Source: https://www.floridabar.org/news/tfb-journal/?durl=%2Fdivcom%2Fjn%2Fjnjournal01.nsf%2FAuthor%2F7004ED3FDD4335268525726F007AC5AD
Timestamp: 2018-12-17 00:14:42
Document Index: 619911292

Matched Legal Cases: ['§61', '§61', '§61', '§61', '§61', '§61', '§61', '§61', '§61', '§61', '§61']

Florida Bar Journal – Determining the Nonmarital Portion of Retirement Benefits and Other Property – The Florida Bar
by A. Matthew Miller and Jerry Reiss
One of the biggest problems in family law and one with which courts often have the most difficulty is distinguishing the passive increases of nonmarital property under §61.075(5)(b)(3) from the active increases defined in the statutes under §61.075(5)(a)(2). The result of the statute is clear: A court finding that substantial marital time has been spent improving the nonmarital property may cause some of the appreciation to be active and marital property. Narrowly construing the statute leads one to conclude that only when little or no marital time is spent improving the nonmarital value that all appreciation is passive. The increase is then the result of market forces. The difficulty begins when the results of market forces are confused with what work effort is necessary in order to achieve the market result.1
To better understand this distinction, we begin the analysis by examining the statute and searching for the common sense purpose behind it. Section 61.075(5)(a)(2) tells us that active increases are the result of substantial work effort expended during the marriage. But is the “substantial work effort” sufficient in and of itself to define an active accrual on nonmarital property? Or is it simply a necessary element before a conclusion may be reached that the accrual is active appreciation, but by itself is insufficient to support the finding that the amount of marital property is to include the appreciation resulting from the substantial marital work effort? Simple logic tells us that it cannot be sufficient to support this finding because substantial work effort can result in a loss.2 The clear intent behind the statute is not to decrease the amount of marital property by this loss.
It is impossible to achieve a positive market result without spending some marital time even if that time is spent finding someone unrelated to the marriage to manage the nonmarital investments. It is ludicrous to suggest that marital time spent automatically transforms the appreciation into a marital asset, because if that were true there would be no point to §61.075(5)(b)(3) defining passive appreciation.3 Yet, some will spend more marital time than others, and this extra time may produce better results. When this occurs, the extra income achieved is no different than if that person acquired a second job and it produced an extra income. The test, then, is to determine when the additional time transforms some of the income into extra income, as if that person acquired a second job.4 This is easily accomplished by using averages to define the “pure” market forces. Such averages could be established by indexes such as the Dow Jones, New York Stock Exchange, or the S&P 500, when the measurement process involves active trading.5 Averages could also be established with expert testimony on the particular type of investment under scrutiny (e.g., real estate). The measurement baseline could be the averages produced by the industry itself, which would be particularly relevant and meaningful when measuring passive appreciation of a business owned before the parties married.6
In Landay v. Landay, 429 So. 2d 1197 (Fla. 1983),11 the Supreme Court was faced with determining a nonmarital portion of such property when nonmarital money was used to purchase or otherwise improve the value of the property. Recognizing that the nonmarital portion could not be segregated, it found that a particular formula was appropriate for separating marital and nonmarital components. It ruled that the nonmarital or special equity portion is determined by multiplying the value of the residence on the date of division by a fraction, the numerator of which is the nonmarital dollar value invested, and the denominator is the value that the house had acquired when the investment was made. There are a number of problems with this formula particularly when we test to see whether it conforms to the Florida Statutes.
The Landay formula has many problems associated with it. Chief among them is the very essence of §61.075(5)(b)(3) (passive appreciation of a nonmarital asset) is that time is required for passive appreciation to occur. In addition, it is axiomatic in the formula that the more time passes, the more appreciation accrues. Landay is problematic with respect to this axiom. Time does not properly figure into the equation because the nonmarital portion is determined without respect to when the investment is made. Clearly, when an investment is made 25 years before the house is valued and divided, it should receive proper credit for the 25 years of compounding. To illustrate the severity of this problem, assume that a house was free and clear of encumbrances when the parties married. The nonmarital portion under Landay becomes a decreasing percentage interest with the passage of time. Furthermore, the numerator portion in Landay reflects the investment made when the house was purchased. This results in a further discount to the nonmarital portion. Add to that the fact that pure market forces involving no effort are disproportionately credited to the marital portion of the house’s value.
