Classification of Livestock Upon Divorce
© 2005 National Legal Research Group, Inc.
While the population of the United States today is mostly urban or suburban, it is a rare state which does not have at least some portion of its population living on farms. When divorce occurs in a farm family, classification of livestock can be a very significant issue.
Livestock are governed by the same rules of classification as other assets. In general, the court's task is to determine the extent to which the real economic value of the livestock was acquired during the marriage as a result of marital contributions. Livestock are unique, however, because they reproduce naturally, and therefore replace themselves on an ongoing basis during the marriage. The classification of new livestock born during the marriage, as offspring of separate property livestock, has been a recurring issue in the reported cases.
A good entry point into the case law is the Oregon Court of Appeals' colorful opinion in In re Marriage of Mallorie, 200 Or. App. 204, 113 P.3d 924 (2005). The husband in Mallorie ran his family's business, Mallorie's Dairy. To produce the milk it sold, the dairy obviously needed cows. On the date of the marriage, the milk was produced by a herd of 362 cows, all of which were owned by the husband individually. The husband leased the cows to the dairy, in return for payment of $8 per cow per month. Whenever a cow died or was sold, the lease required the dairy to pay $900 for a replacement cow. The productive life of a cow in the dairy was roughly three years. After that period was over, the cow's peak productivity was ended, and it was replaced with a cow whose peak productivity was just starting. The lease was terminable at will by either the husband or the dairy.
At the end of the parties' 20-year marriage, the cattle herd consisted of 493 cows, 131 more than at the beginning of the marriage. Of the 493 cows, 11 were titled in the name of the wife, and the remaining 482 were titled in the name of the husband. The trial court held that 362 cows were acquired before the marriage, and that 131 cows were acquired during the marriage. The wife appealed, arguing that the 362 cows which the husband had brought into the marriage were replaced during the marriage, so that all of the cows existing at the time of the divorce should have been treated as marital assets.
Oregon's equitable distribution system is a unique mixture of dual-classification and all-property principles, but it has been construed in a manner generally within the nationwide mainstream. The trial court has the authority to divide any asset owned by either spouse at the time of the divorce, regardless of when acquired. There is a rebuttable presumption, however, that assets acquired during the marriage are the product of equal contributions by both spouses, whereas contributions to assets acquired outside of the marriage (or during the marriage by gift or inheritance) must be proven. The net effect is that property acquired through traditionally marital means is normally divided equally, while property acquired through traditionally nonmarital means is normally divided only to the extent that marital funds or marital efforts created its real economic value. See generally Or. Rev. Stat. Ann. 107.105 (Westlaw 2005); In re Marriage of Kunze, 337 Or. 122, 92 P.3d 100, 112 (2004); Leslie Joan Harris, Tracing, Spousal Gifts, and Rebuttable Presumptions: Puzzles of Oregon Property Distribution Law, 83 Or. L. Rev. 1291 (2004). This is the same result reached in many other states with more traditional dual-classification systems.
In terms of Oregon law, therefore, the issue in Mallorie was the time at which the 362 cows were acquired. The husband argued, and the trial court found, that the cows were acquired before the marriage, so that the presumption of equal contribution did not apply. The wife argued that the cows were acquired during the marriage, so that the presumption of equal contribution should apply.
The wife was completely correct in asserting that the husband no longer owned the 362 cows which he had brought into the marriage. Those cows were sold within three years of the date of the marriage, replaced as their peak productive years ended. But the law of equitable distribution does not always insist that assets acquired during the marriage are marital property. On the contrary, an asset acquired during the marriage is universally treated as separate property if it was acquired in exchange for another separate asset. Brett R. Turner, Equitable Distribution of Property 5.23 (2d ed. 1994 & Supp. 2004). For example, if the husband sells a separate property share of IBM stock, and uses the proceeds (and no other source of funds) to acquire a share of Microsoft stock, the Microsoft share is also separate property.
