James Ware Kelley, Jr. v. Alice Chilton Kelley

COURT OF APPEALS OF VIRGINIA
Present: Judges Coleman, Humphreys and Senior Judge Overton
Argued at Chesapeake, Virginia
JAMES WARE KELLEY, JR.
MEMORANDUM OPINION * BY
v. Record No. 0896-99-2 JUDGE NELSON T. OVERTON
AUGUST 1, 2000
ALICE CHILTON KELLEY
FROM THE CIRCUIT COURT OF NORTHUMBERLAND COUNTY
Joseph E. Spruill, Jr., Judge
Mary Burkey Owens (Ishneila Ingalls Gubb;
Cowan & Owen, P.C., on briefs), for
appellant.
Thomas Scott Word, III (Matthew N. Ott, P.C.,
on brief), for appellee.
James Ware Kelley, Jr. (husband) appeals the decision of the
circuit court accepting the equitable distribution recommendations
of the commissioner in chancery. Husband contends that the trial
court erred (1) by failing to include any appreciation in value
for his contribution of separate property to certain tracts or
parcels of land owned by the parties; (2) by failing to credit
husband with his separate, monetary contributions to the marital
home; and (3) by awarding Alice Chilton Kelley (wife) $20,000 in
attorney's fees. Wife contends that the trial court erred when it
accepted the recommendation of the commissioner that the business
* Pursuant to Code § 17.1-413, recodifying Code
§ 17-116.010, this opinion is not designated for publication.
known as "Kelley's Seafood" was husband's separate property. We
find that the trial court erred when it failed to properly
calculate the passive appreciation value of husband's separate
property portion of the marital residence and the land on which
husband constructed the cinder block freezer. We vacate the award
of attorney's fees to wife and remand that matter to the trial
court. We find no error in the classification of the Kelley
Seafood property as husband's separate property. We deny wife's
request for appellate attorney's fees. Accordingly, we affirm in
part, reverse in part and remand the decision of the circuit
court.
The evidence was heard by the commissioner in chancery, whose
report was accepted largely unchanged by the trial court.
The commissioner's report is deemed to be
prima facie correct. The commissioner has
the authority to resolve conflicts in the
evidence and to make factual findings. When
the commissioner's findings are based upon
ore tenus evidence, "due regard [must be
given] to the commissioner's ability . . .
to see, hear and evaluate the witness at
first hand." Because of the presumption of
correctness, the trial judge ordinarily must
sustain the commissioner's report unless the
trial judge concludes that it is not
supported by the evidence.
Brown v. Brown, 11 Va. App. 231, 236, 397 S.E.2d 545, 548 (1990)
(citations omitted). "The decree confirming the commissioner's
report is presumed to be correct and will not be disturbed if it
is reasonably supported by substantial, competent, and credible
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evidence." Brawand v. Brawand, 1 Va. App. 305, 308, 338 S.E.2d
651, 652 (1986).
Marital Residence
The evidence established that, shortly before the parties'
marriage in 1960, husband was deeded a two and one-half acre
parcel of unimproved land on Dividing Creek as a gift from his
parents. This land, valued at $5,000 at the time of the gift,
was the site on which the parties built the marital residence.
Husband's parents also gave him $4,985 in cash towards
construction of the marital residence. The commissioner found
that these funds were a wedding gift to the couple in
consideration of their upcoming marriage. Husband obtained a
$15,000 mortgage, also before the marriage, which was repaid
during the marriage with marital assets.
Based upon the evidence introduced at the hearing, pursuant
to Code § 20-107.3(A)(3), the commissioner classified the
marital residence as part husband's separate property and part
marital property. The parties did not contest that
classification. The commissioner found that husband proved the
parents' gift of the land on which the house was built was a
separate gift to him and was separate property worth $5,000.
Code § 20-107.3(A)(3) provides the equitable distribution
scheme for "hybrid" property composed of both marital and
separate property. See Rahbaran v. Rahbaran, 26 Va. App. 195,
494 S.E.2d 135 (1997). In this instance, there was no loss of
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identity of husband's separate property in the acquisition of
newly acquired property. Cf. Code § 20-107.3(A)(3)(e). The
real estate was never retitled or gifted or transmuted into
marital property and remained the husband's separate property.
In the case of the increase in value of
separate property during the marriage, such
increase in value shall be marital property
only to the extent that marital property or
the personal efforts of either party have
contributed to such increases, provided that
any such personal efforts must be
significant and result in substantial
appreciation of the separate property.
