Court Opinion

ID: 5118351
Source: CourtListenerOpinion
Date Created: 2021-10-14 16:02:17.671005+00
Date Added: 2024-06-11T08:22:06.890133
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE

                              In re the Marriage of:

            PATRYCIA JEWEL NACKARD, Petitioner/Appellant,

                                         v.

                 PATRICK NACKARD, Respondent/Appellee.

                            No. 1 CA-CV 20-0621 FC
                                 FILED 10-14-2021

            Appeal from the Superior Court in Maricopa County
                           No. FN 2018-091830
                   The Honorable Alison Bachus, Judge

                                   AFFIRMED

                                    COUNSEL

Burt Feldman Grenier, Scottsdale
By Elizabeth Feldman, Mary K. Grenier
Counsel for Petitioner/Appellant

Jeffrey G. Pollitt PC, Phoenix
By Jeffrey G. Pollitt, Lindsay Cohen, Jennika McKusick
Co-Counsel for Respondent/Appellee

Berkshire Law Office PLLC, Tempe
By Keith Berkshire, Erica Leavitt
Co-Counsel for Respondent/Appellee
                        NACKARD v. NACKARD
                         Decision of the Court

                      MEMORANDUM DECISION

Presiding Judge Jennifer B. Campbell delivered the decision of the Court,
in which Judge Samuel A. Thumma and Chief Judge Kent E. Cattani joined.

C A M P B E L L, Judge:

¶1             Patrycia Nackard (Wife) appeals from the decree dissolving
her marriage to Patrick Nackard (Husband). She challenges the superior
court’s classification and allocation of certain businesses and its denial of
her request for an award of attorneys’ fees. Because Husband inherited the
businesses as his sole and separate property and the community enjoyed
the profits and increase from the businesses during the marriage, the
superior court properly allocated the businesses to Husband. Additionally,
the superior court acted within its discretion in denying Wife’s request for
fees. Accordingly, we affirm.

                             BACKGROUND

¶2            After 36 years of marriage, Wife petitioned for dissolution.
The superior court adopted the parties’ partial settlement agreement,
entered summary judgment rulings designating some businesses as
community property (the community businesses) and other businesses as
Husband’s separate property (the contested businesses), held a two-day
trial on contested issues, and entered a decree of dissolution.

¶3            In the decree, and specific to this appeal, the superior court:
(1) reaffirmed its summary judgment rulings;1 (2) found the community
“enjoyed the profits” from the contested businesses during the marriage
and therefore “no additional apportionment of Husband’s separate
entities” was warranted; (3) determined Husband’s distribution of profits
from the contested businesses to the community “did not constitute

1       Despite the superior court’s prior ruling on Husband’s motion for
summary judgment, the character of the contested businesses was fully
litigated at trial. Wife was not foreclosed from presenting any evidence on
any issue, and at the conclusion of the trial, the court confirmed its prior
ruling: “After carefully considering the evidence presented at trial, the
Court continues to find that the [contested businesses] are Husband’s sole
and separate property.”

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transmutation or commingling”; (4) awarded the community businesses to
Husband with corresponding offsets to Wife for her one-half share in each;
(5) ordered Husband to pay Wife an equalization payment of $665,057.99;
(6) reaffirmed the parties’ property settlement agreement, which, among
other things, awarded Wife $1.9 million in unencumbered real estate and
financial accounts totaling more than $700,000; (7) awarded Wife indefinite
spousal maintenance of $10,000 per month; and (8) denied both parties’
requests for attorneys’ fees and costs. Wife timely appealed.

                               DISCUSSION

I.     Characterization of the Contested Businesses

¶4           Wife challenges the superior court’s characterization of the
contested businesses as Husband’s separate property.

¶5            “The characterization of property as separate or community
is a question of law we review de novo.” Schickner v. Schickner, 237 Ariz.
194, 199, ¶ 22 (App. 2015). In conducting our review, we “defer to the
[superior] court’s determination of witnesses’ credibility and the weight to
give conflicting evidence.” Gutierrez v. Gutierrez, 193 Ariz. 343, 347, ¶ 13
(App. 1998); see also Hurd v. Hurd, 223 Ariz. 48, 52, ¶ 16 (App. 2009) (“Even
though conflicting evidence may exist, we affirm the [superior] court’s
ruling if substantial evidence supports it.”).

