the account from that on the marital contributions and whether the commingling of the funds rendered the premarital funds marital.
Appellate Court Ruling on Remand:The Court of Appeals affirmed the Supreme Court ruling in so far as finding that a portion of the appreciation of the retirement accounts was non-marital but remanded to the trial court to determine if it was necessary to reopen the question based on the method of calculation used.
Mathers v Brown, 21 So. 3d 834 – Fla: Dist. Court of Appeals, 4th Dist. 2009
Facts of the Case: The parties were married in January 2003 and filed for divorce in March 2007. The Husband came into the marriage with a stock portfolio worth $4.4 million, which grew to approximately $7.9 million at the time of the divorce. After several adjustments, which are not relevant here, it was determined that the appreciation in the account during the marriage was $2.8 million. Husband acknowledged that he actively managed his portfolio but argued that a significant portion of the appreciation was attributable to general market forces. Testimony was presented using the S&P 500 as a benchmark to determine the portion of the growth attributable to passive market forces.
Trial Court Ruling: The trial court found that the entire appreciation in Husband’s portfolio was marital property subject to equitable division. Husband appealed.
Appellate Court Ruling:The Court of Appeals upheld the trial court decision. Under Florida law, the burden of proof is on the party claiming separate property to establish that part or all of the increase in value is attributable to passive market conditions. Because the trial court found that Husband had not presented sufficient proof to establish the S&P 500 as the appropriate measure of passive appreciation, there was no reversible error.
However, the court went on to say, “in a rising world market such as the 2003-2007 one in this case, where the holdings in a brokerage account have appreciated in value, there will always be an element of passive appreciation due to market forces. For this reason, a recognized index such as the S&P 500 should be used to measure passive factors influencing the appreciation of a stock portfolio. However, the husband traded many foreign stocks and there was no testimony to allay the trial judge’s concern that that index was not proper here. The law has not led to a fair result in this case.”
Zaretsky v Zaretsky, 66 AD 3d 885 – NY: Appellate Div., 2d Dept. 2009
Facts of the Case: At the time of the parties’ marriage in 1994, Husband owned a one-third interest in Maxi-Aids, a company founded by his father. Shortly after the marriage, Husband acquired a one-half interest in M&H Realty, Inc. (M&H), which owned the building from which Maxi-Aids operated. Husband worked for Maxi-Aids at all times during the marriage. Husband contended that his interests in both companies were gifts from his father and should remain his separate property.
Trial Court Ruling: The trial court determined that Wife was entitled to 40% of Husband’s interest in the M&H property and 40% of the appreciation in value of Maxi-Aids. Husband appealed.
Appellate Court Ruling: The Appellate Court reversed in part and remanded in part.
The Appellate Court reversed on both accounts. With regard to the one-half interest in M&H, the court ruled that Wife was not entitled to any share of Husband’s interest. The court found that the entire down payment for the property had been provided by Husband’s father and brother and that the conveyance of his interest was intended as a gift to Husband only rather than to both Husband and Wife.
The court remanded the case to the trial court for determination of the amount, if any, of the appreciated value of Maxi-Aids should be considered marital property subject to distribution. The court ruled that, “the record reveals that the appreciation of Maxi-Aids during the marriage was due, at least in part, to the plaintiff’s active participation which was facilitated by the defendant’s indirect contributions as a homemaker. Accordingly, the defendant is entitled to a share of the appreciated value of that asset”. The court directed the trial court to consider the extent and significance of the plaintiff’s efforts in relation to the active efforts of others and any additional passive or active factors, and determine what percentage of the total appreciation should be deemed marital property.
Food For Thought
- If a premarital asset appreciates during a marriage, does any involvement in the management of that asset render the appreciation a marital asset?
- Should all factors contributing to the increase in the value of an asset be considered in determining the amount, if any, of the appreciation that should be considered marital? And, if so, how can various factors be quantified?
- Should a different standard be applied depending on the nature of the asset? Do the same factors contribute to the increase in the value of an operating company as to the increase in the value of a stock portfolio or the value of real property?