Demenno v. Demenno, 2024
The Alaska Supreme Court made three rulings in this, but we focus the digest on the second ruling, that the trial court did not err in valuing the business’s active appreciation. The trial court’s explanation was reasonable and considered aspects of the reports. Each spouse appealed certain aspects of the trial court’s order dividing their property. The wife appealed that the trial court erred in valuing the active appreciation of the business, and the husband challenged the trial court’s valuation of the active appreciation of real property rented to the business. The supreme court affirmed the trial court property division in all aspects.
Facts and proceedings.
The parties married in 2003. The husband founded Alaska Land Clearing Contractors LLC in 1998. In February 2002, the wife went to work for the husband at Alaska Land Clearing Contractors, working in the office on multiple tasks and, according to her, managing the “inside” aspects of the business. Shortly before the marriage, the husband purchased a property that he rented to Alaska Land Clearing Contractors, which used it as its primary headquarters. The parties made significant renovations in 2011 and 2012.
“During the marriage, income from ALC supported the parties’ lifestyle. Their combined income was routinely over $600,000, comprised of Tamerra’s salary from ALC and David’s extensive owner’s draws from the company.”
Transmutation trial.
The trial court ruled in March 2020 that Alaska Land Clearing Contractors had not transmuted (meaning it did not change from the husband’s separate property to marital property) because the husband never intended to donate the business to the marital estate.
Second property division trial (November 2020).
Both parties presented expert witnesses on the valuation and active appreciation of Alaska Land Clearing Contractors. The wife’s expert, Jacquelyn Briskey, CPA, stated this was her first active appreciation analysis, but she had valued many similar construction companies in the past.
She used two methods to value Alaska Land Clearing Contractors: the capitalization of earnings (COE) method, using years from 2013 to 2017, and the net asset method (NAM), using the appraised value of the equipment at 2017. She chose the NAM value of $4,397,300, much higher than the COE value, as being a much truer value. She used the husband’s expert’s 2003 report to calculate active appreciation as it was the only value available as of that date, even though it used a different method, which she justified by stating that both valuations represented the fair market value at their respective dates. “Accounting for inflation as the only relevant aspect of passive appreciation, she calculated the net marital active appreciation to be $3,339,122.”
The husband’s expert, Susan Spyker, CPA, CVA, testified she had done at least 20 active appreciation analyses since 2006. Using the COE method for a 2003 valuation, since no equipment appraisals were available, she arrived at a fair market value of $446,800. Spyker determined a 2017 COE value of $1,460,000 and a net asset value of $1,400,900. In determining the active appreciation, she used the COE at both dates since it was more often used in divorce cases and the 2003 value used this method. She found much of the appreciation to be passive, pointing to a number of issues such as customer relationships, federal funding increases, etc. She found 40% to be active appreciation, arriving at a value of $337,040.
In its final order in June 2021, the trial court found all three elements of active appreciation to be satisfied. The trial court relied on Spyker’s report in its analysis. It found it to be more persuasive in part because of her experience. The trial court agreed with Spyker that very little of the income during the appreciation period was put back into the business. “But the court criticized Spyker’s reliance on the 2019 equipment valuation rather than the 2017 equipment valuation because it resulted in an undervaluation of ALC.” The trial court found that all appreciation other than inflation was active appreciation. The trial court valued the active appreciation at $842,600.
As to the East 56th Avenue active appreciation, the trial court found the property to be separate property purchased before the marriage and never intended to be donated to the marriage. In finding and valuing active appreciation, the trial court used McSwain’s valuation to calculate the appreciation. (McSwain was the wife’s real estate appraiser, who valued the property at $1,150,000.) The trial court credited the wife’s testimony that improvements had been made to the property. “The court valued the active appreciation of the property due to marital efforts at $686,036.30.”
This appeal.
The wife appealed the decision that Alaska Land Clearing Contractors did not transmute to the marital estate and the reliance on Spyker’s report to determine active appreciation. The husband appealed the trial court’s determination of the active appreciation on the East 56th Avenue property.
The superior court did not err in determining that Alaska Land Clearing Contractors did not transmute into marital property.
Whether property had transmuted to the marital estate focused on whether the owning spouse, in this case the husband, intended to make a gift. (Kessler) The trial court found that the wife did not prove that the husband ever intended to gift Alaska Land Clearing Contractors to the marriage.
The superior court did not clearly err in valuing Alaska Land Clearing Contractors’ active appreciation.
The wife argued that the trial court should not have relied on Spyker’s analysis to determine active appreciation. The court must determine three factors exist to determine there was active appreciation applicable to the increase in value of the property during the marriage: (1) that the property did appreciate during the marriage; (2) marital contributions were made during the marriage; and (3) there was a “causal connection between the marital contributions and at least some part of the appreciation.” The nonowning spouse must show the first two, and the owning spouse must show the absence of a causal link. When a court determined the active appreciation, it must also account for the passive appreciation.
Conflicting valuations are often presented to the court. It was not the supreme court’s role to weigh the evidence anew but to determine whether the trial court’s decision was supported by the record. Here, the trial court’s reasoning for accepting aspects of Spyker’s report was not clearly erroneous. Spyker’s report was found more credible in part due to her experience. Further demonstrating the trial court’s careful consideration was its “correction” of two errors in Spyker’s report. First, it determined that 60% of the appreciation being passive was incorrect, reducing it to inflation only and then calculating the inflation amount.
The trial court also found the wife’s other arguments not persuasive for valid reasons. The supreme court will not disturb the weighting in an appeal. Spyker’s testimony also noted that the compensation paid the husband was reasonable and that he had forgone some compensation in order to put money back into the business to help drive growth. “We reiterate that when presented with conflicting expert analysis, it is well within the trial court’s role to consider and weigh the reliability and credibility of that expert evidence.”
“Considering the court’s careful weighing and detailed analysis, we see no clear error, and we affirm the court’s valuation of ALC’s active appreciation.” The superior court did not err in its valuation of the active appreciation of the East 56th Avenue property. After accounting for inflation, the trial court found that all of the appreciation on this property was active appreciation and valued it at $686,036. The supreme court affirmed this judgment of the trial court also.