Smith v. Smith

• Citation: 111 N.C.App. 460,433 S.E.2d 196
• Decision Date: 17 August 1993
• Docket Number: No. 9126DC1287,9126DC1287
• Court: Court of Appeal of North Carolina (US)
• Parties: Bonita Harris SMITH v. Ollen Bruton SMITH.

Page 196

433 S.E.2d 196

111 N.C.App. 460

Bonita Harris SMITH v. Ollen Bruton SMITH.

No. 9126DC1287.

Court of Appeals of North Carolina.

Aug. 17, 1993.

Robinson, Bradshaw & Hinson, P.A. by Martin L. Brackett, Jr., Mark W. Merritt, and John B. Garver, III, Charlotte, for plaintiff.

James, McElroy & Diehl, P.A. by William K. Diehl, Jr., John S. Arrowood, and G. Russell Kornegay, III, Charlotte, for defendant.

ARNOLD, Chief Judge.

OVERVIEW

This case involves a marital estate with a net value as of the date of trial of over fifty-one million dollars. Issues pertaining to classification, valuation, and distribution of property are presented. As is particularly shown by the judgment, the trial court thoroughly sifted through the evidence; addressed in detail each issue presented, many of which are extremely complex; and did a commendable job of the tasks assigned him. Despite the laudable effort of the trial judge, there is error appearing from the judgment which requires that the case be remanded for correction of those errors.

Upon application of a party for an equitable distribution, the trial court "shall determine what is the marital property and shall provide for an equitable distribution of the marital property ... in accordance with the provisions of [N.C.Gen.Stat. § 50-20 (Cum.Supp.1992) ]." N.C.Gen.Stat. § 50-20 (Cum.Supp.1992). In so doing, the court must conduct a three-step analysis. Willis v. Willis, 86 N.C.App. 546, 358 S.E.2d 571 (1987). First, the court must identify and classify all property as marital or separate based upon the evidence presented regarding the nature of the asset. Ciobanu v. Ciobanu, 104 N.C.App. 461, 409 S.E.2d 749 (1991). Second, the court must determine the net value of the marital property as of the date of the parties' separation, with net value being market value, if any, less the amount of any encumbrances. Beightol v. Beightol, 90 N.C.App. 58, 367 S.E.2d 347, disc. review denied, 323 N.C. 171, 373 S.E.2d 104 (1988); Willis v. Willis, 85 N.C.App. 708, 355 In performing the latter task, the trial court is vested with wide discretion. White v. White, 312 N.C. 770, 324 S.E.2d 829 (1985). "[W]here matters are left to the discretion of the trial court, appellate review is limited to a determination of whether there was a clear abuse of discretion." White, 312 N.C. at 777, 324 S.E.2d at 833.

S.E.2d 828 (1987); N.C.Gen.Stat. § 50-21(b) (Cum.Supp.1992). Third, the court must distribute the marital property in an equitable manner. Beightol, 90 N.C.App. 58, 367 S.E.2d 347.

A trial court may be reversed for abuse of discretion only upon a showing that its actions are manifestly unsupported by reason, or that its ruling could not have been the result of a reasoned decision.... Only when the evidence fails to show any rational basis for the distribution ordered by the court will its determination be upset on appeal.

Nix v. Nix, 80 N.C.App. 110, 112, 341 S.E.2d 116, 118 (1986) (citation omitted). Furthermore, for purposes of appellate review, the trial court's findings of fact are conclusive if supported by any competent evidence in the record. Nix, 80 N.C.App. 110, 341 S.E.2d 116.

Finally, we note that many of the figures relied upon by the court were rounded off, a fact which should be kept in mind in checking the mathematical accuracy of the calculations referred to herein. We now turn to the issues presented.

CLASSIFICATION

A. Sonic

The key asset in dispute in this case is defendant's interest in Sonic Financial Corporation ("Sonic"), a North Carolina corporation that serves as a holding company for a variety of defendant's business interests. On the date of the parties' separation, defendant owned 90.4% of the stock of Sonic. The court found that the net value of defendant's interest in Sonic as of the date of separation was $35,515,000. It appears that the court found defendant's interest in Sonic was of a dual nature, having both a marital property component and a separate property component. The court found the asset to be primarily marital in that it found the separate property component had a net value as of the date of separation of only $1,196,862, leaving a marital property component with a net value as of that date of $34,318,000.

