Appreciation of Separate Property: A New York Case Study

Plaintiff-Husband and Defendant-Wife met in 2001 and married in 2003. At the date of marriage, Plaintiff-Husband was employed in the financial industry and Defendant-Wife owned an art gallery (“AWI”), which she established in 1995. During the marriage, the Defendant-Wife primarily paid the family’s living expenses and became the sole provider when the Plaintiff-Husband left employment in 2008.

Through AWI, Defendant-Wife performed two separate roles: She managed approximately 30 artists and brokered their artwork, earning AWI between 40% and 50% of the proceeds; and she acquired art for AWI as an investment. AWI is located on property in the Chelsea neighborhood, which was identified by Defendant-Wife in 2002, prior to the marriage, and purchased in January 2005, after the date of marriage. The land was held by an LLC that was owned 100% by Defendant-Wife until 2011, when she transferred a 20% interest into a trust for the parties’ minor child.

Defendant-Wife utilized separate property funds to purchase the Chelsea land, and she used marital funds to pay for AWI’s construction and renovation. AWI opened in the new gallery space in September 2006; however, a portion of the building, approximately 10%, became the parties’ marital residence when renovation was completed in 2007. AWI leased the gallery space from the LLC while the parties resided in the residential portion rent-free.

The trial court, in determining Plaintiff-Husband’s contributions, found he attended gallery-related events with the Defendant-Wife but was not involved in the day-to-day operations, had limited knowledge of Defendant-Wife’s art acquisitions and their value and storage, and did not play any role in representing the artists. Additionally, the trial court found the Plaintiff-Husband’s contributions were detrimental in certain respects. Evidence was introduced that he engaged in inappropriate behavior with a collector, staff members of AWI, and an artist represented by AWI. The trial court found that the Plaintiff-Husband’s economic and non-economic contributions to the marriage began to diminish in 2008 and stopped entirely in 2012/2013.

With respect to AWI and the Chelsea property, the trial court awarded Plaintiff-Husband:

1. Seven and a half percent of the appreciation in the value of AWI;
2. Ten percent of the value of the LLC that held the Chelsea property, without awarding Defendant-Wife a separate property credit; and
3. Ten percent of the marital value of the Chelsea property. Plaintiff-Husband appealed, arguing that the trial court’s decision was unprecedented and extraordinarily punitive and that he received a de minimis percentage of the total assets of the marital estate, which he calculated to be 10.2%.

The appellate court rejected Plaintiff-Husband’s argument for two reasons:

1. Equitable distribution does not require equal distribution; and
2. Plaintiff-Husband failed to take into account the tax consequences allocable to Defendant-Wife in paying Plaintiff-Husband his distributive award.

In its first point, the appellate court noted that precedent provided courts with great discretion in the distribution of assets depending on the nature of the asset, whether the acquisition occurred before or during the marriage, and the contributions each spouse made to any appreciation in value of the asset. The appellate court specifically noted that precedent supported the non-titled spouse receiving a smaller percentage distribution of the value of a business created and managed by the titled spouse.

On its second point, the appellate court, which increased Plaintiff-Husband’s award of the value of the appreciation of AWI to 15%, noted that Defendant-Wife would have to liquidate approximately 30% of the marital portion of AWI’s value to account for the tax consequences in paying Plaintiff-Husband his distributive award. The appellate court noted that this decreased the Defendant-Wife’s retained value of this asset to 70%.

The appellate court also increased the Plaintiff-Husband’s award of the marital portion of the value of the LLC that holds the Chelsea property from 10% to 15%, based on Plaintiff-Husband’s indirect contributions as a spouse and parent over time. However, it also found that Defendant-Wife was entitled to a separate property tax credit.

Separate property, spousal contributions, and appreciation in value are inextricably intertwined, and the relationship among the three is worthy of careful consideration.