Opinion
NO. 2012-CA-001158-MR
05-16-2014
JANICE A. IVEY HENTON APPELLANT v. HAMPTON HARRIS HENTON, JR. APPELLEE
BRIEFS FOR APPELLANT: James P. McCrocklin Louisville, Kentucky BRIEF FOR APPELLEE: Anita M. Britton Kate L. Green Lexington, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM FRANKLIN FAMILY COURT
HONORABLE O. REED RHORER, JUDGE
ACTION NO. 09-CI-02049
OPINION
AFFIRMING IN PART, REVERSING IN PART
AND REMANDING
BEFORE: ACREE, CHIEF JUDGE; LAMBERT AND STUMBO, JUDGES. ACREE, CHIEF JUDGE: Janice "Ivey" Henton appeals from the Franklin Family Court's order dissolving her marriage to Hampton "Hoppy" Henton, Jr., which classified certain property as Hoppy's non-marital property, awarded her maintenance in the amount of $750 per month for three years, and held the parties equally responsible for debt incurred to fund a business during the marriage. We affirm in part, reverse in part, and remand for additional proceedings.
I. Background
In 1983, Hoppy and six of his family members created Henton Farms, Inc. (HFI), a Subchapter S entity incorporated in Delaware. 26 U.S.C.A. §1362 (2007). Ten thousand shares of stock were initially issued, divided among each of the shareholders in proportion to the value of land and farm equipment he or she had contributed to HFI. Hoppy initially received 1,576 shares, and he has acted as general manager and president of HFI since its formation.
Hoppy later received a total of 2,846 shares as gifts. The parties agree that the shares Hoppy acquired upon the formation of the business and as gifts are his non-marital property. KRS 403.190.
HFI's real property initially consisted of four tracts of land, known to the shareholders as the Hilltop tract, the Milner tract, the O'Rear tract, and the Midway tract. Between HFI's formation in 1983 and 1997, there were several real estate transactions which changed the landscape of the real estate holdings. HFI sold the Midway tract in 1993, traded away the Hilltop and O'Rear tracts in 1997 for cash and a new property, the Waverly tract, and sold the Milner tract in 1999.
The shareholders changed over time, as well. Hoppy's father made gifts of shares to his three children, eventually giving all his remaining shares to Hoppy. Hoppy purchased his siblings' shares in 1993. In 1995, Hoppy's aunt and cousins (the Maddoxes) sold their shares back to HFI, and they became unissued stock, i.e., treasury stock.
These transactions and other matters will be described in greater detail where necessary to the discussion.
Ivey and Hoppy married in December of 1990. During the marriage, Hoppy gave Ivey 338 shares of HFI. The parties agree that these are her non-marital property.
From 1999 to 2003, Ivey owned and operated a retail clothing business called Hemp Universe. It amassed considerable debt, much of which was secured by HFI's real estate and $234,000 of which remained outstanding as of September 2011.
Hoppy filed a petition for dissolution of the marriage in 2009. The parties disagreed about a number of property matters, including the extent to which Hoppy's interest in HFI is marital or non-marital property, the amount of maintenance to which Ivey was entitled, and division of the marital debt incurred for Hemp Universe.
Following trial, the family court concluded Hoppy's entire interest in HFI was non-marital, awarded Ivey $750 monthly maintenance for three years, and ordered the parties to equally share the Hemp Universe debt.
Ivey appealed. She claims the family court erred in five respects: (1) classifying as non-marital the 1,222 shares Hoppy bought from his siblings; (2) not classifying as marital property the 4,050 shares of treasury stock traded in by the Maddoxes; (3) failing to conclude the appreciation of Hoppy's interest in HFI was due to the efforts of the parties and was therefore marital property; (4) awarding her too little maintenance; and (5) splitting the marital debt equally.
Strictly speaking, Ivey has identified six reasons she believes the family court's order should be reversed. We will not be addressing one of these, the first argument presented in her appellant's brief, because it was not presented in a way that allows us to meaningfully address it. It bears minimal citation to legal authority, no explanation of the rationale which would justify reversal, and, as Hoppy notes, no statement of preservation. Under these circumstances, we are permitted to disregard the argument, and we elect to do so. See CR 76.12.
