Active Appreciation in Divorce: Marketing, Promotional, and Lobbying Activity
© 2004 National Legal Research Group, Inc.
As most practitioners know, increases in the value of separate property do not always necessarily remain separate. Increases which are caused by marital contributions are known generally as active appreciation, and they constitute marital property. Increases caused by other factors most commonly market forces or the efforts of independent third parties are known generally as passive appreciation, and they remain separate property. The real world being a complex place, appreciation in separate property is only rarely caused by a single factor; most often, appreciation is caused by a entire set of factors acting together. In most states, the classification of appreciation as active or passive is therefore a matter of degree. The court does not decide in an either/or manner whether appreciation is active or passive; rather, it decides the extent to which the appreciation was caused by marital contributions. If marital contributions caused 50% of the appreciation, then 50% of the appreciation is marital property. See generally Brett R. Turner, Equitable Distribution of Property 5.22 (2d ed. 1994 & Supp. 2003).
A recent Virginia decision is a good entry point for discussing several different issues regarding active appreciation. In Courembis v. Courembis, 43 Va. App. 18, 595 S.E.2d 505 (2004), the husband was a real estate developer. Before the parties were married, he acquired a one-third interest in real estate known as the "Route 50 property." During the marriage, the property was rezoned, and the husband filed a site plan allowing the construction of townhouses on the property. The property was then sold at auction, yielding a substantial gain. The wife conducted the auction, after spending several days preparing and setting up rules. The husband's share of the increase in value was $357,667. The trial court held that this sum was marital property and awarded $200,000 to the wife.
Burden of Proof
Virginia's equitable distribution expressly allocates the burden of proof on active appreciation issues. If the nonowning spouse seeks to classify part of the owning spouse's separate property as marital under active appreciation principles, the nonowning spouse must prove (1) the presence of "substantial" appreciation during the marriage, and (2) the existence of "significant" marital contributions to the property. If these two burdens are met, the owning spouse then bears the burden of proving the extent to which the increase in value arose from passive factors. Va. Code Ann. 20-107.3(A)(3)(a) (Westlaw 2004). Stated differently, once significant marital contributions are proven, any appreciation is presumed active unless proven to be passive. The standard of proof on all points is a preponderance of the evidence.
Virginia is somewhat unusual in specifying the burden of proof by statute, but the Virginia statute is expressly based upon case law from other states. There is almost uniform agreement that the nonowning spouse bears the burden of proving the existence and amount of an increase in value. If no increase in value is proven, there is no appreciation to be classified as active or passive. Other states also generally agree that the nonowning spouse bears the burden of proving the existence of marital contributions. See generally Turner, supra, 5.22 nn.473, 478.
The final element of the statute, the existence of a causal link between the marital contributions and the increase in value, is the only close point. A majority of states place the burden on the owning spouse to prove that the appreciation was passive. A minority of states place the burden on the nonowning spouse to prove that the appreciation was active. See generally Harrower v. Harrower, 71 P.3d 854, 858 (Alaska 2003) (adopting the majority rule after full discussion of the cases); Gaetani-Slade v. Slade, 852 So. 2d 343 (Fla. Dist. Ct. App. 2003); Turner, supra, 5.22 nn.473, 474. Very few of the minority decisions expressly note the existence of the majority position; their holdings are often made in a summary fashion, without full discussion and probably without full argument. Of those cases expressly considering both the majority and the minority rule, only one opts for the minority position. Mayhew v. Mayhew, 205 W. Va. 490, 519 S.E.2d 188 (1999).
Promotional and Marketing Efforts
Part I: The Wife's Contributions
The husband in Courembis argued on appeal that the wife had not proven the existence of marital contributions because she had not proven that she had made significant marital contributions to the Route 50 property. The court agreed that the wife's contributions to that property were minimal:
[W]ife's testimony regarding her contributions to the Route 50 property was insufficient as a matter of law. She testified that "she set up all the details of the auction, collected the deposit, and signed everybody in, and helped . . . conduct the auction." She testified that the time she expended in preparing the auction amounted to "probably a couple of days." Her testimony gave no indication, moreover, that her personal efforts generated the increase in value.
