On June 3, 2016, the Hawaii Supreme Court issued a decision in Dorinda Hamilton v. David Hamilton, SCWC-13-0001498, vacating (in part) a divorce decree in a case in which the Family Court found that the parties had a Premarital Economic Partnership dating back nine years before the date of marriage, the husband received a $3.5 million inheritance only a few years before the divorce, the husband expended over $1.5 million of the inheritance before the wife filed for divorce, and the divorce decree gave the husband a capital contribution for the inheritance funds expended thereby creating a marital debt, deducted the marital debt from the marital estate and ordered the wife to pay the husband an equalization payment but also credited her with the full amount of that payment, and also awarded the husband all of the remaining inherence.
One of the key impacts of the Hamilton decision, is that is provides a step-by-step analysis of how Family Court’s should be approaching the division and distribution or property at divorce:
- First, there is no fixed rule in dividing and distributing property except HRS Section 580-47.
- Second, the family court has wide discretion in dividing property in a way that is just and equitable.
- Third, the partnership model is “guidance.”
- Fourth, the partnership model recognizes the general classifications of property: premarital separate property, marital separate property, and marital partnership property.
- Fifth, there are 5 net market values (NMVs) of marital partnership property used as “guidance” in divorce cases.
- Sixth, the Family Court should apply the analytical framework outlined by the HAWSCT in Gordon v. Gordon:
(1) Find facts necessary for categorization of property and NMV classifications;
(2) Find equitable considerations, if any, to deviate from equitable distribution
(also known as VARCS – valid and relevant considerations);
(3) Absent equitable considerations, Category 1 and 2 values are repaid;
(4) Decide whether to deviate; and
(5) Determine extent of deviation.
Here, in equitably deviating from what the court presumes should have been an equal (50/50) distribution, the HAWSCT held that the Family Court erred in doing # 4 (deciding to deviate) before #2 (finding equitable considerations). According to the HAWSCT, this error resulted in the Family Court improperly ordering equal losses before determining if equitable considerations justified doing so
The HAWSCT also weighed in on how inheritance should be considered during divorce. The court determined that inheritance is only properly classified as “marital separate property” if it is: (1) segregated, (2) has no funds from any other source, and (3) no marital assets are used to maintain it. In this case, the HAWSCT held that there was insufficient evidence to determine whether the marital estate was used to pay taxes on the inheritance. If so, then under HAWSCT case law (Kakinami), the entire amount of the inheritance becomes Marital Partnership Property – i.e. part of the marital estate subject to division and distribution between the parties.
The HAWSCT also addressed Category 3 NMV, and whether the husband was entitled to a capital contribution for inheritance funds expended during the marriage. According to the HAWSCT, Category 3 funds expended the following categories are repaid: down payments, improvements, and loan principals related to Marital Partnership Property real estate or Marital Partnership Property stock & business interests, other advances; and payments toward Marital Partnership Property real, personal, and investments. However, the Category 3 expended on the following should not be repaid: spouse & kids education expenses, meals, trips, socializing, entertaining, and daily living requirements (presents, tuition, entertainment activities).
The only exception to the later is if the Category 3 expenditures are “in the nature of a contribution to or investment in Marital Partnership Property.” Thus, under Hamilton, the Family Court must separately examine each expenditure to ascertain whether qualifies as a contribution or investment into Marital Partnership Property. Then, the Family Court must analyze if the donative intent/gift to spouse makes capital contribution excluded. The three elements of a gift are: donative intent, delivery, and acceptance. Although there was some evidence in Hamilton that the wife tried to show that the funds expended by the husband were in the nature of a gift, the HAWSCT statement on analyzing donative intent does not appear limited to the facts of the Hamilton case.
After all the analysis, however, the HAWSCT concluded that, in any event, the division and distribution of property was not “just and equitable.”
As to the Husband’s argument that the Family Court erred in basing the parties “premarital economic partnership” on an illegal marijuana business enterprise, the HAWSCT held that the alleged partial illegality of “partnership” element of the PEP was not material to the outcome. According to the HAWSCT, the wife had not actually sought to enforce an illegal contract, any gains from the illegal business no longer existed and had been converted real estate, and substantial other evidence support the premarital economic partnership other than the illegal business.
Some of the morals of Hamilton: (1) parties should think about their marriage as a business from the moment of marriage (or even before if their living arrangement might be viewed as a partnership) – the failure to do so means that Hawaii law places strict procedure for dividing and distributing that people may never have contemplated would occur; (2) married individuals in Hawaii should consider pre- and/or post-marital agreements to avoid after-the-fact divorce law being imposed on them, especially if one party receives or anticipates receiving an inheritance; (3) individuals who seek to take advantage of capital contribution – and the Family Court itself – will need to implement much more specific tracing of assets than previously required under Hawaii law; (4) the language of opinion related to gifts during marriage is not specific to facts of Hamilton so there is a question of the impact of gift issue on every divorce case, and whether the other two elements of a gift are effectively presumed.
The HAWSCT’s full unanimous opinion, authorized by Justice McKenna, is available here.