Equitable Distribution of the Appreciation in Value of Separately Owned Residences

In the period of time since an article we authored with Pamela Sullivan, Esq. appeared in the February 2006 issue of this newsletter, courts continue to differ widely on the issue of the equitable distribution of the appreciation in value of a residence that is the separate property of one party. It is widely believed that a residence's appreciation in value is primarily “passive” in nature resulting from market forces outside of either party's control as opposed to the “active” efforts of either spouse. Yet despite the classification of this appreciation in value as mostly passive in nature, courts still frequently have awarded non-titled spouses a share of the appreciation in a separate property residence due to direct or indirect, financial or nonfinancial, contributions to the economic partnership of the marriage ' often without any demonstrated nexus between such contributions and the increase in value of the residence.

Unfortunately, financial and nonfinancial contributions are generally not spelled out in the judicial decisions, particularly when only the appellate, and not the trial, decision is published. However, it seems clear that courts distribute the appreciation in separately owned residences based upon fact-sensitive, case-by-case inquiries as well as assessments of the parties' meeting their respective burdens of proof and the credibility of each party's evidence. The overarching goal of the courts appears to be reaching an equitable result considering each party's role in, and contributions toward, the marital relationship and the acquisition of marital property.

Our February 2006 article focused solely on the equitable distribution of the appreciation in separately owned primary residences. In order to fully understand whether courts treat primary residences differently from other types of residences, in this update we have also included recent cases that have dealt with separately owned secondary weekend and vacation homes. Additionally, we discuss the importance of credibility and full disclosure; we follow up from our last article on the issue of who has the burden to show entitlement to the disputed appreciation; and we discuss the inclinations of some courts to award other marital property in lieu of a share of the appreciation. Finally, we posit a formulaic approach to the distribution of appreciation in value of separately owned residences.

Primary Separately Owned Residences

Courts continue to tend to grant the non-titled spouse a portion of the appreciation in value of the primary separately owned residence, typically ranging from 25% to 50% of the appreciation, even when the residence is the titled spouse's separate property and even when there appears to be minimal, if any, nexus shown between either party's direct or indirect, financial or nonfinancial contributions and the increase in value to the asset. This is apparent in the First Department decisions of Hale v. Hale, 16 AD3d 231 (1st Dept. 2005) (affirming the trial court's decision to equally split the increase in value in the husband's condominium in Connecticut accruing during the parties' six-year marriage because the record contained “evidence that the wife played some role in the upkeep and maintenance of the condo”) and Lee v. Lee, 2008 WL 525432 (1st Dept. 2008) (holding that in a marriage of 24 years, the award to the wife of 25% of the $585,000 of appreciation to the primary residence, which defendant purchased long before the parties' marriage, was appropriate because of the wife's “direct and indirect contributions to the marriage and the home ' “). In these cases, there is no discussion or description of the specifics of the role that led the courts to distribute significant portions of the appreciation to the non-titled spouse. Accordingly, we have little guidance as to what factors a court finds persuasive or how upkeep and maintenance led, in whole or in part, to the residence's increase in value. Discussions in these cases would seem to be particularly enlightening as it seems somewhat inconsistent ' and possibly arbitrary ' to award a spouse in a six-year marriage 50% of the appreciation in value and a spouse in a 24-year marriage only 25%.

The Second Department has also recently issued decisions with differing results. However, in both such instances, the non-titled spouse obtained a favorable disposition. In Michelini v. Michelini, 47 A.D.3d 902 (2nd Dept. 2008), the Second Department determined that the trial court “properly awarded the defendant [husband] 50% of the appreciation of the value of the marital residence” because, “[a]lthough the residence was the separate property of the plaintiff [wife], the defendant established that the subsequent appreciation of the value of the marital residence was attributable to their joint efforts and, therefore, he was entitled to the award by the trial court.” Notably absent from this decision were details such as descriptions of these joint efforts, values of the residence (at the date of marriage, date of commencement of the action or date of trial) or mention of nonfinancial contributions such as child-rearing or domestic responsibilities.

