Thomas Sanders v. Heidi Sanders

Annotate this Case




February 4, 2004



[DR 01-352-2]






Olly Neal, Judge

In this case, both parties have appealed from a divorce decree entered by the Boone County Circuit Court. Appellant Thomas Sanders asserts error in the trial court's division of income he earned from a commercial plumbing business that he started during the marriage with nonmarital funds. Appellee Heidi Sanders argues in her cross-appeal that the trial court erred in denying her request for attorney's fees and in determining the value of the business. We find no error in the trial court's decision and affirm it in all respects.

Factual and Procedural History

The parties were married in 1992, and two daughters were born to them. In 1997, appellant used a gift of $100,000 from his father to start T.J. Mechanical, Inc., a Subchapter S corporation, in which he is the sole shareholder. During the remainder of the marriage, appellant devoted all of his work time and effort toward this business. The parties separated in 2001. On April 4, 2002, the trial court found that any increase in value of the business, over the amount of $100,000, was marital property because the increase was directly attributable to appellant's "significant contributions of time, effort and skill." The trial court appointed the CPA firm of Baird, Kurtz, and Dobson of Springfield, Missouri, to complete a valuation of the business.

On November 8, 2002, the trial court granted a divorce to appellee on the basis of eighteen months' separation, reserving all other issues. Before trial, the parties settled all issues except the disposition of the property, and the major source of disagreement was the business's valuation and income. Angela Morelock, a certified public accountant and business valuator with the Baird firm, testified that the business was worth $29,000 and that she assigned it no goodwill. In contrast, appellee presented the testimony of Randy Atkins, a financial analyst, who testified that the business had a value of $240,000.

In a letter opinion, the trial court stated that the parties were not as wealthy as they might have thought and that the business was not worth $100,000. Regarding the disposition of the marital assets, the trial court stated: "The Court did not have all the information the Court would have liked therefore the Court was forced to make certain reasonable assumptions [in] arriving at certain figures."

In the order entered January 2, 2003, the trial court ordered the marital home to be sold and the proceeds or remaining debt to be divided equally, giving appellant the right to claim the mortgage interest on his 2003 taxes. The trial court also ordered a substantial amount of personal property (mostly household and camping items) to be sold at auction. To appellee, the trial court awarded personal property consisting of designer luggage, pots and pans, jewelry, silverware, ovenware, dishes, glasses, serving pieces, two pairs of Gucci sunglasses, art and paint supplies, some art prints, a blender, all books with a publication date prior to the marriage, and certain other decorative household items. The children were permitted to keep their stereos, mountain bikes, sleeping bags, and bedroom furniture.

Appellant was awarded all property in his current residence, a laptop computer, and the business, about which the trial court made the following findings:

T.J. Mechanical, Inc. is the real focus and thrust of the Court's hearing of November 20-21, 2002. The Court finds the testimony of Angela Morlock, C.P.A. CFE, ABV of B.K.D. to be very credible. The Court believes that her testimony benefited [sic] both Tom Sanders and Heidi Sanders a great deal and the parties have to realize that while the company generates a great deal of money its actual value is not that great - except for Tom Sanders. The 13th Amendment of the United States Constitution outlawed slavery and the Court cannot place a value on Tom Sanders' contribution. Instead, using methods that have been adopted and upheld by courts BKD arrived at a value of the business which is less than $100,000. The Court is not ignoring the testimony of Randy Atkins, a financial analysist [sic] who was called by the plaintiff who believes the value of the business should be $240,000 based on a five (5) year average of cash. That is an acceptable method of calculating the value of a business and Mr. Atkins was correct when he indicated that if he was selling a business he would use that method and if [sic] was buying the business he would use the method employed by BKD. The Court has to value this particular business as to what a willing buyer and a willing seller would give and the method employed by BKD is much more accurate. The Court therefore finds that T.J. Mechanical, Inc. is the sole property of Tom Sanders free and clear of any claim of Heidi Sanders. Likewise any notes or other financial obligations for which Heidi Sanders has signed as a personal guarantor shall be the sole responsibility of Tom Sanders and he shall hold her harmless.

