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
- UNEQUAL DIVISION OF PROPERTY IN A DIVORCE IN ARIZONA
- DIVIDING PROPERTY NOT INCLUDED IN DIVORCE DECREE IN ARIZONA
- EFFECT OF COMMUNITY PROPERTY LAWS ON A PERSONAL GUARANTY IN ARIZONA
- DIVISION OF PENSIONS IN AN ARIZONA DIVORCE
- CAN A SPOUSE BE HELD LIABLE FOR CREDIT CARD DEBT IN ARIZONA
- DIVISION OF DEBT IN AN ARIZONA DIVORCE
- MILITARY RETIREMENT PAY AND DIVORCE IN ARIZONA
- INTEREST ON A LOAN BETWEEN SPOUSES IN AN ARIZONA DIVORCE
- IMPROVEMENTS TO SEPARATE PROPERTY IN AN ARIZONA DIVORCE
- ENFORCING A PROPERTY SETTLEMENT AGREEMENT IN AN ARIZONA DIVORCE
- DETERMINING COMMUNITY VERSUS SOLE AND SEPARATE PROPERTY IN ARIZONA
- EFFECT OF A DISCLAIMER DEED OR QUITCLAIM DEED IN A DIVORCE IN ARIZONA
- ENFORCE DIVISION OF PROPERTY AND DEBT IN AN ARIZONA DIVORCE
- HOW STOCK OPTIONS ARE DIVIDED IN AN ARIZONA DIVORCE
- HOW RETIREMENT ACCOUNTS ARE DIVIDED IN AN ARIZONA DIVORCE
- HOW IS COMMUNITY PROPERTY DIVIDED IN ARIZONA
- IS SEPARATE PROPERTY DIVIDED DIFFERENTLY THAN COMMUNITY PROPERTY IN ARIZONA
- DIFFERENCE BETWEEN COMMUNITY AND SEPARATE PROPERTY IN ARIZONA
- WHAT IS CONSIDERED TO BE SEPARATE PROPERTY IN ARIZONA
- IS ALL PROPERTY OWNED BY EITHER SPOUSE COMMUNITY PROPERTY IN ARIZONA
- DO RULES REGARDING PROPERTY APPLY TO DEBTS IN ARIZONA
- WHAT HAPPENS WHEN SEPARATE PROPERTY IS USED TO PURCHASE A HOME DURING MARRIAGE IN ARIZONA
- COMMUNITY LIEN ON SOLE AND SEPARATE PROPERTY IN ARIZONA
- HOW TO DIVIDE PROPERTY IN ARIZONA WHEN A SPOUSE IS HIDING ASSETS
- IS ARIZONA A 50 50 STATE IN A DIVORCE
- UNFAIR SEPARATION AGREEMENT IN ARIZONA
- VALUATION AND DISTRIBUTION OPTIONS FOR A PENSION IN AN ARIZONA DIVORCE
- FILING A LIS PENDENS IN A DIVORCE IN ARIZONA
- COMMUNITY PROPERTY LIEN ON A DEPRECIATING ASSET IN ARIZONA
- REIMBURSEMENT FOR PAYING SEPARATE DEBTS OF A SPOUSE IN ARIZONA
- REFUSAL TO SELL A HOUSE AFTER A DIVORCE IN ARIZONA
- EFFECT OF MILITARY BENEFITS ON A DIVORCE IN ARIZONA
- VALUING GOODWILL OF A LAW FIRM IN AN ARIZONA DIVORCE
- EFFECT OF A DISCLAIMER DEED ON COMMUNITY PROPERTY RIGHTS IN A DIVORCE IN ARIZONA
- EFFECT OF USING SOLE AND SEPARATE FUNDS USED TO BUY A HOUSE IN ARIZONA
- DIVISION OF MILITARY RETIREMENT AND DISABILITY PAYMENTS IN AN ARIZONA DIVORCE
- WHEN SEPARATE PROPERTY IS USED TO BUY COMMUNITY PROPERTY IN ARIZONA
- WHAT HAPPENS WHEN ASSETS ARE NOT DIVIDED IN AN ARIZONA DIVORCE DECREE
- PROPERTY HELD AS JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP IN A DIVORCE IN ARIZONA
- SEGREGATING SEPARATE FROM COMMUNITY PROPERTY IN ARIZONA
- TRANSMUTING SEPARATE INTO COMMUNITY PROPERTY IN ARIZONA
- TRACING SEPARATE PROPERTY IN AN ARIZONA DIVORCE
- REIMBURSEMENT OF SEPARATE PROPERTY IN ARIZONA
- COMMUNITY LIABILITY FOR SEPARATE DEBTS IN ARIZONA
- STATEMENTS ON PROPERTY ARE BINDING IN AN ARIZONA DIVORCE
- DIVIDING RETIREMENT ACCOUNTS IN A DIVORCE IN ARIZONA
