CLIENT INFORMATION LETTER #12

EQUITABLE DISTRIBUTION IN NORTH CAROLINA


In 1981 North Carolina passed a statute allowing for equitable distribution of marital property in cases of divorce and separation. While some sections of the statute can be complex, we wanted you to have a basic and straightforward explanation of some of the more important points about equitable distribution so we can better help you in your case. Accordingly we have attached hereto a copy of a 1987 article from Popular Government magazine," Equitable Distribution Comes to North Carolina" (reprint permission granted). We have also given you below a series of questions and answers to common questions about divorce and property division. We hope these are of assistance to you in your case. Please study them closely and feel free to ask us any questions that arise in connection with your case after you have read these items.


1. Q. Can I get my own divorce without an attorney?
A. Yes. You can prepare your own summons, complaint and judgment and go through the steps of filing for divorce and scheduling a hearing. While it is not required that you hire a private attorney, there are many errors and mistakes which can be avoided if you retain an attorney to represent you, especially if you haven't reached a property settlement with your spouse or if you have a claim for alimony. Your claim for alimony or property division will be lost if it's not filed before your divorce is granted.
2. Q. Who pays for my lawyer?
A. As a general rule, you must retain and pay for your own attorney in a divorce case. There are exceptions, but these are usually in cases involving alimony, custody or child support.
3. Q. What if my spouse won't give me a divorce?
A. The judge is the person who grants a divorce, not your spouse. Once you have filed the divorce complaint at the courthouse, your attorney will serve a copy of the summons and complaint on your spouse, by sheriff or by certified mail. If no answer is filed within thirty days after service, you will probably be granted a divorce "by default" after a hearing. If your spouse contests the divorce action by filing an answer denying one or more of the statements in your complaint, a hearing will be set during which the two of you can testify and the judge can decide what the truth is.
4. Q. Is my divorce final when the judge signs the judgment?
A. Yes. You are then legally divorced. There is no waiting period after entry of judgment.
5. Q. Can I resume the use of my maiden name at the time of divorce?
A. Yes. You may ask for the right to resume your maiden name in the divorce papers your lawyer files for you. This is routinely granted by the judge. Even if you do not ask for your maiden name back at the time of the divorce, you can file for resumption of your maiden name after the divorce is granted.
6. Q. Can I use "mental cruelty" as a ground for divorce in North Carolina?
A. No. In North Carolina, the only ground ever used for divorce is living apart for over one year. Most divorces granted on the grounds of one year's separation are uncontested, since this is essentially a "no-fault" ground for divorce, with no proof necessary as to who left whom or what reason was involved.
7. Q. If I just move here from another state, can I file for divorce in this state?
A. North Carolina law states that you may file for divorce here if you have been living in North Carolina for at least six (6) months prior to the date of filing. You cannot file before then, even if you've been separated for over a year.
8. Q. Do I have to have a "legal separation" to get a divorce here if I have been living in North Carolina?
A. All you need to do to obtain a divorce in North Carolina is live separate and apart for at least one year and a day, with the intention that the separation be permanent. You do not need to show the judge a copy of a separation agreement, since such a document doesn't necessarily prove that you have indeed separated from your spouse. These is no such thing as "filing for separation" in North Carolina, although there are certain cases in which a judge can grant a "divorce from bed and board," or judge-approved separation, which allows you to live separate and apart from your partner.
9. Q. Can the judge in North Carolina order a property division at the time of divorce?  
A. After the divorce has been granted, the judge can divide the marital property of the couple if the court has been requested by either or both of them to do so. The court would not have the power to divide the marital property if neither party asked the court to do so before the divorce judgment was entered or if the parties had already executed a separation agreement that fairly divided their property.
10. Q. Is there some property that the judge cannot divide?
A. The judge in North Carolina cannot divide "separate property" and there are several kinds of separate property. Property acquired by either party before the marriage cannot be divided by the judge. Property acquired by either party by gift or by inheritance is separate property, even if it is later traded or exchanged for another item. Business and professional licenses are also separate property if they cannot be transferred to another individual. For more on pensions and retirement rights, see our client information letter on that subject.
11. Q. How will the judge divide our property?
A. There is a presumption in North Carolina law that the fairest split would be an even division of all the marital property, regardless of who has title to the property, who paid for it, and so on. Under certain circumstances, however, the judge might decide that a fifty-fifty split is not fair to one or both of the parties. The statutes have a list of factors that the judge may then use to determine an unequal division of property between the couple. The judge will consider such matters as monetary and homemaker contributions to the marriage by each party, tax consequences of unequal division, whether alimony or child support is presently being paid, source of the property and who purchased it, and so on. Marital fault, such as adultery or abandonment, is not a factor in equitable distribution.
12. Q. Can I get the judge to order my spouse to pay my attorney's fees in a property division case?
A. The courts in North Carolina can't award attorney's fees in most property division cases. You will have to retain and pay for your own attorney to represent you, and you may also have to pay for an accountant or an appraiser if expert witness testimony is necessary in your case. You can, however, ask the court to allow you an "advance" or interim allocation of marital property pending a final hearing, and this could be used by you to pay the above fees.


