In re Marriage of Joynt

SUPREME COURT CASES

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State: Illinois

Court: 3rd District Appellate

Docket No: 3-06-0919 Rel

Case Date: 08/16/2007

Preview:No. 3-06-0919 Filed August 16, 2007. _________________________________________________________________ IN THE APPELLATE COURT OF ILLINOIS THIRD DISTRICT A.D., 2007 In re MARRIAGE OF ) Appeal from the Circuit Court ) of the 10th Judicial Circuit, THERESA A. JOYNT, ) Peoria County, Illinois, ) Petitioner-Appellant, ) ) No. 04-D-501 v. ) ) MICHAEL J. JOYNT, ) Honorable ) Stephen A. Kouri, Respondent-Appellee. ) Judge, Presiding. _________________________________________________________________ PRESIDING JUSTICE LYTTON delivered the opinion of the court: _________________________________________________________________ Plaintiff, Theresa Joynt, appeals the trial court's judgment dissolving her 12-year marriage to defendant, Michael Joynt.

Theresa argues that the trial court erred in characterizing the retained earnings of a closely held corporation as non-marital property. Alternatively, she claims that the trial court's

distribution of marital assets was inequitable.

We affirm.

Theresa filed a petition for dissolution of marriage on August 20, 2004. At trial, the parties stipulated that Michael owned 41

shares of stock in Mississippi Value Stihl, Inc. (MVS), worth approximately $94,000 and that the stock was nonmarital property. James Carey, an accountant for MVS, testified that the company was closely held and designated as a subchapter S

corporation.

Michael served as the company's president and owned

33% of the corporate stock.

Michael's sister owned 19.4% of the Carey testified that

stock, and Michael's father owned 47.6%.

Michael's gross pay from the company, approximately $240,000 to $250,000 per year, was fair compensation in the industry. In 2004, Michael's total net income from the corporation after the payment of taxes was $162,545. Carey stated that based on the company's balance sheet, the retained earnings of the business in 2004 were $3,750,929. earnings were held by MVS for future operating expenses. Those The

company did not pay dividends to its stockholders from the retained earnings account. However, if the company chose to do so, it could

pay retained earnings dividends through liquidation of the business or declaration of the corporate board of directors. Michael would

not be able to receive a retained earnings dividend individually unless an equal dividend were paid to and agreed upon by a majority of the shareholders. Michael's 33% ownership in the corporation The estimated

entitled him to one-third of the retained earnings.

value of Michael's retained earnings ownership at the time of the trial was $1,250,309. Carey further testified that Michael had a buyout contract with his father. The contract provided that, upon his father's

death, Michael would become the majority stockholder of the company by purchasing his father's stock. shareholder, Michael would be At that time, as the majority to determine distribution

able

payments from the retained earnings without approval from the remaining shareholder. 2

Carey further testified that the retained earnings are not reported as an asset. He explained that the corporation's stock If you

would be an asset and "then the stock has to be valued."

wanted to value the company's stock at book value, "in essence your [sic] valuing the retained earnings." Carey stated that a

company's book value is the assets minus the debts, which equals the stockholders' equity. The trial court concluded that the retained earnings of the closely held corporation should be classified as nonmarital

property.

In so doing, the court emphasized "this is not to

suggest that under no circumstances would retained earnings of a nonmarital interest in a subchapter S corporation be classified as marital." The court noted that Michael was the president of the

company and that the value of the retained earnings account had increased significantly in recent years. However, in reaching its

determination in this case, the court placed "considerable weight on the significant amount of cash distributed by the company to its officers over the last three years versus the amount it has retained, along with the evidence in its entirety on the issue of control." In addition to the division of property, the trial court ordered Michael to pay temporary maintenance and child support, and awarded Teresa approximately 60% of the marital estate. ANALYSIS I. Retained Earnings

On appeal, Theresa contends that the trial court erred in 3

failing to classify Michael's interest in the retained earnings account of the closely held corporation as marital property. Generally, we will not disturb a court's determination that an asset is nonmarital unless that finding is against the manifest weight of the evidence. 138 (1996). In re Marriage of Hegge, 285 Ill. App. 3d

However, that standard of review is based on the

presumption that determining whether an asset is marital involves weighing the credibility of the witnesses. Werries, 247 Ill. App. 3d 639 (1993). In re Marriage of

In this case, the parties Those

have asked us to rule on the legal effect of certain facts.

facts are not in dispute, and the witnesses' credibility is not an issue. Accordingly, our review is de novo. In re Marriage of

Peters, 326 Ill. App. 3d 364 (2001). Whether retained earnings should be classified as marital property is an issue of first impression in Illinois. As noted by

both parties, however, other states have generally held that retained earnings are nonmarital. Those jurisdictions have reached that conclusion based on the evaluation of two primary factors: (1) the nature and extent of the stock holdings, i.e., is a majority of the stock held by a single shareholder spouse with the power to distribute the retained earnings; and (2) to what extent are retained earnings considered in the value of the corporation. See

1 H. Gitlin, Gitlin on Divorce

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