McDONALD v. McDONALD, 27005-6-II (Wash.App. 3-11-2003)

No. 27005-6-II.The Court of Appeals of Washington, Division Two.
Filed: March 11, 2003. DO NOT CITE. SEE RAP 10.4(h). UNPUBLISHED OPINION

Appeal from Superior Court of Pierce County. Docket No. 98-3-03661-2. Judgment or order under review. Date filed: 02/02/2001.

Counsel for Appellant(s), Joseph J. Loran, Attorney at Law, 748 Market St. Ste 300, Tacoma, WA 98402-3738.

Counsel for Respondent(s), Herbert Gelman, Attorney at Law, 1101 Fawcett Ave Ste 300, Tacoma, WA 98402-2015.

HUNT, C.J.

Charles McDonald appeals the dissolution trial court’s property distribution award of a $315,873.88 judgment to his former wife, Lynne McDonald, in lieu of half the shares of his separately owned stock in a closely held family corporation. We reverse and remand.

FACTS I. The Marriage
The McDonalds[1] married in 1989. Lynne had a bachelor’s degree in business administration and worked in sales, earning approximately $32,000 a year. After the birth of their autistic son in 1991, Lynne was unable to work outside the home because of the time necessary to manage their son’s doctor’s appointments and therapies. The couple’s daughter was born in 1995.

Before separating from Charles in 1998, Lynne received $1,500 a month from her father for doing bookkeeping. Charles worked as a sales representative for his family’s business, Savage Wholesale Building Materials, Inc. (Savage). Although the couple owned no cars, Charles had two company cars for their use.

II. The Stock
As part of his estate planning, Charles’ father, Charles H. McDonald II (Pete), decided to give shares of Savage stock to his sons, hoping to avoid tax liability for them upon his death. Pete recapitalized the corporation, creating two classes of stock — voting and non-voting. Pete and his brother, Bruce McDonald, owned all of the voting shares, with Pete, the majority shareholder, holding 51 percent, and Bruce, 49 percent.

In December 1994, Charles’ parents gave him 65,534 non-voting shares of Savage stock,[2] and Pete and Charles entered into a stock transfer agreement (Agreement). Clerk’s Papers (CP) at 285. The Agreement required Charles’ wife, Lynne, to execute an appended spousal acknowledgement form in which she stated that the Savage shares were Charles’ separate property. Lynne executed this acknowledgement on December 28; she now claims she signed without benefit of counsel, although the acknowledgment form explicitly states that she had been advised by counsel.

Savage is a Subchapter S corporation, hence, any corporate earnings are reportable as personal income taxable to the individual shareholders. To cover the resultant tax liability, Savage paid Charles `bonuses.’ Charles’ and Lynne’s marital community never actually received these bonuses because Savage paid them directly to the IRS on Charles’ behalf.

The Agreement also placed a variety of restrictions on future sale of the stock, including who can purchase the stock and how to accomplish a transfer of shares to a spouse during marital dissolution. In the event of marital dissolution, the corporation has a 30-day option to buy all or any part of the shares offered to the spouse. If the corporation chooses to buy, the purchase price is to be the one listed in Article 5 of the Agreement. If the corporation chooses not to exercise the option to purchase the shares, other individual shareholders have an option to purchase the shares at the same price within 60 days after the corporation chooses not to exercise its first option.

Article 5 of the Agreement contains explicit instructions on how to set the purchase price in the event that the corporation or existing shareholders elect to exercise their option to purchase the stock, which at the time of the dissolution decree was $9.64 per share. The Agreement makes no provision for otherwise establishing a fair market value of this non-voting stock. Rather, in the event that a shareholder wishes to sell stock and neither the corporation nor another shareholder exercises its option to purchase at the price established in the Agreement, then a highly restrictive provision for selling outside the corporation comes into play.

Under Article 3, Sections 3.1, if a shareholder wishes to transfer stock to a person outside the corporation, that shareholder must first give notice of the proposed purchase price and the proposed transferee’s name to the corporation and to the other shareholders, who then have time-limited options to purchase the stock themselves. Under Section 3.3, if neither the corporation nor any other shareholder exercises an option to purchase, then (1) the selling shareholder has 30 days in which to consummate the specified transfer; (2) there is no opportunity for renegotiation of price or substitution of a different buyer; (3) the buyer is subject to the same restrictive terms of the Agreement, including the requirement that the buyer’s spouse must sign the Acknowledgment-by-Spouse form; and (4) if the transaction fails, then the seller must start the process all over again. CP at 288.

III. Separation and Dissolution
Lynne surprised Charles when she commenced dissolution proceedings four years later in October 1998 and obtained an ex parte restraining order. Unable to afford a place of his own when he left the family home, Charles lived in a room above his parents’ garage.

