Allen v. Allen

• Decision Date: 06 March 1986
• Docket Number: No. 2-85-027-CV,2-85-027-CV
• Citation: 704 S.W.2d 600
• Parties: Mary Marlene ALLEN, Appellant, v. Robert Wood ALLEN, Appellee.
• Court: Texas Court of Appeals

Page 600

704 S.W.2d 600

Mary Marlene ALLEN, Appellant, v. Robert Wood ALLEN, Appellee.

No. 2-85-027-CV.

Court of Appeals of Texas,

Fort Worth.

March 6, 1986.

McCracken, Taylor & Nelson, Thomas S. Nelson, Carrollton, for appellant.

Lee Clemens and Lane McDaniel, Dallas, for appellee.

Before ASHWORTH, JOE SPURLOCK, II and HILL, JJ.

OPINION

JOE SPURLOCK, II, Justice.

This is an appeal from the trial court's division of property in a divorce action. Mary Marlene Allen, appellant, contests the property settlement on the grounds that the trial court abused its discretion by mischaracterizing the separate and community nature of certain properties and by failing to reimburse her for improvements to the separate estate of Robert Wood Allen, appellee.

We affirm.

Appellant presents three points of error. In her first point of error, appellant claims that the trial court abused its discretion by classifying Marlene's Beauty Salon and Cuttery, Inc., as community property. In her second point of error, appellant challenges the trial court's classification of the KEOGH retirement plan as appellee's separate property. In point of error number three, appellant asserts that the trial court abused its discretion by failing to reimburse appellant for payments of $10,000 of appellant's separate property and $20,000 from the community estate used to make improvements on appellant's farm, which is his separate property.

The parties were married on December 31, 1977 and ceased to live together in October 1982. Appellee husband filed for divorce on January 20, 1983 on the grounds of insupportability. Appellant wife subsequently cross-petitioned for divorce on the same grounds. Both parties claimed extensive separate property and made claims for reimbursement to their separate property and to the community estate. Both parties have their own business. The husband is a doctor and a partner in a medical clinic; the wife is a beautician and owns a beauty salon. At the time of the separation, there was also over $150,000 of real estate in the community estate and the husband owned a $200,000 farm. There were no children born to or adopted by the parties during their marriage; both parties, however, did have children from previous marriages. Both parties made claims for reimbursement to the community estate for money spent on the other's children during the parties' marriage.

Prior to trial, stipulations signed by both parties were entered and approved by the trial court. In these stipulations, the parties agreed that certain property was to be considered the separate property of the respective spouse, subject to the right to claim for reimbursement. The trial was held before the court. The divorce decree was signed on September 12, 1984. The property settlement incorporated the stipulations and divided the remaining estate; all reimbursement claims were denied. There were no requests for findings of fact or conclusions of law.

In her first point of error, appellant claims that the trial court abused its discretion in treating "Marlene's Beauty Salon and Cuttery, Inc." as part of the community estate to be divided in the property settlement. Appellant admits that the beauty salon was incorporated during the period she was married to appellee, but she contends that this was an incorporation of her separate sole proprietorship, "Marlene's Beauty Salon". Appellant argues that the corporation's inception of title was in the sole proprietorship because it was an incorporation of an "ongoing business". Appellant presented evidence that the corporation was valued between $131,789 and $263,578 at the time of the parties' separation. According to appellant, the inclusion of the corporation in the estate of the parties resulted in an unjust division of the estate. In dividing the community estate, the trial court did, however, award the corporation to appellant.

The characterization of marital property or community property is not a matter left to the discretion of the trial court, but is subject to the harmless error rule on appeal. Smith v. Smith, 620 S.W.2d 619, 625-26 (Tex.Civ.App.--Dallas 1981, no writ) (on rehearing); TEX.R.CIV.P. 434. Mere mischaracterization of property alone is not reversible as a matter of law; the mischaracterization must result in a manifestly unjust and unfair division of property. King v. King, 661 S.W.2d 252, 254 (Tex.App.--Houston [1st Dist.] 1983, no writ); Mundy v. Mundy, 653 S.W.2d 954, 957 (Tex.App.--Dallas 1983, no writ). It is not necessary, however, for us to determine whether there was harmful error in this case because appellant failed to meet her burden to show that the trial court erred in its treatment of the beauty salon as community property.

