in the Court of Appeals 6 October 2016.
by plaintiff from order entered 14 October 2015 by Judge
Melinda H. Crouch in District Court, New Hanover County. No.
14 CVD 0168
Robbins Yates & Ponton LLP, by K. Edward Greene and
Tobias S. Hampson, for plaintiff-appellant.
Lea/Schultz Law Firm, P.C., by James W. Lea, III and Paige E.
Inman, for defendant-appellee.
Jeffery Lawrence Porter ("Husband") appeals from
the trial court's equitable distribution order filed 14
October 2015. Husband argues that the trial court erred in
the classification, valuation, and distribution of his 1/3
interest in Rugworks, LLC and that the court erred in
awarding defendant Sheila Joy Porter ("Wife") a
distributional award payable over 15 years subject to an
eight percent interest rate. Although the trial court
properly classified and divided Husband's business
interest in Rugworks as marital property, the court's
order does not properly set out the distributive award
Husband must pay to Wife. Accordingly, we reverse the
court's order in part and remand for the trial court to
enter an order clearly establishing the distributive payment
due, interest rate, and terms of payment.
and Wife were married on 12 April 1996 and had two children
during the marriage. In April 1998, Husband started a
business, Rugworks, LLC ("Rugworks") with two
business partners. Each partner had a 1/3 interest in the
business, and Husband invested $50, 000.00 from a separate
retirement account to acquire his 1/3 interest. Husband
worked full time with Rugworks during the marriage, while
Wife worked during part of the marriage as a respiratory
therapist before eventually becoming a stay-at-home mother
after the birth of their second child, as she remained until
the parties' separation.
and Wife moved to Wilmington, North Carolina, in 2006, where
they had both grown up, in order to relocate a second
Rugworks store from Myrtle Beach, South Carolina to Leland,
North Carolina. At that time, Husband became the main
operator of the relocated store and solely supported the
family from this employment until he and Wife separated.
Husband also formed a business known as R.W. Management
Company with his Rugworks partners to purchase and lease land
to Rugworks. R.W. Management Company was formed after the
marriage of the parties and there was no evidence presented
of any separate property invested in its acquisition.
and Wife separated on 2 December 2013. Husband filed his
complaint on 15 January 2014 with claims for child custody
and equitable distribution. Wife answered and included
counterclaims for alimony, child support, child custody, and
equitable distribution. All of the pending claims were tried
together on three days, starting on 16 June 2015 and ending
on 22 June 2015. The trial court rendered its rulings on all
of the claims orally on 28 July 2015, but the trial court
ultimately entered three separate orders. On 15 September
2015, the trial court entered a child custody order granting
joint custody, with Husband having primary physical custody
of one child and Wife having primary physical custody of the
other. A few weeks later, on 14 October 2015, the
court entered an order denying Wife alimony on the basis that
she had not presented sufficient proof that she was a
trial court also entered its equitable distribution order on
14 October 2015. In the order, the court found that the
parties had stipulated to the values of several items of
personal property and financial accounts. The primary dispute
in the equitable distribution portion of the trial was the
valuation of Rugworks and R.W. Management. The trial court
found that Husband invested $50, 000.00 of separate funds
into Rugworks when it was formed and that at the time of
trial, the business had gross revenues around $10, 000,
000.00 per year. The court also found that Wife's expert
was a qualified business valuation expert and noted the
valuation techniques he relied on to determine revenue and
profits of Rugworks, specifically the "capitalization of
earnings" technique, which the trial court found to be
"the most credible methodology." The court
concluded that Husband's expert, in contrast,
"expressed limited knowledge in the area of business
valuations and had not conducted any of the preferred methods
of business valuations on Rugworks." As for R.W.
Management, the court found that the fair market value of its
real estate on the date of separation was $1, 400, 000.00.
