by Benjamin N. Neece, Attorney
Equitable Distribution, in a nutshell, is giving each party to a marriage what they are entitled regarding property acquired during the marriage. As one of the pillars of many divorce proceedings, it is commonly the most complex aspects, requiring extensive research into the lives of individuals going through a divorce. In some instances, the parties to a divorce can amicably agree as to how the property acquired during the marriage shall be distributed, and in some instances where parties fail to agree, distribution may be simple due to the nature, amount, and availability of information regarding marital property. In other instances, the parties cannot agree, and the marital assets are numerous, complex, and difficult to find; this situation can create a very tall task for attorneys in properly representing client interests.
A recent North Carolina case, Uli v. Uli (N.C. App., 2017), breaks down equitable distribution in an effort to comprehensively explain how North Carolina courts are to handle these types of claims. North Carolina courts conduct a three-step analysis to determine what is marital property, what is divisible property, and how to provide for an equitable distribution between the parties. First, the court must identify and classify the property as marital or separate based upon evidence presented regarding the nature of the asset. Next, the court must determine the net value of the marital property as of the date of separation. Lastly, the court must distribute the marital property equitably. Smith v. Smith, 433 S.E.2d 196, 202-203 (1993).
The primary issue presented in Uli is the classification of real property in dispute throughout the proceedings. Classifying property in an equitable distribution case is no walk in the park. Courts must determine whether property is marital or separate. Marital property is “all real and personal property acquired by either spouse or both spouses during the course of the marriage and before the date of separation of the parties, and presently owned, except property determined to be separate property or divisible property…” Separate property is “all real and personal property acquired by a spouse before marriage or acquired by a spouse by devise, descent, or gift during the course of the marriage…” N.C. Gen. Stat. §50-20(b)(2015). “Acquired” is the key term in both definitions. North Carolina courts have adopted a “dynamic” interpretation of the term “acquired” as the courts recognized that acquisition is an on-going process of making payment for a property or contributing to the marital estate, instead of being fixed on the date that legal title to the property is obtained. Wade v. Wade, 330 S.E.2d 616 (1985). With this interpretation, the court realizes that property may have a dual nature consisting of both “separate” and “marital” qualities.
In approaching the issues of identifying the “separate” and “marital” qualities of items of real or personal property, North Carolina has adopted the “Source of Funds” rule. This states that “…when both the marital and separate estates contribute assets towards the acquisition of property, each estate is entitled to an interest in the property in the ration its contribution bears to the total investment in the property…Thus, both the separate and marital estates receive a proportionate and fair return on its investment.” See Smith at 204. In Uli, the trial court initially found that the property was entirely marital property. The Court of Appeals found that the trial court erred in their application of the law and as such improperly classified the piece of property.
In short, the real property was acquired by the Defendant prior to the marriage, classifying it as separate prior at the time of acquisition. Shortly thereafter, Defendant and Plaintiff were married, moved into the house, and encumbered it with a mortgage and made improvements. Despite the trial court not making any findings as to improvements made to the property, evidence is present that shows at least a portion of the money from encumbering the property was used to improve the property. Upon applying the “Source of Funds” Rule, the Court of Appeals takes the stance that value of the property prior to the marriage is separate in nature. Once the parties moved in, encumbered, and made improvements, the property is converted to a dual nature with both the Defendant’s separate estate and the marital estate having proportionate interests in the property. It is at times very complex, difficult, time consuming, and expensive to accurately divvy up the marital estate, but in the pursuit of equity and fairness, North Carolina courts are second to none.