As for the income appellant received from the business, the trial court stated:

The plaintiff argues that the defendant, Tom Sanders, was "raiding" the company and decreasing its value. To some extent that is true, but not to the extent that Ms. Sanders believes nor can the Court hold Tom Sanders in contempt. The testimony from the accountants is very clear that as an "S" corporation what Mr. Sanders spends on non-business related items is reported as income on his personal income tax return. Income from wages is marital property. Over the past two years, Mr. Sanders has or will receive roughly $410,586 in compensation. While the defense tried to point out that based on his salary he was grossly underpaid, the reality is that typically a person in his position would earn an income of $398,487 so Mr. Sanders is actually 3% above the industry average. It had always been reported in discussions with the Court and affidavit of financial means and other matters that Mr. Sanders earned between $60,000 and $70,000 a year. The great value of BKD to both the plaintiff and the defendant is that Angela Morlock clearly explained the time situation and explained why the company was worth what it was and gave the actual income of Tom Sanders. The earning power of the parties is unequal, so the Court in weighing the equities, and following Arkansas law, finds that the money earned by Tom Sanders from the separation of the parties through September 30, 2002 to be marital property and subject to division. The Court [sic] that based on the testimony that it is undisputed that Tom Sanders had an income of $250,996 in 2001 and $159,590 annualized for 2002.

The parties were together for roughly 40% of 2001 and rounding figures off the Court finds that $150,000 of Tom Sanders 2001 income is marital property subject todivision by this Court. The Court is mindful that Tom Sanders is in a high tax bracket and may very well have to pay social security taxes for both himself and the employer on some of this income. The Court arbitrarily determines he will pay roughly 40% in income tax and therefore the Court finds that there is $90,000 remaining that is marital property. To be fair the Court has to determine how much Heidi Sanders earned in 2001 and the Court tried to get that information from Ms. Sanders and she just flat out did not know the answer. Based on the types of employment she has had the Court determines that she has earned $8,000 in 2001. Half of that would be $4,000. The Court on September 10, 2001 also held a hearing in which the Court ordered Tom Sanders to pay $2,000 per month as support to Ms. Sanders which included making the mortgage payment on the residence which she occupied. There was a total of $8,000 paid in 2001 and so the Court determines that Heidi Sanders is entitled [to] $33,000 ($45,000 minus $4,000 minus $8,000) of Tom Sanders' income for 2001 as marital property.

For 2002 the Court heard testimony that the annualized income of Tom Sanders would be $159,590. The Court considers 75% of that to be marital property or a total of $120,000. Again applying 40% in income tax that indicates to the Court that $72,000 is marital property subject to division by this Court. Mr. Sanders made support payments to Ms. Sanders for ten (10) months in the amount of $2,000 per month and the Court believes Heidi Sanders could have earned $8,000 in 2002 and that leaves a total of $12,000 ($36,000 minus $20,000 minus $4,000) in marital property income for 2002. The Court therefore orders that Tom Sanders shall pay to Heidi Sanders the sum of $45,000 subject to the stipulations that the Court has set out below.

The trial court ordered the parties equally responsible for a $400 debt and the business valuator's fee and denied appellee's motion for attorney's fees.

The Direct Appeal

In his direct appeal, appellant argues that the trial court erred (1) in finding that his income from the business was marital property and (2) in calculating the income to be divided.

The Income from T.J. Mechanical

In his first point on appeal, appellant argues that, under Ark. Code Ann. § 9-12-315(b)(7) (Repl. 2002), the trial court erred in holding that the business's income from 2001 and 2002 was marital property, because it was started with a $100,000 gift from appellant's father. That statute provides:

(b) For the purpose of this section, "marital property" means all property acquired by either spouse subsequent to the marriage except:


(7) Income from property owned prior to the marriage or from property acquired by gift or by reason of the death of another, including, but not limited to, life insurance proceeds, payments made under a deferred compensation plan, or an individual retirement account, and property acquired by right of survivorship, by a trust distribution, by bequest or inheritance, or by a payable on death or a transfer on death arrangement, or in exchange therefor.

