KLEET V. KLEET
FAMILY LAW: PROPERTY (SOURCE OF FUNDS RULE, TRACING)
2006-CA-000035
PUBLISHED: AFFIRMING
PANEL: HOWARD PRESIDING; ABRAMSON AND ACRE CONCUR
COUNTY: MCCRACKEN
DATE RENDERED: 8/3/2007

Husband and wife were married for 17 years. No children were born of the marriage. Husband appealed property division. COA affirmed.

Wife’s earnings were relatively stable during the marriage, ranging from $22,531.00 to $38,171.00. Husband’s income varied widely. In three different years he reported no W-2 earnings. On the other hand, in 1999, when People’s Bank sold, Husband’s W-2 earnings were $4,167,011.00. Excluding that one exceptional year, Husband averaged approximately $100,000 in income per year throughout the course of the marriage.

The family court valued the total property of the parties at $6,489,719.00, with $1,906,977.40 set aside as husband’s nonmarital property and $20,000 as wife’s nonmarital property. However, the court credited Husband’s award of marital property with $2,052,297.00, an amount the court found that Husband had dissipated the marital estate. In other words, $2,052,297.00 of the $2,509,507.80 awarded to Husband consisted of moneys that he had given away and that no longer existed, at least in the possession of these parties. The court also credited Husband’s marital property award with $90,000 for his interest in a condominium in Florida which it found that he owned jointly with his sister and brother-in-law. The net result is that Wife was awarded approximately 80% of the marital assets actually in the possession of the parties at the time of the divorce.

Husband appealed circuit court order awarding wife 80% of marital assets actually in the possession of the parties at the time of the divorce raising four major claims.

First, he claimed the court erred in not awarding him his non-marital assets and holding that he had failed to meet his burden of proving those assets were non-marital. Although the husband produced some documentation for his non-marital assets, the family found he had selectively produced documents and claimed not to be able to produce other documents. The CJO concluded this finding was not clearly erroneous and also upheld the circuit court’s finding that husband’s expert witness’ testimony was flawed as the expert did not attempt to do a traditional tracing. Husband’s attempted tracing consisted of testimony and reports by another certified public accountant who did not attempt to do a traditional tracing of any specific premarital asset into any currently existing asset. She testified that she did not follow the formula set out in Brandenburg v. Brandenburg, 617 S.W.2d 871 (Ky. App. 1981), at all (she felt it was “inapplicable”). Rather, she used an approximate growth rate, the parties’ joint tax returns, depositions of each party, interviews with Husband and Husband’s statements to produce a "forensic tracing" model the family court refused to accept Husband’s tracing method, so as to entitle him to any increase in the value of the exchanged assets. While it may be very likely that some portion of this increase was due to general economic conditions, COA agreed with the trial court that Husband did not provide clear and convincing evidence of how much of the increase was due to these conditions, as opposed to the parties’ joint efforts. There is no presumption that general economic conditions caused the increase in value.

Second, husband claimed it was error to find that he had dissipated marital assets. Husband gave two million dollars to his sister, brother-in-law, and accountant. Husband claimed he had always given monetary gifts and this was not dissipation. Dissipation may be found when marital funds are expended for a nonmarital purpose, “(1) during a period when there is a separation or dissolution impending; and (2) where there is a clear showing of intent to deprive one’s spouse of her proportionate share of the marital property." The standard of proving dissipation is preponderance of the evidence. Gifts to family members can constitute dissipation of marital assets.

The family court found that Husband made the gifts “during a period that the Husband was contemplating dissolving the marriage.” The finding that Husband made these gifts to deprive Wife of her share of the marital estate is not clearly erroneous. While COA stated it may have decided differently on the division of marital property, it could not say that the award of 55% of the marital property to Husband and 45% to Wife was an abuse of discretion. COA, however, found that husband was aware that there was a real possibility divorce was eminent and that he never informed wife of the gifts. Additionally, husband did not report the gifts on his gift tax return until after discovery. There was substantial evidence that husband tried to hide the gifts from wife.

Third, husband claimed the family court erred in dividing the property. With regard to the husband’s claims that that his wife was unsupportive and did not contribute to the marital home, the CJOA held the family court was in the best position to judge the evidence as to these facts and even though it might have reached a different conclusion it would not find the lower courts holding to be clearly erroneous.

Finally, husband claim that the family court failed to credit him monies paid to wife during litigation would found by COA not to constitute error as trial court did not abuse its discretion in dividing the assets.

Property acquired during the marriage and before a decree of legal separation is presumed to be marital property, "regardless of whether title is held individually or by the spouses in some form of co-ownership[.]" KRS 403.190(3). Kentucky uses the "source of funds" rule to characterize property or to determine the parties’ nonmarital and marital interests. The source of funds rule "simply means that the character of the property, i.e., whether it is marital, nonmarital, or both, is determined by the source of the funds used to acquire property." If nonmarital property increases in value during the marriage, the trial court must determine the reason for the increase. If the increase is attributable to general economic conditions, it is nonmarital; where the parties’ joint efforts cause the increase, it is marital property. However, the burden of proof is on the party claiming the increase in value to be nonmarital, and he must satisfy that burden by clear and convincing evidence. When nonmarital property is not in existence at the time of dissolution, the party claiming a nonmarital interest in a presently owned asset must "trace" the previously owned asset into an existing asset.

Tracing to a mathematical certainty is not always possible, and a claimant cannot meet the tracing requirement simply by showing that he or she brought nonmarital property into the marriage without also showing that he or she has spent his or her nonmarital assets in a traceable manner during the marriage.

Digested by Michael Stevens