¶6            The character of property is established at its acquisition,
Myrland v. Myrland, 19 Ariz. App. 498, 503 (1973), and property acquired by
a spouse during marriage “by gift, devise or descent . . . is the separate
property of that spouse,” A.R.S. § 25-213(A). While it is “possible” to change
the separate character of property, in the absence of an “agreement, gift or
commingling,” separately acquired property remains separate in nature.
Myrland, 19 Ariz. App. at 503-04.

¶7             The parties married in 1982. Although Husband owned some
interest in his family’s businesses before the parties’ marriage, he acquired
the balance of the businesses two years after the marriage. Specifically,
upon his father’s death, Husband inherited a soft drink bottling
distributorship (the bottling company), a land subsidiary, a wholesale
liquor subsidiary, and a trucking subsidiary.

¶8            Wife does not dispute that these inherited businesses, the
predecessors to the contested businesses (the predecessor companies),
became Husband’s separate property at the time of their acquisition.
Instead, she argues that she acquired a community property interest in the

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contested businesses because Husband “transmuted and commingled [the
inherited] separate property into community property.”

¶9            “Mere mutations of form do not of themselves work a
transmutation of the character of property.” Porter v. Porter, 67 Ariz. 273,
283 (1948), declined to follow on other grounds by Cockrill v. Cockrill, 124 Ariz.
50 (1979). Rather, “separate property remain[s] separate as long as it can be
identified,” and it is only when “the identity of separate property is lost”
and cannot be traced that “transmutation takes place.” Id.

¶10          At trial, Wife testified that during most of the marriage, she
believed the parties jointly held the contested businesses as community
property. As support for this contention, Wife presented: (1) corporate
meeting minutes of the predecessor companies, which for a time identified
her as a “shareholder,” and (2) expert opinion testimony that she is a
“beneficial owner” of the contested businesses, though not a record
shareholder.

¶11           Husband, in turn, testified that he owns the contested
businesses as his separate property. When confronted with the corporate
meeting minutes identifying Wife as a shareholder of the predecessor
companies, Husband testified that the designations were erroneous, noting
that Wife was the one who had drafted the documents. See Porter, 67 Ariz.
at 284-85 (holding the inclusion of wife’s name on notes, mortgages, and
contracts relating to the purchase of real property with husband’s separate
funds did not transmute the separate property to community property
because no evidence demonstrated “that the insertion of the wife’s name in
the conveyances was by the direction of the husband”). Husband also
pointed out that Wife was not included as a shareholder, owner, or officer
in the 2008 operating and restructuring agreements converting the
contested businesses from C corporations to S corporations. Finally,
Husband presented evidence that the only time Wife held any shares in
either the predecessor companies or the contested businesses was on a
single day in 1992, when, for estate-planning purposes, he transferred 25%
of his ownership interest in the bottling company to Wife, which she then
immediately transferred to trusts for the benefit of the parties’ two children.

¶12           Wife first argues that a community interest in the contested
businesses is evidenced by corporate documents that identify her both as a
corporate officer and a shareholder. Pointing to her designation on certain
liquor licenses, Wife asserts that she served as a corporate officer for the
contested businesses and is therefore an owner. In his trial testimony,
Husband denied Wife’s claim to an officer role, testifying that she never

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held any management position and operated only in an administrative
capacity. Regardless, Wife cites no authority for the proposition that a
corporate officer necessarily maintains an ownership interest in that
corporation, and our research reveals none. See A.R.S. § 10-802 (“A director
need not be . . . a shareholder of the corporation.”). Nor does Wife cite any
authority for the proposition that an individual’s “shareholder”
designation on corporate minutes necessarily establishes that individual’s
ownership interest in the corporation absent any other evidence
demonstrating an actual acquisition of shares. See A.R.S. § 10-140(44)
(defining a “shareholder” as a “person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation”);
see also Potthoff, 128 Ariz. at 565 (holding evidence that husband’s separate
property was listed as community property on some of the parties’ federal
income tax returns did not transmute the separate property into community
property); Myrland, 19 Ariz. App. at 503 (holding wife’s deposit of her
separate business monies into a jointly held bank account did not constitute
a gift to the community); cf. Grant v. Grant, 119 Ariz. 470, 471-72 (App. 1978)
(concluding wife gifted husband a community interest in her separate stock
by specifically instructing her attorney to place the stock in joint tenancy
ownership).