A pro tem commissioner ordered Charles to pay combined child support and temporary spousal maintenance of $3,000 a month. At that time, Charles’ net pay was $3,400 a month; after paying child support and spousal maintenance, there remained only $400 per month for his living expenses. The couple had about $23,000 in debt, primarily in credit card accounts, and a $1,000 line of credit with Seafirst National Bank. The commissioner ordered Lynne to maintain the credit card debt.

The Temporary Parenting Plan placed the children with Lynne. As she had done before the separation, Lynne continued to care for their son’s autism-related treatments. Lynne provided for all of his therapies either with financial support from her parents or through financial aid.[3]
Their son’s school provided speech therapy. But he also attended other therapies, including sensory integration therapy at Mary Bridge Children’s Hospital, which cost $175 weekly. To pay for this therapy, Lynne applied for and received financial support from Mary Bridge.

IV. Distribution of Assets
Before distributing the couple’s assets, the trial court found the Savage stock to be Charles’ separate property. Charles also had a 401(k) plan through his job; its value at the time of separation was approximately $10,750. By the end of 1999, the value had grown to $18,000. The cash value, however, was only 65 percent, or $12,000. CP at 146.

When Charles and Lynne separated, they had $12,210 in a joint money market account; after the trial court ordered each party to withdraw two thousand dollars to pay for attorney fees, the money market account balance was reduced to approximately $8,000. Both parties had also incurred substantial additional debt, such that by the time of their marriage dissolution, they had accumulated $38,000 on their line of credit.[4]

The couple’s major asset was their home, with a fair market value of $200,000 and monthly mortgage payments of $1,174.51. Throughout the dissolution proceedings, Lynne lived in the house with the children; she wanted to keep it. But the trial court ordered the home liquidated, with the proceeds going to pay the community debt.

In September 1999, Charles moved for temporary relief from his payments to Lynne because he was unable to pay. The trial court progressively reduced Charles’ spousal maintenance obligation by $200 each month until the monthly obligation reached zero. Stating that Lynne should find employment, the trial court did not include spousal maintenance in the dissolution decree; without spousal maintenance, Lynne’s monthly income was $1,168. Charles remained responsible for child support.

Lynne hired an accountant, Roger Lilley, to review Savage’s corporate records and to determine the stock value per share. Lilley followed the valuation criteria in the stock transfer Agreement, with two exceptions: (1) he modified the discount deduction for accounts receivable because there was no actual history of bad debts, and (2) he adjusted the discount for inventory to represent a fair market value basis.[5] Lilley then calculated a fair market price per share of $11.25, yielding a total value of $737,258 for all of Charles’ Savage stock. The trial court, however, valued the stock strictly in accordance with the stock transfer Agreement at $631,749.76.

Initially, in an oral ruling, the trial court awarded half of Charles’ separate Savage shares to Lynne, and half to Charles. But Lynne argued that in lieu of receiving half of the stock, she should receive a money judgment against Charles, secured by the stock, in an amount equal to half the stock’s value. Questioning its power to grant her request, the trial court suggested that if Lynne provided legal authority, it would consider the proposal. Lynne did not provide specific legal authority; instead, she submitted a memorandum stating that under Washington law, the trial court generally has authority to distribute assets however it deems fair and just.

Upon entering the dissolution decree in December, the trial court awarded all of Charles’ shares to him and ordered him to pay Lynne $315,873.88, which the trial court considered to be the value of `Lynne’s half’ of Charles’ Savage stock.[6] The trial court entered a $315,873.88 judgment against Charles, due immediately, with interest accruing at the rate of 12 percent per year beginning six months after the date of entry of the decree. Charles also received approximately $30,000 in community assets[7] and over $18,000 in community liabilities. CP at 221-23.

The trial court found that Charles’ monthly net income was $4,137, and it ordered him to pay child support of $935.86 per month. After paying child support, Charles had $3,201.14 per month to cover his unsecured debt and to pay his own living expenses.[8]

Charles moved for reconsideration of the money judgment. The trial court denied the motion.

Charles now appeals the trial court’s monetary award to Lynne based on the court’s valuation of half of his stock, which Lynne had previously agreed in writing was his separate property. In the alternative, Charles argues that if the court must award Lynne some of his separate property, she should receive a portion of his non-voting common stock instead of a money judgment.

ANALYSIS I. Standard of Review
In a dissolution action, all property belonging to the spouses is before the trial court, which has discretion to distribute community as well as separate property. Konzen v. Konzen, 103 Wn.2d 470, 478, 693 P.2d 97 (1985). The trial court exercises its discretion to make a `just and equitable’ distribution of the parties’ property and liabilities after considering all relevant factors, including the nature and extent of the separate and community properties and the duration of the marriage. RCW 26.09.080.

