JOHNSON VS. JOHNSON (DIVORCE PROPERTY & ALIMONY)

Key holdings

Practitioner summary

In this landmark decision, the court departed from the all-or-nothing rule of Lake v. Bender, 18 Nev. 361, 4 P. 711 (1884), and held that the increase in value of separate property during marriage must be apportioned between the owner's separate property and the community where the increase results from both the separate capital investment and the labor, skill, or industry of one or both spouses. Apportionment prevents the inherent injustice of denying the separate owner a reasonable return on the investment merely because the increase resulted 'mainly' from a spouse's efforts. The court identified the two recognized apportionment methods - Pereira v. Pereira, 103 P. 488 (Cal. 1909) (allocate a reasonable return on the original capital investment to separate property and the excess to the community) and Van Camp v. Van Camp, 199 P. 885 (Cal. App. 1921) (deduct reasonable compensation for the owner's services as the community's share and allocate the balance to separate property) - and held that courts are bound by neither but may apply whichever will achieve substantial justice (Beam v. Bank of America, 490 P.2d 257 (Cal. 1971)). The trial court's determination of the amount of the increase was supported by substantial evidence and would not be disturbed (Ormachea v. Ormachea, 67 Nev. 273, 217 P.2d 355 (1950)), and its application of the Pereira formula was neither inherently unfair nor a contravention of substantial justice. Affirmed.

In plain language

Before marrying, the husband owned two A&W drive-in restaurants, which he placed into a corporation. After the marriage, the corporation acquired two more drive-ins, funded largely by the cash flow from the original restaurants, and the business grew substantially in value during the marriage. In the divorce, the key question was how to treat that increase in value - as the husband's separate property, as the community's, or split between them. The Nevada Supreme Court used this case to change Nevada law. Under the old 'all-or-nothing' rule (from Lake v. Bender), the increase went entirely to the separate owner if it came mainly from the property itself, or entirely to the community if it came mainly from a spouse's efforts. The Court rejected that rule. It held that when the increase in value of separate property during marriage results from BOTH the invested separate capital AND the labor or skill of a spouse, the increase must be apportioned - divided - between separate and community property. This prevents the unfairness of denying the separate owner a reasonable return on the investment just because a spouse's efforts also contributed. The Court described two accepted methods for doing the apportionment: the Pereira approach (give the separate estate a fair return on its capital and treat the excess as community) and the Van Camp approach (value the spouse's services as the community's share and treat the rest as separate). It said courts may use whichever method achieves substantial justice. Finding the trial court's use of the Pereira method fair on these facts, the Court affirmed.