Sexton v. Sexton

• Decision Date: 22 January 2004
• Docket Number: No. 2001-SC-0204-DG.,2001-SC-0204-DG.
• Citation: 125 S.W.3d 258
• Parties: Jennifer Paige SEXTON, Appellant, v. Larry Duane SEXTON, Appellee.
• Court: United States State Supreme Court — District of Kentucky

125 S.W.3d 258

Jennifer Paige SEXTON, Appellant, v. Larry Duane SEXTON, Appellee.

No. 2001-SC-0204-DG.

Supreme Court of Kentucky.

January 22, 2004.

Sharon K. Morris, James Michael Morris, Morris & Morris, Lexington, for Appellant.

William Miles Arvin, Nicholasville, for Appellee.

OPINION of the Court by Justice KELLER.

I. ISSUE

This dissolution-of-marriage action presents one primary issue for our consideration. Appellee owned an apartment building before his marriage to Appellant. During the marriage, in exchange for the apartment building, the parties acquired in their joint names an undivided one-sixth (1/6) partnership interest in Autumn Park Partnership (Autumn Park), a real estate partnership. At the time of the exchange, Appellee had a 94% nonmarital interest in the apartment building. Both the trial court and the Court of Appeals held that Appellee's nonmarital interest in the apartment building did not become marital property because the partnership interest was placed in the parties' joint names. Therefore, Appellee was awarded a 94% nonmarital interest in the parties' partnership interest in Autumn Park. Did Appellee's nonmarital interest in the apartment building transmute into marital property when the partnership interest was placed in the parties' joint names? Because, one, title is not controlling in determining property's character, and, two, Appellee and his parents did not intend for Appellant to receive any interest in the partnership as a result of placing the partnership interest in the parties' joint names, we hold that Appellee's nonmarital interest in the apartment building did not become marital property simply because it was used to acquire property that was placed in the parties' joint names. Accordingly, we affirm the Court of Appeals's decision upholding the trial court's judgment awarding Appellee a 94% nonmarital interest in the parties' partnership interest.

II. BACKGROUND

Appellant, Jennifer Paige Sexton, and Appellee, Larry Duane Sexton, married on May 26, 1984. At the time of their marriage, Appellee owned an eight-unit apartment building valued at $165,000 with a mortgage debt of $89,900 against it. Appellee thus had equity of $75,100 in the apartment building. During the marriage, the principal on the apartment building's mortgage was reduced by $20,764 as a result of money gifts totaling $4,706 from Appellee's parents and by the application of $16,058 in rental proceeds from the apartment building.

In March 1992, the parties¹ conveyed the apartment building to Autumn Park² in exchange for a one-sixth (1/6) partnership interest that was placed in the parties' joint names.³ In addition, Appellee individually executed a $69,000 note payable to his parents. This note represented the unpaid balance of the debt against the apartment building⁴ and thus allowed Appellee to make a partnership contribution equal to the apartment building's unencumbered value. Appellee did not repay the note; rather, his parents gifted the $69,000 to him over the next few years.⁵ The trial court determined that when the parties transferred the apartment building to the partnership, Appellee had a 94% nonmarital interest in the apartment building and the parties, together, had a 6% marital interest.⁶

The trial court found that Appellee's parents placed the Autumn Park partnership interest in both parties' names (rather than Appellee's name alone) only because the parties were married, and that there was no intent by Appellee's parents to benefit Appellant.⁷ Similarly, the trial court found that Appellee's parents' forgiveness of the $69,000 note was intended as a gift to Appellee only. Additionally, the trial court found that the increase in the value of Autumn Park did not occur as a result of the efforts of the parties but solely from the efforts of Appellee's father, "the man running the show," who "intended the benefit to go to his son." Specifically, the trial court pointed out that no marital funds were used to operate the partnership, and, even though Appellee worked for Autumn Park, he received a salary and "did not personally cause the increase." The trial court thus concluded that the parties did not as a "marital unit participat[e] or contribut[e] in any way" to Autumn Park's increase in value. As a result of its findings, the trial court found that the relative nonmarital and marital shares of the one-sixth (1/6) partnership interest in Autumn Park remained the same as they had prior to the exchange of the apartment building, i.e., Appellee had a 94% nonmarital interest and the parties together owned a 6% marital interest.⁸ At the time the apartment building was conveyed to the partnership, the trial court found that the apartment building's total equity was $134,622, and therefore, Appellee's 94% nonmarital interest in the apartment building was worth $125,897.⁹ At the time of trial in September 1998, the trial court determined that the one-sixth (1/6) partnership interest in the Autumn Park Partnership had increased in value to $507,410 and that Appellee's 94% nonmarital interest in the parties' partnership interest was, therefore, worth $476,965, and the parties 6% marital interest was worth $30,445. Accordingly, the trial court assigned Appellee's nonmarital interest of $476,965 to him and found that the marital interest of $30,445 should be equally divided between the parties.¹⁰ A panel of the Court of Appeals, in a 2-1 split decision, found no abuse of discretion by the trial court and affirmed its allocation of the parties' partnership interest in Autumn Park. For reasons stated infra, we affirm the trial court' disposition of the partnership interest.

