Jeffrey M. Johnson v. Leslie C. Johnson ( 2006 )

COURT OF APPEALS OF VIRGINIA
Present: Judges Elder, Humphreys and Senior Judge Fitzpatrick
Argued at Alexandria, Virginia
JEFFREY M. JOHNSON
MEMORANDUM OPINION* BY
v. Record No. 0037-06-4 JUDGE LARRY G. ELDER
OCTOBER 3, 2006
LESLIE C. JOHNSON
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Leslie M. Alden, Judge
Marc A. Astore (Marc A. Astore, P.C., on briefs), for appellant.
Robert J. Surovell (Cory Frederick Goriup; Surovell Markle Isaacs &
Levy PLC, on brief), for appellee.
Jeffrey M. Johnson (husband) appeals from an equitable distribution award determining
that Leslie C. Johnson (wife) maintained a ninety-five percent separate ownership interest in a
warehouse leasing business in which the parties acquired separate interests shortly prior to their
marriage in 1985. On appeal, husband contends the trial court erroneously determined (1) that
wife was entitled to retain her separate interest in the business despite the fact that the parties had
used the business’ profits to reduce the mortgage on its sole asset, a rental warehouse, and (2)
that the parties’ conversion of the business from a partnership to a limited liability company in
1999, prior to their separating, did not make it marital property. We hold the trial court reached
the right result on this record, and we affirm.
*
Pursuant to Code § 17.1-413, this opinion is not designated for publication.
I.
On appeal, we review the evidence in the light most favorable to the party prevailing
below. Anderson v. Anderson, 29 Va. App. 673, 678, 514 S.E.2d 369, 372 (1999).
Unless it appears from the record that the chancellor has abused his
discretion, that he has not considered or has misapplied one of the
statutory mandates, or that the evidence fails to support the
findings of fact underlying his resolution of the conflict in the
equities, the . . . equitable distribution award will not be reversed
on appeal.
Smoot v. Smoot, 233 Va. 435, 443, 357 S.E.2d 728, 732 (1987).
A.
CLASSIFICATION OF INCREASE IN VALUE OF PARTNERSHIP
In classifying the increase in the value of the partnership between 1985 and 1999, the trial
court found that husband’s acting as leasing agent for the partnership’s warehouse did not
constitute “significant personal efforts that increased the value of the property.” (Emphasis
added). However, it concluded that, due to the personal efforts of both parties, “the income
received from the” “separate” “property” was marital property and that, when it was used to pay
down the mortgage on the warehouse, it was “marital money that was contributed to the separate
asset.” The court then held--presumably under Code § 20-107.3(A)(3)(a), which governs the
classification of hybrid assets--that husband, as the nonowning spouse, had proved the
contribution of marital property (the rental income received) to the separate property (the
partnership owned 95% by wife) but failed to prove the amount of that contribution because
“[t]here was no evidence of the balance of the mortgage in 1999 at the time that the property
went from [a partnership] to [a limited liability company].” As a result, it held the increase in
value of the partnership remained separate property as of 1999, with 95% owned by wife and 5%
owned by husband. We agree with the trial court’s conclusion but not with its reasoning.
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As the trial court noted, an increase in the value of separate property during the marriage
is separate property unless one of two things has occurred. Code § 20-107.3(A)(1). If “marital
property or the personal efforts of either party have contributed to such increases,” the portion of
the increase in value “attributable to those contributions” is marital property. Id. Further, for an
increase in value caused by personal efforts to be considered marital, those personal efforts
“must be significant and result in substantial appreciation of the separate property.” Id. The trial
court found husband’s personal efforts were not substantial and that, even if they were, no
evidence proved they caused an appreciable increase in the value of the property any more so
than did wife’s efforts in keeping the partnership’s books. These findings are not plainly wrong
or without evidence to support them. Cf. 1 Brett Turner, Equitable Distribution of Property
§ 5:50, at 528 (3d ed. 2005) (discussing appreciation of and income from separate property and
noting that “the degree of marital involvement [in producing income] is a factual issue”).
We also note that despite the partnership agreement’s provision that profits would be paid
to each partner in proportion to his or her percentage share of ownership, i.e., 95% to wife and
5% to husband, husband conceded they actually shared the partnership’s profits equally
throughout the marriage, with distribution checks being written to them jointly or to them
separately in equal amounts. Wife did not seek to retrace and recoup any of these sums in the
equitable distribution proceedings. The evidence established this method of distributing the
business’ profits resulted in husband’s receipt of or sharing in sums totaling $1,193,710, as
shown by the business’ tax returns through 2003. Additional evidence established these sums
were substantially in excess of the commissions of $80,000 to which the court found a leasing
agent would have been entitled. Accordingly, the evidence showed husband was, in fact,
compensated for his efforts on behalf of the business.
