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Stephens v. Stephens

Supreme Court of Nebraska

July 14, 2017

Robert L. Stephens, appellee,
Janet E. Stephens, appellant.

         1. Divorce: Appeal and Error. In actions for dissolution of marriage, an appellate court reviews the case de novo on the record to determine whether there has been an abuse of discretion by the trial judge.

         2. Judges: Words and Phrases. A judicial abuse of discretion exists if the reasons or rulings of a trial judge are clearly untenable, unfairly depriving a litigant of a substantial right and denying just results in matters submitted for disposition.

         3. Appeal and Error. Errors must be specifically assigned and argued to be considered by an appellate court.

         4. Statutes: Words and Phrases. Traditionally, the word "include" in a statute connotes that the provided list of components is not exhaustive and that there are other items includable though not specifically enumerated.

         5. Property Division. Equitable property division under Neb. Rev. Stat. § 42-365 (Reissue 2016) is a three-step process. The first step is to classify the parties' property as marital or nonmarital. The second step is to value the marital assets and determine the marital liabilities of the parties. The third step is to calculate and divide the net marital estate between the parties in accordance with the principles contained in § 42-365.

         6. Divorce: Property Division. All property accumulated and acquired by either spouse during the marriage is part of the marital estate, unless it falls within an exception to this general rule.

         7. ___: ___. Any given property can constitute a mixture of marital and nonmarital interests; a portion of an asset can be marital property while another portion can be separate property.

         8. Divorce: Property Division: Pensions. Investment earnings accrued during the marriage on the nonmarital portion of a retirement account [297 Neb. 189] may be classified as nonmarital where the party seeking the classification proves: (1) The growth is readily identifiable and traceable to the nonmarital portion of the account and (2) the growth is due solely to inflation, market forces, or guaranteed rate rather than the direct or indirect effort, contribution, or fund management of either spouse.

         9. Divorce: Property Division. The active appreciation rule sets forth the relevant test to determine to what extent marital efforts caused any part of the appreciation or income.

         10. Property Division: Words and Phrases. Appreciation caused by marital contributions is known as active appreciation, and it constitutes marital property.

         11. ___: ___. Passive appreciation is appreciation caused by separate contributions and nonmarital forces.

         12. Divorce: Property Division: Proof. The burden is on the owning spouse to prove the extent to which marital contributions did not cause the appreciation or income.

         13. Divorce: Property Division. Appreciation or income of a nonmarital asset during the marriage is marital insofar as it was caused by the efforts of either spouse or both spouses.

         14. Corporations: Employer and Employee. Despite the importance of each employee in a company, a company's value for purposes of active appreciation is attributable only to the efforts of first-tier management or similar persons with control over the asset's value.

         15. ___: ___. Courts have uniformly rejected arguments by the owning spouse that the universe of persons in a company that effect its value is so large that no one person has any significant effect.

         16. Property Division: Proof. The burden of proof to show that property is nonmarital remains with the person making the claim.

         17. Divorce: Mental Competency. The amount of support awarded under Neb. Rev. Stat. § 42-362 (Reissue 2016) is a matter initially entrusted to the sound discretion of the trial judge, which award, on appeal to this court, is reviewed de novo on the record and affirmed in the absence of an abuse of the trial judge's discretion.

         Appeal from the District Court for Lancaster County: Robert R. Otte, Judge. Affirmed in part, vacated in part, and in part reversed and remanded with directions.

          Stefanie Flodman and Steven J. Flodman, of Johnson, Flodman, Guenzel & Widger, for appellant.

          David P. Kyker for appellee.

          [297 Neb. 190] Heavican, C.J., Wright, Miller-Lerman, Cassel, Kelch, and Funke, JJ.

          Wright, J.

         I. NATURE OF CASE

         In this dissolution action, the husband is the cofounder and president of a C corporation and owns 34 percent of its stock. He asserts that only the appreciation, during the marriage, of a business interest that is due to the active efforts of the non-owning spouse is part of the marital estate. He claims, therefore, that none of the almost $5 million in appreciation of his stock interest during the parties' 25-year marriage was subject to equitable division.


         Janet E. Stephens and Robert L. Stephens were married on September 8, 1991. Twin boys were born of the marriage in 1996. Robert filed for dissolution in 2014.

         For approximately 15 years of the marriage, Janet worked as a real estate agent. But during the last 10 years of the marriage, Janet suffered from a mental illness that required periodic hospitalization and left her unable to work. She receives approximately $1, 500 per month in Social Security disability income. Robert testified that he did not expect Janet would recover and become employable in the future.

         A guardian ad litem (GAL) was appointed to protect Janet's interests at trial. The GAL is also Janet's guardian and conservator. Janet refused to participate in the dissolution proceedings but was represented by counsel.

         Both before and during the marriage, Robert worked full time as president of Stephens & Smith Construction Co., Inc. (Stephens & Smith), and his current annual salary is approximately $265, 000 per year. Robert received additional income from bonuses and from his other business interests. In 2014, Robert's total taxable income was $503, 414. When Janet's mental health allowed, she shared equally with Robert the tasks relating to the care of their children.

          [297 Neb. 191] The principal issue at trial was what assets should be considered marital and subject to equitable division. The approximate total value of the assets under the court's consideration in the dissolution action was $9 million. There were 166 exhibits entered into evidence without objection, and Robert was the only witness.