In Massimi v. Massimi, 35 AD3d 400 (2nd Dept. 2006), the non-titled wife was granted an equitable distribution award in the parties' primary residence in the sum of $260,000. This award included both a portion of the appreciation and a recoupment of the wife's “equitable share of the marital funds used to reduce the indebtedness and pay for improvements to the marital abode.” The court based this award on the wife's unspecified “indirect nonfinancial contributions to the household.” The appellate decision does not set forth any financial calculations explaining how the amount of $260,000 was derived. However, isn't it likely that the improvements to the marital abode would also increase its value? Then wouldn't an award to the wife of a share of the appreciation and a recoupment of her equitable share of marital funds used to pay for improvements to the marital abode constitute double-dipping, at least to some extent?

One recent case in which a non-titled party did not receive any distribution of the value of the appreciation in the parties' marital residence was the Third Department case of Burtchaell v. Burtchaell, 42 AD3d 783 (3rd Dept. 2007). The facts of that case, however, are unusual and do not appear to reflect that Judicial Department's position as to a non-titled spouse's right to appreciation in the marital residence. (See Nolan v. Nolan, 107 AD2d 190 (3rd Dept. 1985); Lord v. Lord, 124 AD2d 930 (3rd Dept. 1986).) In Burtchaell, prior to the date of the parties' marriage, the wife acquired property on which were situated the house (which became the primary residence) and rental apartments whose rental income “produced nearly enough money to pay the mortgage.” Because there was no proof that any mortgage payments were made using marital funds, the court refused to allow plaintiff to recoup any portion of the reduction of the mortgage debt on the property. With the rental units located on the same property as the marital residence, the court may have viewed the property as a commercial property more than a marital residence and, therefore, did not afford the husband a right to the appreciation (See Lawson v. Lawson, 288 AD2d 795 (3rd Dept. 2001)). Or, since there is no discussion as to the appreciation of the marital residence, perhaps the husband did not even seek a share of the appreciation.

Simply put, courts seem inclined to award the non-titled spouse's material portions of the appreciation in the separately owned primary residence. However, the results vary and the criteria for an award have not been clearly defined.

Vacation or Country Homes

In order to determine if courts view primary marital residences as a wholly different type of property, we must also review recent cases addressing the distribution of appreciation in value of vacation or country homes that is the separate property of one party. The portion distributed to the non-titled spouses differs somewhat, but perhaps not as much as one might expect.

In Keane v. Keane, 25 AD3d 729 (2nd Dept. 2006), a case in which the parties were married for over 30 years, the Second Department determined that 30% of the appreciation in the value of defendant husband's one-third interest in certain vacation property was marital property. The court reasoned that “plaintiff's contributions or efforts constituted marital property subject to equitable distribution” and directly or indirectly accounted for 30% of the appreciation in the residence. The balance of the appreciation in the value of the husband's interest of the vacation property was determined to be a result of market forces rather the wife's contributions or efforts. By stipulation entered into by the parties prior to the trial, the parties agreed that any marital property would be split equally between the parties, so that issue was not before the court. There was no description of “plaintiff's contribution or efforts,” no values of the residence at the dates of either marriage or trial, nor a description of why the appreciation was determined to be the result of active endeavors or passive market forces.

When comparing Keane with the case of Faello v. Faello, 43 AD3d 1102 (2nd Dept. 2007), also decided by the Second Department, it seems that the marital/separate property distinction is not as determinative a factor as what a court finds is equitable in any particular situation. The husband in Faello contributed $200,000 of his separate property toward the purchase and furnishing of a Florida residence, which was held in the parties' joint name. The trial court classified the property as marital property but awarded the wife only 15% of the appreciation in the property, after crediting the husband with his separate property contributions.

It is notable that in neither Keane nor Faello are the non-titled spouse's contributions spelled out, and the courts only vaguely refer to them. Indeed, it seems that these cases have virtually identical fact patterns, with the sole distinction being that one vacation home is separately titled and the other is jointly titled.

