Facts: Husband and Wife married in 1996. No children were born of the marriage. In 2018, Wife filed for divorce after 22 years of marriage.

During the marriage, the parties accumulated several assets, including real estate and a business, along with significant debt. Two primary assets in dispute were a house in Etowah, Tennessee (“the Etowah House”) and a business the parties started during the marriage (“PTI”).

Wife had owned the Etowah House since 1983, well before the marriage. At the time of marriage, the Etowah House was solely in Wife’s name, and Husband’s name was never added to the deed. The parties only used the Etowah House briefly as a residence: they lived there for about two months during the marriage while repairs were being made to their primary marital home.

During the marriage, the couple made improvements to the Etowah House, adding living space, a garage, a pool covering, sidewalks, and other upgrades. They used marital funds for these renovations and to pay the mortgage. The mortgage was refinanced twice during the marriage, in part to withdraw funds to invest in a marital business.

By the time Wife filed for divorce and moved out of the marital residence and back into the Etowah House, about $22,000 remained on the mortgage, which Wife paid off during the parties’ separation.

At trial, Husband argued that marital funds used on the Etowah House and the improvements transformed it into marital property or at least made any increase in its value a marital asset. The trial court disagreed. It found that the Etowah House remained Wife’s separate property because Wife owned it before the marriage, Husband was never on the title, and the home never served as a long-term marital residence. The trial court awarded the Etowah House to Wife as her separate property, valuing it at $275,000.

The parties’ business, “PTI,” was created during the marriage and was a central focus of the divorce. PTI is a machine tool distributor: it connects equipment manufacturers with buyers and earns commissions of 3-5% on sales. Both spouses worked at PTI while married, but Husband maintained primary control of the company, especially after the divorce proceedings began.

During the separation, Husband engaged in a series of actions that severely damaged PTI’s finances. He took substantial “shareholder loans” from PTI for personal use, incurred new debt in PTI’s name (including a $433,000 Small Business Administration loan) in violation of the statutory injunction, and moved company funds between various accounts without informing Wife. He also failed to fully disclose assets and back-dated promissory notes to make the company’s finances look worse. These actions caused PTI’s debts to increase dramatically and its apparent value to drop.

At trial, both parties presented expert valuations of PTI. Wife’s expert initially valued PTI at around $202,000, but Husband’s expert considered it a negative asset (approximately -$324,000) due to the debts. By the time of trial, after accounting for debts—most of which Husband had accumulated post-separation—both experts essentially agreed the company’s net value was nearly zero.

The trial court, however, found that this “zero” valuation was mainly a result of Husband’s improper conduct. The evidence showed that Husband had siphoned off funds and burdened the business with additional debt to reduce its value and deprive Wife of a fair share. The trial court concluded that, if Husband’s asset dissipation had not occurred, PTI would have been worth much more. Specifically, the court found that if Husband’s $600,000 in “shareholder loans” were considered collectible and the barred $433,000 debt were eliminated, PTI would have held substantial value.

The trial court concluded that PTI’s true value had been artificially lowered, noting that it had “never seen an individual attempt to hide assets” as much as Husband did in this case. It ultimately valued PTI at $565,000 and awarded the business to Husband. The court based this value on an estimated $400,000 for PTI before Husband’s dissipation, plus approximately $165,000 for a specific commission PTI earned from a large equipment sale. (The evidence showed PTI was owed a $165,000 commission from a machine sale, money Husband was allegedly delaying or hiding.)

After classifying and valuing the Etowah House and PTI, the trial court made an overall division of the marital estate.

Husband appealed, challenging the trial court’s classification of the Etowah House as Wife’s separate property and the $565,000 valuation of PTI, among other issues.

On Appeal: The Court of Appeals reversed the trial court’s decisions on both the Etowah House and the valuation of PTI.

