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Appreciation of Separate Property - Burden of Proof and Unequal Division
© 2004 National Legal Research Group, Inc.
NEW YORK: Ritz v. Ritz, 21 A.D.3d 267, 799 N.Y.S.2d 501 (1st Dep't 2005)
The trial court did not err in holding that the marital estate included the increase in value of the husband's separate property apartment building from the date it was acquired until the date of classification in the divorce case, even though the building was acquired well before the date of the marriage. The record did not show the value of the building on the date of the marriage, and it was the husband's burden to prove that value. Because there was no proof of passive appreciation, the entire amount of appreciation was properly treated as active. Given the wife's overall lack of contribution to the building, however, the trial court erred by dividing the appreciation equally. Rather, the wife's equitable share was only 25% of the increase in value.
The husband brought an apartment building into the marriage. During the marriage, rents from the building were deposited into a joint checking account. The trial court held that the increase in the value of the building was marital property, measuring the increase in value as the difference between the value at the date of acquisition (which was well before the date of the marriage) and the date of commencement of the divorce action (which is the date of classification under New York law). It then divided the enhanced value equally between the parties.
Upon appeal, the New York Appellate Division affirmed the trial court's classification of the apartment building. The appreciation was active therefore marital, "as the rent money was deposited in a joint checking account and there was evidence of plaintiff's indirect contributions as a homemaker and mother." 799 N.Y.S.2d at 502. The decision to use the date of acquisition rather than the date of the marriage as the starting date for measuring the increase in value was proper, "because the court was only provided with a dollar figure for the former, not the latter (notwithstanding the generous result this gives plaintiff)." Id. The husband argued that some of the appreciation was caused by market forces, but the court held otherwise, as no evidence of passive appreciation had been presented. "[S]ince defendant produced no evidence as to the amount of increase due to passive market forces as opposed to his direct efforts, we will not disturb the classification that the entire increase was marital property." Id.
The equal division of the increase in value, however, was reversed:
[I]n view of this most favorable calculation for plaintiff to determine the marital portion, an award of 50% of the enhanced value is clearly disproportionate. She contributed no money to the operation of the apartment; the rent money, which was merely "parked" in the joint checking account, more than paid for its expenses. Nor did plaintiff directly contribute to the operation or management of the apartment. [Citations omitted.] In fact, the record shows plaintiff had no involvement with the apartment whatsoever. Consequently, we reduce plaintiff's share in the enhanced value of the apartment to 25%.
Id.
Editor's Note: The classification issue in Ritz is a striking example of how dysfunctional New York law can be on the classification of the increase in the value of separate property. Like most other states, New York holds that appreciation in separate property is marital property when it is caused by marital contributions. Past New York cases, however, have uniformly placed the burden of proof on the nonowning spouse. "As the nontitled spouse, plaintiff has the burden of establishing the value, if any, that was added to this property by her direct or indirect contributions during the marriage. [Citation omitted.] As she did not, Supreme Court should not have awarded her any interest in this asset." London v. London, 21 A.D.3d 602, 799 N.Y.S.2d 646 (3d Dep't 2005); Morrow v. Morrow, 19 A.D.3d 253, 800 N.Y.S.2d 378, 379 (1st Dep't 2005) (awarding wife no share of appreciation in husband's business where she "failed to satisfy her burden of establishing 'the baseline value of the business and the extent of its appreciation'") (citing Kurtz v. Kurtz, 1 A.D.3d 214, 215, 767 N.Y.S.2d 104 (1st Dep't 2003)); Burgio v. Burgio, 278 A.D.2d 767, 769, 717 N.Y.S.2d 769, 771 (3d Dep't 2000) ("Defendant, as the nontitled spouse, bore the burden of proof on appreciation of the property [citation omitted], and her failure to meet that burden forecloses this Court's consideration of the issue"); see also Brett R. Turner, Equitable Distribution of Property 5.22 (2d ed. 1994 & Supp. 2004) (in all states except West Virginia, the burden of proving the amount of appreciation in separate property is on the nonowning spouse).
Citing no authority, Ritz reversed the settled burden of proof, holding that the husband had the burden of proving the value of the building on the date of the marriage. This is not the law, either in New York or elsewhere. The result was particularly unfair to the husband on the facts of Ritz, for he had no way to anticipate that the court would fail to follow the existing case law placing the burden on the wife, and therefore no reason to introduce evidence on the value of the home on the date of the marriage.
