One issue that comes up periodically in divorce cases has to do with appreciation of separate property brought into the marriage by one spouse. If that separate property is a business that appreciated during the marriage, did that appreciation come as active spousal effort, which would render the appreciation marital property, or did the appreciation come as a result of passive, non-spousal effort, and therefore should be treated as separate property? In other words, what was the comparable economic contribution of each party to the appreciation of such asset?
While the courts do not utilize the terms active and passive appreciation as much as they did in the past, it is clear from the recent decisions that those concepts are still utilized. In Smith v. Winters, 64 A.D.3d 1218 (4th Dept. 2009), the Appellate Division, Fourth Department, recently answered the above question by evaluating how much the efforts of the titled spouse increased the value of the asset in dispute, by looking at what specific efforts of the titled spouse led to the appreciation. In Smith, the plaintiff owned a business that later on purchased another company, PNA. PNA has appreciated significantly during the course of the marriage. After discussing the facts related to the plaintiff’s efforts and involvement in PNA, the court stated:
With respect to PNA, the court found that the value of PNA appreciated by $20 million during the course of the marriage but that the increase in value attributable to plaintiff was minimal when compared to the increase attributable to those hired by plaintiff to run the company. The court thus determined that only 10% of the appreciation in value of PNA was marital property subject to equitable distribution.
Subsequently, the court held that the non-titled spouse was entitled to 40% of the appreciated marital value based on her contributions as a homemaker. Thus, the titled spouse, in this case the husband, was able to retain 96% of appreciation of PNA.
The above represents continuation of the trend toward reevaluating the status of marital property on the basis of various forms of contribution by the parties to the marriage, or, perhaps, third parties as well. The courts have long held that “an increase in the value of separate property of one spouse, occurring during the marriage and prior to the commencement of matrimonial proceedings, which is due in part to the indirect contributions or efforts of the other spouse as homemaker . . . should be considered marital property”. See Price v Price, 69 N.Y.2d 8, 11 (1986). However, the latest decisions in this area are refocusing on requiring “some nexus between the titled spouse’s active efforts and the appreciation in the separate property”, when a nontitled spouse’s claim to appreciation and the other spouse’s separate property is predicated solely on the nontitled spouse’s indirect contributions. See Hartog v. Hartog, 85 N.Y.2d 36, 46 (1995). Therefore in Smith, the Appellate Division Fourth Department held that the trial court properly considered the “active efforts of others and any additional passive or active factors” in determining the percentage of total appreciation that constitutes marital property subject to distribution.
The above case opens various possibilities to lawyers and titled-spouses contesting an appreciation claim. Situations similar to the one in Smith will require a divorce attorney to evaluate carefully how the asset appreciated and what role each spouse or third parties played in that appreciation.