Appellant sought an award of her attorney's fees and costs, totaling $22,810, that she incurred in connection with her legal representation in the dissolution action, but the trial court, without making any findings, totally denied her request. The Court of Appeals, although noting that Appellant references evidence from the record, which indicates that Appellee will earn 450% of what Appellant will earn in the same period,¹¹ found no abuse of discretion and affirmed the trial court. We reverse the Court of Appeals on this issue and remand the case to the trial court for reconsideration of Appellant's request for an award of attorney's fees and costs.

III. ANALYSIS

A. AUTUMN PARK PARTNERSHIP

Appellant claims that the trial court erroneously awarded Appellee a 94% nonmarital interest in the parties' one-sixth (1/6) partnership interest in Autumn Park and advances a number of arguments in support of this claim: first, the trial court ignored Kentucky's general partnership law in classifying the partnership interest and the allocation was erroneous under partnership law; second, the evidence presented by Appellee to show his nonmarital interest in the partnership was insufficient to meet the burden of proof for tracing nonmarital property; third, the debt forgiveness used to purchase the partnership interest was a gift to the marital unit, not Appellee individually; and fourth, Appellee's use of his nonmarital property to purchase the partnership interest in the parties' joint names transmuted Appellee's nonmarital property into a marital interest in the partnership. We find none of these arguments persuasive, and accordingly, we affirm the trial court's division of the parties' partnership interest in Autumn Park.

1. Application of Partnership Law

Because the partnership agreement shows the one-sixth (1/6) partnership interest in Autumn Park in the parties' joint names, i.e., "Larry D. Sexton and Jennifer P. Sexton, husband and wife,"¹² Appellant argues that "partnership law must control because each of the parties already owns one-half of the undivided interest." Appellant posits that under partnership law she was a general partner in Autumn Park and was thus entitled to the benefits afforded by Kentucky's partnership law, namely, one-half (1/2) of the parties one-sixth (1/6) partnership interest. We disagree with Appellant's conclusion that partnership law controls the disposition of the parties' partnership interest in Autumn Park.

The disposition of parties' property in a dissolution-of-marriage action is governed by KRS 403.190,¹³ and neither record title¹⁴ nor the form in which it is held, e.g., partnership, corporation, or sole proprietorship,¹⁵ is controlling or determinative. Under KRS 403.190, a trial court utilizes a three-step process to divide the parties' property: "(1) the trial court first characterizes each item of property as marital or nonmarital; (2) the trial court then assigns each party's nonmarital property to that party; and (3) finally, the trial court equitably divides the marital property between the parties."¹⁶ "An item of property will often consist of both nonmarital and marital components, and when this occurs, a trial court must determine the parties' separate nonmarital and marital shares or interests in the property on the basis of the evidence before the court."¹⁷ Neither title nor the form in which property is held determines the parties' interests in the property; rather, "Kentucky courts have typically applied the `source of funds' rule to characterize property or to determine parties' nonmarital and marital interests in such property."<sup>18</sup> "The `source of funds rule' simply means that the character of the property, i.e., whether it is marital, nonmarital, or both, is determined by the source of the funds used to acquire the property."¹⁹

In the present case, prior to the parties' marriage, Appellee owned the apartment building that was exchanged for the partnership interest,²⁰ and the apartment building's equity increased during the marriage, at least partially, as a result of gifts from Appellee's parents.²¹ Thus, although the parties' partnership interest was acquired during the marriage, the trial court found that Appellee's nonmarital funds and property were primarily used to...