The trial court also found that Husband's 1/3 interest in
the real estate alone was $148, 482.00 and that his interest
in the net real estate value and receivable value was a total
of $198, 553.00.
considering a variety of potential distributional factors,
the trial court concluded that an equal distribution would be
equitable. The court found that Husband "should be
required to pay a distributional payment to Wife in the
amount of $348, 050.00." After concluding that Husband
had insufficient assets to pay this amount by making payments
of over $5, 000.00 per month within six years at no interest,
the court instead concluded that Wife "will need to be
paid her distributional payment over a period of time with
interest applied at the legal rate of eight percent
(8%)." The trial court's order contains a section
regarding the distributional payment, which states: "In
order to equalize the distribution of the parties' assets
and debts, Husband shall pay a distributional payment to Wife
in the amount of $348, 050. Beginning October 1, 2015,
Husband shall pay to Wife $3, 326.15 per month for a period
of 180 months to satisfy this payment." Husband timely
appealed to this Court.
raises two issues on appeal regarding the trial court's
equitable distribution order related to Husband's
interest in Rugworks. This Court has previously explained its
standard of review in equitable distribution cases as
On appeal, when reviewing an equitable distribution order,
this Court will uphold the trial court's written findings
of fact as long as they are supported by competent evidence.
However, the trial court's conclusions of law are
reviewed de novo. Finally, this Court reviews the
trial court's actual distribution decision for abuse of
Mugno v. Mugno, 205 N.C.App. 273, 276, 695 S.E.2d
495, 498 (2010) (citations and quotation marks omitted).
Classification and Valuation of Interest in Rugworks,
first argues that the trial court erred in its classification
and valuation of Husband's 1/3 interest in Rugworks. At
trial, Husband's main argument regarding his interest in
Rugworks was based upon valuation. Husband presented expert
valuation testimony from an accountant that as of December
2013, Rugworks had a negative value. Ultimately, the trial
court found that Wife's valuation expert used the most
credible valuation technique. Wife's expert, Dr. Craig
Galbraith, testified regarding several valuation methods he
compared when determining the value of Rugworks, and he
determined that it had a positive value around $1.8 million.
The trial court specifically found his valuation method more
credible than that presented by Husband's expert and
relied on it when determining a marital value of $566, 931.00
for Husband's 1/3 interest in Rugworks after deducting
his $50, 000.00 separate contribution. Husband's only
argument on appeal regarding the valuation method adopted by
the trial court is an alternative claim that the court
"adopted Galbraith's 'average' of his
various valuation methods" but that this calculation
"appears to be a mathematical error."
Husband seeks to treat his argument on appeal as one
regarding valuation, really his arguments predominately
address classification. At trial, he put all of his eggs in
the valuation basket, while on appeal he asks that we
consider the classification basket. Husband's arguments
on appeal, including those disguised as valuation arguments,
are based upon the premise that some portion of Rugworks
other than the initial $50, 000.00 investment should have
been classified as his separate property.
now argues that as part of its improper valuation of
Rugworks, the trial court erred in its
classification of Husband's 1/3 interest in
Rugworks. Specifically, Husband notes that the trial court
found, in Finding of Fact No. 16, that Husband acquired his
1/3 interest in Rugworks with $50, 000.00 of separate
property. Husband argues that the trial court did not
expressly value his interest in Rugworks either upon
distribution or when it was acquired and that it should have
classified Husband's 1/3 interest in Rugworks as separate
property at the time of separation. The court did describe
Husband's 1/3 interest, less the $50, 000.00 separate
contribution, as having "a total marital value of $566,
931.00." Nevertheless, Husband contends that "it is
evident the trial court considered the 1/3 interest to be
marital property, with the exception of the $50, 000
contribution of separate property. The evidence and trial
court's own findings, however, establish the 1/3 interest
in Rugworks is [Husband's] separate property." But
Husband's argument that his 1/3 interest must be
classified entirely as separate has no foundation in the
evidence presented at trial.
argues that Husband "should be barred from asserting
that Rugworks is not marital property because with the
exception of the $50, 000.00 initially invested by [Husband,
] there was no dispute regarding the classification of the
Rugworks, LLC property until this appeal." Wife notes
that although Husband was obligated under N.C. Gen. Stat.
§ 50-21(a) (2015) to file an initial inventory listing,
which is supposed to identify any property alleged to be
separate, he failed to file this inventory. See N.C.
Gen. Stat. § 50-21(a) ("Within 90 days after
service of a claim for equitable distribution, the party who
first asserts the claim shall prepare and serve upon the
opposing party an equitable distribution inventory affidavit
listing all property claimed by the party to be marital
property and all property claimed by the party to
be separate property, and the estimated
date-of-separation fair market value of each item of marital
and separate property." (Emphasis added)). Nor did the
pretrial order addressing the issues to be decided in the
equitable distribution trial identify classification of
Rugworks as one of the issues for the trial court to decide.
