Johnson v. Johnson, Record No. 0037-06-4 (Va. App. 10/3/2006), Record No. 0037-06-4.

• Decision Date: 03 October 2006
• Docket Number: Record No. 0037-06-4.
• Court: Virginia Court of Appeals
• Parties: JEFFREY M. JOHNSON<SMALL><SUP>*</SUP></SMALL> v. LESLIE C. JOHNSON

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JEFFREY M. JOHNSON^* v. LESLIE C. JOHNSON

Record No. 0037-06-4.

Court of Appeals of Virginia, Alexandria.

October 3, 2006.

Appeal from the Circuit Court of Fairfax County, Leslie M. Alden, Judge.

Marc A. Astore (Marc A. Astore, P.C., on briefs), for appellant.

Robert J. Surovell (Cory Frederick Goriup; Surovell Markle Isaacs & Levy PLC, on brief), for appellee.

Present: Judges Elder, Humphreys and Senior Judge Fitzpatrick.

MEMORANDUM OPINION

JUDGE LARRY G. ELDER.

Jeffrey M. Johnson (husband) appeals from an equitable distribution award determining that Leslie C. Johnson (wife) maintained a ninety-five percent separate ownership interest in a warehouse leasing business in which the parties acquired separate interests shortly prior to their marriage in 1985. On appeal, husband contends the trial court erroneously determined (1) that wife was entitled to retain her separate interest in the business despite the fact that the parties had used the business' profits to reduce the mortgage on its sole asset, a rental warehouse, and (2) that the parties' conversion of the business from a partnership to a limited liability company in 1999, prior to their separating, did not make it marital property. We hold the trial court reached the right result on this record, and we affirm.

I.

On appeal, we review the evidence in the light most favorable to the party prevailing below. Anderson v. Anderson, 29 Va. App. 673, 678, 514 S.E.2d 369, 372 (1999).

Unless it appears from the record that the chancellor has abused his discretion, that he has not considered or has misapplied one of the statutory mandates, or that the evidence fails to support the findings of fact underlying his resolution of the conflict in the equities, the . . . equitable distribution award will not be reversed on appeal.

Smoot v. Smoot, 233 Va. 435, 443, 357 S.E.2d 728, 732 (1987).

A. CLASSIFICATION OF INCREASE IN VALUE OF PARTNERSHIP

In classifying the increase in the value of the partnership between 1985 and 1999, the trial court found that husband's acting as leasing agent for the partnership's warehouse did not constitute "significant personal efforts that increased the value of the property." (Emphasis added). However, it concluded that, due to the personal efforts of both parties, "the income received from the" "separate" "property" was marital property and that, when it was used to pay down the mortgage on the warehouse, it was "marital money that was contributed to the separate asset." The court then held—presumably under Code § 20-107.3(A)(3)(a), which governs the classification of hybrid assets—that husband, as the nonowning spouse, had proved the contribution of marital property (the rental income received) to the separate property (the partnership owned 95% by wife) but failed to prove the amount of that contribution because "[t]here was no evidence of the balance of the mortgage in 1999 at the time that the property went from [a partnership] to [a limited liability company]." As a result, it held the increase in value of the partnership remained separate property as of 1999, with 95% owned by wife and 5% owned by husband. We agree with the trial court's conclusion but not with its reasoning.

As the trial court noted, an increase in the value of separate property during the marriage is separate property unless one of two things has occurred. Code § 20-107.3(A)(1). If "marital property or the personal efforts of either party have contributed to such increases," the portion of the increase in value "attributable to those contributions" is marital property. Id. Further, for an increase in value caused by personal efforts to be considered marital, those personal efforts "must be significant and result in substantial appreciation of the separate property." Id. The trial court found husband's personal efforts were not substantial and that, even if they were, no evidence proved they caused an appreciable increase in the value of the property any more so than did wife's efforts in keeping the partnership's books. These findings are not plainly wrong or without evidence to support them. Cf. 1 Brett Turner, Equitable Distribution of Property § 5:50, at 528 (3d ed. 2005) (discussing appreciation of and income from separate property and noting that "the degree of marital involvement [in producing income] is a factual issue").