43 Va. App. at 33, 595 S.E.2d at 512. Obviously, the mere fact that the wife conducted the auction did not itself prove that she had contributed to the value received. There is no suggestion in the opinion that the winning bid was larger or even that prospective buyers placed higher bids in general merely because the wife conducted the auction. The wife's efforts may have saved the parties some small amount of expenses, for otherwise they might have had to hire a third party to conduct the auction, but the use of marital funds or marital efforts to pay sale expenses generally does not change the price at which the property sells. The wife proved some small degree of involvement with the sale, but she did not prove that her involvement resulted in a higher sale price.
Increased value does not arise from the mere fact that marital efforts are used to conduct a sale of separate property. The wife's willingness to conduct the sale in Courembis may have saved the expense of retaining a third person to conduct it, but avoidance of an expense is not equivalent to an increase in value. Indeed, when the parties use actual tangible marital funds to pay the expenses of selling separate property, no marital contribution results as long as the contribution did not increase the net sale price. E.g., Schoenbachler v. Minyard, 110 S.W.3d 776 (Ky. 2003) (closing costs on real property). If contributions of marital funds to pay the expenses of a sale do not automatically create a marital interest, the same rule should apply to contribution of marital efforts to avoid those expenses.
This entire point assumes, however, that the contributions at issue did not materially increase the amount of proceeds received from the sale the price or quantity of the goods sold. Where marketing or promotional efforts result in more favorable terms of sale, they have accomplished much more than mere avoidance of an expense; they have actually increased the proceeds received from the sale of the property. On another issue discussed later in this article, the Courembis court held that contributions which improved the ultimate terms of the sale did result in active appreciation.
If the wife in Courembis had alleged that buyers bid materially higher prices because of her marketing and promotional efforts, her allegation of active appreciation resulting from her own efforts would have been more persuasive on its face. Given the facts recited by the court, however, it seems doubtful that the wife could have supported such an allegation. If the buyers made the same bids they would have made if a third party of reasonable competence had conducted the auction, then the wife's marketing and promotional efforts created no value. Indeed, if all the wife did was to arrange the purely mechanical details of the auction, without consciously trying to encourage buyers to make higher bids, she may not truly have engaged in marketing or promotional activity to begin with.
The Husband's Contributions
While the Courembis court held that the wife had not proven marital contributions by means of her own efforts in conducting the auction, the court nevertheless held that marital contributions had been successfully proven on the facts. To determine why, we must look at a different point altogether: the efforts of the husband.
The husband argued that the wife could prove active appreciation only by showing that her own efforts created value. But the law is clearly otherwise. Active appreciation is growth in value caused by marital efforts. Just as marital funds can be titled in the name of either party, so can marital efforts be made by either party. In most marriages, each spouse earns salary through his or her own efforts, unassisted by the other, and that salary is still marital property. The fruits of the parties' labors during the marriage belong to the marital estate, not to their own separate estates. Active appreciation, like salary, is merely one particular type of value which can be created by the efforts of the parties during the marriage. Since all value created during the marriage through the active efforts of either spouse is marital property, appreciation caused entirely by the unassisted efforts of the owning spouse must necessarily be marital property. The Courembis court held:
[W]ife argued below, and argues here, that under the statute the increase in value to separate property attributable to the significant personal contributions of either party renders that increase marital property. We agree with wife's second argument for two reasons.
First, the plain reading of the statute confirms that either party's personal efforts may contribute to the increase in value and that such increase in value constitutes marital property. Code 20-107.3(A)(3)(a) ("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." (emphasis added)). Second, although this is an issue that has not been expressly raised or addressed in Virginia . . . , a majority of other states have come to the same conclusion.