For purposes of this subdivision, the
nonowning spouse shall bear the burden of
proving that (i) contributions of marital
property or personal effort were made and
(ii) the separate property increased in
value. Once this burden of proof is met,
the owning spouse shall bear the burden of
proving that the increase in value or some
portion thereof was not caused by
contributions of marital property or
personal effort.
Code § 20-107.3(A)(3)(a); see generally Holden v. Holden, 31 Va.
App. 24, 520 S.E.2d 842 (1999). On the other hand, the
improvement on the realty, that being the house, was constructed
with funds that were a joint gift to the parties and with a loan
that was repaid with marital funds. Thus, the property was
hybrid, consisting of the value of the real estate being
separate property and the home or improvement being marital.
In Hart v. Hart, 27 Va. App. 46, 497 S.E.2d 496 (1998), we
noted that the formula commonly referred to as the Brandenburg
formula is one acceptable means by which a chancellor may
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determine the parties' respective shares in an asset consisting
of separate and marital property which has increased in value
during the marriage. However, in this instance, where there was
an alternative means by which the appreciation in value of
husband's separate property could be determined, reliance on the
Brandenburg formula may have deprived husband of his appropriate
share of the increased equity.
The commissioner accepted as credible evidence the tax
records presented by husband. Those records indicated that the
value of the marital contributions was $189,179, of which
$98,600 represented the value of the land. Wife's real estate
expert testified that the tax assessment for the land was
$102,350. The expert appraised the property at $238,500, of
which $128,000 was the appraised value attributable solely to
the land. Using the Brandenburg formula, the commissioner
determined that the marital share of the property was
$226,646.55 and that husband's separate contribution of the land
worth $5,000 translated to a credit of $6,129.45 as his separate
property share of the marital residence.
Wife argues that there is no support in Virginia law for
husband's contention that the land and the residence should be
separately classified as marital and separate property and
separately valued. We find nothing in Code § 20-107.3 and the
cases that have construed the statute that prohibits such
classification and valuation when warranted under the facts.
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The definition of "real estate" set out in Code § 1-13.12 is not
in itself persuasive authority governing the valuation of hybrid
property. Wade v. Wade, 325 S.E.2d 260 (N.C. App. 1985), which
wife cites as authority arises under a different statutory
scheme and a different factual setting and is unpersuasive.
Furthermore, the court in Wade noted that parties could agree by
express or implied contract whether a house and the land to
which it was affixed were a single asset. See id. at 267.
Moreover, under our current statutory scheme, a single asset no
longer must be classified as unitary property but may be hybrid
property, that is, part marital and part separate. See Code
§ 20-107.3(A)(3)(a). Accordingly, the separate and marital
proportions must be valued separately.
Here, the parties agreed that the land on which the marital
residence was built was husband's separate property. Thus, the
separate and marital property necessarily had to be separately
valued. Wife's real estate expert described the property as "a
beautiful waterfront lot on Dividing Creek with a [Chesapeake]
Bay view" and "an exceptionally nice waterfront lot." The
commissioner's finding that husband's separate waterfront
property valued at $5,000 in 1960 was worth only $6,129.45 in
passive appreciation in 1999 is plainly wrong. But, even so,
the trial court did not find any appreciation in value in the
real estate even though all appraisals and the tax records
showed that the real estate and improvements had substantially
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increased in value. While husband failed to introduce expert
testimony concerning the increased value attributable to passive
appreciation in the real property, other evidence established a
value for the land between $98,600 and $128,000. The
commissioner found that "the increase in value of the marital
residence (land and improvements) is entirely marital because
the land itself increased in value as a result of the addition
of the improvement." The evidence does not support that
finding. No expenditure of marital assets or personal effort
caused the passive increase in the value of the real property.
The appreciation in the value of the marital residence over the
past forty years was due, at least in part, strictly to a
passive appreciation in the value of such prime real estate.
See Moran v. Moran, 29 Va. App. 408, 414-17, 512 S.E.2d 834,
837-38 (1999). Because the value attributable to husband's
separate property at the time of the hearing was greater than
its initial value, it was error for the commissioner and the
trial court to fail to credit husband with a greater share of
the total value of the marital residence.
Cinder Block Freezer
The parties agreed that the one-acre tract on which the
cinder block freezer used in the Kelley Seafood business was
built was husband's separate property and that the freezer was
marital property. The commissioner accepted husband's evidence
that the land was worth $600 at the time husband received this
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property from his parents. Wife argued that the cost of the
subsequent improvements determined the value of the marital
share. However, under Code § 20-107.3(A)(3)(a), when valuing
separate and marital property portions of hybrid property, it
does not follow that expenditures of marital assets
automatically result in increases in the value of the marital
portion. See Moran, 29 Va. App. at 412, 512 S.E.2d at 835-36.
