Allison v. Allison, No. 2006-CA-001967-MR.

• Decision Date: 15 February 2008
• Docket Number: No. 2006-CA-001967-MR.,No. 2006-CA-002575-MR.
• Citation: 246 S.W.3d 898
• Parties: John Fred ALLISON, Appellant v. Vicki Lynn ALLISON, Appellee.
• Court: Kentucky Court of Appeals

246 S.W.3d 898

John Fred ALLISON, Appellant v. Vicki Lynn ALLISON, Appellee.

No. 2006-CA-001967-MR.

No. 2006-CA-002575-MR.

Court of Appeals of Kentucky.

February 15, 2008.

Anita M. Britton, Crystal Osborne, Lexington, KY, for appellant.

W. Stokes Harris, Jr., Lexington, KY, for appellee.

Before THOMPSON, Judge; BUCKINGHAM and HENRY, Senior Judges.¹

OPINION

BUCKINGHAM, Senior Judge.

John Fred Allison appeals from orders and judgments of the Fayette Circuit Court, Family Branch, relating to the resolution of issues in a dissolution of marriage action that he filed against Vicki Lynn Allison. John appeals from the court's rulings regarding the marital/nonmarital nature of his family's business, the marital/nonmarital nature of a $66,714 debt allegedly owed by Vicki to her mother, and the award of attorney and expert witness fees. We affirm in part and vacate in part and remand.

John and Vicki were married on September 5, 1986. They had one child, Courtney, who is now emancipated. John filed a dissolution of marriage action on June 29, 2004. The court held hearings and issued a decree and several orders. John's dissatisfaction with the court's rulings on the aforementioned three issues is the subject of this appeal.

In the early 1970's, John's mother and father acquired all stock in a business known as Action Business Suppliers, Inc. (ABS). John now owns all shares of stock in ABS, and he claims that the shares are his nonmarital property. He first states that in August 1984 (prior to his marriage to Vicki), he entered into an employment and stock option agreement with his parents that gave him the right to acquire an 8% interest in ABS. He acknowledges that this option was not exercised. Rather, he maintains that in April 1986 (four months prior to the marriage), he entered into a new agreement that continued the terms of his employment and gave him a 16% interest in the business in exchange for a promissory note from him for $32,000. John never paid the note, and the court found that his father had forgiven the debt. John contends that he owns this portion of the outstanding ABS shares as his nonmarital property because the forgiveness of the debt constituted a gift to him. Alternatively, he contends that this ownership interest is his nonmarital property because he acquired it before marriage.

As to the remaining shares of corporate stock, in December 1996, there was a stock redemption agreement between John's parents and the corporation whereby they sold their 84,800 shares of ABS stock to the corporation for $1,152,125 to be paid to them over a ten-year period. The court found that this amount had been paid in full over a period of years by the corporation. John claims that these shares were also his parents' gift to him and that he never paid any money, from marital funds or otherwise, for the stock.

The court found that all shares of stock were acquired during the marriage and that John had not provided adequate proof to overcome the presumption that his entire interest, or even any interest, in ABS was marital. The court specifically rejected testimony that the 84,800 shares of stock were a gift to John from his parents. Rather, the court found that John's parents had been paid over $1 million by the corporation for those shares.

The court noted that John had initially stated that he and his parents had agreed he would purchase their shares of stock and become full owner, but that he later recanted that statement and stated the shares were a gift. Further, John's father had stated that the shares were a gift to John and that he had made similar gifts to other children. However, the court noted that there was no proof of such similar gifts.

In determining that all shares of stock owned by John were marital property, the court found that "in the present case the ownership interest increased from either 0%, 8%, or 16% to 100%. The value of his interest increased this much as well. Regardless, the Husband failed to prove by documents or evidence what interest he acquired before marriage or by gift, and the Court[']s only real proof is that he paid for the stock after 1996."²

John first argued in his brief that he has at least a 16% nonmarital interest in ABS. He asserted that he acquired such interest by agreement with his parents in April 1986 (before the marriage) and that his father later forgave the payment of the $32,000 promissory note that John had given in return. In fact, the court specifically found that the indebtedness had been forgiven. Thus, John claims that such interest was a gift to him and was therefore nonmarital and that the court erred in not so finding. In support of this argument, John cited KRS 403.190(2)(a) which expressly excludes property acquired by gift from the definition of "marital property" unless "there are significant activities of either spouse which contributed to the increase in value of said property and the income earned therefrom."