Some states also treat property acquired during the marriage as separate property if it is "passive income" from another separate asset. For example, if Microsoft paid a dividend on the separate property share described above, and the husband did not work as a Microsoft employee to produce the funds used to pay the dividend, the dividend would be separate property value produced by another separate asset with no marital contribution. Conversely, if the husband earned $100 through active marital efforts on behalf of the family business, and chose to pay that $100 to himself as a dividend rather than as salary, the $100 would be "active income" from separate property, and thus would be classified as marital property. Income from separate property is separate only where it is produced without the investment of marital funds or marital efforts. See generally id. 5.21.
The above description of the law on income from separate property is somewhat idealized. Some states focus single-mindedly on the second situation and insist that all income from separate property should be marital; other states focus single-mindedly on the first situation and insist that all income from separate property should remain separate. Since almost all dual-classification states apply the active/passive approach to appreciation in separate property, the result of both single-minded positions has been to create a series of arbitrary hairline distinctions between appreciation and income. See id. The better policy, and the current trend among states to revisit the issue within the past 10 years, is to apply the active/passive distinction to both income from separate property and appreciation in separate property.
On the facts of Mallorie, therefore, the wife could not prevail simply by establishing that the husband no longer owned the exact same 362 cows he had brought into the marriage. If the replacement cows were acquired in exchange for the original cows, or if the replacement cows were passive income from the original cows, the trial court's decision would still be correct.
The husband's argument on appeal was essentially that the replacement cows were acquired in exchange for the original premarital cows:
Husband maintains, and the trial court agreed, that the 362 cows that husband brought into the marriage, although long since dead, were replaced during the marriage by cows that should not be treated as "property acquired during the marriage." Husband reasons that what he brought into the marriage was not 362 specific cows, but was, instead, 362 income-producing items that were to be replaced regularly by the dairy pursuant to the lease. In essence, husband argues that he brought to the marriage 362 perpetual cows rather than 362 mortal cows. He likens his interest to the holdings in a mutual fund acquired before marriage, noting that the selling of one stock and the buying of another by the fund's manager during the marriage would not convert the mutual fund into a marital asset.
113 P.3d at 928-29.
The appellate court identified two different reasons why the husband's argument was mistaken. First, the undeniable biological fact is that cows, like all living creatures, are mortal. The lease was not sufficiently strong to make the cows immortal:
[W]e do not view the combination of the 362 cows and the lease as representing the equivalent of "perpetual cows." The lease, as noted, is, and always has been, terminable at will by either party and cannot be viewed as a premarital guarantee by the dairy to husband of perpetual cow replacement throughout the marriage or indeed for any specific term at all. That is, although, as events transpired, the lease did, in fact, operate throughout the marriage to confer benefits on husband, it never (either at the time of the marriage or thereafter) provided any guarantee of such benefits because the dairy could have terminated it at any time and stopped replacing the cows. As such, the lease arrangement itself had only speculative value as a long-term asset.
Id. at 929 (court's emphasis).
Second, while each new cow acquired under the terms of the lease nominally replaced an old one, the financial reality of the transaction was more complex. The old cows had passed their peak earning years, and their value was reduced. "[E]vidence at trial indicated that at least some [old] cows culled from the herd were sold for more than $500," id. at 927 but the replacement cost of the new cows under the lease was $900, a figure which was apparently not materially different from the actual cost to acquire a new cow in the marketplace. Thus, what actually occurred was that the dairy sold the old cow, added from its own funds the difference between $900 and the sale price, and purchased a new cow. The effect of the transaction was to distribute income from the dairy to the husband. Since the husband ran the dairy, the income so produced was active and not passive, and it was therefore marital in nature. Over time, therefore, there was a significant volume of indirect marital contribution to the real economic value of the herd:
The other flaw with husband's position is demonstrated by husband's own expert's testimony. We find convincing Ranweiler's conclusion that, every time one of the cows was replaced by the dairy, the cow's owner received a benefit. As noted, Ranweiler opined that the cow leases, as structured, gave husband and other family members a "no-risk perpetual income stream." See 200 Or.App. at ---- n. 6, 113 P.3d at 927 n. 6. By setting up the leases in that manner, the dairy's transfer of replacement animals to husband during the marriage "had significant value that must be recognized for tax purposes." Id. That is, each time during the marriage that an old cow was replaced with a new cow of greater value, a benefit was conferred on the owner of the cow at that time.
