Rueschenberg v. Rueschenberg
Annotate this Case
Download PDF
IN THE COURT OF APPEALS STATE OF ARIZONA DIVISION ONE JUBIE RUESCHENBERG, Petitioner/Appellee, v. SCOTT RUESCHENBERG, Respondent/Appellant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) 1 CA-CV 07-0300 DEPARTMENT B O P I N I O N FILED 5-13-08 Appeal from the Superior Court in Maricopa County Cause No. FC 2003-094565 The Honorable Michael O. Wilkinson, Judge AFFIRMED Warner Angle Hallam Jackson Formanek, PLC By Charles R. Hallam and Tracey Van Wickler Attorneys for Petitioner/Appellee Phoenix Law Office of Scott E. Boehm, PC By Scott E. Boehm Co-Counsel for Respondent/Appellant and Jeffrey G. Pollitt, PC By Jeffrey G. Pollitt Co-Counsel for Respondent/Appellant Phoenix Phoenix B A R K E R, Judge ¶1 Scott Rueschenberg ( Husband ) appeals from the trial court s award of $296,667 to Jubie Rueschenberg ( Wife ) as one- half of the community s share in the value of Husband s separate property. For the reasons that follow, we agree with the trial court and affirm. Facts and Procedural History Wife and Husband were married May 15, 1998. ¶2 Prior to and at the time of marriage, Husband owned a business called Desert Mountain Medical ( DMM ). DMM sells medical hardware, for the repair of human joints, to surgeons and hospitals. It is undisputed that DMM is Husband s separate property. The ¶3 parties resolved all issues regarding the dissolution of marriage through mediation except for the issue of any community interest in the increase in value of DMM over the life of the marriage. On December 14, 2005, the trial court appointed a special master at the request of the parties.1 On December 22, 2006, the special master filed a report with the trial court. The special master s report used the capitalization of ¶4 earnings method of valuation2 to find that DMM had a fair value 1 The parties actually requested an arbitrator, and the trial court order read Order Appointing Arbitrator. The court appears to have intended to appoint a special master, and subsequently referred to him as a special master. 2 One source defines capitalization of earnings as the [v]aluation of a going concern business on the basis that the operations will continue to yield constant and regular earnings. These earnings (called normalized earnings ) are multiplied by a capitalization rate (normally the reciprocal of the desired 2 of $163,166 at the commencement of the marriage. This value was based on the special master s finding that normalized earnings3 were $38,000 at the time the parties married, that the applicable capitalization rate was 25%, and that there was an additional $11,166 in a which added to the value. DMM was worth non-operating asset/shareholder loan Using the same method, it found that $1,440,000 (having $360,000) on October 31, 2003.4 normalized earnings of The report then awarded Husband a sole and separate property interest of $550,000. It arrived at this figure by giving what it considered to be a fair rate of return on the original investment of $163,166. The report then subtracted that $550,000 from the value at the dissolution of marriage, $1,440,000, and found that the community was responsible for two-thirds of the resulting increase (i.e. twothirds of $890,000), which amounts to $593,333. It then awarded Wife half of this amount, or $296,667. The report found that the community s labor was only ¶5 responsible for two-thirds of the increase in the value of the rate of return) to arrive at the value of the business. Business Dictionary, http://www.businessdictionary.com/ definition/capitalization-of-earnings-method.html (last visited April 16, 2008). 3 See n.2, supra, for a definition of normalized earnings. 4 The parties stipulated to use October 31, 2003 as the valuation date for DMM for divorce purposes. 3 company because external factors were responsible for one-third of the increase. company s Husband increase in had value presented was due evidence to an that increase the in manufacturer marketing and sales assistance, increased customer acceptance of the products, increased research and development by manufacturers, natural population growth in the market area, and other DMM sales personnel expanding the market. The ¶6 special master s report also found that the community had received virtually 100% of the net distributable earnings during the marriage, but did not include a finding as to what that amount was. Wife s expert believed the total amount of monies distributed to the community during marriage to be $2,875,000 $3,122,521. while There Husband s was no expert request, believed however, it by to be Husband to determine the amount of net distributable earnings (generally, income less salary and other expenses) generated by DMM during the marriage. Consequently, the report did not consider whether there was an amount of net distributable earnings that had been overpaid to the community and was due Husband as the owner of DMM or should be subtracted as an offset from the community s interest in the value of DMM. ¶7 The trial court incorporated the special findings verbatim into its decree of dissolution. 