SUSAN DIANE STARKS ROSS v. BILLY WAYNE ROSS
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FOR IMMEDIATE NEWS RELEASE NEWS RELEASE # 71 FROM: CLERK OF SUPREME COURT OF LOUISIANA The Opinions handed down on the 21st day of October, 2003, are as follows: BY JOHNSON, J.: 2002-C -2984 SUSAN DIANE STARKS ROSS v. BILLY WAYNE ROSS (Parish of E. Baton Rouge) Accordingly, we reverse the lower courts' findings that Mr. Ross did not exert effort, skill or industry during the existence of the community property regime to produce the renewal commissions he received during the regime. We also reverse the lower courts' decision insofar as it places the burden of proof on Mrs. Starks to prove her entitlement to a share of renewal commissions during the marriage. REVERSED. VICTORY, J., concurs in the result. KNOLL, J., concurs in the result and assigns reasons. 10/21/03 SUPREME COURT OF LOUISIANA 02-C-2984 SUSAN DIANE STARKS ROSS versus BILLY WAYNE ROSS ON WRIT OF CERTIORARI TO THE COURT OF APPEAL FIRST CIRCUIT, FAMILY COURT FOR THE PARISH OF EAST BATON ROUGE JOHNSON, Justice We are called upon to determine whether renewal commissions received by the ex-husband during the marriage on insurance policies issued prior to the marriage were the ex-husband s separate property subject to his declarat io n of paraphernality. The trial court an d court of appeal found that the renewal commissions were separate property. We granted the ex-wife s writ of certiorari to d etermine the correctness o f t h e lo wer courts rulings. For the reasons that follow, we conclude that effort, skill, and industry were exerted to obtain the renewals, an d we reverse the lower courts rulings. FACTS AND PROCEDURAL HISTORY Mr. Billy Wayne Ross (Mr. Ross) and Ms. Susan Diane Starks Ro s s (M s. Starks)1 were married on May 29, 1992. Mr. Ross h as b een an independent insurance agent with State Farm since 1963 and operates the Billy Ross Agen cy in By order of t he divorce decree, M s. Starks resumed the use of her maiden name. Accordingly, we will refer to her as M s. Starks throughout this opinion. 1 1 Baton Rouge, Louisiana. Shortly after their marriage, Mr. Ross filed a d eclarat io n of paraphernality on July 10, 1992, wherein he declared: that in acco rd an ce with the provisions of Article 2339 of the Civil Code o f Lo uisiana, as amended by Act 709 of 1979, he reserves all fruits o f his paraphernal and separate property, wherever located and however administered, wh ether such fruits be natural and civil, including interest, dividends and rents, bonuses, royalties, delay rentals and shut-in payments arising from mineral leases on separate property, or from t h e result of labor, or otherwise, for his own separate use and benefit and that it is h is intention to administer such property separately and alone. In t h e declaration, Mr. Ross acknowledged that a regime of acquets and gain s otherwise existed between him and his wife. Ms. Starks filed for divorce on November 18, 1996 and a judgment of divorce was rendered on June 11, 1997. Ms. Starks subsequently filed a p etition to partition community property on November 6, 1997 in which s he asserted that Mr. Ross had used community fu n d s t o satisfy his separate debts. In his answer, Mr. Ross claimed t h at the income in question, which he received from his insurance business, was his separate property subject to the declaration of paraphernality. The trial court held a hearing on the single issue of whether the income derived from Mr. Ross insurance agency was h is s ep arat e property and thus subject to the declarat io n of paraphernality. Following the hearing, the trial court rendered judgment, finding that any and all renewal commissions for policies origin ally is sued before the date of marriage and receiv ed by Mr. Ross prior to or during the marriage are classified as his separate, paraphernal property. The court als o found that Ms. Starks bore the burden of proving any entitlemen t t o a p ro rata share of renewals received by Mr. Ross between the date of the marriage and the filing of the declaration of paraphernality. The court further concluded that any inco me generated 2 from new polices is s u ed during the marital regime, as well as any renewal commissions derived therefrom are deemed to be community property. In extensive written reasons for judgment, the trial court relied on jurispruden ce t hat has held that renewal commissions received after the termination of the community as a result of the s ale o f insurance policies during the existence of the community are co mmu n ity property. Futch v. Futch, 26-149 (La. App. 4 Cir. 9/23/940, 643 So.2d 364; Michel v. Michel, 484 So .2d 829 (La. App. 1 Cir. 1986); Boyle v. Boyle, 459 So.2d 735 (La. App. 4 Cir. 1984). The court t hen reasoned that income generated from policies issued prior to the establishment of the community were Mr. Ross separate property. Based on Mr. Ross declaration of paraphernality, th e t rial court held that the renewal commissions generated from those policies issued prior t o the establishment of the matrimonial regime were also Mr. Ro s s separate property. The court further found that the effort, skill and industry which ultimately produced the renewals was p erformed by Mr. Ross prior to the marriage which rendered them to be his separate property. A ddressing Ms. Starks argument that no thing exists from which fruits may be produced, the t rial court concluded that the thin g or asset from which civil fruits derived were the actual policies of insurance written by Mr. Ross. The court of appeal affirmed the trial court s ruling in a 2-1 decision. The majority concluded that Mr. Ross received renewal commis s io n s based on his contract wit h St ate Farm and renewals of pre-existing insurance policies, and since both the contract and the insurance policies are juridical acts, we find no erro r in t he trial co u rt s determination that the policies are things or assets from which civil fruits may be derived. Ross v. Ross, 01-2691 (La. App. 1 Cir. 11/8/02), 835 So.2d 817, 820. 