Stewart v. Stewart, 1 CA-CV 12-0747
| Decision Date | 29 May 2014 |
| Docket Number | No. 1 CA-CV 12-0747,1 CA-CV 12-0747 |
| Parties | In re the Marriage of: BARBARA STEWART, Petitioner/Appellee, v. GARY STEWART, Respondent/Appellant. |
| Court | Arizona Court of Appeals |
NOTICE: NOT FOR PUBLICATION.
UNDER ARIZ. R. SUP. CT. 111(c), THIS DECISION DOES NOT CREATE LEGAL PRECEDENT
AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
Appeal from the Superior Court in Maricopa County
The Honorable Sam J. Myers, Judge
AFFIRMED IN PART, REVERSED IN PART; REMANDED
Dickinson Wright/Mariscal Weeks PLLC, Phoenix
By Marlene A. Pontrelli
Pearlstein Law Office PLLC, Phoenix
By Lynn M. Pearlstein
Presiding Judge Lawrence F. Winthrop delivered the decision of the Court, in which Judge Margaret H. Downie and Judge Diane M. Johnsen joined.
¶1 Gary Stewart ("Husband") appeals from the allocation of property in the parties' decree of dissolution and the award of attorneys' fees to Barbara Stewart ("Wife"). For the following reasons, we reverse that portion of the decree related to the issue of Husband's compensation; we reverse the portions of the decree related to the issues of the life insurance policy, the loan to Husband's separate property business, and the Chase joint accounts, and remand for further proceedings consistent with this decision. We affirm the portions of the decree related to the Wells Fargo investment account and the award of attorneys' fees to Wife.
¶2 Husband and Wife were married in 1996; each brought to the marriage a separately owned and operated business, and they continue to operate those businesses. Husband is also an officer of his business. In June 2011, Wife filed a petition for dissolution of marriage.
¶3 Relevant to this appeal, the parties disputed at trial: (a) whether the community was adequately compensated during marriage for Husband's work at his separate property business; (b) the community nature of a life insurance policy insuring Husband and Wife; (c) the community nature of a Wells Fargo investment account (8700); (d) whether and to what extent Husband's pre-marital loan of $185,000 to his separate property business had been re-paid during marriage; and (e) the allocation of community funds in certain Chase joint accounts (5871) and (3014). The parties also disputed whether Wife was entitled to attorneys' fees.
¶4 The family court ruled: (a) Wife was entitled to half the amount the court found Husband's separate property business had undercompensated the community for Husband's labor in the last four years of marriage; (b) the entire life insurance policy was a community asset,awarding each party half of its $900,000 cash-surrender value; (c) Husband's separate pre-marital deposits into the Wells Fargo investment account (8700) had been comingled and transmuted so the account had become community property; (d) Husband failed to demonstrate the premarital loan to his separate property business had not been paid back during marriage; and (e) Husband used community funds from the Chase joint bank accounts (5871) and (3014) for purposes not benefiting the community and, therefore, Wife was entitled to equalization payments totaling $71,612.70. The court also awarded Wife $54,160.57 in attorneys' fees and costs based on the disparity of the parties' financial resources. Husband filed a timely notice of appeal. We have appellate jurisdiction pursuant to the Arizona Constitution, Article 6, Section 9, and Arizona Revised Statutes ("A.R.S.") section 12-2101(A)(1), (2) (West 2014).1
¶5 Husband argues the family court erred when it determined the community had been under-compensated as a result of Husband's decision to reduce his annual salary from his separate business in the four years preceding the petition for dissolution of marriage, and in awarding Wife half of the amount of under-compensation. The court concluded "Husband breached his fiduciary obligation to the community by failing to take fair compensation for the community labor expended" from 2008 to 2011.
¶6 It is undisputed that as the owner of his separate property business Husband could set his own pay as an officer of the company. The parties also agree, and the record demonstrates, that beginning in 2008 Husband's salary as an officer decreased in comparison to previous years.
¶7 At trial, Wife sought to demonstrate that from 2008 to 2011 Husband's separate property business "under-compensated" the marital community for the labor expended by Husband and this "undercompensation" was the result of Husband's unilateral decision to take areduced salary.2 Under Wife's under-compensation theory, the community could recover the difference between the compensation Husband should have received and the compensation Husband actually received because such deliberate under-compensation is a breach of Husband's fiduciary duty to the marital community. Implicit in Wife's argument is the conclusion that any under-compensation is community property. The classification of property as separate or community is a question of law we review de novo. Bell-Kilbourn v. Bell-Kilbourn, 216 Ariz. 521, 523, ¶ 4, 169 P.3d 111, 113 (App. 2007).