There is a presumption that all property acquired during the marriage is marital property. McKay v. McKay, 340 Ark. 171, 8 S.W.3d 525 (2000). Also, earnings acquired subsequent to marriage are classified as marital property. Box v. Box, 312 Ark. 550, 851 S.W.2d 437 (1993). According to appellant, this presumption does not apply in this case because he earned this income while working for the business, which he acquired by gift and which was nonmarital property. In response, appellee argues that, if this court agrees with appellant, "every self-employed person in Arkansas who marries after that business is up and going and who does not specifically include his wife in ownership of that business would be able to avoid dividing profits and would be able to avoid dividing his earnings in a divorce action." Appellee also contends that the statute was obviously intended to apply only to "passive" income that did not result from a spouse's investment of time, effort, and skill. Here, there is no dispute that appellant devoted significant amounts of time and effort to the business as its sole owner and as its employee.

An interpretation of Ark. Code Ann. § 9-12-315(b)(7), which was added to the property division statute in 1989, must begin with a review of the decisions that preceded its enactment. In Speer v. Speer, 18 Ark. App. 186, 712 S.W.2d 659 (1986), this court held that rental income from a husband's nonmarital farm land was marital property. In Wagoner v. Wagoner, 294 Ark. 82, 740 S.W.2d 915 (1987), the supreme court held that interest income that accumulated from the wife's nonmarital certificate of deposit accounts was marital property. In its decision, the court noted that the property division statute in effect at that time, Ark. Stat. Ann. § 34-1214(B)(1), did not expressly except from the marital property definition any income from, orincreased value of, a gift. In 1989, this changed when the General Assembly rewrote subsection (5) and added subsection (7) to Ark. Code Ann. § 9-12-315(b).

Common sense is a key element in the construction of statutes. Harold Ives Trucking Co. v. Pickens, ___ Ark. ___, ___ S.W.3d ___ (Dec. 18, 2003). Additionally, the basic rule of statutory construction is to give effect to the intent of the General Assembly. Id. We will construe a statute just as it reads, giving the words their ordinary and usually accepted meaning in common language. Id. As appellee points out, the sources of income that are listed as examples of property excepted by this subsection from the definition of marital property are mostly passive and are not generated through employment.

Certainly, the interpretation of the statute offered by appellant is unreasonable. It makes little sense to hold that a spouse's earnings that were generated by significant amounts of his time, skill, and effort during the marriage are not marital property if they are directed toward a business purchased with a gift of money. In Layman v. Layman, 292 Ark. 539, 731 S.W.2d 771 (1987), the supreme court noted that the increase in value of the nonmarital property was attributable in part to the time, effort, and skill of Mr. Layman over an extended period of time and stated: "Those endeavors belonging to the marital estate, it follows that Mrs. Layman is entitled to share in the fruits of such efforts." 292 Ark. at 543, 731 S.W.2d at 773. Layman v. Layman is still good law, notwithstanding the 1989 amendments to the statute. In Powell v. Powell, 82 Ark. App. 17, 110 S.W.3d 290 (2003), we cited Layman v. Layman as authority for our statement that there is a presumption that an increase in the value of nonmarital property resulting from the time, effort, and skill of a spouse is regarded as a marital asset.

Our decision in Davis v. Davis, 79 Ark. App. 178, 84 S.W.3d 447 (2002), is also relevant. In that case, we considered whether the increase in the value of a farm purchased prior to marriage was marital property and stated:

We believe that the trial judge clearly erred in finding that the farm is appellee's nonmarital property. It is true that Ark. Code Ann. §§ 9-12-315 (b)(1), (5), and (7) (Repl. 2002) provide that all property acquired prior to the marriage, its increase in value, and its income are not marital property. See Thomas v. Thomas, 68 Ark. App. 196, 4 S.W.3d 517 (1999). However, a spouse's earnings acquired subsequent to marriage are classified as marital property. Box v. Box, 312 Ark. 550, 851 S.W.2d 437 (1993).

Appellee's earnings from farming were, therefore, undisputably marital property. When dividing the parties' marital and nonmarital property, the trial court should consider that marital property was used to pay a debt that one spouse incurred prior to the marriage. Id.; Bagwell v. Bagwell, 282 Ark. 403, 668 S.W.2d 949 (1984); see also Williford v. Williford, 280 Ark. 71, 655 S.W.2d 398 (1983). In this case, all of the debt was paid from income that appellee produced while farming. In Layman v. Layman, 292 Ark. 539, 731 S.W.2d 771 (1987), the supreme court held that marital property does not include passive appreciation of nonmarital property but that active appreciation of such property as a result of a spouse's contribution of substantial time, effort, or skill over an extended period of time should be classified as marital property.

