holding that "the party claiming a separate interest in transmuted property bears the burden of proving retraceability"Summary of this case from Hvozdovic v. McGuire
Record No. 0669-97-4.
December 23, 1997.
Appeal from the Circuit Court, City of Alexandria, Alfred D. Swersky, J.
Daniel G. Dannenbaum, Washington, DC (Glenn C. Lewis, Washington, DC; Leslie Weber Hoffman, Fairfax; Wendy H. Schwartz, Washington, DC; The Lewis Law Firm, Fairfax, on briefs), for appellant.
Richard C. Shadyac, Jr. (Alane A. Peragallo; Shadyac Shadyac, P.C., on brief), Falls Church, for appellee.
William von Raab (husband) appeals the trial court's award of equitable distribution in his divorce from Susan von Raab (wife). He contends the trial court erred when it classified the marital home (Prince Street property) as wholly "marital" and declined to award him his pre-marital equity in the property. For the reasons that follow, we affirm.
Husband also argued that the trial court's award of equitable distribution was erroneous on other grounds. He challenged the trial courts decisions regarding the classification and distribution of a farm property in Madison County, the apportionment of the marital debts, and the classification and distribution of wife's retirement accounts. We affirmed the trial court's decisions on these issues in an unpublished memorandum opinion released simultaneously with this opinion.
The parties were married in October 1979, had one child in October 1989, separated in November 1994, and divorced in 1996. The Prince Street property served as the parties primary marital residence from 1980 until their separation. The property was purchased by husband with his first wife in 1972 for $62,500. As an incident of his divorce from his first wife in 1979, husband purchased her interest in the property, and the property was retitled exclusively in his name. At the time of husband's marriage to wife in 1979, the value of the Prince Street property was $185,000. The principal due on the mortgage secured by the property was $70,000, and husbands equity in the property was $115,000.
In 1990, Fred Karam, a businessman and former client of husband, asked husband to lend him $150,000 for ninety days so that he could pay the current debts of his cash-strapped business. Because husband believed that Karam was "reliable" and because it was "the thing that friends do for friends," husband decided to "bail him out" of his business problems. Husband used the equity in the Prince Street property to borrow $150,000 from Burke Herbert Bank for a term of ninety days. Husband gave the bank a ninety-day note for $150,000 that was secured by a second deed of trust on the Prince Street property. Husband then lent this money to Karam in exchange for a promissory note. When Karam did not repay the loan from husband within ninety days as promised, husband refinanced his loan from the bank by "rolling it over" into a continuing series of ninety-day notes. In 1993, the bank refused to extend husband's ninety-day note and insisted that he obtain "permanent financing" for the debt. At the time, husband's annual income was $8,291, while wife's was $61,603. Husband and wife agreed to refinance husband's existing mortgage on the Prince Street property with a jointly-obtained mortgage that would cover husbands debt to Burke Herbert. The Prince Street property was retitled to husband and wife as tenants by the entirety as part of the refinancing transaction. The record established that Karam has yet to fully repay husband and still owes him between $110,000 and $112,000.
Both husband and wife testified about wife's monetary and non-monetary contributions to the Prince Street property. Wife testified that she was responsible for most of the maintenance of the property, including hiring a maid to clean the premises. Wife also played a substantial role in the ongoing renovation of the interior and exterior of the property. Wife testified that she assisted in the payment of the mortgage and utility bills for the Prince Street property by contributing her paycheck to the joint checking account that was used to pay these obligations. The renovations to the property were also paid for with funds drawn from this joint checking account. Wife also paid for several expenses associated with the property with funds from her personal checking account, including utility bills, real estate taxes, the maid, and renovation of the kitchen. Husband testified that wife contributed her salary into the parties' joint checking account, "which [was] then disbursed over a full range of matters." Husband also testified that wife managed both the redesign of the kitchen and the replastering and painting of their son's room and procured one set of curtains.
After the parties separated in November 1994, husband made all mortgage payments and paid all expenses associated with maintaining the Prince Street property. Husband's post-separation mortgage payments totaled $47,000 and increased the equity in the property by $3,666. Husband also retained exclusive use of the property after the parties separated.
On the date of the equitable distribution hearing, the value of the Prince Street property was $355,000, the principal due on the mortgage was $250,315, and the equity in the property was $104,685.
