Equitable Distribution of the Appreciation in Value of Separately Owned Residences

In last month's newsletter, we discussed recent case law concerning the equitable distribution of the increased value of separately owned primary and secondary homes. Not all of these cases are in line with one another, leading us to the question: “How are courts really deciding who will benefit from increases in value in separately owned homes?”

Credibility/Non-disclosure

At first glance, the award in the vacation-home related case of Johnson v. Chapi, 854 NYS2d 18 (1st Dept. 2008), which we discussed in last month's issue, may seem inexplicably favorable to the non-titled spouse. However, numerous decisions indicate that parties who do not comply with court directives and discovery procedures and who lack credibility are less likely to receive a favorable outcome when passive appreciation on real property is at issue.

• In connection with the Johnson v. Chapin matter, during the course of the proceedings:”The court recognized the husband's deception and non-disclosure of assets, and imputed an average annual income to him of $2,273,680″;
• “The husband failed to pay the sums as ordered by the court and built up arrears totaling more than $200,000″;
• The court found the husband's “allegations of poverty to be spurious noting that he spent approximately $63,000 per month on himself”;
• The trial court, as quoted by the First Department, found that the husband had been disingenuous when claiming that ” ' his earning position has greatly changed since September 11, 2001. His economic position now is much, much better than it was in 2001. The [husband] has not demonstrated that he has suffered a substantial change in circumstance, financial hardship, loss of income, or loss of earning capacity. If anything, his income has increased ' ” (emphasis supplied);
• “The court found the testimony of the wife, and her witnesses, to be credible. By contrast, the court did not credit the testimony of the husband, or his witnesses.”;
• “The [trial] court expressed continued frustration at the fact that the husband had 'stonewalled' and erected numerous obstacles to the full discovery of his income and assets. [The trial court] stated: 'The defendant posed every obstacle imaginable to prevent a fair and orderly discovery of his income and assets. Just as he had stonewalled Justice Marjory Fields, hiding the five million dollars he had made in 2000, so too has he stonewalled this court. In a downward modification application to this court he falsely claimed that he earned 1 million dollars less than he actually received in 2001. In addition to his salary, the defendant has been or is a director for a few very large publicly traded companies, both foreign and domestic, from which has earned substantial additional income.'”; and
• “The court also noted the husband's 'severe lapses in memory' when questioned about the thousands of dollars of marital funds spent on his paramour.”

The more “credible” spouses also received favorable awards in Hale v. Hale, 16 AD3d 231 (1st Dept. 2005) (trial court resolved issue of credibility in wife's favor when awarding her half of the appreciation in the condominium, despite the wife's lack of evidence demonstrating how the condominium's appreciation was through either party's direct or indirect efforts) and Naimollah v. DeUgarte, 18 AD3d 268 (1st Dept. 2005) (awarding the plaintiff wife a greater share of the marital assets, because the trial court “credited plaintiff's and the family nanny's testimony that defendant contributed little to the family, and discredited defendant's testimony about the extent of his child-care and homemaking efforts; credibility determinations are entitled to deference”).

Perhaps the strongest cautionary tale is the case of Hildreth-Henry v. Henry, 27 AD3d 419 (2nd Dept. 2006), in which, because the defendant husband failed to fully comply with plaintiff wife's discovery demands, he was precluded from testifying at trial and, therefore, could not establish his claim to the appreciated value of certain of his wife's separate property.

Equitable Distribution of Appreciation vs. Recoupment of Marital Funds

Courts seem inclined to grant a party a recoupment of his or her equitable share of the marital funds expended on the other party's separate property when the particular facts of a case do not clearly merit an equitable distribution of the appreciation in the separate property. (See, e.g., Dermigny v. Dermigny, 23 AD3d 439 (2nd Dept. 2005); Seeley v. Seeley, 135 AD2d 703 (2nd Dept. 1987); and Burgio v. Burgio, 278 AD2d 767 (3rd Dept. 2000).)