Layman clearly applies here. When the parties married, appellee owned nothing more than bare legal title to the farm; all of the equity was accumulated during the marriage. For over forty years, appellee devoted virtually all of his work efforts toward producing income from the farm, and through his labors, appellee satisfied the debt on the farm and increased its value. Additionally, appellant provided decades of services to the family in running the household and rearing the children. Until the mid-1970's, appellee had serious health problems that required appellant's care and attention. Appellant frequently had to take appellee to the doctor at night. Without a doubt, her efforts also contributed to the farm's appreciation in value. The court is required to consider the services of a homemaker in dividing the marital property. See Keathley v. Keathley, 76 Ark. App. 150, 61 S.W.3d 219 (2001); see also Ark. Code Ann. § 9-12-315(1)(A)(viii) (Repl. 2002).

The trial court's award of the farm to appellee must, therefore, be reversed and remanded. Although the burden was on appellee to establish the value of the farm prior to the parties' marriage, Aldridge v. Aldridge, [28 Ark. App. 175, 773 S.W.2d 103 (1989)], he failed to present any such evidence. Accordingly, the farm should be treated as marital property in the entirety and divided equally between the parties.

79 Ark. App. at 184-85, 84 S.W.3d at 450-51.

Accordingly, we affirm the trial court's finding that appellant's income was marital property.

The Calculation of Appellant's Income

In his second point, appellant argues that, if we affirm the finding that his income from the business was marital property, we should reverse the trial court's findings as to the amounts of his income for 2001 and 2002. These are findings of fact, which will not be reversed unless they are clearly erroneous or clearly against the preponderance of the evidence. Holcombe v. Marts, 352 Ark. 201, 99 S.W.3d 401 (2003). Appellant contends that the trial court erred in failing to deduct certain expenses from his income. He admits that the trial court expressly deducted the amounts he paid for income taxes and spousal and child support but contends that the trial court erred in failing to deduct his living expenses and the amounts he spent on the children during that time. He asserts that these errors resulted in an unequal distribution of property. Appellant cites no Arkansas decisions that support his argument but does, however, cite several decisions from courts in other states wherein it was held that the parties' income could only be distributed as a marital asset after taxes and living expenses were deducted.

Arkansas law, however, does not support appellant's position. We rejected a similar argument regarding marital debts in Williams v. Williams, 82 Ark. App. 294, 108 S.W.3d 629 (2003). In that case, we held that marital debts need not be subtracted from the marital assets to determine the net value of the total award made to each party:

Citing Missouri and Tennessee cases, appellant asserts that when a debt is secured, its value must ordinarily be offset against the value of the underlying asset. In essence, appellant argues that, because Ark. Code Ann. § 9-12-315 (Repl. 2002) mandates that marital property be divided equally unless the court finds that such a division is inequitable, it also requires that the division of debts be treated the same way. We do not agree. Section 9-12-315 does not apply to the division of marital debts; hence, in Arkansas, there is no presumption that an equal division of debts must occur. Ellis v. Ellis, 75 Ark. App. 173, 57 S.W.3d 220 (2001). In Ellis v. Ellis, the trial judge divided the marital property equally and ordered the husband to pay seventy percent of the marital debts. We affirmed the judge's unequal division of the marital debts due to the disparity between the parties' incomes and their relative abilities to pay the debts.

Although the division of marital debt is not addressed in Ark. Code Ann. § 9-12-315 (Repl. 2002), the chancellor has authority to consider the allocation of debt in a divorce case. Box v. Box, 312 Ark. 550, 851 S.W.2d 437 (1993); Anderson v. Anderson, [60 Ark. App. 221, 963 S.W.2d 604 (1998)]. In fact, we have stated that an allocation of the parties' debt is an essential item to be resolved in a divorce dispute, Ellis v. Ellis, supra, and that it must be considered in the context of the distribution of all of the parties' property. Boxley v. Boxley, 77 Ark. App. 136, 73 S.W.3d 19 (2002). A judge's decision to allocate debt to a particular party or in a particular manner is a question of fact and will not be reversed on appeal unless clearly erroneous. Ellis v. Ellis, supra; Anderson v. Anderson, supra. It is not error to determine that debts should be allocated between the parties in a divorce case on the basis of their relative ability to pay. Ellis v. Ellis, supra; Anderson v. Anderson, supra. Furthermore, the effect of an allocation of debt on a spouse's lifestyle is a valid consideration; the supreme court has affirmed unequal debt allocations where a husband was able to pay the debts from income without materially changing his style of life but the wife could not pay the debts from her income without disposing of assets to pay part of the debt. Richardson v. Richardson, 280 Ark. 498, 503, 659 S.W.2d 510, 513 (1983). When considering the allocation of debts, it is also appropriate that the judge consider who should equitably be required to pay them. Keathley v. Keathley, 76 Ark. App. 150, 61 S.W.3d 219 (2001).