The starting point in the division of the marital estate is the characterization of the parties' property as community or separate. Cooper v. Cooper, 513 S.W.2d 229, 232 (Tex.Civ.App.--Houston [1st Dist.] 1974, no writ). Property possessed by either spouse during or on dissolution of marriage is presumed to be community property. TEX.FAM.CODE ANN. sec. 5.02 (Vernon 1975). In order to overcome this presumption, the party asserting separate ownership must clearly trace the original separate property into the particular assets on hand during the marriage. Cockerham v. Cockerham, 527 S.W.2d 162, 167 (Tex.1975). The degree of proof required to overcome this presumption requires that the proponent prove the separate character of the property by "clear and convincing" evidence or by "clear and satisfactory" evidence. Newland v. Newland, 529 S.W.2d 105, 107 (Tex.Civ.App.--Fort Worth 1975, writ dism'd).

"Marlene's Beauty Salon" was a sole proprietorship and was owned and operated by appellant for about 17 years prior to August 21, 1978. On that date, a corporate charter was applied for under the name of "Marlene's Beauty Salon and Cuttery, Inc." by appellant. This act of incorporation occurred almost eight months after appellant's marriage to appellee. The corporation required an initial capitalization of $1,000. There was no evidence to show that this money was funded from anything other than the community estate. All of the physical assets of the sole proprietorship "Marlene's Beauty Salon" were retained in appellant's name and rented by her to the corporation. ¹ Appellant continued to operate the beauty salon in the same location it had been in for the previous six years although under the new corporate name. There was evidence that the management, employees, and clientele of the salon remained substantially the same following the incorporation. Appellant testified that her purpose in incorporating was to avoid having to purchase malpractice insurance.

The appellant's principal argument is that because this incorporation was of an ongoing business, the actual inception of title occurred at the acquisition of the sole proprietorship and therefore the corporation should be characterized as appellant's separate property. Appellant has not cited any authority for this "ongoing business" theory and we have not found any legal authority supporting this claim. Under Texas law, a corporation does not exist until the issuance of a certificate of incorporation. TEX.BUS.CORP.ACT ANN. art. 3.04 (Vernon 1980). It is undisputed that Marlene's Beauty Salon and Cuttery, Inc. was not incorporated until after the parties had married. We hold there can be no title to a corporation until it actually exists; consequently, the inception of title doctrine can only be applied to a corporation as of the date of incorporation.

The approach of Texas courts in determining the separate or community character of a corporation formed during a marriage has been to require the parties to clearly trace the separate and community property assets that were contributed during the formation of the corporation. See Vallone v. Vallone, 644 S.W.2d 455, 457 (Tex.1982); Marriage of York, 613 S.W.2d 764, 769-70 (Tex.Civ.App.--Amarillo 1981, no writ). Corporations organized during marriage and capitalized entirely with traceable separate property of one spouse are characterized as the separate property of that spouse. Holloway v. Holloway, 671 S.W.2d 51, 56-57 (Tex.App.--Dallas 1983, writ dism'd).

Appellant in this case has failed to meet her burden to clearly trace her contribution of separate property in the formation of Marlene's Beauty Salon and Cuttery, Inc. The $1,000 used to capitalize the corporation is community property under the community property presumption. TEX.FAM.CODE ANN. sec. 5.02 (Vernon 1975). Appellant did not contribute any tangible assets to the corporation; the corporation rented all business property, equipment and furniture from appellant. The only contribution of separate property that appellant seems to claim is that the corporation continued to do business in the same location, with the same employees and the same clientele. Appellant appears to be claiming that she contributed goodwill to the corporation. See Taormina v. Culicchia, 355 S.W.2d 569, 574 (Tex.Civ.App.--El Paso 1962, writ ref'd n.r.e.) ("Good will is generally understood to mean the advantages that accrue to a business on account of its name, location, reputation and success.").

Although it is well established that goodwill is a property right which may be sold or transferred, Nail v. Nail, 477 S.W.2d 395, 397 (Tex.Civ.App.--Fort Worth), rev'd on other grounds, 486 S.W.2d 761 (Tex.1972), appellant failed to meet her burden of clearly tracing this intangible asset as a contribution of her separate property to the corporation. While it is clear that the corporation took over the activities of appellant's sole proprietorship, there was no evidence presented at trial concerning the value of the goodwill contributed by the appellant at the time of incorporation. ²

Without this information, it is impossible for this court to trace the portion of the corporation created with appellant's separate...