Oral Argument Preview: Are Oil and Gas Rights Marital or Separate Property In A Divorce? James P. Kuhn v. Kelly L. Kuhn n/k/a Cottle

Update: On July 14, 2015, the Supreme Court of Ohio dismissed this case as improvidently accepted.  Read more about that here.

Read the analysis of the oral argument here.

On May 5, 2015, the Supreme Court of Ohio will hear oral argument in the case of James P. Kuhn v. Kelly L. Kuhn n/k/a Cottle, 2014-0601.  At issue in this case is whether a signing bonus for oil and gas rights associated with a piece of property separately owned by one spouse before the marriage, but acquired after the marriage, constitutes marital property subject to division in a divorce. Central to that determination is whether that bonus is active or passive income.

Case Background

In April 2001, appellant James Kuhn bought an undeveloped tract of land in Guernsey County for $30,000. After a down payment of $6,000, a mortgage was executed for the remaining $24,000. Mineral rights were included in the sale of the property. Kuhn refinanced in March 2002, borrowing additional funds to build a home on the property. After the refinancing, Kuhn’s mortgage liability was $136,000. In June 2006, Kuhn executed a home equity line of credit for $25,000 in order to consolidate credit card debt.

Prior to her marriage to James Kuhn, appellee Kelly Cottle paid the $18,644.38 balance due on the home equity line of credit, and $80,000 toward the mortgage on the property in February 2007. In March 2007, Kuhn and Cottle jointly refinanced the $47,500 remaining on the mortgage. The couple married in May 2007.

The remaining liability on the mortgage was paid jointly by both parties, and satisfied during the marriage. Both parties contributed financially to improvements on the property. At no time during the marriage, however, was a deed executed transferring any interest in the property to Cottle.

In the spring of 2011, energy companies became interested in obtaining oil and gas rights in Eastern and Southeastern Ohio. Kuhn and Cottle participated together in meetings about this in their area. Cottle testified that she spent time and money in the negotiation of a deal for the oil and gas rights of the property, including spending marital funds to obtain legal advice. In October 2011, the couple jointly signed a lease of the oil and gas rights with Gulfport Energy Corporation. In exchange for these oil and gas rights, Kuhn and Cottle received a $121,285 signing bonus, and a 20% royalty interest on production of gas and oil from the property.

The signing bonus was received as a check issued to both parties in February 2012. Kuhn and Cottle separated shortly after depositing the check in a joint bank account, and in March 2012 Kuhn filed for divorce.

Through agreement, Kuhn and Cottle disposed of all property issues in the divorce except for the disposition and/or division of the $121,285 signing bonus and rights of future royalties from the oil and gas lease. After a hearing on the issue, the Magistrate found the property was Kuhn’s separate property, because there were no documents giving Cottle an interest in the property. Further, no transmutation of the separate property had occurred through Cottle’s various payments, since those payments had been traced and reimbursed to her. Finally, the Magistrate rejected Cottle’s argument that she was entitled to an interest in the oil and gas bonus and/or royalties. Cottle argued her actions in obtaining the lease constituted an active appreciation in the value of the real estate, but the Magistrate determined the lease, signing bonus, and future royalties were passive appreciation and the full amount of the signing bonus and all future royalties were awarded to Kuhn. The trial court approved the Magistrate’s findings, and entered a final order granting the divorce in March 2013.

On appeal, the Fifth District Court of Appeals issued a split decision, with two judges voting to reverse on the signing bonus, and all the judges affirming the trial court’s decision to award future royalties solely to Kuhn. Judges Sheila Farmer and Roger Wise found the signing bonus to be marital property like any other income generated during the marriage, which should be divided equally. Judge Scott Gwin dissented on this point, agreeing with the trial court that the signing bonus is passive income under R.C. 3105.171(B)(4), and thus solely Kuhn’s separate property.

All three judges found, however, that the future royalties were Kuhn’s separate property. In a separate concurrence on this point, Judge Wise noted that it was arguable that Kuhn’s agreement in writing on the lease effectively made Cottle a co-lessor, which could be evidence of transmutation of the future revenue stream into marital property, but  concluded that the trial court’s finding of separate property on that issue did not constitute an abuse of discretion.

The Fifth District denied Kuhn’s request for En Banc consideration.

Key Statutes and Precedent

R.C. 3105.171 governs the equitable division of marital and separate property.

Subsection (A)(3)(b) indicates marital property does not include separate property, but subsection (A)(3)(a)(iii) includes as martial property “all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses during the marriage.”

Subsection (A)(4) provides a “passive income” exception to subsection (A)(3)(a)(iii), defining passive income as “income acquired other than as a result of the labor, monetary, or in-kind contribution of either spouse.”

“Separate property” includes, under subsection (A)(6)(a)(ii) all real and personal property and any interest in real or personal property acquired by one spouse prior to the date of marriage, and under subsection (A)(6)(a)(iii) passive income and appreciation acquired from separate property by one spouse during the marriage.

R.C. 2103.02 (sets forth a spouse’s dower rights in property)

Petrella v. Petrella, 2008-Ohio-6714 (5th Dist.) (affirmed the trial court’s denial of husband’s claims that the marital home, purchased by the husband before the marriage, was separate property. The trial court found “whatever separate property claim existed at the beginning of the marriage had been clouded and diluted by the use of marital funds for the obligation payment, multiple refinancing by the parties, and the use of a second mortgage on the property.”)