Id. at 929 (emphasis added). The court concluded:
We do not view this situation as akin to ownership of a mutual fund that has not appreciated and from which no withdrawals are made through a marriage. Livestock and corporate stock simply are not equivalent. Dairy cattle live and die; shares of stock don't. Thus, a dairy cow, like produce, is a "consumable" commodity she has a finite productive life, with her value inexorably decreasing, rather than increasing or remaining static, with the passage of time over her productive life. That value is a function of the cow's projected remaining production capacity. But once the cow is dead, she's dead. In sum, the cows that husband brought into the marriage are long gone. They have no residual value that lasted in perpetuity or even throughout a 20-year marriage, despite the existence of a lease that provided for the replacement of the cows at no cost to husband. The successive generations of replacement cows generated the stream of rental income and that income was used throughout the marriage by the family.
The court's rationale for rejecting the husband's argument makes sense; the 362 cows which existed at the time of the divorce were not acquired solely in exchange for the 362 cows which existed at the time of the marriage. But the court's apparent conclusion that all 362 new cows were fruits of the marital tree was just as oversimplistic as the husband's contrary argument. The economic reality of the situation, clearly recognized by the court, is that the new cows were acquired in exchange for the proceeds from sale of the old cows, plus the additional funds contributed from the income of the dairy to meet the difference between the sale proceeds and the actual replacement price. The new cows were acquired in exchange for both marital and separate property. The husband and the trial court were wrong to ignore the marital contribution, but it is equally wrong to ignore the separate contribution.
The court's discussion of this point suggests that the separate contribution could be ignored solely because it was commingled with the marital contribution:
[E]ven if we were to accept husband's premise that he brought into the marriage "perpetual" rather than "mortal" cows, we would reach the conclusion that the cows, at the time of the dissolution, were a marital asset because of commingling. As noted, the parties, between them, owned a total of almost 500 cows, which they leased to the dairy. Those owned by husband were not in any way kept separate from the remainder of the cows; all the cows were treated the same by both the dairy and the parties. . . . Given those circumstances, it would be extremely difficult, if not impossible, to discern what part, if any, of husband's premarital dairy herd was not integrated into "the parties' joint financial affairs[.]" Id.
Id. at 930-31.
The above passage seems to imply that separate property should be treated as separate property only if it is kept clearly segregated from marital property. That is not the law, in either Oregon or other states. Commingling of marital and separate contributions renders the mixture entirely marital property only if the separate contributions cannot be reliably identified on the facts. See Kunze, 92 P.3d at 110 ("[C]ommingling may make the identification of the separately acquired asset so unreliable as to defeat any claim on that spouse's part of an unequal contribution by the other spouse").
Whether a commingled asset was integrated into the parties' finances does not alone determine whether the separate contributions can or cannot be reliably identified. If the wife proves that she made separate contributions of exactly $100 to an asset acquired for exactly $200, which is still worth $200, a separate interest of exactly $100 continues to exist in the asset. This is true regardless of whether the commingled asset was stored in a lockbox or integrated into the parties' finances. If this were not true, there would be a tremendous incentive for owners of separate property to hold it in unproductive storage, instead of using it productively for family benefit. Likewise, if separate property disappears when it is integrated into family finances, then the law will be penalizing owners of separate property who use it for family purposes and that is very bad social policy. The law should encourage family use of separate property, not penalize it.
