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Court of Appeals reverses family court finding that Husband’s three pre-marital rental homes were transmuted into marital property

The March 16, 2011 Court of Appeals opinion in Smallwood v. Smallwood, 392 S.C. 574, 709 S.E.2d 543 (Ct.App.,2011), reversed the family court’s finding that Husband’s pre-marital rental homes were transmuted into marital property.  The family court found these properties were transmuted because the parties lived in two of the properties during their marriage and the properties were paid in full during the marriage from rental income, the parties’ jointly titled bank account, and Husband’s earnings during the marriage.  The family court also found the insurance bill for one property was held in the name of both parties and Wife was a manager of the rental properties.

However, Husband argued that Wife only assisted him in managing these properties during the first few months of the marriage.  Thereafter, she returned to work and he hired property management companies to manage the properties.  He further testified that the rental income from the properties was deposited into his separate account and no marital funds were used to support the rental properties.  Husband also maintained the mortgages on the rental properties were paid with rental income.  He acknowledged Wife assisted with the rental properties by painting, cleaning, and taking lease applications; however, he contended the rental properties were not transmuted into marital property because he never intended to treat them as marital property.

The Court of Appeals noted the record included no evidence Husband commingled the rental properties with marital property, used the rental properties exclusively for marital purposes, or used marital funds to build equity in the rental properties.  It further noted he never placed the rental properties in Wife’s name or transferred the properties to Wife as a gift.

In reversing the family court’s finding that these properties were transmuted, the Court of Appeals noted, “Wife failed to carry her burden of producing objective evidence showing Husband regarded the rental properties as the common property of the marriage.”  Thus, Smallwood continues the recent trend of the Court of Appeals focusing on the property owner’s intent, rather than the other spouse’s intent, in determining transmutation. See alsoPruitt v. Pruitt, 389 S.C. 250, 697 S.E.2d 702 (Ct. App. 2010). The spouse claiming transmutation will always argue it was his or her understanding that the other spouse’s pre-marital property was intended to be treated as marital–otherwise there is no transmutation claim.  Given that transmutation turns pre-marital or inherited property into marital property, this focus on the property owner’s intent is welcome.  Until recently, the family courts have too often found transmutation when there was little evidence that the property owner intended to treat the property as marital.  If the family courts are going to transmute property, it ought to be the property owner’s intent that controls.

However, given this reversal, it’s surprising the Court of Appeals did not award Wife any “special equity” interest in these rental properties due to her admittedly limited assistance in their maintenance and management.  Such “special equity” interest is authorized by S.C. Code § 20-3-630(A)(5).

The Smallwood court rejected the two other issues Husband raised on appeal.  Husband argued that a Southern Union Revolving Fund wasn’t completely marital because it had been partially funded from the sale of non-marital property.  However Husband acknowledged making regular contributions of marital funds into this account and the parties used this account for common purposes during the marriage.  Further Husband produced no evidence that the he had actually deposited non-marital funds into the account.  Based on these factors, the Court of Appeal rejected Husband’s argument that the account was only partially marital.

The final issue on appeal was the family court’s division of a relocation benefit Husband received upon retiring from the Church at which he’d pastored for forty-two years.   The family court found this benefit was partially marital, based on the parties being married for thirteen of the years Husband worked for this Church, and equitably divided the marital portion. Husband argued that this benefit was not marital property because it was not part of his retirement pay and he received it after the divorce proceeding was commenced.  However at trial Husband himself argued the benefit was partially marital.  The first time Husband raised the argument that none of this benefit was marital was in a post-trial Rule 59(e) motion.  Noting that a party cannot raise through a Rule 59(e) motion an issue that could have been raised at trial, the Court of Appeals held Husband failed to preserve this issue for appeal.

 

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