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Business owners who are going through a divorce might be interested to learn of a new case which further defines the issue of how a spouse’s contribution to a business can transform all or part of the business from separate to marital property.
In The case of Jerry V. Brown, Appellant, v. Yvonne A. Brown Appellee, 2020 Ut App 146. The parties disputed whether a dental business acquired husband, Jerry, prior to the marriage became marital property as a result of wife’s, Yvonne, or the marital estate’s contribution to the growth of the business. Jerry owned a dental practice prior to marrying Yvonne but kept the dental practice through the duration of the marriage. Yvonne argued at trial that the dental practice was marital property; therefore, she would be entitled to half of its value, even though the practice was acquired prior to the marriage.
The dental practice was purchased in 1986. Ten years later, Jerry married Yvonne. Yvonne brought 3 children into the marriage. In 1999 Jerry and Yvonne had a child together. They divorced in 2011, but they remarried approximately one year later. Soon after the first marriage to each other, Yvonne began working at the dental practice. After about one month, however, Jerry and Yvonne decided it was not a good fit. Regardless of the hours, Yvonne worked, the practice paid her a monthly salary, which she deposited into the parties’ joint bank account.
After a trial, the trial court ruled that “ because martial funds were expended for the benefit of the practice, it was converted from Jerry’s separate property to marital property.” The court based this ruling on its finding that on two occasions, Jerry decided to use income from the practice to reinvest in the practice, instead of what he normally did was deposit earnings from the practice in the parties’ joint bank account. The Court reasoned that Jerry used income from the practice to pay for the business expansion, thereby decreasing the funds he routinely pulled from the practice to pay marital expenses as he routinely had done. The Court reasoned that in doing so, the practice was receiving a marital contribution.
The presumption is that marital property will be divided equally while separate property will not be divided at all. Brown v. Brown, 2020 Ut App 146. Equity requires that each party retain the separate property he or she brought into the marriage, including any appreciation of the separate property. Utah has identified three circumstances that support an award of separate property to the other spouse: 1. Commingling with marital property to the degree that the separate property has lost its separate character; 2. When the other spouse has augmented, maintained, or protected the separate property; or 3. In extraordinary situations when equity so demand.
The trial court relied entirely on the second circumstances, also called spousal contribution, finding that, “Because marital funds were expended for the benefit of the practice it was converted from Jerry’s separate property to marital property. Jerry, having previously been more amenable to using money from the practice to pay for family expenses, reduced the amount of those transfers to help fund expansion of the practice. The trial court reasoned that the practice was converted to a marital asset because funds that were normally diverted from the practice to cover family expenses were instead retain to build the practice. A create argument indeed, but one that did not ultimately prevail.
The Utah Court of Appeals overturned the trial court’s decision. The Court ruled that the dental practice was Jerry’s separate asset, holding that the wife’s “martial contribution,” argument failed because it is clear from the record that no marital funds were ever used to benefit the practice; the flow of funds was only in the other direction, from the business to the marriage. If there is only this “one-way flow,” this is not sufficient to prove a claim of spousal contribution to a business that would render a separate asset marital. Once money left the practice and entered the joint accounts of the parties, that income was marital. However, this one-way flow did not convert the source of that money, i.e., the practice into a marital asset.
When a business owner is divorcing, it is important to get good legal counsel who is knowledgeable about how a divorce trial court will treat a business acquired before or during a marriage. There are intricacies in the law that could affect whether your separate business asset might still be subject to division with your spouse. If you are a business owner concerned about how your property will be handled on divorce call 801-448-0156 today for a free consultation. At Fontenot law, we have an amazing reliable team that will work on your case day in and day out to help you get your fair share.