We also note that despite the partnership agreement's provision that profits would be paid to each partner in proportion to his or her percentage share of ownership, i.e., 95% to wife and 5% to husband, husband conceded they actually shared the partnership's profits equally throughout the marriage, with distribution checks being written to them jointly or to them separately in equal amounts. Wife did not seek to retrace and recoup any of these sums in the equitable distribution proceedings. The evidence established this method of distributing the business' profits resulted in husband's receipt of or sharing in sums totaling $1,193,710, as shown by the business' tax returns through 2003. Additional evidence established these sums were substantially in excess of the commissions of $80,000 to which the court found a leasing agent would have been entitled. Accordingly, the evidence showed husband was, in fact, compensated for his efforts on behalf of the business.

Thus, we do not disturb the trial court's finding regarding the effect of husband's personal efforts on the increase in value of the business. However, as to the trial court's conclusion that "the income from the property that was used to pay down the mortgage [on the warehouse] was marital money," we hold the trial court erred. Both Code § 20-107.3(A)(1), which defines marital and separate property, and subsection (A)(3)(a), which discusses the classification of property having both marital and separate components, refer to "income received from separate property during the marriage." (Emphasis added).

Subsection (A)(1) provides that "[i]ncome received from separate property during the marriage is separate property if not attributable to the personal effort of either party." Similarly, subsection (A)(3)(a) provides that, "[i]n the case of income received from separate property during the marriage, such income shall be marital property only to the extent it is attributable to the personal efforts of either party." Thus, Virginia's equitable distribution statute provides, although perhaps subject to certain exceptions not applicable here,¹ that income earned by a spouse's separate property may be marital property only after it is "received" from the separate property.

As commentator Brett Turner has observed,

[I]ncome earned by a business [owned in whole or in part by a spouse] and the resulting appreciation in [the business'] value are not equivalent to income [to the owning spouse] from separate property. Such income is earned by the business, which in most cases will be a legally distinct entity from the owning spouse. Property which is owned by third parties, including a corporation owned entirely by the parties, is generally not marital property subject to equitable distribution. Income earned by [a business in which one or both spouses have an ownership interest] [is not] income earned by [a spouse] until it [is] distributed to [the spouse]. 1 Turner, supra, § 5:51, at 531 (emphases added) (footnote omitted); see also id. § 5:16, at 311-12 (recognizing rule that corporate assets are third-party property and noting "same entity-ownership principles [have] been applied to partnerships and irrevocable trusts" but not "to revocable trusts, sole proprietorships, and other informal organizations not permitted to hold property in their own name" (footnotes omitted)).

Here, no evidence established that the parties as individuals "received" the rental income that was used to pay the mortgage on the warehouse owned by the partnership as that term is used in Code § 20-107.3(A)(1) and (A)(3)(a). To the contrary, the partnership agreement provided that the business' profits would be "distributed" to the partners, "in proportion to their respective percentages of Partnership interest," only after the deduction of, inter alia, "payments upon the principal of any mortgages upon Partnership property or of any other Partnership obligations or loans." Cf. Code § 20-108.2(C) (allowing deduction of reasonable business expenses from gross income used to calculate child support). Compare Vanwassenhove v. Vanwassenhove, 998 P.2d 505, 506-07 (Idaho Ct. App. 2000) (where husband, rather than separate business, owned farm as separate property and used portion of rental income to pay principal and interest on mortgage, court recognized concept that "only net income from separate property becomes community property" but rejected husband's claim that principal payments "constituted an expense that should be subtracted from the gross rental proceeds in calculating net rental income," thereby concluding that rents used to reduce principal became community property and noting that "generally accepted accounting principles" also "do not treat payments on the principal of a mortgage loan as an expense when calculating net income"). Thus, the partnership, not the parties, paid the mortgage on the warehouse, and the partnership maintained a separate ownership interest in the warehouse's equity. Accordingly, granting deference to the trial court's findings of fact but not to its conclusions of law, we hold no evidence establishes that either significant personal efforts or marital property contributed to the increase in the value of the partnership in a fashion that would permit the trial court to classify as marital property any portion of wife's 95% ownership interest in...