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Brennan v. Brennan

Supreme Court of Alaska

August 10, 2018

KELLY BRENNAN, Appellant,
v.
RACHAEL BRENNAN, Appellee.

          Appeal from the Superior Court No. 3HO-12-00 166 CI of the State of Alaska, Third Judicial District, Homer, Charles T. Huguelet, Judge.

          Dan O'Phelan, Law Office of Dan O'Phelan LLC, Homer, for Appellant.

          Rachael Brennan, pro se, Homer, Appellee.

          Before: Stowers, Chief Justice, Winfree, Maassen, Bolger, and Carney, Justices.

          OPINION

          STOWERS, Chief Justice.

         I. INTRODUCTION

         This appeal presents a variety of issues relating to the divorce of Kelly and Rachael Brennan. At the time of separation, the couple controlled substantial assets, including a successful fishing business, Individual Fishing Quotas (IFQs) that Kelly obtained prior to his marriage to Rachael, and a large home in Halibut Cove. The court ordered Kelly to pay $5, 000 per month as interim spousal support. After trial, the superior court determined that the IFQs had become marital property through transmutation, and it divided most of the marital estate 50/50. The property division included the proceeds from two post-separation sales of IFQs; the court also awarded Rachael half the gross proceeds from the post-trial sale of the couple's fishing vessel, the F/V Alaska.

         Kelly appeals. He argues that the IFQs were his separate property not subject to division; he also challenges several other aspects of the court's property division, arguing that the court abused its discretion in failing to account for various tax liabilities, payments, alleged damage to marital property, and other factors that he contends unfairly favored Rachael. We conclude that the superior court applied the wrong legal standard to its transmutation analysis regarding the IFQs. We therefore reverse the determination that the IFQs were marital property, and reverse the award to Rachael ofproceeds from post-separation IFQ sales. We remand for the superior court to reconsider these issues as well as the overall equitable property distribution, and to explain its reasoning for awarding Rachael gross rather than net proceeds from the sale of the F/V Alaska. We find no error or abuse of discretion regarding the other points raised on appeal.

         II. FACTS AND PROCEEDINGS

         A. Facts

         Kelly Brennan is a lifelong fisherman. He formed the fishing business Eclipse, Inc. with his first wife, Mary, in 1981. Through his work as a fisherman, he acquired IFQs from the federal government, giving him the right to harvest specified amounts of halibut and sablefish.[1]

         Kelly and Rachael Brennan met in the summer of 1991 when Rachael was in her early 20s and Kelly was in his early 30s. Rachael was working for a fish buyer at the time, but she left her job to be with Kelly and began helping him with his fishing business. The couple married in July 1994. During their marriage, Kelly's settlement agreement with his ex-wife required Kelly to make payments to her, which both he and Rachael labeled "IFQ payments." Kelly's ex-wife apparently also had a lien on the IFQs. Kelly was responsible for all of the administrative tasks related to registering and using IFQs during his marriage to Rachael.

         The fishing business was very successful and consistently produced high spendable income. With the help of proceeds from the sale of some IFQs, the couple built the largest home in Halibut Cove at 6, 500 square feet with an apartment, barn, dock, and outbuildings on 19.5 acres.

         The parties dispute the extent of their respective contributions to the fishing business. Kelly fished and maintained the F/V Alaska, and delegated all bookkeeping to Rachael. Rachael testified to running errands for the business, outfitting and cleaning the boat, helping obtain parts for the boat, paying bills, maintaining financial records, tracking licenses, and performing other tasks.

         The couple separated in April 2011 and split a substantial amount of what were apparently marital funds at the time.[2] Kelly continued to receive the income produced by the fishing business. He bought land and built a house in Seldovia that he titled in his new girlfriend's name, and in October 2011 he sold a number of IFQs to one of his deckhands for $110, 022.

         Rachael, who has a high school diploma, lived off what money Kelly chose to give her. She claimed this consisted of an initial $84, 000 after separation-of which she later returned $24, 000 - plus an additional $15, 000 in the summer of2012. Kelly did not initially contest those figures-although he later claimed the initial payment was $86, 000 - but he asserted that Rachael received additional amounts, for a net total of over $ 150, 000 in the first few months after separating, in addition to the $ 15, 000 he gave her in 2012. The bulk of the difference appears to be a $74, 000 transfer which Kelly claimed went to Rachael, but which Rachael asserted went to their joint "tax account" and not to her individually. Rachael also used her credit card and loans from friends to support herself.

