While recently on trial in a case involving a client who started his business before the marriage, my adversary, shortly in advance of trial, began referencing the seminal Price¹ and Hartog² cases for the proposition that the wife was automatically entitled to 50% of the appreciation of the business’ value as marital property. That position, which was opposed by me at trial on several grounds, involved various sub-issues, not the least of which was that the wife had not actually valued the business, nor engaged in timely expert disclosure, nor retained an expert and filed a report prior to the commencement of trial.³

In looking at DRL 236B as well as relevant case law, it seems that the approach taken by attorneys similar to the wife’s attorney in the aforementioned case, occur more frequently than one would have thought. Those claims, of course, normally, and should, fail on the proofs.

Section 236B of the Domestic Relations Law, defines marital property and separate property. Marital property is defined as “all property acquired by either or both spouses during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action, regardless of the form in which title is held, except as otherwise provided in agreement pursuant to subdivision three of this part.” Marital property does not include separate property which is defined as, “(1) property acquired before marriage or property acquired by bequest, devise, or descent, or gift from a party other than the spouse; (2) compensation for personal injuries; (3) property acquired in exchange for or the increase in value of separate property, except to the extent that such appreciation is due in part to the contributions or efforts of the other spouse; (4) property described as separate property by written agreement of the parties pursuant to subdivision three of this part.”

It has been held that separate property shall be narrowly construed while marital property shall be given a broad construction.⁴ By statute, any property acquired during the course of the marriage, as defined, is presumptively marital and therefore subject to equitable distribution upon dissolution of the marriage.⁵ In its defining separate property, the statute includes “property acquired in exchange for or the increase in value of separate property, except to the extent that such appreciation is due in part to the contributions or efforts of the other spouse”.⁶ (emphasis added) Inasmuch as from the limited statutory definition of separate property, the appreciation is exempted as indicated, such appreciation has been held to be marital property.⁷ Starting then from the statutory definition, such appreciation, to be marital must be found to have occurred due to some contribution or effort of the non-titled spouse – hence, all appreciation is not automatically marital.

In Price, the Court of Appeals, in addressing the appreciation issue, held, “...where separate property of one spouse has appreciated during the marriage and before execution of a separation agreement or commencement of a matrimonial proceeding and where such appreciation was ‘due in part’ to the contributions or efforts of the non titled spouse as parent and homemaker, the amount of that appreciation should be added to the sum of marital property for equitable distribution (§ 236[B][5]). Whether assistance of a non titled spouse, when indirect, can be said to have contributed ‘in part’ to the appreciation of an asset depends primarily upon the nature of the asset and whether its appreciation was due in some measure to the time and efforts of the titled spouse. If such efforts, as allegedly is true of defendant’s interest in Unity, were aided and the time devoted to the enterprise made possible, at least in part, by the indirect contributions of the non titled spouse, the appreciation should, to the extent it was produced by efforts of the titled spouse, be considered a product of the marital partnership and hence, marital property.” The Court continued, “As a general rule, however, where the appreciation is not due, in any part, to the efforts of the titled spouse but to the efforts of others or to unrelated factors including inflation or other market forces, as in the case of a mutual fund, an investment in unimproved land, or in a work of art, the appreciation remains separate property, and the non titled spouse has no claim to a share of the appreciation.”

Even upon a determination that such appreciation of separate property is, in fact, marital property, the extent of its distribution remains subject to equitable considerations under the Domestic Relations Law. The Price Court continued on to make this clear, holding, “The question under section 236(B)(1)(d)(3) as to indirect contributions of the non titled spouse as parent and homemaker is whether there was an appreciation of separate property due to the efforts of the titled spouse during the period when it is shown that those efforts were being aided or facilitated in some way by these indirect contributions. If so, the amount of appreciation during that period is considered a product of the marital partnership over which the trial court ‘retains the flexibility and discretion to structure [a] distributive award equitably’ (O’Brien v. O’Brien, 66 N.Y.2d 576, 588, 498 N.Y.S.2d 743, 489 N.E.2d 712, supra). The nature and measure of the services performed by the non titled spouse as parent and homemaker and the degree to which they may have indirectly contributed to the appreciation of separate property, are matters to be weighed and decided by the trial court – not in making this initial determination under section 236(B)(1)(d)(3) – but in making its distribution of the appreciation as marital property under section 236(B)(5).” Out of Price then comes a multi-prong test. First, is the asset separate property as defined⁸; second, has the asset appreciated; third, has the asset appreciated due to some active effort of the titled spouse; fourth, was the appreciation facilitated by the indirect efforts of the non-titled spouse. Only when these tests have been met, is the appreciation deemed “marital”.

