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In
The

Court of
Appeals

Ninth District of Texas at Beaumont

______________________

NO. 09-07-009 CV

______________________

STACE CAROL LEGRAND-BROCK, Appellant

V.

ROY RICHARD BROCK, Appellee

On
Appeal from the 221st District Court

Montgomery County, Texas

Trial Cause No. 02-10-06730 CV

OPINION

Stace Carol LeGrand-Brock appeals the
property division in a divorce decree. She challenges the trial court's
characterization of $6,975,510 as Roy Richard Brock's separate property.
Finding no reversible error, we affirm the trial court's
judgment.

Stace and Roy were married on January 10,
1999. Roy obtained 740.5 shares of separate property stock in BTH
Holdings, Inc. before his marriage to Stace. On February 15, 1999, BTH's
board of directors, with the unanimous consent of the stockholders, passed
a resolution to dissolve BTH, liquidate its assets, and distribute the
assets pursuant to a plan of liquidation. The plan of liquidation required
the officers of the corporation to pay all of BTH's current outstanding
liabilities, debts, and obligations. All remaining corporate assets would
then be distributed pro rata to the shareholders in complete cancellation
or redemption of all the shares of capital stock. BTH distributed to Roy
the following cash distributions: $4,443,000 on March 5, 1999; $1,406,950
on September 10, 1999; $444,300 on November 5, 1999; and $681,260 on
November 23, 2001.
(1) A certificate of
dissolution was issued on October 31, 2001.

Stace filed for divorce on October 10,
2002. The trial court granted the divorce, and awarded the $6,975,510 in
cash distributions to Roy as his separate property. Stace appealed. The
Supreme Court transferred the appeal to the Tenth Court of Appeals
pursuant to a docket equalization order. In that appeal, Stace argued the
trial court erred in refusing to allow her to present expert testimony
regarding the characterization of the cash distributions.
LeGrand-Brock v. Brock, No. 10-04-00251-CV, 2005 WL 2578944, at
*1 (Tex. App.-- Waco Oct. 12, 2005, no pet.). The Tenth Court of Appeals
found that the trial court erred in refusing to admit the expert testimony
"[b]ecause there was a fact issue regarding whether Roy's stock was
exchanged/sold for cash or whether the cash payments were (in whole or in
part) dividends[.]" Id. at *2. The appellate court remanded the
cause for further proceedings. Id.

On remand, the trial court heard
testimony from Stace's accounting expert regarding the characterization of
the cash distributions. The accountant testified the cash distributions
were paid from retained earnings, were liquidating dividends, and should
be characterized as community property. The trial court found that the
distributions were not dividends. The court ruled that Roy had received
liquidating distributions pursuant to the dissolution of BTH, and the
distributions were in redemption or cancellation of his separate property
stock. The property division in the divorce decree remained the same.

Stace brings five appellate issues
attacking the court's characterization of the distributions. In issue one,
Stace argues the trial court erred in determining the distributions were
separate property because Roy failed to present evidence to overcome the
community property presumption. In issue two, Stace argues the trial
court's mischaracterization of the cash distributions resulted in an
inequitable property division. In issue three, she asserts there is no
evidence to support the trial court's finding that the cash distributions
were in cancellation or redemption of Roy's separate property stock. In
her fourth issue, Stace argues there is no evidence to support the trial
court's finding that the cash distributions were not dividends. In issue
five, she asserts there is no evidence to support the trial court's
conclusion that the distributions were Roy's separate property and were
distributed in cancellation and redemption of his separate-property stock.
She argues the issues together as a challenge to the characterization of
the distributions, and we address the issues together. BTH was a Delaware
corporation. Under Delaware law, a dissolving corporation must first pay
its creditors, and then distribute the remaining assets to the
stockholders. See Del. Code Ann. tit. 8, §§ 280, 281 (2007);
see generally Tex. Bus. Corp. Act. Ann. art. 6.04 (Vernon Supp.
2007) (distribution under Texas law).
(2) The corporation survives for three years after dissolution
to settle and close the business, to dispose of and convey property, to
discharge liabilities and to distribute to the stockholders any remaining
assets, but not for the purpose of continuing the business for which it
was organized. Del. Code Ann. tit. 8, § 278 (2007); see Tex. Bus.
Corp. Act. Ann. art. 7.12 (Vernon 2003) (limited survival after
dissolution).

