In a dramatic about-face, a divided Arkansas Supreme Court recently decided to get rid of the active appreciation rule—a rule the court had introduced almost 30 years ago when it interpreted a state statutory provision on nonmarital property. What adds to the controversy is that the court decided to overrule its earlier decisions of its own volition. Neither of the parties had advocated for a change in case law.
Trial court follows precedent. The case reached the state Supreme Court after the husband contested a trial court’s decision to award the wife half of the appreciation in value of his company, which was separate property. The appreciation was over $556,000. Performing an active appreciation analysis, the trial court found that the appreciation was the result of the husband’s efforts during the marriage as well as the wife’s contributions to the company.
In contesting the trial court’s analysis, the husband argued that, under the applicable state statute, the increase in value of the nonmarital business remained nonmarital property. But he also acknowledged that in a line of cases the state Supreme Court had used the active appreciation doctrine to carve out an exception to the statutory law. Instead of claiming the controlling case law was wrong on the issue, the husband argued the exception was inapplicable to the facts of the instant case. Therefore, the trial court in this case erred when it awarded the wife part of the appreciation.
High court overrules precedent. A majority of the state Supreme Court performed a different analysis altogether. It began by noting that the applicable statutory provision defines marital property as “all property acquired by either spouse subsequent to the marriage except … the increase in value of property acquired prior to marriage.” Therefore, the court said, “the increase in value of property during a marriage is nonmarital, without exception, and should be returned to the owning party.”
The majority then went on to “expressly overrule” all prior cases in which the court once had “redefined marital property through the ‘active appreciation’ rule.” These cases, and the active appreciation rule, “clearly conflict with the statutory scheme,” the court’s majority said. How to define marital property and how to divide property at divorce is “a matter of policy with which the legislature, not this court, is almost exclusively tasked.”
The majority observed that, over time, some trial courts confused the issue even more by weighing the efforts of both the owner and nonowner spouse in determining whether or not to reclassify nonmarital property as marital property. This happened in the instant case.
In creating the active appreciation doctrine, the judiciary moved the law “too far from the statute,” the high court decided. The only way to correct this “palpable error” was to overturn the prior case law, notwithstanding the legal doctrine of stare decisis, which cautions against overruling precedent.
Majority too activist: Two judges dissented on this issue. Their main contention was that, during the 30 years in which the exception was in effect, the legislature failed to express disagreement with the court’s jurisprudence. Moreover, the question of whether to overrule the active appreciation rule was not in front of the court at this time. It should be reserved for another day, the dissent said.
Takeaway: The Arkansas Supreme Court invalidates the active appreciation doctrine; under the applicable statute, the appreciation in nonmarital property is nonmarital.
A digest of Moore v. Moore, 2016 Ark. LEXIS 82 (March 10, 2016), will appear in the June edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.