This last issue can best be illustrated with the following example: Consider one spouse made a $50,000 down payment on a house valued at $150,000 (leaving a mortgage balance of $100,000), and further consider that the home was purchased six months prior to the marriage. The mortgage balance two years after the marriage is $99,000. Realizing that they were not compatible, the parties divorce after two years. The house was purchased in one of Florida’s rapidly expanding new communities that was almost fully built during that two-year marital period and the house is now worth $300,000. The equity is, therefore, $201,000 ($300,000 - $99,000). Under Landay, the nonmarital portion is but $66,999 (50,000/150,000 x $201,000) and the marital portion is the balance, $134,001. The payments made on the mortgage balance during the marriage were almost entirely interest and a similar amount of money would have been spent during the marriage had the parties instead rented that house. Furthermore, two years of mortgage payments on $100,000 including interest could not possibly exceed half of the $50,000 down payment in today’s economy. Under what theory, then, should the marital estate include almost of all the $200,000 improvement?13
All of the problems presented in Landay are corrected when the nonmarital portion is credited with the timeliness of its investment. A vast number of jurisdictions have recognized the importance attached to the timing of the nonmarital investment and have corrected the problem by eliminating payment of interest on the mortgage balance in the fraction.14 This is accomplished by restricting the numerator of the fraction to the respective share payments it makes toward the mortgage balance and also by restricting the denominator to the combined marital and nonmarital share payments to the mortgage balance. The modified fraction is then multiplied by the appreciation on the asset, not the equity. This is generally known as the debt financing method. When this method is employed, the $1,000 reduction of mortgage principal made during the marriage makes the nonmarital share $196,078 ($50,000/$51,000 x $200,000). The marital share is the balance, $4,972 (201,000 (equity) - $196,078). Even this approach overstates the marital interest because the $1,000 of principal contributed during the marriage was not made at the same time that $50,000 down payment was made, and is in fact spread throughout the marriage. But the $196,078 nonmarital result better reflects the share interest of the nonmarital portion while it preserves the simplicity of the Landay-type formula.15
When a party who owns an asset prior to the date of the marriage changes the titling of that asset to include his or her new spouse, that party makes a presumed gift of the asset to the marital estate.17 This presumption may be rebutted if that was not the clear intent.18 The burden of proof under §61.075(7) is a very high one and is seldom overcome. While few parties may have actually intended the gift, little thought is usually given to the gifting issue when the marriage is expected to continue. One of the conditions often cited as necessary to satisfying the burden in the case law is that the moving party must now demonstrate a nonmarital portion by means of “tracing investments.”19 But while tracing very often will be required, this requirement is based upon the facts of the particular cases weighed against which the principle of §61.075(7) is applied. It is often believed that if the party having the burden did not intend a gift, steps would have been taken to segregate the asset, thereby showing that no intent of a gift existed at the time of the transaction. This belief assumes that no thought was given to the consequences of the transaction because the parties were happily married at that time. Suppose, however, that commingling was necessary to accomplish a financial objective and that the consequences of the transaction were both considered and dealt with in a contract. This contract provides that the nonmarital addition does not lose its nonmarital character. As the “no gift” intent has clearly been established without segregation of funds and without the need to trace the investment, a method which recognizes an investment result of the merged funds should be permitted. This is accomplished by considering the timing of all transactions made within the commingled funds. Of course, both marital and nonmarital shares will be credited with an identical rate of return for the time that the particular marital and nonmarital amounts were subject to the force of investment earnings. The methodology and formulas will be especially relevant in determining nonmarital shares of defined contribution account balances.
Case law has established that one of the problems that occur when liquid funds are commingled is that they become untraceable. The term used to describe this activity is that money is “fungible.” But the valuator cannot lose focus that a determination that money is fungible rests on the conclusion that §61.075(5)(3) is applicable and the fungibility issue goes directly to that party’s inability to sustain the burden under §61.075(7). If interspousal gifting does not apply, then the conclusion that money is fungible does not apply either because he or she has no burden under §61.075(7) that needs to be satisfied.20 Yet the owner of the asset still has the burden to demonstrate a nonmarital portion.21 This is where the dollar-weighted method will become useful.
I = ($117,000 + $5,000) - ($100,000 + $10,000) = $12,000.
E = $100,000 + (7/12 x $10,000) - (5/12 x $5,000) = $103,750.
