Smith v. Smith

• Decision Date: 19 July 1996
• Docket Number: No. 23267,23267
• Court: West Virginia Supreme Court
• Parties: Tammera L. SMITH, Petitioner Below, Appellant, v. Clyde Ellsworth SMITH, III, Respondent Below, Appellee.

Page 881

475 S.E.2d 881

197 W.Va. 505

Tammera L. SMITH, Petitioner Below, Appellant, v. Clyde Ellsworth SMITH, III, Respondent Below, Appellee.

No. 23267.

Supreme Court of Appeals of West Virginia.

Submitted May 2, 1996.

Decided July 19, 1996.

Syllabus by the Court

1. "In reviewing challenges to findings made by a family law master that also were adopted by a circuit court, a three-pronged standard of review is applied. Under these circumstances, a final equitable distribution order is reviewed under an abuse of discretion standard; the underlying factual findings are reviewed under a clearly erroneous standard; and questions of law and statutory interpretations are subject to a de novo review." Syl. Pt. 1, Burnside v. Burnside, 194 W.Va. 263, 460 S.E.2d 264 (1995).

2. "Active appreciation of separate property of either of the parties to a marriage, or that increase which 'results from (A) an expenditure of funds which are marital property, including an expenditure of such funds which reduces indebtedness against separate property, extinguishes liens, or otherwise increases the net value of separate property, or (B) work performed by either or both of the parties during the marriage' is marital property which is subject to equitable distribution. W.Va.Code § 48-2-1(e)(2) (1986)." Syl. Pt. 2, Shank v. Shank, 182 W.Va. 271, 387 S.E.2d 325 (1989).

3. "Passive appreciation of separate property of either of the parties to a marriage, or that increase 'which is due to inflation or to a change in market value resulting from conditions outside the control of the parties,' is separate property which is not subject to equitable distribution. W.Va.Code § 48-2-1(f)(6) (1986)." Syl. Pt. 1, Shank v. Shank, 182 W.Va. 271, 387 S.E.2d 325 (1989).

4. Participation as an officer or director of a corporation together with significant stock ownership by a spouse constitutes sufficient participation to qualify, at least to some degree, as active appreciation for purposes of equitable distribution. When these factors are coupled with full-time work activity by the spouse for the corporation, some degree of active participation must be assessed.

John C. Skinner, Jr., Deborah B. Hillyard, Nichols & Skinner, Charles Town, for Appellant.

Homer A. Speaker, Burke Street Law Center, Martinsburg, for Appellee.

WORKMAN, Justice:

This case arose from the divorce of the Appellant, Tammera L. Smith, and the Appellee, Clyde Ellsworth Smith, III. The Circuit Court of Berkeley County entered an equitable distribution order finding, among other things, that the appreciation in value of the Appellee's separately owned stock in a closely held corporation was separate property. The Appellant contends that the circuit court erred by failing to find that the appreciation should be classified as marital property because it was due at least in part to her husband's efforts on behalf of the corporation and that the circuit court erred in its valuation of a van. Based on our review of the record and relevant legal authority, we reverse the decision of the circuit court regarding the appreciation in stock value and the valuation of the family van.

I.

The parties were married in September 1987 and separated in May 1992. Mrs. Smith has a bachelor's degree from West Virginia University and worked first in her family's business, and later as a teacher at Martinsburg High School, until the couple's only child was born in July 1990. Mrs. Smith then left her job to become a full-time homemaker. Throughout the marriage, Mr. Smith worked for Smith-Nadenbousch Insurance, Inc. ("Smith-Nadenbousch"), which he described as the largest independent insurance agency in the Eastern Panhandle. At the time of the final divorce hearing, Mr. Smith was Executive Vice President and a member of the Board of Directors of the corporation.