¶13          Here, Wife’s expert did not testify that she was a shareholder.
Instead, Wife’s expert opined that she was a beneficial owner only, and
Wife does not challenge Husband’s assertion that she was only an actual
shareholder of one predecessor company for a single day as part of an estate
planning device to transfer shares to the parties’ children. Therefore,
consistent with the superior court’s findings, none of the cited corporate
documents conclusively establish a community interest in the contested
businesses.

¶14            Next, Wife asserts that the community acquired an interest in
the contested businesses when (1) Husband changed the name of the
trucking subsidiary and (2) the community acquired a snack and vending
subsidiary. Again, Wife cites no authority for her assertion that simply
changing the name of a separately held business during marriage
transmutes the character of the business from separate to community, and
our research reveals none. Further, Wife fails to explain how the
community’s acquisition of the snack and vending subsidiary transmuted
the separate nature of the predecessor companies. At trial, Husband
testified that he used his separate funds from the bottling company to retire
debts owed by the community’s subsidiary company, effectively
consolidating all outstanding debts from the various businesses into the

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bottling company. Had Husband used the community’s assets to pay off
his separate property debt, transmutation of the separate property, in the
absence of clear tracing, may have occurred. See Potthoff, 128 Ariz. at 562
(explaining “transmutation of separate to community property by
operation of law” occurs only when “property of identical character, such
as money, is so mixed together that a court is unable to tell how much
money was originally separate and how much was originally community,”
and the satisfaction of a “separate obligation with [traceable] community
funds . . . at most . . . [provides the community with] a claim for
reimbursement”); see also Nace v. Nace, 104 Ariz. 20, 23 (1968) (“[T]he mere
commingling of funds does not have the effect of destroying the identity of
. . . separate property as long as it can be identified.”). But contrary to Wife’s
apparent contention, a spouse’s use of separate monies to extinguish a
community debt does not transmute the nature of that spouse’s remaining
separate property. See Battiste v. Battiste, 135 Ariz. 470, 473 (App. 1983)
(explaining the occasional use of separate funds for community purposes
does not transmute the character of the underlying source of the funds or
convert the remaining balance of the separate funds to community
property).

¶15           In sum, the superior court properly characterized the
contested businesses as Husband’s separate property. The uncontroverted
record reflects that Husband, alone, inherited the predecessor companies
from his father. Wife failed to present compelling evidence that he
transmuted the nature of his separate property by agreement, gift, or
commingling.2

II.    Allocation of the Contested Businesses

¶16         Wife next challenges the superior court’s allocation of the
contested businesses to Husband. Citing her labor contribution to the
contested businesses on behalf of the community and the length of the

2      We find no merit to Wife’s contention that Husband, in omitting her
from the restructuring of the contested businesses, violated a fiduciary duty
owed to her. Because the contested businesses were Husband’s separate
property, he owed Wife no fiduciary duty in his management of them. See
A.R.S. § 25-214(A) (“Each spouse has the sole management, control and
disposition rights of each spouse’s separate property.”); cf. Gerow v. Covill,
192 Ariz. 9, 18, ¶ 40 (App. 1998) (explaining “that a fiduciary relationship
between spouses does exist with respect to community assets,” and the
“[r]emoval of community assets without spousal notice and/or approval
can constitute a breach of that duty”).

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                          NACKARD v. NACKARD
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parties’ marriage, Wife argues that the use of any apportionment
methodology “must be rejected” in this case.

¶17             We review a superior court’s apportionment of property for
an abuse of discretion. Bell-Kilbourn v. Bell-Kilbourn, 216 Ariz. 521, 523, ¶ 4
(App. 2007). Although the “increase” and “profits” of a spouse’s separate
property are “the separate property of that spouse,” A.R.S. § 25-213(A),
“[a]ll property acquired by either husband or wife during the marriage is
. . . community property . . . except for property that is . . . [a]cquired by gift,
devise, or descent.” A.R.S. § 25-211(A). The supreme court resolved the
potential conflict between these statutory provisions by adopting an
apportionment rule that allocates the profits or increase of separate
property “in accordance with whether they are the result of the individual
toil and application of a spouse or the inherent qualities of the business
itself.” Cockrill, 124 Ariz. at 52.