The trial court classified the Prince Street property as marital property and awarded wife one-half of the equity in the property. The trial court found that husband acquired the property before the marriage and that the equity in the property at the time of the marriage was $115,000. However, the trial court concluded that the Prince Street property had been transmuted from husband's separate property into marital property by "the monetary and non-monetary contributions of [wife] together with the refinancing and the conveyance by [husband] to husband and wife as tenants by the entiret[y]." Regarding the loan to Karam in 1990 and the subsequent refinancing of the property's mortgage in 1993, the trial court found:
The evidence is . . . clear that [husband] put this marital asset at risk when he made the loan to Karam. This ultimately required the equity in Prince Street be used to secure his loan made to obtain funds to lend to Karam. While [wife] may have dealt with the administration of the Karam loan, there is no evidence she was consulted beforehand nor acquiesced in the loan. She had little or no choice but to join in the refinancing.
The trial court did not award husband any credit for his premarital equity in the property or his post-separation reduction in the principal of the mortgage. The trial court also valued the Karam note "at between $110,000.00 and $112,000.00" and classified it as husband's separate property.
II. CLASSIFICATION OF THE PRINCE STREET PROPERTY
Husband contends the trial court erred when it failed to classify the Prince Street property as part marital and part separate and award him a credit for his pre-marital equity in the property. He also contends the trial court erred when it declined to award him a credit for his post-separation contributions to the property. We disagree.
Code § 20-107.3, which governs awards of equitable distribution, "is intended to recognize a marriage as a partnership and to provide a means to divide equitably the wealth accumulated during and by that partnership based on the monetary and non-monetary contributions of each spouse." Williams v. Williams, 4 Va. App. 19, 24, 354 S.E.2d 64, 66 (1987). "Where an equitable distribution is appropriate, then all of the provisions of Code § 20-107.3 must be followed." Artis v. Artis, 4 Va. App. 132, 136, 354 S.E.2d 812, 814 (1987). The court must determine "the legal title as between the parties" and "the ownership and value" of all of the parties' property and then classify this property as "marital," "separate," or "part separate and part marital." Code § 20-107.3 (A). After this is done, the court may (1) order the division or transfer, or both, of jointly owned marital property, (2) apportion and order the payment of marital debts, or (3) grant a monetary award to either party. See Code § 20-107.3 (C), (D). The court must determine the amount of its award of any of these remedies "upon the factors listed in [Code § 20-107.3 (E)]." Code § 20-107.3 (C), (D). Subject to these enumerated statutory factors, "this division or transfer of jointly owned marital property, [the apportionment of marital debts,] and the amount of any monetary award, is within the sound discretion of the trial court." Dietz v. Dietz, 17 Va. App. 203, 216, 436 S.E.2d 463, 471 (1993).
On appeal, the trial court's award of equitable distribution will not be reversed "unless it appears from the record that the chancellor has abused his discretion, that he has not considered or has misapplied one of the statutory mandates, or that the evidence fails to support the findings of fact underlying his resolution of the conflict in the equities." Robinette v. Robinette, 10 Va. App. 480, 486, 393 S.E.2d 629, 633 (1990) (citations omitted).
We hold that the trial court's classification of the Prince Street property as marital property was not erroneous. Because husband acquired the Prince Street property prior to October 1979, it was husband's separate property at the beginning of the parties' marriage. However, depending on how property is utilized during the marriage, property that was at one time "separate" can be converted into either "marital" property or "part marital property and part separate property" for the purposes of equitable distribution. See McDavid v. McDavid, 19 Va. App. 406, 410-11, 451 S.E.2d 713, 716 (1994) (citations omitted). Code § 20-107.3 (A)(1) states how the increase in value of separate property during the marriage may be classified as marital property.
The increase in value of separate property during the marriage is separate property, unless marital property or the personal efforts of either party have contributed to such increases and then only to the extent of the increases in value attributable to such contributions. The personal efforts of either party must be significant and result in substantial appreciation of the separate property if any increase in value attributable thereto is to be considered marital property.
In addition, Code § 20-107.3 (A)(3) sets forth the means by which property may be "transmuted" into a different class. Of particular relevance to the classification of the Prince Street property in this case is Code § 20-107.3 (A)(3)(f), which states:
When separate property is retitled in the joint names of the parties, the retitled property shall be deemed transmuted to marital property. However, to the extent the property is retraceable by the preponderance of the evidence and was not a gift, the retitled property shall retain its original classification.
Applying these code sections to the facts of this case, we conclude that the entirety of husband's separate interest in the Prince Street property was transmuted to marital property during the parties' marriage. The value of the Prince Street property increased from $185,000 at the beginning of the marriage to $355,000 on the date of the hearing. The record established that, during the marriage, wife made significant monetary and non-monetary contributions to the maintenance and renovation of the property. The increase in value of the Prince Street property that occurred prior to the retitling of the property that was attributable to these contributions was marital property. See Code § 20-107.3 (A)(1). Furthermore, all of husband's separate interest in the Prince Street property was transmuted to marital property when husband retitled the property to himself and wife as part of the transaction to obtain permanent financing for the money he borrowed from Burke Herbert Bank and lent to Fred Karam. See Code § 20-107.3 (A)(3)(f).