3 The court of appeal disagreed with Ms. Starks contention that the renewal commissions should be deemed M r. Ro ss salary because the majority, if not all of his income, is attributable to the renewal commissions. The cou rt cited Kyson v. Kyson, 596 So.2d 1308 (La. App. 2 Cir. 1991) (on re g), writ denied, 599 So.2d 314 (La. 1992); Gautreau v. Gautreau, 96-1548 (La. App. 3 Cir. 6/18/97); and Paxton v. Braml et t e, 228 So .2d 161 (La. App. 3 Cir. 1969) writ denied, 255 La. 241, 230 So.2d 92 (La. 1970) for the propos it ion that in order to disprove that the renewal commissions received by Mr. Ross were not civil fruits, it was necessary for Ms. Starks to p ro v e t hat substantial labor was exerted by Mr. Ross to obtain the renewal commissions during the existence of the community property regime. The court of appeal further found that: [h]ad the trial court found that Mr. Ross h ad expended any significant effort skill or industry in effecting the renewal of policies pre-existing the community during the existence of the community propert y regime, then the commissions would constitute community prop ert y and be subject t o a claim of partition, to the extent or percentage community labor or effort skill an d in dustry was attributable to the renewal so effected. Ross v. Ross, 835 So.2d at 821 The appellate court further fo u n d that [a]lthough Mr. Ross may have listed the renewal commissions as in come on his tax statements and such income comprised a disproportio n at e s h are of his total income, the evidence shows that Mr. Ross received this income as a result of little or no effort, skill or industry exert ed o n his part during the community. Id. at 821. Judge Pettigrew dissented, stating: M r. Ross had no ownership interest in the insurance policies t h at renewed during the existence of the community of acquets and gains between him and his former wife. In my humble opinion, the commis s ions earned on these renewal premiums fit no description of 4 separate property or asset that produces n at ural or civil fruits as utilized in La. Civ. Code art. 2339. *** Premiums earned during the community of acquets and gains on renewal policies are nothing mo re than wages or compensation earned during the community of acquets and gains and are therefore community property. DISCUSSION Civil Fruits The only issue b efo re t h is court is whether the renewal commissions received by Mr. Ross during the community propert y reg ime on insurance policies written before the existence of the community are t h e result of labor, skill or industry, and are, thus, community property or whether, on the other hand, the ren ewal commissions are the civil fruit of some asset acquired by Mr. Ross prior to the existence of the community, such t h at t h ey are subject to his declaration of paraphernality. We are called upon to determine, in other wo rd s , wh et her the renewal policies are property from which Mr. Ross may derive such civil fruits. We begin our discussion with a historical b ackground of the concept of fruits in Lo u is ian a as well as the rights of spouses with regard to fruits under the Louisiana community property regime. Professor A. N. Yiannopoulos in his discussion of the notion of fruits and products in Louisiana and comparative law d escribes the basic principle of fruits and products as follows: Certain things are capable of producing other things, namely, corporeal objects or incorporeal economic advantages. In Louisiana and in France, the things that are p roduced by another thing without diminution o f it s substance are termed fruits. The fruit-producing thing is often termed a princi p a l t h ing. Things produced by another thing whose substance is thereby d iminished are termed products. (Emphasis by author) 5 Yiannopoulos, Property § 37, Louisiana Civil Law Treatise (4th ed. 2001). In a comparison with Roman law, Yiannopoulos notes that under classical Roman law, fruits were, generally, the products derived from a thing regardless of diminution of its economic value. Yiannopoulos, supra, at §38.2 Distinction was made between natural and civil fruits. Ordinarily, natural fruits were corporeal objects while civil fruits were values resulting from the ownership of a t h in g o r from the conduct of business. Id. Also und er Roman law, fruits followed the juridical situation of the principal thing in all cases. Th e o wn er o f a thing ordinarily acquired its fruits. It was only in exceptional cases that other persons- a lessee, fo r in s tance, or usufructuary, or a bona fide possessor, acquired them. Id. In discussing the French Code, Professor Yiannopoulos notes: Th e French Civil Code does not define the generic term fruits. Th e definition accepted by courts and writers is that fruits are things that are produced periodically from a principal thin g without diminution of its substan ce. (Citations omitted). Things produced by, or derived from, another t h in g whose substance is thereby diminished are not fruits but products (produits). Once separated from the principal thing, products are not reproduced. According to Yiannopoulos, the significance of the d istinction between fruits and products is that it provides the standard for the apportionment of eco n o mic advantag es between the owner of a thing and other persons entitled to its fruits. The owner is entitled to all products, whereas persons entitled to fruits o n ly receive revenues produ ced by a thing periodically without diminution of its substance. Yiannopoulos at §39. He further explains that under French law ordinarily, fruits as well as prod u ct s , follow the juridical situation of the principal thing. The owner of the principal thing acquires, upon separation, the ownership of fruits and p ro d u ct s Yiannopoulos refers to Weiss, Institutionen des romis-chen Privatrechts 135 (2d ed. 1949); but cf. Sohm-M itteis-Wenger, Institutionen 262 (17th ed. 1923). 2 6 as individual things. However, [i]n certain circumstances, principal t h ings and fruits are disassociated; t h eir ju ridical situation is not the same. In these circumstances, fruits do not follow the ownership of the principal thing, though products still do. Thus, when a usufruct is established, the fruits belong to the usufructuary, but products ordinarily belong to the naked owner. Id. (Emphasis added). In interpreting the correspo n d ing provisions of the Louisiana Civil Code of 1870 in this area, Yiannopoulos notes that Lou is iana frequently followed French d o ctrine and jurisprudence. The terminological distinction between fruits an d products, h o wever, was not at first accepted. As a result, a different conceptual apparatus had to be employ ed for the apportionment of economic advantages between the owner of a thing and other persons en t itled to fruits such as usufructuaries, possessors in good faith , o r as s pouses living under the regime of co mmu n ity property. However, Article 551 of the Louisiana Civil Code established a unitary notion of fruits for all purposes, and following the French doctrine, the 1979 legislation has adopted the distinction between fruits and products. 3 The Louisiana Code of 1870 established three categories of fruits, namely, natural fruits, fruits of industry, and civil fruits. La. C.C. art. 545 (1870). 4 3 See La. C.C. arts. 488, 551. 4 Fruits La. C.C. art. 545 (1870) provided: Natural fruits are such as are the spontaneous product of the earth; the product and increase of cattle are likewise natural fruits. The fruits, which result from industry bestowed on a piece of ground, are those which are obtained by cultivation. Civil fruits are rents of real property, the interest of money, and annuities. All other kinds of revenue or income derived from property by the operation of law or private agreement, are civil fruits. 