         B. Proceedings

         Kelly filed a complaint for divorce in May 2012. Rachel filed a motion for interim support, interim possession of the marital home, and attorney's fees in August 2012. In his opposition, Kelly requested financial records and an accounting of what Rachael had done with the money he had already given her. After a hearing in November 2012, the superior court awarded Rachael exclusive possession of the Halibut Cove home, ordered the parties to prepare to sell the home, and ordered Kelly to pay Rachael $5, 000 per month in interim spousal support effective November 1. The court found that this amount would allow Rachael to keep the property in a condition that could be shown to potential buyers. The court also ordered Kelly to pay Rachael $ 10, 000 in attorney's fees. Kelly did not pay the attorney's fees, and did not consistently pay the court-ordered spousal support.

         In May 2013 the court ordered Kelly to sell a batch of IFQs worth about $83, 905 so he could pay spousal support arrears and Rachael's attorney's fees. The IFQs were technically held by Eclipse, Inc.; the court later explained that Kelly used corporate assets as if they were his personal assets, and it therefore treated them as such, effectively disregarding the corporation for purposes of the property division at divorce.[3] The court ordered that $18, 000 be used to pay off a lien Kelly's ex-wife apparently had on the IFQs; that money for any taxes on the sale be put in an escrow account; that the broker's fee be paid; and that a sum of $50, 000 be put in Rachael's law firm's trust account for the payment of spousal support arrears, on-going spousal support for June and July 2013, and attorney's fees.

         Kelly thereafter filed motions requesting that Rachael be required to disclose financial records relating to the marital estate in order to find out whether she was really spending $4, 000 a month on property maintenance as she claimed. Rachael opposed Kelly's motions, yet the court failed to rule on them.

         After a two-day trial in July 2013 the court issued findings of fact and conclusions of law. First, the court found that Kelly's previously separate IFQs were transmuted during the marriage into marital property. The court reasoned that because Kelly gave Rachael an active role in the fishing business for "nearly 20 years," made payments using marital income from the fishing business for his ex-wife's interest in the IFQs and also sold some of his IFQs to purchase marital property, Kelly demonstrated both the conduct and intent necessary to transmute presumptively separate property obtained before marriage into marital property subject to division. At the time of trial, these remaining IFQs were worth $682, 868.

         Second, the court determined that a 50/50 division of the marital assets was equitable despite Rachael's lack of skills and Kelly's status as a successful fisherman.[4]The court considered Kelly's contribution of his successful pre-marital business to the marriage, his age, and medical issues that would eventually limit his ability to fish commercially. Consequently, the court awarded the fishing business, including the IFQs, to Kelly, but ordered that Rachael be paid her 50% share of the business value from the sale of the Halibut Cove home and property. At the time the court issued its decision, the house had not sold but was listed at approximately $2.8 million dollars.

         Third, the court stated that "[t]he parties' personal property was valued and/or allocated on the record at trial. The remainder of the couple's personal property [was] to be sold at auction and the proceeds divided . . . 50/50." The court denied Kelly's subsequent motion for clarification on this issue.

         Fourth, the court ruled that Kelly was "entitled to an offset for the $ 15, 000 provided to [Rachael] in 2012, and an amount equal to one half of [the] pretrial spousal support" because the amount "included funds needed for upkeep of the jointly owned home." The court also ordered Kelly to pay Rachael $1, 000 per month for one year in spousal support and $10, 000 in attorney's fees.

         Finally, the court recognized that Kelly claimed Rachael had failed to rent an apartment on the couple's property and allowed it to deteriorate after he left the home, but the court provided no offset for the alleged damage. The court awarded Rachael $55, 000 from the proceeds from Kelly's October 2011 IFQ sale to his deckhand for $110, 022. The court also ordered that Rachael be paid $35, 000 as her half of the proceeds of the sale of the F/V Alaska, marital property that Kelly had sold for $70, 000 following trial.

         Kelly filed an Alaska Civil Rule 60(b) motion raising the issue of the $74, 000 transfer, which he claimed was deposited into Rachael's personal account, and he asked for an evidentiary hearing on the issue. The court denied his motion and request for an evidentiary hearing. Kelly appeals.