Because husband's separate interest in the Prince Street property was transmuted into marital property, the correctness of the trial court's classification of the property as wholly marital hinges upon whether husband's separate interest was both "retraceable" and "not a gift." Id. Although our prior cases address how to determine whether a particular retitling of separate property in the joint names of the parties is "not a gift," we have heretofore said little about how separate property is traced back from property that has been transmuted during the marriage. See Rowe v. Rowe, 24 Va. App. 123, 136, 480 S.E.2d 760, 766 (1997) (holding that evidence was sufficient to retrace property claimed by husband as separate).
See Rowe v. Rowe, 24 Va. App. 123, 136-37, 480 S.E.2d 760, 766 (1997); Lightburn v. Lightburn, 22 Va. App. 612, 616-17, 472 S.E.2d 281, 283 (1996); Theismann v. Theismann, 22 Va. App. 557, 565-66, 471 S.E.2d 809, 813, aff'd en banc, 23 Va. App. 697, 479 S.E.2d 534 (1996).
The goal of the tracing process is to link a transmuted asset to its primary source, which is either separate property or marital property. See Brett R. Turner, Equitable Distribution of Property § 5.23 (2d ed. 1994). Whether a transmuted asset can be traced back to a separate property interest is determined by the circumstances of each case, including the value and identity of the separate interest at the time of the transmutation. Because all property acquired by either spouse during the marriage and before the last separation of the parties is presumed to be marital property, see Code § 20-107.3 (A)(2), the party claiming a separate interest in transmuted property bears the burden of proving retraceability. See id. If the party claiming the separate interest in transmuted property proves retraceabiity, the burden shifts to the other party to prove that the transmutation of the separate property resulted from a "gift." Lightburn v. Lightburn, 22 Va. App. 612, 617, 472 S.E.2d 281, 283 (1996) (citing Turner, supra, § 5.18); see also Theismann v. Theismann, 22 Va. App. 557, 565-66, 471 S.E.2d 809, 813, aff'd en banc, 23 Va. App. 697, 479 S.E.2d 534 (1996).
We hold that, in the aftermath of the two-step, tripartite transaction to lend Karam $150,000, husband's initial separate interest in the equity of the Prince Street property was no longer retraceable from the current joint title to the property held by husband and wife. Husband's equity in the Prince Street property on the date of the marriage was $115,000. The record indicates that husband leveraged his equity in the Prince Street property to borrow $150,000 from Burke Herbert which he subsequently lent to Karam in exchange for an unsecured note. When Karam failed to repay the loan, wife assumed joint liability for the amount of money husband borrowed from Burke Herbert. Wife assumed liability for this debt to ensure that the bank would not foreclose on what was both husband's "separate" property and the marital home. The combination of husband's initial leverage of his separate interest in the Prince Street property and wife's intervention to secure the parties' uninterrupted possession of the marital home effectively severed any link between husband's prior separate interest and the transmuted marital property. If husband's initial interest in the Prince Street property is retraceable at all, it can be traced back from the Karam note, which the trial court found to be husband's separate property. Because husband's separate interest in the Prince Street property was no longer retraceable from anything other than the Karam note, the trial court did not err when it classified the entire property as "marital."
We also hold that the trial court did not abuse its discretion when it refused to award husband a credit for his post-separation payments that increased the equity in the marital property by $3,666. The trial court's award indicated that it considered husband's "direct monetary contributions" to the Prince Street property. The record also established that husband retained exclusive use of the property after the parties separated. Although the separate contribution of one party to the acquisition, care, and maintenance of marital property is a factor that the trial court must consider when making its award of equitable distribution, Code § 20-107.3 does not mandate that the trial court award a corresponding dollar-for-dollar credit for such contributions. See Ellington v. Ellington, 8 Va. App. 48, 56, 378 S.E.2d 626, 630 (1989). Furthermore, no evidence established that husband's source of funds for making the post-separation mortgage payments on the Prince Street property was actually his separate property. In light of the trial court's analysis, we cannot say that its refusal to award husband a credit for his post-separation contributions to the Prince Street property was an abuse of discretion.
For the foregoing reasons, we affirm the trial court's award of equitable distribution regarding the Prince Street property.