1	See Anson v. Anson, 772 So. 2d 52 (Fla. 5th D.C.A. 2000); Mitchell v. Mitchell, 841 So. 2d 564 (Fla. 2d D.C.A. 2003).
2	Anson, 772 So. 2d at 54-55.
3	See Straley v. Frank, 612 So. 2d 610 (Fla. 2d D.C.A. 1992).
4	See Anson, 772 So. 2d 52; and Mitchell, 841 So. 2d 564.
5	See O’Neill v. O’Neill, 868 So. 2d 3 (Fla. 4th D.C.A. 2004).
6	Anson, 772 So. 2d at 54-55.
7	See Straley v. Frank, 612 So. 2d 610; Adkins v. Adkins, 650 So. 2d 61, 63-64 (Fla. 3d D.C.A. 1994); and O’Brien v. O’Brien, 508 S.E. 2d 300 (N.C. App. 1998).
8	See Anson, 772 So. 2d at 54-55; see also Thibault v. Thibault, 632 So. 2d 261 (Fla. 1st D.C.A. 1994).
9	See Dan M. McGill, Fundamentals of Private Pensions 305 (4th ed., Richard D. Irwin, Inc. 1979).
10	See H. Rep. No 93-533, 93rd Cong., 2d Sess., 1974 U.S. Code. Cong. & Adm. News 4639, 4640-4641; S. Rep. No. 93-127, 93rd Cong., 2d Sess., 1974 U.S. Code Cong & Adm. News 4838, 4839-4840.
11	Some have pointed out that the Landay formula may not apply because it was decided years before the 1988 statute, which dramatically changed the way we view property. Application of the Landay formula also seems to have diminished as the use of an award of special equity has diminished as a remedy. Most special equity claims can be dealt with as part of the equitable distribution scheme. However, special equity is the exclusive remedy where there is a marital contribution to a nonmarital asset that has not been transmuted or commingled.
12	In Gregg v. Gregg, 474 So. 2d 262 (Fla. 3d D.C.A. 1985), the court notes that these facts are distinguishable from Landay, but fails to suggest a formula to account for this difference.
13	A few states reject rationing the principal pay-down as the basis for measuring nonmarital interests and instead use the full value of payments made, including interest. Even when this approach is adopted, the nonmarital portion of the appreciation calculates to about 75 percent, not 93 percent as in Landay.
14	Brandenberg v. Brandenberg, 617 S.W. 2d 871 (Ky. Ct. App. 1981); Willis v. Willis, 358 S.E. 2d 571 (N.C. 1987; In re Herr, 705 S.W. 2d 619 (Mo. Ct. App. 1986)); Thomas v. Thomas, 377 S.E. 2d 666 (Ga. 1989).
15	While Straley v. Frank, 612 So. 2d 610 (Fla. 2d D.C.A. 1992), understood that the interest portion was nonmarital property, it failed to recognize the share of the home’s appreciation that should be credited to the payment of principal made during the marriage.
16	Brett R. Turner, Distinguishing Between Active and Passive Appreciation in Separate Property: A Suggested Approach, 13 Divorce Litigation 73 (May 2001).
17	In Crouch v. Crouch, 898 So. 2d 177 (Fla. 5th D.C.A. 2005), the court further clarifies that changing the title of joint funds in and of itself does not confer an interspousal gift. It found that in order to extend the right of joint tenancy in their entireties to personal property, the exercise of joint control must be established. Without it, §61.075(7) does not apply. Under the facts of Crouch, the husband offered unrebutted testimony that he changed the title of the AG Edwards solely for the sake of convenience. Nothing was ever withdrawn from or added to that account.
18	See Fla. Stat. §61.075(7).
19	Williams v. Williams, 686 So. 2d 805 (Fla. 4th D.C.A. 1997); Amato v. Amato, 596 So. 2d 1243 (Fla. 4th D.C.A. 1992); Archer v. Archer, 712 So. 2d 1198 (Fla. 5th D.C.A. 1998).
20	Certain decisions have found that the nonmarital account loses its nonmarital character by commingling the two funds. The courts found that it is impossible to establish intent on which portion to deduct funds expended. Thus, the rulings assume that intent is an issue when it is not. It is only an issue when an interspousal gift is presumed. It is little wonder why the Fifth District Court has expanded its ruling on presumed interspousal gifts to exclude titling in Crouch.
21See Jahnke v. Jahnke, 804 So. 2d 513 (Fla. 3d D.C.A. 2001).
Jerry Reiss, ASA (1982) Enrolled Actuary (1983), provides expert testimony and support services on employment topics, equitable distribution, and alimony. He maintains offices in Ft. Lauderdale, Clearwater, and Orlando.
This column is submitted on behalf of the Family Law Section, Thomas J. Sasser, chair, and Susan W. Savard and Jeff Weissman, editors.