Classification of Etowah House. Tennessee is a “dual property” state, meaning courts must classify property as either separate property or marital property before dividing the marital estate. Property owned by a spouse before marriage is considered separate property and is not subject to division. However, Tennessee law also recognizes that an increase in the value of separate property during marriage may be treated as marital property if both spouses significantly contributed to its preservation and appreciation. A “substantial contribution” can be direct or indirect and includes efforts such as being a homemaker, wage earner, manager, or any other meaningful contribution by a spouse.

Transmutation is a related doctrine where separate property can be treated in a way that shows an intention for it to become marital property. This can include using it as the marital residence, jointly titling it, or heavily commingling marital funds into it, among other actions. In short, if spouses treat a separately owned asset as marital property, the law may consider it marital property. Even if an asset remains separate, any equity gained during the marriage through both spouses’ efforts is part of the marital estate. Once a spouse’s real and significant contributions to a separately owned asset are demonstrated, that spouse is entitled to a share in the asset’s appreciation.

Applying these principles, the Court of Appeals found that the trial court correctly determined that the Etowah House itself was Wife’s separate property because Wife owned it before the marriage and it was never jointly titled or extensively used as a marital home. However, the Court of Appeals concluded that the trial court erred in failing to classify any increase in the value of the Etowah House during the marriage as marital property, explaining:

The evidence demonstrated that the home was owned by Wife at the time of the parties’ marriage and that the title was never jointly held. Moreover, the home never served as the parties’ marital residence except during brief periods when the actual marital residence was under repair. In addition, Husband did not demonstrate that his credit was utilized to improve the real property. Instead, the Etowah House was used as collateral for loans to obtain funds that were used in the parties’ marital business, and Husband admitted that he had told Wife that such practice would “repay” her for the renovations the parties had made to the home. Accordingly, Husband has not demonstrated that Wife evinced a clear intent that this property be converted to marital property. Husband also posits, however, that the trial court erred by failing to classify the increase in the Etowah Houses value as part of the marital estate because the fax demonstrated that he had substantially contributed to the home’s preservation and appreciation. Upon review, we agree with Husband that the evidence supported a finding that Husband had substantially contributed to the preservation and appreciation of the Etowah House. Wife acknowledged that the parties had made significant improvements to the home during the marriage and that ongoing maintenance and mortgage payments have been paid using marital funds….

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Here, the proof demonstrated that both parties had earned wages during the marriage and that these wages were placed into a joint account from which expenses and mortgage payments related to the Etowah House were paid. Moreover, the parties acknowledged that they had made significant renovations during the marriage that had increased the Etowah House’s size and amenities. The evidence thus appears to support a finding of contributions by the parties that were “real and significant.” We must also consider, however, whether there was a link between the parties’ contributions and any increase in the equity and value of the Etowah House. Although we would assume such to be the case given the substantial improvements that were undertaken by the parties during the marriage, we note that neither party provided proof regarding the amount of the Etowah House’s appreciation during the marriage. Although the parties generally agreed regarding the value of the home at the time of the divorce, no evidence was introduced concerning the home’s value at the time of the marriage and the extent to which that value had increased during the marriage. Accordingly, we reverse the trial court’s determination that the entire value of the Etowah House was Wife’s separate property, and we remand this issue to the trial court.

Therefore, the Court of Appeals agreed that the Etowah House itself remains Wife’s separate property, but it ruled that Husband may be entitled to a share of any equity increase in the property during the marriage if that increase was due to marital contributions.

Valuation of PTI. Tennessee courts evaluate each party’s contribution to either preserving or dissipating marital property when dividing the marital estate. “Dissipation” is defined as “wasteful expenditures which reduce the marital property available for equitable distribution, and which are made for a purpose contrary to the marriage, either before or after a complaint for divorce.” Usually, dissipation is considered during property division; for instance, a trial court might award a larger share of the remaining assets to the innocent spouse if the other spouse wasted marital funds.

In this case, however, the trial court effectively addressed dissipation during the valuation phase: instead of accepting PTI’s depressed final condition at face value, the court adjusted the valuation to include the value that Husband had drained away. The principle is that a spouse should not benefit from undermining a marital asset’s value.

