Stace Carol LeGrand-Brock v. Roy Richard Brock

Citation: Not availableDocket: 09-07-00009-CV

Court: Court of Appeals of Texas; January 23, 2008; Texas; State Appellate Court

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Stace Carol LeGrand-Brock appealed the trial court's property division in her divorce from Roy Richard Brock, particularly challenging the classification of $6,975,510 as Roy's separate property. The couple married on January 10, 1999. Prior to the marriage, Roy held 740.5 shares of stock in BTH Holdings, Inc. Following a unanimous resolution by BTH's board to dissolve and liquidate the company, Roy received multiple cash distributions totaling $6,975,510 between March 1999 and November 2001. Stace filed for divorce on October 10, 2002, and the trial court awarded these distributions to Roy as separate property.

Stace's appeal included several claims: she argued the trial court erred by not allowing expert testimony on the cash distribution characterization; that the court mischaracterized the distributions, leading to an unfair property division; and that there was insufficient evidence to support the trial court's findings that the cash distributions were liquidating distributions and not dividends. The appellate court initially identified an error in the trial court regarding expert testimony and remanded the case for further proceedings.

On remand, an accounting expert testified that the cash distributions were liquidating dividends and should be classified as community property. However, the trial court maintained that the distributions were liquidating in nature, linked to the dissolution of BTH, and thus Roy's separate property. Stace raised five issues in her appeal, all contesting the trial court's findings on the nature of the cash distributions and their characterization as Roy's separate property.

The argument challenges the characterization of distributions from BTH, a Delaware corporation, emphasizing that under Delaware law, a dissolving corporation must first pay its creditors before distributing remaining assets to stockholders. BTH retains the capacity to settle business affairs for three years post-dissolution, but cannot continue its business operations. Under Texas law, property owned before marriage is considered separate property, and the parties have agreed that the stock in question is Roy's separate property. Generally, distributions received from a dissolving corporation for separate-property stock remain separate property, even if they are in exchange for liquidated assets. 

Stace contends that BTH's cash distributions from retained earnings should be classified as dividends and thus community property, arguing they represent income derived from Roy’s separate-property stock. Her expert identified these distributions as "liquidating dividends," asserting that cash dividends treated as income during marriage are community property. However, legal precedent indicates that a distribution can be a dividend even if not formally declared by the board, as the act of setting aside funds for shareholders has the legal effect of a declared dividend. Importantly, retained earnings do not constitute dividends until formally declared.

It is undisputed that the distributions were made following proper corporate dissolution procedures. Stace does not allege any fraud against the community estate or attempt to pierce the corporate veil, which could occur if the corporation was used fraudulently. There is no evidence that BTH's board declared the distributions as dividends prior to dissolution or that the corporation continued to operate post-distribution.

A liquidating distribution refers to a transfer of money from a corporation to its shareholders during the liquidation of its assets, applicable to both corporations and partnerships. The board resolution mandated BTH to distribute its remaining assets to shareholders following the complete cancellation or redemption of all capital stock shares. The nature of the distributed assets—retained earnings—does not affect their characterization. Roy received $6,975,510 in cash distributions in exchange for his separate property stock upon BTH’s dissolution. Stace contended that Roy did not provide evidence to counter the community property presumption regarding these distributions on remand. Notably, the Tenth Court of Appeals highlighted uncertainty regarding the shares exchanged for cash payments. However, the court noted that BTH was dissolved and had its dissolution certified by the State of Delaware. Stace's expert testified that stock shares were to be canceled upon dissolution, rendering them worthless, and that the payout of retained earnings supported this conclusion. The expert's assertions were largely unchallenged, and the number of shares involved was not critical to the determination. Roy’s ownership of separate-property stock entitled him to share in the liquidation proceeds. The court found that the characterization of distributions was a legal issue based on uncontroverted evidence. Despite Stace's expert referring to the distributions as "liquidating dividends," this characterization did not influence the legal determination.

An expert witness is not permitted to define legal principles in a case, a responsibility that belongs to the trial court. In this matter, Roy did not require expert testimony to present the legal issue, as his arguments and brief sufficed. The trial court correctly identified the liquidating distributions as Roy's separate property, and Stace's challenges to this decision were overruled, resulting in the affirmation of the trial court's judgment. Roy received 740.5 shares of stock in BTH Property Services, Inc., which was stipulated as his separate property. The definitions and legal principles surrounding liquidation dividends were referenced, highlighting that such dividends are typically paid from a corporation's capital during dissolution. The treatment of stock received as dividends is established as a mutation of property, inheriting the character of the original stock. Although not decisive for state law, similarities between the Internal Revenue Code's treatment of liquidating distributions and the case at hand were noted. The distinction between a liquidation distribution and a traditional dividend was emphasized. Stace did not contest the trial court's reliance on prior proceedings during the trial.