Appreciation Analysis Reveals Owner’s Substantial Contribution to Company’s Success

Appreciation of separate property is a knotty issue and the analysis can be challenging for attorneys and valuators, but a Tennessee appeals court decision helps practitioners understand the framework a court may use to decide whether the non-owner spouse has a claim to the increase in value.

Successful liquor business: During the marriage, the husband and his two brothers each owned a one-third interest in a liquor distributorship that their father had started. When the brothers acquired their interests, the business was operating at a loss. But, during the marriage, the company grew into one of the state’s largest wine and spirits distributors. In 2012, the company sold itself for over $10 million. Each brother received nearly $3.7 million for his shares. While working at the company, the husband was operations manager and vice president.

The trial court had to determine whether any part of the proceeds to the husband was a marital asset. The court first classified the husband’s interest as separate property and set the starting value at $75,000. Next, the court found any appreciation in the value of the separate property was marital property if “each party substantially contributed to [the separate property’s] preservation and appreciation.” The parties stipulated that the wife’s efforts as homemaker represented a substantial contribution to the appreciation and preservation of the asset. At issue was whether the husband’s efforts similarly qualified.

The husband tried to downplay the role he played at the company, arguing he had delegated much of his role as operations manager and was not particularly instrumental in the sale of the company. He said the negotiations surrounding the sale were “more of a collective group of the three of us deciding what price do we want to sell it.” The evidence contradicted this portrayal, the court found. It noted the husband at all times took an active role in running the company. As a member of the executive management team, he was involved in important financial decisions on cutting expenses, raising prices, and expanding the brands the company carried. Testimony from the husband’s brother showed the husband handled the negotiations on behalf of the company when it looked to sell itself. Consequently, the trial court found that the increase in value, minus the $75,000 (which was the husband’s separate property), was marital property subject to equitable division.

The Tennessee Court of Appeals affirmed, noting the trial court devoted over seven pages of findings to the business, examining in detail whether the parties both “substantially contributed” to the husband’s separate property, as required by statute.

Twists and turns: Several points stand out and show the complexity of the analysis. For example, neither court expressly referred to the active/passive framework, although the trial court mentioned the husband’s active role. Also, it was undisputed that the wife’s efforts as homemaker represented a substantial contribution to the business. The parties’ stipulation created the odd situation in which the husband had to prove that his efforts did not qualify as such. This was difficult given his brother’s testimony as to the successful sale and the husband’s own testimony that he and his brothers ran the company and all worked hard to build on what their father had achieved.

Lucchesi v. Lucchesi, 2019 Tenn. App. LEXIS 27; 2019 WL 325493 (Jan. 23, 2019)