4 master s Husband filed a timely notice of appeal. We have jurisdiction pursuant to Arizona Revised Statutes ( A.R.S. ) § 12-2101(B) (2003). Discussion Husband makes several arguments on appeal: 1) that the ¶8 court erred in giving the community an interest in DMM s increased value (here, goodwill) when the community had already received the company s profits (net distributable earnings) generated during the course of the marriage, 2) that the trial court erred in awarding the community a further interest in DMM when a fair salary had already been paid to the community, 3) that the trial court abused its discretion in finding that twothirds of DMM s growth was due to community labor and efforts, and 4) that apportioning already the the received trial increase more than court in abused value its pro when rata its the share discretion in community had of the total increase in net profits and value. 1. Both Profits and Increase in Value Must Be Considered in Order to Effect an Equitable Apportionment. ¶9 Husband apportionment of argues both that profits community and separate property. Arizona and law increased prohibits value the between Specifically, Husband argues that Arizona statutes define all of the increased value of a separate property business as separate property and that Arizona courts have carved out a limited qualification to the statutory 5 scheme that may grant the community some interest in either profits or increase misunderstands the in value Arizona but not community both. property Husband scheme and mischaracterizes the Arizona case law addressing the issue. Arizona s statutory community property scheme provides ¶10 that the increase, rents, issues and profits of a spouse s real and personal property that is owned by that spouse before marriage is the separate property of that spouse. § 25-213(A) (2007). It also provides, however, A.R.S. that all property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is . . . [a]cquired by gift, devise or descent. A.R.S. § 25-211 (2007). ¶11 These provisions potentially conflict when a separate property business earns profits because of community labor. that the and/or increases in value For instance, § 25-213(A) provides increase . . . and profits of separate continue to be the separate property of that spouse. property On the other hand, § 25-211 provides that [a]ll property acquired during the marriage by husband or wife, with exceptions not applicable here, is the community property of the husband and wife. Thus, as to profits and increases from a separate business that are the product of community labor, the competing statutes can render potentially different results. 6 When it appears that two statutes conflict, whenever ¶12 possible, we adopt a construction that reconciles one with the other, giving force and meaning to all statutes involved. UNUM Life Ins. Co. of America v. Craig, 200 Ariz. 327, 333, ¶ 28, 26 P.3d 510, 516 (2001) (citing Lewis v. Ariz. Dep t of Econ. Sec., 186 Ariz. 610, 614, 925 P.2d 751, 755 (App. 1996)). Arizona courts have long agreed that the results of a spouse s labor are community property. Koelsch v. Koelsch, 148 Ariz. 176, 181, 713 P.2d 1234, 1239 (1986) ( [I]t is established law that . . . the fruits of labor expended during marriage are community property. . . . ) (citing Shaw v. Greer, 67 Ariz. 223, 225, 194 P.2d 430, regarding 431 (1948)). separate In property resolving profits and the specific increase in issue value, Arizona courts have looked to the nature, or source, of the profit from or increase of the separate property business. Cockrill v. Cockrill, 124 Ariz. 50, 53, 601 P.2d 1334, 1337 (1979); Rundle v. Winters, 38 Ariz. 239, 245, 298 P. 929, 931 (1931). The rule is that if the profits and/or increase result from the inherent qualities of the business, the profits and increase are separate property; if the profits and/or increase result from the individual toil and application of the spouse, they are community property. Rundle, 38 Ariz. at 245, 298 P. at 931. 