Moran v. Moran

COURT OF APPEALS OF VIRGINIA

Present: Judges Coleman, Bumgardner and Lemons
Argued at Salem, Virginia

DIANE L. MORAN
OPINION BY
v. Record No. 2543-97-3 JUDGE SAM W. COLEMAN III
MARCH 30, 1999
CURTIS E. MORAN, JR.

FROM THE CIRCUIT COURT OF THE CITY OF MARTINSVILLE
Martin F. Clark, Jr., Judge

Stacey W. Moreau (Williams, Morrison, Light
and Moreau, on briefs), for appellant.

Gregory P. Cochran (Caskie & Frost, P.C., on
brief), for appellee.

Diane Moran, wife, and Curtis Moran, husband, appeal the

equitable distribution of their marital assets. Wife contends

the trial court erroneously classified her separately owned

rental house, known as the "Berkshire house," as hybrid

property, and unfairly distributed the marital portion of

husband's defined contribution pension plan. On cross-appeal,

husband contends the trial court erred in refusing to award him

the passive income earned on his separate share of the defined

contribution pension plan, and in assigning him the total debt

remaining on a loan secured by the pension plan. We hold that

the trial court did not err in classifying the Berkshire home as

hybrid property and did not err in assigning husband the debt
secured by the pension plan. However, we hold that the court

erred by failing to classify as separate property the passive

income earned in the husband's pre-marital contributions to the

pension plan. Accordingly, we reverse and remand for

reclassification, valuation and distribution of the pension

plan.

I. BERKSHIRE HOUSE

In 1983, when the parties married, wife owned the Berkshire

house that she had purchased in 1978 for $27,900. According to

husband's estimate, at the date of marriage, wife owed between

$24,000 to $25,000 on the deed of trust, giving her $2,900 to

$3,900 equity in the Berkshire house. The Berkshire house was

their marital home from 1983 to 1990, at which time they

purchased another home and leased the Berkshire property. When

the parties separated, the fair market value of the Berkshire

home was $58,500. The parties still owed $18,533 on the

original deed of trust and $11,079 on a home equity loan,

resulting in net equity of $28,888. During the marriage, the

parties spent $30,000 of marital funds renovating the Berkshire

property and used marital funds to make the monthly payments on

the deed of trust.

Property that is acquired by either party before the

marriage is separate property, Code § 20-107.3(A)(1)(i), subject

to being transmuted into hybrid property -- that is, part

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marital and part separate -- (1) by virtue of an increase in

value due to personal efforts or contributions of marital funds,

Code § 20–107.3(A)(3)(a); or (2) by having been commingled with

marital funds when the marital funds can be retraced, Code

§ 20-107.3(A)(3)(d); or (3) by being commingled with marital

property into newly acquired property when the separate property

can be retraced. Code § 20–107.3(A)(3)(e). Thus, the Berkshire

property would be wife's separate property unless the property

was converted into marital or hybrid property by virtue of

marital contributions increasing the value of the property or by

commingling marital and separate funds.

Husband claims that the expenditure of $30,000 of marital

funds to renovate the Berkshire property transmuted the property

to a hybrid classification. Code § 20-107.3(A)(3)(a) provides

"the increase in value of separate property during the marriage

[is] . . . marital property only to the extent that marital

property or the personal efforts of either party have

contributed to such increases." The expenditure of marital

funds in connection with a separate asset does not, without

more, justify classifying an increase in value or appreciation

of that asset as marital rather than separate property. Martin

v. Martin, 27 Va. App. 745, 753-58, 501 S.E.2d 450, 454-56

(1998). In the context of renovations, the term "'contribution

of marital property' within the meaning of the statute

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contemplates an improvement, renovation, addition or other

contribution which, by its nature, imparts intrinsic value to

the property and materially changes the character thereof." Id.

at 756, 501 S.E.2d at 455. The increase in value of separate

property becomes marital if the expenditure of marital funds or

a married party's personal efforts generated the increase in

value. The significant factor, however, is not the amount of

effort or funds expended, but rather the fact that value was

generated or added by the expenditure or significant personal

effort. See Hart v. Hart, 27 Va. App. 46, 65, 497 S.E.2d 496,

505 (1998) (stating that marital contribution includes the

"value of improvements to the property after the marriage from

other than non-marital funds").

During the marriage, the house appreciated in value to

$58,500 (from an original 1978 purchase price of $27,900).

During that time, the Morans spent $30,000 of marital funds to

renovate the Berkshire house. However, the evidence failed to

prove the extent to which the "contributions" of marital funds

to the renovations caused any of the home's appreciation in

value. Absent evidence that the renovations contributed to a

specific increase in value, the husband failed to satisfy his

initial burden of proof under Code § 20-107.3(A)(3)(a) and to

that extent the appreciation cannot be classified as marital

property. The husband's evidence, which proved the expenditure

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of $30,000 of marital funds for renovating the Berkshire home,

is not, alone, sufficient to support classifying any specific

portion of the increase in value as marital property.