Sonic, as a North Carolina corporation and holding company, did not come into existence until December 1987. Sonic was the product, however, of a long series of mergers, name changes, and acquisitions involving various business entities in which defendant had an interest, which for the most part occurred during the parties' marriage. The trial court approached the classification of Sonic by first identifying the assets in which defendant had an interest as of the date of marriage, which after the date of marriage were contributed by defendant towards the eventual creation of Sonic. In so doing, the court traced the history of much of defendant's business dealings during the marriage and the history of the events leading to the creation of Sonic. Despite the fact Sonic did not exist on the date of marriage, the court, in effect, classified Sonic by treating it as defendant's separate property that had appreciated in value during the marriage. The court determined that all of the appreciation in value of Sonic during the marriage had been active, and therefore was marital property.

The court found that the assets owned by defendant prior to the marriage which were utilized in the eventual creation of Sonic, comprised the separate property component of Sonic, and had a total net value as of the date of marriage of $1,196,862. Consistent with its finding that all of the appreciation in Sonic during the marriage had been active, the court found that there had been no passive appreciation during the marriage in the separate property component of Sonic. The court further found that $1,196,862 was the date of separation net value of Sonic, and that this was defendant's separate property which was to be returned to him.

Two arguments are made by defendant that the court erred in classifying Sonic: (1) by failing to provide him with a fair and proportionate return on his investment of separate property in the marital estate; and (2) by "classifying [his] separate property as marital." In the latter argument he contends the court's finding that all of the appreciation of Sonic during the marriage was active is unsupported by the record. We uphold the court's classification of Sonic, but we use a different analysis from that utilized by the trial court.

The trial court's first task in an action for equitable distribution is to classify all property owned by the parties as marital or separate in accordance with the definitions set forth in N.C.Gen.Stat. § 50-20(b) (Cum.Supp.1992). See N.C.Gen.Stat. § 50-20(a) (Cum.Supp.1992); McLean v. McLean, 323 N.C. 543, 374 S.E.2d 376 (1988). N.C.Gen.Stat. § 50-20(b)(1), in pertinent part, defines marital property as "all ... property acquired by either spouse or both spouses during the course of the marriage and before the date of the separation of the parties, and presently owned, except property determined to be separate property...." Separate property is defined by the statute as including the following:

all ... property acquired by a spouse before marriage or acquired by a spouse by bequest, devise, descent, or gift during the course of the marriage.... Property acquired in exchange for separate property shall remain separate property regardless of whether the title is in the name of the husband or wife or both and shall not be considered to be marital property unless a contrary intention is expressly stated in the conveyance. The increase in value of separate property and the income derived from separate property shall be considered separate property.

N.C.Gen.Stat. § 50-20(b)(2).

The key term in both definitions is "acquired." In Wade v. Wade, 72 N.C.App. 372, 325 S.E.2d 260, disc. review denied, 313 N.C. 612, 330 S.E.2d 616 (1985), this Court adopted a dynamic rather than a static interpretation of the term "acquired" as used in G.S. § 50-20(b), stating "that acquisition must be recognized as the ongoing process of making payment for property or contributing to the marital estate rather than being fixed on the date that legal title to property is obtained." Wade, 72 N.C.App. at 380, 325 S.E.2d at 268-69. This Court further recognized that since acquisition is an ongoing process, property may have a dual nature and consist of both marital property and separate property components. Wade, 72 N.C.App. 372, 325 S.E.2d 260.

By recognizing that acquisition is an ongoing process and that property may have a dual nature, this Court adopted what is known as the "source of funds" approach. Id.; Willis, 86 N.C.App. 546, 358 S.E.2d 571. See also Lawrence J. Golden, Equitable Distribution of Property (1983) (Cum.Supp.1993 by B. Turner at § 5.07) (hereinafter "Turner") (The source of funds rule is a combination of a payment-based definition of acquired, and the recognition that property may be of a dual, or mixed, nature.) The Court explained the source of funds approach as follows:

Under this [approach], when both the marital and separate estates contribute assets towards the acquisition of property, each estate is entitled to an interest in the property in the ratio its contribution bears to the total investment in the property.... Thus, both the separate and marital estates receive a proportionate and fair return on its investment.

Wade, 72 N.C.App. at 382, 325 S.E.2d at 269 (citation omitted).

In Wade, this Court also distinguished between active and passive appreciation of separate property occurring during marriage and before separation. The Court interpreted that part of G.S. § 50-20(b)(2), which classifies the increase in value of separate property as separate property, as referring only to increases due to passive appreciation, such as that due to inflation or other market forces. Increases...