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Community Property Interest in a Business Owned Prior to Marriage

Posted on : August 10, 2016, By:  Christopher Hildebrand
Community Property Interest in a Business Owned Prior to Marriage

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.

Community Property Interest in a Business Owned Before Marriage.

Community Property Interest in a Business Owned Before Marriage.

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

Business Owned Prior to Marriage: Community Property Interest.

Business Owned Prior to Marriage: Community Property Interest.

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.

Decision

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.

Jennifer, thank you for being my attorney. I could not have been more pleased with the outcome of my family court hearing. Everything you have done for me throughout this case reflects in the final ruling of the judge. You helped me keep my head together and taught me a lot about myself as a person. I learned so much about my life from observing and listening to you. I will take all the advice you gave me to continue taking responsibility for my choices, continue to put the kids' needs first, and always stay truthful. Your diligence, dedication, and persistence in my case made what seemed impossible, possible. You are a wonderful person and an amazing attorney and I am stronger and more confident because of you.
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I just want to again thank the Firm for working with me all that it has. I could not have done anything without everyone's assistance. You, Chris and Stacey have been and continue to provide me with compassion and hard work towards my case. Also a very special thanks to Kip for taking my case in the beginning. Also continued support from him and his dedication to providing me with his expertise in this matter.
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After interviewing several law firms, I came across Jennifer Shick, and her firm, who I hired to represent me for my Family Court case. Jennifer has extensive knowledge of the law and is determined to bring the truth to every issue involved within the case. Throughout my case, Jennifer was prepared meticulously as well as went above and beyond all of my expectations. Even when the other party tried to differ from the truth, lie to the Judge, and turn situations around, Jennifer remained attentive and provided substantial evidence to show the judge the facts as well as the proof to support what was the best interests of my children. Additionally, Jennifer helped me endure many difficult experiences, situations and inspired me to remain positive throughout the entirety of my case. Her kindness, compassion, and professionalism helped me through very difficult times and made the process feel a thousand times lighter on my shoulders. She truly has my children and my best interest at heart and I trust her perspective as well as her honesty on each and every aspect of my case. She lessened the burden on my shoulders and even when I felt like the case was not going to go in my favor, Jennifer was open-minded and reassured me that the Judge would, in fact, see the truth, which he did and the case went in my favor. After nine months of court, everything finally came together. I cannot declare how much Jennifer has been an outstanding attorney. She addressed each and every issue with diligence, she cares about her clients and their families. Jennifer genuinely cares about her clients and her dedication to the details of the case was remarkable. Overall, I am extremely pleased with Jennifer’s services and I am truly thankful that I was so blessed to have her represent my children and me. I highly recommend Jennifer as one of the best attorneys in Arizona and if the situation ever arises, I will definitely have her represent my children and me again.
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