Step 1: Classification of Marital and Nonmarital Property

• Jurisdiction: Maryland

II. STEP 1: CLASSIFICATION OF MARITAL AND NONMARITAL PROPERTY

A. Introduction

The first formal step in a court's disposition of property upon divorce or annulment is classifying the property as either marital property or as the nonmarital property (also known as separate property) of one of the spouses.⁹ However, before a court can address whether a particular interest is marital or nonmarital, it must sometimes first determine whether the interest is even property. If an interest is not property, then it cannot be marital property.¹⁰

The goal of the Marital Property Act is to provide for an equitable division of the property the parties acquired during their marriage. The Marital Property Act, however, prohibits the court from transferring ownership of property to carry out an equitable division of marital property, with a few specific exceptions:

• Pension, retirement, profit sharing, or deferred compensation plans;
• Family use personal property, with the consent of any lienholders;
• Real property that is jointly owned by the parties and used as their principal residence when they lived together, subject to the terms of any lien.¹¹

Because the court's power to order property to be transferred between the parties is limited to the above exceptions, when there is a dispute about title to property, the court must determine who holds title as a prerequisite to carrying out the three-step process.

B. What is "Property?"

The Supreme Court of Maryland defines property broadly for purposes of the Marital Property Act. Property consists of "everything which has exchangeable value or goes to make up a [person]'s wealth-every interest or estate which the law regards of sufficient value for judicial recognition."¹² Property can be comprised of both tangible and intangible interests, including contingent interests, such as deferred com-pensation.¹³ A particular interest is property if it can be sold, transferred, exchanged, redeemed, inherited, or liquidated in any way.¹⁴ Expressed another way, property consists of "obligations, rights and other intangibles as well as physical things."¹⁵ A property right is distinguishable from a mere expectancy.¹⁶ Many interests-real estate, cash, securities, and furniture, for example-are obviously property. However, since the advent of equitable distribution, Maryland courts have had to confront questions about defining the concept of property as claimants have sought to expand the pool of divisible assets.¹⁷

1. Goodwill of a business

Goodwill of a business is defined as the "probability that the old customers will resort to the old place."¹⁸ Though the classification and valuation of goodwill can be difficult, it is well established in Maryland law that goodwill is a legally protected, intangible property right.¹⁹

2. Dissipated property

Ordinarily, property must be in existence to be included in the pool of marital property.²⁰ Property disposed of before trial cannot be marital property unless the court finds that it was dissipated.²¹ Early cases say that dissipation occurs when "one spouse uses marital property for his or her own benefit for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown."²² These early cases appear to require evidence of a specific intent coupled with timing in relation to the marital breakup. Later cases expand the definition of dissipation. Thus, a trial judge could find dissipation even when the marriage was not already breaking down, and when the dissipating spouse's spending was improper, but the purpose was not necessarily to reduce the funds available for equitable distribution.²³

A spouse's squandering of marital assets could make out a prima facie case without necessarily requiring a finding of the intent to deprive the other spouse. For example, in Libertelli v. Noguchi,²⁴ that the husband's opioid addiction was a disease did not preclude the trial court from finding his spending on drugs was dissipation. In Omayaka,²⁵ the Supreme Court of Maryland suggested, in dicta, that a trial judge could also find dissipation when a spouse used marital assets without the agreement of the other party, or for improper purposes, such as gambling, or for the benefit of a paramour, even when the guilty spouse did not do so to deprive the other spouse.