The party seeking to prove the value of the marital portion must
establish not only the expenditure of marital funds but also
that the funds increased the value of the hybrid property.
The increase in value of separate property
becomes marital if the expenditure of
marital funds or a married party's personal
efforts generated the increase in value.
The significant factor, however, is not the
amount of effort or funds expended, but
rather the fact that value was generated or
added by the expenditure or significant
personal effort.
Id. at 412, 512 S.E.2d at 836; see also Martin v. Martin, 27 Va.
App. 745, 753-58, 501 S.E.2d 450, 454-56 (1998) (en banc); Hart,
27 Va. App. at 65, 497 S.E.2d at 505.
It was uncontested that marital assets were used to build
the cinder block freezer. While the commissioner rejected
wife's evidence of value based on marital funds expended, he
accepted her evidence of value based upon the tax assessment
records. The commissioner found that husband failed to prove
that any part of the increased value was not due to marital
contributions. See Code § 20-107.3(A)(3)(a). The commissioner
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found that the hybrid property was worth $35,114, of which $600
was husband's separate property.
Evidence established that husband's separate property was
valued at $8,000, a value attributable to passive appreciation
of husband's separate property. Therefore, husband was also
entitled to the increased equity attributable to his separate
property. We find that the commissioner erred in failing to
credit husband with the passive increase in value of his
separate property.
Kelley's Seafood
Wife contends that the trial court erred when it ruled that
the Kelley Seafood property, consisting of the freezer and
improvements to the building and the business in which husband
inherited a remainder interest subject to his mother's life
estate, was husband's separate property. Wife does not contest
that some portion of this property is husband's separate
property, but asserts that husband expended marital funds to
improve the property from its value of $4,400 at the time of
inheritance to $133,291 in 1997.
Wife asserts that a $40,000 loan during the marriage for
improvements to the property was a contribution of marital
assets. Wife also asserts that husband should have borne the
burden of proving that the increased value was not caused by
contribution of marital property or personal effort. According
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to wife, the error resulted in her receiving $9,632 less in her
monetary award.
We find no error. The commissioner found that wife's
evidence that marital funds were expended was insufficient to
prove that husband's separate property increased in value. See
Martin, 27 Va. App. at 753-58, 501 S.E.2d at 454-56. The
evidence supports that finding.
Attorney's Fees
An award of attorney's fees is a matter submitted to the
sound discretion of the trial court and is reviewable on appeal
only for an abuse of discretion. See Graves v. Graves, 4 Va. App.
326, 333, 357 S.E.2d 554, 558 (1987). The key to a proper award
of counsel fees is reasonableness under all the circumstances.
See McGinnis v. McGinnis, 1 Va. App. 272, 277, 338 S.E.2d 159, 162
(1985). The parties presented evidence that they each paid
approximately $50,000 in attorney's fees prior to the hearing
before the commissioner. The commissioner recommended an award to
wife of $11,000 in attorney's fees, based in part on husband's
failure to comply with discovery requests and in part on husband's
assertion of claims that the commissioner found to be without
legal merit. The trial court increased the award to $20,000,
noting that husband refused to settle for $100,000 early in the
litigation but was ordered to pay wife a lump sum amount of
$117,659.98 at the conclusion. The commissioner chastised husband
for deleterious compliance with discovery requests. Based on the
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credibility determinations made by the commissioner and accepted
by the trial court, we cannot say that an award of fees due to
discovery violations was unreasonable or an abuse of discretion.
However, because we find that husband's arguments concerning
the value of his separate property had merit, it would be
inappropriate to award attorney's fees attributable to his
attempts to persuade the commissioner or the trial court to accept
those arguments. Accordingly, we vacate the award of attorney's
fees, and, on remand, direct the trial court to reconsider the
amount of attorney's fees awarded to wife for reasons other than
his unwillingness to settle the case during the early stages of
litigation.
Appellate Attorney's Fees
Finally, wife argues that she is entitled to an award of
appellate attorney's fees as a result of husband's continued
"assertion of flawed legal arguments." We decline to award wife
attorney's fees related to this appeal. See O'Loughlin v.
O'Loughlin, 23 Va. App. 690, 479 S.E.2d 98 (1996).
Accordingly, we reverse the decision of the circuit court as
to the value of husband's separate real property on which the
marital residence and cinder block freezer were built, and remand
these matters for reconsideration in accordance with this
decision. We vacate the trial court's award of $20,000 to wife in
attorney's fees and remand that matter for reconsideration in
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accordance with this decision. We affirm all remaining aspects of
the circuit court's decision.
Affirmed in part,
reversed in part,
vacated in part,
and remanded.
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