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Thus, we do not disturb the trial court’s finding regarding the effect of husband’s
personal efforts on the increase in value of the business. However, as to the trial court’s
conclusion that “the income from the property that was used to pay down the mortgage [on the
warehouse] was marital money,” we hold the trial court erred. Both Code § 20-107.3(A)(1),
which defines marital and separate property, and subsection (A)(3)(a), which discusses the
classification of property having both marital and separate components, refer to “income
received from separate property during the marriage.” (Emphasis added).
Subsection (A)(1) provides that “[i]ncome received from separate property during the
marriage is separate property if not attributable to the personal effort of either party.” Similarly,
subsection (A)(3)(a) provides that, “[i]n the case of income received from separate property
during the marriage, such income shall be marital property only to the extent it is attributable to
the personal efforts of either party.” Thus, Virginia’s equitable distribution statute provides,
although perhaps subject to certain exceptions not applicable here,1 that income earned by a
spouse’s separate property may be marital property only after it is “received” from the separate
property.
As commentator Brett Turner has observed,
[I]ncome earned by a business [owned in whole or in part by a
spouse] and the resulting appreciation in [the business’] value are
not equivalent to income [to the owning spouse] from separate
property. Such income is earned by the business, which in most
cases will be a legally distinct entity from the owning spouse.
Property which is owned by third parties, including a corporation
owned entirely by the parties, is generally not marital property
subject to equitable distribution. Income earned by [a business in
which one or both spouses have an ownership interest] [is not]
income earned by [a spouse] until it [is] distributed to [the
spouse].
1
This case involves no allegation that the company retained earnings in excessive
amounts in order to reduce the “income received” from the parties’ separate interests in the
business or to adversely affect the financial interests of either party in any way. See 1 Turner,
supra, § 5:53 (discussing impact of retained earnings on property distribution).
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1 Turner, supra, § 5:51, at 531 (emphases added) (footnote omitted); see also id. § 5:16, at
311-12 (recognizing rule that corporate assets are third-party property and noting “same
entity-ownership principles [have] been applied to partnerships and irrevocable trusts” but not
“to revocable trusts, sole proprietorships, and other informal organizations not permitted to hold
property in their own name” (footnotes omitted)).
Here, no evidence established that the parties as individuals “received” the rental income
that was used to pay the mortgage on the warehouse owned by the partnership as that term is
used in Code § 20-107.3(A)(1) and (A)(3)(a). To the contrary, the partnership agreement
provided that the business’ profits would be “distributed” to the partners, “in proportion to their
respective percentages of Partnership interest,” only after the deduction of, inter alia, “payments
upon the principal of any mortgages upon Partnership property or of any other Partnership
obligations or loans.” Cf. Code § 20-108.2(C) (allowing deduction of reasonable business
expenses from gross income used to calculate child support). Compare Vanwassenhove v.
Vanwassenhove, 998 P.2d 505, 506-07 (Idaho Ct. App. 2000) (where husband, rather than
separate business, owned farm as separate property and used portion of rental income to pay
principal and interest on mortgage, court recognized concept that “only net income from separate
property becomes community property” but rejected husband’s claim that principal payments
“constituted an expense that should be subtracted from the gross rental proceeds in calculating
net rental income,” thereby concluding that rents used to reduce principal became community
property and noting that “generally accepted accounting principles” also “do not treat payments
on the principal of a mortgage loan as an expense when calculating net income”). Thus, the
partnership, not the parties, paid the mortgage on the warehouse, and the partnership maintained
a separate ownership interest in the warehouse’s equity. Accordingly, granting deference to the
trial court’s findings of fact but not to its conclusions of law, we hold no evidence establishes
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that either significant personal efforts or marital property contributed to the increase in the value
of the partnership in a fashion that would permit the trial court to classify as marital property any
portion of wife’s 95% ownership interest in the partnership. Thus, we conclude that, as to the
classification of the increase in value of the partnership, the trial court reached the right result.
B.
CLASSIFICATION OF INCREASE IN VALUE OF LIMITED LIABILITY COMPANY
The trial court ruled that the creation of J.T. Hayes LC (the LLC) and subsequent
transference of the warehouse owned by the partnership (the LLP) to the limited liability
company constituted a “retitl[ing]” of “the LLP . . . to an LLC.” Husband contends that the
property was not retitled. Thus, he contends the trial court erred in applying Code
§ 20-107.3(A)(3)(f) and should, instead, have applied Code § 20-107.3(A)(3)(e), which governs
the commingling of marital property and separate property into newly acquired property. He
also contends the trial court erred in concluding wife retraced her separate property interest in the
LLC. We disagree and affirm the ruling of the trial court.
The LLC came into being during the marriage and, thus, was presumed to be marital
property. See Code § 20-107.3(A)(2). The Articles of Organization listed husband and wife as
“[t]he managers of the Company,” but they contained no information regarding how the
company was owned, and no other documents were created that set out the parties’ respective
percentages of ownership. Thus, the limited liability company, at its inception on March 11,
1999, was marital property.
