McLeod v. McLeod, s. 8412DC647

• Decision Date: 16 April 1985
• Docket Number: Nos. 8412DC647,8412DC755 and 8412DC766,s. 8412DC647
• Citation: 327 S.E.2d 910,74 N.C.App. 144
• Court: North Carolina Court of Appeals
• Parties: Edward W. McLEOD, III v. Louisa Farmer McLEOD.

Page 910

327 S.E.2d 910

74 N.C.App. 144

Edward W. McLEOD, III v. Louisa Farmer McLEOD.

Nos. 8412DC647, 8412DC755 and 8412DC766.

Court of Appeals of North Carolina.

April 16, 1985.

Charles S. Fox, Fayetteville, for plaintiff-appellant.

Jerome B. Clark, Jr., Fayetteville, for defendant-appellant.

WHICHARD, Judge.

Plaintiff and defendant were married in 1963 and divorced in 1984. Two children were born of the marriage.

In 1967 the parties purchased a house and lot which they held as tenants by the entirety. The court found that defendant contributed $8,000 toward the down payment and plaintiff contributed $2,000. The parties assumed a mortgage for the balance of approximately $13,000. In 1980 the parties deeded this property to defendant's parents. In exchange defendant's parents conveyed to them a house and lot located on Skye Drive in Fayetteville. The parties held the Skye Drive property, worth $126,000 at the date of separation, as tenants by the entirety. The court concluded that "[d]efendant owns an eighty (80%) percent interest in said house ... and that the remaining twenty (20%) percent is marital property." The court then awarded the Skye Drive house and lot to defendant, adjudging it to be her "sole and separate property." The exact basis for the award is not clear from the judgment or the record. Nor is it clear whether the court was using the word "separate" as it is statutorily defined at G.S. 50-20(b)(2). Plaintiff appeals from this award.

In 1970 plaintiff inherited 61.23 shares of Edmac Trucking Company stock and 18.42 shares of Edmac Truck Sales and Service, Inc. (the corporation) stock. Before the stock was placed in plaintiff's name he exchanged the shares in Trucking Company with his sister for 13.05 shares of the corporation, giving him 31.47 shares of the corporation and an approximate ownership interest of thirty percent.

In 1974 plaintiff, as president of the corporation, borrowed $225,000 on a note guaranteed by the parties. With these funds, plus $21,743.45 in corporate funds, the corporation redeemed as treasury stock all outstanding and issued shares except those owned by plaintiff. Plaintiff thus became sole owner of the corporation, from which he drew his primary income during the marriage. The court concluded "[t]hat Edmac Truck Sales & Service, Inc. is the sole and separate property of the Plaintiff and is not marital property." It awarded him the corporation. Defendant appeals.

In 1978 plaintiff purchased a camper with dividends paid by inherited property--stock in Nedco Sales and Trucking (Nedco)--and funds from a bonus from the corporation. An addition to the camper was financed the same way. The court concluded the camper was marital property to be sold and the proceeds divided equally. Plaintiff appeals.

For reasons hereinafter set forth, we vacate and remand.

I.

In an action for equitable distribution first the court must classify property as either marital or separate as defined in G.S. 50-20(b)(1) and G.S. 50-20(b)(2). Loeb v. Loeb, 72 N.C.App. 205, ---, 324 S.E.2d 33, 37 (1985). Next it must divide the marital property equally, unless it determines that an equal division is not equitable. G.S. 50-20(c); White v. White, 312 N.C. 770, ---, 324 S.E.2d 829, 832 (1985). Separate property is not subject to equitable distribution. G.S. 50-20(c); Loeb, 72 N.C.App. at ---, 324 S.E.2d at 37.

" 'Marital property' means all real and personal property acquired by either spouse or both spouses during the course of the marriage and before the date of separation of the parties, and presently owned, except property determined to be separate property...." G.S. 50-20(b)(1). " 'Separate property' means all real and personal property acquired by a spouse before marriage or acquired by a spouse by bequest, devise, descent, or gift during the course of the marriage." G.S. 50-20(b)(2). "Property acquired in exchange for separate property" is separate property, as is income derived from separate property and increases in value of separate property. Id.

The key term in both definitions is "acquired." In Wade v. Wade, 72 N.C.App. 372, 325 S.E.2d 260 (1985), this Court adopted the source of funds rule, id. at ---, 325 S.E.2d at 269, by which property is "acquired" as it is paid for, so that it may include both marital and separate ownership interests. Sharp, Equitable Distribution of Property in North Carolina: A Preliminary Analysis, 61 N.C.L.Rev. 247, 255 (1983); Krauskopf, Marital Property at Marriage Dissolution, 43 Mo.L.Rev. 157, 180 (1978). Under the source of funds rule acquisition is an ongoing process. Harper v. Harper, 294 Md. 54, 448 A.2d 916, 929 (1982). See also Tibbetts v. Tibbetts, 406 A.2d 70, 75-76 (Me.1979). It does not depend upon inception of title but upon monetary or other contributions made by one or both of the parties. In adopting this rule by which to characterize property as marital or separate or some combination, this Court recognized "that a dynamic rather than static interpretation of the term 'acquired' as used in G.S. 50-20(b)(1)" best serves to implement the remedial intent of the statute. Wade, 72 N.C.App. at ---, 325 S.E.2d at 268.

