Community Property Interest in a Business Owned Prior to Marriage
In Arizona, the earnings of the spouses during marriage are community property. In a divorce, the court divides the money and assets between the spouses equitably. The exact division is generally left to the discretion of the trial court. However, an appellate court can review a decision that seems inequitable and reverse the trial judge’s orders.
In Lawson v Ridgeway, 72 Ariz. 253, 233 P.2d 459 (1951), the Arizona Supreme Court considered the fairness of a division of property between spouses.
Facts of the Case
Mrs. Lawson and Mr. Lawson were married for 16 years and had one daughter. They remained married until Mrs. Lawson died in 1929. Just before that marriage, husband bought properties in Oracle, Arizona.
During the marriage, he built a house on one property and rental houses on others. He also bought additional lots in Oracle during the marriage. He financed all this with his profits from owning and managing a general store.
Three years after Mrs. Lawson died, Mr. Lawson remarried. He and his new wife, Katherine, remained married until he died in 1946.
When Katherine opened probate proceedings for his estate, Mrs. Lawson’s daughter Dorothy opened probate proceedings for her mother’s estate.
Dorothy filed a suit against the estate of Mr. Lawson. She claimed it owed Mrs. Lawson half of the community funds Mr. Lawson invested to build the house and rental houses.
She also charged that Mrs. Lawson’s estate owned 50% of the properties purchased during the marriage.
The trial court found in her favor and Katherine appealed.
John’s Work Efforts Produced the Business Profits
Katherine argued that the Oracle property Mr. Lawson brought into his first marriage was his separate property. She claimed that the money he used to build on them and buy other land was also his separate property.
Mr. Lawson received a salary from his business. Katherine argues that the court should accept the salary as the true value of his services. The salary, she claims, is community property and all the profits he makes from the business are his separate property.
The Arizona Supreme Court rejected that argument since it is not an accurate statement of the law in Arizona.
The fact that a businessman draws a salary doesn’t mean that the salary represents the true value of his work. The law in Arizona is different.
Profits from a separate-property business are separate if they result from a natural increase in the business’ value.
On the other hand, if the profits result from a spouse’s efforts, they are community property.
The Arizona Supreme Court found that Mr. Lawson was not a mere employee of the store, but an active manager. Therefore, business profits resulted from his personal efforts and good business sense. They did not result from a natural increase in the store’s value.
They contrasted the facts of the case with the facts of Porter v Porter, 67 Ariz. 273, 195 P.2d 132.
Lawson’s situation was entirely different from that of Porter in the case of Porter v. Porter, supra, where Porter as a young man inherited his father’s interest in an extremely large, long-established and wealthy mercantile and manufacturing establishment, where he was employed with a hundred or more other employees and paid a salary commensurate with his services as an employee of the partnership. In that case, it was readily discernible that the profits that were distributed to him, in addition to his salary, were the result of large capital under the guidance and management of older partners and skilled management personnel for which he was only nominally responsible.
Mr. Lawson Treated his Profits as Community Property
The Court noted that the record shows that Mr. Lawson mixed the separate property and community property. Mr. Lawson and Mrs. Lawson both treated the income and profits from his store as earned through a community effort. That intention, the Court held, changes the character of the separate property to community property.
The Court affirmed the award of one-half of the community funds Mr. Lawson invested in the property to Mrs. Lawson’s estate. It said that she was actually entitled to one-half of the value of that investment. However, that amount was only slightly larger.
It also affirmed the ruling that Mrs. Lawson owned half of the properties the couple bought during their marriage. When she died, that interest transferred to her daughter, Katherine. The trial court, in error, awarded that one-half interest to Katherine as Mrs. Lawson’s Administratrix. Therefore, the Supreme Court changed the award to Katherine in her individual capacity.
Chris Hildebrand wrote this article to ensure everyone has access to information about family law in Arizona. Chris is a divorce and family law attorney at Hildebrand Law, PC. He has over 24 years of Arizona family law experience and has received multiple awards, including US News and World Report “Top Arizona Divorce Attorneys”, Phoenix Magazine “Top Divorce Law Firms”, and Arizona Foothills Magazine “Best of the Valley” award. He believes the policies and procedures he uses to get his clients through a divorce should all be guided by the principles of honesty, integrity, and, quite frankly, actually caring about what his clients are going through in a divorce or family law case. In short, his practice is defined by the success of his clients. He also manages all of the other attorneys at his firm to make sure the outcomes in their clients’ cases are successful as well.
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