The court in Johnson v. Chapin, 854 NYS2d 18 (1st Dept. 2008), explicitly sets forth its basis and reasoning for reducing from 50% to 25% the trial court's award to the non-titled wife of the appreciation in the husband's country home. The parties were married in January 1991; their son was born in October that same year. The wife had been corporate vice president of the motion picture and television department of Disney, but stopped working outside the home when the parties' son was three years old. The husband was a partner at a major New York City law firm during the first eight years of marriage and thereafter “became a managing director at Lazard Freres & Company ' [and] served on the Board of Directors for a number of publicly traded companies ' .” Before the parties' marriage, the husband had acquired a small home and a tenant house on approximately 160 acres of land in Claverack, NY. During the marriage, the parties invested close to $2 million of marital money to remodel the house and make substantial improvements on the surrounding property, which renovations and improvements spanned the entire 11-year period that the parties were married. Each party took part in planning, assisting or supervising the renovations, but the parties agreed that the husband “played a larger role in the conceptualization and oversight of the Claverack improvements.” And, “[t]he couple brought their son to Claverack for many weekends and holidays while the renovation was being completed.”

The trial court in Johnson determined that the “extensive renovations accounted for the vast increase in value and that all improvements were 100% marital.” The First Department agreed with this assessment, for the most part, but also noted that “[m]arket forces over the approximately 11 years of marriage accounted for some of the property's increased value” and that the wife was not entitled to a credit for any portion of this passive appreciation. Thus, the First Department reduced the wife's share from 50% to 25% of the appreciation as it found it “a more equitable apportionment in the circumstances.”

Additionally, the trial court awarded the wife 50% of the difference between the amount spent on the renovations and the remodeling and the amount of the appreciation in the property. The First Department declined to do so because “the couple shared the risk that the property's appreciation would not equal their investment, and there is no basis in law or equity to now shield the wife from the economic consequences of a shared decision to renovate the Claverack property.”

In next month's newsletter we'll look at factors that may influence a court's decision concerning the equitable distribution of increased value in separately owned primary and vacation homes.

Marcy L. Wachtel, a member of this newsletter's Board of Editors, is a partner in the firm of Katsky, Korins, LLP. Lori K. Meyer is an attorney with the firm.

In the period of time since an article we authored with Pamela Sullivan, Esq. appeared in the February 2006 issue of this newsletter, courts continue to differ widely on the issue of the equitable distribution of the appreciation in value of a residence that is the separate property of one party. It is widely believed that a residence's appreciation in value is primarily “passive” in nature resulting from market forces outside of either party's control as opposed to the “active” efforts of either spouse. Yet despite the classification of this appreciation in value as mostly passive in nature, courts still frequently have awarded non-titled spouses a share of the appreciation in a separate property residence due to direct or indirect, financial or nonfinancial, contributions to the economic partnership of the marriage ' often without any demonstrated nexus between such contributions and the increase in value of the residence.

Unfortunately, financial and nonfinancial contributions are generally not spelled out in the judicial decisions, particularly when only the appellate, and not the trial, decision is published. However, it seems clear that courts distribute the appreciation in separately owned residences based upon fact-sensitive, case-by-case inquiries as well as assessments of the parties' meeting their respective burdens of proof and the credibility of each party's evidence. The overarching goal of the courts appears to be reaching an equitable result considering each party's role in, and contributions toward, the marital relationship and the acquisition of marital property.

Our February 2006 article focused solely on the equitable distribution of the appreciation in separately owned primary residences. In order to fully understand whether courts treat primary residences differently from other types of residences, in this update we have also included recent cases that have dealt with separately owned secondary weekend and vacation homes. Additionally, we discuss the importance of credibility and full disclosure; we follow up from our last article on the issue of who has the burden to show entitlement to the disputed appreciation; and we discuss the inclinations of some courts to award other marital property in lieu of a share of the appreciation. Finally, we posit a formulaic approach to the distribution of appreciation in value of separately owned residences.

