Sharma v. Routh

302 S.W.3d 355

Timothy L. SHARMA, Appellant v. Lisa C. ROUTH, Appellee.

No. 14-06-00717-CV.

Court of Appeals of Texas, Houston (14th Dist.).

October 8, 2009.

Concurring Opinion on Rehearing December 3, 2009.

Sallee S. Smyth, Richmond, TX, Michael P. Von Blon, Houston, TX, for appellants.

Marshall Davis Brown, Jr., JoAnn Storey, Houston, TX, for appellees.

Panel consists of Chief Justice HEDGES and Justices FROST and GUZMAN.

MAJORITY OPINION ON REHEARING

KEM THOMPSON FROST, Justice.

Appellant Timothy L. Sharma's motion for rehearing is granted. The majority and dissenting opinions issued in this case on December 31, 2008, are withdrawn, and this Majority Opinion on Rehearing is issued today, with a concurring opinion by Chief Justice Hedges to follow.

I. INTRODUCTION

This is an appeal from a divorce decree in which the husband asserts that the trial court reversibly erred by characterizing income distributions he received from two testamentary trusts as community property and awarding half of those distributions to his wife, rather than awarding all of the distributions to him as his separate property. In the context of a spouse who receives distributions of trust income under an irrevocable trust during marriage, case law indicates that the income distributions are community property if the receiving spouse owns the trust corpus but that the distributions are separate property if the receiving spouse does not own the trust corpus. Neither the Supreme Court of Texas nor this court has decided what the legal standard should be for determining whether the receiving spouse owns the trust corpus. We hold that, when a spouse receives distributions of trust income under an irrevocable trust during marriage, the income distributions are community property only if the recipient has a present possessory right to part of the corpus. The trial evidence conclusively proved that the husband did not have such a right and that the distributions in question were separate property to which the husband acquired title by devise or gift during the marriage. Although we affirm the trial court's grant of divorce and dissolution of the marriage, based on the trial court's reversible error in awarding the wife substantial amounts of the husband's separate property, we sever and reverse the remainder of the judgment and remand for further proceedings.

II. FACTUAL AND PROCEDURAL BACKGROUND¹

Appellant Timothy L. Sharma and appellee Lisa C. Routh were married in August 2004.² A few months later, Timothy filed for divorce. Soon thereafter, the couple separated and ceased living together as husband and wife. After a lengthy bench trial, in January 2006, the trial court signed a decree ending the parties' brief marriage.

Husband's Prior Marriage and Rights to Trust Property

Before his marriage to Lisa, Timothy was married to Alice Hiniker Sharma from 1982 until Alice's death in 2001. Under Alice's will, two trusts were created: the Alice Hiniker Sharma Marital Trust (hereinafter "Marital Trust") and the Alice Hiniker Sharma Family Trust (hereinafter "Family Trust"). Timothy is the trustee of both the Marital Trust and the Family Trust. Alice's will requires that the net income of the Marital Trust be distributed to Timothy at least quarterly. Likewise, under certain circumstances and to a specified extent, the trustee of the Family Trust is required to distribute to Timothy income or principal from the Family Trust.

While married to Alice, Timothy, who is a psychiatrist, built up and developed psychiatric hospitals in the Houston area. In 2002, the Marital Trust was initially funded with two psychiatric hospitals, realty, and shares of common stock in Cambridge International, Inc. ("International"), with a total stated value of more than $39 million. The Family Trust was initially funded only with shares of International common stock.

In 2003, Timothy, as trustee of the Marital Trust, sold the realty and improvements for the two hospitals to a nonprofit organization now known as the Cambridge Health Foundation³ (hereinafter "Cambridge Foundation") in exchange for a promissory note in the original principal amount of $30,115,000 (hereinafter "Building Note"). As a result of its ownership of International stock, the Marital Trust also received a promissory note in the original principal amount of $3,952,680.10, executed by Intracare Hospital (hereinafter "Intracare Note"). As a result of its ownership of International stock, the Family Trust received a promissory note in the original principal amount of $739,601.22, executed by Intracare Hospital (hereinafter "Family Trust Note"). Following a complex set of transactions in December 2003, two nonprofit organizations, Intracare Hospital and Intracare North Hospital, began operating the two psychiatric hospitals. The Cambridge Foundation owned the land and buildings for these two hospitals.