II. Classification of property as marital or non-marital
The first three of Ivey's arguments concern the classification of property as marital or non-marital.
"[M]arital property" means all property acquired by either spouse subsequent to the marriage except:KRS 403.190(2).
(a) Property acquired by gift, bequest, devise, or descent during the marriage and the income derived therefrom unless there are significant activities of either spouse which contributed to the increase in value of said property and the income earned therefrom;
(b) Property acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift, bequest, devise, or descent;
(c) Property acquired by a spouse after a decree of legal separation;
(d) Property excluded by valid agreement of the parties; and
(e) The increase in value of property acquired before the marriage to the extent that such increase did not result from the efforts of the parties during marriage.
The standards governing the family court's classification of property have been succinctly explained:
[A] trial court utilizes a three-step process to divide the parties' property: (1) the trial court first characterizes each item of property as marital or non[-]marital; (2) the trial court then assigns each party's non[-]marital property to that party; and (3) finally, the trial court equitably divides the marital property between the parties. An item of property will often consist of both non[-]marital and marital components, and when this occurs, a trial court must determine the parties' separate non[-]marital and marital shares or interests in the property on the basis of the evidence before the court. ... The 'source of funds rule' simply means that the character of the property, i.e., whether it is marital, non[-] marital, or both, is determined by the source of the funds used to acquire the property.Sexton v. Sexton 125 S.W.3d 258, 265 (Ky. 2004) (quotations and footnotes omitted).
Property acquired during the marriage is presumptively marital property. KRS 403.190(3). When a party to dissolution asserts that he acquired property during the marriage by exchanging non-marital property, he bears the burden of proof; he may meet this burden by "tracing" the source of the funds to non-marital property:
"Tracing" is defined as [t]he process of tracking property's ownership or characteristics from the time of its origin to the present. In the context of tracing non[-] marital property, [w]hen the original property claimed to be non[-]marital is no longer owned, the non[-]marital claimant must trace the previously owned property into a presently owned specific asset.Sexton, 125 S.W.3d at 266 (Ky. 2004) (footnotes and quotations omitted). Likewise, when the value of a party's non-marital property has increased during the marriage, it is the burden of that party to prove that the appreciation is non-marital. Travis v. Travis, 59 S.W.3d 904, 910 (Ky. 2001).
"On appellate review of a trial court's ruling regarding the classification of marital property, we review de novo because the trial court's classification of property as marital or non-marital is based on its application of KRS 403.190; thus, it is a question of law." Heskett v. Heskett, 245 S.W.3d 222, 226 (Ky. App. 2008). Findings of fact are reviewed for clear error. Hempel v. Hempel, 380 S.W.3d 549, 551 (Ky. App. 2012).
a. The 1,222 shares Hoppy bought from his brother and sister
The family court concluded the 1,222 shares Hoppy acquired from his siblings were his non-marital property. It found, more specifically, that in 1993, HFI had sold the Midway tract to a neighboring farm for roughly $1.2 million. The shareholders had received disbursements of that $1.2 million in proportion to their interest in HFI. Hoppy's ownership of 1,576 shares in HFI entitled him to a disbursement of $183,700 following the sale. The family court found that later in 1993 Hoppy used that money to purchase his siblings' shares. The family court was persuaded that Hoppy had adequately traced his ownership of the 1,222 shares to a non-marital source and had met his burden of proving that the 1,222 shares were his non-marital property.
Income earned from property acquired before the marriage or as a gift is non-marital unless the income is the result of either party's efforts during the marriage. KRS 403.190(2)(a). "Property acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift" is also non-marital. KRS 403.190(2)(b).
Ivey argues the family court improperly classified the 1,222 shares. Her rationale is not clearly stated, but it appears she believes the payment of $183,700 was marital income. On that basis, she maintains that his purchase of his siblings' 1,222 shares was made with marital property; therefore, she argues, the shares are marital property. We are not persuaded because the family court's order reflects factual findings supported by substantial evidence and correct application of the law to those facts.
