JUDITH H. TERWILLlGER V. THOMAS E. TERWILLIGER
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MODIFIED : FEBRUARY II,2002
RENDERED: JANUARY ?.& 2002
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JUDITH H. TE:RWILLlGER
V.
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APPELLANT
ON REVIEW FROM THE COURT OF APPEALS
NOS. 98-CA-0032 AND 98-CA-0212
JEFFERSON CIRCUIT COURT NO. 93-FD-2892
THOMAS E. TERWILLIGER
APPELLEE
OPINION OF THE COURT BY JUSTICE STUMBO
REVERSING AND REMANDING
In October 1993, Thomas Terwilliger, filed a Petition for Dissolution of Marriage,
seeking to end his seventeen-year marriage to Judith Terwilliger, the Appellant herein.
Mr. Terwilliger drafted a marital settlement agreement providing for custody, visitation,
and support of the couple’s two minor children, as well as division of the couple’s
marital property and debts. The parties then signed this agreement, both acting pro se,
at Mr. Terwilliger’s urging.
The Terwilligers owned several closely-held corporations which were subject to
division as marital property. Mr. Terwilliger represented to Mrs. Terwilliger that those
corporations were experiencing financial difficulties, and particularly that TransAmerica
Cable d/b/a Mid-America Cable (“MAC”) was nearly bankrupt, overdrawing at the rate of
$100,000.00 per day. Based upon Appellee’s representations, and his assertion that
she needed to act quickly or risk losing her home to creditors, Mrs. Terwilliger agreed to
accept the following as her portion of the marital property settlement: the marital home,
valued at $67,000.00 and subject to a $51 ,OOO.OO mortgage; a Hyundai automobile
valued at $1,800.00; some $2,550.00 in other cash and/or assets; unencumbered stock
equaling 10% of the companies owned by the couple, which Mr. Terwilliger valued at
$11 ,OOO.OO; and some $6,000.00 in credit card debt. Mr. Terwilliger was to receive
90% of the stock of the corporations, which he valued at $100,000.00, as well as the
corporate debt; a houseboat on which he was residing; a 1989 Hyundai automobile
valued at $3,000.00;
and a computer. Within two weeks of the signing of the settlement
agreement and before the divorce decree was entered, Mr. Terwilliger was representing
to a potential buyer that MAC was worth 1.7 million dollars.
The final decree of dissolution was entered on January 6, 1994, incorporating by
reference the marital settlement agreement signed by Mr. and Mrs. Terwilliger. Less
than one month after the divorce decree was entered, Mr. Terwilliger entered an
agreement to sell MAC, for approximately 1.6 million dollars, to be paid in stock and
cash. On December 8, 1994, Mrs. Terwilliger moved to reopen the decree of
dissolution and modify the settlement agreement pursuant to CR 60.02 and KRS
403.250. Specifically, she argued that the property division that she had agreed to in
the settlement was procured through fraud, misrepresentation, lack of full disclosure,
and overreaching on the part of Mr. Terwilliger.
Appellant’s motion to reopen the decree was granted. On December 8, 1997,
after holding a hearing, the family court modified the property division, awarding Mrs.
Terwilliger $384,166.50 (equaling one-half of the profits realized from the sale of MAC,
less monies that she had previously received from the sale, and setting aside
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$200,000.00 to Mr. Terwilliger as separate, non-marital property, invested by him in the
business).
Mr. Terwilliger appealed the modification to the Court of Appeals, arguing,
among other things, that his actions did not constitute a “fraud affecting the
proceedings” as contemplated by CR 60.02(d) and thus that the reopening was
improper. The Court of Appeals noted the family court’s finding that Appellee had (1)
convinced his wife to proceed without counsel, (2) that he had prepared the settlement
agreement, and (3) that he had convinced his wife that the corporations were near
bankruptcy and that she needed to sign the settlement agreement in order to prevent
the possibility of losing her home to creditors. However, citing Rasnick v. Rasnick, Ky.
App., 982 S.W.2d 218 (1998), the court held that, while disturbing, Appellee’s conduct
did not constitute “fraud affecting the proceeding” within the meaning of CR 60.02(d),
and, therefore, the reopening was improper. On this basis, the Court of Appeals
reversed the family court’s order modifying the property settlement. Ms. Terwilliger now
appeals to this Court.
In Rasnick v. Rasnick, Ky. App., 982 S.W.2d 218 (1998), Mr. and Mrs. Rasnick,
in contemplation of divorce, met with both an attorney and an accountant to discuss the
consequences to their prior financial planning of their impending divorce. The
accountant informed the court that he had reviewed with the couple, in detail, their
financial interests, holdings, partnerships and approximate net worth. During the
meeting with legal counsel, Mr. Rasnick left the room specifically to allow Mrs. Rasnick
to consult freely with the attorney. Additionally, the Rasnick’s had filed joint tax returns,
fully disclosing their annual income over the three years preceding their divorce, and
Mrs. Rasnick admitted that she had seen and signed those forms. Subsequent to the
divorce, Mrs. Rasnick moved to reopen the property settlement and child support
provisions of the agreement on the basis of, among other things, CR 60.02(d), “fraud
affecting the proceedings.”