Perhaps courts have been comfortable with granting this form of relief because the amount awarded can be definitively determined by documentary evidence such as bank statements corroborating the exact amounts of marital funds that have been used. Although this approach typically results in lesser amounts awarded to non-titled spouses when the marital funds expended are minimal in comparison to the amount of the appreciation, in certain cases, non-titled spouses may benefit. For example, assume the following facts: One spouse is the primary source of income for a household; the marital residence is the separate property of the other party; in the first few years of marriage, the marital residence is significantly renovated using the non-titled spouse's earnings; and, despite the significant renovations, the value of the property does not appreciate materially by the time the parties file for divorce shortly after the renovations have been completed.

With these facts, it would seem that the non-titled spouse may receive a larger distribution if he or she were to seek an equitable recoupment of amounts which he or she earned during the marriage and then spent on the renovations. The court in Johnson v. Chapin, supra, found that the improvements and renovations to the husband's separate property were the joint efforts of the parties and that both parties undertook the risk associated with the various expenditures. However, that was a 14-year marriage, where the parties had a child together and both parties testified to their contributions to the property. Query if the result would differ if it had been a short-term, childless marriage in which the non-titled spouse only provided the money and did not facilitate, or even necessarily approve of, the improvements to the residence.

Taking into consideration the results of Johnson v. Chapin, it may be prudent for the non-titled spouse to analyze the potential result of seeking recoupment of marital property expended instead of automatically seeking a portion of the appreciation.

Burden of Proof

In a February 2006 article we wrote with Pamela Sullivan (“How Courts Handle Equitable Distribution,” Volume 7, Number 6), we noted that, contrary to the burden of proof typically imposed by courts, the cases of Parise v. Parise, 13 AD3d 504 (2nd Dept. 2004), and Ritz v. Ritz, 21 AD3d 267 (1st Dept. 2005), placed on the titled spouse the burden of demonstrating that the non-titled spouse was not entitled to any share of the appreciation in the titled spouse's separate property. Since publication of that article, we have come across no subsequent cases that have assigned burdens of proof as in Parise and Ritz. In fact, four cases ' Chernoff v. Chernoff, 31 AD3d 900 (3rd Dept. 2006); London v. London, 21 AD3d 602 (3rd Dept. 2005); Michelini v. Michelini, 47 AD3d 902 (2nd Dept. 2008); and Embury v. Embury, 2008 WL 809026 (2nd Dept. 2008) ' indicate that the non-titled spouse maintains the burden of demonstrating an entitlement to a portion of the appreciation in the other party's separate property. However, Parise and Ritz have not been specifically overruled and remain on the books.

An Old Issue Reconsidered

In Heine v. Heine, 176 AD2d 77 (1st Dept. 1992), the First Department held as follows when confronted with how to distribute passive appreciation when one party contributes separate property to the purchase of real property:

[W]hile the husband sustained his burden of showing that a percentage of the original purchase price of the [marital residence] was paid with his separate property, the IAS court erred in awarding him a like percentage of the townhouse's current value. Clearly, the appreciation was not attributable to the down payment but to the extensive renovations supervised by the wife and paid for with marital funds, mortgage payments made with marital funds and market forces, and the award of 23% to the husband of the current value of the townhouse as separate property, aside from being mathematically incorrect, is improper as a matter of law. The husband should only be credited with the initial investment of $54,500. Where a spouse contributes separate property towards the creation of a marital asset, he or she is entitled to a credit for the amount of property contributed. (See, e.g., Lolli-Ghetti v. Lolli-Ghetti 165 AD2d 426, 432; Coffey v. Coffey, 119 AD2d 620, 622) Transmuting that contribution into a percentage and applying the percentage to an appreciated asset to which it bore no relationship constituted manifest error. (Emphasis added.)

However, in SM v. MM, 13 Misc. 3d 1201, (Sup. Ct., Nassau Cty. 2006), which denied the wife's motion seeking a determination that certain property was the wife's separate property, the court noted that each party would receive a proportionate share of the “passive” appreciation, based upon each party's separate property contributions thereto. It will be interesting to see if other courts follow the SM v. MM court's approach and reject the Heine position that such a distribution would be erroneous. Or will separate property contributions continue to be limited to the dollar-for-dollar credit which has generally been awarded?

In next month's newsletter we'll offer a proposed formulaic approach to the division and distribution of the appreciation in value of a separately owned residence (SOR).

