LOUISA MACLEAN F/K/A LOUISA MIDDLETON, APPELLANT/CROSS-APPELLEE
LAWRENCE MIDDLETON, APPELLEE/CROSS-APPELLANT
Modified January 10, 2014
APPEALS AND CROSS-APPEALS FROM JEFFERSON FAMILY COURT. HONORABLE JERRY J. BOWLES, JUDGE. ACTION NO. 06-CI-502718.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
BRIEF AND ORAL ARGUMENT FOR APPELLANT/CROSS-APPELLEE: Marcia L. Sparks, Louisville, Kentucky.
BRIEF FOR APPELLEE/CROSS-APPELLANT: J. Russell Lloyd, Donna J. Foust, Louisville, Kentucky.
ORAL ARGUMENT FOR APPELLEE/ CROSS-APPELLANT: J. Russell Lloyd, Louisville, Kentucky.
BEFORE: MAZE, STUMBO AND TAYLOR, JUDGES. STUMBO, JUDGE, CONCURS. TAYLOR, JUDGE, CONCURS IN PART, DISSENTS IN PART, AND FILES SEPARATE OPINION.
This appeal and cross-appeal arises from a judgment of the Jefferson Family Court which dissolved the marriage between Louisa Maclean and Lawrence Middleton. Maclean challenges the trial court's findings and orders which characterized Trust distributions as Middleton's non-marital property, divided marital property, allocated debt, and interpreted a prior support order. Middleton argues that the trial court erred in its determination of his non-marital interest in the marital residence, allocation of debt, calculation of child support, and awards of maintenance, attorney fees and costs to Maclean. Finding no clear error or abuse of discretion, we affirm.
I. Facts and Procedural History
Louisa Maclean and Lawrence Middleton were married on April 24, 1999. On the date of the marriage, Middleton was 48 years of age, and Maclean was 36. The parties are the parents of two minor children, A.M.M., born in 2000, and S.C.M., born in 2002.
At the time of the marriage, Middleton was employed as a financial advisor with Hilliard Lyons. He reported income ranging from a high of $583,393 in 2003 following a low of $238,472 in 2002. In 2005, Middleton left his employment with Hilliard Lyons to become a 20% shareholder of Atlas Brown, Inc. His base salary was $275,000, and the parties invested $444,000 in Atlas Brown at its creation. In December 2006, Middleton was terminated as president and chief compliance officer of Atlas Brown. However, he continued as a board member and shareholder of Atlas Brown and he received substantial income from that investment and other sources. Maclean was employed with Commonwealth Bank at the time of the marriage. Her highest income prior to the marriage was $28,000 per year. Following the marriage, she did not work outside the home.
The parties separated in May of 2006 and Maclean filed this petition for dissolution of the marriage in June of that year. After separation, Maclean was self-employed as the sole shareholder of Spring House Interiors, Inc., earning $1,462 per month. She also had other income through free-lance and contracting positions. From 2006 until October of 2007, Middleton paid Maclean combined maintenance and child support totaling $8,500 per month. Thereafter, Middleton paid temporary maintenance of $5,000 per month. In the final decree, the trial court found that Maclean was voluntarily underemployed and capable of earning at least $2,100 per month. Based on these findings and the allocation of property and debt, the trial court directed Middleton to pay Maclean $2,500 in maintenance for twelve months.
By agreement, the parties settled the issues relating to the care, custody and support of the two children. The primary disputed issue concerned the characterization of distributions to Middleton from a family trust. Middleton also claimed a substantial non-marital interest in the marital residence. There were also disputed issues concerning child support, division of marital property, assignment of responsibility for indebtedness, maintenance and assignment of attorney fees and costs. The parties agreed to submit these issues to a Master Commissioner, and the trial court appointed Hon. B. Mark Mulloy to serve in that capacity.
The parties appeared before the Master Commissioner during a series of hearings on these issues from October 2007 through October 2008. The Master Commissioner issued his report and findings on February 3, 2009. Both parties filed exceptions to various aspects of the Master Commissioner's report. The Master Commissioner filed a subsequent report addressing those exceptions on March 16, 2009.