7 As a further refinement to this rule, prior to the ¶13 Cockrill decision in 1979, Arizona followed what is known as the all or none rule. That rule provided that either all of the profits and all of the increase were separate property or all of the profits and all of the increase were community property depending on whether the profits and increase were primarily due to the toil of the community or primarily the result of the inherent nature of the separate property. Cockrill, 124 Ariz. at 53, 601 P.2d at 1337 (citing Porter v. Porter, 67 Ariz. 273, 195 P.2d 132 (1948)) (emphasis added); Anderson v. Anderson, 65 Ariz. 184, 187, 177 P.2d 227, 229 (1947) (stating that because the inherent nature of the [separate] business is such that the success is due to the management and requires the attention of the owner, all the profits of that business were community property ); In re Torrey's Estate, 54 Ariz. 369, 375-76, 95 P.2d 990, 993 (1939) ( [I]f profits come mainly from the property, . . . they belong to the owner of the property, but if profits come mainly from the efforts or skill of one or both [spouses], they belong to the community. ); Spector v. Spector, 23 Ariz. App. 131, 140-44, 531 P.2d 176, 185-86 (1975) (holding that all of the profits from a separate business were separate property even though the increase in value was almost all due to the increases in the value of Arizona real estate during the 8 period and making no effort to apportion between separate and community property) (emphasis added). ¶14 Cockrill did away with the all or none rule and instead instituted an apportionment rule that apportions to the community and to the separate property the profits or increase in separate property attributable to each. P.2d at 1338. The court explained 124 Ariz. at 54, 601 that the purpose of apportioning the profits or increase was to achieve substantial justice between the parties. Id. To do otherwise would either deprive the [separate] property owner of a reasonable return on the investment or [would] deprive the community of just compensation for its labor. Husband ¶15 points to many Id. of the pre-Cockrill cases, arguing that some discuss the granting of a community interest in the profits of a separate business,5 while others discuss the granting of a community interest in the increase in value, 6 5 Husband argues that the cases which grant only profits include Rundle v. Winters, 38 Ariz. 239, 298 P. 929 (1931); Lincoln Fire Insurance Co. v. Barnes, 53 Ariz. 264, 88 P.2d 533 (1939); In re Torrey s Estate, 54 Ariz. 369, 95 P.2d 990 (1939); Anderson v. Anderson, 65 Ariz. 184, 177 P.2d 227 (1947); and Lawson v. Ridgeway, 72 Ariz. 253, 233 P.2d 459 (1951). 6 Husband argues that the cases which grant only the increase in value include Nace v. Nace, 104 Ariz. 20, 448 P.2d 76 (1968); Everson v. Everson, 24 Ariz. App. 239, 537 P.2d 624 (1975); Nelson v. Nelson, 114 Ariz. 369, 560 P.2d 1276 (App. 1977); Percy v. Percy, 115 Ariz. 230, 564 P.2d 919 (App. 1977); and Baum v. Baum, 120 Ariz. 140, 584 P.2d 604 (App. 1978). 9 but none grant both. He then argues that Cockrill intended to allow the apportionment of either profits or increase in value, but not both. Husband points to the phrase profits, or increased value employed by the Cockrill court, id., and argues that the court declined to give the community an interest in both profits and increase in value, but rather just one of them. He argues that Cockrill tried to balance the underlying tension between § 25-213(A) (attributing increase in separate property to the separate property) and § 25-211 (providing that all property acquired during marriage is community property). In view of that balance, he argues, Cockrill permits an award to the community only for profits (net distributable earnings) or increase in value (here, goodwill), but not both. this interpretation of Cockrill. ¶16 Cockrill states in pertinent part: This Court has also become disenchanted with the all or none rule. To implement the all or none rule and determine the [p]rimary source of the profits, the portion of the profits that resulted from each source must be calculated. Once this has been done, it is only logical to apportion the profits, or increased value, accordingly. To do otherwise will either deprive the property owner of a reasonable return on the investment or will deprive the community of just compensation for its labor. We, therefore, also depart from the all or none rule and hold that profits, which 10 We reject result from a combination of separate and community labor, must be apportioned accordingly. Id. (emphasis added). holding in the It is true that the language of the last sentence apportioning profits. quoted above refers only to For a number of reasons, however, we do not view Cockrill as holding that either profits or increase in value may be apportioned but not both. First, Cockrill does not distinguish between profits ¶17 and increased value; to the contrary, it appears to use the terms interchangeably. The court first says that the portion of resulted the profits that from each source must be calculated and then immediately follows that with it is only logical to apportion accordingly. the profits, added). (emphasis Id. or increased By setting value, increased value off with commas, the court implies that increased value is a phrase that restates or modifies profits. Manual of restrictive Style . . ¶ . 