7 o f industry differed from natural fruits in that they were the result of effo rt an d industry, whereas natural fruits were t he spontaneous product of the earth or of animals. Since the rules governing natural fruits and fruits of industry have always been the s ame, the two categories were combined in the 1976 codal revision into one. See. La. C.C. art 551 (Acts 1976, No. 103, § 1, eff. Jan . 1 1977). Louisiana Civil Law Treatise; Property; Yiannopoulos. Prior to the effective date of art icle 551, the jurisprudence, as well as doctrinal materials, indicated fruits was construed according to the context in wh ich t h e issue of classificat ion arose. Succession of Doll, 593 So.2d 1239, 1244, 1245 (La. 1992). Citing Gueno v. Medlenka, 238 La. 1081, 117 So.2d 817 (1960) (usufruct); Milling v. Collector of Revenu e, 220 La. 773, 57 So.2d 679 (1952) (taxation); Harang v. Bowie Lumber Co., 145 La. 96, 81 So. 769 (1919) (good faith possession); Elder v. Ellerbe, 135 La. 990, 66 So . 337 (1914) (good faith possession). Finally, a unitary notion of fruits ensued with the enactment of article 551. As it relates to the mode of acquisition of fruits, Yiannopoulos states: According to civilian conceptions, nonseparted fruits fo rm a part of the fruit-producing thing and belong to the owner o f t h at t hing by right of accession. Upon separation, natural fruits become individual things, and question arises as to how the o wn ership of these things are acquired. Owners, good faith possessors, and persons having real rights in fruitproducing things acquire ownership of natural fruits upon separation, wit h o u t the need of any act on their part. Persons having real rights acquire ownership o f n at ural fruits by virtue of an act of collection, namely by the taking of possession. Th e mode of acquisition of civil fruits involves distinct problems. According to traditional civilian ideas, ma i n t ained in modern codes, civil fruits accrue by virtue of an obligation; hence one entitled to civil fruits acquires a clai m fo r the collection of civil fruits rather than ownership thereof. Accordingly, the mo d e o f acquisition of civil fruits is ord i n arily a matter governed by the agreement of the parties and the law of obligations. (Emphasis added) 8 Yiannopoulos, supra, §41. With regard to the classification o f p roperty among married persons , the legal principles are found the Louisiana Civil Code. La. C.C. art. 2338 provides: The communit y p ro perty comprises: property acquired during the existence of the legal regime t h ro u g h the effort, skill, or industry of either spouse; property acquired with community things or with community and sep arat e things, unless classified as separate under Article 2341; property donated to the spouses jointly; natural and civil fruits of community property; damages awarded for loss or injury to a thing belonging to the community; and all o t h er p ro perty not classified by law as separate property. As was explain ed in 16 Spaht and L.W. Hargrave, Louisiana Civil Law Treatise, Matrimonial Regimes §3.3 at 48(1997): Wages are the premier community asset. It is wages paid in return for work d o n e d u ring the existence of the community that are included, regardless of when the payment is actually made. The property acquired, in th e lan guage of Louisiana Civil Code Article 2338, is a right to payment at some point fo r t h e wo rk d one. If payment is made during the community for work done b efo re its commencement, the money is separate. If the ch eck is cut after termination, but is for work done during the community, the funds are community. Property acquired by a spouse prior to the establishment of the community p ro perty regime is separate property. La. C.C. art. 2341. However, the natural an d civil fruits of separate property produced during the existence of the community property regime are community unless a spouse reserves them as his separate property in a declaration made by authentic act or an act under private signature duly acknowledged. La. C.C. art. 2339. The Code also p ro v id es that things in the possession of a spouse during the existence of a regime of acquets and gains are presu med t o b e co mmunity. La. C.C. art . 2340. However, either spouse may rebut this presumption. La. C.C. art . 2340. The spouse seeking to rebut the presumption bears the burden o f proving that the 9 property is separate in nature. Knighten v. Knighten, 00-1662 (La. App. 1 Cir. 9/28/01), 809 So.2d 324, writ denied, 01-2846 (La. 1/4/02), 805 So.2d 207. The current definition of fruits is found in La. C.C. art. 551, which p ro v id es: Fruits are things that are produ ced by or derived from another thing without diminution of its substance. There are two kinds of fruits; natural and civil fruits. Natural fruits are products of the earth or of animal. Civ il fru it s are revenues derived from a thing by operation of law or by reason of juridical act, such as rentals, interest , and certain corporate distributions. Is there a fruit producing thing or asset? Wit h t his background, we will now address Ms. Starks first argument that the lo wer courts erred in finding that the insurance policies between State Farm an d t h e individual policy holders constitutes things o r assets from which fruits may be produced. Ms. Starks argues that neither the insurance po licies written by Mr. Ross prior to the marriag e nor his agency contract with State Farm Insurance Company (the agency contract) constitute things or assets in which Mr. Ross had an ownership interest and from which fruits may be derived. Without any ownership interest, Ms. Starks argues, the agency contract is no differen t in fu n ction than a medical license, a law license, or an exclusive franchise agreement. She maintains that like these examples, the agency contract has no inherent valu e, cannot be inherited by children or trans ferred for value to a third person, and returns nothing on the investment required to acquire it. Ms. Starks further maintains that the individual insurance policies sold to the customers prior to the marriage did not create p roperty because Mr. Ross had no legal interest in those policies. Only the policyholders or State Farm could enforce, 10 cancel, renew, modify, or avail themselves of the provisions of those policies . Mr. Ross could not transfer o r assign the policies themselves, and his ability to collect premiums from the renewal of the policies is conditioned upon his p o s session of a valid Louisiana insurance licens e, t h e continuation of the State Farm Agency Contract, the decision of the policyholder to ren ew t h e policy, and the payment of the premiums . Th u s , according to Ms. Starks, the