Opinion ID: 2513883
Heading Depth: 3
Heading Rank: 1

Heading: James's Appeal

Text: The parties agree that the Kennicott stock was originally James's separate property and that the commission James received for selling the Kennicott holdings is marital property. But they dispute whether James's stock became marital property during the marriage and whether the funds he received for his shares could properly be divided as part of the marital estate. [1] We have previously recognized that a spouse's premarital property can become marital through transmutation or active appreciation. [2] Transmutation occurs when married parties intend to make a spouse's separate property marital and their conduct during marriage demonstrates that intent. [3] Active appreciation occurs when marital funds or marital efforts cause a spouse's separate property to increase in value during the marriage. [4] In contrast to transmutation, which converts an asset completely from separate to marital, active appreciation recognizes that a separate asset can become partly marital by growing in value during the course of a marriage. Under the latter theory, the asset's value at the inception of the marriage retains its separate character, but any subsequent increase in value is treated as marital property to the extent that it results from active marital conduct: Appreciation in separate property is marital if it was caused by marital funds or marital efforts; otherwise it remains separate. [5] As can be seen, then, the essential elements of active appreciation differ significantly from those of transmutation. While transmutation requires an intent to change the property's separate character and conduct corresponding with that intent, active appreciation requires increased value, marital contribution, and a causal link connecting the two: In order to find active appreciation in separate property, the court must make three subsidiary findings. First, it must find that the separate property in question appreciated during the marriage. Second, it must find that the parties made marital contributions to the property. Finally, the court must find a causal connection between the marital contributions and at least part of the appreciation. [6] In the present case, the trial court's findings blurred the distinction between transmutation and active appreciation. Although at trial it was undisputed that James acquired his stock in the Kennicott holdings as separate propertypartly by purchasing it before he married Dolores and partly by later inheritance from his motherthe court found that his stock became marital property in its entirety during the marriage; the court therefore distributed the net proceeds from the stock sale as part of the marital estate. Yet the court's findings fail to mention the necessary elements of transmutation; the court did not expressly find either that the parties intended to treat James's stock as marital property or that they engaged in any conduct demonstrating their intent. Nor could the record sustain a finding of transmutation. Dolores did express her belief that the Kennicott holdings would be part of the couple's retirement. But she acknowledged that James never told her that the property was partly hers. Her subjective belief does not establish an intent to operate jointly. [7] In Green v. Green , we gave examples of conduct that demonstrates an intent to transmute separate property: the property's use as a marital residence; its ongoing maintenance and management by the parties; the listing of its title in joint ownership; or the use of the non-owner spouse's credit to improve the property. [8] Here, the parties did not use James's stock for any marital purpose; James continued to hold it in his own name throughout the marriage; and Dolores did not contribute money, credit, or any appreciable time to the Kennicott holdings. Although James devoted considerable time to his Kennicott holdings, his efforts, standing alone, would not demonstrate an intent to transmute the property. As we have emphasized on other occasions, a finding of transmutation based on management and maintenance of separate property requires significant involvement by both spouses. [9] Instead of finding that the parties' conduct demonstrated their intent to transmute James's stock into marital property, the court based its ruling on grounds that seem more akin to the theory of active appreciation. Pointing to James's testimony acknowledging that he had put his life into the Kennicott project, the court concluded, I think under just about any analysis an asset that had been actively pursued with so much marital effort throughout the period of marriage would have to be considered as part of the marital estate. But under the active appreciation theory, this conclusion is problematic. The court's express finding that James contributed active marital effort to the Kennicott project squarely addresses the theory's requirement of a marital contribution to separate property; but it loses sight of the two other necessary elements of the active appreciation theory: appreciation and causation. In context, these elements would have required the court to determine how much James's stock increased in value during the marriage and what part of that increase resulted from active marital efforts. [10] Yet the court failed to address either of these two additional elements. To prevail under the active appreciation theory, Dolores bore the burden of proof on the first two elements  marital contribution and appreciation. [11] Cases divide as to who bears the burden on the third element, causation. The majority view would assign it to James, requiring him to prove the absence of a causal link between his efforts to market the Kennicott holdings and any appreciation in his stock that occurred during the marriage. [12] Since the majority rule is almost overwhelming among those cases which consider the issue expressly, [13] since it places the burden of proof on the person with the best access to the relevant evidence, [14] and since it allocates the risk of failure of proof in