These matters were then submitted to the trial court for final adjudication. On May 11, 2009, the trial court entered a decree dissolving the marriage. After additional proceedings and hearings, the trial court entered findings of fact, conclusions of law on November 8, 2010. The court adopted the Master Commissioner's findings and recommendations and entered final judgment resolving the disputed issues per the Master Commissioner's report.
Both parties filed motions to alter, amend or vacate the judgment pursuant to CR 59.05, which the trial court denied. This appeal and cross-appeal followed. Additional facts will be set forth below as necessary.
II. Preliminary Matters
As an initial matter, the dissent takes the position that the trial court lacked the authority to appoint the Master Commissioner in this case. Consequently, the dissent concludes that the trial court's order adopting the Master Commissioner's findings of fact and conclusions of law are void ab initio and must be set aside. We do not take issue with the dissent's analysis concerning the lack of statutory or procedural authority for the process used in this case. Nevertheless, we do not agree with the dissent's conclusion that this matter amounts to a jurisdictional error which this Court may raise on its own motion without prompting by either party.
As a general rule, an alleged failure to make adequate findings of fact must be brought to the trial court's attention as required under CR 52.02 or CR 52.04. Otherwise, a party has waived its right to raise the issue on appeal. Cherry v. Cherry, 634 S.W.2d 423, 425 (Ky. 1982). In this case, neither party objected to the appointment of the Master Commissioner in this case. To the contrary, both parties agreed to the submission of the disputed issues to the Commissioner.
Moreover, we disagree with the dissent that the trial court improperly delegated its decision-making responsibility. As was the situation in Bingham v. Bingham, 628 S.W.2d 628 (1982), the record clearly shows that the trial court was thoroughly familiar with the proceedings and facts of the case and that it had prudently examined the proposed findings and conclusions. Although the Commissioner actually heard must of the evidence presented by the parties, a thorough record was made of those evidentiary hearings. The Commissioner's recommended findings were the subject of lengthy proceedings before the trial court. The trial court extensively discussed the issues raised by parties in their respective objections to the Commissioner's recommended findings. After thorough review, the trial court incorporated those findings into its judgment. Under the circumstances, we cannot find that the trial court abdicated its fact-finding and decision-making responsibilities to such a decree that its judgment must be set aside on this basis alone.
In the alternative, we also note that the trial court has the discretion to appoint experts who may assist the court in its fact-finding duties. Kentucky Rule of Evidence (KRE) 706(a). While Mulloy was designated as a " Master Commissioner" in this case rather than an expert witness, the practical effect was the same. The court appointed Mulloy, a well-qualified expert in the field, to assist it in resolving
the complicated financial issues which were disputed in this dissolution case. Furthermore, we also disagree with the dissent that the trial court improperly delegated its decision-making responsibility. Although the precise procedure used may not have been correct, the appointment was within the discretion of the trial court.
Along similar lines, we also agree with the dissent that the $52,000 fee paid to the Master Commissioner in this case exceeds that total amount which would be authorized under CR 53.07. It is entirely appropriate for the dissent to comment on the excessive amount of the fee and to advise trial courts of the need to comply with the requirements of the rule in the future. However, the fee was awarded as part of an agreement by the parties, and the trial court directed payment of that amount as part of its allocation of attorney fees under KRS 403.220. On the other hand, if Mulloy is viewed as an appointed expert, then his compensation may be allocated in the same manner as costs without regard for the limitation in CR 53.07. KRE 706(b). In any event, neither party has challenged this aspect of the trial court's judgment. Consequently, we have no basis for reversing the award sua sponte .
Finally, the dissent correctly notes the lack of any statutory basis for the sealing the record in this case. Although trial courts have the authority to seal the record where there are interests favoring nondisclosure of court file materials, there is a strong presumption in favor of public access to court records. Roman Catholic Diocese of Lexington v. Noble, 92 S.W.3d 724, 730-731, 734 (Ky. 2002). See also Cline v. Spectrum Care Academy, Inc., 316 S.W.3d 320 (Ky. App. 2010). We certainly agree that court records should not be sealed as a matter of routine practice simply at the request of the parties. But in the absence of any challenge to the order, the issue is not before this Court and we have no authority to disturb the trial court's decision to seal the record.