Equitable Distribution Comes to North Carolina

Dona G. Lewandowski

   On August 17, 1947, Bessie and Floyd Leatherman were married. Four years later Floyd bought a bulldozer and began doing custom grading work. Bessie kept the books, answered the telephone, paid the bills, and handled the business end of the work. Neither Bessie nor Floyd drew a salary from the business; instead, income from the business was deposited directly into their joint bank account, and household and business expenses were paid from the account. As time went on, the business grew. By 1963, the company had 28 employees, and Bessie was working in the business office 40 or more hours each week. In 1965, the couple decided to incorporate the business, and Leatherman, Inc. was born. The company had a net worth of about $93,000 by this time, and "for tax purposes" all of the stock was issued to Floyd.

   Ten years later, Bessie and Floyd were divorced. Bessie contended that she owned one-half the business and sought a court order to this effect. Her efforts were of no avail, however, because all of the shares of stock were in Floyd's name, and Bessie could not prove that she and Floyd had ever agreed that she would share in the ownership of the business. What about the time and effort and energy she had devoted to the business for almost 25 years? The court said these services were assumed to have been a gift from Bessie to Floyd, since Bessie did not even claim, much less prove, that the couple had ever agreed that she would be paid or otherwise compensated for her work.1

   The Leatherman case was decided by the North Carolina Supreme Court in 1979, and the result was greeted with neither approval nor surprise by lawyers practicing in the area of family law. While it seemed very unfair that Bessie Leatherman should be deprived of the fruit of her labors, the law in North Carolina had long been that property belonged to the person holding title to it. When a husband and wife were divorced, the law endeavored to return to each spouse the property that "belonged" to that spouse, and that determination was based whenever possible on record evidence of ownership. In the case of an automobile or land, for example, the court would examine the title or deed to determine the owner of the property. Ownership of a business was determined by documents such as partnership agreements and stock certificates. Money held in a bank account ordinarily belonged to the person in whose name the account was established.2 Property without record evidence of ownership ordinarily belonged to the person furnishing the funds to acquire the property. Application of these principles often meant that spouses who contributed labor rather than funds to the acquisition of property found themselves destitute upon divorce.

   A variety of legal theories provided some relief from this harsh doctrine,3 but these applied only in limited situations. Furthermore, these theories were often grounded on the assumption that husbands and wives deal with each other just as they deal with other people --- in an arms-length, businesslike manner. On divorce, if a spouse was unable to show some contract of employment or other formal business arrangement with the other spouse, he would be entitled to take with him only that property to which he held title.4

   In 1981 the North Carolina General Assembly followed the lead of approximately 40 other states and drastically changed the law governing ownership of property after divorce. It is impossible to overstate the impact of the Equitable Distribution Act5 on the property laws of North Carolina. Under the Act, title is of virtually no significance in determining which spouse ultimately retains possession of property the couple acquired during the marriage. Instead, a district court judge hears evidence and applies complicated statutory criteria to determine what division of property is "equitable," i.e., what result is fairest to both spouses. This emphasis on a fair division of property is based, as one court put it, on the "idea that marriage is a partnership enterprise to which both spouses make vital contributions and which entitles the homemaker spouse to a share of the property acquired during the relationship."6 Another court asserted that "The heart of the theory is that both spouses contribute to the economic circumstances of a marriage, whether directly by employment or indirectly by providing homemaker services."7

How it works

   Before a judge can decide which spouse is entitled to what property, the husband or wife must ask the judge for equitable distribution. A person is entitled to equitable distribution if (1) the couple has not entered into a written and notarized property settlement; (2) the request for equitable distribution is made before a divorce is granted; and (3) a judgment of absolute divorce has been entered.

   It is important to be aware that a person waives his right to have the court equitably distribute the marital property if he fails to request equitable distribution before a divorce is granted.8 Ordinarily, equitable distribution is requested in the complaint for divorce, in the response to the complaint (called an "answer"), or in a motion filed after the divorce action has begun.9

   In today's world of increased legal fees, many people choose to represent themselves, rather than hire a lawyer, in an action for divorce that they expect to be uncontested, and various books and other references are available to assist them in doing so. Since the Equitable Distribution Act came into effect, however, this is a much more significant (and potentially dangerous) decision because many people are not informed about their right to have the court decide on a fair division of the marital property. Indeed, many people continue to believe that property is divided according to title. If the husband has title to the car or house, for example, the wife may assume he is entitled to that property. If a person who is not informed about his rights decides to represent himself in an action for divorce and fails to request equitable distribution before divorce is granted, he loses forever his right to share in the marital property. Instead, property will be divided as it was before the new law took effect, on the basis of title and pre-divorce ownership.

   A valid property settlement (sometimes contained in a document labeled a "separation agreement") is a bar to a party's request for equitable distribution. The law prefers that people settle their affairs by agreement rather than by bringing their disputes to court. Consequently, the court will not interfere with an agreement about the division of marital property as long as the agreement meets certain requirements. Those requirements are: (1) the agreement must be written; (2) it must be signed by both parties; (3) it must be signed before a notary, judge, magistrate, or clerk of court; and (4) the agreement must be a property settlement, i.e. it must contain the parties' understanding about how the property accumulated during the marriage will be divided between them.10 Often, separation agreements contain provisions about child custody, child support, and alimony, but contain no provisions about property. A separation agreement that does not include a property settlement will not prevent a court, on request of one of the spouses, from dividing the property.

