Value of luck is key to big-money divorce case

BVWireIssue #149-2
February 11, 2015

When Jed Clampett went to shoot at a critter, he missed his target but tapped into an oil gusher. Old Jed, the lead character in TV’s ”The Beverly Hillbillies,” got rich and moved to the land of swimming pools and movie stars. The “Jed Clampett defense” is what some court pundits are calling the position an oil billionaire took in his recent divorce case, according to an article in The New York Times. The defense is based on the “active versus passive appreciation” concept in divorce law.

Luck versus skill: In some states, if a spouse owns an asset before the marriage, the increase in value of that asset is not subject to division if the increase was due to “passive” appreciation, that is, if the asset’s value increases due to factors outside of either spouse’s control. But if the value increases due to the efforts or skills of a spouse, it is considered “active” and is thus subject to division in a divorce. So the question comes down to luck versus skill.

Harold G. Hamm, chief executive and founder of Continental Resources, claimed that it was luck that brought him the bulk of his fortune, which amounted to $18 billion at one point. He says his skills and efforts were responsible for less than 10% of his personal and corporate success. His wife claimed it wasn’t mostly luck—his skill was responsible for more than 90% of his wealth. The judge in the case, which took place in Oklahoma, largely sided with the husband and awarded the wife about $1 billion. Both sides are appealing.

The parties managed to have the court seal the proceedings, so details of the case are not available, according to Sylvia Golden, executive legal editor at Business Valuation Resources. “The subject is very interesting—active versus passive appreciation—and it does not come up that often. I thought we might see it more because of the huge amounts of money involved in tech start-ups and similar enterprises. But it may also be the case that many of the entrepreneurs make prenuptial agreements that take care of the issue.”

Trying to quantify active versus passive appreciation can be very challenging. The small amount of academic research on this topic has “often found that broader market forces often have a bigger impact on a company’s success than an executive’s actions,” says the Times article.

Please let us know if you have any comments about this article or enhancements you would like to see.