43 Va. App. at 32-33, 595 S.E.2d at 512 (footnote and citations omitted). For sample cases agreeing with Courembis that marital efforts include the efforts of either spouse, see Harrower v. Harrower, 71 P.3d 854, 858 n.5 (Alaska 2003); Middendorf v. Middendorf, 82 Ohio St. 3d 397, 696 N.E.2d 575 (1998); and Wade v. Wade, 72 N.C. App. 372, 325 S.E.2d 260 (1985).
A minority of states hold, sometimes as a result of specific statutory language, that active appreciation must result from the efforts of the nonowning spouse. As a matter of policy, these statutes and cases are unwise. As a general rule, value created during the marriage by the unassisted efforts of one spouse is still marital property. The most common example, as noted above, is salary. For example, a physician-spouse's salary is always marital property even if the physician's spouse makes absolutely no direct contribution to the physician's practice of medicine. Why should active appreciation resulting from one spouse's unassisted efforts be classified differently from salary resulting from one spouse's unassisted efforts? There is no valid conceptual reason for a distinction. Moreover, at a very practical level, most owners of small businesses have the ability to choose between withdrawing value as salary or as dividends and leaving the value in the business as active appreciation. In many instances, the only difference between active income and active appreciation is the owning spouse's self-interested decision to distribute or retain the fruits of his efforts during the marriage. If active appreciation caused by one spouse's efforts alone is not marital property, then the owning spouse will be able to convert a great deal of marital salary into separate appreciation merely by retaining value in the business.
Influenced by these arguments, most states following the minority position have reached something close to the majority result by adopting a broad definition of a marital contribution. In New York, for example, the statutory definition of "active appreciation" includes only the efforts of the nonowning spouse. N.Y. Dom. Rel. Law. 236B(1)(d)(3) (Westlaw 2004). Nevertheless, in Price v. Price, 69 N.Y.2d 8, 511 N.Y.S.2d 219 (1986), the highest court of New York held that appreciation resulting directly from the efforts of the husband alone was marital property. The court reasoned that the husband had been able to spend more time and energy on his separate property business because the wife had assumed a disproportionate share of the homemaker and child-care duties. By leveraging the husband's time and energy, the wife therefore made an important indirect contribution to the business. For additional cases following the Price rationale, see In re Marriage of Grady-Woods, 577 N.W.2d 851 (Iowa Ct. App. 1998) (error to give homemaker wife no share of appreciation where her contributions had contributed indirectly to husband's efforts); Long v. Long, 129 Md. App. 554, 743 A.2d 281 (2000) (wife's homemaker services allowed husband to spend long hours working for the company; appreciation active); Hanaway v. Hanaway, 208 Mich. App. 278, 527 N.W.2d 792 (1995) (husband's efforts managing company were facilitated by wife's homemaker services, appreciation active); and Valentino v. Valentino, 309 N.J. Super. 334, 707 A.2d 168 (App. Div. 1998) (awarding 10% of appreciation to wife, who leveraged husband's business efforts by providing homemaker services).
It is important to understand that Price and similar cases do not hold that a full-time homemaker indirectly contributes to every separate property business owned by a full-time breadwinner. The reasoning of Price was a two-step process: The wife's efforts contributed to the husband's efforts, and the husband's efforts contributed to the appreciation of the business. In a line of post-Price cases, the wife made valuable homemaker contributions which leveraged the husband's time and energy, but the growth in the business was caused by factors other than the efforts of the husband. The courts quite properly found no active appreciation. See Fish v. Fish, 161 A.D.2d 979, 557 N.Y.S.2d 549 (1990); Stoneman v. Drollinger, 302 Mont. 107, 14 P.3d 12 (2000) (husband did not improve or otherwise work on his premarital farm during the marriage; despite wife's homemaker contributions, she was not entitled to any interest in the farm); Langschmidt v. Langschmidt, 81 S.W.3d 741, 746 (Tenn. 2002) (wife's homemaker contributions did not contribute indirectly to the growth of husband's investment accounts; growth "was entirely market-driven"); In re Marriage of Terhaar, 171 Or. App. 112, 14 P.3d 657 (2000) (where appreciation in husband's premarital investment accounts was purely passive and husband contributed nothing to the appreciation, court rejected wife's argument that she contributed indirectly).
