Simplot v. Simplot

• Decision Date: 13 June 1974
• Docket Number: No. 11112,11112
• Citation: 526 P.2d 844,96 Idaho 239
• Parties: Don J. SIMPLOT, Plaintiff-Respondent, v. Sharidon Lee SIMPLOT, Defendant-Appellant.
• Court: Idaho Supreme Court

Page 844

526 P.2d 844

96 Idaho 239

Don J. SIMPLOT, Plaintiff-Respondent, v. Sharidon Lee SIMPLOT, Defendant-Appellant.

No. 11112.

Supreme Court of Idaho.

June 13, 1974.

Eberle, Berlin, Kading, Turnbow & Gillespie, Boise, for defendant-appellant.

Clemons, Cosho, Humphrey & Samuelsen, Boise, for plaintiff-respondent.

McQUADE, Justice.

This action arises out of a judgment and decree of divorce. The plaintiff-respondent, Don J. Simplot, and the defendant-appellant, Sharidon Lee Simplot, were married on June 28, 1953. Since 1953, the respondent has been employed by J. R. Simplot Company and its various subsidiaries and the appellant has maintained the family household. The respondent instituted a divorce action on the ground of extreme cruelty and on November 19, 1971, the district court entered a judgment and decree of divorce which was amended on February 23, 1972. The appellant appeals from the amended judgment and decree of divorce and the supporting findings of fact and conclusions of law to this Court. The appellant's assignments of error deal with the trial court's classification and award of specific property and the adequacy of alimony and child support.

The appellant contends that the trial court erred in not classifying as community property the respondent's proportionate share of J. R. Simplot Company's retained earnings that were accumulated during the marriage. At the time of the marriage, the respondent owned 610 shares out of a total of 2,262.2395 outstanding shares of Apex Corporation. There has been no change during the marriage in the respondent's holdings in Apex. Apex has no functions other than to hold 22,622.395 shares of J. R. Simplot Company, Class B stock. The ownership of J. R. Simplot Company is made up of 76.445 Class A shares and 72,545.950 Class B shares. The respondent's ownership of J. R. Simplot Company through his shares of Apex constitutes 8.4% of the total ownership of J. R. Simplot Company. The total retained earnings of J. R. Simplot Company at the date of the marriage was $6,171,098 making the respondents' proportionate share (8.4%) amount to $235,269. As of July 31, 1971, the retained earnings of J. R. Simplot company had grown to $44,230,790, and the respondent's proportionate share had increased to $4,039,480. During the marriage the respondent's proportionate share of retained earnings had increased 88% or $3,789,090.

It is provided in I.C. § 32-903 that all property acquired before marriage remains the separate property of the acquiring spouse. Since the 610 shares of Apex were acquired before the marriage, they are the respondent's separate property.

It is provided in I.C. § 32-906 that,

'All other property acquired after marriage by either husband or wife, including the rent and profits of the separate property of the husband and wife, is community property, unless by the instrument by which any such property is acquired by the wife it is provided that the rents and profits thereof be applied to her sole and separate use; in which case the management and disposal of such rents and profits belongs to the wife, and they are not liable for the debts of the husband. Rent and profits as used in this chapter shall mean income only.'

It is the appellant's position that the respondent's proportionate share of the increase in retained earnings during the marriage is rent and profit of his separate property and in accordance with I.C. § 32-906 is therefore community property.

There are no Idaho cases dealing with the character of retained earnings of a corporation which are earned and accumulated during a marriage. ¹ The only other community property states that provide that rents and profits of separate property are community property are Louisiana and Texas. ² The Louisiana statute ³ is of no guidance in this action because the Louisiana legislature has limited increases in value of separate property that become community property to those increases due to 'common labor, expenses or industry.' The Texas provision that rents and profits of separate property is community property has been arrived has been arrived at by judicial construction of art. 16, § 15 of the Texas Constitution, Vernon's Ann.St. which defines the separate property of the wife. ⁴ Since Texas has no comparable constitutional or statutory provision, its cases dealing with rents and profits are of no assistance in construing I.C. § 32-906.