¶8 To demonstrate the compensation the community should have received for Husband's labor, Wife determined an annual "fair compensation" figure based on a standardized annual salary for corporate officers in the relevant industry using data provided by Husband's expert.3 Wife then compared Husband's annual actual compensation to this "fair compensation" figure and argued that from 2008 to 2011 the marital community was under-compensated by $304,415. To show that the "fair compensation" figure was realistic, Wife's expert testified that Husband's business had sufficient cash flow to pay Husband the higher "fair compensation" amount during those years. Wife argued this undercompensation in the four years preceding dissolution proved a breach of fiduciary duty.
¶9 Husband rebutted this evidence by testifying that his declining compensation from 2008 to 2011 was the result of the general contraction of the economy and the negative economic trends in the relevant industry based on technological advances that reduced consumerdemand. Using the same "fair compensation" measurement as Wife, Husband also argued the community was actually over-compensated throughout the life of the marriage because his annual actual compensation from 1996 to 2007 exceeded the "fair compensation" figure, off-setting any under-compensation from 2008 to 2011.
¶10 The family court found that, as a result of Husband's unilateral business decision, the community was under-compensated from 2008 to 2011. As a result of this finding, the court concluded Husband breached his fiduciary duty to the community and awarded Wife half of the additional $304,415 of compensation the community would have received had Husband elected to take "fair compensation" during those years.
¶11 Arizona courts acknowledge the existence of a fiduciary duty between spouses. See Gerow v. Covill, 192 Ariz. 9, 18, ¶ 40, 960 P.2d 55, 64 (App. 1998).4 "Removal of community assets without spousal notice and/or approval can constitute a breach of [fiduciary] duty." Id. at 18, ¶ 40, 960 P.2d at 64. Wife relies entirely on her analysis of Husband's salary falling below the industry standard of "fair compensation," coupled with his ability to set his own pay, to establish Husband's breach of fiduciary duty to the community. In support of this argument, Wife cites Gerow and Smith v. Smith, 860 P.2d 634 (Idaho 1993). The facts of those two cases, however, belie Wife's argument.
¶12 In Gerow, the husband was self-employed as an independent consultant through a sole proprietorship. Gerow, 192 Ariz. at 11-12, ¶¶ 2-5, 960 P.2d at 57-58. A few months after the wife filed a petition for dissolution, the husband incorporated a second, similar business with his sister-in-law listed as the sole shareholder, concealing this business from the wife. Id. The court concluded the husband's conduct breached his fiduciary duty to the marital community because he concealed the incorporation of the second business from the wife and used this concealed business to remove community assets without notice to the wifeand without compensation for the community. Id. at 18, ¶ 40, 960 P.2d at 64.
¶13 In Smith, the husband was a lawyer. In one case, the husband agreed to receive a reduced fee after his client elected to avoid an appeal by taking a settlement rather than attempting to collect the full court award. Smith, 860 P.2d at 643. The reduced fee was less than half the husband's hourly rate and also less than a one-third contingency fee on the settlement amount. Id. The court concluded the husband breached his fiduciary duty to his wife by accepting the reduced fee. Id.
¶14 In this case, Husband's conduct does not bear any of the indicia of a breach of fiduciary duty as established in Gerow or Smith. First, Wife had notice of the reduced compensation to the community by way of jointly filed tax returns from 2008 to 2010.5 Second, Wife does not point to anything in the record suggesting she objected at the time to Husband's decision to take reduced compensation from his separate property business. Third, the breach in Gerow occurred after the filing of the petition for dissolution of marriage; in this case, Husband's declining compensation began four years prior to the filing of the petition for dissolution, and Wife does not point to anything in the record that suggests Husband's declining salary was a form of so-called "divorce planning." Fourth, the degree to which Husband's annual actual compensation varied from the annual "fair compensation" figure is not so drastic as to demonstrate that, on this evidence alone, Husband breached a fiduciary duty. In 2008, the first year in which Husband's salary fell below "fair compensation," the...
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