The marital share of passive appreciation of nonmarital property: deconstructing Kaaa for a better solution.

• Author: Manz, David L.
• Position: Florida

On September 30, 2010, the Florida Supreme Court issued its opinion in Kaaa v. Kaaa, 58 So. 3d 867 (Fla. 2010), resolving a conflict between the Second District's opinion in Kaaa v. Kaaa, 9 So. 3d 756 (Fla. 2d DCA 2009), and the First District's decision in Stevens v. Stevens, 651 So. 2d 1306 (Fla. 1st DCA 1995). It would be premature to predict whether the Supreme Court's decision will survive and eventually join the pantheon of Florida's seminal Supreme Court equitable distribution decisions, such as Ball v. Ball, 335 So. 2d 5 (Fla. 1976); (1) Canakaris v. Canakaris, 382 So. 2d 1197 (Fla. 1980); (2) Landay v. Landay, 429 So. 2d 1197 (Fla. 1983); (3) and Robertson v. Robertson, 593 So. 2d 491 (Fla. 1991). (4) At the same time, it can safely be said, similar to the cited decisions, that the Supreme Court's issue in Kaaa represents a bold, sweeping pronouncement on the complex and seemingly intractable issue of quantifying the marital share of passive appreciation on nonmarital propert. This issue is potentially far reaching in scope and significance.

First, this article traces the history of the statute and case law regarding this issue. Second, this article analyze s and critiques the Supreme Court's decision, recognizing the Supreme Court's attempt to address the harsh inequities created by the Second District's decision in Kaaa, but revealing internal inconsistencies and conflicts with case law and statute. Third, this article concludes by explaining and analyzing a legislative solution proposed, and defeated, during the 2012 legislative session (5) that would have equitably allocated a portion of the appreciation as marital in accordance with current case law and statutory principle and created a more balanced, equitable resolution than the construct adopted by the Supreme Court in Kaaa.

We begin by restating the issue: What portion, if any, of passive appreciation of a parcel of nonmarital property during a marriage becomes marital when a mortgage on that property is paid down with marital funds during the marriage? The relevant statute, F.S. [section] 61.075(6)(a)1(b), states that marital assets include the "enhancement in value and appreciation of nonmarital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets or both."

At least three principles arise from [section] 61.075(6)(a)1(b). The first is a cornerstone of Florida equitable distribution law: the principle of active appreciation. This principle provides that equitable distribution of marital assets should take into account the active appreciation of a nonmarital asset during the marriage. Appreciation caused by the expenditure of marital funds or labor during the marriage, including the parties' management, oversight, or contribution to principal, is a marital asset subject to equitable distribution. (6) The second principle is equally well settled: passive appreciation on nonmarital assets as a result of market forces, such as inflation, is not subject to division. (7) The third principle is acknowledged in the case law. The district courts of appeal have long agreed that the paydown of a mortgage with marital funds on nonmarital property during a marriage is a marital asset. (8)

Characterizing passive appreciation of a parcel of nonmarital real property when a mortgage on the property was paid with marital funds during the marriage is an issue unresolved by the statute's plain language. Thus, one must turn to case law.

Stevens was the first case in Florida to address this issue directly. The Stevens decision must be read particularly carefully because the Supreme Court in Kaaa approved Stevens. (9) In Stevens, the husband owned a parcel of nonmarital real property which was then used to secure a debt that was serviced by marital funds during the marriage. In concluding that some of the appreciation of the property should be deemed marital when a mortgage on the property is paid down during the marriage, the First District made several distinct pronouncements. First, the court held that if a separate asset is "unencumbered and no marital funds are used to finance its acquisition, improvement, or maintenance, no portion of the value of the property will be included in the marital estate, absent improvements effected by marital labor," and that "[i]f an asset is financed entirely by borrowed money which marital funds repay, the entire asset should be included in the marital estate." (10) Second, the court agreed that the equitable distribution of assets should take into account the appreciated value of nonmarital assets caused by the "expenditure of marital funds or labor, including the parties' management, oversight, or contributions to principal" as well as a portion of any passive appreciation where "some portion of the current value ... must reasonably be classified as a marital asset." (11) This finding broke new ground, as, previous to Stevens, courts universally agreed that the sole marital component of nonmarital property was the active appreciation of the property as a result of the efforts or contributions of either party, or the mortgage paydown. The Stevens court crafted a formula to determine what portion of the passive appreciation of property during a marriage should be classified as a marital asset. The Stevens court held, and the Supreme Court in Kaaa adopted, the following language:

In general, in the absence of improvements, the portion of the appreciated value of a separate asset which should be treated as a marital asset will be the same as the fraction calculated by dividing the indebtedness with which the asset was encumbered at the time of the marriage by the value of the asset at the time of the marriage. If, for example, one party brings to the marriage an asset in which he or she has an equity of fifty percent, the other half of which is financed by marital funds, half the appreciated value at the time of the petition for dissolution was filed, should be included as a marital asset. The value of this marital asset should be reduced, however, by the unpaid indebtedness marital funds were used to service. (12)

While the general holdings by the Stevens court are largely neutral and consistent with the cited principles arising from the statute, the court's resolution of the issue is highly flawed by an arbitrary formula crafted by the court. This formula relates division of any appreciation to a ratio created by dividing the indebtedness on the property at the time of the marriage by the value of the property at the time of the marriage, without regard to the statutory requirements of [section] 61.075(6)(a)1(b). Only the enhancement or appreciation of a nonmarital asset created by marital labor or marital funds creates an asset subject to division. (13) The Stevens formula bears no relationship to the enhancement in value of the asset caused by marital funds during the marriage. Application of the Stevens formula in certain situations will result in the entire passive appreciation of nonmarital property being declared marital, even when a minimal portion of the underlying nonmarital mortgage has been paid during the marriage. For example, assume a parcel of nonmarital real property has a mortgage of $90,000 and a fair market value of $100,000 at the time of the marriage, which passively appreciates during a four-year marriage to $300,000. Assume also that the mortgage is also paid down during the marriage by $10,000. Applying the Stevens formula, $180,000 of the $200,000 appreciation would be deemed marital, notwithstanding that virtually none of the mortgage principal was paid down during the marriage. Assume that the mortgage at the time of the marriage had been $10,000, and that because of the terms, the same amount was paid down as in the above hypothetical. In the case of the $10,000 mortgage, only $20,000 of the same appreciation would be marital, though the payment on the mortgage was identical. (14) Is that fair? It is apparent that application of the Stevens formula would result in a windfall to the nontitled spouse in contravention of the fundamental equitable distribution principle...