In the case of Gapsch v. Gapsch ⁵ it was held that the natural enhancement in value of separate property remained separate property and was not rent or profit. That case involved the sale of an automobile that was the husband's separate property which resulted in the realization of a fifty dollar gain. The wife claimed that the gain was a profit and pursuant to I.C. § 32-906 was community property. This Court held that,

'The enhanced value of the car was not due to the employment of community effort, labor, industry or funds but was a natural enhancement due to the ordinary course of events. The proceeds of the sale thereof, including the profit of $50, remained the separate property of the husband.' ⁶

First, it must be determined whether separate property stock's proportionate share of an increase in a corporation's retained earnings is rent and profit or natural enhancement. In the case of Malone v. Malone ⁷ rents and profits were held to mean net rents and net profits. Subsequently, I.C. § 32-906 was amended to state that rents and profits mean income only. The record establishes that there has been a dramatic increase in J. R. Simplot Company's retained earnings, but the respondent has no means of obtaining the use or control over his proportionate share of the retained earnings.

'Corporate earnings and profits remain the property of the company, until severed from the assets and distributed as dividends among the stockholders entitled thereto. A stockholder has no property rights in the accumulated earnings and surplus of the corporation, and any right that he may have to cumulated undeclared dividends is not a vested property or constitutional right but is subject to change or cancellation by proper corporate law. It is the declaration of the dividend which creates both the dividend itself and the right of the stockholder to demand and receive it.' ⁸

The retained earnings of J. R. Simplot Company are not accumulated as a cash account, but rather the corporation's earnings have been reinvested in the expansion of the business through the purchase of plant and equipment. ⁹ The decision of the directors to reinvest the earnings is a matter of business judgment, ¹⁰ and the growth of the J. R. Simplot Company demonstrates that it was a sound decision. For this Court to declare that the respondent is entitled to a portion of the retained earnings would be in effect to require the J. R. Simplot Co. to declare a dividend and then require Apex Corporation to declare a dividend and thus, substitute its judgment for the business judgment of the directors of both the Simplot and Apex Corporations. Since the respondent has no legal right to the retained earnings and since there is no guarantee that they will ever become of economic benefit to him, they are not income or rents and profits as the terms are used in I.C. *s 32-906.

The existence of separate property is recognized by I.C. § 32-903 which provides:

'Separate property of husband and wife.-All property of either the husband or the wife owned by him or her before marriage, and that acquired afterward by either by gift, bequest, devise or descent, or that which either he or she shall acquire with the proceeds of his or her separate property, by way of moneys or other property, shall remain his or her sole and separate property.'

In the Malone case it was held that,

'(I.C.A. § 31-907) of the code, heretofore quoted, providing that property acquired after marriage by either husband or wife, including the rents and profits of their separate property, is community property, refers to net rents and profits, and is not to be construed to mean that the gross income from separate property belongs to the community. To hold otherwise would cause the community to, in time, entirely consume the separate estates of the members thereof and would nullify (I.C.A. § 31-903 and § 31-906.)' ¹¹

The right to preserve separate property was acknowledged in the Malone case. Respondent owned 610 unencumbered shares of Apex before the marriage; there were no changes in his ownership during the marriage; at the dissolution of the marriage the respondent should still own 610 unencumbered shares of Apex stock to be consistent with the right to own and maintain separate property. If the increase in retained earnings allowable to the 610 shares of Apex stock is held to be community property, the result will be to divide and distribute part of the respondent's stock owned as separate property. Similar to the holding in the Malone case, the increase in retained earnings in this action must be considered natural enhancement and not income or rents and profits in order to preserve the right to own and hold separate property.

The appellant contends that if retained earnings are not held to be a profit, then the husband may deny the community his business earnings by incorporating the business. In this action the respondent has served on the board of directors of J. R. Simplot Company, but the appellant does not allege that the retention of earnings has been fraudulent or intended to deprive the community of funds. There is no evidence that the respondent did not receive an adequate salary in relationship to his responsibilities. Furthermore, there is no evidence that the respondent used the corporate structure to deprive the community of earnings. ¹² The courts must be vigilant to protect the community from the use of business organizations to deprive the community of earnings that are the result of community labor, but there is no...