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BILLIONS IN THE BALANCE: ACTIVE VS. PASSIVE

Recently a divorce case made the news with screaming headlines such as “Ex-wife of US Oil Baron to appeal $1 Billion Divorce Award”. Yes, that was billion with a “B” . Intrigued, I was drawn to read how someone could not only receive such an award, but more importantly, on what basis someone would even want to challenge it, representing an amount far beyond most peoples’ wildest dreams. This divorce involved Harold Hamm and his wife, Sue Ann Hamm. The Hamms were married in 1988. Mr. Hamm was the founder, CEO and majority shareholder of an Oklahoma-based oil company, Continental Resources. Mr. Hamm had founded Continental in 1967, 21 years prior to this marriage. The principal issue in controversy in this divorce case was the extent to which the value of this pre-marital business, Continental Resources, had appreciated in value during the course of the parties’ marriage, the reasons for this appreciation, and the extent to which Ms. Hamm should have been entitled to share in same as part of her distribution of marital assets. While the value of Mr. Hamm’s stake in Continental had soared during the marriage (it was valued between $13 and $18 billion during the pendency of the divorce proceedings), the courts ruled that only $1.4 billion of the growth in Mr. Hamm’s Continental shares during the marriage was “marital capital” to be split with the wife, the rest awarded to Mr. Hamm as his “separate property”. While Oklahoma law provided that the enhanced value of premarital property may be split “equitably” in a divorce if it resulted from the efforts of skills of either spouse during the marriage, the court had attributed most of Continental’s growth during the marriage to passive or market factors, rather than the efforts of either Mr. Hamm or even his wife, who also claimed that she had worked in the business for stretches during the couple’s marriage. Clearly, it was the court’s disposition on this “valuable” issue that prompted Ms. Hamm’s pursuit of her possible appeal. Looking beyond the numbers involved or the sensational headlines, the legal principles at work are similar to those which frequently arise in New Jersey divorce proceedings, namely how one deals with the appreciation of otherwise premarital assets, whether they are businesses or any other forms of property in conjunction with divorce.

Similar to Oklahoma, New Jersey is governed by principles of “equitable distribution” when it comes to the division of property and assets incident to divorce. Excluding property that may have been acquired by either party by way of gift, devise or intestate succession, N.J.S.A. 2A: 34-23 (h) provides that upon divorce a court may make such an award or awards to the parties “to effectuate an equitable distribution of the property, both real and personal, which was legally and beneficially acquired by them or either of them during the marriage or civil union”. The operative phrase for our discussion today is “during the marriage”. Shortly after this Statute’s enactment, our state’s Supreme Court in Painter v. Painter, 65 N.J. 196 (1974), noted that any property owed by a husband or wife at the time or marriage would remain the separate property of such spouse and in the event of divorce, would not qualify as an asset eligible for distribution. The Court went on to hold that if such property, owned at the time of the marriage, later increases in value, such incremental enjoys a like immunity; however, in a footnote thereto provided:

“The immunity of incremental value to which we refer is not necessarily intended to include elements of value contributed by the other spouse, nor those for which husband and wife are jointly responsible.” Id at 214

Taking the language from this footnote as their cue, a myriad of cases were decided attempting to carve out principles of how to address any incremental changes in value of premarital assets which would have otherwise been deemed exempt or immune from equitable distribution, predicated upon the “nature” of those assets and/or of the contributions or efforts made by either or both spouses with respect thereto during the marriage. The characterization of whether such assets were either “active” or “passive” in nature were developed in the cases of Scavone v. Scavone, 230 N.J. Super 482 (Ch. Div. 1988), aff’d 243 N.J. Super 134 (App. Div. 1990) and Bednar v. Bednar, 193 N.J. Super 330 (App. Div. 1994). Those principles were carried over into a situation involving a premarital business similar to that confronting the Oklahoma court in Hamm in the case of Valentino v. Valentino, 309 N. J. Super 334 (App. Div. 1998). First, the court in Valentino recognized that there were circumstances in which the appreciation during the marriage of a pre-owned asset would be subject to distribution, and which would require first the determination of whether such asset was active or passive.  The court defined passive immune assets as those whose value fluctuations were based exclusively on market conditions. However, an active, immune asset involves contribution and efforts by one or both spouses towards the assets’ growth and development which directly increase its value. The court noted that when an increase in value was brought about solely through the efforts of the owner, that value remained undistributable; however, when such value was derived, in whole or in part, from the efforts of the non-owner, that appreciation was subject to distribution. Therefore, the court was of the view that the increased value of active immune assets must be considered eligible to the extent that it may be attributable to the expenditures or the effort of the non-owner spouse, and thereby, a determination must be made regarding the extent to which the original investment “has been enhanced by contributions of either spouse”. Id at 338. In Valentino, the property in question was strip mall/gas station owned by the husband prior to marriage, but which continued to be owned and operated during the marriage. The husband contended that this property should have been considered a passive asset immune from equitable distribution. The wife contended that same should have been considered an active asset whose increased value was not only due to market forces, but due to marital contributions made toward its growth and development which she contended not only included to certain work performed by her with respect thereto, but by her contributions to the home and children which had enabled the husband to devote his time to the business. The trial court seemed to generally concur with the wife’s position, and recognizing that there was also a mortgage paydown during the marriage, determined that the wife was entitled to ten percent of the value of the property. While both parties appealed, the Appellate Division chose not to disturb this ruling. Hence, in assessing whether the enhancement in value of an otherwise exempt or immune asset was due to the “contributions of either spouse”, the analysis does not appear to turn solely upon efforts of the non-owner spouse as to the business or property itself, although certainly in consideration, but of a spouse’s “non-financial contributions” as well, and thereby enabling the owner-spouse to devote his or her time to the business with any corresponding growth and development from those efforts. The recognition of such “non-financial contributions” has not only been recognized by the courts of this state i.e. Chalmers v. Chalmers, 65 N.J. 186 (1974); Gibbons v. Gibbons, 174 N.J. Super 107 (App. Div. 190), rev’d o.g. 86 N.J. 515 (1981), Carr v. Carr, 120 N.J. 336 (1990), but statutorily through the rebuttable presumption that each party made a substantial financial or non-financial contribution to the acquisition of income or property while the party was married. N.J.S.A. 2A: 34-23.1.

While obviously the stakes involved in the Hamm matter were of exponentially greater value, it is evident that the principles involved and the determinations to be made are similar to those confronting the divorce courts here in New Jersey. The lesson to be gleaned in that just because a property or asset may be premarital is not the end of the inquiry but merely the beginning. Is it active, passive or a hybrid of the two? Has it gone up or down in value during the marriage and if so, how much and more importantly why? What was the relative contribution or effort of either or both parties to any enhancement in value during the marriage? The answers to these types of questions are not only fact sensitive in any given case, but are often complex, requiring the assistance of appraisers, accountants or other financial experts in addition to substantial discovery covering periods not only during the marriage, but preexisting the marriage as well. The law firm of James P. Yudes, P.C. has handled many of these types of cases and has the expertise and resources to deal with such complex matters. Our firm stands ready to assist you.