No. 2021-CA-0667-MR

Jefferson Circuit Court

Leslie and Janice Geralds negotiated a property settlement agreement through a collaborative divorce process.  The property settlement agreement awarded Mrs. Geralds 40.62% of Mr. Geralds’ retirement plan.  Several years following the entry of the decree and property settlement agreement, Mr. Geralds retired and signed a noncompete agreement.  As a result, he received additional funds from his company that were not previously addressed in the divorce proceedings.  Thereafter, Mrs. Geralds moved to reopen their case as she believed the additional funds were part of the retirement plan and that she was entitled to receive a portion of those funds pursuant to the parties’ property settlement agreement. Mr. Geralds disagreed, claiming the additional funds were not part of the retirement plan, but rather, new income from him signing the noncompete agreement.

The trial court found that Mrs. Geralds was rightfully entitled to reopen the case because Mr. Geralds did not inform her of the additional funds he was receiving.  Further, the trial court determined the additional funds were in fact part of the retirement plan and that Mrs. Geralds was entitled to a portion of said funds.  Attorney’s fees were also awarded to Mrs. Geralds.  A timely appeal followed.

The Court of Appeals affirmed the trial court, in part, that CR 60.02(d) applied to this case and that Mr. Geralds intentionally did not disclose the additional funds.  By not doing so, the Court emphasized “[f]ailing to disclose assets to the court and [Mrs. Geralds] can be considered fraud affecting the proceedings,” thereby meeting a situation justifying reopening the case.  However, the Court disagreed with the trial court in that the additional funds were not part of Mr. Geralds’ retirement plan, but rather, funds he received after executing the noncompete agreement.  Therefore, the Court did not agree Mrs. Geralds was entitled to a portion of these funds because the funds were not marital property.  Finally, the Court reversed and remanded the case to address the attorney’s fee issue to determine if Mrs. Geralds was entitled to attorney’s fees in reopening the case due to Mr. Geralds failing to disclose an asset during the collaborative divorce proceeding and an unrelated hearing following his retirement.

Caitlin P. Kidd, Esq.

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Oldham Circuit Court

Wade B. Lewis and Laura R. Fulkerson, after a tumultuous relationship, filed a petition for dissolution of marriage on April 3, 2013. During the process, a key dispute was the gift status of a trust established in 2009, titled the Laura Renee Fulkerson (“LRF”) Trust. While Wade stated the trust was established for estate planning purposes only, Laura argued it was a gift from Wade and that he gave her exclusive control of its contents. The family court barred the trust’s drafting attorney, Ed Lowry, from testifying on the dispute. After hearing testimony from only Wade and Laura, the family court ruled that the LRF Trust was a gift. The final decision was appealed, and the Court determined that the testimony from Lowry would have been crucial for the gift status analysis. Accordingly, the Court vacated that portion of the final ruling and remanded it further proceedings.

On remand, an evidentiary hearing was held for Lowry’s testimony, this time in front of a different judge due to the prior judge’s retirement. Nevertheless, the family court continued to hold the LRF Trust as Laura’s non-marital asset, finding Lowry’s testimony “could not shed light on the actual intent of the parties” at the trust’s creation. Instead, the Court found that Wade’s habit of making financial gifts as a means of reducing difficulties in his marriage, alongside other factors, was substantial evidence that the trust was a gift. Again, Wade appealed, arguing that the family court failed to apply the clear and convincing evidence standard to Laura’s gift claim.

Ultimately, the Court found no error in the family court’s conclusion. While admitting that the matter was a “close call”, the Court heavily emphasized that the there was “no deficit of nuance and complexity” in the family court’s analysis, having gone through two bouts of fact-finding and having two different judges rule in Laura’s favor. Therefore, Wade’s claim of clear error was unfounded, and the family court’s order was affirmed.

K. Spencer Pierson

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Boyd Circuit Court

As part of a dissolution of marriage action, Family Court ordered that the parties’ marital residence be sold and after reduction for the costs associated with the sale of the house, the net proceeds be applied to the parties’ credit card debt or other marital debt and then that the remainder be divided equally between the parties. The parties were subsequently unable to agree on listing and selling the marital residence. Husband moved Family Court to set the conditions for the listing and sale of the marital residence. Family Court ordered Wife to cooperate in the preparation and listing of the marital residence. Subsequently, Family Court ordered the parties to agree on an appraiser to value the marital residence and then for Wife to pay Husband half the appraised value. Husband disputed the appraised value. Family Court eventually set the value of the property, allowed Wife to purchase the property, ordered Wife to place funds in escrow for her to present evidence on payments on marital debt, and ordered Husband to sign a quitclaim deed. Husband appealed, and the Court of Appeals vacated Family Court’s order, concluding that Family Court had no jurisdiction to modify the decree in absence of a CR 60.02 motion, remanding the matter to Family Court with instructions to enforce the decree as entered.

