Kelly v. Kelly

PAUL E. DANIELSON, Justice.

|! Appellant John K. Kelly appeals from the divorce decree granting appellee Christian Snowden Kelly (“Christy”) a divorce. He asserts two points on appeal: (1) that the circuit court erred in finding that certain stock was nonmarital property; and (2) that the circuit court erred in finding him liable for one-half of the deficiency resulting from the sale of the marital home. We reverse and remand.

The facts, in brief, are these. John and Christy were married on November 27, 1982, and had one minor child born of the marriage.¹ On January 10, 2006, Christy filed for divorce, alleging general indignities. John answered and counterclaimed, also alleging the grounds of general indignities and seeking spousal support. On May 10, 2007, a hearing was held, during which the circuit court heard testimony regarding Christy’s interest in Tarco |2Roofing Materials (“TRM”), a separate entity from Tarco, Inc., and Tarco of Texas, both of which were owned by Christy’s family. When TRM was created, the stock was distributed to both Christy and her brother, David Snowden, Jr., as the sole shareholders. The issue at the hearing was whether Christy’s stock interest in TRM was marital or nonmarital property. In a letter opinion, dated July 30, 2007, the circuit court found that the stock was a gifted interest to Christy from her father, David Snowden, Sr., and stated in pertinent part, that

[a]n inter vivos gift requires that the donor be of sound mind; that there was an actual delivery of the property; that the donor clearly intended to make an immediate, present and final gift; that the donor unconditionally released all future dominion and control over the property; and the donee accepted the gift. Wright v. Union National Bank, 307 Ark. 301, 819 S.W.2d 698 (1991). Each of these elements is present in this case. In fact, by the time that the Plaintiff and Snowden Jr., incorporated TRM, in exactly the manner directed by the gifting plan and direction of their father, each of these elements had been accomplished.

The Plaintiff also points out in her argument that Arkansas recognizes that property can be an interest, present or future, legal or equitable, vested or contingent in real or personal property including income and earnings in the context of a matrimonial relationship. ACA § 9-11-401. Snowden Sr. possessed the original legal and equitable property interest in the concept and plans that became a business that was subsequently gifted to the Plaintiff and Snowden, Jr., who in turn, incorporated this gift as Tarco Roofing Materials, Inc.

The Defendant focuses upon the issuance of the original stock in TRM. His position is that because this stock was issued to the Plaintiff during the parties’ marriage, and because the stock did not transfer directly from the name of Snowden, Sr., that the company could not be the subject of a valid gift. Therefore, he argues that the Plaintiffs interest should be declared marital property. The Court disagrees. This argument reaches a result, not only inconsistent with the obvious intent of the alleged donor, Snowden, Sr., but also inconsistent with the intent of ACA § 9-12-315(b)(1). The form over substance approach is not appropriate when viewed in the factual context of this donor’s involvement in creating and gifting this business.

The Defendant argues that the Plaintiff and her brother independently acquired their respective interests in TRM by only the initial issuance of the company’s stock. However, this restricted approach disregards the property’s origin immediately before it was transferred to the Plaintiff. Consideration must be given to the factual ^background and the entire context involved in Snowden Sr.’s creation of the business concept that became TRM, plus how he actually planned and directed the initial stock issuance. It is clear from the testimony that the ownership interest in this company that flowed to the Plaintiff was a gift from her father.

The uncontroverted testimony was that the concept for TRM and the location for the company originated with Snowden Sr. Snowden Sr. initiated the physical plans for the company, along with the internal strategy for integrating the company with his other Tarco entities. Snowden Sr. assigned Snow-den Jr. the task of working with the Pennsylvania authorities, legal counsel, financial advisors and others in order to create TRM. Snowden Sr. even included the outline for creating this asset in his total estate planning strategy as both this strategy and the company were developed by his attorney, himself, and his CPA. Snowden Sr. intended to personally own TRM if the Plaintiff and her brother did not want to accept the gift of ownership. Snowden Sr. provided the very crucial and necessary financial underpinnings and guarantees required to take the company beyond a proposed concept and actually bring the physical facility “out of the ground” to become a functioning reality. Snowden Sr. provided the initial working capital, key management, employees, together with a customer base and the Tarco name, all of which were essential to create TRM and for its subsequent successful operation. This identity alone was a major component of the overall gift of the company. And, very important, the undisputed testimony was that Snowden Sr. directed and ordered the total initial shares of TRM stock be issued in the specific respective percentages, as he determined, to only the Plaintiff and Snowden Jr. He had the undisputed ownership, dominion and control of the company that became TRM until he voluntarily gifted these very elements of ownership, dominion, and control to his children by expressly directing that the TRM shares be issued to them instead of himself.

