“Sullivan v. Sullivan: An Example of How Appreciation in Value of Pre-Marital Stock in a Closely-Held Business May Remain the Spouse’s ‘Separate Property’ in the Event of Divorce

Posted By Austin Buerlein, Esq. On April 17, 2014

The recent case of Sullivan v. Sullivan, 2014 WL 1266263 (Ga.), 14 FCDR 687, provides a seminal case in Georgia addressing certain Separate vs. Marital Property rights in a divorce case, involving a party's interest in closely held business.

More specifically, it provides an example of a factual scenario where the Court held that appreciation in value of pre-marital shares (or, distributions derived from such shares) during the marriage were considered the owning party's Separate/Non-Marital Property - notwithstanding the fact that the Husband worked for the (closely held) business during the marriage.

A Brief Synopsis of the Case is as Follows:

  • Prior to the marriage, Husband acquired shares in a closely held S-Corp
  • The Husband WORKED for the company, before and during the marriage. In fact, he "carried a title indicating that he managed the operation of the company."
  • In parties divorce, Wife argued that the appreciation of the Husband's shares during the marriage should be considered in part or full as Marital Property. Her primary basis was that it was the Husband's individual efforts that caused the corporation to grow in value during their marriage.
  • HELD: The appreciation in value of the stock was not sufficiently "attributed to the marital unit;" rather, it was more attributed to "market forces" under the facts of this case, and, accordingly, all of the appreciation was considered the Husband's Separate property. Further, the Court effectively also held that K-1 distributions generated by the corporation were also considered Husband's Separate Property under the circumstances, even though it was arguably "income" "earned" during the marriage.
  • General Basis for the Holding: "First, although Husband was a shareholder and carried a title indicating that he managed the operation of the company, testimony at trial showed that he was primarily responsible for managing the company's pick-ups and deliveries, and that he had comparatively little influence in the running of the company. Second, Husband testified that the rapid rise in the company's appreciation was due to the company's acquisition of new government contracts, in which he was not involved. Third, assuming arguendo that K-1 income can be a marital investment as a matter of law, the superior court did not err in concluding that the K-1 income in this case was not an investment made by the marital unit. Here, the marital unit had no control over whether the K-1 income would be retained in the company or distributed. If the marital unit did not control whether K-1 earnings would be retained, their retention cannot be said to be an investment by either spouse. Fourth, given the preceding findings, Wife cannot succeed in her argument that her support of Husband's career was evidence of marital investment. If Husband did not contribute to any growth in the company, then by extension Wife's efforts to support Husband in his career did not indirectly contribute to the growth of the company either, and is not a marital investment. The superior court's finding that there was no evidence of marital investment in this case was not clearly erroneous."

As held by the Sullivan Court, in Georgia:

Certainly, a spouse's interest in a closely-held corporation may be a marital asset subject to equitable division in a divorce; this is so even when the business interest was started as the result of separate pre-marital funds. Jones-Shaw v. Shaw, 291 Ga. 252, 253, 728 S.E.2d 646 (2012). The key is whether there is an appreciation in the value of the business interest during the course of the marriage as a result of the spouses' individual or joint efforts. However, appreciation in value of the asset during the marriage does not render it a marital asset subject to equitable division if the appreciation is solely a result of market forces. Thus, the determinative factors are the asset's increase in value, if any, during the marriage, and that any such gain be due to spousal effort, either separately or in conjunction with the other spouse.

Accordingly, any time a spouse comes into the marriage owning any interests in a business, a central issue will be: "What was responsible for any appreciation in value of said business during the course of the marriage?" Where the owning spouse works for the company during the marriage, the parties should review and consider the Sullivan case for guidance.

Tags: Appreciation in value of pre-marital shares, Divorce, Pre-marital property, Separate v. Marital Property