McHugh v. McHugh

• Decision Date: 11 April 1985
• Docket Number: No. 14622,14622
• Citation: 108 Idaho 347,699 P.2d 1361
• Parties: Berit Elisabet McHUGH, Plaintiff-Respondent, v. Richard Gregory McHUGH, Defendant-Appellant.
• Court: Idaho Supreme Court

Page 1361

699 P.2d 1361

108 Idaho 347

Berit Elisabet McHUGH, Plaintiff-Respondent, v. Richard Gregory McHUGH, Defendant-Appellant.

No. 14622.

Supreme Court of Idaho.

April 11, 1985.

Rehearing Denied June 13, 1985.

Robert P. Tunnicliff, Moscow, for defendant-appellant

Marilyn Schwam, Moscow, for plaintiff-respondent.

HUNTLEY, Justice.

By this appeal we are required to resolve three primary issues:

(1) The classification of Maryland property of Idaho residents upon dissolution of marriage, the property having been purchased by the husband seven months before the marriage;

(2) The separate property interest of the husband in property purchased in Idaho from the proceeds of the sale of Maryland property which under Maryland law was partially "non-marital" and partially "marital" ; and

(3) The propriety of the trial court establishing child support for five children at the rate of $250.00 per month per child rather than on a graduated scale basis.

We treat each in turn.

I

With respect to the characterization or classification of the Maryland property, the pertinent facts are: Husband purchased the property in his separate name in 1971, approximately seven months prior to the marriage. The parties resided upon and farmed it for approximately six years before moving to Idaho, and owned it for four more years while domiciled in Idaho before the dissolution of the marriage. The property was purchased for $120,000, $10,000 down having been paid from husband's savings Following marriage, a series of bank and PCA loans were procured under the joint signatures of the parties. The loan proceeds were applied to the payment of the two original mortgages or to one of the preceding loans in the series. Payments were also made upon the two original mortgages from sales of certain farm equipment purchased along with the farm, and in the years 1978 through 1981 from proceeds of sales of subdivided portions of the farm property. The farm also experienced net income and net losses in various years, and income was applied to mortgage payments.

account, $35,000 having been paid at time of closing from proceeds of a loan procured by the husband on his separate credit with the real estate as collateral, with the balance of $75,000 represented by a mortgage and note carried by the seller.

The specific issue is whether the trial court erred in its division of the acreage remaining at the time of divorce as between "non-marital" and "marital" property (similar to separate property and community property under Idaho law) under a formula whereby it assigned non-marital status to that portion of the property represented by the percentage that the husband's initial separate contribution bore to the $120,000 purchase price.

This issue must be resolved by the law of the state of Maryland, most definitively expressed in Harper v. Harper, 294 Md. 54, 448 A.2d 916 (1982).

In Harper, the Maryland court characterized the distinguishing factors for clarifying property in the majority of community property states, such as Idaho, as contrasted with states such as Maryland which model their laws on the Uniform Marriage and Divorce Act, as being (1) whether the property takes on its character as marital or non-marital at the date of its initial legal acquisition; or, (2) whether the character is in some instances established at a later date due to subsequent events. The Maryland court, rejecting the date of initial acquisition as being determinative under cases such as Idaho's Gapsch v. Gapsch, 76 Idaho 44, 277 P.2d 278 (1954) and Fisher v. Fisher, 86 Idaho 131, 383 P.2d 840 (1963), stated that "acquisition" does not occur at the date of initial legal obligation, but rather is an ongoing process of making payment for property. ¹

In rejecting the inception of title approach, the Maryland court commented upon Idaho's Fisher case, which stated:

Under this rule, property to which one spouse has acquired an equitable right before marriage is separate property, though such right is not perfected until after marriage. Harper at 922 citing Fisher.

The court referred to Gapsch and similar cases from other community property jurisdictions:

Courts in such jurisdictions have held that increases in the value of a spouse's separate property, attributable solely to the normal appreciation of such property, remain a part of the separate property and require no reimbursement to the community. Harper at 922.