Her contention was that she had been led to believe that
the parties’ net worth was far less than it really was and that she was fraudulently
induced into giving up a disproportionate share of the parties’ accumulated property.
The Court in Rasnick held that nondisclosure of assets in a divorce proceeding
does not constitute “fraud affecting the proceedings” within the meaning of
CR 60.02 (d). The Rasnick decision draws a distinction between fraud intrinsic to the
proceedings, such as perjury or nondisclosure during pretrial discovery which causes
injury to a single litigant, and “extrinsic” fraud, which, the Court held, constitutes “fraud
affecting the proceedings.” In reexamining the Rasnick decision, which relies primarily
upon decisions from other jurisdictions, this Court finds that the definition of “fraud
affecting the proceeding” utilized by the Court in Rasnick is an overly restrictive
conception of CR 60.02(d). It is the finding of this Court that fraud on a party is, in fact,
“fraud affecting the proceedings.” As Appellant notes, by filing a settlement agreement
with knowingly undervalued marital assets, Mr. Terwilliger used the proceedings as a
tool to defraud his wife.
Whatever popularity the distinction between intrinsic and extrinsic fraud may
have enjoyed in the past, the judicial tide is turning against the distinction in favor of
equity. According to the leading authority on the Kentucky Rules of Civil Procedure,
As a general proposition [fraud affecting the
proceedings] relates to what is denominated ‘extrinsic’ fraud.
This covers fraudulent conduct outside of the trial which is
practiced upon the court, or upon the defeated party, in such a
manner that he is prevented from appearing or presenting fully
and fairly his side of the case.
The distinction between extrinsic and intrinsic fraud has
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been widely criticized and has been rejected by more
recent [federal] decisions.
7 Kurt A. Philipps, Jr., Kentucky Practice, CR 60.02, cmt. 6 (5th Ed. 1995). Our rule,
however, does distinguish between fraud affecting the proceedings as discussed
herein, and the presentation of perjury or falsified evidence, which is clearly a fraud
upon the court. This distinction is important because the latter can be raised only “not
more than one year after the judgement,” CR 60.02, while the former must be “made
within a reasonable time.” Thus, it appears that fraud perpetrated in the courtroom or
through testimony under oath is subject to a one-year limitation while fraud occurring
outside the courtroom that interferes with presentation of the losing party’s evidence to
the extent that he or she is “prevented from appearing or presenting fully and fairly his
side of the case” is not subject to that limitation. 7 Kurt A. Philipps, Jr., Kentuckv
Practice, CR 60.02, cmt. 6 (5th Ed. 1995). Philipps goes on to say: “It may be said the
language specifying [fraud upon the proceeding] is quite broad and allows for flexibility
in the determination of what constitutes ‘fraud affecting the proceedings’ where the net
effect would cause an unjust judgment to stand.” Id. While finality of judgment is a
laudable goal, it cannot take precedence over the fair and equitable resolution of
disputes.
In Burke v. Sexton, Ky. App., 814 S.W.2d 290 (1991) Mr. Burke’s attorney
drafted a marital settlement agreement, which Mrs. Burke signed without benefit of
counsel. The agreement gave Mr. Burke essentially all of the couple’s assets, and
relieved him of any child support or maintenance obligations. Mrs. Burke received a
vehicle, custody of the couple’s minor child, and waived notice of further proceedings.
After signing the agreement, Mr. Burke led his wife to believe that he was no longer
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pursuing a divorce, thus the divorce and property settlement became final without Mrs.
Burke’s knowledge. Mrs. Burke subsequently brought suit to reopen the settlement,
which motion was granted and the settlement was found to be unconscionable. On
appeal by Mr. Burke, the Court of Appeals found this sort of situation to fall under
CR 60.02(d) as a “fraud affecting the proceedings.” Burke does not differ significantly
from the case at bar. While in both cases a fraud was perpetrated against a party to
the dispute, the ultimate result was a fraud against the court. Both in the case at bar,
and as noted by the court in Burke, allowing the original decree to stand would be a
miscarriage of justice. Id. at 292.
In McMurry v. McMurry, Ky. App., 957 S.W.2d 731 (1998), Mrs. McMurry’s
CR 60.02(d) motion to reopen was found to have been properly denied by the trial
court. Mrs. McMurry alleged that she had relied to her detriment upon her husband’s
misrepresentations concerning the true value of the couple’s marital assets. The court,
however, denied the motion to reopen because Mrs. McMurry failed to show that her
husband had attempted to or had concealed or misrepresented any information
concerning the couple’s finances. Implicitly, had such evidence been produced, Mrs.
