In re Marriage of Lundahl

• Decision Date: 25 November 2009
• Docket Number: No. 1-08-3541.,1-08-3541.
• Citation: 919 N.E.2d 480
• Parties: In re MARRIAGE OF Daniel W. LUNDAHL, Petitioner-Appellant, and Susan Lundahl, n/k/a Susan Hopper, Respondent-Appellee.
• Court: United States Appellate Court of Illinois

919 N.E.2d 480

In re MARRIAGE OF Daniel W. LUNDAHL, Petitioner-Appellant, and Susan Lundahl, n/k/a Susan Hopper, Respondent-Appellee.

No. 1-08-3541.

Appellate Court of Illinois, First District, Fifth Division.

November 25, 2009.

R. Stephen Polachek, Polachek & Polachek, Barrington, IL, for Appellant.

Phillip J. Nathanson, The Nathanson Law Firm, Chicago, IL, for Appellee.

Justice FITZGERALD SMITH delivered the opinion of the court:

This action was for dissolution of marriage. The trial court granted the parties, Daniel W. Lundahl (Lundahl) and Susan Hopper (Hopper), a dissolution of their marriage and awarded Hopper 100% of her nonmarital assets and 100% of the marital assets, while awarding Lundahl 100% of his nonmarital assets. Thereafter, both parties filed motions to reconsider, and the trial court subsequently reclassified the retained earnings of Lundahl's company from nonmarital property to marital property. Lundahl filed a motion to reconsider, which was denied. Lundahl now appeals arguing that (1) the trial court's original classification of his retained earning as nonmarital property was correct, (2) the amount of retained earnings found was incorrect, and (3) the trial court erred in awarding attorney fees to Hopper. For the following reasons, we affirm in part and remand for further proceedings in accordance with this Opinion.

I. BACKGROUND

Lundahl and Hopper met in early 2004 and were married on July 3, 2004. At the time of their marriage, Lundahl owned two businesses: APS Corporation USA and American Internet Services Network Corporation (AIS). Lundahl was the sole shareholder of each corporation, and each corporation was taxed as a subchapter S corporation for federal income tax purposes. The parties were married for approximately two years.

During the marriage, APS Corporation USA reported no income for the calendar years of 2004 and 2005, and it conducted no business in those years. AIS, on the other hand, produced income, which was reported on Lundahl and Hopper's joint income tax return for the calendar year of 2004 in the amount of $139,688. On Lundahl's individual income tax return for the calendar year of 2005, AIS produced $260,754.

Lundahl was paid a salary by AIS in the amount of $52,047 in 2004, $50,962 in 2005, and approximately $50,000 in 2006. In addition, Lundahl took disbursements from AIS's earnings and assets in the amount of $147,000 in 2004, $218,500 in 2005, and $411,500 in 2006. All of Lundahl's salary and disbursements were deposited into the parties' joint checking account, or were used to pay the parties' taxes.

During the parties' marriage, Hopper began working outside the marital home in August of 2005. For three months of the marriage, she deposited $1,000 each month from her employment income into the parties' joint checking account. Other than that, she maintained her own bank account, into which she deposited her own wages. Lundahl did not have access to such account.

Lundahl filed his petition for dissolution of marriage in March of 2006. Hopper filed a counterpetition for dissolution of marriage on July 18, 2006. Prior to trial, Lundahl was granted exclusive possession of the marital residence, which was his nonmarital property. Hopper was provided $4,000 per month for temporary maintenance from August 2006 through the date of the trial court's memorandum opinion and judgment for dissolution of marriage on April 24, 2007.

In its memorandum opinion and judgment for dissolution of marriage, the trial court found that the testimony of Hopper was neither credible nor reasonable, but that testimony of Lundahl was both credible and reasonable. The trial court classified the parties' assets and awarded Hopper 100% of the marital assets, and 100% of her nonmarital assets. The trial court awarded Lundahl 100% of his nonmarital assets, which included his retained earnings from AIS.

In its reasoning, the trial court noted that the statute which governs marital property (750 ILCS 5/503(a) (West 2006)), states in pertinent part, "`marital property' means all property acquired by either spouse." The trial court found that this definition focused on which spouse, if any received the retained earnings. The trial court noted that in the instant case, neither party acquired the retained earnings because the earnings were the property of AIS and were located in AIS's corporate account. Because the parties agreed that AIS was Lundahl's nonmarital asset, the trial court found that the retained earnings constituted nonmarital property.