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 last month's newsletter, we discussed recent case law concerning the equitable distribution of the increased value of separately owned primary and secondary homes. Not all of these cases are in line with one another, leading us to the question: “How are courts really deciding who will benefit from increases in value in separately owned homes?”

Credibility/Non-disclosure

At first glance, the award in the vacation-home related case of Johnson v. Chapi , 854 NYS2d 18 (1st Dept. 2008), which we discussed in last month's issue, may seem inexplicably favorable to the non-titled spouse. However, numerous decisions indicate that parties who do not comply with court directives and discovery procedures and who lack credibility are less likely to receive a favorable outcome when passive appreciation on real property is at issue.

• In connection with the Johnson v. Chapin matter, during the course of the proceedings:”The court recognized the husband's deception and non-disclosure of assets, and imputed an average annual income to him of $2,273,680″;
• “The husband failed to pay the sums as ordered by the court and built up arrears totaling more than $200,000″;
• The court found the husband's “allegations of poverty to be spurious noting that he spent approximately $63,000 per month on himself”;
• The trial court, as quoted by the First Department, found that the husband had been disingenuous when claiming that ” ' his earning position has greatly changed since September 11, 2001. His economic position now is much, much better than it was in 2001. The [husband] has not demonstrated that he has suffered a substantial change in circumstance, financial hardship, loss of income, or loss of earning capacity. If anything, his income has increased ' ” (emphasis supplied);
• “The court found the testimony of the wife, and her witnesses, to be credible. By contrast, the court did not credit the testimony of the husband, or his witnesses.”;
• “The [trial] court expressed continued frustration at the fact that the husband had 'stonewalled' and erected numerous obstacles to the full discovery of his income and assets. [The trial court] stated: 'The defendant posed every obstacle imaginable to prevent a fair and orderly discovery of his income and assets. Just as he had stonewalled Justice Marjory Fields, hiding the five million dollars he had made in 2000, so too has he stonewalled this court. In a downward modification application to this court he falsely claimed that he earned 1 million dollars less than he actually received in 2001. In addition to his salary, the defendant has been or is a director for a few very large publicly traded companies, both foreign and domestic, from which has earned substantial additional income.'”; and
• “The court also noted the husband's 'severe lapses in memory' when questioned about the thousands of dollars of marital funds spent on his paramour.”

The more “credible” spouses also received favorable awards in Hale v. Hale , 16 AD3d 231 (1st Dept. 2005) (trial court resolved issue of credibility in wife's favor when awarding her half of the appreciation in the condominium, despite the wife's lack of evidence demonstrating how the condominium's appreciation was through either party's direct or indirect efforts) and Naimollah v. DeUgarte , 18 AD3d 268 (1st Dept. 2005) (awarding the plaintiff wife a greater share of the marital assets, because the trial court “credited plaintiff's and the family nanny's testimony that defendant contributed little to the family, and discredited defendant's testimony about the extent of his child-care and homemaking efforts; credibility determinations are entitled to deference”).

Perhaps the strongest cautionary tale is the case of Hildreth-Henry v. Henry , 27 AD3d 419 (2nd Dept. 2006), in which, because the defendant husband failed to fully comply with plaintiff wife's discovery demands, he was precluded from testifying at trial and, therefore, could not establish his claim to the appreciated value of certain of his wife's separate property.

Equitable Distribution of Appreciation vs. Recoupment of Marital Funds

Courts seem inclined to grant a party a recoupment of his or her equitable share of the marital funds expended on the other party's separate property when the particular facts of a case do not clearly merit an equitable distribution of the appreciation in the separate property. ( See, e.g., Dermigny v. Dermigny , 23 AD3d 439 (2nd Dept. 2005); Seeley v. Seeley , 135 AD2d 703 (2nd Dept. 1987); and Burgio v. Burgio , 278 AD2d 767 (3rd Dept. 2000).)