82 Ark. App. at 308-09, 108 S.W.3d at 638-39.

Without citation to supporting authority, appellant also claims that the trial court erred in "redivid[ing]" his income because it had already awarded appellee temporary child support and alimony. We can find no legal basis for this argument and, therefore, reject it.

Appellant also asserts that there is no testimony in the record as to the total amount of Mrs. Sanders's income during the relevant time period and argues that the trial court erred in speculating as to that amount. It is true that the record contains very little information about Mrs. Sanders's income. At trial, she testified that she is an artist and had worked at several part-time jobs during the parties' separation. She gave no information about her income other than that she had earned approximately $1,500 from selling some paintings. Appellant, however, demonstrated no prejudice from the $8,000 annual income the trial court imputed to Mrs. Sanders; for all we know, she may have earned far less than that amount. Because we will not reverse unless error and prejudice have been shown, Lucas v. Grant, 61 Ark. App. 29, 962 S.W.2d 388 (1998), we reject this argument.

Appellant further argues that the trial court erred in determining that he would pay roughly forty percent of his gross income in taxes for 2001 and 2002. He points out that he testified that he spent $100,000 from the business's accumulation account on taxes for 2000 and 2001, and that his tax liability for 2002 was not yet determined as of the date of trial. As withMrs. Sanders's income, however, appellant has produced nothing in the abstract or addendum to demonstrate that the trial court's finding on this issue is clearly erroneous. There is no dispute that, in 2001 and 2002, appellant had a gross income of $410,586. We can find no evidence of the taxes that were due for those years in the abstract or addendum. However, the evidence that is in the record tends to support the trial court's finding. Without breaking the number down by year, appellant testified that he had paid $100,000 in taxes for 2000 and 2001. The business's CPA, Ramona Stein, testified that the amount was between $95,000 and $100,000. We hold that the trial court's finding is not clearly erroneous and, if error did occur, it was not shown to be prejudicial to appellant.

Appellee points out that the record contains evidence that appellant spent a significant amount of marital funds on his girlfriend during the pendency of this action. For example, appellant bought his girlfriend an $8,000 engagement ring; he bought her $1,200 earrings; he paid for three months of her lease, amounting to $3,600; he spent $480 for tattoos for her and himself; he gave her gift certificates amounting to $200; he spent $1,500 on plane tickets for both of them; and he paid $900 for a substitute for his girlfriend at her place of employment so she could go on vacation with him. Appellee also presented evidence that appellant had spent around $15,000 on two motorcycles and had paid a private investigator over $10,098 in connection with the divorce. This evidence is relevant as to the overall distribution of property. It has often been held that the parties to a divorce must often use marital funds during the pendency of the action and that the trial court has discretion to determine when it is necessary to use those funds, whether the amount used was reasonable, and whether an offset is appropriate. Williams v. Williams, supra.

We review division-of-property cases de novo. Copeland v. Copeland, ___ Ark. App. ___, ___ S.W.3d ___ (Dec. 17, 2003). The trial court's findings as to the circumstances warranting a property division will not be reversed unless they are clearly erroneous. Williams v. Williams, supra. Arkansas Code Annotated section 9-12-315(a)(1) (Repl. 2002) provides that all marital property shall be distributed one-half to each party unless the court finds such a division to be inequitable; in that event, the court shall make some other division that the court deems equitable, taking into consideration certain enumerated factors. The statute further states that, when property is divided pursuant to these considerations, the court must state in the order its reasons for not dividing the marital property equally. Williams v. Williams, supra.