5.49 , a (14th word, ed. phrase, 1993) or The Chicago ( Unless clause that it is is in apposition to a noun is usually set off by commas . . . . ). Apposition is defined as a grammatical construction in which a noun or pronoun is followed by another that explains it. Merriam-Webster Dictionary 50 (3d ed. 1974). The This interpretation is strengthened by the fact that the preceding sentence did not even mention increased value. 11 Second, ¶18 reinforces the language idea apportioned. For 114 Ariz. Nelson, that in both instance, 369, cases 560 prior profits this P.2d and court 1276 to increase stated (App. also Cockrill be Nelson in can v. that an 1977), increase in value of separate property is subject to the same test as profits from separate property. 114 Ariz. at 372, 560 P.2d at 1279 (citing Everson v. Everson, 24 Ariz. App. 239, 537 P.2d 624 (1975)). Third, and most importantly, it would be inconsistent ¶19 with the supreme court s mandate in Cockrill to achieve substantial justice for this court to hold that the community has an interest in either the profits (net earnings) or the increased value (treated in this case as goodwill) but not both. For instance, in a situation where the community labor was responsible both for the net earnings generated by a separate business and for the increase in goodwill of that separate business, allowing the community only an interest in one or the other would not achieve substantial justice. It would shortchange the community of either its fair share of the net earnings or its fair share of the goodwill. In addressing the approaches to the problem of apportionment, Cockrill endorsed the proposition that our courts have developed no precise criterion or fixed standard, but have endeavored to adopt a yardstick which is most appropriate 12 and equitable in a particular situation. entire purpose of 124 Ariz. at 54, 601 P.2d at 1338. rejecting implementing apportionment result. would It seem the was odd all to or achieve indeed if none a we rule more were The and equitable to construe Cockrill to require the exclusion from the apportionment process of an entire category of assets either net earnings or goodwill - when both the separate property itself and the labor of the community were jointly responsible for increasing them. Each category of property, separate and community, should receive its fair and equitable share. Therefore, we hold that when apportioning the increase ¶20 in value and/or profits from a separately held business, it is not error to apportion both profits (net earnings) and increase in value (whether that is goodwill or a measurable increase in value of some other asset) if the community labor was responsible for a portion of both and if such an apportionment will achieve substantial justice between the parties. Id. Rather, as we describe more fully below, we hold that the trial court must equitably apportion the combined total of the profits (net distributable earnings) and increase in value (whether goodwill or otherwise) of the separate business if the efforts of the community caused a portion substantial justice requires it. 13 of that increase and 2. A Finding of Necessarily Preclude and/or Profits. Husband ¶21 next Reasonable Compensation Does Not an Award Based on Increased Value argues that when the community has received a fair salary for the community s labor contributed to the separately held business, the Cockrill inquiry ends and no further apportionment is permitted. We disagree. Husband s argument is based upon the rule set forth in ¶22 Nace v. Nace, 6 Ariz. App. 348, 354, 432 P.2d 896, 902 (1967), vacated on other grounds in 104 Ariz. 20, 448 P.2d 76 (1968), and subsequent cases. In Nace, the husband had a separate property interest in the ownership of a chain of movie theaters. 6 Ariz. App. at 349, 432 P.2d at 897. The separate property increased in value during the marriage. Id. at 349-50, 432 P.2d at 897-98. The husband actively managed the business during the marriage. Id. The trial court determined that the separate property had increased in value both due to the inherent nature of the property and the husband s management skills. trial court awarded the husband the lion s share Id. of The the increase in the separate property business because it was due to the husband s efforts, as contrasted with the wife s, after the marriage. Id. at 354, 432 P.2d at 902. The court of appeals rejected this reasoning because the efforts of the husband on behalf of the community entitled to share. were efforts Id. 14 in which the wife was In ¶23 describing the all or none rule in place in Arizona, the Nace court stated that [i]n the absence of a clear showing that a fair salary for the husband s efforts has been set, Arizona rule. . . . to the more. ¶24 decisions Id. separate have followed an all or none The court reversed the allocation of value as property and awarded the wife substantially Id. at 355, 432 P.2d at 903. In Cockrill, the Arizona Supreme Court noted the rule from Nace. 124 Ariz. at 53, 601 P.2d at 1337. It stated that [t]his language seems to imply that if the