    Divorce is an absolute prerequisite to equitable distribution of property. In one case the parties agreed that they wished to live legally separate but did not wish to divorce, and they asked the court to decide on a fair division of property. The court could not make a legally binding decision, despite the couple's agreement, because the parties were not divorced.11 North Carolina is a "no-fault" divorce state, and almost all divorces are based on one year's separation. Thus anyone can obtain a divorce in this state if he proves that he has lived in North Carolina for six months and that he and his wife have lived separate and apart continuously for one year.12 Only after the divorce is actually granted, may the court divide the property.

   Assume that the divorcing couple is unable to agree on how to divide their property, and that one or both spouses ask the court for equitable distribution. How does the court decide how to divide the property? After the divorce is granted, the judge will conduct a hearing on equitable distribution. At the hearing, the parties have an opportunity to present testimony and other evidence about the property they own and about its value. The law requires the judge, after he considers all the evidence, to follow a four-step process in making his decision. First, he must identify the property to be distributed, called "marital property" in the Equitable Distribution Act. Next, the judge must determine the value of each item of marital property. Then, the judge must decide what division of property would be most fair; should the property be divided equally between the parties or should one spouse receive more than the other? In deciding what division would be fair, the law requires the judge to take many different factors into consideration, including such things as the health of the parties, the contribution of one party to the career of the other, and the need of the spouse with custody of the children to continue to live in the marital home. Finally, after the judge decides what division is fair, he goes on to decide what specific property each spouse should have. This process is sometimes described in terms of a pie. The judge first determines what property goes into the "marital pie." Next, he determines how large the pie is. Then he decides how to cut the pie: right down the middle, or in some other way. Finally, he decides which party gets which piece of pie.

     This four-step process sounds fairly straightforward, and many times it is. Often, however, the court confronts complex and troublesome questions in its quest to make a decision that is fair to both parties.

What goes into the pie?

   As we have seen, under the Equitable Distribution Act, the first step in deciding on a fair division of property is identification of the property to be divided. Not all property owned by one or both of the spouses at the time of divorce is eligible for distribution. The only property the court has authority to divide is "marital property."13 The statute defines marital property as property acquired during the marriage and before separation. Some types of marital property are obvious: furniture and other goods purchased during the marriage, the family car, the family house, the joint savings and checking accounts. Other types of marital property are less obvious. Pension and retirement benefits, for example, are marital property under some conditions. One spouse's dental practice may be marital property, and the value of that property includes the value of goodwill. Insurance policies are another often-overlooked example of marital property.

   In deciding what assets constitute marital property, it is important to remember that title is unimportant. Suppose John Doe works as a dentist throughout his marriage to Jane. Each week John deposits his paycheck into his checking account. (Jane and John have a joint account, and each maintains a separate account as well.) After several years, John withdraws the money from his account and buys a bright red sports car. Title to the car is in his name alone. Is the car marital property? Absolutely. The car was acquired during the marriage and before he and Jane separated. Unless the car falls into one of the exceptions set out in the statute, it is marital property.14

   Possession is also unimportant in determining whether an item of property is marital property. It makes no difference that John drives off in his new sports car when he and Jane separate, and that the car is in his possession when the judge sits down to decide how to divide the property. Even though Jane and John were separated for a year before the divorce, and even though John drove the car as his own throughout that time, the judge has authority to order John to transfer title to and possession of the car to Jane.

   Not all property is marital property, however. Property acquired before marriage, inherited property, and gifts are examples of "separate property." The distinction is important because separate property is excluded from equitable distribution. Thus, if the judge finds an item of property is separate property, that item of property will be given to the person who has title to it.

   Some types of property present special classification problems. One example is gifts. A gift from one spouse to the other will be marital property unless the gift is accompanied by some clear statement that the giver intends that the gift belong to the other spouse alone. If John gives Jane a diamond necklace for Christmas, the necklace is marital property, and its value will be included in the total amount of marital property. If John encloses a note with the necklace, however, saying that he intends the necklace to be exempt from equitable distribution in the event of divorce (a highly unlikely contingency), the necklace will be separate property, and its value will not be included in the total marital property to be distributed.

   A gift from someone other than a spouse receives different treatment under the Act. In this case, the classification depends on whether the property is given only to one spouse or to both, and on the giver's intention at the time she makes the gift. If Jane's mother gives a necklace to Jane, for example, the necklace is Jane's separate property. On the other hand, if Jane's mother gives Jane and John an oil painting for Christmas, the painting will be marital property unless Jane can somehow prove to the judge that her mother intended that the painting belong only to Jane.

   Suppose that shortly after his marriage to Jane, John graduated from dental school and went into private practice with two of his classmates. When Jane and John divorce, the part of the practice that "belongs" to John is marital property. Even though Jane cannot take possession of John's dental practice, the law recognizes that a profitable business has value, and thus treats it like any other kind of property. Assuming that John's interest in the practice was "acquired" during the marriage and before separation it will be included in the total marital property.

