Pattee v. Pattee

• Decision Date: 30 October 1987
• Docket Number: No. S-1651,S-1651
• Citation: 744 P.2d 658
• Parties: Kim R. PATTEE, Appellant, v. Richard PATTEE, Appellee.
• Court: Alaska Supreme Court

Page 658

744 P.2d 658

Kim R. PATTEE, Appellant, v. Richard PATTEE, Appellee.

No. S-1651.

Supreme Court of Alaska.

Oct. 30, 1987.

G.R. Eschbacher, Anchorage, for appellant.

Dan W. Allan, Anchorage, for appellee.

Before RABINOWITZ, C.J., and BURKE, MATTHEWS, COMPTON and MOORE, JJ.

OPINION

MOORE, Justice.

This appeal concerns the property division and child support award made as part of the divorce of Kim Pattee (appellant) from Richard Pattee (appellee). Kim contends that the trial court erred in finding that Richard's sale of a marital asset to his brother immediately after service of the divorce complaint was not intended to defraud her of her fair share of the property. She also argues that the court erred in basing the child support award on Richard's income after he had voluntarily chosen to give up a lucrative job to become an unemployed student.

I. FACTS

Kim married Richard in Washington State in 1979. They had two children, a son born in 1979 and a daughter born in 1984.

In 1982 Richard's stepfather gave Richard and his brother John an interest in a gold mine. Kim and Richard subsequently sold their Anchorage home, and used the profit from the house sale to support them while Richard worked with John at the mine. The brothers sold the mine in November 1982 for a total profit of about $125,000.

Some of the profit was apparently used to purchase cars and to support Kim, Richard and John during a subsequent mining venture. Richard and John invested the remainder of the profit, about $109,000, in an Anchorage bar (the Union Club, now called The Avenue) in a joint venture with their mother. ¹ Half of this money, or $54,500, was Richard's.

Richard and John paid $800,000 for the Union Club. Richard originally took a one-half interest in the bar, but reduced his interest to one-third by the end of 1984. By December 31, 1984, the partners had reduced the mortgage owed on the bar to $590,480.96. In addition, they had invested $73,000 in bar improvements.

Kim filed for divorce on December 26, 1984. On December 31, 1984, Richard executed a contract selling his interest in The Avenue to his brother for $54,500, payable by an unsecured, non-transferable promissory note due over a ten-year term. This contract was not recorded. It was not disclosed to Kim or to the divorce court until June 1985. ² Richard continued to work at the bar; he took partnership draws of more than $3,000 per month through April 1985. ³ Subsequently, Richard quit work, moved to Seattle and became a student at Tacoma Community College. At the time of trial, Richard lived with his sister rent-free and received an allowance of $1,000 per month, plus his tuition expenses, from his mother.

On January 4, 1985, a few days after the undisclosed sale, Kim obtained a temporary restraining order preventing Richard from selling or encumbering his assets, including his interest in the bar, and providing interim child support. The parties were divorced on July 16, 1985, under an interim decree that left open the property settlement and child support questions.

After a three-day bench trial, the court found that Richard's sale of his interest in the bar was made at fair market value and was not fraudulent to Kim. The court divided the remaining payments due on John's promissory note to Richard (totalling $44,000) equally between the two parties. The court then found that Richard's only income was his half of the payments on this note, or $326 per month. It ordered Richard to pay this sum as child support ($163 per month per child).

II. FRAUDULENT CONVEYANCE OF "THE AVENUE"

Kim argues that Richard's secret conveyance of his interest in The Avenue to his brother three days after receiving service of divorce papers was intended to defraud her of her fair share of a primary marital asset.

Alaska Statute 34.40.010, the Fraudulent Conveyance Act, provides:

A conveyance or assignment, in writing or otherwise, of an estate or interest in lands, or in goods, or things in action, or of rents or profits issuing from them or a charge upon lands, goods, or things in action, or upon the rents or profits from them, made with the intent to hinder, delay, or defraud creditors or other persons of their lawful suits, damages, forfeitures, debts, or demands, or a bond or other evidence of debt given, action commenced, decree or judgment suffered, with the like intent, as against the persons so hindered, delayed, or defrauded is void.