         III. STANDARD OF REVIEW

         "[T]he characterization of property as separate or marital may involve both legal and factual questions."[5] "Underlying factual findings as to the parties' intent, actions, and contributions to the marital estate are factual questions."[6] "Findings of fact are reviewed for clear error, but whether the trial court applied the correct legal rule in exercising its discretion is a question of law that we review de novo using our independent judgment."[7] We review the equitable allocation of property for an abuse of discretion.[8] "Additionally, the trial court must render findings of ultimate fact that support any decreed property division; the findings must be explicit and sufficiently detailed to give this court a clear understanding of the basis of the trial court's decision."[9] "Whether a superior court's findings are sufficiently clear is a legal question, which we review de novo."[10]

         A motion for "clarification" that asks the court to reconsider substantive matters is treated as a motion for reconsideration, and its denial is reviewed for abuse of discretion.[11] The award of interim spousal maintenance under AS 25.24.140(a)(2) is committed to the sound discretion of the trial court and reviewed for abuse of discretion.[12] "The superior court must base its interim support order on sufficient factual findings concerning the parties' needs and ability to pay."[13]

         The trial court's failure to rule on Kelly's request for disclosure effectively acted as a denial of that request; we review the denial of a request for disclosure for abuse of discretion.[14] "Whether there was a violation of due process is a question o flaw, which we review de novo."[15] However, we will "disregard any error or defect in the proceeding which does not affect the substantial rights of the parties."[16] The denial of a Civil Rule 60(b) motion is generally reviewed for an abuse of discretion, [17] as is the denial of a request for an evidentiary hearing on the subject of a Rule 60(b) motion.[18]

IV. DISCUSSION

         Under Alaska law, equitable division of marital assets involves three steps: (1) determining the specific property available for distribution; (2) valuing the available property; and (3) equitably dividing property available for distribution.[19] In order to complete the first step, the court must characterize assets as separate or marital, the latter being subject to division.[20] Property acquired by one spouse prior to the marriage is separate property, which is not divisible but subject to "invasion" only "when the balancing of the equities between the parties requires it."[21] Marital property generally includes all property acquired during the marriage, except for property received by one spouse as a gift or inheritance, and property acquired in exchange for separate property which is maintained as separate.[22] However, initially separate property may "transmute" into marital property through an implied interspousal gift.[23] Once the trial court has determined what property is marital and valued that property, it must equitably divide it between the parties. An equal division of property is presumptively equitable, [24] but the trial court has broad discretion in this area.[25]

         Kelly argues that the superior court erred by (1) finding that the IFQs were marital property subject to division via the doctrine of transmutation; (2) failing to offset the value of personal property orally awarded to Rachael at trial in its written property division; (3) failing to credit Kelly for overpayment of spousal support; (4) failing to address alleged payments to Rachael of $74, 000 and $20, 000 or to provide an evidentiary hearing on the subject of the $74, 000 payment when raised in a Rule 60(b) motion; (5) failing to account for damage to the marital apartment allegedly caused by Rachael in its property division; (6) failing to rule on requests for records regarding the cost of maintaining the marital home; and (7) failing to credit Kelly for tax payments he made on the post-separation sale of IFQs and the F/V Alaska.

         A. The Superior Court Applied An Incorrect Legal Standard When Determining That The IFQs Transmuted To Marital Property.

         We have established that an IFQ creates a property interest that may be subject to division in a divorce.[26] The superior court found that the IFQs were all based on work Kelly performed before he married Rachael, so the IFQs were his separate property when he entered the marriage.[27] However, the superior court found that because Kelly made payments for the IFQs to his ex-wife using marital income from the fishing business, because Kelly sold IFQs to pay for the marital home, and because Rachael had been working in the fishing business for nearly 20 years, the evidence established an "intent to treat the IFQs as marital." On that basis, the superior court determined that the IFQs had all been transmuted to marital property and were subject to division.

         Kelly challenges the superior court's transmutation finding by arguing that (1) no evidence supports that the parties took the actions relied on by the court to find transmutation and the basis for the finding is clearly erroneous and (2) the court's finding that the parties' alleged conduct demonstrated an intent on his part to treat the IFQs as marital was based on a misapplication of our case law.

         As we recently explained in Kessler v. Kessler, our prior opinions have not always been precise in describing the transmutation doctrine.[28] For the superior court to find transmutation by implied interspousal gift, it is not enough to show that a married couple has demonstrated "an intent... to treat one spouse's separate property as marital property."[29] First, the relevant intent is not that of the "married parties" or the "couple," but only that of the owning spouse - the spouse whose separate property is in question.[30] Second, the intent that must be shown is not merely intent to "treat" separate property as marital, in the sense of sharing the property during the marriage.[31] Rather, the relevant question is whether the owning spouse intended "to 'donate' or 'convey' separate property to the marital unit or marital estate."[32] The following sections discuss each of the trial court's factual findings and how they relate to this standard.