While the appeal was pending, Wife recorded the quitclaim deed and obtained a mortgage from Kentucky Farmers Bank (“KFB”). She used some of the proceeds to pay off the marital credit cards and deposited the remainder into escrow. Following the remand, Husband moved Family Court for the marital residence to be sold by master commissioner, and Wife moved Family Court for a credit for monies paid toward the marital debt and credit representing the remaining proceeds from the mortgage.

KFB was subsequently permitted to intervene in the action to protect its interest in the mortgage. It requested that Family Court conclude that it had a valid mortgage and that its mortgage had priority over all over liens or debts. Family Court concluded that KFB properly relied on the quitclaim deed, concluded that the mortgage was free and clear of any interest by Husband, and directed that any order of sale be subject to the mortgage. Family Court designated this order as final and appealable. Husband objected to the finality language but conceded that KFB’s interest was valid and should have priority. Family Court overruled the finality language objection and ordered that the property be sold by master commissioner.

The property was sold. Husband objected to payment of KFB’s attorney fees from his portion of the sale proceeds and took the position that the mortgage debt and associated attorney fees claimed by KFB were Wife’s nonmarital debt. Family Court directed the pay out of the proceeds, which Husband moved Family Court to reconsider, noting that the prior Court of Appeals opinion directed that only the debts of the parties set out in the decree could be deducted from the sale proceeds. He also argued that the property should be sold subject to KFB’s mortgage indebtedness, objected to payment of KFB’s attorney fees from the sale proceeds, and argued that Family Court improperly credited Wife for payment of a credit card debt which was still outstanding. Family Court denied Husband’s motion and stated that the issues raised were addressed on appeal and upon subsequent order of the court following the Court of Appeal’s direction was not appealed and is now the law of the case. Husband appealed.

Husband argued that KFB should be responsible for the mortgage and charges associated with the litigation. The Kentucky Court of Appeals held that KFB’s intervening complaint invoked Family Court’s jurisdiction for the matters relating to the master commissioner sale, and it acted within its jurisdiction when it addressed KFB’s claims relating to the mortgage. Furthermore, Husband did not appeal from the order concluding that KFB’s mortgage and litigation costs have priority from the sale proceeds. And KFB was entitled to rely on the recorded quitclaim deed, because it had no notice of the pending appeal. The Court of Appeals affirmed Family Court’s orders with respect to the KFB’s claims to the sale proceeds.

Husband argued that Family Court failed to properly allocate the sale proceeds between him and Wife. The Court of Appeals held that Family Court did err in its allocation of the sale proceeds after satisfaction of KFB’s claims. The mortgage was a nonmarital debt since the mortgage was granted after the entry of the decree of dissolution. Wife acted in reasonable reliance upon Family Court’s orders, but Husband had no part in incurring the new debt and he promptly appealed the order permitting Wife to purchase and encumber the property. Family Court was required to strictly construe the adjudications in the decree absent a CR 60.02 motion. Any claims arising between Husband and Wife after the entry of the decree were outside the scope of the remand. Family Court properly credited Wife for payment of marital debts from the mortgage proceeds, as ordered in the decree, but it erred in treating KFB’s mortgage debt as marital debt. Those amounts should be deducted from Wife’s share of the remaining sales proceeds.

Digested by Nathan R. Hardymon

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Carter Circuit Court

During a dissolution of marriage action, Husband had a medical malpractice claim pending. Family Court reserved the issue of classification of any award. After the claim was settled, although the settlement did not classify the awards by type, the money from several medical malpractice actions were pooled and divided among the claimants in two phases. Phase 1 compensated the claimants for unnecessary procedures. To determine the amount of compensation, each claimant received various points based on the type(s) of unnecessary procedures that were performed on him. There was no accounting for any medical bills or lost wages, etc. A certain portion of the settlement was set aside to provide additional, Phase 2 compensation to claimants who suffered extraordinary damages not captured in the award for having had the unnecessary procedures. Phase 2 damages included things such as allergic reactions, disability, lost wages, aneurysms, and death. The excess funds not dispersed from the extraordinary injury fund were reallocated proportionally to all claimants. Husband made no claim for the Phase 2 compensation. At a hearing to classify and divide the settlement, Husband’s attorney testified that Husband did not make a claim for Phase 2 compensation, and that all the funds received by Husband were awarded to compensate him for unnecessary procedures he underwent. Family Court concluded that the entirety of the award was Husband’s nonmarital property, as pain and suffering damages are nonmarital property.

