A while back we posted an article about the complexities of dividing small business assets in Arizona as marital property. (Read Divorce Business, Changes to Mom and Pop Shops.) Just last March, a case out of Pinellas County, Florida, dealt with that very issue. In Florida, marital assets are subject to equitable distribution in a divorce. Nonmarital property is not divided, instead it belongs to the spouse as an individual. In divorce, Florida's nonmarital property is the equivalent of separate property in Arizona. Appeal of the Property Division in the Final Decree of Divorce. The main issue in Louis Orloff's appeal from the trial court's equitable property division revolved around the Matrix Group Ltd., Inc. (Matrix). As is so often the case with small business, Louis began Matrix as a sole proprietorship in the 1980s — he was the only owner. Matrix was a sporting goods mail-order company which Louis incorporated in Massachusetts in 1991. At the time of incorporation, Louis was the only stockholder and was still unmarried. When Louis married Joyce, the couple moved to Florida where Matrix was reincorporated. Louis was president, CEO, and sole stockholder of Matrix after the Florida reincorporation; Joyce worked as an employee of Matrix. The trial court ordered Matrix divided as the couple's "most significant marital asset," to which Louis appealed. Error as to Characterization of Property. The Court of Appeals reversed the trial court — Matrix was not a marital asset and, therefore, was not subject to equitable division in the divorce. Here is an excerpt of the Florida statute defining nonmarital property: Nonmarital property includes "[a]ssets acquired and liabilities incurred by either party prior to the marriage, and assets acquired and liabilities incurred in exchange for such assets and liabilities." Fla.Stat. § 61.075(6)(b)(1). For the sake of comparison, here is an excerpt from our Arizona statute defining separate property: Separate property includes "[a] spouse's real and personal property that is owned by that spouse before marriage and that is acquired by that spouse during the marriage by gift, devise or descent, and the increase, rents, issues and profits of that property…" A.R.S. § 25-213(A). Tracing the NonMarital Property. Even though Louis reincorporated Matrix during the marriage, that was insufficient to transform the business asset into marital property. In this case, it was very easy to trace the asset back to Louis' sole proprietorship and Massachusetts incorporation. If anything, Florida-Matrix was traded wholly for Massachusetts-Matrix — that is, assets and liabilities incurred "in exchange" for premarital assets (the same result as with separate property in Arizona). The case examples that the Court relied on in its analysis all dealt with the reality of business growth and development. As small businesses grow into larger ones, they typically restructure. Louis organized his sole proprietorship into a legally independent corporate entity. He then reincorporated Matrix in a new state, continuing as an independent entity. As the Court noted, another owner might transition from a partnership into a limited liability company without changing the character of the asset as nonmarital property. As the business needs and goals change, the legal entity may be changed, too. None of those transformations, however, will change the character of the underlying asset as nonmarital property. It takes something more… Louis did make a transfer of Matrix ownership that he probably came to regret. As the Court said, "this does not conclude the issues concerning Matrix." In our next post, we'll discuss the portion of Matrix that Louis gifted to Joyce on the advice of his tax professional. At first blush, an asset that was owned before the marriage may seem to be the separate property of one spouse. In some situations, however, a separate asset can transmute into community property, depending upon how it was used during the marriage. If you have complex assets, including a sole proprietorship, corporation, limited liability company, or other business entity, then look to the Law Offices of Scott David Stewart for representation. Our family law attorneys have the experience and expert resources on hand to ensure that your interests are protected at every step in the negotiation of your divorce. Resources: Orloff v. Orloff (Fla. Dist.Ct.App. 2011) http://caselaw.findlaw.com/fl-district-court-of-appeal/1561676.html A.R.S. § 25-213: Separate Property http://www.azleg.gov/FormatDocument.asp?inDoc=/ars/25/00213.htm&Title=25&DocType=ARS
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