A conveyance of marital property made in anticipation of a divorce may be set aside as fraudulent. Gabaig v. Gabaig, 717 P.2d 835, 837-38 (Alaska 1986). In Gabaig, the husband, in anticipation of divorce, secretly conveyed marital property through a "straw man" to his son by a prior marriage. We affirmed the trial court's finding that the transfer was fraudulent and therefore void under AS 34.40.010. The key attribute of fraudulent conveyances is that they are made with the intent to defraud. Existence of fraudulent intent is a question of fact. Id. at 838. We will not set aside a determination of fraudulent intent unless, upon our reading of the record as a whole, we are left with the "definite and firm conviction that a mistake has been made." Alaska R.Civ.P. 52(a); Williams v. Alyeska Pipeline Service Co., 650 P.2d 343, 347 (Alaska 1982).

In Gabaig, we identified eight "badges of fraud" which may provide circumstantial evidence of a fraudulent conveyance: inadequate consideration; transfer in anticipation of an impending suit; insolvency of the transferor; failure to record; a transfer encompassing substantially all of the transferor's property; a transfer completely depleting the transferor's property; and the relationship between the parties to the sale. 717 P.2d at 839 n. 6. Not all the "badges" need be present to affirm a finding of fraud. Id. at 839 n. 8.

The court below concluded that Richard's sale of his interest in The Avenue was not intended to defraud Kim because it found that the sale was made at fair market value and that Richard did not retain an interest in the property after the sale. Neither of these findings is supported by substantial evidence in the record. Our reading of the record leaves us with the definite and firm conviction that Richard intended to defraud Kim when he sold his interest in The Avenue.

(1) Fair Market Value of Richard's Interest in The Avenue

Richard sold his interest in The Avenue to his brother John for an unsecured, non-transferable note for $54,500 payable over 10 years at 10% interest. ⁴ Expert testimony established that the value of such a note, even if it were transferable and fully secured, was at most 60-72% of its face value. In reality, the sale brought less than $39,240 (72% of $54,500). ⁵

Kim provided expert testimony from an accountant that the value of Richard's interest in The Avenue on December 31, 1984 was $132,000. ⁶ This value was based on the "capitalization of earnings method" for the value of the liquor license and good will, plus the cost value of the real property. In Rostel v. Rostel, 622 P.2d 429, 430 (Alaska 1981), we held that the value of a close corporation, held as marital property by a divorcing couple, properly included the value of its good will as well as the value of its physical property and accounts receivable. See also Marriage of Foster, 42 Cal.App.3d 577, 117 Cal.Rptr. 49, 52 (1974); Marriage of Goger, 27 Or.App. 729, 557 P.2d 46, 47-48 (1976); Marriage of Lukens, 16 Wash.App. 481, 558 P.2d 279, 282 (1976) (professional practices have good will value). The capitalization of earnings method is one generally accepted method for evaluating the good will of a business. See In re Marriage of Hall, 103 Wash.2d 236, 692 P.2d 175, 179 (1984). See generally Comment, The Recognition and Valuation of Professional Goodwill in the Marital Estate, 66 Mar.L.Rev. 697 (1983); Comment, Identifying, Valuing, and Dividing Professional Goodwill as Community Property at Dissolution of the Marital Community, 56 Tul.L.Rev. 313 (1981).

The trial court's finding that the sale was made at fair market value was clearly erroneous for the following reasons: (1) Richard did not even recover the amount of his investment made more than a year earlier; and (2) he got nothing for his share of the good will.

(2) Richard's Continued Interest in The Avenue

Richard accepted partnership draws totalling $14,575 in the four months after the sale. Moreover, The Avenue paid $7,771 to the Internal Revenue Service on his behalf during this period. Richard's name also appeared on the liquor license after 1984. In light of this evidence, we believe that the trial court's finding that Richard retained no interest in The Avenue was clearly erroneous.

(3) Other Badges of Fraud

The sale was made for insufficient consideration, and Richard maintained at least some interest in The Avenue subsequent to its sale. Other badges of fraud also suggest that Richard intended to defraud Kim of a substantial part of her share of The Avenue.

First, the transfer was made in anticipation of an impending suit. Richard made the sale on December 31, 1984, just three days after Kim had served him with a complaint for divorce. Second, even if the sale did not leave Richard completely insolvent, the record suggests that his remaining assets might be insufficient to provide Kim with her half of the fair market value of the interest in The Avenue. Third, he failed to record the transaction promptly. The most significant portion of the parties' marital estate was sold without the knowledge of the wife or of the court having jurisdiction over the divorce. Fourth, the transfer encompassed substantially all the valuable property held by Richard. Fifth, although the transfer did not entirely deplete his assets (because he was left with the value of the note), it reduced his assets significantly. Moreover, once the note was shared with Kim the income from the remainder was far less than enough to pay his...