Primary Separately Owned Residences

Courts continue to tend to grant the non-titled spouse a portion of the appreciation in value of the primary separately owned residence, typically ranging from 25% to 50% of the appreciation, even when the residence is the titled spouse's separate property and even when there appears to be minimal, if any, nexus shown between either party's direct or indirect, financial or nonfinancial contributions and the increase in value to the asset. This is apparent in the First Department decisions of Hale v. Hale , 16 AD3d 231 (1st Dept. 2005) (affirming the trial court's decision to equally split the increase in value in the husband's condominium in Connecticut accruing during the parties' six-year marriage because the record contained “evidence that the wife played some role in the upkeep and maintenance of the condo”) and Lee v. Lee, 2008 WL 525432 (1st Dept. 2008) (holding that in a marriage of 24 years, the award to the wife of 25% of the $585,000 of appreciation to the primary residence, which defendant purchased long before the parties' marriage, was appropriate because of the wife's “direct and indirect contributions to the marriage and the home ' “). In these cases, there is no discussion or description of the specifics of the role that led the courts to distribute significant portions of the appreciation to the non-titled spouse. Accordingly, we have little guidance as to what factors a court finds persuasive or how upkeep and maintenance led, in whole or in part, to the residence's increase in value. Discussions in these cases would seem to be particularly enlightening as it seems somewhat inconsistent ' and possibly arbitrary ' to award a spouse in a six-year marriage 50% of the appreciation in value and a spouse in a 24-year marriage only 25%.

The Second Department has also recently issued decisions with differing results. However, in both such instances, the non-titled spouse obtained a favorable disposition. In Michelini v. Michelini , 47 A.D.3d 902 (2nd Dept. 2008), the Second Department determined that the trial court “properly awarded the defendant [husband] 50% of the appreciation of the value of the marital residence” because, “[a]lthough the residence was the separate property of the plaintiff [wife], the defendant established that the subsequent appreciation of the value of the marital residence was attributable to their joint efforts and, therefore, he was entitled to the award by the trial court.” Notably absent from this decision were details such as descriptions of these joint efforts, values of the residence (at the date of marriage, date of commencement of the action or date of trial) or mention of nonfinancial contributions such as child-rearing or domestic responsibilities.

In Massimi v. Massimi , 35 AD3d 400 (2nd Dept. 2006), the non-titled wife was granted an equitable distribution award in the parties' primary residence in the sum of $260,000. This award included both a portion of the appreciation and a recoupment of the wife's “equitable share of the marital funds used to reduce the indebtedness and pay for improvements to the marital abode.” The court based this award on the wife's unspecified “indirect nonfinancial contributions to the household.” The appellate decision does not set forth any financial calculations explaining how the amount of $260,000 was derived. However, isn't it likely that the improvements to the marital abode would also increase its value? Then wouldn't an award to the wife of a share of the appreciation and a recoupment of her equitable share of marital funds used to pay for improvements to the marital abode constitute double-dipping, at least to some extent?

One recent case in which a non-titled party did not receive any distribution of the value of the appreciation in the parties' marital residence was the Third Department case of Burtchaell v. Burtchaell , 42 AD3d 783 (3rd Dept. 2007). The facts of that case, however, are unusual and do not appear to reflect that Judicial Department's position as to a non-titled spouse's right to appreciation in the marital residence. ( See Nolan v. Nolan , 107 AD2d 190 (3rd Dept. 1985); Lord v. Lord , 124 AD2d 930 (3rd Dept. 1986).) In Burtchaell, prior to the date of the parties' marriage, the wife acquired property on which were situated the house (which became the primary residence) and rental apartments whose rental income “produced nearly enough money to pay the mortgage.” Because there was no proof that any mortgage payments were made using marital funds, the court refused to allow plaintiff to recoup any portion of the reduction of the mortgage debt on the property. With the rental units located on the same property as the marital residence, the court may have viewed the property as a commercial property more than a marital residence and, therefore, did not afford the husband a right to the appreciation ( See Lawson v. Lawson , 288 AD2d 795 (3rd Dept. 2001)). Or, since there is no discussion as to the appreciation of the marital residence, perhaps the husband did not even seek a share of the appreciation.

Simply put, courts seem inclined to award the non-titled spouse's material portions of the appreciation in the separately owned primary residence. However, the results vary and the criteria for an award have not been clearly defined.