   Certain pension and retirement benefits are also marital property. The law says that "vested" benefits are marital property, while the expectation of "nonvested" benefits is separate property. A retirement or pension benefit is "vested" if the person is entitled to keep the benefit even if he is fired or resigns from his job. A benefit is "nonvested" or contingent, on the other hand, if the benefit will be lost if the person leaves his job.

   [Editors note: As of October 1997 (for all lawsuits filed on or after that date), this distinction between vested and nonvested retirement rights was abolished, and the courts can divide or allocate any pension rights acquired during marriage.]

   Vested pension and retirement benefits are classified as marital property because these benefits are regarded as postponed income. The theory is that John would bring home a larger salary (marital property) if he or his employer were not contributing part of his total compensation to a retirement fund. It would not be fair, the reasoning goes, to allow John to shelter part of his salary from equitable distribution simply by postponing receipt of it. Consequently, the amount of retirement benefits that accrue during the marriage and before separation is marital property, as is the anticipated interest or growth on that amount.

   In addition to dealing with specific types of property, the Equitable Distribution Act also establishes some general rules for classifying property. First, in a rule called "the exchange provision" the Act provides that property acquired in exchange for separate property is also separate property. The simplest example of this is as follows: John inherits $2,000 from his mother. The money is separate property because of the rule that says inherited property is separate property. When John receives the money, he uses part of it to buy himself a watch. The watch is also separate property because it was obtained in exchange for separate property. This is true even though the watch is obtained during the marriage and before the separation of John and Jane. Only if John gives the watch to Jane and expressly states his intention that the watch lose, its character as separate property will the property be treated as marital property.

   Another general rule established by the Act is that increases in value of separate property are separate property. If John invests the $2,000 he inherited from his mother in a money market account, and ten years later the amount in the account has grown to $5,000, the $3,000 increase in value is also separate property, even though it was "acquired" during the marriage and before the separation of the parties.15

   Complicated questions arise when an asset is acquired with funds made up of a combination of separate and marital property. Imagine that John and Jane decide to buy some land that costs $10,000. John contributes $5,000 of separate property, and the remainder of the price is taken from John and Jane's checking account, which contains marital funds. Ten years later, when John and Jane separate, the property is worth $50,000, having in-creased $40,000 in value. How much of this amount should go into the marital property pie? Both the exchange provision and the increase-in-value rule are involved in this determination. Since John contributed $5,000 in separate property to the acquisition of the land, he is entitled to keep $5,000 of its value at the date of separation as separate property under the exchange provision. Furthermore, under the increase-in-value rule, since John contributed one-half of the purchase price of the land, he is entitled to one-half of the increase in value, or $20,000. Thus, John keeps $25,000 as separate property, and $25,000 goes into the marital property pie.

   Assume that in the above example the land's increase in value occurred because John and Jane built a house on the property. John and Jane did a lot of the work on the house themselves, and the residence was paid for with marital funds. In this case, John is still entitled to the return of his $5,000 under the exchange provision. He is not entitled to one-half the increase in value, however, because the increase is not attributable to his $5,000 contribution. The increase is instead attributable to the work and further contributions of both John and Jane. The courts have referred to this type of increase in value as "active appreciation." An increase in value resulting from inflation and increased prices is not attributable to any efforts or further contributions of the parties, and this type of increase in value is referred to as "passive appreciation." The rule established by the courts is this: when separate property increases in value, the court must determine how much of the increase represents passive appreciation and how much represents active appreciation. The amount of increase that results from active appreciation is marital property. The amount of increase that results from passive appreciation remains separate property.

   A special rule applies when a married couple acquires land or a house and has title placed in both their names. In this one limited circumstance, title is important, because it establishes a presumption that the property is marital property. Even if one spouse paid for part or all of the property with separate funds or owned the property before marriage, if the title is in both names, the court will usually classify the entire property as marital property. In order to have part of the property classified as separate, the spouse who furnished the property must show by "clear, cogent, and convincing evidence" that he or she did not intend for the other spouse to share in the property.16 Only in a rare case will a spouse be able to meet this standard of proof.

How much is the pie worth?

   The trial judge has now identified John and Jane's marital property. His list looks like this:17

Marital Property

Separate Property

Red sports car

$2,000 inheritance (John's)

Diamond necklace from John to Jane

Oil painting from Jane's mother

Dental practice

Retirement benefits

Cash in checking and savings accounts

Household furnishings

House and Land (title in John's name)

Return of John's $5,000 investment

   After the judge identifies each item of marital property, his next task is to determine the value of each item. The Equitable Distribution Act provides two rules to assist the court in doing this. First, the Act directs the court to determine net value of property. Net value is defined as fair market value less the amount of any encumbrances.18 John's new red sports car may have a fair market value of $15,000. If John still owes the bank $12,000, however, and he used the car as collateral for the loan, the net value of the car is $3,000. If the court ultimately decides to divide the marital property equally between the parties, John and Jane each will receive $1,500 worth of property as a result of the car's inclusion in the marital property pie.