The pretrial order provided as follows:
9. For the purposes of equitable distribution, the parties
agree that the following are the issues to be decided by the
Court: . . . .
E. Value of Rugworks, LLC;
F. Value of R.W. Management;
(Emphasis added). On the schedules of the pretrial order
setting forth the items of property and parties'
contentions of values and classification, Wife contended that
Rugworks and R.W. Management were marital property,
designated by "M." Husband left the column for his
contention as to classification blank, although he had filled
in the same column for other items of property on the same
page as "M." Notably, he did not fill in the
classification blank with "S" for
"separate." Husband notes that he did not stipulate
to classification of Rugworks or R.W. Management, but Wife
responds that he also did not make any direct contentions or
argument regarding classification of any portion other than
the initial $50, 000.00 investment as separate property. In
fact, he did not even argue in closing that the trial court
should classify any portion of Rugworks other than the
initial $50, 000.00 investment as separate. Instead, his
position at trial was that Rugworks had a negative value as
of the date of separation.
responds that "[t]he question before the trial court was
whether there was any increase in the value of Mr.
Porter's 1/3 interest in Rugworks which could be valued
as marital property." He contends that Wife has made
"general assertions about stipulations -- but points to
no stipulation in the record. Nothing in the pre-trial order
indicates the classification and valuation of
'Rugworks' has been stipulated to or decided. To the
contrary, Rugworks, and [Husband's] 1/3 interest, were a
central issue at trial. In closing arguments to the trial
court, [Husband's] trial attorney argued the 1/3 interest
in Rugworks should not be distributed at all because it had
no value (or really a negative value) based on the evidence
from [Husband's] accountant."
recognize that to some extent classification and valuation
arguments at trial were perhaps conflated, and Husband is
correct that there was no stipulation as to classification,
although the parties did stipulate to the classification and
values of several items of property and to the issues to be
determined by the trial court in the pretrial order. We will
therefore generously assume that Husband did preserve the
issue of classification for appeal, despite his failure to
note it in his inventory or the pretrial order.
argues that a trial court's classification of property
should be reviewed de novo, noting our case law that
states: "Because the classification of property in an
equitable distribution proceeding requires the application of
legal principles, this determination is most appropriately
considered a conclusion of law." Hunt v. Hunt,
112 N.C.App. 722, 729, 436 S.E.2d 856, 861 (1993). More
importantly, however, Husband and Wife both correctly note
that this Court has long held that in an equitable
distribution proceeding, the party seeking the specific
classification has the burden of proving that classification
by the preponderance of the evidence. See, e.g., Brackney
v. Brackney, 199 N.C.App. 375, 383, 682 S.E.2d 401, 406
(2009) ("In equitable distribution proceedings, the
party claiming a certain classification has the burden of
showing, by a preponderance of the evidence, that the
property is within the claimed classification.").
Moreover, "[w]hen marital efforts actively increase the
value of separate property, the increase in value is marital
property and is subject to distribution." Conway v.
Conway, 131 N.C.App. 609, 615, 508 S.E.2d 812, 817
(1998) (citations omitted). "Any increase is
presumptively marital property unless it is shown to be the
result of passive appreciation." Id. at 616,
508 S.E.2d at 817. See also O'Brien v.
O'Brien, 131 N.C.App. 411, 420, 508 S.E.2d 300, 306
(1998) ("[T]he party seeking to establish that any
appreciation of separate property is passive bears the burden
of proving such by the preponderance of the evidence.").
Wife met her burden of showing that Husband's 1/3
interest in Rugworks was marital, as it was acquired during
the marriage and owned on the date of separation. But the
only evidence Husband presented as to a separate
classification of any portion of Rugworks was the evidence of
his initial $50, 000.00 investment from his separate funds.
To the extent that there was any evidence as to the
appreciation of Husband's 1/3 interest during the
marriage, it indicated that the appreciation was active, not
passive. Husband was employed full-time with Rugworks during
the marriage and he and his partners worked to expand the
business for many years. No evidence of passive appreciation
of Rugworks was presented at trial. To the contrary, the
court heard testimony that Husband played a key role in
managing Rugworks during the course of the marriage ...