The court noted that under the Gapsch rule the community gets compensation only for the increase in value attributed to community funds and efforts, and gets nothing for appreciation in value.

The Harper court then discussed the California rule which provides that the spouse contributing separate funds is entitled to a "pro tanto community property interest" in the property and improvements in the ratio of the separate investment to the total separate and community investment in the property, noting that the California rule provides a more equitable result:

As a result of the application of the California rule, both the spouse who contributed separate funds and the community that contributed community funds each receive a proportionate and fair return on their investment. Contrary to the rule adopted in most community property states, the California rule does not limit the community to compensation for a share of the enhanced value of the property attributable to the expenditure of community funds and efforts, but rather entitles the community additionally to share in the increased value attributable to the normal appreciation of the property.

The rationale underlying California's "pro tanto community property interest" rule is the source of funds theory. That theory is premised on the concept that it is unfair to permit a spouse who has contributed separate funds to the purchase or improvement of property to enjoy all of the benefits of sole ownership of the property without regard to the fact that it had been purchased or improved in part with community funds. Harper at 924.

The Harper court, after observing that the California pro tanto theory is in fact a source of funds theory, quoted with approval the following language from Tibbetts v. Tibbetts, 406 A.2d 70 (Me.1979):

In thus interpreting the process of separating marital and non-marital property which has been conjoined in the acquisition of a single property during marriage, we find guidance in the fundamental purposes underlying the approach to disposition of the spouses' property mandated by 19 M.R.S.A. § 722-A and Section 307 of the Uniform Marriage and Divorce Act as originally promulgated in 1970. This research suggests that our choice is between a static or a dynamic interpretation of the term "acquisition." We adopt a dynamic interpretation in that the proper characterization of property as marital or non-marital may shift as individual items of property, marital or non-marital, are contributed by the spouses in exchange for the property acquired.

The approach we choose comports with the general goals of the Uniform Act.

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The partnership theory, upon which the law of community property and this provision of the Uniform Marriage and Divorce Act is based, requires that the marital estate be entitled to a proportionate share in the value of property where its equity interest was partially acquired by marital funds. Where the marital estate chooses to invest its funds in certain property together with non-marital funds, the marital estate is entitled to a proportionate return on its investment.

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Our interpretation of the term "acquisition" has led us up and down the American West and even to the shores of Old Spain. It appears that the courts of our community property states have not with ease adapted to the realities of complex modern transactions and relationships. We conclude that in fairness to both spouses "acquisition" must not arbitrarily and finally be fixed on the date that a legal obligation to purchase is created. Rather, "acquisition" should be recognized as the on-going process of making payment for acquired property. Characterization of the property acquired will then depend on the source of each contribution as payments are made. Harper at 925-26 citing Tibbetts (citations omitted) (footnotes omitted).

The Harper court next explored whether the problems might best be resolved by using the concept that commingling of non-marital and marital property results in a "transmutation" into marital property, citing the Illinois rule as expressed in, In re Marriage of Smith, 86 Ill.2d 518, 56 Ill.Dec. 693, 427 N.E.2d 1239 (1981): ²

We accordingly hold that the preference indicated by the legislature for the classification of property as marital can best be served by presuming that the contributors of marital property to non-marital property intended that the commingled property be treated as marital. In other words, the failure of a non-marital property holder to segregate that property will give rise to the rebuttable presumption that the non-marital property has been transmuted, regardless of the status of title. Harper at 927.

Finally, after also rejecting the transmutation approach, the Harper court adopted the source of funds theory, enunciating the Maryland rule as follows:

We conclude that under the Maryland Act the appropriate analysis to be applied is the source of funds theory. Under that theory, when property is acquired by an expenditure of both non-marital and marital property, the property is characterized as part non-marital and part marital. Thus, a spouse contributing non-marital property is entitled to an interest in the property in the ratio of the non-marital investment to the total non-marital and marital investment in the property. The remaining property is characterized...