renewal commissions could not have been classified as fruits. Mr. Ross counters that the lower courts correctly d et ermined that the insurance policies entered into between t h e policy holders and State Farm were things in themselves. He argues that although the policies themselves did not create property rights per se, they were th in g s t h emselves which produced revenue by juridical act (the state Farm Agency contract with Mr. Ross). Mr. Ross contends that the renewals flo win g from the things in question (the insurance policies) produced civ il fruits (renewal commissions). As the policies were sold prior to the marriage, Mr. Ross argues that the lower courts correctly co n cluded that the civil fruits inured to his separate estate and could be reserved under article 2339. After careful review of the law, we must agree wit h t h e court of appeal s finding that the individual policies of in s u rance are juridical acts from which civil fruits may be derived. As stated, the definition of civil fru it s contained in La. C.C. art. 551 is revenues derived from a thing by operation of law or by reason of juridical act. 5 (Emphasis ad d ed ). Examples given of civil fruits include rent, In Section (B) of the 2000 Revision Comments to La. C.C. art 395, a juridical act is defined as a lawful volitional act intended to have legal consequences. It may be a unilateral act, such as an affidavit, or a bilateral act, such as a contract. It may be onerous or gratuitous. See Civil Code Article 3471 (Rev.1982), Comment (c) (citing 1 A.N. Yiannopoulos, Louisiana Civil Law System Coursebook Section 77 (1977)); 1 Planiol & Ripert, Treatise on the Civil Law, pt. 1, no. 265, at 187 (La.St.L.Inst.trans., 12th ed.1939). 5 11 interest and some corporate distributions. To qualify as a fruit, a thing must first be produced by or derived from an o t h er t h ing. La. C.C. art. 551. Thus, the examples of civil fruits provided in the code must necessarily b e d eriv ed from a thing or asset, i.e. rental property, money, or some corporate investment. We reject Ms. Starks argument that not only must there be a thing, t h ere must be an ownership interest in the thing in order to claim ownership of the civ il fruits. There is n o dispute that Mr. Ross has no ownership interest in the insurance policies per se as he has no direct, immediate or exclusive authority over t hese contracts. Further, he cannot transfer, enjoy, or dispose of these contracts. However, the record indicat es that Mr. Ross received commissions based on his agency contract with St at e Farm coupled with the securing of the individual insurance policies. By virtue of these juridical acts, Mr. Ross gained the right to collect or a claim to the insurance commissions on these policies. As long as these same policies of insurance are renewed, M r. Ro s s h as the same right or claim to the commissions. Thus, under the defin it ion of civil fruits contained in La. C.C. art . 551, Mr. Ross received revenue (renewal commission) by reason of juridical act s (the insurance policies). As explained above, fruits do not always follow the ownership of the principal thing, as is the cas e wit h products. As stated by Yiann o p oulos, the mode of acquisition of civil fruits is ordinarily a matter governed by the agreement of the parties and the law of obligations. Fruits or Earnings? Hav in g d ecided that the insurance policies are things from which civil fruits may be derived, we must now determine wh et h er t he lower courts erred in finding 12 th at the renewal commissions were in fact civil fruits of Mr. Ross separate property, and no t t h e result of Mr. Ross effort, skill or industry during the existence of the community property regime. As evidenced in the ins tant case, our courts have experienced some difficulty in determining whether a spouse s property should be classified as earnings or fruits. Spaht and Hargrave explained: From the earliest times, the most important legislat iv e p olicy underpinning the Lo uisiana community property regime has been that spouses share equally the produce of the reciprocal labor and industry of both husband and wife. No matter how married cou p les o rg anize their lives- one earning income, the other managing the home; both working for wag es ; neither earning wages and both producing things; or whatever- the basic rule is that they share equally in whatever each produces and accumulat es . Historically, this policy protected the wife who was not a wage earn er by giving her a share in the husband s accumulations of income. In more modern times, the policy fosters equality as the household with two working spouses becomes more common. Spaht and Hargrav e, Louisiana Civ. Law Treatise, Matrimonial Regimes, § 3.2 at p. 47 (1997). In the instant case, if the renewal commissions are the result of Mr. Ross effo rt , skill or industry during the existence of the community property regime, t h e renewal commissions, or at least a portion thereof, are community property. This is in keeping with the basic notion that spouses should share equally the produce of the reciprocal labor and industry of both husband an d wife. Spaht and Hargrave, Matrimonial Regimes, supra § 3.2 at p. 47. Spaht and Hargrave also discussed the issue of fruits vs. earnings in their treatise: Fruits may be separate property if the app ro p riat e declaration is filed; otherwise, they are community. [footnote omitted]. Property acquired by the effort, s kill or industry of a spouse is community, and there is no mechanism pro v id ed for making it separate. [footnote omitted]. In the simplest case, produ ction of the fruits would not involve labor or 13 industry of a spouse- the typical passive investment. Ho wever, it is quite common for many investments to combine one spouse s separate capital or property with community labor to produce fruits. Spaht and Hargrave, supra §3.8 at p. 64. The authors then suggest that: [t]o the extent that labor is producing some benefit, the co mmunity ought to s hare in the profit of that labor. If it is combined with separate capital or other separate property, equity wou ld suggest a proportional div is ion of the profits between the community and separate estates of the s p o u s es . If such a pro rata division is not adopted, it would allow a spouse with separate property to act in bad fait h and deprive the community of the revenues by putting all one s efforts into production of fruits from the separate asset. Id. Other authors and commentators have suggested the equitable solution of a pro rata div ision of the property when labor is combined with capital investment to produce fruits.6 Our courts have also adopted this notion. On original hearing in Kyson v. Kyson, supra, the second circuit court of appeal found that while money received by the husband, Mr. Kyson, qualified as rental revenue, the rental pay ments were the result of a substantial amount of time spent by Mr. Kyson on managing the rental property. The court stated: [E]ven if Mr. Kyson had not participated in the rental management he would have received some rentals as passive inves t men t . We find this to be a case in which separat e capital is combined with community labor to produce fruits. Thus, a determination must be made as to the amount of labor attributed to the investment. An appropriate analysis is to examine the relative co n t rib u tions of labor and capital to the funds involved and a proration of the funds according to these contributions. Because the court was unable to determine from the reco rd before it the value of Mr. Kyson s labor in order that the required proration of funds could be made, the court remanded the mat t er t o the trial court for this determination. On rehearing, the See Yiannopoulos, Property; M orrow, M atrimonial Property law in Louisiana 34 Tul L. Rev. 3; L Enfant, Classification of Property, 25 La.L.Rev. 95. 