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Misunderstanding passive depreciation in equitable distribution

South Carolina family law distinguishes active depreciation or appreciation–changes in value due to the deliberate efforts of one party–from passive depreciation or appreciation–changes in value that do not reflect either spouse’s post date-of-filing efforts.  While the date of filing is typically the date of valuation for equitable distribution of marital assets, the family court has the ability to use a later valuation date–typically the date of trial–for assets that have changed in value since the date of filing due to passive appreciation or depreciation.  This active versus passive approach to post-filing changes of value was formally ratified by the South Carolina Supreme Court in the case of Burch v. Burch, 395 S.C. 318, 717 S.E.2d 757 (2011).

The reasoning behind this approach is generally sound.  If an asset has increased or decreased in value due to one spouse’s efforts, that party should receive the benefit of that effort–or suffer the consequences of deliberate destruction of an asset, as happened in Dixon v. Dixon, 334 S.C. 222, 512 S.E.2d 539, 545 (Ct.App. 1999).   In contrast, when the asset has changed value merely due to the passage of time, both parties should share in the benefit or loss of that changed value.

The concept of passive depreciation becomes muddled, however, when one party has use and control of an asset that naturally depreciates with time.  A piece of fruit is an obvious, if picayune, example.  An uneaten banana quickly rots into something that has no value.  In a passive appreciation approach the banana purchased just before the moment of filing has no value because it has rotted by the date of trial.

Yet the idea that a banana has no value because it will rot is absurd–if you dispute this try liberating one from your local grocer without paying for it and see how they react.  When one purchases a banana one obtains the right to use that banana as one sees fit.  One can eat it, give it away, use it as a method of attracting fruit flies, or simply let it rot into nothingness.  Its “value” derives not merely from its use but from the right to control its use.

A less absurd example is automobiles.  These assets depreciate rapidly, especially during their first few years of existence.  It is not uncommon for such vehicles to be worth half as much on the date of trial as on the date of filing.  Litigants who had use of these vehicles during the litigation process will often argue for a date of trial valuation by arguing passive depreciation.  This is a confusion of the concept that the courts occasionally accept–as it did in an unpublished appeal I handled in Fernandes v. Fernandes in which it refused to credit Wife with the $5,000 depreciation in a Toyota Rav-4 that she drove during the litigation but which the court ultimately awarded to Husband.  The Court of Appeals’ reasoning was “the depreciation presumably occurred through no fault of either party.”

Making “fault” a required element of active depreciation leads to this conceptual error.  The Rav-4 at issue depreciated during the litigation because Wife had use of the vehicle during this time period.   While keeping the vehicle garaged and covered would have resulted in less depreciation than heavy use and minimal upkeep, the mere passage of time contributed to that vehicle’s depreciation.  Yet this depreciation should have been properly attributed to Wife as she benefited from the right to use the vehicle during the litigation period.  Had she sold it on the date of filing and deposited the funds into a zero-interest account there would have been no depreciation and hence no diminution of value.

Confusing fault with active depreciation–and lack of fault with passive depreciation–creates this conceptual error.  When a party has enjoyed the right to control the use of a valuable and depreciating asset during the litigation period, that party should be charged with the deprecation in deciding equitable distribution.

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