`The court may also consider health and ages of the parties, their prospects for future earnings, their education and employment histories, their necessities and financial abilities, their foreseeable future acquisitions and obligations, and whether property to be divided should be attributed to the inheritance or efforts of one or both of the spouses.’ In re the Marriage of Olivares, 69 Wn. App. 324, 329-30, 848 P.2d 1281
(1993) (citing Friedlander v. Friedlander, 80 Wn.2d 293, 305, 494 P.2d 208
(1972)). The trial court’s paramount concern is the economic condition in which the decree leaves the parties after the dissolution. In re Marriage of Williams, 84 Wn. App. 263, 270, 927 P.2d 679 (1996), review denied, 131 Wn.2d 1025 (1997); RCW 26.09.080.

We will not disturb the trial court’s property distribution absent a showing of abuse of this discretion. Konzen, 103 Wn.2d at 478. The burden is on the challenging spouse, here, Charles, to show a manifest abuse of discretion. In re Marriage of Washburn, 101 Wn.2d 168, 179, 677 P.2d 152
(1984). Charles has met this burden.

II. Money Judgment Based on `Value’ of Closely Held Corporate Stock
Charles argues that the trial court erred by entering a judgment of $315,873.88 against him immediately payable to Lynne based on the court’s valuation of one-half of his separate property — his Savage stock. He argues that the stock was essentially an early inheritance, given solely to him by his father for estate planning purposes. Moreover, at the time of the stock transfer in 1994, Lynne signed the Spouse Acknowledgment that the stock was Charles’ separate property.[9] Consistent with these facts, the trial court characterized the stock as Charles’ separate property.

But as we noted above, the trial court may distribute separate property to the other spouse during a marriage dissolution. Here, in light of the parties’ few other assets and substantial debts, we cannot say that the trial court abused its discretion in deciding to award a portion of Charles’ separate property to Lynne. We find no abuse of discretion in the trial court’s original inclination to award shares of Charles’ separately-held Savage stock to Lynne in order to achieve post-dissolution economic parity.

What does constitute an abuse of discretion, however, is the form that the trial court ultimately chose for that distribution: The trial court’s entry of a substantial money judgment against Charles, payable immediately to Lynne, did not place the parties in relatively equal economic circumstances following entry of the decree. Rather, the money judgment put Charles in the grossly disparate economic position of having to pay Lynne $315,873.88 in cash immediately, with no apparent way to do so, contrary to RCW 26.09.080(4) (court to consider economic circumstances of each spouse at the time the division of property becomes effective) in the foreseeable future.[10] Thus, we agree with Charles’ alternative position that the trial court erred by awarding the money judgment to Lynne instead of a portion of Charles’ stock.[11]

On the record before us, Charles now has a past-due money judgment of $315,873.88 against him due and accruing interest at a rate of 12 percent, which he is financially unable to pay. None of the parties’ tax returns, either before or after separation, reflect that Charles had a salary large enough to satisfy the judgment immediately as ordered by the trial court. Moreover, because Charles is a salesman receiving commissions, plus his base salary, his earnings may fluctuate from year to year, depending on the market. At the time of trial, his monthly take home pay was $3,201.14 after subtracting child support; from this amount he must pay other court-ordered debts and his own living expenses. The record provided substantial evidence to show Charles was not able to pay the money judgment award to Lynne.

Accordingly, we vacate the $315,873.88 award to Lynne and remand to the trial court to reconsider the property distribution solely as to Charles’ Savage stock.[12] In exercising its discretion on remand, the trial court may consider, but is not limited to, the following options:

(1) Distribute the Savage stock in kind, with or without a monetary adjustment to cover income taxes generated by Savage stock ownership insofar as such taxes exceed any dividends or other income from the stock;[13]
(2) Restructure a monetary award in an amount and with terms such that Charles can reasonably pay the award over time; or
(3) Some combination of options (1) and (2) above.

III. Attorney Fees
Lynne requests attorney fees on appeal, citing RCW 26.09.140 and RAP 18.1. The primary considerations in awarding fees in a dissolution action are `the need of the party requesting the fees, the ability to pay of the party against whom the fee is being requested, and the general equity of the fee given the disposition of the marital property.’ In re Marriage of Van Camp, 82 Wn. App. 339, 342, 918 P.2d 509, review denied, 130 Wn.2d 1019
(1996). In light of Charles’ limited income and the fact that he, not Lynne, is the prevailing party on appeal, we deny Lynne’s request.

Accordingly, we vacate the money judgment entered against Charles and remand to the trial court to exercise its discretion in reconsidering distribution of the Savage stock as outlined above.

A majority of the panel having determined that this opinion will not be printed in the Washington Appellate Reports, but will be filed for public record pursuant to RCW 2.06.040, it is so ordered.

MORGAN and SEINFELD, JJ., concur.