In classifying the Berkshire property, we next consider the

expenditure of marital funds to pay the original deed of trust.

Because marital funds were used to pay the mortgage, the trial

court did not err in classifying the Berkshire property as

hybrid, that is, part marital and part separate.

When marital property and separate property
are commingled by contributing one category
of property to another, resulting in the
loss of identity of the contributed
property, the classification of the
contributed property shall be transmuted to
the category of property receiving the
contribution. However, to the extent the
contributed property is retraceable by a
preponderance of the evidence and was not a
gift, such contributed property shall retain
its original classification.

Code § 20-107.3(A)(3)(d). The evidence showed that the Morans

used marital funds to pay the monthly mortgage obligation for

the Berkshire house. Thus, they commingled marital funds with

separate property, resulting in the presumption that the marital

funds were transmuted to separate property. However, to the

extent the marital funds reduced the principal of the mortgage,

that amount is traceable from the separately acquired equity.

See Hart, 27 Va. App. at 65, 497 S.E.2d at 505 (stating that the

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Brandenberg formula for determining marital contribution

includes amount of marital funds expended in the reduction of

mortgage principal). The "acquisition" of property refers to

the process of purchasing and paying for property. See Brett R.

Turner, Virginia's Equitable Distribution Law: Active

Appreciation and the Source of Funds Rule, 47 Wash. & Lee

L. Rev. 879, 899-905 (1990) ("property is 'acquired' under the

source of funds rule whenever real economic value is created")

(citing Harper v. Harper, 448 A.2d 916, 929 (Md. 1982); Wade v.

Wade, 325 S.E.2d 260 (N.C. Ct. App. 1985)). Here, the husband's

evidence proved that at the time of marriage, the unpaid balance

on the mortgage was $24,000 to $25,000, that during the marriage

the mortgage was paid with marital funds, and at the date of

separation the unpaid balance on the mortgage was $18,533. The

husband's evidence proved a reduction in mortgage principal of

approximately $6,000 through the expenditure of marital funds.

Therefore, in paying the mortgage obligation with marital funds,

the Morans acquired value in the Berkshire property. Although

the husband failed to offer evidence sufficient to prove the

"value" of the renovations, the husband did present sufficient

evidence to establish that a portion of the equity in the

Berkshire property could be traced to marital funds.

Accordingly, the trial court did not err in classifying the

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Berkshire house as hybrid property, part separate and part

marital. 1

II. SAVINGS AND INVESTMENT PLAN

Before and during the marriage, husband participated in his

employer's defined contribution pension plan (Savings and

Investment Plan or "SIP"), valued at $198,000 on the date of

separation. Within the SIP, and throughout the course of its

existence, husband invested his contributions into three

separate funds, each with varying degrees of risk and rates of

return. Husband had authority to direct the disposition of his

investments within the three funds; however, he testified that

he transferred investments among the funds only two or three

times during the course of the twelve-year marriage. The value

of the SIP plan at the time of marriage was $17,489. The trial

court classified the pre-marital contribution of $17,489 as

husband's separate property and awarded him that amount.

Husband contends the trial court erred by not awarding him any

of the passive increase in value on the $17,489 separate

property investment.

1
Although the trial court did not determine the values of
the marital and separate shares in the Berkshire house, as
required by Code § 20-107.3, neither party challenges the
court's failure to do so. Nor does the husband challenge the
court's allotment of the entire asset to the wife.

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 Code § 20-107.3(A)(1)(iv) provides that "[i]ncome received

from separate property during the marriage is separate property

if not attributable to the personal efforts of either party."

Accordingly, passive income earned on pre-marital contributions

to a defined contribution pension plan is separate property.

See Mann v. Mann, 22 Va. App. 459, 470 S.E.2d 605 (1996).

We hold that the trial court erred by failing to determine

the amount of income derived from husband's pre-marital separate

investment of $17,489 in the pension fund. Husband's expert

witness calculated the amount that $17,489 would have earned or

increased in value during the twelve years of marriage using

various scenarios depending on which fund or funds contained the

$17,489. 2 If the $17,489 were invested solely in the fund that

performed the poorest over the twelve years of marriage, its

value would have increased in twelve years to $61,978 at the

time of separation. Thus, husband presented the irrefutable

evidence that the $17,489 separate property had earned income or

increased in value by at least $44,489. On the other hand, had

2
Husband was unable to produce records showing the rates of
return for the various funds during the first six months after
the parties' marriage. Accordingly, the expert estimated the
rates of return for that six-month period. Husband further had
no records showing, nor could anyone delineate, which of the
three funds the $17,489 was invested in at the time of, or
during the period of, the marriage. Nevertheless, the evidence
is undisputed that the $17,489 of separate property was invested
in one or more of the three funds.