   The second valuation rule established by the Equitable Distribution Act applies to the time at which marital property is to be valued. Because the value of property is constantly changing, it is necessary to have some fixed time for setting value. The Act provides that property is valued as of the date the parties separate. For example, assume John's red sports car had a fair market value of $15,000 at date of separation, and that he owed $12,000 on the car, with a resultant net value of $3,000. The equitable distribution hearing takes place a year later.19 By this time the car has a fair market value of $13,500, and John has paid the loan down to $10,000. The net value at time of trial is thus $3,500. In valuing the marital property, the court will list the car as having a net value of $3,000 because the Act requires valuation as of date of separation.20

   Valuation is sometimes a very complicated and expensive process. When the property to be valued is a professional practice or small business, for example, it is almost always necessary to hire accountants and other experts to appraise the property and testify at the hearing. Furthermore, different experts may reach widely divergent results, depending on the appraisal method each expert uses. In this case, the judge is faced with the very difficult task of deciding which expert's testimony is most credible in reaching his decision about the value of particular property.

How should the pie be cut?

   The trial judge in Jane and John's case has finished valuing the marital property, and his list now looks like this:

Marital Property

Value

Red sports car

$3,000

Necklace from John to Jane

$10,000

Oil painting from Jane's mother

$2,000

Dental practice

$75,000

Retirement benefits (John and Jane)

$50,000

Cash in checking and savings

$15,000

Household furnishings

$50,000

House and land (title in John's name)

$45,000

TOTAL MARITAL PROPERTY

$250,000

   After the judge decides what property goes into the pie and how much the whole pie is worth, he must decide how to cut the pie. The law strongly favors cutting the pie in half. This preference is sometimes referred to as a "presumption" that an equal distribution of the marital property would be equitable, and it is based on the premise that in most marriages both parties contribute an equal amount, albeit in different ways, to the acquisition of property. Consequently, unless one party offers evidence showing that an equal division of property would not be "equitable," or fair, the court will divide the property equally between the parties.

What evidence might persuade the judge that an unequal division is equitable? The Equitable Distribution Act lists twelve specific factors that the court should consider:

  1. The income, property, and debts of each party at the time of trial.

  2. Either spouse's obligation to pay child support to a child born of a previous marriage or alimony to a former spouse.

  3. The duration of the marriage and the age and physical and mental health of the parties.

  4. The need of a parent with custody of the children to live in or own the marital home and to use or own the household furnishings.

  5. The expectation of nonvested pension or retirement benefits.

  6. The contributions of a party not having title to an item of marital property to the acquisition of that property.

  7. Contributions or assistance by one spouse to help educate or improve the career potential of the other spouse.

  8. A direct contribution by one spouse to an increase in value of separate property owned by the other spouse.

  9. The liquidity of marital property.

  10. The difficulty in valuing an interest in a business or profession and the economic desirability of retaining such an interest free from claims or interference by the other party.

  11. Tax consequences to each party.

  12. Acts by one party to protect or to waste or neglect marital property during the period between separation and distribution.

   Suppose John and Jane have been married for 15 years. Jane dropped out of college to take a job as a secretary to help put John through dental school. The couple began having children while John was in school, and Jane never went back to get her degree. After John graduated from dental school, he went into private practice with two of his friends. The practice grew, and after ten years John was making approximately $90,000 a year. Jane worked at home during those years, raising the children and maintaining the household. She also worked part-time as a secretary, but the salary she brought home was far less than John's.

    Because John and Jane were students with little income when they married, neither of them brought much property to the marriage. Consequently, almost all of their property will be marital property, property acquired during the marriage and before separation. In considering how to divide the property, the court will take note of the following facts:

First, John's income at the time of trial is in excess of $90,000, and Jane has only a small income. Neither party was married before, and thus neither has support obligations arising out of a previous marriage. The marriage was of lengthy duration, and both parties are in good health and are in their thirties. They have three children and have agreed that Jane will have custody of the children. Except for the marital home, Jane has nowhere to live at present. John and Jane have vested pension rights, which have been included in the marital property, but neither party has nonvested pension rights. Jane contributed throughout the marriage to the growth of John's dental practice by rendering services as a parent and homemaker and by working as a secretary when the practice was first getting off the ground. Jane contributed to John's education and career potential by supporting the family while John went to dental school. John's interest in his dental practice and both parties' interest in their retirement benefits are nonliquid and difficult to value. Further, it would clearly be economically undesirable to give Jane an ownership interest in the dental practice, since she is not a dentist, and John's partners have not agreed to a partnership with Jane.

    After considering these facts, many judges might be concerned that giving Jane only 50 per cent of the marital property would not be fair. Jane's lawyer will argue that Jane has contributed as much to the marriage as John has, even though her contributions have been non-monetary for the most part. Her lawyer will also point out that Jane sacrificed her education so that John could become a dentist, and that John will continue to earn a very high salary, while Jane has little earning power. These considerations may result in Jane's receiving more than 50 per cent of the marital property.