Thereafter, both parties filed motions to reconsider the trial court's decision. Prior to ruling on the parties' posttrial motions, the Third District of the Illinois Appellate Court issued a relevant case, titled In re Marriage of Joynt, 375 Ill.App.3d 817, 314 Ill.Dec. 551, 874 N.E.2d 916 (2007). The trial court requested that the parties brief the issue of classification of retained earnings in light of Joynt.

On December 10, 2007, the trial court issued its judgment order reclassifying the retained earnings from AIS as marital property. The trial court determined that the retained earnings amounted to $730,000. Hopper was awarded $305,900, which represented 40% of the marital estate. In its reasoning, the trial court applied Joynt and found that because Lundahl was the sole shareholder, officer, and director of AIS, and because he had sole discretion over how much of the retained earnings should be distributed to him, the retained earnings were marital property. The trial court further relied on the fact that AIS was a successful entity solely through his efforts, his expertise, and his marketing abilities.

Hopper's attorney, Michael Kalcheim, filed his petition for interim fees and costs on February 6, 2008. After hearing arguments from both parties and after reviewing billing invoices, the trial court awarded Kalcheim $14,500 for fees and costs. Lundahl now appeals.

II. ANALYSIS

On appeal, Lundahl argues that (1) the trial court's original decision classifying AIS's retained earnings as his nonmarital property was correct, (2) the amount of retained earnings found by the trial court was incorrect, and (3) the trial court erred when it awarded Hopper attorney fees.

A. Classification of a Subchapter S Corporation's Retained Earnings

Lundahl's first contention on appeal is that the trial court erred in finding that the retained earnings of AIS constituted marital property. Lundahl relies on section 503 of the Illinois Marriage and Dissolution of Marriage Act (the Act) (750 ILCS 5/503 (West 2006)) to support his position and urges this court not to follow the recent decision of Joynt. Hopper, on the other hand, maintains that according to Joynt, retained earnings of a subchapter S corporation constitute income, and because such income was attributable to Lundahl's personal efforts, such earnings were marital property. We begin by looking at the statute, which states in pertinent part:

"(a) For purposes of this Act, `marital property' means all property acquired by either spouse subsequent to the marriage, except the following, which is known as `non-marital property':

* * *

(6) property acquired before the marriage;

(7) the increase in value of property acquired by a method listed in paragraphs (1) through (6) of this subsection, irrespective of whether the increase results from a contribution of marital property, non-marital property, the personal effort of a spouse, or otherwise, subject to the right of reimbursement provided in subsection (c) of this Section; and

(8) income from property acquired by a method listed in paragraphs (1) through (7) of this subsection if the income is not attributable to the personal effort of a spouse.

* * *

(c) Commingled marital and non-marital property shall be treated in the following manner, unless otherwise agreed by the spouses:

* * *

(2) * * * when a spouse contributes personal effort to non-marital property, the contributing estate shall be reimbursed from the estate receiving the contribution notwithstanding any transmutation. * * * Personal effort of a spouse shall be deemed a contribution by the marital estate." 750 ILCS 5/503 (West 2006).

In the trial court, Hopper argued that section 503(a)(8) applied in this case because the retained earnings constituted income, and that because such income was attributable to Lundahl's personal efforts, that income must therefore be classified as marital property. The trial court found that Hopper misconstrued section 503. It noted that if the retained earnings belonged to AIS, they would be Lundahl's nonmarital property via his stock ownership in AIS. On the other hand, if the retained earnings belonged to Lundahl personally, they would be marital property subject to division. The trial court reiterated that marital property means all property acquired by either spouse, and then noted that here, neither spouse received the retained earnings. Accordingly, the trial court found that the retained earnings were the property of AIS and located in AIS's corporate account and were therefore Lundahl's nonmarital property.

Additionally, the court found that Hopper had completely ignored sections 503(a)(7) and 503(c)(2) of the Act, which provide for the possible reimbursement to the marital estate for a spouse's personal efforts that increase the value and retained earnings of property. The trial court noted that Hopper's argument would render sections 503(a)(7) and 503(c)(2) meaningless because she defined AIS's retained earnings as marital property simply because Lundahl's personal efforts increased the value of the retained earnings. The trial court stated, "[i]f this were the correct definition of marital property, `reimbursement' of the marital estate under 503(a)(7) and 503(c)(2) would be unnecessary in every case and there would be no need for the inclusion of 503(a)(7) and 503(c)(2) in the 503 statute." The trial court found that looking at the...