McMurry would have been entitled to a reopening of the settlement agreement pursuant
to CR 60.02(d). Mrs. Terwilliger has produced evidence of fraud by her husband, and
the trial court found that evidence persuasive.
Mrs. Terwilliger also appeals the decision by the trial court to set aside
!$200,000.00
of the proceeds from the sale of MAC as the separate property of Mr.
Terwilliger. Mr. Terwilliger asserted that he had invested his own separate funds,
originating from the settlement of a lawsuit in Michigan, which arose prior to the
marriage. In support of this contention, Mr. Terwilliger submitted a note issued by MAC
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to himself for $200,000.00. However, the note was created in March or April of 1994,
and backdated to September 1988, which was prior to the settlement from which he
claims the $200,000.00 arose. He also submitted a copy of the release of the Michigan
claim, which indicates that the claim was settled for $275,000.00,
payable to Mr.
Terwilliger and a Mr. Tera, but does not specify the amount of money going to each
payee. Finally, Mr. Terwilliger admitted that he had failed to produce a canceled check
or deposit slip for $200,000.00, but submitted a canceled check payable to MAC in the
amount of $75,000.00, and another document evidencing a $75,000.00 payment to
MAC, which he claims to have been part of the $200,000.00 investment of his separate
funds into the corporation. Mrs. Terwilliger stated that she had not been aware of a
$200,000.00 settlement and testified that Mr. Terwilliger had specifically told her that his
part of the settlement of the Michigan claim was $30,000.00,
and that Mr. Tera was
getting the bulk of the settlement proceeds. In response, Mr. Terwilliger testified that in
1988, as part of the Michigan settlement, he had received checks for $35000.00 and
$200,000.00. H e dI ’no recall if he had told Judith about the $200,000.00,
d t
in part
because he was precluded from disclosing the terms of the settlement, but he assumed
that they had discussed it in private.
The presumption in Kentucky is that all property acquired during the course of
the marriage is marital property, unless the property can be shown to have originated in
one of the excepted ways outlined in KRS 403.190(2). A party claiming that property
acquired during the marriage is other than marital property, bears the burden of proof.
KRS 403.190(3), Brosick v. Brosick, Ky. App., 974 S.W.2d 498 (1998). While the word
does not appear in the statute, judicial construction of KRS 403.190 has given rise to
the concept of “tracing.” Chenault v. Chenault, Ky., 799 S.W.2d 575 (1990). In
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Chenault, this Court recognized that tracing to a mathematical certainty is not always
possible, noting that: “While such precise requirements for nonmarital asset-tracing
may be appropriate for skilled business persons who maintain comprehensive records
of their financial affairs, such may not be appropriate for persons of lesser business skill
or persons who are imprecise in their record-keeping abilities.” Id. at 578.
In Chenault, this Court rejected the trial court’s finding that Ruby Chenault had
failed to adequately trace her nonmarital assets into assets held at the time of divorce.
The facts in Chenault, however, differ dramatically from the facts in this case. Ruby
Chenault came to her marriage with a home worth $14,000.00, cash and securities
worth $21 ,OOO.OO, and some additional inherited stock. Over the course of the
Chenault’s fifteen (15) year marriage, both parties worked at low paying jobs. It was
Ruby’s testimony that she had purchased CDs and otherwise reinvested her separate
property, though she was unable to provide documentary evidence. In holding that
Ruby had sufficiently traced her separate property into assets held at the time of
divorce, this Court noted Ruby’s own testimony, as well as the fact that there was no
other possible source of the funds at issue, since both spouses had held low paying
jobs throughout the marriage. In the case of the Terwilligers, Tom was an experienced
business person, juggling the assets and liabilities of a number of corporations and
orchestrating complex business deals. As such, he would be expected and/or required
to keep detailed and accurate records, and it is certainly reasonable to require him to
maintain and to produce records to establish his claims of nonmarital property being
injected into the business, beyond backdated notes and unexplained deposit slips for
varying amounts. Mr. Terwilliger is clearly a skilled business person with extensive
record keeping experience. As such, it does not appear that he is the sort of person
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that the Court sought to protect in Chenault from excessively stringent tracing
requirements.
Additionally, while the Chenaults had no other likely source for the funds
claimed by Ruby Chenault as nonmarital, Tom Terwilliger had money flowing in and out
of his various corporations from any number of sources. Based upon the trial court’s
finding of fraud by Mr. Terwilliger, it appears that Mr. Terwilliger was not found to be a
credible witness. Thus, the setting aside of the $200,000.00 to Mr. Terwilliger appears
to be the result of a misconception by the trial court of the tracing requirements, rather
than a finding that Tom Terwilliger was more credible than Judith Terwilliger in their
conflicting testimony over the origin of the $200,000.00.
