Rueschenberg v. Rueschenberg

• Decision Date: 13 May 2008
• Docket Number: No. 1 CA-CV 07-0300.,1 CA-CV 07-0300.
• Citation: 219 Ariz. 249,196 P.3d 852
• Parties: Jubie RUESCHENBERG, Petitioner/Appellee, v. Scott RUESCHENBERG, Respondent/Appellant.
• Court: Arizona Court of Appeals

196 P.3d 852

219 Ariz. 249

Jubie RUESCHENBERG, Petitioner/Appellee, v. Scott RUESCHENBERG, Respondent/Appellant.

No. 1 CA-CV 07-0300.

Court of Appeals of Arizona, Division 1, Department B.

May 13, 2008.

Review Denied October 28, 2008.

Warner Angle Hallam Jackson Formanek, PLC By Charles R. Hallam, and Tracey Van Wickler, Phoenix, Attorneys for Petitioner/Appellee.

Law Office of Scott E. Boehm, PC By Scott E. Boehm, Jeffrey G. Pollitt, PC By Jeffrey G. Pollitt Phoenix, Co-Counsel for Respondent/Appellant.

OPINION

BARKER, P.J.

¶ 1 Scott Rueschenberg ("Husband") appeals from the trial court's award of $296,667 to Jubie Rueschenberg ("Wife") as one-half of the community's share in the value of Husband's separate property. For the reasons that follow, we agree with the trial court and affirm.

Facts and Procedural History

¶ 2 Wife and Husband were married May 15, 1998. Prior to and at the time of marriage, Husband owned a business called Desert Mountain Medical ("DMM"). DMM sells medical hardware, for the repair of human joints, to surgeons and hospitals. It is undisputed that DMM is Husband's separate property.

¶ 3 The parties resolved all issues regarding the dissolution of marriage through mediation except for the issue of any community interest in the increase in value of DMM over the life of the marriage. On December 14, 2005, the trial court appointed a special master at the request of the parties.¹ On December 22, 2006, the special master filed a report with the trial court.

¶ 4 The special master's report used the capitalization of earnings method of valuation² to find that DMM had a fair value of $163,166 at the commencement of the marriage. This value was based on the special master's finding that normalized earnings³ were $38,000 at the time the parties married, that the applicable capitalization rate was 25%, and that there was an additional $11,166 in a non-operating asset/shareholder loan which added to the value. Using the same method, it found that DMM was worth $1,440,000 (having normalized earnings of $360,000) on October 31, 2003.⁴ The report then awarded Husband a sole and separate property interest of $550,000. It arrived at this figure by giving what it considered to be a fair rate of return on the original investment of $163,166. The report then subtracted that $550,000 from the value at the dissolution of marriage, $1,440,000, and found that the community was responsible for two-thirds of the resulting increase (i.e. two-thirds of $890,000), which amounts to $593,333. It then awarded Wife half of this amount, or $296,667.

¶ 5 The report found that the community's labor was only responsible for two-thirds of the increase in the value of the company because external factors were responsible for one-third of the increase. Husband had presented evidence that the company's increase in value was due to an increase in manufacturer marketing and sales assistance, increased customer acceptance of the products, increased research and development by manufacturers, natural population growth in the market area, and other DMM sales personnel expanding the market.

¶ 6 The special master's report also found that the community had received virtually 100% of the net distributable earnings during the marriage, but did not include a finding as to what that amount was. Wife's expert believed the total amount of monies distributed to the community during marriage to be $2,875,000 while Husband's expert believed it to be $3,122,521. There was no request, however, by Husband to determine the amount of net distributable earnings (generally, income less salary and other expenses) generated by DMM during the marriage. Consequently, the report did not consider whether there was an amount of net distributable earnings that had been overpaid to the community and was due Husband as the owner of DMM or should be subtracted as an offset from the community's interest in the value of DMM.

¶ 7 The trial court incorporated the special master's findings verbatim into its decree of dissolution. Husband filed a timely notice of appeal. We have jurisdiction pursuant to Arizona Revised Statutes ("A.R.S.") § 12-2101(B) (2003).

Discussion

¶ 8 Husband makes several arguments on appeal: 1) that the court erred in giving the community an interest in DMM's increased value (here, goodwill) when the community had already received the company's profits (net distributable earnings) generated during the course of the marriage, 2) that the trial court erred in awarding the community a further interest in DMM when a fair salary had already been paid to the community, 3) that the trial court abused its discretion in finding that two-thirds of DMM's growth was due to community labor and efforts, and 4) that the trial court abused its discretion in apportioning the increase in value when the community had already received more than its pro rata share of the total increase in net profits and value.