community were paid a fair salary for its labor, the increase or profits from the separate property would remain separate. Only if such a salary had not been paid, or was not reasonable, would the all or none rule be applied. Id. The Cockrill court went on to describe this provision as an exception to the all or none rule and [in] effect, apportionment of the increased value is allowed so long as the parties have segregated the profits themselves by paying the community a salary. Cockrill, as explained above, Id. then rejected the all or none rule in favor of an apportionment rule, stating that profits [and/or increase], which result from a combination of separate property and community labor, must be apportioned accordingly. Id. at 54, 601 P.2d at 1338 (emphasis added). 15 Our ¶25 supreme court possible apportionment. then gave several methods of The first requires the court to Id. determine the reasonable value of the community s services and allocate that amount to the community, and treat the balance as separate property attributable to the inherent nature of the separate property. The second is to allocate to the Id. separate property a reasonable rate of return on the original capital investment. Any increase above this amount is community property. Id. The court went on to make explicitly clear that different circumstances[] requir[e] different method of apportionment. the application of a We, therefore, hold that the trial court is not bound by any one method, but may select whichever will achieve substantial justice between the parties. Id. (emphasis added). Cockrill thus rejected any requirement that the trial ¶26 court follow one method of apportionment over another. clear direction from Cockrill is that the The method of apportionment applied must achieve substantial justice between the parties. Id. how exception the Nace We reject the argument that by describing applied in the then-existing Cockrill was endorsing that exception in future cases. not difficult to envision a scenario in which a law, It is reasonable salary has been paid, but the community nevertheless has not been fairly compensated for the 16 increase in value (whether reflected effort. by trial goodwill or net profits) attributable to its We agree with the reasoning and illustration of the court in this case in rejecting the continued applicability of Nace in light of Cockrill: [Applying the rule from Nace] would be particularly egregious in a situation where an entity had substantial growth and less than one hundred percent (100%) of the [earnings attributable to the community] was distributed. If the testimony deduced that fair compensation was paid (for example based upon comparable industry standards), the sole and separate estate would be awarded all of the intangible growth and the undistributed portion of the earnings and compensation. This is far from the result that Cockrill envisions. Indeed [one of the current parties accountant s] Schedule 3 expands upon this point. In the case at bar, if DMM had hypothetically only distributed the $1,063,322 of his defined reasonable compensation, so that $2,059,199 remained within the entity, under Husband s analysis, reasonable compensation would have been paid, and no further division would occur. Husband would thusly be able to retain not only the $2,059,199 of undistributed earnings, he would be entitled to retain the $1,510,000 of intangible value that [the accountant] found. ¶27 reasonable The foregoing compensation illustration for services makes clear rendered that ended if the analysis, the party owning the separate property could retain all the value (profits and goodwill) built by the community labor simply by paying himself or herself a salary that was 17 comparable to industry standards, and accordingly fair. In that situation, a patently unjust result would arise from the trial court s inability apportionment. The to consider community, though another having method been of fairly compensated for its labor, would not receive any allocation for the increase in value (whether net profits or goodwill) which was directly tied to the community s effort. Thus to the extent that the method applied prior to Cockrill and described in Nace limits the trial court s discretion to choose whichever method of apportionment will achieve substantial justice between the parties, we follow our supreme court s decision in Cockrill, not this court s prior ruling in Nace. Husband also points us to Roden v. Roden, in which ¶28 this court (after Cockrill) stated that if the community is paid a fair return for its labor, the increase or profits from the separate property remain separate. Only if such return has not been paid, or was not reasonable, would the community have a claim to the growth in value of [the] separate property. 