Opinion ID: 2572638
Heading Depth: 3
Heading Rank: 1

Heading: Michael's businesses: Schmitz & Buck and the Nugget Men's Store

Text: The trial court found that Michael's separate property, including his interest in the Nugget Men's Store and Schmitz & Buck, remained his separate property because Michael had no intention to transmute the assets from separate to marital. Christina argues that the trial court made two errors in its characterization of the Nugget Men's Store and Schmitz & Buck as separate property. First, she argues that the court erred in applying a transmutation analysis rather than an active appreciation analysis. [28] Second, she claims that the court's erroneous analysis led it to mischaracterize Michael's business interests as separate. Christina asserts that Michael spent significant marital time and energy on both Schmitz & Buck and the Nugget Men's Store. Specifically, Christina argues that Michael worked at Schmitz & Buck seven days a week during tax season, which occurs between January 1 and April 15, and that he worked approximately eleven hours each day during that period. She notes that for the Nugget Men's Store, Michael did the monthly accounting, prepared the monthly financial statements, as well as the business's tax return, and attended the store's annual meeting. In any property division, the first step is determining what property will be divided between the parties. [29] The trial court determines what property is marital as opposed to separate. [30] Marital property includes all property acquired during the marriage, excepting only inherited property and property acquired with separate property which is kept as separate property. [31] We have recognized that a spouse's premarital separate property can become marital through transmutation or active appreciation. [32] Transmutation occurs when a married couple demonstrates an intent, by virtue of their words and actions during marriage, to treat one spouse's separate property as marital property. [33] Active appreciation occurs when marital funds or marital efforts cause a spouse's separate property to increase in value during the marriage. [34] We have noted that [t]he time and energy of both spouses during the marriage is to be considered in dividing marital property. [35] A spouse should not be able to erase his or her contributions of time and energy from the marital estate by rolling them back into a business which he began before the marriage. [36] The elements of active appreciation are significantly different from those of transmutation. [37] Transmutation requires intent, as demonstrated through conduct, to change the character of property from separate to marital. [38] 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. [39] In addressing the question whether the property at issue was separate or marital, the trial court focused only on the theory of transmutation. This focus was overly narrow and should have included an analysis of whether Michael's efforts during the marriage caused the value of his businesses to increase. To prevail on the active appreciation theory, Christina bore the burden of proof on the first two elementsappreciation in the property's value and marital contribution. [40] Michael bore the burden on the third element, causationwhether his efforts were connected to any increase in value that the business experienced during the marriage. [41] As to Schmitz & Buck, Christina proved that Michael spent significant marital time working at the business: Michael testified that he worked approximately eleven hours a day, seven days a week, at Schmitz & Buck during tax season, from January through April. And although Christina's proof on the first element of appreciation in the property's value did not include evidence that the value of the firm's tangible assets or the value of its good will increased from the date of the marriage to the date of separation, according to Christina this was due to her inability to afford an expert to value Michael's business interests. Christina presented this dilemma to the superior court prior to trial, informing the court that she was financially unable to hire an expert to value Michael's business interests and requesting a continuance and the financial resources to be able to perform that valuation. Despite the trial court's earlier recognition that Christina was the economically disadvantaged spouse and its resulting order that Michael pay her an equivalent amount he pays his own counsel during the course of the proceedings, she apparently was unable to perform the financial valuation of Michael's businesses due in part to Michael's realization that by failing to payor even openhis own attorney's bills, he could avoid paying Christina's. Because of this, Christina alleges that she was unable to prove the value of business assets such as inventory and accounts receivable or demonstrate an increase in these business assets during the course of the marriage. But Christina did prove that Michael's revenue from the accounting business increased during the course of the marriage, from $69,419 in 1999 to $77,584 in 2001. From this evidence of increasing revenue, it can be inferred that the value of the business may have increased during the marriage. Because Christina was the financially disadvantaged spouse and asserts that she was unable, due to Michael's circumvention of the superior court's order, to hire an expert to present evidence of an increase in the value of Schmitz & Buck, and because she alerted the superior court to this predicament prior to trial, requesting appropriate relief, Michael cannot rely on the argument that she failed to meet her burden of proof on the increase in Schmitz & Buck's value. [42] Michael conceded at trial in the end of May 2002 that he had not paid any of his attorney's bills after the superior court's April 1, 2002 attorney's fees order. Q Have you paid your attorney anything since March? A No. Q Do you know how much you owe her? A To tell you the truth, no. There's been some billings, I haven't opened them. I'm just leaving them..... Because he failed to open or pay his own attorney's bills, Michael was able to avoid paying Christina's. Where a party's inequitable conduct hampers an opposing party's ability to develop potentially important evidence, a court on appeal is justified in remanding for development of appropriate evidence. Because the proof of Michael's increased income that Christina was able to present suggests that the business's value may have increased during the marriage, we remand this issue to the superior court, to allow Christina an opportunity to present evidence of the increase in the value of Schmitz & Buck during the marriage. By contrast, an active appreciation analysis fails on the element of marital contribution when applied to the Nugget Men's Store. The record shows that Michael's involvement with the store was quite limited: He only performed some accounting and tax returns for the store and attended its annual meeting. We cannot say, therefore, that Christina met her burden of proof on the element of marital contribution for the Nugget Men's Store. Accordingly, we affirm the superior court's determination that the Nugget Men's Store is Michael's separate property.