   In deciding whether equal is equitable, the trial judge is not limited to the factors set out above. The Equitable Distribution Act also provides that the court may consider "[a]ny other factor which the court finds to be just and proper." This factor, often referred to as the "catch-all factor," has generated more litigation than all the others combined, largely because of disagreement about whether the court should consider the bad conduct of one party in deciding how to divide the marital property. The states are evenly divided in their answers to this question. In North Carolina the question was answered in the case of Smith v. Smith.21

    In Smith, the evidence showed that Barbara Smith, one of the parties, had abandoned her husband and two children "without justification," left the children unsupervised on several occasions, and used alcohol excessively. The evidence also indicated that Mrs. Smith did not contribute to the children's support after the separation, and that she seldom visited the children. The only marital asset of any significance was the home owned by the parties. The trial court awarded the home to Mr. Smith. The award was based on a number of considerations, including those outlined above. Since the home was the only asset, this award amounted to a 100 per cent versus 0 per cent split in the husband's favor, as opposed to the usual equal division. Mrs. Smith appealed, and the North Carolina Supreme Court reversed, holding that the trial court improperly considered Mrs. Smith's misconduct in making its decision.22 The North Carolina rule, announced in Smith, is that the court may consider "economic fault"--conduct by one party that relates to the economic condition of the marriage. "Moral fault," however, may not be considered by the court in determining an equitable division of marital property. This rule is consistent with the philosophical basis of equitable distribution; that because both parties contribute to the economic partnership of the marriage, both are entitled to a fair return of that contribution. Only evidence relating to that economic partnership is relevant in determining a fair return.

   The Smith rule means that such behavior as adultery, domestic violence, abandonment, and alcohol and drug abuse is irrelevant to a determination of an equitable division of marital property. Even if a spouse admits to having engaged in all these behaviors, he or she would still be entitled to 50 per cent of the marital property, nothing else appearing.23 Economic behaviors are not irrelevant, however. If one spouse transfers marital property to his mistress immediately before separating from his wife, for example, the law says this is economic fault, and this conduct is properly considered by the court in deciding on a fair division of property. In addition to permitting the court to consider economic fault, the catch-all factor is useful in another situation. When property values change significantly between the date of separation and trial, the results may be very unfair unless the court relies on this factor to support an unequal division of property. Consider the following example. Jane and John own a house and some land when they separate. At the date of separation, the property has a net value of $50,000. After separation but before trial, development near the land causes its value to increase to $100,000. At trial, the court is obliged by law to list the value of the land as of the date of separation -- $50,000. If the court divides the marital property equally based on this valuation, the spouse who actually receives possession of the land will get a $75,000 windfall. To prevent this from happening, the court may rely on the catch-all factor in support of the decision to divide the property "unequally" by giving one party the land (theoretically worth $50,000) and the other party $100,000 in marital property. 24

Which party gets which slice of pie?

   Imagine that the judge in Doe vs. Doe determines that an equal division of property would be equitable. Jane and John are thus each entitled to receive $125,000 worth of marital property. How does the judge determine the specific property that Jane and John receive? It is interesting that this is often the decision the parties care most about, and yet the statute provides virtually no guidance to the trial judge in making this determination. As one Court of Appeals opinion notes, "Once property has been properly designated marital property and valued, and the court has decided in what proportions its value should be divided, there appears to be no other guide than the discretion and good conscience of the trial judge in determining which party gets which specific property."25

   The Equitable Distribution Act does contain a few suggestions for the trial court in distributing John and Jane's property. First, two of the factors discussed above have implications for distribution as well as division of property. The need of the custodial parent to own or occupy the parties' home will often cause the court to award ownership of the home to that party. Similarly, the predictable problems that would arise from awarding one party an interest in the other party's business or professional practice will usually cause the court to award possession of that type of property to the party engaged in the business or professional practice.

    Assume that the judge in John and Jane's case decides to distribute the property as follows:

Jane's

John's

House and land

$ 45,000

Dental practice

$ 75,000

Retirement benefits

$ 10,000

Retirement benefits

$ 40,000

Red sports car

$ 3,000

Necklace

$ 10,000

Oil painting

$ 2,000

Furniture

$50,000

Cash in Bank

$ 5,000

Cash in Bank

$ 10,000

Totals

$125,000

$125,000

   If the court orders this distribution, one more step is necessary to achieve an equal division of property. Remember that the house and land awarded to Jane has a net value of $50,000. Of this amount, $45,000 is marital property, and $5,000 is John's separate property. It is not practical to award John one-tenth of this property; to divide the property this way would give John a useless piece of property and would decrease the value of both parcels of land. Consequently, the Equitable Distribution Act provides for a "distributive award" in this situation.26 The distributive award in this case will take the form of a court-ordered cash payment from Jane to John in the amount of $5,000. In return, John will transfer title to the property to Jane, and she will thereafter own the property free from any claim of John's.

   Suppose that the judge had concluded that a 60/40 percent split, with Jane receiving the larger share, would be equitable. In this case, Jane would be entitled to $150,000 worth of marital property, and John's share would be worth $100,000. Even if John is awarded only his dental practice and retirement benefits, however, these assets total $115,000, exceeding the amount to which John is entitled by $15,000. What is the court to do in such a situation? The judge could simply award Jane an interest in John's dental practice, but neither Jane, John, nor John's partners finds this solution acceptable. John's retirement benefits, while marital property, will not be available for actual distribution until John retires some years in the future. In this situation, if the parties agree,27 the trial court may make a distributive award of $15,000 to Jane. Further, since John does not presently have funds to make a lump sum payment, the court may direct John to make payments over time in a certain amount, to continue until Jane receives the sum to which she is entitled. This payment to Jane rounds out her share of the marital property, allowing John to retain his dental practice and retirement benefits free of claims by Jane.