The party claiming dissipation has the burden of proof. Withdrawal of sizable amounts from a marital bank account can be sufficient to make out a prima facie case of dissipation.²⁶ Similarly, a pattern of cash withdrawals during separation that exceeds the typical prior rate of withdrawal is evidence of dissipation,²⁷ as is a showing of several withdrawals that add up to a sizable amount and are unexplained.²⁸

Once a party makes out a prima facie case of dissipation, the burden of evidence shifts to the party who spent the funds to explain. In Omayaka,²⁹ the wife withdrew about $80,000 of marital funds, but the court was satisfied with her explanation on the witness stand, notwithstanding she provided no documents corroborating her testimony and she described the spending merely by categories-food, health insurance, rent, credit card debt-without any specificity. The trial court need not credit the testimony of the spouse who liquidated marital assets that they used funds for proper purposes, such as living expenses during a period of unemployment. For example, in Matcha v. Bersoff-Matcha.³⁰ the trial judge rejected the husband's assertion that he legitimately spent sizable IRA withdrawals for living expenses where he paid his own post-separation expenses but made no monetary contribution to the family or the marital home.

Use of marital assets for routine living expenses when a party has lost his or her job is not dissipation.³¹ A party's expenditure of marital assets for reasonable legal fees is not dissipation,³² nor is tuition for a child or a charitable donation.³³ The party who used marital property need not show that the funds went directly to pay the expense if the amount spent is proven and is otherwise reasonable. For example, in Dentz v. Dentz,³⁴ the husband put the invoices for his legal fees in evidence, testified his mother paid his fees, and that he reimbursed her, but did not produce documents showing the reimbursement. The court rejected the idea that the husband had to trace the funds from the accounts directly to his mother in order to meet his burden of evidence of non-dissipation.

The party alleging dissipation has the ultimate burden of persuading the court of the other party's dissipation.³⁵ Whether marital assets were used for an improper purpose is a fact question and, therefore, on review, is subject to the clearly erroneous standard.³⁶ Even when the extent of the spending is very high, the trial judge must make specific findings; it is not sufficient for the trial court, for example, to merely make a finding that all expenditures exceeding an average monthly amount were necessarily dissipation.³⁷ Once the court finds a party dissipated marital property, the amount of dissipated property is included in marital property as an asset of the dissipating spouse.

A party who used a substantial amount of marital assets during the period leading to separation, or thereafter, should be prepared to present both testimony and documentary evidence that explains the disposition of these assets. Similarly, a spouse who intends to liquidate marital assets, for example, to pay legal fees for the divorce or to pay other bona fide expenses that cannot be paid from ordinary cash flow, should be prepared with documentary evidence at trial. For example, the trial court believed the testimony of the wife in Omayaka, but disbelieved the testimony of the husband in Fuquen,³⁸ although in both cases the allegedly dissipating spouse gave only a general description of the disposition of funds. Testimony alone may not be sufficient to meet the burden of evidence imposed on the spending party.

3. Tort claim

A tort claim, such as a claim for personal injury or employment discrimination, is a chose in action, not a mere expectancy, even if the claim is unliquidated.³⁹ Such is claim is therefore a form of property. Whether, and to what extent, an award, or potential award, is marital property, depends upon the particular losses the award is designed to compensate.⁴⁰

C. What is Not Property?

The definition of property for purposes of the Marital Property Act is broad and inclusive. Nevertheless, some interests are not deemed property. An interest that is personal to the holder, and cannot be sold, assigned, or redeemed is not property.⁴¹

1. Country club membership

In Solomon v. Solomon,⁴² the Supreme Court of Maryland considered whether a country club membership might properly be considered property. Because the membership could not be redeemed or transferred, and was personal to the holder, the Court determined it was not property. The holding is limited to cases where the membership fee is nonrefundable. If a club's initiation fee is refundable when a member resigns, the membership could be property.⁴³

2. Professional license

A professional license is not a property interest. Such a license is personal to the holder. It is not transferrable since the license is granted only to one who meets the profession's requirements. The professional license represents only an expectancy of increased earning capacity, without any guarantee or right to wages or other compensation.⁴⁴

3. Professional reputation

Professional reputation is distinct from goodwill and is not property. While business goodwill is a transferrable asset, a professional reputation is personal to an individual.⁴⁵

4. Accrued holiday and vacation entitlement

Holiday and vacation time are personal to the holder and are not a form of deferred compensation. The benefits may be taken at any time by the party who earned them and need not be liquidated as a cash payment.⁴⁶

5. Social Security benefits and...