In Hartog, the Court of Appeals elaborated upon its decision in Price in addressing whether or not a specific quantifiable active connection between the titled spouse and the appreciation must be proven. The Court answered that question in the negative, holding, “We conclude that requiring a non titled spouse to produce a substantial, almost quantifiable, connection between the titled spouse’s efforts and the appreciated value of the asset would be (1) contrary to the letter and spirit of the relevant statutes see, Domestic Relations Law § 236[B][1][c], [d][3]; [5][c], [d][6]); (2) inconsistent with legislative intent (Governor’s Mem approving L 1980, ch. 281, reprinted in 1980 McKinney’s Session Laws of NY, at 1863; Sponsor’s Mem L 1980, ch. 281, 1980 NY Legis Ann, at 129- 130); and (3) at odds with the purport of this Court’s precedents construing the Legislature’s directives (Price v. Price, 69 N.Y.2d 8, 511 N.Y.S.2d 219, 503 N.E.2d 684) ...When a nontitled spouse’s claim to appreciation in the other spouse’s separate property is predicated solely on the nontitled spouse’s indirect contributions, some nexus between the titled spouse’s active efforts and the appreciation in the separate asset is required.” The Hartog Court further found that, “By considering the extent and significance of the titled spouse’s efforts in relation to the active efforts of others and any additional passive or active factors, the fact finder must then determine what percentage of the total appreciation constitutes marital property subject to equitable distribution.” After considering the facts and respective contributions to the appreciation, the Court of Appeals held that only 25% of the appreciation was marital property subject to equitable distribution.⁹

While the criteria set forth in Price and Hartog seem well settled, establishing one’s right to the appreciation and a distribution thereof may not be so simple. In the well known matter of Capasso v. Capasso,¹⁰ the wife significantly contributed, both indirectly, and even directly, to the success of the husband’s business. While the husband’s contention that the business was worth $1,000,000 at the time of the marriage was based upon his own testimony, the wife claimed that value was not based upon competent proof. The court held, however, that it was the wife’s burden to demonstrate the extent of the business’s appreciation “which necessarily required her to prove its value as of the commencement of the marriage. This she did not do.” The wife’s expert only valued the business at or about the commencement date of the action. The court, however, using the husband’s admission of the value as of the date of marriage, was able to ascribe a value to establish and distribute the appreciation. Had the husband not so testified, it would seem that such a distribution would have been impossible as the amount of the appreciation would not have been established in the first place. Failure of proof in this regard has resulted in such an outcome.¹¹

The valuation of the asset must of course be proven with competent witnesses – the expert witness in the case of the business valuation or other non-liquid types of assets. It has been long held that “Valuation is an exercise properly within the fact finding power of the court guided by expert testimony” and that “The determination of the fact-finder as to the value of a business, if within the range of the testimony presented, will not be disturbed on appeal if it rests primarily on the credibility of expert witnesses and their valuation techniques.”¹² This is, of course, axiomatic, as witness may speak of facts only and not of opinion, unless otherwise qualified to do so.¹³ A party’s failure to properly demonstrate the value of that asset results in an inability to obtain its distribution. Where an expert is thus required in order to prove such value, one must be mindful of the requirements of both CPLR 3101(d) and 22 NYCRR 202.16(g).

Under CPLR 3101(d) a Notice for Expert Disclosure may be served which required the responding party to “...identify each person whom the party expects to call as an expert witness at trial and shall disclose in reasonable detail the subject matter on which each expert is expected to testify, the substance of the facts and opinions on which each expert is expected to testify, the qualifications of each expert witness and a summary of the grounds for each expert’s opinion.” The statute continues, “However, where a party for good cause shown retains an expert an insufficient period of time before the commencement of trial to give appropriate notice thereof, the party shall not thereupon be precluded from introducing the expert’s testimony at the trial solely on grounds of noncompliance with this paragraph. In that instance, upon motion of any party, made before or at trial, or on its own initiative, the court may make whatever order may be just.”