The importance of treating commingling as an issue of identification alone is one of the great discoveries in the past 20 years of equitable distribution case law. Some courts entered the equitable distribution era with an implicit belief that separate property is generally kept in complete isolation from marital property. Actual experience rapidly proved this belief to be a fiction. Married persons do not live their financial lives expecting that a divorce will occur. Most separate property is commingled with marital property to some greater or lesser extent during the marriage; little or no separate property remains pristinely separate. If rigid segregation of separate property is required, separate property will become so uncommon that the benefit of keeping track of it will not be worth the cost. See generally Turner, supra, 5.08.
The Mallorie court was wrong to suggest that the separate contribution to the acquisition of the cows could be ignored because the cows were used for marital purposes, or even because they were integrated in a general sense into the finances of the family. The key issue was whether the separate contribution to the acquisition of the cows had been reliably proven on the facts. If the separate contribution had been proven, that contribution should have been recognized in some manner even though there was undoubtedly a greater marital contribution from the income of the dairy. To do otherwise is to ignore a proven contribution to the marriage when dividing the marital property.
Nevertheless, as a matter of classification, Mallorie reached the right result on the facts. The burden of reliably identifying the separate contribution to any asset is always upon the party who claims that it exists. To identify a contribution, the contributing spouse must prove both its identity and its amount. Thus, the husband bore not only the burden of tracing the new cows back to the old cows, but also the burden of proving how much of the value was so traceable.
The appellate court in Mallorie was entirely correct in finding that the indirect marital contribution was substantial. The husband therefore bore the burden of proving how much of the value of the herd at the time of the divorce was traceable to the proceeds from the sale of his 362 old cows, as opposed to new marital contributions from the income of the dairy. The opinion gives no indication that the husband met this burden. On the contrary, by stating in vague terms that "at least some [old] cows culled from the herd were sold for more than $500," 113 P.3d at 927, the court suggests fairly clearly that the husband did not prove the exact proceeds received from the sale of his 362 premarital cows. When separate property is commingled with marital property, and the owner of the separate property cannot prove the extent of the separate contribution, the commingled mixture is marital property. Turner, supra, 5.23. This is true not because commingled property is marital as a matter of law, but rather because the party with the burden of proof has failed to meet the burden on the facts. The husband in Mallorie did not prove the amount of the separate contribution, and the commingled asset was therefore properly treated as marital property.
In most states, however, the separate contribution to the commingled mixture would at least be treated as a division factor. The Mallorie court dismissed this point summarily, finding that the presumption of equal contribution had not been rebutted. Yet there was no dispute that the husband had actually brought 362 cows into the marriage, and no dispute that the cows had real value. He did not prove the amount of the value, making it difficult to apply a classification-stage remedy but there is no doubt that a contribution of some value was made. Many decisions nationwide treat such a contribution as one among many factors in dividing the marital estate. See In re Marriage of Dall, 191 Ill. App. 3d 652, 548 N.E.2d 109, 116 (1989) (separate property contribution to marital home transmuted into marital property; trial court properly found separate contribution "of great consequence" and awarded the contributing party more than one-half of the marital estate); McGee v. McGee, 277 N.J. Super. 1, 648 A.2d 1128 (App. Div. 1994) (where wife brought $87,000 into marriage, error to award her only $25,000 upon divorce); Rauch v. Rauch, 226 A.D.2d 1141, 641 N.Y.S.2d 212 (1996) (where wife contributed 75% of parties' premarital property and had substantially smaller income at divorce, equal division was error; awarding wife 65% of marital estate). There are even a few Oregon cases reaching the same result. See In re Marriage of Conser, 128 Or. App. 377, 875 P.2d 1184 (1994) (trial court did not err by giving wife only $20,000 interest in husband's $141,000 premarital business); In re Marriage of Helm, 107 Or. App. 556, 813 P.2d 52 (1991) (where land was traceable to bonds given to wife by her mother, proper to divide unequally proceeds from timber grown on the land). See generally Turner, supra, 8.05.