¶18            When the value of separate property has increased, a spouse
asserting that the increase is separate must “prove that the increase is the
result of the inherent value of the property” and “not the product of the
work effort of the community.” Id. But even if the spouse fails to carry this
burden, only “profits or the increase in value” of the separate property
“may become community property.” Id. Meaning, “the separate property
of the spouse remains separate.” Id. This principle holds even when both
spouses have “work[ed] to improve the property during marriage.” Id.; see
also Myrland, 19 Ariz. App. at 502-04 (holding that husband’s employment
by wife’s businesses, both before and during the marriage, did not change
the character of wife’s businesses from separate to community).

¶19           Without adopting a “precise criterion or fixed standard” for
allocating the profits or increase of separate property, the supreme court
has presented two approaches for equitable apportionment that are
applicable to this case: (1) “determine the reasonable value of the
community’s services[,] allocate that amount to the community, and treat
the balance as separate property attributable to the inherent nature of the
separate estate,” or (2) “allocate to the separate property a reasonable rate
of return on the original capital investment,” with “[a]ny increase above
this amount” allocated to the community. Cockrill, 124 Ariz. at 54 (citation
omitted); see Rueschenberg v. Rueschenberg, 219 Ariz. 249, 254, ¶ 19 (App.
2008) (“The entire purpose of . . . implementing apportionment was to
achieve a more equitable result.”).

¶20         Both before and after her father-in-law’s death, Wife worked
for the predecessor companies in various capacities, including sales,

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training, administration, and payroll. While her employment was not
continuous and her office presence waned after the parties had children,
Wife remained involved with the contested businesses for most of the
parties’ marriage and received significant annual compensation in the
several years preceding the divorce.

¶21            At trial, both parties’ experts testified that the contested
businesses did not generate a reasonable rate of return during the marriage,
failing even to keep pace with inflation. In fact, Wife’s expert agreed that
had Husband simply liquidated the predecessor companies when he
inherited them and invested the money in stock, the stock would have a
greater present-day value than the contested businesses. The parties also
agreed that either the community or the parties’ children received all net
distributable earnings from the contested businesses, not Husband
individually, and that the parties shared all compensation. As explained by
Husband’s expert, had the profits not been distributed to the community,
the contested businesses would have experienced substantially higher
growth and a reasonable rate of return. But because the community enjoyed
all that increase during the marriage, there was no increase to allocate upon
divorce.

¶22           Reframing her transmutation argument, Wife first contends
that because the net distributable earnings “were hopelessly commingled”
with other community assets and “never traced back to separate property,”
the contested businesses became community property and “what began as
an inherited business is now a community asset subject to equitable
division.” Without question, the character of the net distributable earnings
was transmuted from separate to community when the funds were
distributed to the community, and Husband has never claimed otherwise.
But contrary to Wife’s contention, the transmutation of the character of the
profits did not simultaneously transmute the character of the source of
those profits. In other words, the contested businesses remained distinct
and separate from the disbursements. See Cockrill, 124 Ariz. at 52.

¶23           Turning to equitable principles, Wife next asserts that “[i]t is
illogical and unconscionable” that she would gift an interest in “an entity
to which she allegedly has no interest to her children.” In making this claim,
Wife fails to acknowledge the uncontroverted evidence that Husband
transferred a portion of his separate property shares in the bottling
company to her for estate planning purposes, and that she only held those
shares momentarily before transferring them to the parties’ children. Given
the sequence of these transfers, and this “straw person” transaction
apparently undertaken to satisfy legal requirements for the transfer to the

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                         NACKARD v. NACKARD
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children, Wife’s contention that she would not have made the gifts to the
parties’ children had she not detrimentally relied on Husband’s
representations that the predecessor companies were community assets is
unpersuasive. The superior court could have concluded that a reasonable
person in Wife’s position would have realized that the predecessor
companies were not community property simply because of her
participation in the “straw-person” transaction used as an estate planning
mechanism to transfer an interest in the company to the children. In fact,
had Wife owned an interest in the company, the initial stock transfer would
have been unnecessary.

