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Charlson v. Charlson

Supreme Court of South Dakota

March 29, 2017

2017 S.D. 11

          ARGUED FEBRUARY 15, 2017


          LINDA LEA M. VIKEN SHELLY D. ROHR Attorneys for plaintiff and appellee.

          MICHAEL K. SABERS Attorneys for defendant and appellant.


          WILBUR, Justice

         [¶1.] In this declaratory judgment action, the circuit court held that husband and wife's premarital agreement was valid and enforceable. In a subsequent decision, the court interpreted the agreement as it relates to the parties' debts and assets. Husband appeals. We affirm.


         [¶2.] Angela Smoot and Donald Charlson married in Deadwood, South Dakota in 1993. Prior to the marriage, the parties entered into a Pre-Marriage Agreement (PMA). Both Angela and Donald had been married before, and Angela wanted to protect her assets prior to marrying Donald. The parties listed their assets and liabilities in separate attachments to the PMA. Angela identified an ownership interest in three Taco John's restaurants, a home, an investment account, and two vehicles. Donald was working as a financial advisor for Edward Jones at the time. He listed "0 assets" in his financial statement attached to the PMA.

         [¶3.] For the first few years of their marriage, Angela lived in South Dakota, and Donald lived in Minnesota. In 1996, Angela relocated to Rochester, Minnesota to live with Donald. The parties continued to live together in Minnesota until 2011. During a trip to Mexico in January 2011, Angela learned that Donald was having an affair. Donald moved out of their home, but the two attempted to work on their marriage. Ultimately, in January 2012, Donald sued Angela for divorce in Minnesota. The Minnesota court bifurcated the case. It granted the parties a divorce in 2014, but left to be determined the issues of spousal maintenance, division of property and debts, attorney's fees, and other financial matters.

         [¶4.] Donald filed a motion with the Minnesota court to establish venue in Olmsted County for the interpretation of the PMA. Angela responded that Butte County, South Dakota was the proper venue. After a hearing, the Minnesota court held "[t]hat Butte County, South Dakota, is the proper venue to determine any issues regarding the validity and enforceability of the parties' Pre-Marriage Agreement."

         [¶5.] In January 2014, Angela filed a declaratory judgment action against Donald in Butte County, South Dakota under SDCL 21-24-3. Angela requested a judgment declaring the PMA valid and enforceable and asked the court to construe the rights and interests of the parties under the PMA. Donald moved to dismiss or stay Angela's South Dakota action so that the Minnesota court could resolve certain pending matters. Donald abandoned his motion to dismiss, and the circuit court scheduled a hearing to determine the validity of the PMA. After a hearing in July 2014, the circuit court issued findings and conclusions declaring the PMA valid and enforceable. The court scheduled a court trial to interpret the PMA "as it relates to the debts and assets of the parties, which decision will be forwarded to the Minnesota Court for use in its distribution of debts and assets in the divorce action between the parties."

         [¶6.] The court trial occurred from April 20-24, 2015, and from August 24-27, 2015. Donald and Angela disputed how the management of their finances impacted the parties' separate and marital property as defined by the PMA. During the twenty-plus years of their marriage, Angela comingled her separate assets with the parties' marital assets. At trial, Angela asserted that, regardless of any comingling, the PMA mandated that her separate property interests remain separate, thereby significantly reducing the value of the marital estate. Donald, on the other hand, alleged that the language of the PMA required that once either party placed separate funds in the parties' joint marital accounts, the once-separate funds became marital and any purchases with funds from the joint accounts became marital property. According to Donald, the marital estate approximated $6 million dollars.

         [¶7.] To resolve the dispute, Donald and Angela presented separate, detailed, and extensive expert testimony and evidence. Over Donald's objection, the circuit court allowed the admission of Angela's expert's 310-page report. In this report, Value Consulting Group (VCG) used a "tracing" method to track the movement of Angela's separate property interests when Angela placed her separate funds or property interests within the parties' marital accounts. VCG explained that it used a "direct tracing" approach when Angela moved monies from one asset to another asset on the same day or very close in time. VCG used a "pro rata" approach to determine what percentage of an account was marital and what percentage was separate. VCG would then apply this percentage against certain transactions to determine the respective account's separate versus marital property interests at a given time. When VCG could not trace a specific transaction, it would designate Angela's separate interest as a marital interest to benefit the marital estate.