Smith-Nadenbousch is a closely-held family business. The majority of its stock has always been owned by members of the two families in the corporate name. The corporation currently has a total of eleven shareholders, all employed by Smith-Nadenbousch. All shareholders are party to a stock redemption agreement executed in December 1974. At that time, the major shareholders, owning 97% of the stock, were the Appellee, his father (C.E. Smith, Jr.), his brother-in-law (Stewart Borger), John L. Nadenbousch, and John R. Nadenbousch. Prior to the parties' marriage, two shareholders, C.E. Smith, Jr., and John L. Nadenbousch, sold their stock to the corporation pursuant to a stock redemption agreement. At the time of the marriage, the Appellee owned 65 shares, or 28% of the outstanding stock in Smith-Nadenbousch. In 1989, John R. Nadenbousch redeemed his stock as well. When John R. Nadenbousch retired and the corporation redeemed his stock, the remaining producers took over his book of business. Stuart Borger testified that the shareholders originally intended for the book of business left behind by a retiring shareholder to generate sufficient commissions to cover the corporation's payments to that shareholder. In the case of John R. Nadenbousch, the income generated by his book of business was insufficient to cover those costs. Therefore, Stuart Borger, Mr. Smith, and others were left in a position of working that book of business at a loss. The latter redemption, which occurred during the marriage, resulted in an increase in Mr. Smith's percentage ownership from 28% to 44%. In connection with the redemption, Smith-Nadenbousch declared a two-for-one stock split. ¹ The split caused an increase in the number of shares owned by Mr. Smith, from 65 shares to 130 shares. The balance of the stock at the time of the separation was owned by the Appellee's brother-in-law, Stewart Borger, who owned 44% of the stock, and nine other "producers," or insurance salesmen, employed by Smith-Nadenbousch.

The lower court, adopting the findings of the family law master, concluded that the value of the stock increased during the marriage due to the corporation's redemption of John R. Nadenbousch's stock and the payments made out of corporate earnings to the redeemed shareholder. The court found further that the Appellant was not entitled to a share of the corporation's retained earnings, because the Appellee did not have sufficient control over the corporation to cause it to retain funds as separate property which would have become marital property on distribution. Based upon these findings, the court concluded that the appreciation of the Smith-Nadenbousch stock remained the separate property of the Appellee.

On appeal to this Court, Mrs. Smith asserts that the lower court erred in concluding that the appreciation in her husband's Smith-Nadenbousch stock was passive. She argues that the appreciation was active, because it was attributable, at least in part, to work performed by Mr. Smith during the marriage in his capacity as employee, officer, and director of the corporation. In the alternative, Mrs. Smith argues that the appreciation in value was due to an expenditure of marital funds in the form of retained earnings used to finance the redemption of John R. Nadenbousch's stock.

II.

West Virginia Code § 48-2-1(f)(1) (1995) provides that "property acquired by a person before marriage" is separate property. The Appellant does not dispute the lower court's conclusion that Mr. Smith's stock in Smith-Nadenbousch is his separate property, because he acquired it prior to the marriage. ² See id. The parties also agree that the value of the stock increased during their marriage. ³ The primary issue presented is whether that increase in value is marital property, subject to equitable distribution, or separate property belonging to Mr. Smith alone.

Syllabus point one of Burnside v. Burnside, 194 W.Va. 263, 460 S.E.2d 264 (1995), provides the following standard of review:

In reviewing challenges to findings made by a family law master that also were adopted by a circuit court, a three-pronged standard of review is applied. Under these circumstances, a final equitable distribution order is reviewed under an abuse of discretion standard; the underlying factual findings are reviewed under a clearly erroneous standard; and questions of law and statutory interpretations are subject to a de novo review.

West Virginia Code §§ 48-2-1(e)(2) & (f)(6) provide:

(e) "Marital property" means:

...

(2) The amount of any increase in value in the separate property of either of the parties to a marriage, which increase results from (A) an expenditure of funds which are marital property, including an expenditure of such funds which reduces indebtedness against separate property, extinguishes liens, or otherwise increases the net value of separate property, or (B) work performed by either or both of the parties during the marriage.

...

(f) "Separate property" means:

...

(6) Any increase in the value of separate property ... which is due to inflation or to a change in market value resulting from conditions outside the control of the parties.

This statutory language illustrates the distinction between "active" and "passive" appreciation, with only active appreciation being subject to the marital property definition. See id.

We first interpreted West Virginia Code §§ 48-2-1(e)(2) and (f)(6) in Shank v. Shank, 182 W.Va. 271, 387 S.E.2d 325 (1989). In Shank, the husband owned, as his separate property, certain stock in Shank's Oil, a family business. By the time of the divorce in Shank, Shank's Oil had sold or liquidated its active businesses, and held three parcels of real estate. The parties disputed whether the value of the stock in Shank's Oil had appreciated during their marriage. Assuming there was an increase, Mr. Shank contended that it was due to inflation, whereas Mrs. Shank asserted that the increase in value was due to her husband's active management and the expenditure of marital resources. Id. at 274, 387 S.E.2d at 328. The circuit court concluded that there...