The argument has been made that Oregon courts should not treat the relative contributions of the spouses to the marriage as a factor in dividing marital property. See Harris, supra, 83 Or. L. Rev. at 1321 et seq. Contributions to the marriage from marital sources are ordinarily not a major factor, at least where both spouses put equivalent levels of effort into performing their respective roles in the marriage. E.g., Dunn v. Dunn, 802 P.2d 1314, 1322 (Utah Ct. App. 1990); Turner, supra, 8.05. Cases considering marital contributions as a division factor tend to present extreme fact situations in which one spouse substantially defaulted on a significant portion of his or her duty to contribute anything of value to the marriage. E.g., In re Marriage of Johnson, 138 Or. App. 462, 909 P.2d 185 (1996) (wife worked for 30 years as a teacher and obtained inheritance during marriage, while husband made no serious work efforts and no homemaker contributions; unequal division to wife was equitable); Williams v. Massa, 431 Mass. 619, 728 N.E.2d 932 (2000) (proper to award 75% of estate to husband, who was sole breadwinner and did all of the shopping and cooking; wife did the laundry, did the dishes on an inconsistent basis, was responsible for the cluttered state of the marital home, and had a difficult relationship with the parties' children). See generally Brett R. Turner, Spouses Who Serve as Both Breadwinner and Homemaker, 21 Equitable Distribution J. 85 (2004).
Most states draw an important distinction, however, between direct financial contributions from marital sources (e.g., the breadwinner's salary) and direct financial contributions from nonmarital sources (premarital property, gifts, and inheritances). The former type of contribution is ordinary and expected; the latter type of contribution is extraordinary and unusual. If a nonmarital contribution can be traced to an asset which exists at the time of the divorce, that asset is separate property. If a proven contribution cannot be so traced, however, it still receives weight as a division factor. The facts in Mallorie clearly proved that a separate contribution of 362 cows had been made. The contribution was not valued or traced with sufficient accuracy to establish nonmarital equity in the 362 new cows, but there was general evidence on the value of the contribution (as much as $500 per old cow in some cases). It does not seem equitable to decide the case in the same way it would have been decided if the separate contribution did not exist and that is essentially what the Mallorie court did.
While Mallorie's refusal to recognize the husband's contributions at the division stage is contrary to the practice of other states, its treatment of the herd as entirely marital property is the general rule nationwide. Old cows cannot be traced to replacement cows purchased with funds, as a new cow is always worth more than the old one. New cows born to old cows cannot be acquired in exchange for the old cows, as the old cows do not vanish upon bearing their first calf, but rather ordinarily produce more than one calf during their lifetime. See Brennan v. Brennan, 103 A.D.2d 48, 479 N.Y.S.2d 877 (1984).
Owning spouses realizing the limits of the exchange theory have sometimes tried to argue that calves constitute income from their mothers. In states in which income from separate property is unconditionally separate, this argument could carry weight. In states in which income from separate property is unconditionally marital, this argument of course does not make the calves separate property. See Rhodus v. McKinley, 16 S.W.3d 615 (Mo. Ct. App. 2000); In re Marriage of Ballay, 924 S.W.2d 572 (Mo. Ct. App. 1996) (rejecting an argument that dairy cattle should be treated differently from beef cattle); Elder v. Elder, 824 S.W.2d 520 (Mo. Ct. App. 1992); Preuss v. Preuss, 195 Wis. 2d 95, 536 N.W.2d 101 (Ct. App. 1995) (growth in cattle herd is income, not appreciation).
In states in which only passive income remains separate, calves are probably active income from their parents. Cows do not produce children on their own; both mother and calf must be cared for. In many situations, the farmer's marital efforts and/or marital funds provide the care. See Gutierrez v. Gutierrez, 791 S.W.2d 659 (Tex. App. 1990). In addition, from a biological standpoint, calves are income from both their mothers and their fathers. In the not-uncommon situation in which the services of the bull are rented rather than owned by the farmer, and marital funds are used to pay the rental cost, the calf seems particularly likely to be a product of marital contributions.
Classification of Assets Category