The Court of Appeals held that Husband provided sufficient evidence to prove that the funds were nonmarital. Funds received for pain and suffering are nonmarital property. A settlement silent on the type of award is not to be automatically classified as marital property. The burden is on the spouse receiving the settlement to prove it is nonmarital, which Husband did. Family Court did not err in classifying the funds as nonmarital property.

Digested by Nathan R. Hardymon

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Oldham Circuit Court

The Kentucky Supreme Court modified its December 17, 2020 Opinion to allow the parties to offer evidence to rebut the presumption that the marital portion of each RSU allotment would be the proportion of time in each three-year vesting period that was marital and the proportion in which the RSUs are earned because the parties did not have the benefit of knowing the presumption at trial.

Digested by Nathan R. Hardymon

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Questions Presented: Marital Dissolution. Restricted Stock Units. Trial court improperly classified restricted stock units (RSUs) as entirely nonmarital property. To appropriately classify such assets the trial court applies a presumption that the RSUs are earned over the period between grant and vesting, and the proportion of RSUs acquired for purposes of marital classification is the proportion of time between grant and decree of separation that is marital. This presumption may be rebutted by the parties. Because trial court did not include RSU income in the income calculation for child support, the child support calculation is also reversed. However, trial court’s determination of the wife’s reasonable needs and the amount of ordered maintenance was not an abuse of discretion.

Oldham Circuit Court

In a dissolution of marriage action, Husband, employed by Humana, earned incentive-based income, including restricted stock units (RSUs), which were usually granted annually and vested to the employee after three years. Prior to vesting, the RSUs were subject to restrictions, unavailable to the employee, and non-transferable until such restrictions lapsed and vesting occurred. The primary restriction was continued employment.

The parties also contested classification as marital or nonmarital an interest in Husband’s 401(k) and a plot of land in Wyoming. The 401(k) consisted of contributions from employment both prior to and during the marriage. Husband testified that he transferred his premarital retirement funds into his Humana account and claimed that $77,000 was the nonmarital value of the account. Wife argued that Husband did not sufficiently prove the nonmarital interest. The plot of land was purchased prior to the marriage with Wife paying the initial down payment of $5,000. Husband testified that he reimbursed Wife for the down payment. They both argued that a portion of the land should be their nonmarital property.

Family Court found all proceeds from the unvested RSUs to be Husband’s nonmarital property, and it did not include them in calculating his income for maintenance or child support. It accepted the $77,000 nonmartial value for the 401(k) account, and it found that neither party presented sufficient evidence to a nonmarital claim to the plot of land. Family Court awarded Wife $1,500 per month in maintenance for 48 months, after finding that Wife’s reasonable needs were $6,000 per month and considering her nonmarital property, the martial property awarded to her, and her ability to become employed. Regarding child support, Family Court found that the parties’ monthly adjusted income was above the statutory guidelines and refused to adjust upward.

Wife appealed, disputing the classification of the RSUs, the retirement account, and the plot of land, the calculation of maintenance and child support, and the denial of attorney’s fees. The Court of Appeals of Kentucky affirmed Family Court in full. Wife sought discretionary review of the classification of the RSUs, the 401(k), and the plot of land and the calculation of maintenance and child support.

The Supreme Court found that RSUs are a form of equity-based compensation under which the issuer company promises to deliver whole shares of stock of the company in the future to an employee at no cost to the employee, if pre-specified vesting ad distribution conditions are satisfied. It held that, as a default rule, RSUs are earned over the period between grant and vesting. The proportion of the RSUs acquired for classification is the proportion of time between grant and decree of separation that is marital. This presumption may be overcome by offering contrary evidence, which may include appropriate plan documents, such as SEC filings, plan prospectus, or grant documents. RSUs are analogous to contingency fee contracts, which may represent both marital and nonmarital property, and the trial court must determine whether and to what extent they were granted as compensation for service prior to the grant versus as an incentive for the employee’s future services. The critical issue is the extent to which the anticipated benefits will have been generated by the mutual effort of the parties.

In this matter, the RSUs were awarded in February of a given year, vesting three years later. They were reported as ordinary income on Husband’s W-2 in the vesting year and taxed in the same year. Husband testified that the grants were a means of hiring and retention. Thus, the Court found no reason to disturb the general rule that the RSUs were a form of deferred compensation.

The Supreme Court held that Family Court incorrectly calculated the parties’ combined monthly adjusted gross income. Gross income includes, inter alia, wages, bonuses, and capital gains. Family Court considered only Husband’s base salary when calculating his income and did not consider the RSUs as part of his income. The Court must consider all income proven by substantial evidence. The party seeking to use a different income bears the burden of proving a different income. Family Court should have considered the RSUs deferred marital income and added the income proportionally to each spouse’s gross monthly income.