Using a source of funds analysis, this Court drew a distinction in Wade between increases in value of separate property due to passive appreciation, such as by inflation or governmental action, see e.g. Hoffmann v. Hoffmann, 676 S.W.2d 817 (Mo. banc 1984) (increased value of separate property due to Clean Water Act of 1977, 33 U.S.C. Sec. 1251), and increases due to active appreciation, such as by financial or managerial contributions from one or both of the spouses. Wade, 72 N.C.App. at ---, 325 S.E.2d at 268; Sharp, supra, at 260-61. It interpreted G.S. 50-20(b)(2), which classifies increase in value of separate property as separate property, as referring only to increase due to passive appreciation, which does not deplete the marital estate. Wade, 72 N.C.App. at ---, 325 S.E.2d at 268. It held that increase in value of separate property due to active appreciation, which otherwise would have augmented the marital estate, is marital property. Id. Thus the marital partnership shares in increases in value of property it has proportionately "acquired" in its own right. Sharp, supra, at 257.

II.

With the foregoing as background, we address the award of the corporation to plaintiff as his "sole and separate property."

The status of closely-held corporate stock brought into a marriage by one spouse--rather than inherited during the marriage as here--has recently been determined in Phillips v. Phillips, 73 N.C.App. 68, 326 S.E.2d 57 (1985). There plaintiff owned 98 per cent of a corporation prior to his marriage to defendant. He accumulated considerable assets after the marriage by profit-making manipulation of corporate funds. Plaintiff contended that because he owned the corporation prior to marriage, it and assets purchased by withdrawal of corporate funds were separate property. In rejecting plaintiff's contentions this Court noted that under this view increases in value of separate property would be immune from equitable distribution even if the marriage partner managing the separate property "was able to do so because his or her spouse devoted time and money to maintaining the household, enabling him or her to engage in profitable business dealings." Phillips, 73 N.C.App. at ---, 326 S.E.2d at 60. If this were the case, the Court continued, "the equitable distribution [would be] no help to the person whose spouse is a business [person] or entrepreneur [and] who brings considerable corporate property into the marriage...." Id. "We do not believe," the Court concluded, "that merely by covering his transactions with the corporate veil plaintiff can claim that any assets acquired thereby are wholly insulated from equitable distribution." Id. at ---, 326 S.E.2d at 61.

The Phillips court found, therefore, that the active appreciation of the closely-held corporation during marriage and before separation was marital property and that assets acquired by siphoning funds from the corporation could be marital property if such assets were a product of the active appreciation of the corporation and/or actively appreciated during the marriage. ¹ The Court thus followed the analysis of Wade, 72 N.C.App. 372, 325 S.E.2d 260, reenforcing the principle that the sophisticated spouse who expends money and effort during the marriage to improve his or her separate property should not be insulated from equitable distribution when the marriage breaks down. See Hall v. Hall, 462 A.2d 1179, 1181-82 (Me.1983). See also Roffman v. Roffman, 124 Misc.2d 636, 476 N.Y.S.2d 713 (1983) (term "separate property" not applicable to growth of a business that was the primary economic foundation of a lengthy marriage).

We find Phillips controlling and rely upon its reasoning to determine the status of closely-held corporate stock inherited by one of the parties during the marriage here.

In 1970 plaintiff inherited, after an exchange with his sister, 31.47 shares of Edmac corporation, giving him an ownership interest of approximately 30 per cent. That initial interest qualifies as separate property under the statute. G.S. 50-20(b)(2). Any increase in its value due to active appreciation is marital property. Wade, 72 N.C.App. at ---, 325 S.E.2d at 268; Phillips, 73 N.C.App. at ---, 326 S.E.2d at 60-61. Thus, on remand, the court should make findings as to: (1) the value of plaintiff's minority interest at the time of inheritance, see, e.g. 2 McCahey, Valuation and Distribution of Marital Property, 22-5 to 22-129 (1984); (2) the value of plaintiff's controlling interest at the date of separation (while no finding was made, uncontradicted evidence shows that value to be $400,000); (3) the difference between the two; and (4) the proportion of that difference that is due to active appreciation, i.e., attributable to funds, talent, or labor that are...