The gift of Plaintiffs interest in TRM was culminated by the unambiguous, precise and express conduct of Snowden Sr. in directing that the ownership of TRM vest in the Plaintiff and her brother subsequent to his numerous undisputed actions, as detailed above. The Defendant’s position of limiting the issue only to the initial formal stock issuance is too restricted and narrow in scope when considering the extensive factual context of this entire gifting procedure by Snowden Sr.

The Court holds that the Plaintiffs interest in TRM was obtained as a gift from her father. It is not controlling that the Plaintiff subsequently satisfied the “shareholder receivable” with her own non-marital funds. In effect she was funding a non-marital asset with non-marital funds.

Since TRM is a Pennsylvania corporation the issue of the significance of the phrase “fully paid” shares, as it appears in TRM’s bylaws, should be determined by the applicable Pennsylvania law. The testimony and arguments offered by both parties on this issue was not sufficiently developed for a decision upon the term’s relevance to the ^issuance of TRM stock. However, it appears from the Court’s finding that (1) the Plaintiffs ownership interest in TRM is a non-marital gifted interest and that (2) the infusion of funds by the Plaintiff into TRM’s capitalization was accomplished with her non-marital monies, regardless of the timing, [and] renders moot the issue of when the shares were “fully paid” as argued by the parties.

Last, the Defendant asserts that the rationale in the decision in Farrell v. Farrell, 365 Ark. 465, 231 S.W.3d 619 (2006), is controlling in regard to his claim that the Plaintiffs interest in TRM is marital. It appears that Farrell is not directly applicable due to the Court’s decision that the Plaintiffs interest in Tarco Roofing Materials, Inc., is a gifted interest from Snowden Sr.

A subsequent hearing was held on October 21, 2008, and on December 29, 2008, the circuit court issued another letter opinion in which it divided the property at issue between the parties. On April 9, 2009, another hearing was held, and on August 20, 2009, the circuit court entered the final divorce decree, incorporating its prior division of property from its letter opinion, and finding, pertinent to this appeal:

4. The testimony of Mr. David Snow-den, Sr., Mr. David Snowden, Jr., and Christian Kelly, together with the Tarco financial exhibits (Plaintiffs exhibits 2, 3, 4, 5, 6, 7 and 8) clearly indicate that the $2,080,000.00 funding received by the Plaintiff from Tarco Roofing Materials, Inc. (“TRM”) to finance the purchase of the parties’ Edgehill residence was a loan. The relevant witnesses stated that the repayment schedule was flexible and that it was intended that future dividend disbursements would be applied to service the loan payments. There had been no payments at the time of the hearing and the loan had accrued interest on the amount owed. Both Snowdens testified that the tax consequences of providing this money as a gift were prohibitive and therefore the decision was to loan the funds for the home purchase. The exhibits corroborate the testimony. Therefore:

(a) The Edgehill residence shall be sold and the net proceeds from the sale, after payment of selling and closing costs, shall be applied first to the original $750,000.00 mortgage; then to the marital loan debt owed to TRM in the principal amount of $2,080,000.00, plus interest accrued thereon according to the terms set forth in the promissory note and the other Tarco financial exhibits.