Conclusion

   The Equitable Distribution Act is five years old now. The appellate courts have decided more than 50 cases arising under the Act, and new cases are handed down regularly. To family law practitioners and others interested in the development of the law in this area, it sometimes seems that each new appellate decision raises more questions than it answers, and it is clear that a host of extremely significant issues remain to be resolved. Nevertheless, the law has been in effect long enough to elicit some initial reactions and, perhaps not surprisingly, its effectiveness in achieving a more equitable system of property division meets with mixed reviews. Many practitioners point out that a court action for equitable distribution is often very expensive, and some cynics have suggested that the Act is in reality a "lawyer's relief bill." There are loopholes in the statute, and opportunities for inequitable manipulation of the law. Application of seemingly straightforward statutory language sometimes results in extremely complicated legal questions. Judges often experience profound difficulty in identifying and valuing Certain items of marital property, such as retirement benefits and business interests, particularly when they must also deal with such slippery concepts as passive and active appreciation. In short, the Equitable Distribution Act is not a perfect law.

   On the other hand, the Act has substantial strengths. Its emphasis on fairness and common-sense decision making is far more difficult to circumvent and manipulate than the former title system of property. The race to take possession of cash and other property, so common under the old system, is of little avail to parties under the new law. The expense of litigation is of limited significance in the vast majority of cases, which never go to court because parties agree on how their property should be divided. And the availability of distribution under the Act, even though expensive, gives substantial bargaining power to parties who have traditionally had little with which to bargain. Perhaps the greatest strengths of the Act are its recognition of the myriad of ways in which people contribute to the economic growth of their marital partnership and its means of property division that takes into account, however imperfectly, the informal and un-businesslike manner in which married couples typically conduct their property transactions within the context of the marital relationship. Despite its loopholes and difficulty of application the Act is a great step forward in achieving a fair and reasoned system for dividing and distributing property following divorce.

  The author is an Institute of Government faculty member who specializes in domestic relations law and equitable distribution issues.

1. Leatherman v. Leatherman 297 N.C. 618, 256 S.E.2d 793 (1979).

2. In the case of a joint account in the names of both spouses the court would attempt to identify the person furnishing the funds; if the source of funds could not be identified, the funds would belong to both spouses.

3. At common law, persons were sometimes successful in asserting claims against property titled to another by demonstrating that the other person had given them the property. A person could also recover under a "resulting trust" theory if he could show that he furnished the actual purchase price for the property, but title to the property was placed in the name of someone else. A third approach that sometimes worked was a "constructive trust," which arises when a person holding title to property is ordered by a court to give the property to another because it would be unfair under the circumstances to allow the first person to keep the property. To establish a constructive trust, however, there must be a showing of fraud or some other wrongdoing by the person with title. Spouses like Bessie Leatherman could seldom make such a showing. Finally, a person could establish an interest in property if he could show that he and the person with title had contracted or agreed that he would receive the property in exchange for work, money, or other contributions. Traditionally, few spouses entered into such businesslike arrangements with each other. Each of these approaches is discussed in Leatherman.

4. It is important to distinguish alimony and child support from division of property following divorce. North Carolina has always recognized a parent's duty to support his children, and courts have long had authority to order a parent to pay child support. Furthermore, a judge may order a spouse to pay alimony if two requirements are met: first, the spouse receiving payments must be a "dependent spouse" under the law, and second, the spouse making payments must have been at fault in bringing the marriage to an end. See footnote 23. While judges have had the power for decades to order child support and alimony, a court had no authority before 1981 to divide property between divorcing spouses except on the basis of title. For this reason, the Leatherman court had no choice but to find that Bessie Leatherman was not entitled to any part of her husband's business.

5. N.C. GEN STAT. §§ 50-20, -21 (1984).

6. White v. White, 312 N.C. 770, 775, 324 S.E.2d 829, 832 (1985).

7. Smith v. Smith, 314 N.C. 80, 86, 331 S.E.2d 682, 686 (1985).

8. N.C. GEN. STAT. § 50-11(e) (1984). This rule is subject to two narrow exceptions, involving the situation in which a person may not have known that his spouse had filed for and obtained a divorce and the situation in which the court granting the divorce did not have jurisdiction over one spouse. In these cases, the spouse who did not file the action for divorce has six months from the date of divorce to assert his claim for equitable distribution. See also id. § 50-11(f).

9. Id. § 50-21(a) (1984) also permits a party to seek equitable distribution in a separate lawsuit.

10. If a separation agreement is entered into in another state and it satisfies the requirements of that state's law, it does not have to meet these requirements in order to bar an action for equitable distribution.