¶24            Further, Wife contends that she was deprived of the contested
businesses’ increase because the profits were disbursed and spent, leaving
no allocatable rate of return. This claim lacks merit. At trial, Wife detailed
the parties’ robust lifestyle during the marriage, and apart from subsidizing
the parties’ living expenses, the net distributable earnings also funded the
community’s accumulation of wealth. As the joint owner of these
accumulated community assets, Wife received substantial property in the
dissolution decree, including unencumbered real property worth at least
$1.9 million and nearly $1.5 million in liquid assets. While Wife would have
received a portion of the contested businesses’ increase had Husband
simply reinvested the companies’ profits rather than disbursing them to the
community, she instead benefited from the companies’ profits throughout
the marriage and received her one-half share of the community assets
acquired during the marriage at divorce―assets that were unquestionably
acquired, at least in significant part, with disbursement proceeds from
Husband’s separate property business. Simply put, the trial evidence shows
that the community received the benefit of the contested businesses’
increase during the marriage and that Wife received her community share
of that accumulated benefit upon divorce. For these reasons, we also reject
Wife’s contention that the community’s payment of taxes on the net
disbursement earnings transmuted the contested businesses. The
community, not Husband alone, received the benefit of the contested
businesses’ increase in value and paid the taxes accordingly.

¶25           In sum, we find no merit to Wife’s contention that she
received nothing from the contested businesses’ increase despite her
community labor contribution during the marriage. The uncontroverted
record reflects that she received both compensation for her labor and a
community interest in the contested businesses’ profits. Notwithstanding
the length of the parties’ marriage and Wife’s contribution of labor on
behalf of the community, substantial justice does not require an allocation
of Husband’s separate property to the community. Wife is not entitled to

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dispossess Husband of his inheritance, which was and remains his sole and
separate property.3

III.   Denial of Request for Attorneys’ Fees

¶26           Wife argues the superior court improperly denied her request
for an award of attorneys’ fees under A.R.S. § 25-324, which authorizes an
award of attorneys’ fees after considering both parties’ financial resources
and the reasonableness of their positions throughout the proceedings. We
review the superior court’s ruling on an attorneys’ fees request under this
statute for an abuse of discretion. Myrick v. Maloney, 235 Ariz. 491, 494, ¶ 6
(App. 2014).

¶27          Both parties requested an award of attorneys’ fees and costs.
Considering both prongs of A.R.S. § 25-324, the superior court found that
Husband has “considerably more resources” and that “both parties acted
unreasonably,” with neither acting “more unreasonable than the other.”
Without further explanation, the court denied both parties’ requests.

¶28           The record supports each of the superior court’s findings.
Although Husband has greater financial resources available to contribute
toward attorneys’ fees, a financial “disparity alone does not mandate an
award of fees.” Myrick, 235 Ariz. at 494, ¶ 9. Because A.R.S. § 25-324 is
permissive, not mandatory, the superior court “has the discretion to deny a
fee request even after considering both statutory factors.” Id. We conclude
the superior court did not abuse its discretion in denying Wife’s fee request.

3      We also find no merit to Wife’s contention that the superior court
“committed reversible error” by failing to recognize that it could reject all
allocation methods and simply find the character of the contested
businesses community in nature to achieve substantial justice. In making
this argument, Wife correctly notes that the superior court found no
recognized methodology for awarding a spouse a 50% “sweat equity”
interest in the other spouse’s separate property, as Wife requested. But the
superior court further found no basis to apply a “sweat equity”
apportionment analysis because the “community enjoyed the profits of
Husband’s separate properties during the marriage” and “that enjoyment
constitutes ‘substantial justice’ under the case law.”

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                        NACKARD v. NACKARD
                         Decision of the Court

                              CONCLUSION

¶29           For the foregoing reasons, we affirm the decree of dissolution.
Both parties request an award of attorneys’ fees on appeal under A.R.S.
§ 25-324. In our discretion, we deny both requests but award Husband his
taxable costs upon compliance with ARCAP 21.

                            AMY M. WOOD • Clerk of the Court
                            FILED: AA

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