a way that accurately reflects the probabilities of the situation, [15] we choose to follow the majority rule. Here, the record supports the trial court's express finding that James contributed significant marital effort to the Kennicott property. Thus, Dolores met her burden of proof as to the first element of active appreciation. But Dolores did not attempt to establish the extent of any marital increase in the value of James's Kennicott stock. The record fails to disclose the fair market value of James's premarital shares at the time that he married Dolores or the value of his mother's shares at the time he inherited them; and the trial court's findings do not address the issue. Nevertheless, the record would permit a reasonable inference that James's stock experienced a considerable increase in value during the course of the thirty-year marriage. Thus, Dolores arguably met her burden as to the second element of active appreciation by making a prima facie showing that at least some appreciation occurred. As to the third element of active appreciation, causation, the record is almost completely silent. James did not attempt to establish the lack of a causal link between his marketing efforts and the price ultimately paid for the Kennicott holdings; and the trial court failed to address the point in its findings and conclusions. [16] In summary, then, although the record does not support the trial court's conclusion that James's interest in the Kennicott holdings transmuted entirely into marital property, the evidence could conceivably support a narrower finding that a part of the sale proceeds was marital because it reflected an increase in value resulting from James's contribution of active marital effort, as opposed to any increase in value that was passivein other words, appreciation that was not the result of James's marital efforts. But neither the trial court nor the parties addressed all of the elements necessary to support a finding of active appreciation. Accordingly, we must vacate the court's conclusion that the sale proceeds were marital property in their entirety and remand for additional proceedings on the issue of active appreciation. [17]
The trial court valued the Stony River Lodge at $450,000. This was the value attributed to the lodge in an appraisal that James received approximately a year before Dolores filed for divorce. The appraisal had been prepared at James's request by an acquaintance, Rick Richter, for use in connection with a bankruptcy proceeding. In the divorce proceedings, Dolores relied on Richter's appraised value; but James called Richter as a witness to establish that the lodge's actual value was lower than that stated in his earlier appraisal. Richter confirmed the appraisal's estimate that the lodge had a market value of $450,000. But he attempted to qualify this estimate, testifying that the appraisal's reference to market value indicated a value based on the customary financing terms prevalent in the rural Alaskan real estate marketa ten to twenty percent down payment with seller financing. To arrive at the lodge's present cash value, Richter explained, it would be necessary to deduct an additional forty to sixty percent from the market value stated in his original appraisal. Using this cash discount theory, Richter estimated the lodge's present value at forty to sixty percent of $450,000. The superior court rejected this testimony, finding the lodge's value to be $450,000, as stated in Richter's original appraisal. On appeal James contends that this finding is clearly erroneous. [18] He argues that market value is a term of art and that the trial court improperly disregarded Richter's unrefuted expert testimony concerning its meaning. Citing McQueary v. McQueary for the proposition that proper valuation of marital assets requires the reduction of streams of future payments to present value, [19] James maintains that the trial court should have assigned a present cash value to the lodge by applying Richter's cash discount method. Yet the record establishes that the trial court fully considered Richter's testimony. Although accepting Richter's premise that it needed to determine the lodge's present cash value, the court rejected his proposed method of calculating that value. In the court's view, Richter's original appraisal already incorporated adjustments to reflect present cash value and therefore required no further reduction. While the court recognized that Richter disagreed with this conclusion, it expressly found that he was not a credible witness, describing his testimony as that of an advocate choosing arguments for a preconceived result, not an objective expert. [20] Furthermore, the court noted, Richter's trial testimony concerning an additional discount was completely contradicted by the very words that Mr. Richter put in the appraisal itself. The record supports this finding of contradiction. While Richter insisted at trial that an additional discount of forty to sixty percent would be needed to make his original appraisal's estimate of market value reflect the lodge's present cash value, the appraisal itself expressly defined market value as a term that reflected a sale occurring under conditions whereby ... payment is made in terms of cash in U.S. dollars, or in terms of financial arrangements comparable thereto. [21] Richter did not attempt to reconcile this definition with his apparently contradictory position at trial that the appraisal's use of market value reflected a value based on long-term seller financing. Because [i]t is the function of the trial court, not of this court, to judge witnesses' credibility and to weigh conflicting evidence, [22] we have consistently recognized that appellate review of trial court rulings based on testimonial credibility must give due regard to the opportunity of the trial court to judge the credibility of the witnesses. [23] Having reviewed the record with due regard for the trial court's unique ability to assess the credibility of testimony, we hold that the court's valuation of the Stony River Lodge was not clearly erroneous.
