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If you own a business and are considering a divorce, you need to be aware of the fair compensation defense in an Arizona Divorce.
The Arizona Court of Appeals applied the fair compensation method to defeat a community lien in the case of Rowe vs. Rowe.
The Arizona appellate court in the matter of Patricia Rowe v. Jack Rowe was faced with an appeal concerning the characterization of a business as Jack’s sole and separate property or the parties’ community property, as well as the correct valuation methodology to use to value that business or any community lien attaching to that business.
The facts are straightforward. Jack owned an unincorporated business prior to his marriage to Patricia.
Jack made the decision to incorporate that business shortly after the parties’ marriage.
In doing so, Jack issued all of the shares in the newly formed corporation to himself and named himself as an officer of the company.
Jack also named Patricia as an officer of the company. Shortly before filing for divorce, Jack removed Patricia as an officer of the company.
Fair Compensation Defense to a Community Lien Claim in Arizona
The Arizona trial court found that the business was Husband’s sole and separate property and that the community had been fairly compensated for any increase in the equity of the home.
The trial court used the “reasonable value of community services” valuation methodology, as opposed to the “fair rate of return on the initial capital investment” approach in valuing the business.
Patricia’s argument at trial was that the incorporation of the business owned prior to marriage turned into community property in Arizona by the mere creation of the newly incorporated business.
The Arizona appellate court disagreed.
Specifically, the appellate court held that the Arizona case of Bender v. Bender does provide a rebuttable presumption that property acquired during a marriage is presumed to be community property.
However, the appellate court also pointed out the ruling in Cockrill v. Cockrill providing that property acquired prior to marriage remains the separate property of the spouse who acquired that property unless and until the parties agree otherwise.
The appellate court agreed with the trial court’s reliance on the case of Porter v. Porter, which held that a simple change in the form of a company as a result of incorporation during the marriage does not change that separate property into community property.
The trial court found the value of the business had not increased and that the community was fairly compensated for the work Jack provided to his company from the earnings that flowed through to the community during the parties’ marriage.
The appellate court one step further to cite Michelson v. Michelson and Katson v. Katson in support of the proposition that a spouse should not be required from withholding his or her labors during marriage towards their sole and separate business out of fear of converting the sole and separate business into a community asset.
Business Bank Accounts Are Treated Differently Than Personal Bank Accounts
Patricia, however, argued that the day to day balances in Jack’s business accounts varied on a regular basis and that those funds were earned from Jack’s community labors and, therefore, the business accounts were commingled and, therefore, were transmuted to community accounts.
Patricia relied upon existing Cooper v. Cooper, which held that the commingling of separate and community funds into accounts may transmute those accounts into community property.
The Arizona appellate court disagreed.
The appellate court distinguished the Cooper v. Cooper rule by holding business accounts are treated differently than personal accounts because the commingling of sole and separate funds with community funds in a personal account may make the identity of the separate funds too difficult to determine and it appears as those spouses intended to treat such personal accounts as community property.
Such was not the case here where the business accounts remained in the sole name of the community and the trial court found that community had been adequately compensated for Jack’s labor spent in his business during the parties’ marriage.
Fair Compensation Method Versus Fair Rate of Return on Capital Method
Patricia then challenged the business valuation methodology adopted by the Court. Patricia argued that the “fair compensation to the community” approach in the California case of Van Camp v. Van Camp emphasizes the focus upon the capital of the business, whereas the “fair rate of return on initial investment” approaches in the California case of Pereira v. Pereira case focuses on the community efforts expended on the business by a spouse during the marriage.
Patricia argued the latter approach was more appropriate because the increase in the value of the business was not related to the initial premarital capital investment but, instead, the labors of Jack during the parties’ marriage.
The appellate court relied upon the Cockrill v. Cockrill decision and held that the Cockrill decision made it clear that all businesses and situations in a divorce will be uniquely different and, further, that there needed to be different valuation methodologies based upon those differences.
In a situation wherein the growth was solely the result of the capital investment or, on the other extreme, solely the result of labor then Patricia’s argument may have prevailed.
However, there will rarely be a situation that falls into either extreme scenario.
The appellate court then cited the language in Cockrill that provided a trial court is not bound by any single methodology and must select the business valuation methodology that will achieve substantial justice.
The appellate court agreed with the trial court that the value of the business was not based solely on Jack’s initial investment but the ten years of pre-marital labor he invested in that business.
The appellate court, therefore, confirmed the trial judge’s use of the “fair compensation to the community” approach and affirmed the trial court’s ruling.
If you have questions about community lien in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have over 100 years of combined experience successfully representing clients in community property and family law cases.
Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.
Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your community property or family law case around today.