We now turn to the issues raised by the parties in these appeals. In her direct appeal, Maclean raised challenges the trial court's decisions on five issues: (1) the designation of Trust settlement proceeds as non-marital; (2) the valuation of the marital residence for purposes of determining marital equity; (3) the sufficiency of findings concerning the division of personal property from the marital residence; (4) the allocation of martial debt; and (5) the denial of her claim for reimbursement of medical expenses and health insurance Premiums incurred while this action was pending.
Middleton also presents five issues in his cross-appeal: (1) the sufficiency of the trial court's findings concerning his non-marital contributions to the acquisition and renovation of the marital residence; (2) the allocation of marital debt; (3) the award of post-decree maintenance to Maclean; (4) the calculation of Maclean's earning capacity for purposes of setting child support; and (5) the award of attorney fees and costs to Maclean.
For the most part, the issues presented in the direct and cross-appeals are distinct and can be addressed separately. However, the parties' disputes involving the marital residence and the allocation of debt are factually intertwined. Therefore, we shall address those issues together.
IV. Direct Appeal and Common Issues
A. Characterization of Distributions to Middleton from Trust.
The primary dispute in this case concerns distributions to Middleton under a series of trusts created by his maternal great-grandfather, Lawrence Jones. In 1933, Jones established a series of inter vivos
trusts for the benefit of his three daughters and their descendents (the Daughters' Trust). He established a similar series of trusts for the benefit of his son, Lawrence Jones, Jr., and his descendants. Those trusts became irrevocable in 1935 and became testamentary trusts in 1941 under Jones's will. Middleton is a descendent of Lawrence Jones, Jr., who predeceased his father.
Over the decades, many issues involving the administration of the Daughter's Trust have been raised and have been the subject of agreements and private resolutions among the beneficiaries, including a 1980 agreement. In 1996, further issues regarding the administration of income interests were raised and addressed in an arbitration proceeding and order. The order settled a number of long-standing issues, most notably regarding the continued validity of the trusts under the Rule Against Perpetuities and whether the descendants of the Son's Trust could be considered as remainder beneficiaries under the Daughters' Trust. The arbitration order also required the trustee to institute a declaratory judgment action to confirm the agreement and award.
Pursuant to this latter provision, PNC Bank, as trustee, instituted a declaratory judgment action in 2004: (1) to determine whether the Daughter's Trust violates the Rule Against Perpetuities; (2) to confirm the 1996 Arbitrator's Opinion and Award; (3) to declare whether the descendants of Lawrence Jones, Jr. are included in the class of remainder beneficiaries under the Daughters' Trust; and (4) to grant permission to transfer the trust situs to Delaware. Lawrence and his brother Charles Middleton were named parties to that action. In addition, they filed a separate action raising various claims against the trustee. The separate actions were ultimately consolidated.
After several years of litigation and mediation, the beneficiaries under the various trusts entered into a Settlement Agreement and Release on December 28, 2007. In pertinent part, the Settlement Agreement stipulated that the Middleton brothers were deemed to be remaindermen under the Daughters' Trust. Beginning in March of 2008, the Middleton brothers began receiving distributions from the Daughters' Trust. As of the date of trial, those distributions to Lawrence Middleton have totaled more than $1,800,000.
Maclean correctly notes that all property acquired by either spouse subsequent to the marriage is marital property under KRS 403.190(3). As a result, she argues that Middleton's right to receive these distributions arose from his participation in the litigation during the marriage and thus should be considered as martial property. The Master Commissioner and the trial court disagreed, concluding that Middleton's right to receive the distributions arose from his status as a remainder beneficiary of the Daughters' Trust. Consequently, the court concluded that the distributions constitute property acquired by " devise or descent," and are thus exempt from characterization as marital property under KRS 403.190(2)(a).