6 14 court in Kyson, noting that the trial court made no factual finding in this reg ard, concluded that it was un ab le t o discern from the record sufficient quantification of Mr. Kyson s time and labor associated with the disputed rental inco me from which it co u ld d raw any meaningful conclusion. The court, therefore, reversed its original decision on the basis that the facts d id n o t s upport its initial conclusion. Although rev ersed on other grounds, the case remains as authority for prorating income that results both from a spouse s labor and from a return on a separat e property investment. In an earlier case, Paxton v. Bramlette, supra, the court was faced with a dispute over whether corporate distributions to the wife were co mmu n ity salary or separate dividends. The co u rt concluded that the funds were community earnings since it found the wife contributed substantial s erv ices to two corporations in which she had controlling interests. The wife owned real estate and received rents from those properties that the court charact erized as fruits of her paraphernal property. She later transferred the properties to a newly formed realty corporation. She was paid a salary by the co rp o rat io n before and after she filed an affidavit reserving the fruits of her separate property. The court, fin d in g t h at the wife performed most of the man ag erial duties in operating the corporation, including collecting rents, depositing them, and handling maintenance and repairs, held that the payments after the filing were community and were not fruits of sep arat e property. The wife also owned as separate property 82% of the stock in a corporation that operated furniture sto res. She went to the store daily and participated in important decisions, none of which were made without her approval. The court quoted appro v ingly from law review writers suggesting that the basic analysis in such a case is to examine the relat iv e contributions of labor and capital to the funds involved; if 15 the revenue was the result of substantial capital, it would be a fruit ; if it represented substantial labor wit h little capital, it would be earnings. The court then concluded that her labor was substantial and thus the payments were community earnings. The court in Gautreau v. Gautreau, supra, als o fo llowed this approach and found that to the extent the income derived by t h e wife from her separate property was paid to her because of her effort, skill or industry and was not simp ly p assive income accruing as the result of corporate distributions or the increase in value of the corporation, the income was community property. Gautreau, 96-1548 at 12,13, 697 So.2d at 1349. Although the is s u e is res nova in this Court, the difficulty in determining whether rev enue is earnings or fruit has been considered in the context of renewal commissions by our colleagues on t h e co u rts of appeal. In Michel v. Michel, supra, the husband received commissions on life insurance policies he sold as well as Factor 1 commissions based on the performance of salesmen he recru ited and trained. The husband s work in recruit in g an d training the sales staff was performed during the existence of the communit y , h o wev er, the sales by the latter and the payments to him came after termination of the communit y . The first circuit court of appeal held that the wife was entitled to share in her husband s insu ran ce sales commissions on the policy renewals received by her husband after termination, since all of the sums involved related to commu n ity effort. The court stated, while it is true that the spade work had b een done when the original sale had been made, some service work had to be performed and in addition there was no certainty that the policies would b e ren ewed. Michel, 484 So.2d at 835. Since the revenue resulted from labor during and after the community, it was to be divided proport io n ally. Alt h o u g h the court admitted that the amount attributed to post-community work was 16 speculative, the court of appeal affirmed the trial court s approximation of this interest in giving one-half to t h e husband s separate estate and one-half to the community.7 A different approach was undertaken by the third circuit in Williams v. Williams, 590 So.2d 649 (La. App. 3 Cir. 1991). In that case, the court concluded that an ex-husband s renewal commissions attributed to insurance policies sold during the community but paid after t ermination were not to be shared with his exwife. Th e court suggested that even if the renewal premiums were attributed to work during and after the community , t h e v alue to the community was speculative in nature. Thus, it found that the wife s interest was so speculative that it had no value at all. The court in Futch v. Futch, 26-149 (La. App. 2 Cir. 9/23/94), 643 So.2d 364, expressly disagreed with the holding in Williams and followed the rationale in Michel, supra . Th e court in Futch stated, although it may be impossible to perfectly divide renewal commissions generated by insurance policies written during the marriag e, we disagree with Wil liams, supra, and conclude that these renewal commissions are community property subject to partition. Futch, 643 So.2d at 367. The court further found that [e]quity requires a division in which Mr. Fu t ch s separate labor and costs to keep the policies in effect are considered in determining the community s share. Id. at 369. Finding the record lacked ev id ence needed to make this determination, the court remanded the matter to the trial co u rt for the taking of such evidence. The court of appeal further found t h at t h e b u rden would be on the See also Boyle vs. Boyle, 459 So.2d 735 (La. App. 4 Cir. 1984), writ denied, 462 So.2d 651 (1985) relied on by the Michel court, wherein, the fourth circuit court of appeal awarded the wife one-half of the renewal commissions on policies written before termination of the community. 