190 Ariz. 407, 411, 949 P.2d 67, 71 (App. 1997) (citing Nace, 104 Ariz. at 20, 448 P.2d at 76). Husband argues that Roden reaffirms Nace and supports his argument that the trial court need not engage in an overall apportionment of the total increase in value of separate property due to the community s 18 efforts if a reasonable salary has been paid the community. We disagree with Husband s arguments. We appreciate that, on its face, the quoted language ¶29 in Roden does apportionment support of the the proposition community s from interest in that Nace profits no and/or value is required so long as a reasonable salary has been paid to the community. in Roden. However, this principle was not relied upon The wife in that case argued that she was entitled to her share of a community interest in the increase in value of a separate business. than finding that 190 Ariz. at 410, 949 P.2d at 70. the community had been paid a Rather reasonable salary, and therefore was not entitled under Nace to a community interest in the increase in value of the business, the trial court determined that the increase in value of [the separate business], which resulted from community efforts, was offset by the amount of compensation community property that each party received during the marriage. (emphasis added). Id. at 411, 949 P.2d at 71 This court concluded that the trial court did not abuse its discretion in coming to that conclusion. Id. Although the this court set forth that Nace could preclude ability to receive an increase in value (if the community is reasonably compensated), neither the trial court nor this court relied on that rule. Id. at 410, 949 P.2d at 70. Rather, both the trial court and this court applied the underlying holding 19 from Cockrill; namely, that apportionment must be appropriate and equitable in a particular situation substantial justice between the parties. at 54, 601 P.2d at 1338. and achieve Cockrill, 124 Ariz. This took place as the trial court applied, and this court affirmed, an offset of the community s share in the increase in value of the separate property in light of the amount of compensation previously paid the community. Roden, 190 Ariz. at 411, 949 P.2d at 710. It is instructive to consider, particularly in light ¶30 of Roden and Nace, that a different analysis would apply in a typical business setting than one involving both separate and community property. For example, in a typical business, A (the business owner) hires B (the employee) to work for A s company. A is the sole owner of the company. reasonable salary. A agrees to pay B a Assume that over the course of five years A s business increases substantially in value and that 50% of the increase in value can be attributed to B s efforts. The law does not entitle B to 50% of any increase in value or profits because his contractual arrangement was salary, which had been paid and received. the profits and/or of the company s only 20 the fair To grant B a share of increased essentially make B an equity partner with A. not the contractual arrangement. for value would This, however, was Now, if we change the facts to reflect a community ¶31 property scenario, the result is different. Assume that all facts in the hypothetical are the same except that the business is A s separate property and when A hires B, they are married to each other and remain married during the relevant time period. The reason for the different result is the community nature of the property that results from the labor of B. In short, B s labor on behalf of the community makes the community a form of equity partner (to the extent of the community s toil) in A s sole and separate business. The Arizona Supreme Court put it this way: Where either spouse is engaged in a business whose capital is the separate property of such spouse, the profits of the business are either community or separate in accordance with whether they are the result of the individual toil and application of the spouse, or the inherent qualities of the business itself. Rundle, 38 Ariz. at 245, 298 P. at 931. Thus, the company s profits, and as set forth above we construe that to also include its increase in value, become a community asset to the extent they are the result of the individual toil and application of the spouse. Id. In essence, our community property laws transform the community into an equity partner with the sole and separate property-owning spouse to the extent the community s efforts have generated net earnings, increased the value, or 21 otherwise increased the net worth and/or market value of the company. Under our hypothetical, the community is apportioned 50% of the total increase (however denominated) of A s company, as that is the amount attributable to B s efforts. The community s share is not eliminated just because the laboring spouse has been paid a fair salary along the way.7 Thus, to the extent the language from Roden suggests ¶32 receipt of a fair salary deprives the community of an interest in value and/or profits in a separate