The Court of Appeals found that the trial court was justified in refusing to value PTI at zero. Husband’s actions, such as incurring large debt, diverting funds, and hiding commissions, made the company appear worthless, and the trial court correctly viewed this as a form of dissipation of marital assets. The Court of Appeals agreed that the evidence supported valuing PTI as if those dissipation activities had not occurred, at least based on the $400,000 “baseline” value used by the trial court. However, the Court of Appeals determined that one part of the trial court’s valuation went too far: the inclusion of the $165,000 commission. The evidence indicated that this commission, although expected, had not been received by the time of trial and was uncertain. There were issues with the underlying deal, and even if paid, much of it would go toward business expenses and sales commissions. In the Court’s opinion, including the full $165,000 in PTI’s value was speculative and not supported by the evidence. The Court of Appeals upheld the trial court’s finding that PTI had value despite Husband’s actions but rejected the specific addition of $165,000.

Based on the evidence presented, we simply cannot conclude that the addition of $165,000.00 to the value of PTI for a somewhat speculative commission was supported by the proof in the record. Even taking the trial court’s findings regarding Husband’s lack of credibility into account, the evidence was undisputed regarding the fact that this commission was unrealized at the time of trial. In addition, as Husband explained regarding the commission for the Oklahoma City contract, PTI would likely not realize the entire amount of the commission were it collectable because there would be expenses that would need to be paid from it. Therefore, we reverse the portion of the trial court’s judgment adding this $165,000.00 commission amount to PTI’s value and remand that issue to the trial court for further hearing and determination as necessary. We affirm the remainder of the trial court’s findings regarding PTI’s value.

By excluding the $165,000 speculative commission from the valuation, the Court of Appeals effectively lowered PTI’s value for division purposes to around $400,000.

Because both the Etowah House classification and the PTI valuation were crucial to dividing the marital estate, the Court of Appeals vacated the entire property distribution. On remand, the trial court will need to re-divide the marital assets and debts after deciding (1) how much, if any, of the Etowah House’s increased value during the marriage should be considered marital property, and (2) the value of PTI without the unsupported commission.

K.O.’s Comment: First, when one spouse brings a home or other asset into the marriage, any increase in that asset’s value during the marriage can become a divisible marital asset if both parties contributed marital funds and efforts toward the appreciation of that property during the marriage. However, neither side proved how much the house’s value increased during the marriage. When this is a potential issue, lawyers should obtain an appraisal or other evidence of the asset’s value at the time of marriage whenever a spouse’s separate property might have appreciated. Without that baseline value, the court cannot determine the amount of increase attributable to the marriage. Practically, it’s much easier to address this during the original trial than years later on remand. In this case, the parties now face additional proceedings and expenses to determine the value of a house that has been part of the case all along.

Second, this appeal should serve as a warning to any spouse tempted to play financial games during a divorce. Husband’s maneuvers to hide money and undermine the company’s value did not fool the courts; in fact, they backfired. The trial court essentially said, “We’re going to value this business as if you hadn’t done all that.” And the Court of Appeals largely agreed, except for one part (the $165,000 commission) that was truly uncertain.

Tennessee courts have little patience for spouses who dissipate marital assets out of spite or greed. From a litigation standpoint, when there’s evidence that a spouse has intentionally reduced an asset (such as incurring debt or draining accounts), lawyers and parties should understand that courts can and will consider that. This may be reflected in the valuation or by awarding the other spouse a larger share of what remains, but the outcome is the same: the offending spouse isn’t allowed to profit from their misdeeds.

Lawyers representing parties who find themselves on the wrong side of a court’s injunction—such as Husband taking a prohibited SBA loan and hiding funds—should come clean and work to minimize the damage. Continuing to hide and obscure facts, as Husband did, only harms your credibility and raises the risk of a more serious outcome.

Source: Lee v. Lee (Tennessee Court of Appeals, Eastern Section, March 3, 2026).

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