Thus, the trial court erred in
setting aside the $200,000.00 as Mr. Terwilliger’s separate property based upon the
evidence presented. While Chenault recognized the potential difficulties of tracing and
sought to relax the draconian requirements laid down in prior case law, it did not do
away with the tracing requirements altogether.
In sum, the trial court’s reopening of the settlement agreement herein was proper
under CR 60.092 (d). We affirm as to the division of the profits from the sale of MAC.
However, we remand to the trial court to reconsider the issue of whether the claimed
nonmarital share is sufficiently established.
This case is reversed and remanded to the trial court for action consistent with
this opinion.
Cooper, Graves, Johnstone, and Wintersheimer, JJ., concur. Keller, J., concurs
in part and dissents in part, by separate opinion, with Lambert, C.J., joining that opinion.
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COUNSEL FOR APPELLANT:
Jeffrey D. Stamper
Connelly, Kaercher & Stamper
1610 Kentucky Home Life Building
Louisville, KY 40202
Alan M. Patterson, III.
Connelly, Kaercher & Stamper
1610 Kentucky Home Life Building
Louisville, KY 40202
COUNSEL FOR APPELLEE:
Michael L. Allen
123 South Seventh Street
Louisville, KY 40202
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MODIFIED: FEBRUARY II,2002
RENDERED: JANUARY 17,2002
TO BE PUBLISHED
1999-SC-1064-DG
JUDITH H. TERWILLIGER
V.
APPELLANT
ON REVIEW FROM THE COURT OF APPEALS
NOS. 98CA-0032 AND 98-CA-0212
JEFFERSON CIRCUIT COURT NO. 93-FD-2892
THOMAS E. TERWILLIGER
APPELLEE
OPINION BY JUSTICE KELLER
CONCURRING IN PART AND DISSENTING IN PART
I would reverse the decision of the Court of Appeals and reinstate the entire
judgment of the Jefferson Circuit Court. Thus, while I concur in the part of the majority
opinion which holds that the trial court properly set aside the property settlement
agreement and reconsidered property division issues in light of evidence of Appellee’s
overreaching, I dissent from the part of the majority opinion that remands the case to
the trial court for it to “reconsider” the $200,000.00 it awarded to Appellee as separate,
nonmarital property.
The majority simply ignores its role as a reviewing Court’ - as well as the trial
court’s factual finding that the $200,000.00 in question represented Appellee’s
separate, nonmarital investment - and reaches its own conclusions as to witness
credibility.
The majority’s view of the evidence is conspicuous - “Thus, the trial court
erred in setting aside the $200,000.00 as Tom’s separate property based upon the
evidence presented.“* Instead of labeling the trial court’s findings as clear error and
remanding the case for the trial court to treat the $200,000.00 as marital property and to
reconsider its previous division of marital property, however, the majority distances itself
from its fact-finding and compounds its errors.
Unable to explain the fact that the trial court, after reviewing the evidence,
reached a different conclusion, the majority rationalizes the trial court’s findings as “the
result of a misconception by the trial court of the tracing requirements, rather than a
finding that Tom Terwilliger was more credible than Judith Terwilliger in their conflicting
testimony over the origin of the $200,000.00.“3
Of course there is not a shred of
evidence in the record to support this assertion, and the primary authority from this
‘a CR 52.01:
In all actions tried upon the facts without a jury . . the
court shall find the facts specifically and state separately in
its conclusions of law thereon and render an appropriate
judgment. . . Findinas of fact shall not be set aside unless
clearlv erroneous, and due reaard shall be aiven to the
opportunitv of the trial court to iudae the credibilitv of
witnesses. .
(emphasis added). See also Lament v. Lament, Ky., 643 S.W.2d 261, 263 (1982)
(“The trial court is the finder of fact . . ., and the judgment of the trial court may not be
reversed unless the findings are clearly erroneous.“).
“Majority Opinion at - S.W.3d -, ~ (200-) (Slip Op. at 9).
‘ld. at __ (Slip Op. at 9).
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Court addressing the tracing of assets is not particularly prone to “misconceptions”
about the process because it removed hypertechnical proof requirements and vested
trial courts with the discretion to determine the adequacy of evidence tracing nonmarital
assets to assets owned at the time of dissolution.4
The majority’s “solution” is to create
unnecessary complexity by suggesting that trial courts must examine tracing evidence
using a “sliding scale” approach that apparently requires trial courts to adjust proof
requirements to account for a party’s business acumen and financial position. Having
done everything but actually nudge and wink, the majority then remands the case to the
trial court for it to “reconsider the issue of whether the claimed nonmarital share is
sufficiently established.“5
Because I recognize both our position as a reviewing court that, particularly in
cases such as this, should give due deference to the trial court’s findings when they are
supported by substantial evidence,6
I accordingly dissent from this second part of the
majority opinion.
