Increase in Value of a Separate Property Business Stock
When one spouse earns profits from their separate property, those profits are classified as either separate property or community property. They are community property only to the extent of which they are earned through a spouse’s efforts.
But, do the same rules apply to a valuation of the increased value of one spouse’s business? In Baum v. Baum 638 P.2d 705 (Ariz. 1981), the Arizona Court of Appeals considered this issue.
Facts of the Case
Mrs. Baum and Mr. Baum married and remained together for 25 years. They divorced in 1976. The trial court awarded wife custody of the minor children, $300 per month per child for child support, and $500 per month as spousal maintenance.
In the property division, the court said Mrs. Baum had separate property worth $38,471.12, while Mr. Baum had separate property worth $270,818.59.
It then divided the community property. Under its calculations of value, wife received community assets of $267,509 while husband got $157,434.
The court also ordered Mr. Baum to pay $10,000 toward his wife’s attorney fees, $1,000 toward her accountant fee and $36,560 for community debts. From this property division, wife appeals.
B&A Stock Value
Wife’s primary argument regards the court’s division of the B&A stock.
A. Stock Acquisition History
Mr. Baum managed a corporation called Baum & Anderson (“B&A). He received 80 shares of B&A stock as a gift from his father. He also held 5 shares as custodian for the couple’s children. Wife does not dispute these shares.
Four other members of the founding families of B&A Company initially owned the remaining 115 shares of B&A. In 1967, Mr. Baum negotiated a deal for Goodrich to buy all of these shares of B&A. But Mr. Baum did not transfer his 85 shares to Goodrich when the other shareholders did. Instead, he entered into a different agreement.
Once Goodrich owned the other 115 shares, Mr. Baum acquired an option to buy them for $215,017.59. He also agreed to serve as manager at a salary of $18,000 per year plus a bonus.
Once husband had the option, he transferred it to the B&A company for no consideration. In 1969, B&A exercised the option and repurchased the stock. At the same time, he canceled a $32,500 note from B&A in exchange for 33 shares of stock.
Mr. Baum had loaned that money to the company using a bank account containing both his separate money and community funds.
B. Trial Court Ruling re Stock
The trial court ruled that the 80 shares given to Mr. Baum by his father were Mr. Baum’s separate property. It ruled that the 33 shares, paid from a commingled account, belonged to the community.
It awarded the stock to Mr. Baum as his part of the community property. The court also ruled that stock option had no independent value.
C. Blaine v. Blaine
Wife cited Blaine v. Blaine, 159 P.2d 786 (1945). She said that, under Blaine, the court must presume that the option was a community asset since the husband had acquired it during the marriage.
The Court of Appeals ruled that the community lost any rights to the option when husband transferred it to B&A. The community paid nothing for the option, nor did the Court find evidence that husband acted improperly.
The community never expressed an interest in exercising the option, nor did it have the funds to do so. The B&A corporation bought the 115 shares and held it as treasury stock. If this added to the value of the remaining shares, the community had a 33/118 interest in the increase.
When the trial court awarded the 33 shares to James, he also received whatever additional value was in those shares. The Court noted that Mrs. Baum received over $100,000 more than James in the court’s community property split. This was adequate to offset the value of the community asset awarded to James.
D. Increase in Value of Husband’s Separate Shares
During the marriage, the value of James’s stock shares increased. Wife claims that the increase was due to his hard work, and therefore it should be community property.
The Court reviewed Nelson v. Nelson, 560 P.2d 1276 (1977). In Nelson, the issue was whether the profits of a husband’s separately owned corporation belonged to the community.
The Court ruled that they were separate if they resulted from a natural growth in the business. However, they were community assets if they resulted from the husband’s skill in management. When the husband receives an adequate salary for his labor, the court assumes that the community labors are compensated for. All profits are his separate property.
The Court of Appeals found the Nelson reasoning applicable to an increase in the value of a business as well. It found that the salary Mr. Baum received was adequate and reasonable. Since he took home an adequate salary, that salary was the community’s compensation for James’s labor. The increase in the separately owned stock remains his separate property.
The Court of Appeals dismissed wife’s arguments that she was entitled to more maintenance and more attorney fees.
It also rejected her claim that she should be reimbursed for separate property she invested in the community. It pointed out that she had significant assets after the divorce.
The Arizona Court of Appeals affirmed the trial court decision. The decision, in this case, was subsequently distinguished by the Arizona Court of Appeals in the Johnson v. Johnson and Valladee v. Valladee cases.