Separate and apart from the CPLR, however, 22 NYCRR 202.16, which governs matrimonial actions, provides at paragraph (g) thereof, that responses to expert demands under CPLR 3101(d) be provided within 20 days of service; that written reports be exchanged and filed as to any expert expected to be called by a party no later than 60 days before trial; that reply reports be exchanged and filed within 30 days of the trial date; and that failure to so comply “may, in the court’s discretion, preclude the use of the expert.” The Rule additionally provides as follows: “Except for good cause shown, the reports exchanged between the parties shall be the only reports admissible at trial. Late retention of experts and consequent late submission of reports shall be permitted only upon a showing of good cause as authorized by CPLR 3101(d)(1)(i). In the discretion of the court, written reports may be used to substitute for direct testimony at the trial, but the reports shall be submitted by the expert under oath, and the expert shall be present and available for cross-examination. In the discretion of the court, in a proper case, parties may be bound by the expert’s report in their direct case.”

Failure then, to comply with the provisions of the CPLR and the Uniform Rules could result in an inability to prove the value of any asset requiring expert testimony and most certainly an inability to prove the appreciation of an item of separate property which requires multiple valuations in order to arrive at the amount of that appreciation. It then becomes essential, as the title holder of the separate property, to be able establish the asset as separately acquired and to early on serve a CPLR 3101(d) Expert Demand. The opposing spouse claiming the appreciation may find themselves precluded if an inordinate time passes prior to compliance and good cause is not shown, particularly if that failure to comply is combined with a failure to also comply in a timely fashion with 22 NYCRR 202.16(g).¹⁴ Of course, this applies not just to cases of appreciation, but to valuation of other assets, issues of custody and visitation, income stream valuation and any other matters in which an expert is required.

Even where values are established, the distribution percentage of the marital portion of the asset remains to be determined equitably and not per se equally. It is not necessarily uncommon for certain assets such as appreciation of separate property and enhanced earnings to result in a less than 50% distribution.

In Miller v. Miller,¹⁵ the wife received 40% of the appreciation of the value of the husband’s pre-marital residence and no interest in his investment property. In Kurtz v. Kurtz,¹⁶ the husband was denied a share in the appreciation of his wife’s business as he failed to demonstrate a baseline value and the extent of the appreciation. In Byck v. Byck,¹⁷ the court found the husband to have failed to sustain his burden to establish that his contributions resulted in an increase in value of his wife’s minority interest in the family business and made no equitable distribution of that appreciation. Similarly, in Rubin v. Rubin,¹⁸ the husband also failed to establish the manner in which his contributions resulted in the appreciation of the wife’s interest in her family’s business or the value attributable to his effort. No distribution to the husband was then made in this regard.

In Carniol v. Carniol,¹⁹ involving the appreciation of the marital residence, the wife failed to establish that the appreciation was the result of either party’s efforts and the entire value was retained by the husband. A similar result occurred in Saslow v. Saslow,²⁰ which involved the appreciation of a Manhattan condominium. In McCann v. McCann,²¹ the wife failed to provide any expert testimony to establish the appreciation of the marital residence or that the appreciation was not due to market or other passive forces even though she claimed direct and indirect contributions. In Fish v. Fish,²² the court awarded the wife 10.08% of the appreciation of the marital residence attributable only to her efforts in the addition of a garage on the property. In Robinson v. Robinson,²³ the wife was awarded $18,500 of a $65,000 appreciation of the husband’s pre-marital condominium. In Van Dyke v. Van Dyke,²⁴ the plaintiff’s claim to the appreciation of the husband’s business failed where both parties each engaged in homemaking activities, did not shoulder additional responsibilities and could not demonstrate the value of the appreciation or her contribution thereto. In A.Z. v. C.Z.,²⁵ no distribution of the husband’s enhanced earning capacity or its appreciation was distributed.