- SELLING A HOUSE DURING A DIVORCE IN ARIZONA
- CRSC PAY AND DIVORCE IN ARIZONA
- JUDGMENT FOR SEPARATE PROPERTY STOLEN DURING MARRIAGE IN ARIZONA
- JUDGE IGNORES A BUSINESS APPRAISAL IN AN ARIZONA DIVORCE
- MINORITY DISCOUNT IN A BUSINESS APPRAISAL IN AN ARIZONA DIVORCE
- WHAT HAPPENS TO PERSONAL INJURY AWARDS IN A DIVORCE IN ARIZONA
- REIMBURSEMENT OF SEPARATE PROPERTY IN A DIVORCE IN ARIZONA
- THE VALUATION OF A LAW PRACTICE IN A DIVORCE IN ARIZONA
- COMMUNITY PROPERTY LOTTERY WINNINGS IN ARIZONA
- IMPACT OF FILING A HOMESTEAD ON SEPARATE PROPERTY IN ARIZONA
- SEPARATE PROPERTY INCREASES IN VALUE DURING MARRIAGE IN ARIZONA
- DIVIDING CONTINGENCY FEES IN A DIVORCE IN ARIZONA
- EFFECT OF POSTNUPTIAL AGREEMENT ON CREDITORS IN ARIZONA
- EFFECT OF A PRENUPTIAL AGREEMENT ON CREDITORS IN ARIZONA
- VALUING A BUSINESS IN ARIZONA DIVORCE WITH NO FINANCIAL DOCUMENTS
- UNAUTHORIZED USE OF A POWER OF ATTORNEY IN ARIZONA
- EFFECT OF PLACING COMMUNITY PROPERTY INTO A FAMILY TRUST IN ARIZONA
- WHAT HAPPENS TO AN INCREASE IN RETIREMENT BENEFITS AFTER A DIVORCE
- FAILURE TO DISCLOSE FINANCIAL INFORMATION IN ARIZONA
- AWARD OF MONEY IN AN ARIZONA DIVORCE
- INTEREST ON A JUDGMENT IN AN ARIZONA DIVORCE DECREE
- SANCTIONS FOR COMPELLING LATE DISCOVERY IN ARIZONA
- PREMARITAL AGREEMENTS AND CREDITORS IN ARIZONA
- INTEREST ON A JUDGMENT IN AN ARIZONA DIVORCE DECREE
- FRAUDULENT QUITCLAIM DEED IN AN ARIZONA DIVORCE
- WHAT HAPPENS TO DEBTS NOT INCLUDED IN A DIVORCE DECREE IN ARIZONA
- IS SEPARATE PROPERTY LIABLE FOR COMMUNITY DEBT IN ARIZONA
- EFFECT OF COMMINGLING SEPARATE AND COMMUNITY PROPERTY IN ARIZONA
- EFFORT DOES NOT ENTITLE A SPOUSE TO MORE COMMUNITY PROPERTY IN ARIZONA
- COMMUNITY PROPERTY INTEREST IN A BUSINESS OWNED PRIOR TO MARRIAGE
- WHAT HAPPENS TO LOANS BEFORE MARRIAGE IN ARIZONA
- TITLE AFFECTS COMMUNITY PROPERTY RIGHTS IN ARIZONA
- LIABILITY FOR A SPOUSE’S NEGLIGENCE IN ARIZONA
- CREDITOR COLLECTING A SEPARATE DEBT WITH COMMUNITY PROPERTY IN ARIZONA
- VALUATION OF STOCK HOLDINGS AND DEBT IN AN ARIZONA DIVORCE
- COMMUNITY PROPERTY LIABILITY EXISTS EVEN AFTER PROBATE ENDS
- CAN A CREDITOR TAKE SOLE AND SEPARATE ASSETS IN ARIZONA
- IMPACT ON THE INCREASED VALUE OF A BUSINESS IN AN ARIZONA DIVORCE
- PROFITS FROM SOLE AND SEPARATE BUSINESS IN AN ARIZONA DIVORCE
- EFFECT OF COMBINING COMMUNITY AND SEPARATE PROPERTY IN ARIZONA
- ABANDONMENT OF MARRIAGE AND COMMUNITY PROPERTY RIGHTS IN ARIZONA
- EFFECT OF AN INCREASE IN SEPARATE BUSINESS STOCK IN AN ARIZONA DIVORCE
- VALUING A PENSION PLAN IN A DIVORCE IN ARIZONA
- GIFT OF SEPARATE PROPERTY BY ISSUING A JOINT TENANCY DEED IN ARIZONA
- CREDITOR LIEN ON JOINT TENANCY PROPERTY IN AN ARIZONA DIVORCE
- FAILURE TO PROVIDE EVIDENCE OF THE VALUE OF PROPERTY IN AN ARIZONA DIVORCE
- MILITARY RETIREMENT PAYMENTS IN AN ARIZONA DIVORCE
- JOINT TENANCY PROPERTY IN AN ARIZONA PROBATE