Arkansas Code Annotated section 9-12-315, however, does not compel mathematical precision in the distribution of property; it simply requires that marital property be distributed equitably. Williams v. Williams, supra. The statute vests the trial court with a measure of flexibility and broad powers in apportioning property, nonmarital as well as marital, in order to achieve an equitable distribution; the critical inquiry is how the total assets are divided. Id. We will not substitute our judgment on appeal as to the exact interest each party should have but will only decide whether the order is clearly wrong. Boxley v. Boxley, 77 Ark. App. 136, 73 S.W.3d 19 (2002).

We hold that the trial court's equal division of the property was fair and equitable and affirm on this point.

The Cross-Appeal

Attorney's Fees

In her first point on her cross-appeal, appellee argues that the trial court abused its discretion in denying her request for attorney's fees. She contends that the trial court committed error by failing to consider the relative financial abilities of the parties in deciding whether to award her attorney's fees. It is true that, in determining whether to award attorney's fees, the trial court must consider the relative financial abilities of the parties. McKay v. McKay, supra. However, the trial court did consider this factor in its order:

The plaintiff has requested on a number of occasions before this Court attorneys fees in arguing the inequity of the incomes of the parties. However, based on the affidavit of financial means the plaintiff was receiving close to half of the disposable income each month as indicated by the salary of Tom Sanders. Only when BKD testified did it become apparent that there was a real disparity in income between the parties. A legal fee in a case such as this would be $15,000 to $20,000. Each of these parties are represented by two of the finest attorneys in Boone County, Arkansas and each did an admirable job for their clients. Because the Court divided the parties' marital assets equally and the parties have made either provisions for alimony as well as child support and the Court is going to find that each party will be responsible for their own legal fees.

Further, a trial court has considerable discretion in making this decision. McKay v. McKay, supra. Attorney's fees in divorce cases are not awarded as a matter of right but rest with the trial court's discretion; its decision will not be disturbed unless that discretion is abused. Williford v. Williford, 280 Ark. 71, 655 S.W.2d 398 (1983). Although appellee has little income, she received one-half of the marital estate. We find no abuse of the trial court's discretion and affirm on this point.

Valuation of the Business

In her second point on her cross-appeal, appellee argues that the trial court erred in assigning a value to the business. She contends that the trial court should have adopted the valuation offered by her witness, Randy Atkins, who testified that the business had a value of $240,000, based upon its income over the five years of its existence.

Arkansas Code Annotated section 9-12-315 (Repl. 2002) requires the use of the "fair market value" standard for valuing businesses in a marital property context. See Cole v. Cole, 82 Ark. App. 47, 110 S.W.3d 310 (2003). We will reverse the trial court's finding of the valuation of a business only if it is clearly erroneous. Williams v. Williams, supra. In valuing marital property, it is the province of the trier of fact to determine the credibility of witnesses and to resolve conflicting testimony. Crismon v. Crismon, 72 Ark. App. 116, 34 S.W.3d 763 (2000). Difficulty arises in valuing a business when goodwill is likely to depend on the continuing presence of a particular individual in that business. For goodwill to be marital property, it mustbe a business asset with value independent of the presence or reputation of a particular individual - an asset that may be sold, transferred, conveyed or pledged. Williams v. Williams, supra. Thus, whether goodwill is marital property is a fact question, and a party, to establish goodwill as marital property and divisible as such, must produce evidence establishing the salability or marketability of that goodwill as a business asset. Id. Ms. Morelock testified that the business had no goodwill value, and the trial court found that the business had little value without appellant.

We hold that the trial court did not commit reversible error when it chose to adopt Ms. Morelock's valuation. Ms. Morelock is a certified business valuator, while Mr. Atkins has no training or expertise in that field. Ms. Morelock testified at great length about her methodology, calculations, and adjustments in arriving at her valuation of the business, and she provided a detailed report. She thoroughly explained the two methods that she used to arrive at her valuation of $29,000 - the excess earnings method and the sales price to seller's discretionary cash flow method. She also testified that Mr. Atkins's adjustments and mathematical calculations were not correct.

Because the trial court's valuation of the business is not clearly erroneous, we affirm on this issue.


Pittman and Vaught, JJ., agree.