‘Chenault v. Chenault, Ky., 799 S.W.2d 575, 579 (1990):
Accordingly, we shall adhere to the general requirement
that nonmarital assets be traced into assets owned at the
time of dissolution, but relax some of the draconian
requirements heretofore laid down. We take this position, in
part, in reliance upon the trial courts of Kentucky to detect
deception and exaggeration or to require additional proof
when such is suspected.
Id.
‘Majority Opinion, supra note 2 at ( S l i p O p . a t 9-10).
6See Marcum v. Marcum, Ky., 779 S.W.2d 209, 212 (1989) (“[Dlomestic cases
require a greater degree of deference to the determinations made by trial courts.“).
Contrary to the majority’s characterization, the trial court’s Findings of Fact,
Conclusions of Law, and Order do not equivocate or express any doubts regarding
Appellee’s proof as to his $200,000.00 nonmarital investment in Mid-America Cable. In
fact, the trial court found, by clear and convincing evidence,7
and after “consider[ing]
the evidence presented, the arguments of counsel, and being otherwise sufficiently
advised,” that (1) “Prior to the marriage the instant Petitioner was also the petitioner in
litigation taking place in Michigan and which later was settled for $275,000.00”; (2)
“[T]he money he received in settlement of his Michigan tort claims, $200,000.00,
became the initial investment in the corporation. This investment is the undisputed
non-marital property of Petitioner” (emphasis added); and (3) “[T]he marital interest of
the parties in the sale is $938,333.00,
with the non-marital investment of $200,000.00
being restored to the petitioner” (emphasis added). Later, in the “conclusions of law”
section, the trial court recognized - and cited - the KRS 403.190(3) presumption that
all property acquired during the marriage is marital and correctly observed that a party
seeking to overcome the presumption bears the burden of proving that he or she
acquired the property pursuant to an exception listed in KRS 403.190(l). The trial court
then concluded that “Petitioner made an initial non-marital investment of $200,000.00 in
the corporation.”
Although the majority opinion characterizes these findings as the result of the
trial court’s improper application of the tracing requirements, this assertion is
inextricably intertwined with the majority’s own factual determinations. Specifically, the
7Although the trial court evaluated the evidence under a “clear and convincing
evidence,” standard, I believe that KRS 403.190 requires only that the trial court be
convinced of an asset’s character by a preponderance of the evidence. See infra notes
20-34 and accompanying text.
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majority concludes that the trial court could not possibly have found credible Appellee’s
testimony regarding the $200,000.00 invested in the corporation because the trial court
clearly found Appellant’s testimony more credible than Appellee’s when it determined
that the original property settlement agreement resulted from overreaching on
Appellee’s part.’ This overly myopic view illustrates why appellate courts should not
make credibility determinations and, more importantly, overlooks the fact that a factfinder can believe portions of a witness’s testimony without endorsing that testimony
whole-cloth.
Perhaps the best evidence that the trial court properly performed its fact-
finding function is the fact that it rejected Appellee’s claims that other funds - e.g., an
additional portion of the purchase price of the corporation and the down payment on the
parties’ residence - and tangible property - e.g., a speedboat and some tools - also
constituted his nonmarital property. In doing so, the trial court found the evidence as to
each item of claimed nonmarital property insufficient to overcome the KRS 403.190(3)
presumption.
Additionally, I must admit that I cannot discern the standard utilized or
established by the majority for the “tracing” of nonmarital property. While professing to
follow Chenault v. Chenaultg and paying homage to Chenault’s declared relaxation of
the “draconian” requirements of the tracing of nonmarital assets set forth by earlier
cases, lo the majority sends a loud and clear signal to family law practitioners and the
‘Majority Opinion, supra note 2 at - (Slip Op. at 9) (“Based upon the trial
court’s finding of fraud by Mr. Terwilliger, it appears that Tom was not found to be a
credible witness.“).
9Supra note 4.
‘Old. at 577:
(continued...)
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trial bench that - in a certain class of unspecified cases which, coincidentally, mirrors
those cases where a majority of this court disagrees with the trial court’s factual findings
- nothing less than a verified audit conducted in accordance with generally accepted
accounting principles will suffice.” I also see no justification for the majority’s holding
that trial courts must apply different proof requirements based upon the business
success, or lack thereof, and financial position of a claimant. I agree that a trial court
may find the fact that a claimant has kept detailed and accurate records in the past of
other similar matters relevant to its decision whether a claimant has overcome the KRS
403.190(3) presumption by demonstrating his or her right to nonmarital property.
