Facts: After living together for 21 years and being married for 16 of those years, the parties separated and filed for divorce.

Eight years ago, the Court of Appeals affirmed the trial court’s decision that their prenuptial agreement was invalid. I covered that opinion here. The case was then remanded to the trial court before making its second appearance in the Court of Appeals, this time on a property classification issue.

Two of the largest assets in the marital estate are Wedgecorp, a Tennessee corporation involved in real estate development, and Quality Machining Service, LLC (“QMS”).

Wedgecorp was started by Husband well before the marriage and is his separate property. QMS was started during the marriage and is owned 51% by Wedgecorp and 49% by a third party.

The trial court found that QMS “was created by Husband and” a third party, stating:

Husband’s income and efforts during the marriage were used to purchase land and equipment for this business. QMS is, therefore, marital property. While Wife did not work for QMS, she did contribute to the home and raised the parties’ child. Wife became a stay-at-home mother at Husband’s insistence. Wife’s contribution as a homemaker and parent is to be given the same weight as that of Husband as wage earner.

After classifying QMS as marital property, the trial court included it in the equitable division of the marital estate.

Husband appealed.

On Appeal: The Court of Appeals reversed the trial court.

Husband argued that the trial court misclassified QMS as marital property when it should have been classified as his separate property.

Before equitably dividing the marital estate, Tennessee courts must classify all assets possessed by the divorcing parties as either separate or marital.

Separate property is not part of the marital estate and is not subject to division.

Marital property includes all assets, both tangible and intangible, acquired by either or both spouses during the marriage. It also includes income from, and any increase in value during the marriage of, property determined to be separate property if each party substantially contributed to its preservation and appreciation. “Substantial contribution” may include the direct or indirect contribution of a spouse as homemaker, wage earner, parent, or family financial manager, together with such other factors as the court may determine.

After classifying and valuing marital property, a Tennessee court must equitably divide it between the parties.

The Court agreed with Husband that QMS was his separate property not subject to equitable division:

It is undisputed that Husband has never held a direct, personal ownership interest in QMS. QMS is owned 51% by Wedgecorp and 49%” [by a third party]. Moreover, the trial court expressly held that Wedgecorp is Husband’s separate property, a proposition that Wife does not dispute.

When Wife was asked “did you ever do anything for QMS” she answered “no.” The trial court expressly found that Wife did not substantially contribute to the preservation and appreciation of Wedgecorp. The evidence in the record does not support a finding that Wife substantially contributed to QMS.

QMS is a corporate entity separate from Wedgecorp. It is not owned by Husband and consequently cannot be classified as marital property. To consider QMS as merely an increase in the value of Wedgecorp would be to improperly disregard the corporate forms of those entities.

The trial court found the value of Wedgecorp’s 51% interest in QMS to be $581,400. Our holding that it was misclassified as marital means that the size of the marital estate has changed by a significant amount. We vacate the finding that QMS is marital property and remand to the trial court for an opportunity to reconsider the distribution of the marital estate in light of this modification.

The Court reversed the trial court’s classification of Husband’s interest in QMS as marital property and remanded the case for reconsideration of the overall equitable division.

Ellis v. Ellis (Tennessee Court of Appeals, Eastern Section, August 29, 2022).

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