Hoppy testified that the $1.2 million dollars HFI received for the Midway tract was divided among the shareholders in proportion to their respective interests in HFI. Hoppy's interest at the time, his 1,576 shares acquired upon the 1983 formation of HFI, was entirely non-marital, and Ivey concedes as much. The payment of $183,700 was non-marital income because it derived solely from Hoppy's premarital ownership interest, and not from the efforts of either party. KRS 403.190(2)(a).
It may be Ivey's position that the $187,300 payment was earned by way of Hoppy's efforts as general manager and president of HFI, and was therefore marital income. This would be incorrect. The other six shareholders who received disbursements following the sale of the Midway tract played no role in the day-to-day operations of HFI. Their disbursements were based solely on their ownership interests, as was Hoppy's. He did not receive any additional payment due to the management positions he held within the company. The payment was due purely to his non-marital ownership interest in HFI.
Ivey presented some evidence that Hoppy had actually purchased the 1,222 shares using a loan purportedly taken out by the couple rather than from his non-marital income. The family court simply found Hoppy's evidence more convincing on the question of tracing. Because the evidence upon which the family court relied constitutes substantial evidence, the finding must be affirmed despite the existence of contrary evidence in the record. Allen v. Kentucky Horse Racing Authority, 136 S.W.3d 54, 59 (Ky. App. 2004) (citation omitted).
b. The 4,050 shares HFI bought from the Maddoxes
Hoppy presented evidence of the following matters to the family court in the form of testimony and documentation: In 1995, the Maddoxes agreed to sell their 4,050 shares in the company back to HFI at a rate of $88.50 per share. The 4,050 shares became treasury stock. HFI financed the trade through a combination of promissory notes and mortgages.
Ivey maintained below that the Maddox stock was actually purchased with the loan she claims to have taken out with Hoppy.
The family court was persuaded by Hoppy's evidence that HFI had purchased the Maddox shares. In other words, the shares were not Hoppy's property at all, marital or non-marital; they were the property of the corporation. The evidence was sufficient to support the relevant factual findings, and Ivey has raised no argument on appeal which mandates reversal; she simply believes her evidence was more compelling.
The family court was likewise correct in its legal conclusion that the treasury stock was not marital property. Treasury stock "is corporate stock that ... has been reacquired by the corporation by purchase, donation, forfeiture, or other means." 18A Am. Jur. 2d Corporations §367 (2013). It "becomes personal property of the company and part of its assets ... [.]" Id. It does not belong to any shareholder.
We affirm on this matter.
c. Increase in value of HFI
The parties also debated the change in valuation of Hoppy's interest in HFI. Ivey claimed the value of HFI had grown nearly $7 million over the course of the marriage. Hoppy claimed any appreciation in the value of the farm operation arose from changes in the market rather than his efforts as general manager and president. See 403.190(2)(e).
Hoppy presented some evidence in support of his claim that the appreciation was non-marital property. His expert witness testified that between 2000 and roughly 2008, there had been approximately a seven percent yearly increase in the value of farms in Woodford County due to market conditions; the expert reported that HFI's farm property had enjoyed the same increase.
Ivey's expert witness substantially confirmed this testimony. He stated that farm values rose steadily until around 2007 or 2008 when they stagnated. The witness opined, however, that the increase in the value of HFI was due to more than just market forces: he knew Hoppy to be an excellent businessman and believed his management contributed to the increase in value. However, this expert conceded that he was aware of no specific factor other than market forces which would have caused an increase in the value since 1997.
The family court concluded that Hoppy's non-marital property had increased in value during the marriage but found the increase was due to market changes, rendering the appreciation non-marital property. The court did not enter findings as to the specific value of HFI or Hoppy's ownership interest therein at the beginning or end of the marriage.
Ivey argues the increase in value was due to the parties' efforts rather than market forces. She believes, therefore, that the increase is marital property. She contends, furthermore, that the family court's failure to enter precise valuations of the property as of the date of the marriage and upon dissolution constitutes reversible error.
