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Porter v. Porter

Court of Appeals of North Carolina

March 21, 2017


          Heard in the Court of Appeals 6 October 2016.

         Appeal by plaintiff from order entered 14 October 2015 by Judge Melinda H. Crouch in District Court, New Hanover County. No. 14 CVD 0168

          Wyrick Robbins Yates & Ponton LLP, by K. Edward Greene and Tobias S. Hampson, for plaintiff-appellant.

          The Lea/Schultz Law Firm, P.C., by James W. Lea, III and Paige E. Inman, for defendant-appellee.

          STROUD, Judge.

         Plaintiff 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.


         Husband 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.

         Husband 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.

         Husband 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.[1] 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 dependent spouse.

         The 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.

         After 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.


         Husband 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 follows:

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 discretion.

Mugno v. Mugno, 205 N.C.App. 273, 276, 695 S.E.2d 495, 498 (2010) (citations and quotation marks omitted).

         I. Classification and Valuation of Interest in Rugworks, LLC

         Husband 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."

         Although 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.

         Husband 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.

         Wife 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.

         Husband 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."

         We 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.

         Husband 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.").

         Here, 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 ...

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