However, I cannot agree that a claimant’s wealth or business success, standing alone,
“(...continued)
This Court granted discretionary review of the decision of the
Court of Appeals which imposed stringent requirements
upon appellant, Ruby E. Chenault, who sought to “trace” the
proceeds of nonmarital property at the time the marriage
was dissolved. In effect, the Court of Appeals held that at
the time of dissolution, a party undertaking to prove the
nonmarital character of property must do so by documentary
evidence and with near mathematical precision. We believe
such a requirement is beyond the mandate of KRS 403.190
and contrary to sound public policy.
Id.
“a Majority Opinion, supra note 2 at - (Slip Op. at 9) (“[Tom Terwilliger]
would be expected and/or required to keep detailed and accurate records, and it is
certainly reasonable to require him to maintain and to produce records to establish his
claims of nonmarital property being injected into the business, beyond backdated notes
and unexplained deposit slips for varying amounts.“). It should be noted that Tom
Terwilliger’s nonmarital claim stems from a settlement he received in a civil case prior to
his marriage to the Appellant. The parties were married in 1976 and the final hearing
on the division of the parties’ marital property was held in 1997. Thus, after a lapse of
time of more than twenty-three (23) years, the majority requires Tom Terwilliger to
produce detailed and accurate records to prove his nonmarital property claims. How
many people can meet this onerous requirement? Very few, I would posit.
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imposes an additional requirement upon the claimant to produce detailed and accurate
records.
In Chenault, this Court relaxed the tracing requirements because of its faith in
trial courts’ ability to make factual determinations regarding the character of assets’*
and its recognition that heightened proof requirements “may promote marital
disharmony by placing a premium on the careful maintenance of separate estates.“‘3
Today’s majority opinion gives no deference to the trial court’s finding and adopts a
heightened proof requirement that is flagrantly in opposition to the Chenault holding.
KRS 403.190(3) establishes a presumption that all property acquired during the
marriage is marital property.14
The marital presumption, however, is rebuttable and
may be overcome “by a showing that the property was acquired by a method listed in
[KRS 403.190(2)].“‘”
This legislatively-created presumption is the genesis of the
judicially created “tracing requirement.“” While a great deal of confusion has arisen
regarding this “tracing requirement,” it simply means that, “[w]hen the original property
“See Chenault v. Chenault, supra note 4.
“ld. at 578.
14KRS 403.190(3) (“All property acquired by either spouse after the marriage and
before a decree of legal separation is presumed to be marital property, regardless of
whether title is held individually or by the spouses in some form of co-ownership such
as joint tenancy, tenancy in common, tenancy by the entirety, and community property.”
Id. (emphasis added)).
“KRS 403.190(3) (“The presumption of marital property is overcome by a
showing that the property was acquired by a method listed in subsection (2) of this
section.” (emphasis added)); Underwood v. Underwood, Ky.App., 836 S.W.2d 439, 441
(1992) (“This presumption may be rebutted by clear and convincing proof that the
property was acquired by, amongst other means, ‘gift, bequest, devise, or descent.’
(emphasis added)).
I615 L. Graham & J. Keller, Kentucky Practice, Domestic Relations Law § 15.10
(2nd ed. West Group 2000) (hereinafter “Graham & Keller”).
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claimed to be nonmarital is no longer owned, the nonmarital claimant must trace the
previously owned property into a presently owned specific asset.“17 If the claimant does
so, then the trial court assigns the specific property, or an interest in specific property,
to the claimant as his or her nonmarital property. In contrast, a claimant fails to meet
the tracing requirement when he or she is able to show only that he or she brought
nonmarital property into the marriage because he or she has spent his or her
nonmarital assets in a nontraceable manner during the marriage. Thus, the trial court
will not assign the property to the claimant as nonmarital property,” and will consider
the claimant’s nontraceable, nonmarital contribution only as a factor when it makes a
just division of the parties’ marital property.‘g
A second question which this Court must answer concerns what evidentiary
standard must be met to rebut the marital presumption and successfully trace
nonmarital property.
In a number of cases, beginning with Brownina v. Browning,*’ the
Court of Appeals has held that the burden is on the claimant of nonmarital property to
‘*a Brunson v. Brunson, Ky.App. 569 S.W.2d 173, 176 (1978). See also
American Law Institute Principles of the Law of Family Dissolution: Analysis and
Recommendations, § 4.03, Comment (c) (Proposed Final Draft, Part I, February 14,
1997) (“When tracing yields only ambiguous results the property is typically treated as
marital.“).
19a Anael v. Anael, Ky.App., 562 S.W.2d 661, 664-665 (1978) (“[Wlhen the
nonmarital property of one spouse is expended as a part of the ‘team effort’ for the
benefit of the marriage, that amount should be considered by the trial court in
measuring the contribution of each spouse to the acquisition of the marital property.“);
Graham & Keller, supra note 16 at 5 15.11.
“OKy.App., 551 S.W.2d 823 (1977).
