Zemke v. Zemke

• Decision Date: 25 May 1993
• Docket Number: No. 12326,12326
• Citation: 116 N.M. 114,860 P.2d 756,1993 NMCA 67
• Parties: F. Richard ZEMKE, Petitioner-Appellee, v. Patty ZEMKE, Respondent-Appellant.
• Court: Court of Appeals of New Mexico

Page 756

860 P.2d 756

116 N.M. 114

F. Richard ZEMKE, Petitioner-Appellee, v. Patty ZEMKE, Respondent-Appellant.

No. 12326.

Court of Appeals of New Mexico.

May 25, 1993.

Certiorari Denied Aug. 13, 1993.

Barbara L. Shapiro and Kelley L. Skehen, the Poole Law Firm, P.C., Albuquerque, for petitioner-appellee.

Robert D. Levy and Kathryn M. Wissel, Levy & Geer, P.A., Albuquerque, for respondent-appellant.

OPINION

APODACA, Judge.

Respondent-Appellant Patty Zemke (Wife) appeals the trial court's determination in a divorce action that corporate stock and certain other assets were the separate, rather than community, property of Petitioner-Appellee F. Richard Zemke (Husband). Wife argues that: (1) the trial court should have used a different method of apportioning the stock; (2) a community lien should have been imposed on Husband's separate stock; (3) Husband's "recapitulation" theory to prove the existence of a separate property interest in certain assets was insufficient to trace his separate property interest; and (4) Husband failed to rebut the presumption that certain assets acquired during the marriage were community property. We conclude that substantial evidence supports the trial court's characterization of the stock and the other assets, and therefore affirm the trial court's decision.

FACTS

I. The Division of the Corporate Stock.

In November 1964, Husband, together with George Gardner and two other managers at Reynolds Electrical and Engineering Company (REECO), incorporated Gardner-Zemke Company (Gardner-Zemke). Husband bought 2,495 shares of stock in Gardner-Zemke with $24,950 of separate property funds. The parties stipulated that these shares were Husband's separate property. George Gardner also bought 2,495 shares, and his wife, Faye Gardner, bought 10 shares. George and Faye Gardner owned the majority of the shares in Gardner-Zemke from the company's inception until 1985, when George Gardner retired and Husband became the majority shareholder. By January 1, 1965, Husband and the three managers had left REECO and were working full-time for Gardner-Zemke. Husband at that time had acquired a New Mexico general contractor's license, which Gardner-Zemke used and continues to use to qualify as a general contractor.

The parties were married January 28, 1965, and were divorced January 2, 1990. During the marriage, the number of shares of Gardner-Zemke stock held in Husband's name increased because Husband purchased additional shares with salary adjustments and bonuses and because stock dividends were issued. At the time of trial, the total number of shares held in Husband's name was 60,190, or 73.3% of the total stock in Gardner-Zemke. The total worth of all the stock was found to be $10 million. The trial court found that:

10. Stock dividends issued on the original 2,495 shares totaled 36,321 shares so that the original block of shares plus a proportional share of stock dividends results in 38,816 shares (64.49% of [Husband's] 60,190 shares) held as the separate property of [Husband] at the date of trial.

11. Stock purchased during the marriage and a proportional share of stock dividends on the purchased shares totaled 21,374 shares (35.51% of [Husband's] 60,190 shares) held as community property in the name of [Husband] as of the date of trial.

The trial court further found that the increase in value was due to the financial decisions made by George Gardner and to the combined efforts of the corporate management team, and that Husband intended to preserve his stock in Gardner-Zemke as his separate property. As a result, the trial court awarded Wife the equivalent of 17.75% of the stock and Husband the equivalent of 82.25%. The trial court also denied Wife's request that a community lien be imposed on Husband's separate stock.

At trial, Wife offered evidence that, during the first ten years of Gardner-Zemke's existence, Husband and George Gardner decided that, in order for the company to grow, earnings needed to be retained in the company. Consequently, salary adjustments and bonuses were paid from corporate earnings and timed so that funds were available to purchase additional shares of stock and to pay individual income taxes. Monies paid for the additional shares of stock were placed in the capital stock account.

[116 N.M. 117] At other times, an amount of retained earnings would be moved to the capital stock account and stock dividends issued. Wife presented expert testimony that both methods of retaining earnings in the capital stock account were functionally equivalent.