- CHANGING JOINT PROPERTY INTO COMMUNITY PROPERTY IN ARIZONA
- DISPOSITION OF COMMUNITY PROPERTY IN A LAST WILL AND TESTAMENT
- COMMUNITY LIEN IN A SOLE AND SEPARATE BUSINESS IN A DIVORCE IN ARIZONA
- COMMUNITY FUNDS PAID ON A SOLE AND SEPARATE HOUSE IN ARIZONA
- TRANSMUTING SEPARATE PROPERTY INTO COMMUNITY PROPERTY BY COMMINGLING IN ARIZONA
- COMMUNITY LIABILITY FOR DEBT GUARANTEED BY SPOUSE IN ARIZONA
- SEPARATE FUNDS TO BUY JOINT PROPERTY IN ARIZONA
- COMPENSATION FOR WASTE OF COMMUNITY ASSETS IN AN ARIZONA DIVORCE
- DAMAGE CAUSED BY A COMMUNITY PROPERTY VEHICLE IN ARIZONA
- WHAT TO DO WHEN A SPOUSE IS HIDING ASSETS IN A DIVORCE IN ARIZONA
- OPTIONS FOR BUSINESS OWNERS GOING THROUGH A DIVORCE IN ARIZONA
- MURDERER SPOUSE & COMMUNITY PROPERTY IN ARIZONA
- ENFORCING A SURVIVOR BENEFIT ELECTION IN A PENSION IN A DIVORCE IN ARIZONA
- DIVORCE AND PERSONAL INJURY AWARDS IN ARIZONA
- INJURY AWARDS AND DIVORCE SETTLEMENTS IN ARIZONA
- PROTECT YOUR PERSONAL INJURY AWARD IN AN ARIZONA DIVORCE
- CLAIM OF SPOUSE’S PERSONAL INJURY AWARD IN AN ARIZONA DIVORCE
- PROVING WHAT IS SOLE AND SEPARATE PROPERTY IN AN ARIZONA DIVORCE
- VALUING A HOUSE DURING A DIVORCE IN ARIZONA
- DEFERRED RETIREMENT OPTION PLANS IN AN ARIZONA DIVORCE
- 7 REASONS WHY YOU MIGHT HAVE TO SHARE YOUR PERSONAL INJURY SETTLEMENT IN ARIZONA DIVORCE
- PERSONAL INJURY SETTLEMENT IN A DIVORCE IN ARIZONA
- IMPACT OF TAXES IN A DIVORCE SETTLEMENT IN ARIZONA
- DIVORCE AND REFINANCING A MORTGAGE IN ARIZONA
- RETIREMENT ACCOUNTS, QDROS, AND DIVORCE IN ARIZONA
- TYPES OF BUSINESS APPRAISALS IN A DIVORCE IN ARIZONA
- HEARING TO CONTEST RULE 69 AGREEMENT IN ARIZONA
- HOW TO DEAL WITH A FRAUDULENT CONVEYANCE IN ARIZONA DIVORCE
- PROPERTY EQUALIZATION PAYMENTS IN AN ARIZONA DIVORCE
- TITLE SEARCH ON HOME DURING DIVORCE IN ARIZONA
- DIVIDING ACCOUNTS RECEIVABLE IN AN ARIZONA DIVORCE
- CLAIMS OF WASTE IN AN ARIZONA DIVORCE
- BANK ACCOUNTS AND DIVORCE IN ARIZONA
- REIMBURSEMENT FOR PAYING BILLS IN ARIZONA DIVORCE
- DEFERRED MILITARY RETIREMENT PAY AND DIVORCE IN ARIZONA
- SURVIVOR ELECTION AND MILITARY RETIREMENT IN ARIZONA
- DEFENSE TO REIMBURSEMENT FOR PAYING BILLS IN A DIVORCE IN ARIZONA
- CSRS BENEFITS AND DIVORCE IN ARIZONA
- DIVIDING A PROFESSIONAL PRACTICE IN A DIVORCE IN ARIZONA
- IMPACT OF DISABILITY PAY ON COMMUNITY PROPERTY RIGHTS IN ARIZONA
- COMMUNITY PROPERTY AND ANNULMENT OF MARRIAGE IN ARIZONA
- DEFINITIVE GUIDE TO DIVIDING A BUSINESS IN A DIVORCE IN ARIZONA
- DIVIDING BUSINESS PROFITS DURING A DIVORCE IN ARIZONA
- MINORITY DISCOUNT IN A BUSINESS VALUATION IN AN ARIZONA DIVORCE
- ARIZONA COMMUNITY PROPERTY LAWS
About the Author: Chris Hildebrand has over 26 years of Arizona family law experience and received awards from US News and World Report, Phoenix Magazine, Arizona Foothills Magazine and others. Visit https://www.hildebrandlaw.com.
Leave a Reply