Preparation of the Site Plan
After determining that the efforts of the husband alone could create active appreciation, the Courembis court considered whether those efforts had actually added to the value of the Route 50 property. Relying heavily on the site plan, the court held that the husband's efforts had created value:
[W]ife's testimony also established that husband's efforts contributed to the increase in value. She testified that the Route 50 property was worth "about $500,000" before husband filed a site plan. After husband filed a site plan for the property, wife testified that the value of the property increased threefold. Wife also affirmed that the site plan was prepared during the parties' marriage.
Accordingly, viewing the evidence in a light most favorable to wife, we find that she submitted sufficient evidence of marital contributions to the property from which the trial court could reasonably conclude that the increase in value constituted a marital asset subject to equitable division.
43 Va. App. at 33, 595 S.E.2d at 512-13.
Even though the husband's efforts created at least some additional value, the husband still could have tried to meet his burden that some portion of the appreciation came from passive causes other than the site plan. But the husband apparently did not attempt to argue that any portion of the appreciation came from causes other than his own efforts.
Also at issue in Courembis was a second parcel of the husband's separate real estate, known as the Lee-Taylor property. That property was assembled from 15 smaller lots, and its value as a complete parcel was materially greater than the total value of the 15 smaller lots. "Although husband assumed the lead role in acquiring and assembling the lots, wife contributed to efforts to rezone the property. Wife completed the application for rezoning, contacted members of the board charged with making zoning decisions, and garnered support from members of the community for the rezoning effort." 43 Va. App. at 23, 595 S.E.2d at 507-08.
The rezoning attempt succeeded, and the property increased substantially in value. An expert called by the wife measured the increase at $2,393,000 and testified that it was caused by three different factors: "the rezoning of the property, the assemblage of the lots into one contiguous parcel, and passive market forces." Id. Based upon the expert's testimony, the court found that "the property increased in value by approximately $2.4 million as a result of the efforts of both parties while married. From that increase in value, the trial court awarded wife $800,000." Id.
The husband argued that the wife had not proven marital contributions to the Lee-Taylor property, but the appellate court found otherwise. To begin with, the wife's contributions to rezoning the Lee-Taylor property, unlike her contributions to the auction of the Route 50 property, created substantial value:
Primarily, wife relies on her efforts to re-zone the property. After completing the zoning application papers and filing them with the zoning board, wife "wrote letters to each of the [zoning] board members" and "passed out some seven hundred flyers and talked to neighbors to convince you know, to get approval." Wife called expert Thorne who testified that the increase in value of the property was "due to the lots being re-zoned for townhouses and assembled under common ownership."
43 Va. App. at 37, 595 S.E.2d at 514.
There is no indication in the Courembis opinion that the husband made any specific response to the wife's argument regarding her contributions to rezoning. The actual decision to rezone, however, was made by an independent third party, the relevant government authority. The wife obviously made extensive efforts to lobby in favor of the rezoning change, but the court cited no particular evidence that her lobbying was crucial to the rezoning. It is entirely possible that the government authority's decision to rezone the property was based upon factors other than the wife's activities. Absent additional evidence, it was certainly reasonable for both the trial and appellate courts to conclude that the wife's actions had some positive effect. In future cases, however, the path should be open for showing other potential influences on a rezoning decision.
Courembis is the first published decision nationwide to consider appreciation caused by efforts to convince a local government to rezone real property. Appreciation caused by other forms of government action has generally been held to be passive where government acts independently. See Hoffmann v. Hoffmann, 676 S.W.2d 817 (Mo. 1984) (enactment of federal clean air legislation greatly increased demand for water-cooling towers produced by husband's company; appreciation passive); Harrison v. Harrison, 912 S.W.2d 124 (Tenn. 1995) (interstate highway constructed across husband's separate property farm, increasing value of farm dramatically; appreciation passive). In neither Hoffmann nor Harrison is there any suggestion that either spouse made any attempt to influence the relevant government action.