James also relied on Richter to testify about the value of the parties' Kenai lots. Recent tax assessments had valued the ten lots at between $8,700 and $15,400. Richter estimated their value at $7,000 to $16,000 but qualified these estimates by stating that, because of their rural recreational nature, the lots would have to be sold on terms and could not be expected to sell all in one year. Accordingly, Richter maintained, it was necessary to perform a discounted cash flow analysis; he did so using two different discount rates, both resulting in substantial decreases in value. The trial court rejected Richter's testimony and adopted the lots' assessed values. On appeal, James contends that the superior court erred in relying on the tax appraisals and in rejecting Richter's discounted cash analysis. In other procedural contexts, we have made it clear that [t]ax appraisals do not reliably measure true value. [24] But here, the parties did not dispute the accuracy of the tax appraisals as a starting point for valuation; the only real dispute was whether the assessed value needed to be discounted. In her trial brief, Dolores offered the tax assessments as her evidence establishing the value of the Kenai lots. James did not object to the admissibility of the assessments and did not offer alternative values for the lots or any values, for that matter, in his trial brief. And at trial, James's expert, Richter, adopted similar values as his starting point for calculating the lots' discounted values. If any appreciable error occurred, then, it arose not from the court's acceptance of the lots' assessed values but from its rejection of Richter's cash discount analysis. As with the Stony River Lodge, however, the trial court found Richter's testimony incredible. Thus, our review of the court's findings concerning the Kenai lots is governed by the same narrow test we applied in reviewing the court's findings concerning the Stony River Lodge. Because neither party objected to the admission of the tax assessments to establish value, because the court's credibility determination is supported by the record, and because the value assigned to the lots is within the range of evidence presented at trial, [25] we conclude that the trial court's valuation of the Kenai lots is not clearly erroneous.
The thirty-three-year Lake Hood lease was purchased for $100,000 in 1984. It had seventeen years remaining at the time of trial but was renewable subject to certain improvements. During his pretrial deposition, James agreed that $135,000 was a fair value for the lease. At trial, James admitted his deposition valuation but testified that he valued the lease at only $66,000 by prorating its total value to reflect the unexpired term. No other evidence was presented regarding the lease's value. The trial court valued the lease at $135,000, stating that James had not challenge[d] the $135,000 full lease value. James argues that this finding is clearly erroneous, but his argument lacks merit. Throughout the divorce proceedings Dolores listed the lease as having a fair market value of $135,000; James never contested these listings and provided no alternative value until he testified at trial. Moreover, in his pretrial deposition, James acknowledged that $135,000 was a fair value for the lease. Furthermore, the trial court could properly view James's trial testimony, which attempted to reduce that value, as self-serving, since, by the time of trial, James knew that the lease would be awarded to him and was therefore aware that he stood to gain by obtaining a low valuation. We find no clear error.