(b) Until such time as the Edgehill residence is sold, the parties are to share equally in the payment of the monthly mortgage payments and other reasonable and necessary expenses of maintaining and preserving the Edgehill residence (i.e. utilities, maintenance, repairs, etc.).

|5(c) The Plaintiffs request for reimbursement of mortgage payments she paid prior to the temporary hearing on October 5, 2006 is denied. This Court’s letter opinion dated July 27, 2009 setting forth the basis for this ruling is attached hereto and incorporated herein by reference as Exhibit “A.”

(d) The parties have agreed to list the Edgehill residence with [the] Janet Jones Company. The parties have further stipulated and agreed that the residence shall be listed for a period of six (6) months and in the event a contract for sale is not entered within the six (6) months, either party may petition the Court to have the residence sold via commissioner’s sale. The Commissioner shall, after having advertised the time and place of sale for thirty (30) days by publication in a newspaper having a bona fide circulation in Pulaski County, Arkansas, by at least one insertion, sell the Edgehill residence at the courthouse steps of the Pulaski County Courthouse, at public auction to the highest bidder. The purchaser at such sale shall be required to give a letter of credit or surety bond approved by the Clerk and both parties’ counsel sufficient to assure payment of the purchase price within forty-eight hours of the sale, and a lien shall be retained as additional security for the payment of such purchase price.

(e) Any balance remaining after the payment of the amounts specified herein above shall be divided equally between the parties. In the event there are insufficient funds from the sale of the Edgehill residence to pay the mortgage and the debt owed to TRM, both parties shall be equally liable for paying one-half of the balance owed on such marital debts and shall indemnify and hold the other harmless for his or her one-half of such marital debt obligations.

7. The Plaintiff shall receive as her sole and separate non-marital property her stock interest in Tarco Roofing Materials, Inc. (TRM). This Court’s letter opinion dated July 30, 2007 setting forth the basis for this award is attached hereto and incorporated herein by reference as Exhibit “B.”

John filed a notice of appeal, and Christy filed a notice of cross-appeal, which she has since abandoned. John now appeals.

On appeal, divorce cases are reviewed de novo. See Taylor v. Taylor, 369 Ark. 31, 250 S.W.3d 232 (2007). With respect to the division of property, we review the circuit court’s findings of fact and affirm them unless they are clearly erroneous, or against the preponderance of the evidence; the division of property itself is also reviewed, and the same standard applies. Conlee v. Conlee, 370 Ark. 89, 257 S.W.3d 543 (2007). A finding is clearly erroneous when the reviewing court, on the entire evidence, is left with the definite and firm conviction that a mistake has been committed. See id. In order to demonstrate that the circuit court’s ruling was erroneous, the appellant must show that the circuit court abused its discretion by making a decision that was arbitrary or groundless. See id. We give due deference to the circuit court’s superior position to determine the credibility of witnesses and the weight to be given their testimony. See id.

For his first point on appeal, John argues that the circuit court erred in finding that Christy’s stock interest in TRM was nonmarital property. He contends that the stock was not a gift from Christy’s father because her father never owned the stock. He claims that a business “opportunity” cannot be a gift and that an enforceable right occurred when the stock was issued to Christy during the marriage and for consideration. Accordingly, he asserts that the stock was marital property acquired during the course of the marriage and did not satisfy any of the exceptions set forth by Arkansas Code Annotated § 9-12-315(b). We agree that the stock was marital property.

Marital property means all property acquired by either spouse subsequent to the marriage except:

(1) Property acquired prior to marriage or by gift or by reason of the death of another, including, but not limited to, life insurance proceeds, payments made under a deferred compensation plan, or an individual retirement account, and property acquired by right of survivorship, by a trust distribution, by bequest or inheritance, or by a payable on death or a transfer on death arrangement;

(2) Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent;

|7(3) Property acquired by a spouse after a decree of divorce from bed and board;

(4)Property excluded by valid agreement of the parties;

(5) The increase in value of property acquired prior to marriage or by gift or by reason of the death of another, including, but not limited to, life insurance proceeds, payments made under a deferred compensation plan, or an individual retirement account, and property acquired by right of survivorship, by a trust distribution, by bequest or inheritance, or by a payable on death or a transfer on death arrangement, or in exchange therefor;

(6) Benefits received or to be received from a workers’ compensation claim, personal injury claim, or social security claim when those benefits are for any degree of permanent disability or future medical expenses; and

(7) Income from property owned pri- or to the marriage or from property acquired by gift or by reason of the death of another, including, but not limited to, life insurance proceeds, payments made under a deferred compensation plan, or an individual retirement account, and property acquired by right of survivorship, by a trust distribution, by bequest or inheritance, or by a payable on death or a transfer on death arrangement, or in exchange therefor.