It had appeared a well settled rule that it is the burden of proof of the non-titled spouse to demonstrate their entitlement to a portion of the appreciation. After this article was originally submitted, the Second Department in Parise v. Parise,²⁶ decided on December 20, 2004, that although the husband’s interest in a residential real estate holding was his separate property, “he failed to satisfy his burden of establishing that the defendant’s indirect efforts did not contribute, in some degree, to the appreciation of the value of that interest.” (emphasis added) What we thought was clear, is now markedly unclear. Whose burden now is it? Perhaps the Court of Appeals knows.

The appreciation issues borne of Price and Hartog, are often more involved than many perceive them to be. The substantive and evidentiary requirements which must be met to entitle a party to a distribution of the appreciation, provides yet another of the many pitfalls to avoid in matrimonial litigation by the unwary practitioner.

1. Price v. Price, 69 NY2d 8, 511 NYS2d 219, 503 NE2d 684 (1986)

2. Hartog v. Hartog, 85 NY2d 36, 623 NYS2d 537, 647 NE2d 749

3. The case ultimately settled in mid-trial.

4. Majauskas v. Majauskas, 61 NY2d 481, 474 NYS2d 999, 463 NE2d 15

5. See also Dashnaw v. Dashnaw, 11 AD3d 732, 783 NYS2d 93 (3d Dept 2004)

6. DRL 236B(d)(3)

7. Price at endnote 1

8. Property which had been established as separate property may, however, lose its character as such if there is a pattern of commingling those funds. Cassara v. Cassara, 1 AD3d 817, 767 NYS2d 492 (3d Dept 2003); Fessenden v. Fessenden, 307 AD2d 444, 761 NYS2d 725 (3d Dept 2003)

9. The Court reinstated the finding of the trial court which had awarded the wife 50% of the 25% marital portion of the appreciation in question.

10. 129 AD2d 267, 517 NYS2d 952 (1st Dept 1987)

11. In a non-appreciation case, Antonin v. Antonin, 215 AD2d 421, 626 NYS2d 535 (2d Dept 1995), the Second Department declined to distribute the value of a business to the defendant-wife where, as the party seeking an interest in the asset, she failed to rebut the plaintiff’s assertion that the business had no value at the time of trial. The court also distributed the other assets on a 45/55 basis.

12. Atwal v. Atwal, 270 AD2d 799, 704 NYS2d 765 (2000); L’Esperance v. L’Esperance, 243 AD2d 446, 663 NYS2d 95 (2d Dept 1997); Burns v. Burns, 84 NY2d 369, 618 NYS2d 761, 643 NE2d 80 (1994)

13. Teerpenning v. The Corn Exchange Insurance Co., 43 NY 279 (1871)

14. Kaprelian v. Kaprelian, 236 AD2d 369, 653 NYS2d 634 (2d Dept 1997); Meyers v. Meyers, 255 AD2d 711, 680 NYS2d 690 (3d Dept 1998); Kim v. Kim, N.Y.L.J., April 7, 2003 at 31, col 6 (Sup Court Queens Co, Gartenstein, JHO)

15. 4 AD3d 718, 772 NYS2d 413 (3d Dept 2004)

16. 1 AD3d 214, 767 NYS2d 104 (1st Dept 2003)

17. 285 AD2d 577, 728 NYS2d 95 (2d Dept 2001)

18. 309 AD2d 846, 766 NYS2d 68 (2d Dept 2003)

19. 297 AD2d 697, 747 NYS2d 539 (2d Dept 2002)

20. 305 AD2d 487, 758 NYS2d 825 (2d Dept 2003)

21. 142 Misc2d 1083, 539 NYS2d 281 (Sup Ct Suffolk County, Leis, J.)

22. 161 AD2d 979, 557 NYS2d 549 (3d Dept 1990)

23. 166 AD2d 428, 560 NYS2d 665 (2d Dept 1990)

24. 273 AD2d 589, 709 NYS2d 672 (3d Dept 2000)

25. N.Y.L.J., July 9, 2004 at 19 col 1 (Sup. Ct., Nassau Co., Ross, J.)

26. 13 AD2d 504, 787 NYS2d 360 (2d Dept 2004)

Reprinted with permission from: Family Law Review Newsletter, Spring 2005, Vol. 37, No. 1, published by the New
York State Bar Association, One Elk Street, Albany, New York 12207