When the parties were married in 1998, Husband owned and operated a business. When the parties divorced, the family court awarded Wife $296,667 as her share of the company’s value that increased during the marriage.
Through mediation, the parties were able to resolve all of the issues related to their divorce except for the community interest in the increased value of Husband’s company.
Appointment of Special Master
Family courts have broad discretion to appoint various personnel, including certain kinds of experts, to help resolve disputes. In this case, the family court appointed a special master, which is just the term used to refer to a professional with specific credentials or expertise regarding whatever issues the family court needs their assistance to resolve. Common examples are realtors and accountants.
In this case, the special master prepared a report that assessed the value of Husband’s business at the beginning of the marriage and its value at the time of the divorce. The report also found that the community received the benefit of “virtually 100% of the net distributable earnings during the marriage.” Husband and Wife each hired experts who offered differing opinions about whether the total amount the community received was $2,875,000 or $3,122,521.
Applying other accounting principles, the report assigned a portion of the increased value to Husband as his separate property based on what it opined to be a fair rate of return on Husband’s original investment. Then, from the remainder, the report calculated the portion believed to have resulted from community efforts and the family court awarded half of that amount to Wife.
Husband appealed.
The community interest in the separate business
The Court of Appeals considered two discrete arguments, with slight variations of each: (1) that there should be no community interest in the increased value when the community already received the company’s profits during the marriage; and (2) that the special master inaccurately determined that two thirds of the value increase resulted from the community efforts.
Without getting too granular here, Husband’s first argument was based on what the Court of Appeals acknowledged could be viewed as a conflict between two statutes. Starting with A.R.S. § 25-213, the Court of Appeals interpreted it to provide “that the ‘increase, rents, issues and profits’ of a spouse’s real and personal property ‘that is owned by that spouse before marriage’ is ‘the separate property of that spouse.’”
That is a lot of quotations to parse. But essentially the statute states that rents, profits, and gains to the value of separate real and/or personal property belong to the owning spouse. Read very literally, a separate business might not fall under “real property” or “personal property.” This was the basis of Husband’s first argument.
But another statute, A.R.S. § 25-211 stated that “all property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is … [a]cquired by gift, devise or descent.”
Ultimately, after several pages of detailed analysis, the Court of Appeals determined that family courts can apportion profits and increase in value whenever community labor was responsible for a portion of both.
As for Husband’s second argument, that the portion of the value increase assigned to the community efforts was erroneous, the Court of Appeals concluded that Husband misapplied the applicable burden of proof.
Burden of proof is a term used to refer to what exactly a particular party must prove to resolve a contested issue in their favor. Essentially, Husband argued that Wife failed to prove that two thirds of the growth resulted from community efforts. But that inverted the burden of proof.
Property acquired by either spouse during the marriage is presumed to belong the marital community. The spouse who argues that property is not community property has the burden to rebut this presumption and prove that the property is separate property.
More specific to this case, “when the value of separate property is increased the burden is upon the spouse who contends that the increase is also separate property to prove that the increase is the result of the inherent value of the property itself and is not the product of the work effort of the community.”
The Court of Appeals noted that it was within the family court’s discretion to presume that all of the growth was community property.
Conclusion
Perhaps the most important takeaway from this case and cases like it is that contrary to the common misconception, “community labor” does not require any labor or even involvement from the non-owning spouse (here, the Wife). The term “marital community” or “community” for short refers to an abstract concept that encompasses the labor and efforts of either spouse during the marriage.
Another important takeaway is understanding that family courts have considerable discretion to divide community property however they believe to be fair. This type of discretion sometimes can lead to unpredictable results that are not easily reversed on appeal. The easiest way for parties to control these outcomes is to enter into post- or prenuptial agreements.