Sharma v. Routh, No. 14-06-00717-CV (Tex. App. 12/31/2008)

Page 1

TIMOTHY L. SHARMA, Appellant, v. LISA C. ROUTH, Appellee.

No. 14-06-00717-CV.

Court of Appeals of Texas, Fourteenth District, Houston.

Majority and Dissenting Opinions filed December 31, 2008.

On Appeal from the 246th District Court, Harris County, Texas, Trial Court Cause No. 2004-61264.

Affirmed.

Panel consists of Chief Justice HEDGES and Justices FROST and GUZMAN. (FROST, J. dissenting).

MAJORITY OPINION

ADELE HEDGES, Chief.

Appellant, Timothy L. Sharma, appeals the final decree of divorce entered by the trial court. In seven issues, Sharma challenges the trial court's characterization of income from two testamentary trusts created by Sharma's first wife, the division of the marital estate, the reliability of expert testimony, and the trial court's refusal to file additional findings of fact and conclusions of law. We affirm the trial court's judgment.

I. FACTUAL BACKGROUND

Sharma and Routh were married on August 29, 2004. The couple separated months later, and their marriage was dissolved on January 26, 2006. In the final decree of divorce, the trial court characterized certain trust income as community property. The trust at issue was created by Sharma's first wife, Alice Hinniker Sharma ("Alice"). In her last will and testament, Alice created two trusts, the Marital Deduction Trust ("Marital Trust") and the Family Trust.

A. The Marital Trust

Under the Marital Trust, Sharma is the trustee and beneficiary; Upward Reach Foundation, a charity created by Alice and Sharma, is named as the remainder beneficiary.¹ The Marital Trust provides for mandatory distributions of trust income to the beneficiary. The trust also provides for distributions from "trust principal . . . as are necessary . . . to provide for [Sharma's] health, support, and maintenance in order to maintain him . . . in accordance with the standard of living to which [he] is accustomed . . . ." At the time of Alice's death in July 2001, the Marital Trust owned two buildings that were psychiatric hospitals in Houston. The hospitals' services and other assets were owned by Cambridge International, Inc. and North Houston Enterprises, Inc. (companies owned by Alice and Sharma). In 2002, additional corpus was transferred into the Marital Trust. Specifically, the following pieces of corpus were added: (1) 6798 shares of common stock in Cambridge International; (2) an 86.25% interest in real estate located on Lake Houston (the "Lake Houston Property"); and (3) an 83.08% interest in real estate located on Earle Street in the Houston area (the "Earle Street Property").

B. The Family Trust

The Family Trust also names Sharma as the trustee and beneficiary; the remainder beneficiary is again Upward Reach Foundation. The Family Trust provides for distributions from trust income and principal as necessary "to provide for [Sharma's] health, support and maintenance in order to maintain him . . . in accordance with the standard of living to which [he] is accustomed . . . ." The Family Trust's corpus initially consisted of 1272 shares of common stock in Cambridge International.

C. Sale of Corpus in the Marital Trust

In early 2003, Sharma and his financial advisors created a plan to convert the two psychiatric hospitals into tax exempt hospitals, requiring that the hospitals be sold to a tax exempt entity. The two psychiatric hospitals were renamed Intracare and Intracare North. Sharma then created the Cambridge Health Foundation, the 501(c)(3) corporation that would acquire the two hospitals.² Sharma is on the board of trustees for Cambridge Health Foundation.

In December 2003, Sharma, acting as trustee to the Marital Trust, conveyed Intracare and Intracare North to Cambridge Health Foundation. The sale was financed by five promissory notes: one note was made payable to the Marital Trust, another to North Houston Enterprises, and three notes to Cambridge International. The first note was made payable to the Marital Trust for the real property on which the buildings were located (referred to hereinafter as the "MT building note"). The MT building note was in the amount of $30,115,000.00 and became corpus to the Marital Trust.

