Rueschenberg v. Rueschenberg – 5/13/2008

May 19, 2008

Arizona Court of Appeals Division One Holds that Marital Community in Dissolution Action May Be Allocated a Share of the Increase in the Value of Husband’s Separately Owned Business Despite Having Received Nearly All Net Earnings from the Business During the Marriage.

In a divorce action, Husband and Wife agreed to mediate all issues except for the marital community’s interest in the increase in value, over the life of the marriage, of Husband’s separately owned business.  A special master found the community’s labor was responsible for two-thirds of the increase in value of the business, which was allocated accordingly.  The special master also found that the community had received nearly 100 percent of the net distributable earnings during the marriage but did not resolve how much those distributed earnings equaled.  Because Husband did not request a finding of the amount of net distributable earnings, the report also did not consider whether the community had been “overpaid” its share of the earnings from the business, or whether any portion of the earnings should be considered as an offset from the community’s interest in the value of the business upon dissolution.  The trial court adopted the special master’s findings verbatim into its decree of dissolution.  Husband appealed.

The Arizona Appeals Court affirmed. Arizona law does not prohibit the apportionment of both profits and increased value of a separate property business where a portion of each resulted from the community’s labor.  Instead, Arizona courts look to the nature, or source, of the profit from or increase in value of the business and allocate as necessary to achieve substantial justice between the parties.  Nor does a finding that the community has received a fair salary for the community’s labor contributions to the separately held business preclude apportionment of the increased value of the business.  

The Court also rejected Husband’s argument that the trial court abused its discretion by finding, allegedly without any supporting evidence, that the community was responsible for two-thirds of the growth in value of the business.  When the value of separate property is increased during the marriage, the burden is on the spouse claiming the increase as separate property to prove the increase is the result of the inherent value of the property itself and not the product of the work effort of the community.  The presumption that all earnings during the marriage are community in nature may be overcome only by clear and convincing evidence to the contrary.  Husband’s argument thus misplaced the burden of proof.

Finally, because there was no request made of the trial court to determine 1) the amount of net distributable earnings paid to the community, or 2) whether the two-thirds/one-third apportionment of the increased value of the business should apply also to the apportionment of the net earnings during the marriage, the Court lacked any factual basis to find that the community had received more than its pro-rata share of the combined total of net distributable earnings and increases in the value of the business. 

Judge Barker authored the opinion; Judges Irvine and Johnsen concurred.