         1. Stephens & Smith

         Stephens & Smith is a construction company specializing in concrete work. At all relevant times before and during the marriage, Robert owned stock totaling 34 percent of the stock of Stephens & Smith. Robert cofounded Stephens & Smith in 1971 as a partnership with Michael Smith. Stephens & Smith was incorporated as a C corporation in 1974. According to the exhibits in the record, Robert's stock in Stephens & Smith was worth $298, 459 in 1991 before the parties married. Robert's stock in Stephens & Smith at the time of dissolution was worth $5, 044, 934.16.

         Robert worked a "normal eight-hour day, " 5 days a week, in his capacity as president. At other times during the marriage, he worked more. He was also on the 12-member board of directors. Robert admitted that he sets his own salary and has a significant role in determining bonuses.

         Robert testified that the leadership personnel of Stephens & Smith has not changed since the marriage. He described Stephens & Smith as consisting of six moneymaking departments, each with its own department head. Robert was involved in selecting and training the leadership within Stephens & Smith. At all times during the marriage, Stephens & Smith had approximately 200 employees. Robert considered at least 20 of those employees "integral, " though he believed every employee was important.

         Robert described his role as president as "constantly changing." He made financial and investment decisions for Stephens & Smith and performed "some management real estate oversight." As part of obtaining lending to fund Stephens & [297 Neb. 192] Smith's projects, Robert also personally guaranteed millions of dollars in loans for Stephens & Smith's operations.

         Robert attended human resources, rental management, shareholder, and board meetings. He occasionally consulted with and advised the department heads for the company. Robert conceded that he was an integral part of the success of Stephens & Smith. But Robert suggested that, based on his latest bonus of 6 percent, "maybe I provide 6 percent of the leadership."

         2. RIP., Inc.

         R.I.P., Inc., is a wholly owned subsidiary of Stephens & Smith. It holds Stephens & Smith's real estate investments and represents approximately two-thirds of Stephens & Smith's value. R.I.P. was created before the marriage with capital from Stephens & Smith, and continued thereafter to be funded by the profits of Stephens & Smith. R.I.P. owns a percentage of The Mystic Pines Apartments, L.L.C.; Eagles Landing Apartments, LLC; Aardvark Antique Mall, LLC; and Village Square Apartments, LLC. Although there was no testimony specifically on this point, Robert's estimated interest in Stephens & Smith of $5, 044, 934.16 apparently includes any interests held through R.I.P

         3. Infinity S Development Co., Heritage Square Partners, Smith and Stephens Real Estate, and Aardvark Partners

         (a) Infinity S Development

         Infinity S Development Co. (Infinity) is a partnership between Robert, Smith, and one other partner. Infinity is predominantly involved in the self-storage business, and at the time of trial, it owned approximately 900 storage units. At one point, Robert testified that no capital has been added to Infinity since the marriage. Its expansion has been paid for with the partnership's profits. Robert also indicated, however, that as with Stephens & Smith, he had personally guaranteed bank loans to Infinity.

          [297 Neb. 193] The day-to-day operation of Infinity is run by a hired manager. But Robert and the two other partners make the larger decisions, such as what to build. Robert participates in monthly meetings to analyze occupancy rates and financial statements. Robert owns one-fourth of Infinity. According to the exhibits in evidence, at the time of trial, Robert's equity interest in Infinity was $1, 243, 232. In contrast, when the parties married, Robert's interest in Infinity was worth $270, 553.

         (b) Heritage Square Partners

         Heritage Square Partners (Heritage) was formed as an offshoot of Infinity just prior to the marriage. The partnership consists of Robert; Smith; and, originally, three other persons. It owns one building that was capitalized with funds from Infinity and with loans. No other funds have been funneled into Heritage since the marriage. The building provides rental income and is managed by a person employed by the partnership. Robert is not involved in the day-to-day operation of Heritage. At the time of trial, Robert's equity interest in Heritage was $403, 884. It was unclear what the value of Robert's interest in Heritage was at the time the parties married.

         (c) Smith and Stephens Real Estate

         Smith and Stephens Real Estate was created by Robert and Smith before the marriage and owns a single piece of property that was purchased before the marriage. The value of Robert's interest in Smith and Stephens Real Estate when the parties married was $88, 830, and it was $140, 000 at the time of trial.

         (d) Aardvark Partners

         Aardvark Partners, LLC, was formed after the marriage. It was formed by the five partners of Infinity and with R.I.P. as the sixth partner. R.I.P. owns 50 percent of Aardvark Partners. The $500, 000 purchase of the real estate held by Aardvark Partners was capitalized with $50, 000 from each of five individual [297 Neb. 194] investor partners from Infinity and $250, 000 from R.I.P. Each individual obtained the $50, 000 contribution through a distribution of $55, 000 from Infinity.

         Aardvark Partners owns a property that consists of a cluster of buildings and parking lots. Robert is not involved in the day-to-day operation of Aardvark Partners, which is run by a hired manager. At the time of trial, Robert's interest in Aardvark Partners was valued at $306, 429.

         4. Aardvark Antique Mall, The Mystic Pines Apartments, and Eagles Landing Apartments

         Robert conceded at trial that his ownership interests in Aardvark Antique Mall, The Mystic Pines Apartments, and Eagles Landing Apartments were marital property. At the time of trial, Aardvark Antique Mall was valued at $66, 474, The Mystic Pines Apartments were valued at $923, 687, and Eagles Landing Apartments were valued at $381, 385. Robert's combined interest in the three properties produced approximately $60, 000 per year in owner draws, and he proposed that it would be most beneficial for all parties to transfer to Janet the ownership interest in these properties.

         Janet's attorney and GAL questioned the practicality of making Janet part-owner of the properties. Janet's counsel also pointed out that transfer of ownership would require the cooperation of the other partners, since at least two of the entities required owner approval before allowing new members. ...

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