The Building Note, the Intracare Note, and the Family Trust Note (hereinafter collectively the "Notes") all provide for periodic payments of principal and interest. The interest portion of the payments on the Building Note and the Intracare Note is income to the Marital Trust, which, under Alice's will, must be distributed to Timothy. The record reflects that Timothy also received distributions of income from the Family Trust. However, at all material times since the execution of the Notes on December 31, 2003, Timothy has donated the income distributions from both trusts to the Cambridge Foundation without taking actual receipt of any money.⁴ Timothy reported these distributions as income on his personal income tax return and claimed a charitable deduction for his donation of these distributions. The record contains no evidence that Timothy received distributions of trust corpus from the Marital Trust or the Family Trust.⁵

Trial Court Proceedings

After a lengthy bench trial involving extensive testimony and trial exhibits, the trial judge signed an order on January 26, 2006. In this order, the trial court granted the parties a divorce and, among other things, made the following determinations:

• The Marital Trust is Timothy's separate property.

• Because interest received on separate property is community property, the interest on the corpus of the Marital Trust is community property.

• Lisa is entitled to fifty percent of the interest that accrued on the Building Note and the Intracare Note during the marriage — from August 29, 2004 through January 26, 2006.

In the order the trial court did not specifically mention the Family Trust, but it indicated that it also was awarding Lisa half of the interest that accrued on the Family Trust Note during the marriage. This order did not contain all the necessary information for a property division and a final decree. Therefore, further proceedings in the trial court were required. Following these proceedings, Timothy and Lisa agreed that, from the date of their marriage (August 29, 2004) through the date of their divorce (January 26, 2006), $2,096,067 in interest accrued on the Building Note and $175,996 in interest accrued on the Intracare Note. The sum of these two amounts is $2,272,063 (hereinafter collectively "Marital Trust Income"). The parties also agreed that, during the same period, $32,955 in interest accrued on the Family Trust Note (hereinafter "Family Trust Income").

The trial court signed a final decree and then issued findings of fact and conclusions of law. The trial court found that a just and right division of the community estate having due regard for each party's rights would be to award each party fifty percent of the community estate. The trial court determined that the total community estate, including the Marital Trust Income and the Family Trust Income, had a value of $3,872,924.23. The trial court awarded Lisa one-half of this amount to equalize the division of the estate. The trial court rendered judgment in favor of Lisa and against Timothy in the amount of $1,936,462.12, plus interest. In addition, the trial court ordered that this judgment be secured by an equitable lien against all of Timothy's separate property and against Timothy's half of the community estate. The trial court denied all parties' claims for reimbursement or economic contribution.⁶

III. ISSUES AND ANALYSIS

On appeal, Timothy challenges the trial court's property division, asserting, among other things, that the trial court erred by characterizing the Marital Trust Income and the Family Trust Income as community property rather than as Timothy's separate property. Timothy asserts that this income is his separate property because he acquired it by devise or gift, and that the trial court erred by awarding half of this income to Lisa.

In a divorce decree, the trial court "shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage." TEX. FAM.CODE ANN. § 7.001 (Vernon 2006). To convince this court to disturb the trial court's division of property, Timothy must show the trial court clearly abused its discretion by a division or an order that is manifestly unjust and unfair. See Stavinoha v. Stavinoha, 126 S.W.3d 604, 607 (Tex.App.-Houston [14th Dist.] 2004, no pet.). Under this standard, the legal and factual sufficiency of the evidence are not independent grounds of error, but they are relevant factors in assessing whether the trial court abused its discretion. Id. at 608. If the trial court mischaracterizes a spouse's separate property as community property and awards some of the property to the other spouse, then the trial court abuses its discretion and reversibly errs. See Eggemeyer v. Eggemeyer, 554 S.W.2d 137, 142 (Tex. 1977); Gana v. Gana, No. 14-05-00601-CV, 2007 WL 1191904, at *4 (Tex.App.-Houston [14th Dist.] Apr. 24, 2007, no pet.) (mem. op.).

All property possessed by either spouse during or on dissolution of marriage...