Kotch v. Kotch, 2008-Ohio-5084 (5th Dist.) (affirmed the trial court’s characterization of a shared residence purchased by the husband prior to the marriage, less the appreciated amount of the husband’s down payment, as marital property, where both spouses contributed to the household finances and expenses, joint funds were used to pay down the mortgage, and the wife was added as a mortgager on the deed during a subsequent refinancing of the property.)

Middendorf v. Middendorf, 1998-Ohio-403 (when the efforts of one spouse contributes to the appreciation in value on separate property due to labor, monetary, or in-kind contribution, the appreciation in value of the asset is martial property pursuant to R.C. 3105.171(A)(3)(a)(iii).)

Cherry v. Cherry, 66 Ohio St.2d 348 (1981) (a reviewing court may modify or reverse a property division, if it finds the trial court abused its discretion in dividing the property as it did.)

Blakemore v. Blakemore, 5 Ohio St.3d 217 (1983) (the term “abuse of discretion” connotes more than error of law or judgment; it implies that the court’s attitude is unreasonable, arbitrary or unconscionable.)

Kuhn’s Argument

Kuhn’s primary argument focuses on establishing the signing bonus as “passive income” that would not be subject to division in a divorce. Using Middendorf as an example of active measures that create a marital interest in income from property, Kuhn argues the income on his property was passively created from the location of the land, not from any active development by either spouse. Kuhn agrees with the trial court’s finding that the signing bonus was passive income, because it resulted from property ownership, not “the labor, monetary, or in-kind contribution of either spouse.”

Kuhn’s second argument addresses Cottle’s suggestion that she has a dower interest in the property under R.C. 2103.02. Kuhn argues that Cottle’s signature on the leasing document did not create an ownership interest, but was merely recognition of her dower interest, which no longer exists.

Kuhn’s final argument is a procedural attack on the court of appeals decision. Kuhn argues that the appeals court reversed the trial court’s determination on the signing bonus without finding any abuse of discretion, which is legally wrong, as Judge Wise noted in his separate concurrence on the future royalties issue.

In his reply brief, Kuhn argues that Cottle was fully reimbursed for all her pre-marital contributions to the property, and cannot claim transmutation.  He also notes Cottle did not cross appeal from the finding of the appeals court that she was not entitled to any future royalties from the lease.

Cottle’s Argument

Cottle argues the contested signing bonus, which was received during the marriage, should be classified as marital property, and that she should receive half or more of the signing bonus. Relying on Petrella and Koch, Cottle argues her marital interest in the property arises from her paying down the mortgage debt with her own funds before marriage and from the joint refinancing  and satisfaction of the remaining debt on the property with marital funds. Cottle argues that R.C. 3105.171(H) also supports her position, by rejecting title as dispositive of the determination of property as marital or separate.

Cottle next argues if the property is classified as separate, then the signing bonus is marital property because it is active income.  She and Kuhn both actively pursued the opportunity to make the deal, and it required more work than just having property in the right location. In support of this argument, Cottle points to the groundwork she personally did prior to signing, including title checks and expenditure of joint marital funds to pay for legal advice. Cottle suggests that Middendorf supports this argument, because her active participation helped generate the signing bonus.

Responding to Kuhn’s second argument, Cottle argues the leasing document does more than protect a dower interest. She argues the contract treats both parties equally, because of the absence of any qualifying language expressly indicating her interest is only a dower interest. Her argument is that the composition of the leasing documents generally suggests a marital interest in the deal and the signing bonus. Cottle also argues in favor of the appellate court finding the joint interest because of “the nature of the payment,” timing of the payment, and characterization of the payment as marital for income tax purposes.

Finally, Cottle argues the appellate court did find the trial court abused its discretion in its ruling on the signing bonus and Kuhn’s argument is based on a misreading of the appellate decision.

Kuhn’s Proposed Proposition of Law No. 1

Pursuant to Ohio Revised Code Sections 3105.171(A)(4) and 3105.171(A)(6)(a)(iii) passive appreciation and income is not marital property subject to division by the parties.

Kuhn’s Proposed Proposition of Law No. 2

Where one spouse owns real property in an area experiencing a high volume of oil and gas exploration and leasing, the acquisition and execution of a lease by the property owner is not the result of contributing labor, money or in-kind contribution such that any income generated from said lease could be considered “active income” pursuant to Ohio Revised Code Section 3105.171 but is instead “passive income” generated from the separate property and therefore is not subject to division between the spouses in an action for divorce.

Kuhn’s Proposed Proposition of Law No. 3

The signature of a spouse upon a document regarding real estate, which signature is procured solely for the purpose of acknowledging the spouse’s dower interest does not create in the non-owner spouse an ownership interest in the subject real estate or any proceeds and/or benefits obtained from said real estate.

Kuhn’s Proposed Proposition of Law No. 4

Where no abuse of discretion is shown, a reviewing court may not modify or reverse a trial court’s decision regarding property division.

Student Contributor: Rebecca Campbell

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