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rebut the marital presumption by “clear and convincing evidence.“*’ However, the Court
of Appeals, itself, has expressed doubts about the validity of the clear and convincing
evidence standard*’ and, perhaps, even rejected it.23
I believe that this Court should
also reject it.
*‘ld. at 825 (“The burden is on the Appellant to prove by clear and convincing
proof that he acquired his interest by gift.“); Brosick v. Brosick, Ky.App., 974 S.W.2d
498, 502 (1998) (“We recognize that KRS 403.190(3) creates a presumption that all
property acquired during the marriage is marital. This presumption must be rebutted by
clear and convincing evidence.“); Underwood v. Underwood, supra note 15 at 441
(“According to KRS 403.190(3), ‘[a]11 property acquired by either spouse after the
marriage and before a decree of legal separation is presumed to be marital property....’
This presumption may be rebutted by clear and convincing proof that the property was
acquired by, amongst other means, ‘gift, bequest, devise, or descent.“‘); Mundav v.
Munday, Ky.App., 584 S.W.2d 596, 598 (1979) (“We believe, under the circumstances,
it is incumbent on the appellee to furnish convincing evidence that the appellant
received the $17,300 or otherwise it will be considered premarital property.“); Adams v.
Adams, Ky.App., 565 S.W.2d 169, 171 (1978) (“The question of whether property is
considered marital or nonmarital is dependent on whether the property was a gift or was
received as a result of consideration. To overcome the presumption that the property is
marital, clear and convincing proof must be presented to show that the property was
given as a gift.“).
*Underwood v. Underwood, supra note 15 at 445 n. 1 (“The ‘clear and convincing
evidence’ standard, as used in this context, apparently originated with the Browning
case and has since been cited in numerous opinions of this Court. . . . . Although we
recognize that this standard has been applied in Kentucky for quite some time, we
question its validity.” (citations omitted) (emphasis added)).
We are unable to see why the division of property in a
dissolution of marriage proceeding warrants such a high
standard of proof, arising to the same level of importance as
the termination of parental rights. Surely the most important
issue in any divorce case is the custody of children; yet, we
do not require a party to show by clear and convincing
evidence that living with that individual would be in the
child’s best interest. It seems unreasonable then to require
a party to rebut the presumption that property is marital by
producing clear and convincing evidence. . . . . [W]e believe
that requiring “clear and convincing evidence” to rebut the
“marital property” presumption is improper[] . . .
-9-
The issue in Browning was whether the property in question was a gift or was
received for consideration,24
and the Court, without any reasoning, discussion, or
citation to authority, declared that “[t]he burden is on the [claimant] to prove by clear
and convincing proof that he acquired his interest by gift.“25 However, immediately prior
to its declaration of the clear and convincing evidence standard necessary to rebut the
marital presumption, the Court cited to Bowman’s Adm’rs v. Bowman’s Ex’?~ in support
of its definition of “gift. ‘12’ And, this reliance on Bowman’s Adm’rs v. Bowman’s Ex’r,
albeit for the ostensible purpose of defining a gift, reveals, perhaps, the reason that the
Court in Browninq applied a clear and convincing evidence standard to the tracing of
nonmarital property.
In Bowman’s Adm’rs v. Bowman’s Ex’r, the Court stated the burden of proof and
the evidentiary standard for proving an inter vivos gift:28
Were the appellants here asserting that the money loaned,
as evidenced by the notes, were gifts, the burden of showing
same certainly rests upon them. In Bell’s Ex’r et al. v.
Lawrence et al., 272 Ky. 439, 114 S.W.2d 517, we held that
evidence of a gift inter vivos must be clear, convincing and
free from reasonable doubt.2g
2JBrownina v. Browning, supra note 20 at 825 (“The question of non-marital or
marital property rests on whether or not the Harkins property was a gift or was received
as a result of a consideration.“).
16301 Ky. 694, 192 S.W.2d 955 (1946).
17Brownina v. Browning, supra note 20 at 825.
‘*An “inter vivos sift” is “[a] gift made during the donor’s lifetime and delivered
with the intention of irrevocably surrendering control over the property.” Black’s Law
Dictionary 697 (7’h Ed. 1999).
7’Bowman’s Adm’rs v. Bowman’s Ex’r and Adm’r, supra note 26 at 957.
-lO-
Apparently, the Court in Browning merely took the evidentiary standard for an inter
vivos gift as stated in Bowman’s Adm’rs v. Bowman’s Ex’r and adopted it as the
standard for rebutting KRS 403.190(3)‘s martial presumption. It does not appear from
the opinion itself that the Browninq Court gave any independent consideration to the
appropriate evidentiary standard with respect to the marital presumption. Accordingly, I
believe that this Court should give little or no precedential weight to the standard
adopted by the Court of Appeals in Browninq and perpetuated, but questioned, in its
subsequent decisions.