Where the government's action is motivated by marital efforts, however, there is authority holding that the resulting appreciation is active. See Innerbichler v. Innerbichler, 132 Md. App. 207, 752 A.2d 291, cert. denied, 361 Md. 232, 760 A.2d 1107 (2000) (corporation's success depended on valuable certification from the Small Business Administration, but husband had put considerable effort into applying for and receiving the certification; appreciation active).
All other factors being equal, the extent to which government action was motivated by marital efforts probably depends greatly upon the nature of the government action. Actions directed primarily at individual properties and business, such as the rezoning in Courembis and the certification in Innerbichler, are more likely to be subject to lobbying efforts. By contrast, Congressional enactment of clean air legislation and the routing of interstate highways affect thousands or even millions of persons and are influenced by a much larger number of individuals and groups. To materially cause major federal government actions applying to large numbers of persons, a spouse would have to have considerable political influence, approaching the level of a full-time lobbyist or legislator.
Given the overall level of lobbying activity inherent in democratic government, especially at the local level, cases will probably continue to arise in which significant marital efforts were influential in obtaining favorable government action. In those cases, the extent to which marital efforts caused government action will continue to be an important point.
Promotional and Marketing Efforts
Part II: The Husband
The Courembis court also held that the husband's contribution to assembling the 15 lots created substantial value. This is a significant holding, for the court relied substantially upon promotional and marketing efforts:
Second, wife argues that husband's contributions to the value of the property during marriage were properly considered as evidence that the Lee-Taylor property should partly be characterized as marital. It is undisputed that, during the marriage, husband "assembled" various lots to make the Lee- Taylor property contiguous. He expended personal effort to acquire the lots by negotiating with some of the owners and by outbidding other developers at auctions. He negotiated with one reluctant owner "for fifteen years" before finally acquiring lots 3 and 17. It is further undisputed that the value of the property increased as a result of his efforts to assemble the lots.
We find that wife met her burden of proving that the increase in the value of the Lee-Taylor property constituted marital property subject to equitable division because the evidence proves that the efforts of both husband and wife contributed to the increase.
43 Va. App. at 37-38, 595 S.E.2d at 514-15.
Virginia courts have not always been as willing as Courembis to find that promotional and marketing activities created value. In fact, previous Virginia opinions can fairly be read to doubt whether such activities ever create value. "Merely bargaining to obtain the best price for an asset is not the type of active effort that adds intrinsic value to an asset or increases its worth." Rowe v. Rowe, 33 Va. App. 250, 532 S.E.2d 908, 916 (2000). "While Pettus undoubtedly employed intellectual skill in selecting properties to be purchased, the evidence was insufficient to prove that Pettus contributed 'significant' personal effort that was the proximate cause of 'substantial appreciation' in the value of these assets." Gilman v. Gilman, 32 Va. App. 104, 526 S.E.2d 763, 771 (2000). "[E]ven if husband's negotiations saved money, those efforts are not the type of 'personal efforts' required to transmute a portion of separate property into joint property under Code 20-107.3(A)(3)." Bchara v. Bchara, 38 Va. App. 302, 563 S.E.2d 398, 405 (2002).
Bargaining, negotiating, and employing intellectual skill in selecting the individual lots to be assembled were the core of the husband's efforts in Courembis, and the court nevertheless expressly found those efforts to be significant. There is, accordingly, a significant degree of conflict between the holding in Courembis and the language quoted above. The conflict could be more apparent than real, for the argument that marketing and promotional efforts created value on the facts was weak in all of the pre-Courembis Virginia decisions. But those decisions went too far in suggesting that promotional and marketing activity as a category of effort cannot ever create value particularly because Virginia's statutory definition of "marital effort" includes "promotional or marketing activity." Va. Code Ann. 20-107.3(A)(3)(a). Courembis suggests that Virginia courts are beginning to recognize that promotional and marketing efforts sometimes can create value.