The parties agree that the disposition of the parties' property is governed by KRS 403.190. In Travis v. Travis, 59 S.W.3d 904, 909 (Ky. 2001), the Kentucky Supreme Court set out a three-part test for the trial court to use to divide the parties' property: (1) the trial court first characterizes each item of property as marital or non-marital; (2) the trial court then assigns each party's non-marital property to that party; and (3) finally, the trial court equitably divides the marital property between the parties. Id. at 909. In Sexton v. Sexton, 125 S.W.3d 258 (Ky. 2004), the Court went on to discuss
the application of the " source of funds" rule to this process:
An item of property will often consist of both nonmarital and marital components, and when this occurs, a trial court must determine the parties' separate nonmarital and marital shares or interests in the property on the basis of the evidence before the court. Neither title nor the form in which property is held determines the parties' interests in the property; rather, Kentucky courts have typically applied the " source of funds" rule to characterize property or to determine parties' nonmarital and marital interests in such property. 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 the property.
Id. at 265.
On appeal, this Court applies a two-tiered standard of review to the question of whether an item is characterized as marital or non-marital. The trial court's factual findings are reviewed under the clearly erroneous standard of CR 52.01. However, the court's ultimate legal conclusions are reviewed de novo as an issue of law. Smith v. Smith, 235 S.W.3d 1, 6-7 (Ky. App. 2006).
Maclean argues that the trial court failed to properly apply the source of funds rule to distributions which were paid to Middleton. Maclean presented extensive expert testimony to support her claim that Middleton would not have received any of these distributions but for his participation in the 2004 litigation. Middleton had not participated in the 1980 family discussions or the 1996 arbitration concerning the Daughters' Trust. In addition, he was not in the line of anticipated beneficiaries for the Daughters' Trust. Furthermore, it is unlikely he would have been included in the class of remainder beneficiaries due to the Trust's failure to comply with the Rule Against Perpetuities. Based on these facts, Maclean contends that Middleton's inclusion in that latter class came as a direct result of his active participation in the 2004 litigation.
It is undisputed that distributions were paid to Middleton out of the Daughters' Trust. The Trust itself is clearly non-marital, having been created and funded long before the marriage. Generally, any distributions from such a trust would be considered as a devise or inheritance, which is specifically exempted from classification as marital property under KRS 403.190(2)(b). Under that statute, income from a non-marital trust is also non-marital " unless there are significant activities of either spouse which contributed to the increase in the value of said property and the income earned therefrom . . . ." However, Maclean does not claim that the distributions constitute income from the Trust.
The complicating factor in this case is that Middleton's status as a remainder beneficiary does not arise directly from the Trust instrument, but from his participation in the 2004 litigation and his settlement with the trustee. In addition, Maclean also notes that Middleton used marital funds to pursue the litigation. Consequently, she argues that those expenditures constitute a marital contribution to the value of the non-marital trust. Maclean further argues that the distributions constitute settlement proceeds from litigation arising during the marriage, rather than distributions from a non-marital trust to a remainder beneficiary. As a result, she maintains that the source of the distributions should have been characterized as marital property and subject to division as such.
While Maclean presents an interesting argument in a unique situation, we conclude that the trial court properly characterized
the distributions as Middleton's non-marital property. The distributions were paid to Middleton based upon his status as a remainder beneficiary under the Daughters' Trust. Middleton's expenditure of marital funds for the litigation does not change the source of the distributions from the Trust. At most, Maclean would only be entitled to an equitable recovery of marital funds which Middleton expended to obtain this non-marital asset. However, she has not raised such a claim in this action.