         [¶8.] VCG also utilized the concept of "marital loans" to track when Angela used marital funds from the parties' joint accounts for her separate property interests or transferred marital funds from the parties' joint accounts to her separate accounts, and Angela did not have sufficient funds designated as "separate" within the joint accounts. Because Angela did not have sufficient funds designated as "separate" within the joint accounts at the time of the transfer, VCG created "marital loans" in favor of the marital estate. For example, on January 15, 2003, Angela transferred $1, 000 from the parties' joint account into one of her separate accounts. According to VCG, on that date, Angela did not have sufficient separate funds in the parties' joint account; thus, the $1, 000 Angela transferred to her separate account became a marital loan Angela owed to the marital estate. VCG would keep track of these loans and reduce or eliminate the loans when Angela transferred her separate funds into the parties' joint account at a later date.

         [¶9.] VCG utilized the tracing and marital loan methodologies for all transactions between 1993 and 2013. Although the parties had multiple investment and bank accounts, in this appeal, the parties primarily refer to transactions to and from Angela's separate investment account-"7191"-and to and from the parties' joint investment account-"7183." Edward Jones held both investment accounts, and Donald was the financial advisor. Angela did not have check-writing privileges on her separate account (7191), but the parties' joint account (7183) had check-writing capabilities.

         [¶10.] Donald's experts disputed VCG's tracing and marital loan methodologies. Donald's experts from Baker Tilly opined that, under the terms of the PMA, any use by either party of funds from the parties' joint accounts to acquire property and investment or business interests rendered the acquired assets marital property. Donald and his experts relied on the language in the PMA denoting that the purpose of the joint marital account was to acquire marital property and pay ordinary living expenses from and after the date of the marriage. In Donald's view, any money placed in the joint accounts by Angela became marital and, therefore, any property interests obtained with money that was part of a joint account became marital property. In objecting to VCG's expert opinion on the marital loan concept, Donald argued that VCG's report lacked foundation because Angela testified that neither she nor Donald intended to create loans when one or the other transferred money from joint accounts and deposited the money in his or her personal accounts.

         [¶11.] After the lengthy trial, the parties submitted proposed findings and conclusions and objections. On April 8, 2016, the court issued 622 findings of fact and 56 conclusions of law comprising 188 typewritten pages. The court began by detailing the history of the parties' marriage, the procedural history of the case, the qualifications and foundation for each expert's testimony, and the language of the PMA. The court then identified the pre-marital assets and their values. The court also listed the assets and business interests identified in VCG's report. The court explained its interpretation of the PMA and concluded that the PMA permitted the use of tracing and marital loans.

         [¶12.] The court did not make a specific fact finding on each event of tracing or marital loan occurring between 1993 and 2013. It instead explained that it provided "a sampling of tracing" that occurred. As an example, the court noted that the parties had stipulated that the value of a particular business interest was $1, 220, 000. Through the use of VCG's testimony on tracing and the marital loan concept, the court found that the parties used a portion of Angela's separate property interest to make capital contributions toward the acquisition of the business interest because Angela's separate funds were placed into the joint account close in time to the parties' acquisition of this asset. The court traced all transactions related to that particular business asset, and because the parties used a portion of Angela's separate property to acquire it, the court concluded that of the $1, 220, 000 value, $1, 023, 967 was Angela's separate property interest and $196, 033 was marital.

         [¶13.] On appeal, Donald does not challenge the court's factual findings in particular. Nor does he dispute the court's list of assets to be valued and the values placed on those assets by the court. Donald also does not dispute the details of VCG's tracing report in relation to particular assets. Rather, Donald contends that the circuit court erred when it interpreted the PMA to permit-in any respect- tracing and marital loans through and to the joint marital account. We, therefore, limit the remaining discussion of the circuit court's findings and conclusions to Donald's issues on appeal.

         [¶14.] In regard to the PMA, the court held that the tracing and marital loan methodologies used by VCG "are appropriate" and are "in accordance with the contract terms set forth in the PMA." The court also recognized that South Dakota law allows for the use of tracing. "'Tracing' is an equitable principle which allows a party with the right to property to trace that property through any number of transactions in order to reach the final proceeds or result." Temple v. Temple, 365 N.W.2d 561, 567 (S.D. 1985). The court noted that Angela's and Donald's experts "agree that when a PMA is involved in tracing, the methodology is tailored to the terms of the contract, thereby departing from the standard methodologies because of the contract terms." The court rejected Donald's argument that under the PMA all property purchased with funds from the parties' joint account became marital property. In the court's view, Donald "isolate[d] one sentence in Paragraph 7 of the PMA to support his claim" and ignored the contract language that the comingling of separate property shall not change separate property to ...

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