7 17 husband t o es t ab lish his entitlement to more than one-half of the renewal commissions. For many of the p o licies, no significant servicing may be required; however, for the polices that generate renewal commissions based on Mr. Futch s post-terminatio n effo rts or achievement, he, not the former community, is entitled to the fruits of this enhancement. Id. Spaht and Hargrave have opined that the [e]quitable considerations as well as basic doctrinal principles support the Michel-Bo yl e-Futch approach, even if the division is approximate. Matrimonial Regimes, Louisiana Civil Law Treatise, § 3.4 at 58 (1997). In t h e cas e su b judice, Ms. Starks argues that this case does not involve the return on some separate property asset, but rather the income at issue is en t irely due to the sales efforts of Mr. Ross. She main t ain s t hat the renewal commissions were not passive income, but were the res u lt of labor expended during the existence of the community. Ms. Starks argues that under the test enunciated in Paxton, supra, and Gautreau, supra, it is clear that the revenu es at issue are community property because Mr. Ross had minimum capital investment in his insurance agency, but contrib u ted substantial labor, which produced income during the community regime. She maintains t h at it was Mr. Ross sales efforts, his personality, his knowledge of his customers and their insuran ce n eed s , and his ability to preserve the right to sell insurance policies b y meet ing his contractual and legal requirements to do so that created the revenues at issue. Thus, she argues, the only significant investment in the insurance agency was Mr. Ross hims elf. human labor and not economic capital. In other words, the investment was Ms. Starks further contends that all of the reported decisions by Louisiana courts which have considered renewal commissions 18 acknowledge the rule that some effort is expended by insurance agents to generat e renewal commissions. To the contrary, Mr. Ross argues that the record shows that he did not expend effo rt , s kill or industry during the marriage as it relates to receiving renewals from policies sold some 30 years prior. He con t en ds that he expended no labor during the marriage which was in any way attributable to renewals received during the marital regime. Mr. Ross furt h er main t ains that the balancing test required in determining the proper characterization of renewal assets was u ndertaken by the trial court in this mat t er, which correctly resulted in the court s judgment that Mr. Ross expended little or no effort during the marriage for purposes of receiving these renewals. We firs t n o te, as did the court of appeal, that a trial court s findings regarding the nature of th e property as community or separate is a factual determination subject to manifest error rev iew. Bi o n do v. Biondo, 99-0890, pp. 4-5 (La. App. 1 Cir. 7/31/00), 769 So.2d 94, 99. The trial court in this case did in fact make a factual determination as to the classification of the renewal premiums in this case. The court noted that wit h t h e exception of the Williams case, supra, Louisiana jurisprudence has held that renewal commissions received after the t ermin ation of the community as a res u lt o f t he sale of policies (effort, skill or industry) during the existence of the commu n it y are community. The trial court then reasoned that it follows that the sale of insurance polices (effort, s kill or industry) before the existence of the community were separate property. In determining whether any effort, s kill o r industry was expended during the community, the trial court reviewed the trial testimony of Mr. Ross in this regard. The court noted Mr. Ross testimony that: 19 [w]hen he began his business, Billy Ross Insurance Agency, he called peo ple all day everyday; occasionally went door-to-door; and attempted to gain a listening ear in an effort to generate business. Ho wever, by 1992, when he married Mrs. Ross, his business had grown to the level that he was no longer required to pros p ect . He stated that the nature of effort, labor, skill and industry put in to the business since 1992 consists of training employees and evaluating office products. He stated t h at during the marriage he went to the office three to five days a week for approximately three to eight hours each day. He testified that it has been years since he personally has co mp leted a new application for insurance. However, h e has employees who may have done so. Mr. Ross testified that the majority of the money generated by his b u siness is from renewals of policies written prior to the marriage. He further stated that he cannot t h in k o f a single thing he did to induce peop le to renew their policies, nor does he know what he can do to induce people to renew them. Trial court judgment, p.3. The trial court went on to conclude that the effort, s kill an d industry which u lt imately produced the renewals received during the existence of the commu n it y were performed prior to t he marriage which renders them to be separate property. However, the court did recognize that despite Mr. Ross denial that he put forth any effort to generate renewals that were received during the marriage, some serv icing may have been required. Thus, the trial court found Ms. Starks would bear the burden at trial to quantify Mr. Ross efforts, during t h e min ute time frame between the date of marriage and the filing of the declaration, to prove the amou n t of effort Mr. Ross put forth toward the renewals. The court o f ap p eal affirmed the trial court s conclusion, finding that in order to disprove that t h e renewal commissions received by Mr. Ross were not civil fruits, it was necessary to prove that substantial labor was exerted by Mr. Ro s s to obtain the renewal commissions during the existence of the community pro p ert y regime. Ross, 835 So.2d at 821. The court of appeal concluded, b as ed o n it s own review of 20 the record, that the evidence supports the trial court s determination that M r. Ross had not expended any s ignificant effort, skill or industry in effecting the renewal of policies pre-existing the community during the existence of th e co mmunity property regime. W e find that the lower courts erred in assigning the burden of proof an d in finding that little or no effort was exerted to generate the renewal co mmis s io ns. The evidence in the record is to the contrary . Because the renewal commissions were receiv ed during the existence of the community, the burden was upon Mr. Ross to prove that they were not community property. Knighten v. Knighten, supra. Despite Mr. Ross assertions that no effort was required to serv ice customers and maintain his