Ritz further held that the appreciation was entirely marital because the husband had not proven how much of it was caused by passive forces. While placing the burden of proving causation on the owning spouse is the better rule of law, Brett R. Turner, Equitable Distribution of Property 5.22 (2d ed. 1994), it has not to date been the law of New York, which requires the nonowning spouse to prove causation as well as appreciation. "The Supreme Court properly declined to award to the plaintiff any share of the defendant's separate property located in Cyprus, which she obtained by gift and inheritance from her family, since he failed to establish that the alleged appreciation in value of this separate property was caused by his direct or indirect contributions and efforts." Tzanopoulos v. Tzanopoulos, 18 A.D.3d 464, 795 N.Y.S.2d 254, 255 (2d Dep't 2005). "Since the plaintiff failed to establish that the increase in the valuation of the marital home of $250,000 was attributable to the efforts of either party, and since there is no causal connection between her contributions to the marital relationship and the appreciation of the marital home, the amount of such appreciation should be deemed separate property." Carniol v. Carniol, 306 A.D.2d 366, 368, 762 N.Y.S.2d 619, 620 (2d Dep't 2003).
Given the previous New York cases, the author understands why the husband in Ritz did not introduce evidence of passive appreciation. He had every reason to believe that the wife bore the burden of proving active appreciation, and no reason to anticipate any change in New York law. A change in the burden of proving causation would admittedly be good policy but, in all fairness, such a change should be announced in advance, so that owning spouses are aware of the burden and can prepare to meet it. There is a strong appearance that the husband in Ritz was ambushed by a sudden and unforeseeable change in the burden of proof.
The placement of rents from the building into a joint checking account should not have converted the apartment into marital property. Commingling and marital use of income from a separate asset may convert the income into marital property, but it does not convert the principal. See Murray v. Murray, 312 S.C. 154, 158, 439 S.E.2d 312, 315 (Ct. App. 1993) (placing rental income from separate property into a joint account did not convert the rental property into a marital asset; "merely using income derived from nonmarital property in support of marriage does not transmute nonmarital property into marital property") (citing Peterkin v. Peterkin, 293 S.C. 311, 360 S.E.2d 311 (1987)); Boutwell v. Boutwell, 829 So. 2d 1216 (Miss. 2002) (use of income received from note during the marriage for marital purposes did not transmute income received after the divorce); D.K.H. v. L.R.G., 102 S.W.3d 93 (Mo. Ct. App. 2003) (use of some payments on contract for deed for marital purposes did not transmute the contract itself). Even if mortgage payments on the apartment were paid from the account, a fact not stated in the Ritz opinion, the result would be no different. When income from an asset is deposited into the same account used to pay the mortgage on that asset, there is a reasonable basis for inferring that the mortgage was paid from the income. See Fountain v. Fountain, 148 N.C. App. 329, 559 S.E.2d 25 (2002) (withdrawals from account to make debt payments on separate property airplane were traceable to deposits of income from renting the same airplane to third persons, so that airplane remained separate property).
Sloppy classification reasoning like that displayed in Ritz is an ongoing problem in New York equitable distribution law. Turner, supra, Appendix A (New York section). It is not necessary to recognize separate property in order to exclude nonmarital value from division. Roughly a dozen all-property states do not recognize separate property at all, see Turner, supra, 2.07, but these states generally divide nonmarital value unequally, so that its real value is often awarded to the owning spouse. The purpose of recognizing separate property is therefore not simply to exclude nonmarital value from division; that result can be reached without separate property.
The main benefit to having a classification is not that nonmarital value is excluded from division but, rather, that nonmarital value is excluded consistently. Consistent exclusion is very important, for it makes divorce cases much easier to settle out of court. If all courts applied the classification system as loosely as Ritz did, parties who did not like the system would have every reason to ignore it, in the hope that the court would allow equity (or more properly, the trial court's individual and quite possibly idiosyncratic perception of equity) to dictate a different result. In individual cases, the result might be fairer, as no classification system will ever be perfect, but the courts would quickly be swamped with requests to ignore alleged imperfections in the statute. The purpose of enacting a statutory definition of separate property is to make certain results predictable, so that the courts do not need to decide the same issues over and over again, and so that more cases settle out of court. New York's statutory definition of separate property is not being applied very consistently, and the predictable result is a great deal of needless litigation.
Because of the court's unequal division, the result reached in Ritz is fair on the facts presented. But the court's flawed reasoning makes the classification of property much harder to predict. The result is to make future divorce cases much harder to settle a significant loss for the entire court system.
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