Perhaps courts have been comfortable with granting this form of relief because the amount awarded can be definitively determined by documentary evidence such as bank statements corroborating the exact amounts of marital funds that have been used. Although this approach typically results in lesser amounts awarded to non-titled spouses when the marital funds expended are minimal in comparison to the amount of the appreciation, in certain cases, non-titled spouses may benefit. For example, assume the following facts: One spouse is the primary source of income for a household; the marital residence is the separate property of the other party; in the first few years of marriage, the marital residence is significantly renovated using the non-titled spouse's earnings; and, despite the significant renovations, the value of the property does not appreciate materially by the time the parties file for divorce shortly after the renovations have been completed.

With these facts, it would seem that the non-titled spouse may receive a larger distribution if he or she were to seek an equitable recoupment of amounts which he or she earned during the marriage and then spent on the renovations. The court in Johnson v. Chapin, supra, found that the improvements and renovations to the husband's separate property were the joint efforts of the parties and that both parties undertook the risk associated with the various expenditures. However, that was a 14-year marriage, where the parties had a child together and both parties testified to their contributions to the property. Query if the result would differ if it had been a short-term, childless marriage in which the non-titled spouse only provided the money and did not facilitate, or even necessarily approve of, the improvements to the residence.

Taking into consideration the results of Johnson v. Chapin, it may be prudent for the non-titled spouse to analyze the potential result of seeking recoupment of marital property expended instead of automatically seeking a portion of the appreciation.

Burden of Proof

In a February 2006 article we wrote with Pamela Sullivan (“How Courts Handle Equitable Distribution,” Volume 7, Number 6), we noted that, contrary to the burden of proof typically imposed by courts, the cases of Parise v. Parise , 13 AD3d 504 (2nd Dept. 2004), and Ritz v. Ritz , 21 AD3d 267 (1st Dept. 2005), placed on the titled spouse the burden of demonstrating that the non-titled spouse was not entitled to any share of the appreciation in the titled spouse's separate property. Since publication of that article, we have come across no subsequent cases that have assigned burdens of proof as in Parise and Ritz. In fact, four cases ' Chernoff v. Chernoff , 31 AD3d 900 (3rd Dept. 2006); London v. London , 21 AD3d 602 (3rd Dept. 2005); Michelini v. Michelini , 47 AD3d 902 (2nd Dept. 2008); and Embury v. Embury, 2008 WL 809026 (2nd Dept. 2008) ' indicate that the non-titled spouse maintains the burden of demonstrating an entitlement to a portion of the appreciation in the other party's separate property. However, Parise and Ritz have not been specifically overruled and remain on the books.

An Old Issue Reconsidered

In Heine v. Heine , 176 AD2d 77 (1st Dept. 1992), the First Department held as follows when confronted with how to distribute passive appreciation when one party contributes separate property to the purchase of real property:

[W]hile the husband sustained his burden of showing that a percentage of the original purchase price of the [marital residence] was paid with his separate property, the IAS court erred in awarding him a like percentage of the townhouse's current value. Clearly, the appreciation was not attributable to the down payment but to the extensive renovations supervised by the wife and paid for with marital funds, mortgage payments made with marital funds and market forces, and the award of 23% to the husband of the current value of the townhouse as separate property, aside from being mathematically incorrect, is improper as a matter of law. The husband should only be credited with the initial investment of $54,500. Where a spouse contributes separate property towards the creation of a marital asset, he or she is entitled to a credit for the amount of property contributed. ( See, e.g. , Lolli-Ghetti v. Lolli-Ghetti 165 AD2d 426, 432; Coffey v. Coffey , 119 AD2d 620, 622) Transmuting that contribution into a percentage and applying the percentage to an appreciated asset to which it bore no relationship constituted manifest error. (Emphasis added.)

However, in SM v. MM , 13 Misc. 3d 1201, (Sup. Ct., Nassau Cty. 2006), which denied the wife's motion seeking a determination that certain property was the wife's separate property, the court noted that each party would receive a proportionate share of the “passive” appreciation, based upon each party's separate property contributions thereto. It will be interesting to see if other courts follow the SM v. MM court's approach and reject the Heine position that such a distribution would be erroneous. Or will separate property contributions continue to be limited to the dollar-for-dollar credit which has generally been awarded?

In next month's newsletter we'll offer a proposed formulaic approach to the division and distribution of the appreciation in value of a separately owned residence (SOR).

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.