The Supreme Court held that Family Court did not abuse its discretion in its maintenance award. Family Court found that Wife’s reasonable needs were $6,000 per month, that she was capable of earning $1,733 per month and had personal property valued at $700,000. The trial court is not required to delineate every factor in its decision. Family Court correctly considered Wife’s independent assets and correctly addressed Wife’s inability to return immediately to the job market. Family Court was not required to analyze Husband’s income when calculating the maintenance payment, only to consider his ability to provide for himself and make the payments ordered.

Digested by Nathan R. Hardymon

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At divorce, property is classified as either marital or nonmarital. Nonmarital property is restored to each spouse as his or her separate property and marital property is equitably divided between both spouses. In Kentucky, an inheritance is generally classified as the separate property of the spouse who received it and is not subject to equitable division, even if inherited during the marriage. KRS 403.190 (2)(a). However, there are some situations in which one spouse’s inheritance may be considered part of the marital estate and subject to property division.

Disputes over inherited property are most likely to arise when the inheritance has been “comingled” with marital assets. The spouse claiming nonmarital property has the burden of tracing the inheritance to existing assets. An example of this is when one spouse receives an inheritance upon the passing of his or her grandmother during the parties’ marriage and then deposits those funds into a jointly held bank account that contains marital funds. The inheritance could also become comingled if the inheritance funds are used to make improvements to the parties’ home. In both instances, the inheritance may be considered marital property if it cannot be traced. Generally, that means providing bank statements for every month from the deposit of the inheritance to show that the account balance has never dropped below the unlimited amount.

The best way to ensure that your inheritance does not become subject to property division is to keep it separate from marital property. Thus, if you received an inheritance during the course of your marriage, or even if you received an inheritance prior to marriage, you should keep detailed records of all deposits and withdrawals for the accounts which hold your inheritance from the date of inheritance or date of marriage, whichever is later, and/or documentation showing that any improvements to real property or other assets were made with inherited funds so that if challenged, you are able to “trace” your inheritance.

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“(a)Property acquired by gift, bequest, devise, or descent during the marriage and the  income  derived  therefrom  unless  there  are  significant  activities  of  either spouse  which  contributed  to  the  increase  in  value  of  said  property  and  the income earned therefrom;

(b)Property acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift, bequest, devise, or descent;

(c)Property acquired by a spouse after a decree of legal separation;

(d)Property excluded by valid agreement of the parties; and

(e)The  increase  in  value  of  property  acquired  before  the  marriage  to  the  extent that  such  increase  did  not  result  from  the  efforts  of  the  parties  during marriage.”

Nonmarital property is not always straight forward. It can be mixed with marital property or require difficult asset tracing. When reviewing your finances with your attorney, you should always bring up your property that may be nonmarital. The retirement you earned before the marriage, the stock you inherited from your grandmother, or the jewelry you received as a gift may not be subject to division under Kentucky law.

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Husband and Wife divorced and the family court entered an order on child support, maintenance, and property division. Wife appealed challenging the family court’s conclusions of law on a number of issues.

Wife first argued that the trial court erred in failing to make adequate findings and by considering the nonmarital inheritance she received in setting maintenance. The Court of Appeals affirms the family court holding that “It is well within the court’s discretion to consider nonmarital assets when calculating the amount and duration of maintenance.” The family court properly considered Wife’s financial resources, education level, the marital standard of living, along with other factors.

Wife next argues that the trial court erred in finding Husband’s unvested RSUs were nonmarital property. The Court of Appeal disagrees affirming the family court holding that the trial court properly concluded the RSUs were nonmarital property belonging to Husband and should be excluded from calculating Husband’s income in calculating maintenance and child support.

Wife makes a number of additional arguments on property division, child support, and attorney fees. The Court of Appeals upholds the trial court on all issues.

Digested by Elizabeth M. Howell

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After dissolution of marriage proceeding, Wife appealed on four issues. The Court of Appeals begins with a lengthy discussion of substantial compliance because Wife failed to follow the Civil Rules.

First, Wife argues that “the visitation schedule is improper and should be set aside.” As she did not advance a substantive argument on this issue, the Court of Appeals does not address it pursuant to its holding in Milby v. Mears, 580 S.W.2d 724, 727 (Ky. App. 1979).

Second, Wife argues that the family court erred in classifying three parcels of real estate as nonmarital.

Third, Wife argues that the family court’s division of personal property was inequitable. Again the Court of Appeals does not address these issues this time because Wife failed to preserve them for appeal and failed to cite underlying authority.

Fourth, Wife argues that “the trial court erred in awarding [Husband] a nonmarital interest in another parcel of real estate.” The Court of Appeals briefly addresses this issue affirming the family court holding adequate tracing was admitted into evidence.

Digested by Elizabeth M. Howell

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