Wife also offered evidence that, during this time, Husband was not fully compensated for his labor. She alleged that Husband earned $225 per week at REECO, but only $150 per week at Gardner-Zemke. She recognizes that he also received salary adjustments or bonuses, but asserts that these were usually timed to allow for the purchase of additional shares of stock. She also points to documentary evidence that Husband was inadequately compensated. A deferred compensation agreement prepared in 1974 and signed by Husband stated that he had not been adequately compensated in the first ten years of the corporation. Documents prepared by Gardner-Zemke in the early 1980s, in response to a claim by the Internal Revenue Service that Husband had been overcompensated, also stated that Husband was undercompensated in the early years of the corporation. However, Wife did not offer any evidence of the amount she claims Husband's salary should have been.

There was also evidence that the Gardners owned the controlling shares of stock until 1985, when George Gardner retired. George Gardner was president of Gardner-Zemke and Husband presented evidence that Gardner made most of the financial decisions. From its initiation, the company used a conservative method of accounting, and it reserved retained earnings and cash each year so that it could operate and grow. This was a necessary practice because of the inherent risks of the public contracting construction business. The trial court found that the retention of profits as retained earnings and the issuance of stock dividends were done for good business reasons.

There was also evidence that Husband earned more at Gardner-Zemke than he had as assistant district manager at REECO. The trial court found that, although Husband's weekly wage was lower, his annual compensation was higher. Some corporate minutes said that he was undercompensated, based on the weekly wage, but other minutes spoke of the annual salary adjustments as raising him to adequate compensation. Additionally, not all of the salary adjustments were used to buy stock. In the first five years, Husband received $76,000 in salary adjustments and bought $26,000 worth of stock, which was admitted to be community property.

Based on industry studies from the National Electrical Contractor's Association, Husband presented expert testimony comparing Husband's annual compensation with managers at similar levels in similar companies. The expert concluded that Husband was adequately compensated. The trial court found that Husband may have been undercompensated during 1971 to 1974, but that any deficiency was compensated for by excess salary paid in 1982 and 1983. During the marriage, Husband was paid $3,868,449.49 as wages, bonuses, and salary adjustments, plus deferred compensation in a profit-sharing account worth $964,267 at the time of trial.

At trial, Husband presented expert testimony tracing the earnings on each share of Gardner-Zemke stock. Husband's expert assumed that the initial block of stock was separate property and that the subsequently purchased stock was community property. The stock dividends were treated as proportional earnings on each block of stock. He then calculated the percentage interest of Husband's initial block of stock and the community stock for each year and at the time of trial, based upon the corporate tax returns and financial statements, the list of stock acquisitions from the corporate books, and other information. Husband calculated the value of the corporate stock as of the trial at book value based on a formula set forth in a stock option agreement. Under this approach, the community investment in shares was calculated at $43,396.

II. The Division of Assets Acquired Between 1974 and 1979.

Between 1974 and 1979, Gardner-Zemke operated as a Subchapter S corporation Husband presented evidence that a tax-shelter investment plan was instituted to avoid taxes on the cash dividends that were to be received. Between 1975 and 1979, Husband received approximately $1,621,000 in cash dividends. He also received $721,000 for services rendered to Gardner-Zemke during that period. He testified that the dividends were deposited into three bank accounts. Two, a Merrill Lynch account and a First National Bank account, contained only Subchapter S and investment proceeds; the third, the Sunwest Custom account, contained mixed funds. He testified that most of the investments were purchased out of these accounts.

[116 N.M. 118] and cash dividends were paid to shareholders in the period 1975 to 1980. During that time, the parties acquired numerous properties. Husband acknowledged that his records were incomplete because approximately five years before the divorce, after consultation with his accountant and attorney, Husband had discarded or destroyed many of his records. However, he did produce many other records, including tax returns, W-2 forms, bank records of the joint household account, Gardner-Zemke financial statements, current bank statements, forty investment notebooks, and corporate minutes.

Based on his review of his records and his knowledge of the parties' finances, Husband compiled Exhibit 7 as a supplement to his testimony. Exhibit 7 purports to show that, during the period that Subchapter S dividends were received, community expenses consumed his regular salary and bonuses and, consequently,...