business, otherwise due the community, it is contrary to Cockrill and we decline to follow it. 3. The Facts Support the Finding that Two-Thirds of DMM s Growth Was Attributable to the Community s Labor. Husband ¶33 argues that the trial court abused its discretion in finding that the community was responsible for two-thirds of DMM s growth. He argues that no evidence was presented that anything other than external factors contributed to DMM s growth after 1999. Husband misperceives the burden of proof. ¶34 It was not the responsibility of Wife to present evidence that DMM s growth 7 In the event A did more than simply own the separate property, a court tasked with determining the community s fair share would also have to determine the company s increase and profits attributable to A s toil during the marriage. Our hypothetical assumes that only B provided effort or contributed to the company s profits and/or increase in value. 22 was due to the community labor; rather, it was Husband s burden to show that it remained separate property. Cockrill, 124 Ariz. at 52, 601 P.2d at 1336 ( [W]hen the value of separate property is increased the burden is upon the spouse who contends that the increase is also separate property to prove that the increase is the result of the inherent value of the property itself and is not the product of the work effort of the community. ). There is a strong presumption that all earnings during coverture are community in nature that is overcome only by a showing of clear and convincing evidence to the contrary. Barr v. Petzhold, 77 Ariz. 399, 409, 273 P.2d 161, 167 (1954). Here, it was within the trial court s discretion to ¶35 start with the presumption that all of the growth in DMM was community property and then look to the evidence presented by Husband to see if he had managed to overcome that presumption. Husband did present evidence that DMM s growth was influenced by external factors, including an increase in manufacturer marketing and sales assistance, increased customer acceptance of the products, manufacturers, increased natural research population and growth in development market other DMM sales personnel expanding the market. area, by and However, Wife testified that she served as the manager of operations of DMM from 1999 until the couple separated. Wife s expert testified that the primary factor responsible for DMM s growth was the 23 work effort of the community. Because there was reasonable evidence supporting the trial court s finding that two-thirds of the growth in DMM was primarily due to community labor, there was no error.8 4. There was No Abuse of Discretion in Failing to Apply the Two-Thirds/One-Third Ratio to the Total Increase of DMM During the Marriage. Husband ¶36 argues that the trial court abused its discretion in apportioning the increased value of the company given the prior distribution of net distributable earnings to the community. Specifically, Husband argues that the trial court exceeded the bounds of reason by ignoring the fact that the community had received 100% of [DMM s] (very considerable) net distributable earnings, and by ruling that the community was also entitled to a share of DMM s increase in value. Brief at 25. Reply We agree with the general principle encapsulated 8 Wife also argues that Husband cannot object to the adequacy of the trial court s factual findings because he failed to object below. As set forth above, we construe the primary focus of Husband s argument to be as he argued in his Opening Brief, that [t]he Special Master simply had no basis in the evidence upon which to make its ruling. Opening Brief at 30 (emphasis in original). We have rejected this argument. Additionally, the trial court s order incorporating the special master s report states that each party shall have the right of direct appeal to the Arizona Court of Appeals . . . from the decision of the Superior Court Judge (adopting, modifying or rejecting the arbitrator s decision). Thus, any waiver issue as to the adequacy of the form of the findings is moot. 24 in Husband s argument but disagree that there has been an abuse of discretion on the facts here. The ¶37 that the trial marital court found community (and received neither party virtually distributable earnings during the marriage. 100% contests) of net If, as a result of its receipt of the funds, the community already had received more than its proportionate share of the total profits and increase in DMM, and the trial court used the reasonable rate of return method to award the community additional monies, that may violate the fundamental increase equitably. rule from Cockrill to apportion the However, no request was made of the trial court to determine the amount of the net distributable earnings paid to the community. Neither was there a request to determine that the same two-thirds/one-third ratio as to value (goodwill) applied to net earnings. In Rowe v. Rowe this court also dealt with the issue ¶38 of apportioning an increase in both profits and value for a separately owned business. 