We agree with Ivey that the family court's finding was at least partially erroneous. Although the experts' testimony constitutes substantial evidence to support the conclusion that any changes in value were due to market forces starting in 1997, there is no evidence regarding any change in valuation of HFI, or Hoppy's interest therein, prior to 1997. That leaves seven years of marriage for which there is no evidence concerning the rate and cause of appreciation.
To be clear, as Ivey notes, there is some evidence concerning valuation of HFI during this period, in the form of the sale of stock, but that is not sufficient to satisfy Hoppy's burden.
"A party claiming that property, or an interest therein, acquired during the marriage is non[-]marital bears the burden of proof." Crawford v. Crawford, 358 S.W.3d 16, 21 (Ky. App. 2011) (citing Sexton, 125 S.W.3d at 266). Hoppy has not met his burden of proving that the increase in value of his interest in HFI was due entirely to market forces between 1990 and 1997. We are compelled to reverse that portion of the order and remand for an equitable division of the appreciation of HFI during the period of the marriage prior to 1997. KRS 403.190(1).
III. Maintenance and division of marital debt
The parties agree that Ivey is entitled to some maintenance, but disagree as to the appropriate amount. Ivey contends $750 per month is insufficient to meet her needs, but Hoppy maintains the family court's award was proper.
In establishing an award of maintenance, the family court must consider the following factors:
(a) The financial resources of the party seeking maintenance, including marital property apportioned to him, and his ability to meet his needs independently, including the extent to which a provision for support of a child living with the party includes a sum for that party as custodian;KRS 403.200(2).
(b) The time necessary to acquire sufficient education or training to enable the party seeking maintenance to find appropriate employment;
(c) The standard of living established during the marriage;
(d) The duration of the marriage;
(e) The age, and the physical and emotional condition of the spouse seeking maintenance; and
(f) The ability of the spouse from whom maintenance is sought to meet his needs while meeting those of the spouse seeking maintenance.
Because we have ordered the family court to allocate certain marital property which it erroneously deemed non-marital, some of these factors (specifically, subsections (a) and (f)) are subject to the possibility of change. Therefore, upon remand the family court shall reconsider its award of maintenance in light of the parties' financial positions following an equitable division of the appreciation of HFI during the period of the marriage prior to 1997.
We also recognize that, even after remand, there may be no change in the outcome of this case.
Several factors likewise govern the division of debt incurred during marriage. They include "such factors as receipt of benefits and extent of participation, whether the debt was incurred to purchase assets designated as marital property, and whether the debt was necessary to provide for the maintenance and support of the family[.]" Neidlinger v. Neidlinger, 52 S.W.3d 513, 523 (Ky. 2001) (citations omitted). Another important factor is the "economic circumstances of the parties bearing on their respective abilities to assume the indebtedness." Id.
Once again, the parties' economic circumstances are subject to change on remand of the issue concerning the division of the appreciation of Hoppy's interest in HFI. That change may bear on the parties' ability to repay the marital debt. Consequently, we must remand for reconsideration of allocation of the debt following consideration of the issues related to HFI prior to 1997.
See footnote 3.
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IV. Conclusion
Ivey has raised insufficient reasons to reverse the family court's order to the extent that it determined the 1,222 shares Hoppy acquired from his siblings are his non-marital property, the 4,050 shares repurchased from the Maddoxes by HFI are neither party's property, and the increase in the value of Hoppy's interest in HFI between 1997 and the parties' separation was due entirely to market forces. The family court concluded, without basing that conclusion on substantial evidence, that Hoppy's interest in HFI appreciated only due to market forces between 1990 and 1997. We reverse on that issue, as well as on the issues of maintenance and marital debt that could be affected thereby. We remand those matters for further proceedings as discussed in this opinion.
ALL CONCUR. BRIEFS FOR APPELLANT: James P. McCrocklin
Louisville, Kentucky
BRIEF FOR APPELLEE: Anita M. Britton
Kate L. Green
Lexington, Kentucky