Vacation or Country Homes

In order to determine if courts view primary marital residences as a wholly different type of property, we must also review recent cases addressing the distribution of appreciation in value of vacation or country homes that is the separate property of one party. The portion distributed to the non-titled spouses differs somewhat, but perhaps not as much as one might expect.

In Keane v. Keane , 25 AD3d 729 (2nd Dept. 2006), a case in which the parties were married for over 30 years, the Second Department determined that 30% of the appreciation in the value of defendant husband's one-third interest in certain vacation property was marital property. The court reasoned that “plaintiff's contributions or efforts constituted marital property subject to equitable distribution” and directly or indirectly accounted for 30% of the appreciation in the residence. The balance of the appreciation in the value of the husband's interest of the vacation property was determined to be a result of market forces rather the wife's contributions or efforts. By stipulation entered into by the parties prior to the trial, the parties agreed that any marital property would be split equally between the parties, so that issue was not before the court. There was no description of “plaintiff's contribution or efforts,” no values of the residence at the dates of either marriage or trial, nor a description of why the appreciation was determined to be the result of active endeavors or passive market forces.

When comparing Keane with the case of Faello v. Faello , 43 AD3d 1102 (2nd Dept. 2007), also decided by the Second Department, it seems that the marital/separate property distinction is not as determinative a factor as what a court finds is equitable in any particular situation. The husband in Faello contributed $200,000 of his separate property toward the purchase and furnishing of a Florida residence, which was held in the parties' joint name. The trial court classified the property as marital property but awarded the wife only 15% of the appreciation in the property, after crediting the husband with his separate property contributions.

It is notable that in neither Keane nor Faello are the non-titled spouse's contributions spelled out, and the courts only vaguely refer to them. Indeed, it seems that these cases have virtually identical fact patterns, with the sole distinction being that one vacation home is separately titled and the other is jointly titled.

The court in Johnson v. Chapin , 854 NYS2d 18 (1st Dept. 2008), explicitly sets forth its basis and reasoning for reducing from 50% to 25% the trial court's award to the non-titled wife of the appreciation in the husband's country home. The parties were married in January 1991; their son was born in October that same year. The wife had been corporate vice president of the motion picture and television department of Disney, but stopped working outside the home when the parties' son was three years old. The husband was a partner at a major New York City law firm during the first eight years of marriage and thereafter “became a managing director at Lazard Freres & Company ' [and] served on the Board of Directors for a number of publicly traded companies ' .” Before the parties' marriage, the husband had acquired a small home and a tenant house on approximately 160 acres of land in Claverack, NY. During the marriage, the parties invested close to $2 million of marital money to remodel the house and make substantial improvements on the surrounding property, which renovations and improvements spanned the entire 11-year period that the parties were married. Each party took part in planning, assisting or supervising the renovations, but the parties agreed that the husband “played a larger role in the conceptualization and oversight of the Claverack improvements.” And, “[t]he couple brought their son to Claverack for many weekends and holidays while the renovation was being completed.”

The trial court in Johnson determined that the “extensive renovations accounted for the vast increase in value and that all improvements were 100% marital.” The First Department agreed with this assessment, for the most part, but also noted that “[m]arket forces over the approximately 11 years of marriage accounted for some of the property's increased value” and that the wife was not entitled to a credit for any portion of this passive appreciation. Thus, the First Department reduced the wife's share from 50% to 25% of the appreciation as it found it “a more equitable apportionment in the circumstances.”

Additionally, the trial court awarded the wife 50% of the difference between the amount spent on the renovations and the remodeling and the amount of the appreciation in the property. The First Department declined to do so because “the couple shared the risk that the property's appreciation would not equal their investment, and there is no basis in law or equity to now shield the wife from the economic consequences of a shared decision to renovate the Claverack property.”

In next month's newsletter we'll look at factors that may influence a court's decision concerning the equitable distribution of increased value in separately owned primary and vacation homes.

Marcy L. Wachtel, a member of this newsletter's Board of Editors, is a partner in the firm of Katsky, Korins, LLP. Lori K. Meyer is an attorney with the firm.