1. Both Profits and Increase in Value Must Be Considered in Order to Effect an Equitable Apportionment.

¶ 9 Husband argues that Arizona law prohibits the apportionment of both profits and increased value between community and separate property. Specifically, Husband argues that Arizona statutes define all of the increased value of a separate property business as separate property and that Arizona courts have carved out a limited qualification to the statutory scheme that may grant the community some interest in either profits or increase in value but not both. Husband misunderstands the Arizona community property scheme and mischaracterizes the Arizona case law addressing the issue.

¶ 10 Arizona's statutory community property scheme provides that the "increase, rents, issues and profits" of a spouse's real and personal property "that is owned by that spouse before marriage" is "the separate property of that spouse." A.R.S. § 25-213(A) (2007). It also provides, however, that "all property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is . . . [a]cquired by gift, devise or descent." A.R.S. § 25-211 (2007).

¶ 11 These provisions potentially conflict when a separate property business earns profits and/or increases in value because of community labor. For instance, § 25-213(A) provides that the "increase . . . and profits" of separate property continue to be "the separate property of that spouse." On the other hand, § 25-211 provides that "[a]ll property acquired" during the marriage by husband or wife, with exceptions not applicable here, "is the community property of the husband and wife." Thus, as to "profits" and "increases" from a separate business that are the product of community labor, the competing statutes can render potentially different results.

¶ 12 When it appears that two statutes conflict, "whenever possible, we adopt a construction that reconciles one with the other, giving force and meaning to all statutes involved." UNUM Life Ins. Co. of America v. Craig, 200 Ariz. 327, 333, ¶ 28, 26 P.3d 510, 516 (2001) (citing Lewis v. Ariz. Dep't of Econ. Sec., 186 Ariz. 610, 614, 925 P.2d 751, 755 (App.1996)). Arizona courts have long agreed that the results of a spouse's labor are community property. Koelsch v. Koelsch, 148 Ariz. 176, 181, 713 P.2d 1234, 1239 (1986) ("[I]t is established law that . . . the fruits of labor expended during marriage are community property. . . .") (citing Shaw v. Greer, 67 Ariz. 223, 225, 194 P.2d 430, 431 (1948)). In resolving the specific issue regarding separate property profits and increase in value, Arizona courts have looked to the nature, or source, of the profit from or increase of the separate property business. Cockrill v. Cockrill, 124 Ariz. 50, 53, 601 P.2d 1334, 1337 (1979); Rundle v. Winters, 38 Ariz. 239, 245, 298 P. 929, 931 (1931). The rule is that if the profits and/or increase result from the "inherent qualities of the business," the profits and increase are separate property; if the profits and/or increase result from the "individual toil and application of the spouse," they are community property. Rundle, 38 Ariz. at 245, 298 P. at 931.

¶ 13 As a further refinement to this rule, prior to the Cockrill decision in 1979, Arizona followed what is known as the "all or none" rule. That rule provided that either all of the profits and all of the increase were separate property or all of the profits and all of the increase were community property depending on whether the profits and increase were "primarily due to the toil of the community or primarily the result of the inherent nature of the separate property." Cockrill, 124 Ariz. at 53, 601 P.2d at 1337 (citing Porter v. Porter, 67 Ariz. 273, 195 P.2d 132 (1948)) (emphasis added); Anderson v. Anderson, 65 Ariz. 184, 187, 177 P.2d 227, 229 (1947) (stating that because "the inherent nature of the [separate] business is" such that "the success is due to the management and requires the attention of the owner," all the profits of that business were "community property"); In re Torrey's Estate, 54 Ariz. 369, 375-76, 95 P.2d 990, 993 (1939) ("[I]f profits come mainly from the property, . . . they belong to the owner of the property," but if "profits come mainly from the efforts or skill of one or both [spouses], they belong to the community."); Spector v. Spector, 23 Ariz.App. 131, 140-41, 531 P.2d 176, 185-86 (1975) (holding that all of the profits from a separate business were separate property even though the "increase in value" was almost all due to the "increases in the value of Arizona real estate during the period" and making no effort to apportion between separate and community property) (emphasis added).

¶ 14 Cockrill did away with the all or none rule and instead instituted an apportionment rule that apportions to the community and to the separate property the profits or increase in separate property attributable to each. 124 Ariz. at 54, 601 P.2d...