book of business, his deposition t estimony reveals that he indeed exerted substantial effort, skill and industry to insure the maintenance of his existing business and to satisfy existing policyholders. According t o M r. Ross, he spent three to five days per week, and an av erage of five to ten hours per day working at his insurance agency. The parties agree that Mr. Ros s certainly did not spend this time generating new b u s in ess. In fact, new business constituted only 6-7% of the business income. The majorit y of income from the Billy Ross Insurance Agency came from renewal of policies.8 Despite Mr. Ross assertion that he did n o t hing, and could do nothing, to prod u ce the renewals, the record reveals that he did in fact provide substantial services to existin g policyholders. In his deposition, Mr. Ross testified that he entertained existing policyholders by way of receiving and ret u rn in g phone calls; answering questions regarding, among other things, accident reports, claims, and As a result of M r. Ross effort, the agency had sales of $199,685 in 1992, $218,767 in 1993, $207,147 in 1994 and $261,288 in 1995. 93% to 94% was renewal commissions. 8 21 general insurance matters. He sent Christmas cards and birthday cards. Fu rt h er, the business records show that mo ney was allocated to advertising, newsletters, postage and entertaining clients. Mr. Ross maximized his income by servicing and entertaining exis t in g p o licyholders. We can only conclude that had the customers received no services, shmoozing, if you will, the agency income wo u ld h av e dropped significantly. In his testimo n y, Mr. Ross describes his work as office management and training employees. The fact that Mr. Ross role at some p o in t ch anged from direct sales to a superviso ry role, does not change this court s decision. The employees were mandataries or agents, acting on behalf o f t h e agency servicing old clients and prospecting for new clients. Any servicing by employees equates to servicing by Mr. Ross himself. Mr. Ross employees were h ired and trained by the Billy Ross Agency and were compensated by the agency, not State Farm.9 State Farm even recognizes that its agents perform service on existing accounts. In addition to other forms of compensation, the co mp an y p ays its agents service comp en s ation. The term is defined in the State Farm Agent s Agreements as follows: SERVICE COMPENSATION. For services rendered by you in an y month while this Agreement is in force, in assisting policyholders, cooperating with adjusters in reportin g an d handling claims, and cooperating with and promoting the interests of the Co mpany, you shall be paid for such month and amount equal to ... La. C.C. art. 2989 defines mandate as a contract by which a person, the principal, confers authority on another person, the mandatary, to transact one or more affairs for the principal. An agent is one who acts for or in place of another by authority from the latter. Veneble v. U.S. Fire Ins. Co., 02-505 (La. App. 3 Cir. 10/30/02), 829 So.2d 1179 citing Oliver v. Central Bank, 26,932 (La. App. 2 Cir. 5/10/95); 658 So.2d 1316, 1321 writ denied 95-1469 (La. 9/22/95); 660 So.2d 477. The t erms mandatary and agent are sometimes used synonymously. Cases have held that a mandatary or agent is one who acts in place of another by authority from him. Baker v. Purselley, 411 So.2d 553 (La.App. 1 Cir. 1982). 9 22 We find it is in co n ceivable that Mr. Ross would spend such a significant amount of time working at his office, pro d ucing substantial income mostly attributable to renewal commissions, and then assert t h at h e d id not exert any effort, skill or industry t o ward producing the renewal commissions. Mr. Ross assertions in this regard are simply unconvincing. Based on the above, we must conclu d e that the renewal commissions received by Mr. Ross during the existence of th e community property regime were the result of Mr. Ross effort, skill and industry exerted during the community reg ime. Our holding is consistent with the well s et t led law with regard to what constitutes community property in our state and is in accord with the notion that to the extent t h at labor is producing some benefit, the community ought to share in the profit of that labor. Acco rd in g ly , we find that the lower courts decisions to the contrary are manifestly erro n eo u s , as they are not supported by the evidence. Ms. Starks is entitled to share in the b u s in es s in come generated by Mr. Ross work, industry and effort during the marriage. CONCLUSION A cco rdingly, we reverse the lower courts findings that Mr. Ross did not exert effo rt, skill or industry during the existence of the community property regime t o produce the renewal commissions he received during t h e regime. We also reverse the lower courts decision insofar as it places the burden of proof on Ms. Starks to prove her entitlement to a share of renewal commissions during the marriage. REVERSED 23 10/21/03 SUPREME COURT OF LOUISIANA 02-C-2984 SUSAN DIANE STARKS ROSS VERSUS BILLY WAYNE ROSS ON WRIT OF CERTIORARI TO THE COURT OF APPEAL FIRST CIRCUIT, PARISH OF EAST BATON ROUGE KNOLL, Justice, concurring. I concur with the majority s result that the renewal commis s io n s Mr. Ross received d u rin g the existence of the community were the result of his effort, skill and industry exerted during the commu n it y regime. In my view the majority errs, however, in its analysis that these commissions are civil fruits that are s u bject to the community regime due to the effort expended by Mr. Ross during the regime, because these commissions are not civil fruits. I disagree from the majority s holding that the indiv id ual insurance policies are juridical acts from which civil fruits may be d eriv ed . Th is is not a matter where Mr. Ro ss s effort, skill and industry were combined with capital investment. Th e renewal premiums were not the result of Mr. Ross s separate capital inves t men t o r s ep arate property. The renewal premiums, as the majority concludes, were the res u lt of Mr. Ross s effort , skill and industry. Property acquired by the effort, skill or industry of a spouse is community, and there is no mechanism provided for making it separate. 