Other Articles About Community Property in Arizona
- ARIZONA COMMUNITY PROPERTY LAWS
- CALCULATING A COMMUNITY LIEN ON AN APPRECIATING ASSET IN AN ARIZONA DIVORCE
- VALUING GOODWILL OF A LAWFIRM IN AN ARIZONA DIVORCE
- COMMUNITY PROPERTY AND ANNULMENT OF MARRIAGE IN ARIZONA
- SOLE AND SEPARATE FUNDS USED TO BUY A HOUSE IN ARIZONA
- DIVISION OF MILITARY RETIREMENT AND DISABILITY PAYMENTS IN AN ARIZONA DIVORCE
- SEPARATE PROPERTY CONTRIBUTIONS WHEN DIVIDING COMMUNITY PROPERTY IN ARIZONA
- PROPERTY HELD AS JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP IN AN ARIZONA DIVORCE
- DIVIDING RETIREMENT ACCOUNTS IN AN ARIZONA DIVORCE
- ARIZONA DIVORCE DEBT
- EFFECT OF PLACING COMMUNITY PROPERTY INTO A FAMILY TRUST IN ARIZONA
- COMMUNITY PROPERTY LOTTERY WINNINGS IN ARIZONA
- IS SEPARATE PROPERTY LIABLE FOR COMMUNITY DEBT IN ARIZONA
- CREDITOR COLLECTING A SEPARATE DEBT WITH COMMUNITY PROPERTY IN ARIZONA
- TITLE AFFECTS COMMUNITY PROPERTY RIGHTS IN ARIZONA
- COMMINGLING SEPARATE PROPERTY WITH COMMUNITY PROPERTY IN ARIZONA
- ARE MILITARY RETIREMENT PAYMENTS COMMUNITY PROPERTY IN ARIZONA
- EFFORT DOES NOT ENTITLE A SPOUSE TO MORE COMMUNITY PROPERTY IN ARIZONA
- RESULT OF COMMINGLING COMMUNITY AND SEPARATE PROPERTY IN ARIZONA
- INCREASED VALUE OF A BUSINESS IN AN ARIZONA DIVORCE
- GIFT OF SEPARATE PROPERTY THROUGH A JOINT TENANCY DEED IN ARIZONA
- ABANDONMENT OF MARRIAGE AND COMMUNITY PROPERTY RIGHTS IN ARIZONA
- ARE PROFITS FROM A SEPARATE BUSINESS COMMUNITY OR SEPARATE PROPERTY
- TRACING SEPARATE PROPERTY COMMINGLED WITH COMMUNITY PROPERTY IN ARIZONA
- INTENTION CONTROLS TRANSMUTATION OF SEPARATE INTO COMMUNITY PROPERTY
- RECORDING A HOME IS INSUFFICIENT TO CHANGE SEPARATE PROPERTY INTO COMMUNITY PROPERTY
- COMMUNITY PROPERTY INTEREST IN A BUSINESS OWNED PRIOR TO MARRIAGE
- WHAT IS SEPARATE PROPERTY IN ARIZONA
- VALUATION AND DISTRIBUTION OPTIONS FOR A PENSION IN AN ARIZONA DIVORCE
- UNFAIR SEPARATION AGREEMENT IN ARIZONA
- UNEQUAL DIVISION OF PROPERTY IN A DIVORCE IN ARIZONA
- SEPARATE PROPERTY USED PURCHSE A HOME DURING MARRIAGE IN ARIZONA
- REIMBURSEMENT FOR PAYING SEPARATE DEBTS OF A SPOUSE IN ARIZONA
- REFUSAL TO SELL A HOUSE AFTER A DIVORCE IN ARIZONA
- PENSIONS AND DIVORCE IN ARIZONA
- MILITARY RETIREMENT PAY AND DIVORCE IN ARIZONA
- IS SEPARATE PROPERTY DIVIDED DIFFERENTLY THAN COMMUNITY PROPERTY IN ARIZONA
- IS ARIZONA A 50-50 STATE IN A DIVORCE
- IS ALL PROPERTY OWNED BY EITHER SPOUSE COMMUNITY PROPERTY IN ARIZONA
- INTEREST ON A LOAN BETWEEN SPOUSES IN ARIZONA
- IMPACT OF IMPROVEMENTS TO SEPARATE PROPERTY IN AN ARIZONA DIVORCE
- HOW TO ENFORCE DIVISION OF PROPERTY AND DEBT IN ARIZONA
- HOW TO DIVIDE PROPERTY IN ARIZONA WHEN A SPOUSE IS HIDING ASSETS
- HOW STOCK OPTIONS ARE DIVIDED IN AN ARIZONA DIVORCE
- HOW IS COMMUNITY PROPERTY DIVIDED IN ARIZONA
- HOW ARE RETIREMENT ACCOUNTS DIVIDED IN AN ARIZONA DIVORCE
- FILING A LIS PENDENS IN A DIVORCE IN ARIZONA
- ENFORCE A PROPERTY SETTLEMENT AGREEMENT IN ARIZONA