Furthermore, even if the distributions are treated as proceeds from settlement of litigation, Middleton presented sufficient evidence to establish that those distributions are non-marital in nature. Typically, the character of proceeds from a judgment or settlement of a legal claim will be determined based upon when the underlying claim arose and the purpose for which the judgment or settlement was awarded. In Weakley v. Weakley, 731 S.W.2d 243 (Ky. 1987), the issue involved the character of settlement proceeds from a personal injury claim based upon an automobile accident occurring during the marriage. The Kentucky Supreme Court held that the character of the proceeds is determined by whether the proceeds replace monies which would have been acquired during the marriage. Thus, the Court held that a personal injury award is marital to the extent that it is made for loss of earnings and permanent impairment to earn money during the marriage. Id. at 244. However, the award is non-marital to the extent that it made for permanent impairment to earn money following dissolution of the marriage. Id. Similarly, recovery for pain and suffering is a claim which is personal to the injured person. As a result, such damages are non-marital in nature. Id.
Although the current situation is much different from the facts presented in Weakley, the same analysis applies. The settlement proceeds were paid to Middleton based upon his status as a remainder beneficiary in the Daughters' Trust. Although that status was formally determined as part of the settlement of litigation during the marriage, the underlying claim arose from Middleton's potential interest in the Trust. That interest existed before and outside of the marriage. Therefore, the trial court properly characterized the distributions as Middleton's non-marital property.
B. Marital Residence
Both parties next challenge the trial court's valuation and allocation of the proceeds from the sale of their most recent marital residence, located at 10 River Hill Road in Louisville (the River Hill Road property). Middleton argues that he proved substantial non-marital contributions to that the River Hill Road property, but the Master Commissioner imposed an unreasonably high standard for tracing those contributions. In her appeal, Maclean asserts that Middleton's tactics during the litigation significantly delayed the sale of the residence, resulting in a much lower sale price during the recession. Maclean contends that the reduction in the sale price should be charged against Middleton's share of the marital proceeds.
1. Tracing Issues
In his cross-appeal, Middleton claims a significant non-marital interest in the River Hill Road property through a complex thread of contributions from the proceeds of sales of prior residence and other non-marital contributions. The Master Commissioner made extensive findings concerning Middleton's efforts to trace his non-marital contributions into the River Hill Road property, which can be summarized as follows:
1. In 1998, prior to the parties' marriage, Middleton acquired real
property located at 1514 Goshen Lane in Goshen KY (the Goshen Lane
property). He purchased the property for $292,500, paying $66,002.39 at
closing and financing the balance. On April 26, 1999, two days following the
parties' marriage, Middleton sold the Goshen property. After payment of the
first and second mortgage debts, he received a check for $1,927.07.
1999, also prior to the parties' marriage, Middleton acquired real property
located at 431 Lightfoot Road in Louisville (the Lightfoot Road property). He
purchased the property for $511,000, paying $106,532.06 at closing and
financing the balance of the purchase. Middleton states that he expended
$32,052.71 from a Hilliard Lyons account for improvements and renovations to
3. The Master Commissioner found that the $1,927.03 cash received by
Middleton from the sale of the Goshen Lane property was his non-marital
property. However, Middleton did not attempt to trace those proceeds into any
existing asset. The Master Commissioner further found that Middleton
adequately traced $106,532 in non-marital funds into his purchase of the
Lightfoot Road property. This amount includes the $60,563.79 from the second
mortgage on this property on the Goshen Lane property, and an additional
$46,970 in separate funds.
4. The parties sold the Lightfoot Road property on June 5, 2001 for
$645,000. After payment of mortgage debts, the parties received a check for
$222,214.54. The Master Commissioner found that Middleton had adequately
traced his initial $106,532 non-marital contribution into these proceeds.
However, the Master Commissioner found insufficient evidence to establish that
the increase in value of the Lightfoot Road property was attributable solely
to Middleton's non-marital contributions of the down payment or his
contributions toward renovations.
5. On May 18, 2001, the parties acquired real property located at 319
Mockingbird Hill Road in Louisville (the Mockingbird Hill Road property). They
purchased the property for $635,000, paying $11,158.91 at closing and
financing the balance of the purchase. Shortly thereafter, the parties
re-financed the debt for $500,000. As part of the re-financing, they paid
$148,809.44; a sum that included settlement charges as well as $135,000 in
debt reduction on the property. Middleton alleges that this amount came from
the $222,214.54 in proceeds of the sale of the Lightfoot Road ...