The second note was made payable to North Houston Enterprises in the amount of $1,127,494.00 for its ownership interest in Intracare North (the "Houston Enterprises note").³ The three remaining notes, totaling $5,814,475.00, were made to Cambridge International and were divided between the three co-owners of Cambridge International. A note in the amount of $3,952,680.10 was transferred to the Marital Trust (the "MT asset note"), which owned 6798 shares of Cambridge International common stock. A note in the amount of $1,122,193.68 was made payable to Cambridge International but was not transferred to the Marital Trust; instead, this note was subsequently transferred to Sharma for his ownership interest in Cambridge International. A note in the amount of $739,601.22 was transferred to the Family Trust (the "FT note"), which owned 1272 shares of common stock in Cambridge International. Subsequently, the principal and accrued interest on these notes were generally transferred to Sharma's personal account.⁴

D. Divorce Proceedings

Shortly after the parties' separation in 2004, Sharma filed an original petition for dissolution of marriage. He initially obtained a default judgment against Routh. Routh, then, successfully moved for a new trial, and the trial court set aside the first decree. A trial on the merits commenced on October 10, 2005 and continued thereafter for 13 days. One of the primary issues at trial was the proper characterization and division of the interest accrued during the marriage on the Marital and Family trusts. At the time, the Marital Trust owned the MT building and MT asset notes.⁵ The Family Trust owned the FT note. Both parties admitted and relied on expert testimony regarding the proper characterization of the trust interest income from the Marital and Family trusts.

On May 24, 2006, the trial court signed the final decree of divorce, dissolving the marriage. The trial court also characterized the accrued interest on the MT building, MT asset, and FT notes as community property. In its findings of fact and conclusions of law, the trial court specified the amount of interest accrued on the notes during the marriage. The MT building note had $ 2,096,067.00 in accrued interest, while the MT asset note had $175,996.00. The Houston Enterprises note accrued $50,146.00 in interest during the marriage, and the FT note had $32,955.00 in accrued interest. The trial court found the interest accrued during the marriage to be community property and awarded Routh 50% thereof.

E. Issues on Appeal

Sharma raises seven issues on appeal. In issues one through four, Sharma challenges the trial court's characterization of the trust income as community property.⁶ First, he contends that the trust income is his separate property because he is not a named remainder beneficiary, and therefore he is not entitled to receive trust principal. Second, Sharma argues that the "income from separate property is community property" rule is not controlling in this case because he did not own the property giving rise to the income. Third, Sharma claims that the interest is his separate property because he acquired it by gift or devise. Fourth, Sharma argues that the trial court's mischaracterization of the trust income constitutes reversible error. In his fifth issue, Sharma claims that the trial court erred by including the trust income as part of the marital estate absent a favorable finding on Routh's claims for reimbursement or fraud. In his sixth issue, Sharma contends that the testimony of Routh's expert, Jeannie McClure, was not reliable with respect to the proper characterization of the trust income. Lastly, Sharma alleges that the trial court erred in refusing to file additional findings of fact and conclusions of law after it made its initial findings.

II. STANDARD OF REVIEW

We review the trial court's characterization of property under an abuse of discretion standard. Murff v. Murff, 615 S.W.2d 696, 698-99 (Tex. 1981); Stavinoha v. Stavinoha, 126 S.W.3d 604, 607-08 (Tex. App.-Houston [14th Dist.] 2004, no pet.). The issue of whether property is separate or community is determined by the facts that, according to rules of law, give character to the property. Raymond v. Raymond, 190 S.W.3d 77, 80 (Tex. App.-Houston [1st Dist.] 2005, no pet.). We may reverse the trial court only if, after reviewing the record, it is clear that the trial court's decision is an abuse of discretion or is manifestly unjust and unfair. Stavinoha, 126 S.W.3d at 607-08; see also Sutton v. Eddy, 828 S.W.2d 56, 58 (Tex. App.-San Antonio 1991, no writ) (stating that the record must affirmatively show that the trial court's decision is arbitrary and unreasonable).

Under this abuse of discretion standard, the legal and factual sufficiency of the evidence are not independent grounds for error, but are merely relevant factors in assessing whether an abuse of discretion has occurred. Stavinoha, 126 S.W.3d at 608. When a court mischaracterizes separate property as community property, the error requires reversal because the subsequent division divests a spouse of his or her separate property. Smith v. Smith, 22 S.W.3d 140, 147 (Tex. App.-Houston [14th Dist.] 2000, no pet.);McElwee v. McElwee, 911 S.W.2d 182, 189 (Tex. App.-Houston [1st Dist.] 1995, writ denied).

III. CHARACTERIZATION OF TRUST INCOME

In Sharma's first four issues, he contends that the trial court abused its discretion by improperly characterizing the trust income as community property. According to Sharma, the trust income is his separate property because he has no interest in the trust corpus, and he acquired the interest by gift or devise.

A. Definition of Separate and Community Property

In Texas, all marital property is either separate or community property. Hilley v. Hilley, 342...