March 14, 2006
Case Development: Source of Funds Rule and Active Appreciation of Stock
Here's another fine case to work with for a classroom problem or final exam question. The Arkansas Supreme Court covered all the issues of characterization, valuation and division in this dispute over Wife's controlling stock interest in a small holding company. Wife had purchased the stock before the marriage, borrowing $25,000 from her grandparents. Husband argued that, under the source of funds rule, the stock was marital property because the loan was repaid with marital funds. The court held that, because Wife purchased the stock before the marriage it was clearly separate property and did not become marital merely because marital funds were used to pay off the debt incurred in order to purchase the property. The court distinguished this case from its prior source of funds cases in which the court traced property acquired during the marriage back to separate property through sales or exchanges of that separate property.
The court found that an "active appreciation' analysis applied and that the value of the stock was due to marital efforts and therefore, that appreciation was marital property. Drawing from the caselaw of other equitable distribution states, the court clarified the burden of proof on this issue, holding that "A spouse seeking to have an increase in value of non-marital property declared marital has the burden of proving marital contributions and an increase in value. However, once this burden is met, the owning spouse is required to prove that the marital contributions did not cause the increase in value." Wife had argued that much of the appreciation in the stock's value was due to the efforts of her partners, but the trial court found that the entire value of the increase was marital. Noting the conflicting testimony on the issue, the supreme court deferred to the trial court's findings on that issue.
Farrell v. Farrell, 2006 Ark. LEXIS 171 (March 9, 2006)bgf
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