While a clear and convincing standard may be necessary with respect to inter
vivos gilts because of the substantial risk of fraud,30 nonmarital claims generally do not
present a substantial risk of fraud, and the clear and convincing standard is
inappropriate in the tracing context. The primary issue in the tracing of nonmarital
property is not whether the claimant originally owned, or acquired, nonmarital property
but rather whether the nonmarital property can be traced into presently owned specific
property.
Accordingly, I see no reason to impose an unnecessary burden upon
nonmarital claimants.
Like the Court in Chenault, I have confidence that Kentucky’s trial courts will be
able to detect fraudulent claims of nonmarital property and deny them.31 Additionally, I
would observe that KRE 301 requires that we give the marital presumption the effect
“Hale v. Hale, Ky. 224 S.W. 1078, 1079 (1920) (“It is equally true that, since gifts
of this character furnish a ready means for the perpetration of fraud, the evidence
necessary to establish all of the essentials to complete them must be clear and
convincing . . . .‘I).
31See supra note 4.
-1 l-
intended by the statute,32 and KRS 403.190(3) places the burden of going forward with
the evidence and the risk of nonpersuasion on the nonmarital claimant.33
Placing the
full burden of proof on the nonmarital property claimant adequately reduces the risk that
a fraudulent claim will escape the fact-finder’s detection. If a claimant fails to satisfy the
trial court by a preponderance of evidence that the claimant’s previously owned
nonmarital property34 is now represented, in whole or part, by a presently owned
specific asset, the claimant has not met his or her burden and accordingly will not be
assigned nonmarital property.
Although I do not believe KRS 403.190(3) requires a claimant to demonstrate the
character of an asset by clear and convincing evidence, I find it significant to this
Court’s review of the trial court’s findings that the trial court applied this heightened
evidentiary standard in this case. While it is difficult to precisely define any evidentiary
standard, “this approach requires the party with the burden of proof to produce
evidence substantially more persuasive than a preponderance of evidence, but not
beyond a reasonable doubt.“35
Thus, the trial court was clearly convinced by the
evidence that Appellee sufficiently established his entitlement to the claimed nonmarital
share.
As the trial court’s findings are supported by substantial evidence, I would
“Robert G. Lawson, The Kentucky Evidence Law Handbook 5 10.05 at 549 (3rd
Ed. 1993).
3%J. (“[KRS 403.190(3)] is a clear indication of legislative intent to shift to the
party against whom the presumption operates a full burden of proof -- the burden of
going forward with the evidence and the risk of nonpersuasion[].” ).
‘“Of course the claimant will first be required to satisfy the trial court of the
original ownership of nonmarital property; otherwise, there is no nonmarital property to
trace. See KRS 403.190(2)&(3).
35Fitch v. Burns, Ky., 782 S.W.2d 618, 622 (1989).
-12-
affirm the trial court’s judgment in all respects, including its assignment of nonmarital
property to the Appellee.
Finally, I would note that the majority opinion appears to remand the case to the
trial court only for the limited purpose of “reconsider[ing] the issue of whether the
claimed nonmarital share is sufficiently established.” Of course, if the trial court ignores
all of the hints in the majority opinion and again finds that Appellee sufficiently
established his claim, the trial court would have no reason to reconsider its division of
marital property. If, upon reexamination, however, the trial court finds that Appellee
failed to rebut the KRS 403.190(3) presumption that the $200,000.00 in question is
marital property, it would need to reconsider its previous division of marital property.36
Accordingly, at the very least, if the majority wishes to impose its findings of fact upon
the trial court, it should broaden the scope of its remand to allow the trial court to
properly divide the marital estate.
Lambert, C.J., joins this opinion, concurring in part and dissenting in part.
‘6& KRS 403.190( 1); Graham & Keller, supra note 16 at 5 15.1 (“KRS
403.190(l) requires a trial court to assign each spouse the nonmarital property
belonging to him or her. The court may divide marital property between the parties only
after that assignment.“); Id. at § 15.11 (“At best, Mrs. Brunson’s assertion that she
made a significant monetary contribution to the marriage would increase her share of
marital property.“).
-13-
1999-SC-1064-DG
APPELLANT
JUDITH H. TERWILLIGER
V.
ON REVIEW FROM THE COURT OF APPEALS
NOS. 98-CA-0032 AND 98-CA-0212
JEFFERSON CIRCUIT COURT NO. 93-FD-2892
APPELLEE
THOMAS E. TERWILLIGER
ORDER MODIFYING
On the Court’s own motion, the opinion in the above-styled action,
rendered January 17, 2002, is hereby modified by the substitution of a new first page of
the majority opinion by Justice Stumbo and a new first page of the concurring in part
and dissenting in part opinion by Justice Keller, attached hereto. Said modification’
does not affect the holding of the opinions.
ENTERED: February 11, 2002.
Chief Justice
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