$1B divorce settlement highlights appreciation factors

Typically, when determining division of assets in divorce proceedings, the courts split marital earnings equitably. In the case of a one-income family, it is presumed that while one spouse was off making decisions, directing, advising and earning on the job, the other was home making decisions, directing, advising and saving. It is argued that the stay-at-home spouse supports the working spouse allowing him/her to earn more than he/she would without a partner. It is also assumed that the stay-at-home spouse had the potential to earn and somewhere along the way opted to “sacrifice” those earnings for the good of the family. Since both parties benefitted from the stay-at-home spouse’s efforts, both should also benefit from the working spouse’s income. This works the same whether the worker is increasing his or her salary at a company or improving the value of a family business.

asset appreciationIn the case of a family-owned business, there is also appreciation to consider. As an interesting recent case in Oklahoma demonstrates, the courts will take active vs. passive appreciation into account when considering asset division in divorce.

The New York Times reported on the recent $1B divorce settlement between Continental Resources founder Harold Hamm and his wife. Appreciation arguments were at its core. “The Hamm case hinged on a quirk in divorce law known as ‘active versus passive appreciation.’ In Oklahoma, and many other states, if a spouse owns an asset before the marriage, the increase in the value of an asset during marriage is not subject to division if the increase was because of ‘passive’ appreciation. Passive appreciation is when an asset grows on its own because of factors outside either spouse’s control, like land that appreciates without any improvements or passively held stocks. Any value that’s not deemed as ‘passive’ is considered ‘active’ — meaning it increased because of the efforts, skills or funding of a spouse and can therefore be subject to division in a divorce.”

Typically the assumption would be that Hamm’s wife supported him allowing him to do the active work of growing the company, she should be entitled to half of his assets gained from his success with the company (recently valued at approximately $18B). Hamm’s attorneys argued that the increased value was dependent on positive market conditions and smart employees and not the work of its founder and CEO. They deemed the company’s appreciation as “passive” claiming “only 5 to 10 percent of his wealth came from his own effort, skill, management or investment,” according to The New York Times article, “Are CEOs that talented, or just lucky?

As attorney Kathryn Wayne-Spindler summed up Hamm’s argument, “She didn’t have anything to do with the growth of the company because I didn’t even have anything to do with it.”

In Michigan, the active vs. passive appreciation factoring also applies.

According to The New York Times, “Mr. [Harold G.] Hamm, the chief executive and founder of Continental Resources, who was worth more than $18 billion at one point, wrote his ex-wife a check last month for $974,790,317.77 to settle their split. She’s appealing to get more; he’s appealing to pay less.”

Sources:

The New York Times, “Are CEOs that talented, or just lucky?” Robert Frank, February 8, 2015. http://www.cnbc.com/id/102407091