Outside of Virginia, there is significant authority holding that efforts to market assets and select good investments can create value. See, e.g., DuJack v. DuJack, 221 A.D.2d 712, 632 N.Y.S.2d 895 (1995) (husband sold his separate property company for an unusually high price; finding that 40% of the appreciation was due to husband's effort in negotiating the favorable price); Caffrey v. Caffrey, ___ A.D.2d ___, 770 N.Y.S.2d 33, 34 (2003) ("The [trial] court properly considered the appreciation in defendant's IRA account to be marital property since defendant actively managed the investments in the account"); Nolan v. Nolan, 107 A.D.2d 190, 486 N.Y.S.2d 415 (1985) (husband did not work during marriage, instead managing separate property securities portfolio; appreciation active); Becker v. Becker, 639 So. 2d 1082 (Fla. Dist. Ct. App. 1994) (appreciation in husband's profit-sharing plan was marital property where wife actively managed it during the marriage); Fredel v. Fredel, 531 So. 2d 981 (Fla. Dist. Ct. App. 1988), cert. denied, 542 So. 2d 988 (Fla. 1989) (appreciation in actively traded investment portfolio; "[b]ecause the increase in the stock value was a result of work effort during the marriage, the trial court erred as a matter of law in finding the enhancement non-marital property, and thus not subject to equitable distribution").
Like Courembis, the nationwide decisions finding that promotional or marketing activity created active appreciation tend to involve prolonged contributions to assets of significant value. It is certainly true that the creation of substantial value with promotional or marketing activity alone is the exception and not the rule. Nevertheless, the exception is important, for some persons base their entire careers upon skill in marketing and promoting assets. In addition to real estate developers, mutual fund managers and other investment professionals come immediately to mind. If the courts do not recognize that promotional and marketing activity can create value in at least some cases, it will be difficult to make an equitable division of property in cases involving spouses in these careers.
Passive Market Forces
The Courembis court recognized that the husband was free to argue that some portion of the increase in value of the Lee-Taylor property arose from passive factors. "Husband did not present any credible evidence in this regard, and, in any event, concedes in his opening brief that some of the increase in value derived from his efforts to assemble the lots during the marriage. Thus, considering the evidence in its totality and in a light most favorable to wife, we cannot say the trial court erred." 43 Va. App. at 38, 595 S.E.2d at 515.
The husband's concession that there was no passive appreciation is curious, for it is contrary to the testimony of the wife's own expert. As quoted by the trial court, the wife's expert identified three causes for the appreciation: "the rezoning of the property, the assemblage of the lots into one contiguous parcel, and passive market forces." 43 Va. App. at 23, 595 S.E.2d at 508. The first two causes were clearly active, but market forces are ordinarily passive.
It is unclear why the husband and the court did not discuss in more detail the expert's testimony that passive market forces caused part of the increase. One possible explanation is that the market forces caused only a very small portion of the growth. Another possibility is that the passive market forces were operative only before the actual development of the property. Those forces might not have contributed to the fully developed value of the property, which may have resulted largely from the development itself. Cf. Mitts v. Mitts, 39 S.W.3d 142 (Tenn. Ct. App. 2000) (husband's marital effort constructing and operating golf course on separate property land did not increase land's value, where land was sold at a substantial premium to developers, who immediately removed the golf course and built a residential subdivision). The husband may also have simply made an unwise concession. Still, the question of passive market forces merited more discussion than it received. The wife's expert's testimony was not presented by the husband, but it was still evidence suggesting that some of the appreciation may have been passive.
Courembis is the first major published decision nationwide to address active and passive appreciation in the context of a developer of real estate. By holding that marketing, promotional, and lobbying efforts can add value to separate property, the court established a good foundation for equitably dividing the value created during the marriage when real estate developers deal with their own separate property. At the same time, the court's resolution of the issues presented was heavily influenced by the fact that the husband did not attempt to show that marketing, promotional, and lobbying efforts created only some of the appreciation at issue. In future active appreciation cases, the amount of value created by these sorts of efforts is likely to be a substantially disputed issue.
Appreciation of Assets Category