719-22 (App. 1987). ratio to community quantify 154 Ariz. 616, 618-21, 744 P.2d 717, The trial court concluded that a fair the contribution that contributions attributable to between the separate property itself was a three-fourths/one-fourth ratio. Id. at 620, 744 P.2d at 721. and overlapping In that case we approved the entire amount of the corporate stock in the sole and separate property 25 to be awarded to the sole and separate property owner. 619, 744 P.2d at 720. Id. at This resulted in no further award to the community with regard to the sole and separate property. Id. at 620, 744 P.2d at 721. The reason we found no error in this ruling the was distribution [b]ecause and pension community and had profit-plan received, through contributions, more than 75% of the sum of net distributable earnings and (assumed) goodwill. court s Id. Accordingly, there was no error in the trial conclusion that the community had been fairly compensated for all of its contributions to the growth of [a separate business]. Id. Here, the principle from Rowe teaches that if the two-thirds/one-third ratio allocating growth in DMM applies to both profits (net earnings) and value (here, goodwill) then it could be an abuse of discretion for either the community or the separate property to receive more than its proportionate share of the combined total.9 9 A hypothetical example may add clarity. Assume that a ratio of two-thirds/one-third was determined to apply to the share due the community and separate property, respectively, for its contribution to the growth of the business. Assume the amount of net earnings was $80 and increase in value was $20. The combined total of the increase is $100. The community would be entitled to $66.67, and the sole and separate property would be entitled to $33.33. If the community had already received $80 from net distributable earnings, it may not be entitled to any further amounts unless issues such as waiver, commingling, or other equitable considerations required otherwise. In fact, under this hypothetical, the sole and separate property owner may claim monies from the community if there are no other pertinent factors. 26 Husband did not make this argument below, and it is ¶39 questionable whether the argument is set forth in his appellate briefs.10 Giving Husband the benefit of the doubt, we address the argument but we reject it on the facts before us. To prevail on this argument, Husband would be required ¶40 to show at a minimum11 that the community received more than its pro rata share of the combined earnings and increase in goodwill. total of net distributable Equally, and conversely, he would have to show that he received less than his pro rata share of the earnings as separate property. As pointed out above, the trial court was never asked to determine, and did not determine, the amount of net distributable earnings (income less salary and other expenses) generated during marriage. Because of this, we are unable to determine the combined total of net distributable earnings and increase in value. Thus, there is no factual basis 10 Though Husband argues that it was an abuse of discretion to award a share of the increase in value after awarding 100% of the net distributable earnings, the primary arguments he makes to support this contention are (a) Cockrill permits receiving only an interest in profits or value, but not both and (b) having received a fair salary for services, the community is not entitled to any further interest in the separate business. As we discuss at length in sections one and two above, we have rejected both these arguments. 11 Additionally, as Wife s counsel pointed out at oral argument, because this argument was not advanced below, certain issues were not developed in the trial court. These issues include commingling, waiver, and whether a different ratio should be applied to net earnings as contrasted with increase in value. 27 on which to assert error as there is no total figure to which the two-thirds/one-third ratio can be applied to determine as the court did in Rowe whether the community had already received its proportionate share of the total and no further monies were owed. Thus, there is no error on these grounds.12 Conclusion For the foregoing reasons, we affirm. ¶41 __________________________________ DANIEL A. BARKER, Presiding Judge CONCURRING: ___________________________________ PATRICK IRVINE, Judge ___________________________________ DIANE M. JOHNSEN, Judge 12 Wife requests attorneys fees for the appeal under A.R.S. § 25-324, arguing that Husband s positions on appeal were unreasonable. We consider both parties to have taken reasonable positions in this appeal and decline to award Wife attorneys fees. 28
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