Ark.Code Ann. § 9-12-315(b) (Repl.2009). There is a presumption that all property acquired during a marriage is marital property. See McDermott v. McDermott, 336 Ark. 557, 986 S.W.2d 843 (1999).

Here, it is undisputed that Christy acquired her shares in TRM during the marriage, and the record reveals that Christy acquired the TRM stock after her father decided, for business reasons, to establish another business entity in the northeast. The stock for the new company was issued solely in the names of Christy and her brother, David, Jr., and the TRM books reflected a shareholder receivable from Christy for $22,500 and $27,500 for David, Jr. We have explained that a property’s status “does not depend upon when the property is received, but rather depends upon when the right of the property is acquired.” Farrell v. Farrell, 365 Ark. 465, 471, 231 S.W.3d 619, 623 (2006) (quoting McDermott, 336 Ark. at 560, 986 S.W.2d at 844). Thus, to the extent that either spouse acquires an enforceable right during the marriage, they acquire marital property. See id.

The record before us makes clear that Christy acquired an enforceable right when she acquired her shares of TRM stock during her marriage; therefore, the stock is marital property unless it falls within one of the exceptions set forth in section 9-12-315(b). See Jackson v. Jackson, 298 Ark. 60, 765 S.W.2d 561 (1989). Christy claims that the stock does fall within one of the statutory exceptions. Specifically, she asserts that the circuit court correctly found that her father gifted her a business opportunity, rendering her stock in that business nonmarital property. However, this court has not previously recognized the gift of a business opportunity, nor will we do so now.

Neither do we consider the stock a gift. A gift is a voluntary transfer of property, without valuable consideration, to another. See Davis v. Jackson, 232 Ark. 953, 341 S.W.2d 762 (1961). In the instant ease, it is not disputed that a note receivable for Christy’s shares was on the TRM books. While Christy also contends that the payment of that note with nonmarital funds rendered the stock non-marital under section 9 — 12—315(b)(2) and (7), her contention is without merit. Christy’s stock was not acquired in exchange for nonmarital property or income; instead, at the time it was acquired, it was exchanged for a note receivable. Because we conclude that the circuit court clearly erred in finding that the TRM stock was nonmarital property, we must reverse the circuit court’s order and remand.

John argues, for his second point on appeal, that the circuit court erred in finding that 19any deficiency as to the marital home should be divided equally, claiming that he will be forced to deplete the award of property he did receive in order to pay his portion of the deficiency. We have held, however, that a circuit court is obligated to consider the debts of divorcing parties “in deciding the questions of alimony, support for the children, and perhaps the division of the property.” Hackett v. Hackett, 278 Ark. 82, 85, 643 S.W.2d 560, 562 (1982). See also Gilliam v. Gilliam, 2010 Ark. App. 137, at 9, 374 S.W.3d 108, 114 (“The allocation of marital debt must be considered in the context of the distribution of all of the parties’ property.”); Boxley v. Boxley, 77 Ark.App. 136, 73 S.W.3d 19 (2002). Because we hold herein that the TRM stock was marital property, reversing and remanding to the circuit court for further proceedings relating to the division of property, we need not address this issue at this time.

Reversed and remanded.

Special Justices JAMES A. MCLARTY, III, and ALEX STREETT join in this opinion.

Special Justice VADA BERGER concurs. CORBIN and HENRY, JJ., dissent. BROWN, GUNTER, and BAKER, JJ., not participating.

1 . A second child is mentioned in the record, but it appears that child had reached majority age at the time the divorce complaint was filed.