On June 11, 1999, wife, as general partner of the LLP, executed a deed conveying the
Fairfax warehouse, the sole asset of the partnership, to the limited liability company. At the time
of the transfer, the LLP was owned 95% by wife and 5% by husband. Thus, although the
partnership rather than the parties held title to the warehouse, we hold that, for purposes of
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equitable distribution, the parties had the same 95% and 5% interests in the LLP’s sole asset, the
encumbered warehouse.
Husband contends the transfer of the warehouse to the limited liability company was a
commingling of marital and separate property under subsection (A)(3)(e), whereas the trial court
found it was a retitling of separate property in the joint names of the parties, transmuting it into
marital property, under subdivision (A)(3)(f). Because we hold the outcome is the same under
either subsection,2 we need not decide whether the act constituted a retitling or a commingling.
Under either subsection, “to the extent the [contributed or retitled] property is retraceable by a
preponderance of the evidence and was not a gift, such [contributed or retitled] property shall
retain its original classification.” Here, the retitled or contributed property, wife’s equitable 95%
share of the warehouse, retained its character as her separate property because the evidence
supported the trial court’s finding that it was directly retraceable by a preponderance of the
evidence and was not a gift. Cf. Kelln v. Kelln, 30 Va. App. 113, 126-29, 515 S.E.2d 789,
795-97 (1999) (holding that where parties transferred marital property into two revocable living
trusts, one titled in the name of each spouse, and the record showed “a clear purpose to establish
a mechanism . . . to minimize federal estate tax liability,” the conveyance showed the spouses
intended to retain their marital interest in the trusts’ assets and did not intend to give property
away and, thus, that the transfers were mere conveyances of title that did not change the
classification of the property conveyed into the trusts). Although husband may have taken
conflicting positions, he conceded the record contained no evidence of gift and agreed that the
purpose of transferring the property to the LLC was “to reduce [the parties’] personal liability.”
Wife testified no gift was intended and that any indication in the documents related to the LLC
2
Husband concedes on brief that, “irrespective of whether the Limited Company was
newly acquired . . . or ‘retitled property[,]’ . . . the tracing burden on the non-owning spouse is
the same.”
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that the parties owned the company equally, evidence that was conflicting at best, was error. The
trial court, as the finder of fact, accepted wife’s testimony and concluded no gift was intended.
Thus, the evidence, viewed in the light most favorable to wife, supported the finding that, for
purposes of equitable distribution, wife had a 95% separate ownership interest in the LLC.
Husband’s argument that wife’s separate property interest was not retraceable after the
creation of the LLC is premised in part on his claim that wife’s separate ownership interest in the
LLP was transmuted by payment of the warehouse mortgage and that, because wife failed to
present sufficient evidence to permit the retracing of her interest under the LLP, her interest in
the LLC also was untraceable. However, because the evidence supported a finding that wife’s
95% ownership interest in the LLP remained unchanged and that she maintained the same
percentage of ownership interest in the LLC’s sole asset, the trial court had no need to know the
dollar value of the parties’ respective separate interests and did not err in concluding that wife
maintained a 95% ownership interest in the new entity.
C.
ATTORNEY’S FEES ON APPEAL
Wife seeks an award of attorney’s fees on appeal. We decline that request for fees.
The rationale for the appellate court being the proper forum to
determine the propriety of an award of attorney’s fees for efforts
expended on appeal is clear. The appellate court has the
opportunity to view the record in its entirety and determine
whether the appeal is frivolous or whether other reasons exist for
requiring additional payment.
O’Loughlin v. O’Loughlin, 23 Va. App. 690, 695, 479 S.E.2d 98, 100 (1996). In this context,
and upon consideration of the record in this case, we hold husband’s position was not so
unreasonable as to entitle wife to an award of attorney’s fees incurred in this appeal. “[W]e find
the litigation addressed appropriate and substantial issues and that [husband did not] generate[]
unnecessary delay or expense in pursuit of [his] interests.” Estate of Hackler v. Hackler, 44
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Va. App. 51, 75, 602 S.E.2d 426, 438 (2004). Further, wife received substantial
income-producing assets in the equitable distribution. Therefore, we deny wife’s request for an
award of fees on appeal.
II.
Thus, we hold the trial court did not err in determining (1) that wife retained her separate
interest in the business despite the fact that the business’ profits were used to reduce the
mortgage on its sole asset and (2) that the parties’ conversion of the business from a partnership
to a limited liability company during the marriage did not make the business marital property.
Granting the appropriate deference to the trial court’s findings of fact, we hold the court reached
the right result on this record, and we affirm.
Affirmed.
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