Employee forgivable loans; appreciation of nonmarital accounts;and minority discount - Divorce opinion from Ky Court of Appeals



In a dissolution of marriage proceeding with complex assets, Husband appealed on a variety of asset classification, valuation, and division issues.


Husband first argues that “the trial court improperly classified as marital the encumbered funds in his employee incentive program.” Husband’s Employee Transition Program (“ETP”) work incentive consisted of forgivable promissory notes. The loans matured over nine years and were forgiven at intervals as long as Husband stayed with the business. The forgiven ETP debt appeared on Husband’s paycheck as income. The trial court found that the ETP funds were marital and the total bonus amount should be treated as marital to the extent that it vested during the marriage.


The Court of Appeals disagreed holding that the trial court erred because the ETP fund value was “offset by the outstanding balance of the loans against them.” Thus, “the ETP funds are merely loan proceeds and subject to repayment…akin to unearned future income rather than an unvested benefit.” The Court differentiates this case from its ruling in Dotson because unlike the RPU stocks in Dotson, Husband’s “unrestricted right to the

ETP funds does not accrue until the loans are forgiven.”


Husband next argues that the trial court erred when it declined to recognize a discount in the value of his interest in Cobane Farms, LLC, based upon his minority ownership in the LLC. The Court of Appeals affirms the trial court holding that the trial court properly gave specific reasons for its decision excluding the discount in this case, including transactions that may have been an attempt to diminish the value of the marital estate. Notably, Husband voluntarily reduced the marital interest by transferring shares to his siblings and transferred the marital property to a LLC on the day after Wife filed the petition for dissolution.


Husband then argues that the trial court failed to recognize his non-marital interest in Cobane Farms, LLC. The Court of Appeals affirms the trial court holding that the trial court did not err as it found Husband’s tracing was incomplete noting Husband’s conveyance diluted and co-mingled any non-marital interest. The Court notes the trial court’s finding that Husband was a sophisticated financial advisor and gave no compelling reason for being unable to provide complete tracing.


Husband next argues that the trial court erred in calculating his nonmarital interest in a 401k, Roth IRA, and whole life insurance policy, by failing to find that the increase in the value was attributable to his non-marital contributions. The Court of Appeals affirmed the trial court holding it did not err as Husband “failed to rebut the presumption that the increase in the value of Marc’s non-marital contributions are marital property.” Simply presenting the beginning and ending balances and testifying to average growth was not enough.


The Court of Appeals ultimately remands the portion of the judgment dividing the marital assets for the trial court to equalize the division of assets due to the error in classifying the encumbered ETP funds as marital.


Digested by Elizabeth M. Howell