11. McKenzie v. McKenzie, 75 N.C. App. 188, 330 S.E.2d 270 (1985).

12. N.C. GEN. STAT. §50-6 (1984).

13. In certain limited situations, the court may also award one party the separate property of his spouse. In Wade v. Wade, 72 N.C. App. 372, 325 S.E.2d 260, disc. rev. denied, 313 N.C. 612, 330 S.E.2d 616 (1985), the husband owned a parcel of land before marriage. After marriage, he and his wife built a house on the property. The Court of Appeals noted that the land was separate property, the house marital property, and that it was not practical to return the land to the husband, since the house was on it. In this situation, said the Court, the trial judge could distribute house and land to the wife, even though the land was not marital property, and direct the wife to pay the husband compensation for his property.

14. There is one exception to the rule that title is irrelevant to classification of property. This exception applies only to a type of property referred to in the law as "real property": land and buildings constructed on land. When real property is titled in the name of both husband and wife, that title creates a "presumption" that the property is marital property, McLeod v. McLeod, 74 N.C. App. 144, 327 S.E.2d 910, disc rev. denied, 313 N.C. 612, 333 S.E.2d 488 (1985). This is further discussed later in the text.

15. The limits of this general rule have not yet been defined by our appellate courts. One opinion hints, however, that this rule might be subject to exception in the following situation: husband has significant separate property before marriage. After marriage, he places all of his separate property in money market accounts and other passive investments. Husband and wife support themselves during the marriage by income earned by both (i.e., marital property). Because husband is able to live on marital property, he has no need to deplete his separate property, which continues to grow in value throughout the marriage. It is quite possible that, faced with this situation, a court might find the increases in value of husband's separate property to be marital property because the increases were made possible only by depletion of marital property. See McLeod, 74 N.C. App. at 149 n.1, 327 S.E.2d at 914 n.1.

16. Mcleod, 74 N.C. App. at 154, 327 S.E.2d , at 917.

17. This list is used for explanatory purposes and is obviously abbreviated. The typical list of marital property contains a more detailed itemization than "household furniture" for example. Clothing and other personal effects are also usually marital property and are another example of typical assets omitted from this list in the interests of brevity and simplicity.

18. Alexander v. Alexander, 68 N.C. App. 548, 550, 315 S.E.2d 772, 775 (1984).

19. Because almost all divorces in this state are based on one year's separation and because the court cannot distribute marital assets until divorce is granted, at least one year will have elapsed between separation and the equitable distribution hearing in virtually all cases. Only if divorce is based on the incurable insanity of one spouse does a different valuation date apply. In that case, marital property is valued as of the date the divorce action is filed or as of date of separation, whichever is earlier.

20. Note the profound consequences of fluctuations in value of assets between date of separation and date of distribution. As is discussed later in the text, fluctuation can result in substantial inequity if, for example, one spouse is awarded an asset having an official (as of date of separation) value of $10,000 but a present (as of date of distribution) value of $50,000 or $100!

21. 314 N.C. 80, 331 S.E.2d 682 (1985).

22. The North Carolina Supreme Court noted that some of the evidence introduced at trial would support the action of the trial judge. For example, Mr. Smith's need, as custodial parent, to occupy the home is a proper consideration, and the trial court could have properly awarded him the home based on this factor alone. [The presence of even one factor is enough to support a trial judge's decision to divide the property unequally. Andrews v. Andrews, 79 N.C. App. 228, 338 S.E.2d 809 (1986).] The order entered by the judge, however, clearly revealed that he had also taken into consideration Mrs. Smith's misconduct, and thus the appellate court sent the case back to the trial court for determination of an equitable division based solely on proper considerations.

23. While fault is irrelevant to equitable distribution, it is essential to an award of alimony. No spouse is entitled to court-ordered alimony unless a judge or jury first determines that grounds for alimony exist. All of the grounds for alimony, set out in N.C. GEN. STAT. § 50-16.2 (1984), are based on the fault, or misconduct, of the party against whom an alimony claim is asserted. Further, fault by the party seeking alimony will decrease the amount of -- or even bar an award of -- alimony. N.C. GEN. STAT. § 50-16.5, 50-16.6 (1984).

24. It is anomalous that the trial judge in this situation must rule that an equal distribution of the marital property would not be equitable, and must state reasons in justification of his decision, in order to effect a truly equal division of property between the parties as of the time of trial.

25. Andrews v. Andrews, 79 N.C. App. 228, 338 S.E.2d 809 (1986). The Andrews court noted two possible exceptions to this statement: (1) the marital home and (2) property of great sentimental value.

26. N.C. GEN. STAT. §50-20(b)(3) (1984 and Supp. 1985) defines "distributive award" as "payments that are payable either in a lump sum or over a period of time in fixed amounts...." N.C. GEN. STAT. §50-20(e) (1984) provides for a distributive award in any case in which the court finds that distribution of marital assets would be impractical.

27. The requirement that parties agree to the distributive award in this case results from the special treatment accorded retirement benefits under N.C. GEN. STAT. §50-20(b)(3) (1984 and Supp. 1985). That portion of the Act provides that a court may order retirement benefits to be divided between the parties only at the time benefits are actually received. Both parties must agree before the court can utilize the alternatives of a lump-sum payment or installment payments by one spouse to the other before retirement benefits begin to be received.

 


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