Johnson v. Johnson
89 Nev. 244, 510 P.2d 625, 1973 Nev. LEXIS 480 (1973)
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Rule of Law:
When a spouse's separate property increases in value during a marriage due to both the initial capital investment and the labor of one or both spouses, that increase must be apportioned between the owner's separate property and the community property.
Facts:
- Before his marriage, appellant Doug Johnson acquired two franchised A&W drive-in restaurants.
- In June 1965, he incorporated his business as Doug Johnson, Inc., transferring all business assets to the new corporation.
- On September 9, 1965, appellant married the respondent.
- During the marriage, the corporation acquired two additional drive-ins, financed largely by the cash flow from the original two.
- The value of the business enterprises increased substantially between the date of the marriage and the divorce.
Procedural Posture:
- During a divorce proceeding in a state trial court, the court determined the amount of the increase in value of the appellant's business during the marriage.
- The trial court apportioned that increase between the appellant's separate property and the community property.
- The appellant, Doug Johnson, appealed the trial court's decision regarding the valuation and apportionment to the Supreme Court of Nevada.
- The respondent is the appellant's spouse.
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Issue:
Does the increase in value of a spouse's separate property business, resulting from a combination of the initial capital and spousal labor during the marriage, require apportionment between separate and community property?
Opinions:
Majority - Zenoff, J.
Yes. The increase in the value of separate property during marriage should be apportioned between the separate property of the owner and the community property of the spouses. The court departs from the prior 'all-or-nothing' rule of Lake v. Bender, which was deemed unjust because it could deny a separate property owner a reasonable return on their investment. The court reasons that where profit or increase in value results from both the capital investment itself and the labor, skill, and industry of a spouse, the increase must be apportioned. To do this, courts may use one of two primary approaches, Pereira or Van Camp, or any other method that achieves substantial justice. The Pereira approach allocates a reasonable rate of return to the separate property, with the remainder going to the community. The Van Camp approach allocates a reasonable compensation for the spouse's services to the community, with the remainder going to the separate property. The choice of method is within the trial court's discretion to achieve a just outcome.
Analysis:
This decision marks a significant shift in Nevada community property law, moving away from the rigid, all-or-nothing approach of Lake v. Bender. By adopting an apportionment rule, the court provides a more equitable framework for dividing assets in a divorce where a separate property business has grown due to spousal effort. The endorsement of the Pereira and Van Camp methods from California law gives Nevada courts flexible and established tools for this apportionment, ensuring that both the separate capital investment and the community labor are fairly compensated. This precedent requires courts to analyze the source of increased value rather than simply classifying it as entirely separate or entirely community.