- DO RULES REGARDING PROPERTY APPLY TO DEBTS IN ARIZONA
- DIVISION OF DEBT IN AN ARIZONA DIVORCE
- DIVIDING PROPERTY NOT INCLUDED IN A DIVORCE DECREE IN ARIZONA
- DIFFERENCE IN COMMUNITY AND SEPARATE PROPERTY IN ARIZONA
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- CREATION OF A COMMUNITY LIEN ON SOLE AND SEPARATE PROPERTY IN ARIZONA
- COMMUNITY PROPERTY LAWS ABOUT A SPOUSE’S PERSONAL GUARANTEE IN ARIZONA
- CHOOSING A VALUATION DATE WHEN DIVIDING ASSETS IN A DIVORCE IN ARIZONA
- CAN A SPOUSE BE HELD LIABLE FOR CREDIT CARD DEBT IN ARIZONA
- CALCULATING A COMMUNITY LIEN ON A DEPRECIATING ASSET IN ARIZONA
- EFFECT OF A DISCLAIMER DEED OR QUIT CLAIM DEED IN A DIVORCE IN ARIZONA
- BANK ACCOUNTS AND DIVORCE IN ARIZONA
- DIVIDING PAID TIME OFF IN A DIVORCE IN ARIZONA
- EQUALIZATION PAYMENTS IN AN ARIZONA DIVORCE
- OMITTED ASSETS IN AN ARIZONA DIVORCE DECREE
- CRSC PAY AND DIVORCE IN ARIZONA
- JUDGMENT FOR SEPARATE PROPERTY STOLEN DURING MARRIAGE
- JUDGE IGNORES A BUSINESS APPRAISAL IN AN ARIZONA DIVORCE
- REIMBURSEMENT OF SEPARATE PROPERTY IN A DIVORCE IN ARIZONA
- SEPARATE PROPERTY INCREASES IN VALUE DURING MARRIAGE IN ARIZONA
- PERSONAL INJURY AWARDS AND DIVORCE IN ARIZONA
- VALUING A BUSINESS IN A DIVORCE IN ARIZONA WITHOUT FINANCIAL DOCUMENTATION
- RETIREMENT INCREASE AFTER DIVORCE IN ARIZONA
- FAILURE TO DISCLOSE FINANCIAL INFORMATION IN A DIVORCE IN ARIZONA
- UNAUTHORIZED USE OF A POWER OF ATTORNEY TO DISPOSE OF SPOUSE’S SEPARATE PROPERTY
- COHABITATION AGREEMENTS IN ARIZONA
- FINANCIAL AGREEMENTS BETWEEN UNMARRIED COUPLES IN ARIZONA
- COMMUNITY PROPERTY LIABILITY EXISTS EVEN AFTER PROBATE ENDS
- WHEN A CREDITOR MAY TAKE SOLE AND SEPARATE ASSETS OF A SPOUSE
- LIABILITY FOR A SPOUSE’S NEGLIGENCE IN ARIZONA
- VALUATION OF STOCK HOLDINGS AND DEBT IN AN ARIZONA DIVORCE
- LOANS BEFORE MARRIAGE IN ARIZONA
- CREDITOR LIEN ON JOINT TENANCY PROPERTY IN AN ARIZONA DIVORCE
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- DISABILITY PAY AND COMMUNITY PROPERTY IN ARIZONA
- VALUATION OF A PROFESSIONAL PRACTICE IN A DIVORCE IN ARIZONA
- JOINING A THIRD PARTY IN A DIVORCE IN ARIZONA
- CONTESTING A RULE 69 AGREEMENT WITHOUT A TRIAL IN ARIZONA
- DEFENSE TO REIMBURSEMENT FOR PAYMENT OF COMMUNITY BILLS IN AN ARIZONA DIVORCE
- SURVIVOR ELECTION AND MILITARY RETIREMENT IN AN ARIZONA DIVORCE
- DEFERRED MILITARY RETIREMENT IN AN ARIZONA DIVORCE
- DIVISION OF DEFERRED RETIREMENT OPTION PLANS IN AN ARIZONA DIVORCE
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- PERSONAL INJURY SETTLEMENT IN A DIVORCE IN ARIZONA
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- PROTECTING YOUR PERSONAL INJURY AWARD IN AN ARIZONA DIVORCE
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- MURDERER SPOUSE AND COMMUNITY PROPERTY IN ARIZONA
- DAMAGES CAUSED BY A COMMUNITY PROPERTY VEHICLE IN ARIZONA
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- YOU’RE GETTING A DIVORCE, ARE YOU SURE YOU WANT THE HOUSE?
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