5 Katherin e Sp ah t & W . Lee Hargrave, Louisiana Civil Law Treatise Matrimonial Regimes § 3.8, p. 64 (2d ed. 1997). As the majority correctly notes, the treatise suggests that: If [labor] is combined with separate capital or other separate property, equity would suggest a proportional division of the profits between the community and separate estates of the spouses. If such a pro rata division is not adopted, it would allow a spouse with separate property to act in bad faith and deprive the co mmunity of the revenues by putting all one s efforts into production of fruits from the separate asset. Id. (Emphasis added.) Mr. Ross s effort an d industry were not combined with separate capital or separate property to generate the renewal commissions. In my view, renewal co mmissions are not civil fruits from an asset; the insurance policies were not Mr. Ross s as s et or property. Certainly the policies are juridical acts and things; conceivably they are even assets of t h e p o licyholders. The majority s analysis is flawed, however, in finding that because insurance policies are juridical acts and things, civil fruits necessarily flow from them. The right of ownership, which acco rd ing to traditional civilian analysis includes the elements of usus, fructus and abusus, may lawfully be dismembered in a variety of ways either by the intention of the owner o r b y o p eration of law. Exposé des Motifs, Title III: Personal Servitudes, La. Civ. Cod e A n n . (W est 1980). Because fruits are a right of ownership, the majority errs in rejecting Ms. Starks s argument that there must be ownership interest in the thing in order to claim o wnership of the fruits. Although acquisition of the fruits may be dismembered by a person al servitude, thereby precluding the owner of the thing from claiming ownership of the fruits, it is elemen t al t hat if the rights of ownership have not been dismembered, the righ t s , in cluding the fruits, remain with the owner of the thing. Fruits are a right of ownership; [i]n the absence of rights of other persons, the 2 owner of a thing acquires the ownership of its natural and civil fruit s . La. Civ. Code art. 483. The majority s analysis that . . . under the definition of civil fruits contained in La. C.C. art. 551, M r. Ross received revenue (renewal commission) by reason of juridical acts (the insurance policies.) fails to account for the ownership element of t he fruit producing thing and fails to address the acquisition of the (misnamed) fruits. The insurance policies are co n t ract s between the policyholders and State Farm. The agency co n t ract between Mr. Ross and State Farm was the mechanism that provided for the payment of commissions to Mr. Ros s fo r t h e renewal of insurance policies sold by him. These commissions are compensation p aid t o M r. Ross per the terms of the contract b et ween him and State Farm. Article 551's reference to juridical act s concerns acts that create the civil fruits such as rent, interest and dividends. The code article is not au t h o rity that any juridical act that gives rise to payment transforms that payment into a civil fruit. The majority s conclusion t h at these commissions are civil fruits (a right of ownership) does violence to the civilian concept of ownership. The majority cites to various appellate court decisions declaring that the courts of appeal h av e ad dressed the issue of whether renewal commissions are earnings or fruit. Ross, slip op. at 16. The majority errs in finding that those cou rt s ad d res s ed this issue. In each of those cases, th e co u rt was deciding whether the effort, skill and industry were performed during the community regime so that the resulting commissions would be clas sified as community property. Michel v. Michel, 484 So.2d 829, 835 (La. App. 1 Cir. 1986)(Wife was entitled to share in renewal commissions received by husband after termination o f t h e community where policies were sold during the community; because the money was the product of labor during 3 and after the community it was to be divided proportionately 1 ); Williams v . Williams, 590 So.2d 649,653 (La. App. 3 Cir. 1991)(Service work performed after termination of the community contributed in great measure to policy renewals makin g service work performed during t h e marriage less important vis-a-vis renewals); Futch v. Fu t ch , 26-149 (La. App. 2 Cir. 9/23/94), 643 So.2d 364, 369 (The husb an d is entitled to d ed u ct from the renewal commissions an amount representative of his post-termination efforts in producing these commis s io n s ; he is entitled to the co mmissions generated by his post-termination efforts and apportionment between the community s and h is s ep arat e interest should be made accordingly). In none of these cases was the issue ever raised that the commiss io n s were civil fruits. The issue in the matter before us is the same issue that was before the appellate courts in Michel, Williams, and Futch, i.e., wh et h er renewal commissions are classified as community or separate when the initial policies were sold during one reg ime and the renewal commissions were earned in another. The only difference is that in Michel, Williams an d Futch, the polices were sold during the community and the renewal commissions were paid after its termination, whereas, in the matter presently befo re us, the situation is the complete opposite. The majority takes an unnecessary circuitous route t o reach it s result. The issue was simply whether any effort was expended by Mr. Ross during t h e reg ime that resulted in commissions earned by him from policies sold before the establishment of the community. Mr. Ro s s exerted substantial effort, skill and industry to ensure the maintenance of his exis t in g business and to satisfy existing policy holders. Because of his efforts, he continued to receive renewal commissions. 1 See Spaht, § 3.4, p. 57. 4 Th es e ren ewal commissions were reported as income on his income tax statements and comprised a sign ificant portion of his total income. Property acquired during the existence of the legal regime through the spouse s effort, skill or in d u s t ry is community prop ert y . See La. Civ. Code art. 2338. All forms of payments in return for one s labor, whatever they may be called, are in clu d ed . Spaht, § 3.3, p. 48. Co mmissions representing a percentage of sales or premiums would also be included. Id. Because, as the majority correctly concludes, Mr. Ross expended significant effort, skill and industry in effecting the renewal of policies pre-existing the co mmunity during the existence of the community property regime, these ren ewal commissions constitute compensation paid in retu rn for work done during the community prop erty regime. Therefore the commissions constitute community property and are sub ject t o Ms. Starks s claim for partition, to the extent or percentage community labor was attributable to the renewals so effected. I find the majority has erred in classifying the renewal commission as civil fruits. For these reasons, I do not agree with the majority s analysis. I concur only with the majorit y s res u lt which found the trial court was manifestly erroneous in its determination that the commissions were Mr. Ro s s s separate property, and the determination that the renewal commission s were the result of Mr. Ross s effort, skill and industry exerted during the community regime. 5
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