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the separate property been invested entirely in the fund

yielding the highest rate of return, the maximum increase in

value would have been $135,900.

In Mann, we were not called upon to review the method the

trial court used to calculate the income or interest earned on a

defined contribution pension plan. However, in Mann, we noted

that the formula employed by the expert witness to determine the

income earned on the separate and marital shares comported with

methods used and accepted in other jurisdictions. 3 See Mann, 22

Va. App. at 463 n.4, 470 S.E.2d at 606 n.4 (citing Defined

Contribution Plans, Equitable Distribution Journal, Vol. 13, No.

1 at 4-5 (Jan 1996); Thielenhaus v. Thielenhaus, 890 P.2d 925,

929-30 (Okla. 1995); White v. White, 521 N.W.2d 874 (Minn. Ct.

App. 1994)). In Thielenhaus, a case we cited with approval in

Mann, the Oklahoma Supreme Court affirmed use of the following

method to calculate the marital share of a defined contribution

pension plan:

(1) multiply the fund's beginning balance
. . . at the date of marriage . . . (2)

3
In Mann, we did not expressly endorse a particular formula
for calculating the passive income on a separate portion of a
defined contribution plan. However, in addition to citing
formulas approved in other jurisdictions, we noted that the use
of a coverture fraction (or the "time rule"), which allocates
the value of the separate portion of the fund based on the
length of time the spouse participated in the plan prior to
marriage, would achieve "incongruous" results if applied to a
defined contribution plan.

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 times the average earning of the pension
account [during the marriage] and . . . (3)
compound annually the interest until the
date of separation . . . (4) subtract that
amount from . . . the value of the fund
. . . [on the date of separation] to arrive
at a divisible marital asset.

Thielenhaus, 890 P.2d at 929-30. In doing so, steps (1) through

(3) yield the value of the pre-marital separate investment as of

the date of separation.

Here, husband's expert calculated the income earned on the

husband's $17,489 pre-marital contributions by applying the same

method employed in the Thielenhaus case. The husband's expert

witness presented credible evidence establishing the minimum

income that his pre-marital contribution of $17,489 to the SIP

would have earned were it invested in the fund with the lowest

rate of return.

A trial court's decision regarding equitable distribution

will not be altered on appeal unless plainly wrong or without

evidence to support it. See McDavid v. McDavid, 19 Va. App.

406, 407-08, 451 S.E.2d 713, 715 (1994). Here, the trial court

erred when, in view of the evidence presented, it failed to

classify as husband's separate property at least the minimum

passive growth on the husband's pre-marital investment of

separate property in the SIP.

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 III. DISTRIBUTION OF MARITAL DEBT

Husband contends the trial court erred in assigning him the

total $32,000 debt remaining on a loan secured by the SIP. The

parties incurred this debt, at least in part, to renovate the

Berkshire property. 4

"In reviewing an equitable distribution award on appeal, we

have recognized that the trial court's job is a difficult one,

and we rely heavily on the discretion of the trial judge in

weighing the many considerations and circumstances that are

presented in each case." Klein v. Klein, 11 Va. App. 155, 161,

396 S.E.2d 866, 870 (1990). Unless the record shows that the

trial judge has abused his or her discretion by misapplying the

statutory factors, the trial judge's determination will not be

reversed on appeal. See id.

Although the trial judge awarded husband all of the debt

secured by the SIP, this figure amounted to approximately 52% of

the total remaining marital debt. The court assigned to wife

approximately $28,000 in marital debt incurred to facilitate

purchase of the marital residence. Accordingly, we find that

the trial judge did not abuse his discretion in dividing the

marital debt.

4
The husband's testimony was that the SIP loan was actually
a consolidation of three or four different loans incurred at
different times. The evidence did not establish the purpose for
each of the loans.

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 IV. CONCLUSION

We affirm the trial court's classification of the Berkshire

property and the trial court's apportionment of the marital

debt. However, we reverse the trial court's decision to deny

the husband at least the minimum passive interest earned on his

separate portion of the SIP. We remand the case with

instructions that the trial court exercise its discretion to

determine the appropriate distribution of the SIP in accordance

with this opinion and within the parameters of the expert's

testimony. Accordingly, the judgment of the trial court is

reversed and the case is remanded for further consideration by

the trial judge on the record.

Affirmed, in part,
and reversed and
remanded, in part.

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