         1. IFQ sales during the marriage

         The superior court's transmutation determination was based in part on its finding that IFQs "were sold to pay for marital assets." Kelly argues that there was no evidence of any sale of IFQs during the marriage. But Kelly testified that he sold two partial IFQs to buy property in Halibut Cove that was titled in Rachael's name. This testimony is consistent with concessions in Kelly's brief. In light of these concessions and evidence in the record, the superior court did not clearly err in finding that IFQ sales occurred during the marriage. However, as we noted in Thomas v. Thomas, the use of some separate property to cover marital expenses does not necessarily render other separate property marital.[33] The sale of separate property IFQs to fund the construction of a marital home titled in Rachael's name is not relevant to determining whether Kelly had the intent to convey the remaining IFQs to the marital estate. To the extent this sale was evidence of Kelly's intent to convey any separate property to the marital estate, that property is the Halibut Cove home.

         2. Rachael's contribution to the fishing business

         The transmutation analysis was also based in part on Rachael's work "as bookkeeper and onshore liaison for the [fishing] business" for "nearly 20 years." Kelly argues that "there was little to nothing admitted at trial that showed Rachael worked at all with the fishing business" and no evidence as to when she may have performed this work. There certainly is conflicting testimony on this point, but there is ample support in the record for the court's factual determination that Rachael kept the books and acted as an onshore liaison for the fishing business when Kelly was at sea. The couple's long time friend testified to observing Rachael doing various work required to operate the fishing business. Rachael testified to running errands for the business, outfitting and cleaning the boat, helping obtain parts for the boat, paying bills, maintaining financial records, tracking licenses, and performing other tasks. Kelly conceded that for the most part he delegated all bookkeeping to Rachael, though he repeatedly characterized her contributions as minimal. Given the support in the record and the deference we give to the credibility determinations of the trial court, [34] the court did not clearly err in finding that Rachael contributed to the fishing business.

         But in order for the non-owning spouse's contribution to a separate property business "to be relevant to the owning spouse's donative intent, 'the non-owning spouse's "participation must be significant and evidence an intent to operate jointly."' "[35] Although we can glean from the trial court's analysis that it considered Rachael's contribution "significant," the court did not appear to consider whether that contribution specifically evidenced an intent on Kelly's part to operate the fishing business jointly and therefore to convey to the marital unit either the IFQs or the corporation that held them, Eclipse, Inc. Because the court's findings of donative intent are not "explicit and sufficiently detailed to give this court a clear understanding of the basis of the trial court's decision, "[36] they are insufficient to support the transmutation determination.

         We note, however, that even in the absence of donative intent sufficient to support a finding of transmutation for either the business or the IFQs, Rachael's contributions may still have given her an interest in the fishing business under the doctrine of active appreciation. Under this doctrine, some portion of a separate-property business might be marital property if marital contributions to the business caused some appreciation in its value during the marriage.[37]

         3. IFQ purchases during the marriage

         Finally, the trial court's transmutation analysis was based on its finding that "marital funds were used to purchase the IFQs." Kelly asserts that "[t]here was never any evidence at trial that any IFQs were purchased during Kelly's marriage to Rachael" nor any evidence that Kelly "used marital income to pay any expenses for the IFQs." The critical disagreement between Kelly and the court is over the evidence for and characterization of Kelly's payments to his ex-wife Mary, who apparently had liens against Kelly's IFQs. Kelly asserts the evidence only supports that he paid down a general debt arising from his first marriage. The court viewed the payments as the purchase of IFQs with marital income.[38]

         The evidence surrounding the settlement agreement between Kelly and his first wife and payments pursuant to that agreement is scant, as the superior court acknowledged, but it is sufficient to support a finding that the payments to Mary were for the IFQs specifically, and not for a "general debt." When questioned about the terms of his prior divorce settlement, Kelly testified that he "had to reimburse [Mary] for some halibut shares" but that he was "done paying her" at the time of trial. At a status hearing, Kelly testified that Mary had a lien on the court-ordered sale of IFQs, and the IFQ sale document noted that Mary "has a lien against these shares with a balance due of approximately $18, 000." And as the court noted in its findings, Kelly's financial declaration from October 2012 lists a yearly expense of $17, 500 labeled "IFQ payment."[39] Finally, given that the ...


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