Alternatively, John stated that the 16% interest is nonmarital because it was acquired before marriage. He cited Overstreet v. Overstreet, 144 S.W.3d 834, 837 n. 7 (Ky.App.2003), to support that argument. In his oral argument before the court, John's attorney modified John's position and stated that John only owned an 8% interest, not a 16% interest, in the corporation prior to the 1996 redemption agreement.³

The court stated in an order amending its original ruling that John's father "forgave the original $32,000 which was due for a 16% interest in the business pursuant to an alleged agreement in 1986. This change however does not change the Court's finding that the business is marital property." The court did not explain its ruling in this regard and did not make more specific findings. While the court said that John's father forgave the debt, it did not make any finding that the 16% interest was a gift or even that John owned a 16% interest. In fact, as we have noted, the court stated that John had failed to prove "what interest he may have acquired before marriage or by gift."⁴ At any rate, John now claims that his interest in the corporation prior to the redemption agreement was 8% rather than 16%.

The first issue, therefore, is whether John had no ownership interest in the corporation at the time his parents sold all their shares to the corporation or whether he had an 8% interest. We conclude that the facts indicate John must have had an ownership interest at the time of the redemption agreement. Otherwise, there would have been no interests owned by anyone once John's parents sold their shares back to the corporation. Further, we conclude that the evidence appears to support only an ownership interest of 8%.⁵

The next issue concerns when John acquired that interest and whether that interest was marital or nonmarital. The burden was on John to prove any nonmarital interest in the family business. See Sexton v. Sexton, 125 S.W.3d 258, 266 (Ky. 2004). See also Smith v. Smith, 235 S.W.3d 1, 16 (Ky.App.2006). The trial court determined that John failed to meet that burden.

John claims he acquired that interest pursuant to the 1986 agreement. The court found that the payment of the indebtedness represented by the note had been forgiven. The court also stated that the note was for payment of a 16% interest in the corporation. If, in fact, John acquired his ownership interest in exchange for the note, and that indebtedness was later forgiven, then it would appear that the forgiveness of the indebtedness would be a gift to John and would constitute a nonmarital interest in the corporation.⁶ See KRS 403.190(2)(a).

For this reason, we conclude that the court's ruling contains some inconsistency that we are unable to explain. Thus, we vacate the trial court's determination that John did not have a nonmarital interest in the corporation and remand the matter for the court to determine the extent of John's interest prior to the redemption agreement (which appears to us to be 8%) and whether such interest was marital or was proven by John to be nonmarital as a result of a gift or nonmarital as having been acquired before marriage.

Concerning the stock redemption agreement and whether the redeemed shares of stock constituted John's nonmarital property that issue will be moot unless the court determines that John's interest prior to the redemption was nonmarital. If the court determines that John's interest at that time was marital, then any increase in ownership interest because of the redemption agreement was also necessarily marital.⁷

If the court determines upon remand that John's interest prior to the redemption was nonmarital, then it must determine whether any increase in value was marital or nonmarital. John and Vicki agree that this case is one of first impression in Kentucky. Both have cited cases from other jurisdictions that have addressed similar fact situations. While we will decide this issue under principles of Kentucky law, an overview of these cases is appropriate.

John relies primarily on Hoffmann v. Hoffmann, 676 S.W.2d 817 (Mo.1984). In that case, the Missouri Supreme Court rejected a wife's claim that the husband's increase in his ownership interest in a closely-held corporation after marriage resulted in the increase being marital property. The husband's father owned a corporation, and the husband acquired a 16.17% interest prior to the marriage. After husband and wife were married, the corporation purchased and retired some of the shares owned by the father. The result of the stock redemption was that husband's ownership interest increased to 35.3%. Husband then gave some shares to his son and one share to a newly hired corporate officer. The result was that the husband owned a 29.5% interest.

First, the court rejected the wife's argument that the increase in ownership percentage was marital property. Id. at 823. Based on a Missouri statute, Mo. Rev.Stat. 452.330.2(2),⁸ the court stated that the...