In the last post we took a brief look at some basics of marital and non-martial property and then finished up with a discussion of property distribution at the time of divorce. Now we will take a look at some additional considerations in divorce cases involving substantial assets. These include the reclassification of pre-martial (or non-marital) assets as marital and how courts handle the increase in value of premarital assets during the marriage.
To begin we will review the statute which defines marital and non-marital property.
Ark. Code Ann. § 9-12-315 (b) defines marital property as all property acquired by either spouse subsequent to the marriage except:
(1) Property acquired as a gift or by inheritance.
(2) Property acquired by the trading of property acquired prior to the marriage, as a gift, or by inheritance.
(3) Property acquired after legal separation (divorce from bed and board);
(4) Property the parties agree is not marital.
(5) The increase in value of property described above.
(6) Certain worker’s compensation, personal injury claim, or social security disability funds.
(7) Income from property described above.
Likely one of the most litigated issues with regard to this statute is the increase in value of pre-marital or non-marital property. The Arkansas Supreme Court handed down a seminal opinion in 1984 in the case Layman v. Layman, 292 Ark. 539 (1987). This case set the precedent that Arkansas courts would follow for nearly thirty (30) years and established the “active appreciation” rule. The basic holding of Layman was that where a spouse make a “significant contributions of time, effort and skill which are directly attributable to the increase and value of non-marital property,” that the increase in value of the property is marital. In other words, the increase in value of a pre-marital asset is marital if it is due to “active appreciation.”
A good example of this in application is that if one spouse owned a business prior to marriage and during the marriage then one or both worked in the business and helped it grow and thrive throughout the marriage the amount of that growth attributable to their “time, effort and skill” was marital property. This holding was used regularly over the years in cases such as Davis v. Davis 79 Ark. App. 178 (2002), where a farm acquired prior to the marriage and worked during the marriage to build equity and increase value was found to be marital; Farrell v. Farrell, 365 Ark. 465 (2006), where an increase in stock purchased prior to the marriage with borrowed funds was found to be marital due to spouse’s work in the company during the marriage; and Johnson v. Johnson, 2011 Ark. App. 276.
Fast forward to 2016; the Arkansas Supreme Court reversed this long history of precedent in Moore v. Moore, 2016 Ark. 105. In Moore, husband had a successful business that was non-marital (it was started prior to the marriage). The trial court found the business to be non-marital, but also that the growth and increase in value of the business and its stock were due to, not only husband’s significant investment of time, but also to wife’s participation in the business. The court found that the increase in value of the business during the marriage was over half a million dollars and awarded wife half that amount.
In reversing the trial court, and all of the previous precedent, the Arkansas Supreme Court returned to a basic rule of statutory interpretation. Specifically, the Court ruled that the plain language of the statute should be used if it is unambiguous. As such, Ark. Code Ann. § 9-12-315 (b)(5), which states that “the increase in value of property listed above” is non-marital, no longer has a caveat regarding effort and time spent during the marriage to increase an asset’s value.
In the 2019 Regular Arkansas Legislative Session, there were at least two (2) attempts to revise the statute to make the pre-Moore precedent statutory; HB 1686 and SB 547. Both bills died prior to becoming law.
Now for the “loop hole,” a trial judge can still award a portion of your non-marital property to your spouse. Remember from Part 1 of this entry, Arkansas law allows for an equitable distribution of property which includes awarding non-marital property to your spouse based on certain factors.
Should you go down the road of divorce, make sure that your attorney knows of all of your assets and your spouse’s assets and how and when they were acquired at the earliest possible time.
As always, this post is not meant to be, and should not be construed to be legal advice or a replacement for the counsel of an attorney.
If you would like to schedule an appointment to meet with one of our attorneys regarding divorce, or another area of family law, please call 501-296-9999 for a free consultation.
This article was written by the Tripcony May Team.