Under the Texas Family Code, property owned before
marriage is separate property. Tex. Fam. Code Ann. § 3.001(1) (Vernon
2006). The parties stipulated the stock was Roy's separate property.
Generally, when a
spouse owns separate-property stock in a dissolving corporation and
receives distributions of liquidated assets, the distributions remain the
stockholder's separate property. See Fuhrman v. Fuhrman, 302
S.W.2d 205, 212 (Tex. Civ. App.--El Paso 1957, writ dism'd) (holding that
stock received in liquidation of a corporation in which husband owned
separate stock was husband's separate property); Wells v.
Hiskett, 288 S.W.2d 257, 265 (Tex. Civ. App.--Texarkana 1956, writ
ref'd n.r.e.) (holding that because stockholder received a liquidating
distribution in the form of an oil and gas lease in consideration of the
cancellation of the stock held in a dissolving corporation, the lease
remained stockholder's separate property as a matter of law). The
character of property is not altered by the sale, substitution, or
exchange of the property; separate property that merely undergoes
mutations or changes in form remains separate property. Harris v.
Harris, 765 S.W.2d 798, 802 (Tex. App.--Houston [14th Dist.] 1989,
writ denied). Distributions received in exchange for the cancellation of
stock upon the corporation's dissolution retain the character of the
stock. See Wells, 288 S.W.2d at 265.

Stace
argues that because BTH distributed the cash from its retained earnings,
the distributions were dividends and therefore community property. In her
view, the distributions were essentially income generated from Roy's
separate-property stock and must be characterized as community property.
Her expert witness labeled the cash distributions as "liquidating
dividends."
(3)

Cash
dividends from stock are treated like income, and when distributed during
marriage are community property. Bakken v. Bakken, 503 S.W.2d
315, 317 (Tex. Civ. App.--Dallas 1973, no writ).
(4) A distribution by a corporation to its shareholders may
constitute a dividend in law even though not formally designated as a
dividend by the board of directors. Ramo, Inc. v. English, 500
S.W.2d 461, 465 (Tex. 1973); see also Moroney v. Moroney, 286
S.W. 167, 169-70 (Tex. Comm'n App. 1926, judgment adopted) (explaining
that a corporation does not have to formally declare a dividend when it
sets apart funds for distribution to its shareholders because it has the
legal effect of a declared dividend). The corporation's earnings or
surplus funds normally do not constitute a dividend while they are
retained by the corporation, however. See generally Thomas v.
Thomas, 738 S.W.2d 342, 344 (Tex. App.--Houston [1st Dist.] 1987,
writ denied) (retained earnings are a corporate asset); Bryan v.
Sturgis Nat'l Bank, 90 S.W. 704, 705 (Tex. Civ. App. 1905, writ
ref'd) ("The accumulated earnings or surplus funds of a corporation
constitute a part of its assets, and belong to the corporation, and not to
the stockholders, until they have been declared and set apart as
dividends.").

It is
undisputed the distributions here were properly made pursuant to a
corporate dissolution. Stace makes no allegation of fraud on the community
estate. She makes no effort to pierce the corporate veil. See, e.g.,
Boyo v. Boyo, 196 S.W.3d 409, 419 (Tex. App.--Beaumont 2006, no pet.)
(corporate veil may
be pierced if the corporation is used for the purpose of fraud). There is no
evidence, and Stace does not argue, that BTH's board of directors declared
or otherwise authorized the payments as cash dividends before the
dissolution resolution, or that after liquidating and distributing its
assets, BTH somehow continued to operate as a business.

A
liquidating distribution includes a transfer of money by a corporation to
its shareholders in liquidation of all or a portion of its assets.
See Black Law's Dictionary 508 (8th ed. 2004) (A "liquidating
distribution" is "[a] distribution of trade or business assets by a
dissolving corporation or partnership."); see also Tex. Bus.
Corp. Act. Ann. art. 1.02(A) (13) (c) (Vernon Supp. 2007) ("'Distribution'
means a transfer of money . . . by a corporation to its shareholders . . .
in liquidation of all or a portion of its assets."). The board resolution
required BTH to distribute its remaining assets to its shareholders "in
complete cancellation or redemption of all the shares of capital stock of
the Company[.]" It is immaterial to the characterization of the property
in this case that the assets distributed on dissolution were the
corporation's retained earnings. Upon the dissolution of the corporation,
Roy received distributions of $6,975,510 in exchange for his separate
property stock. The cash distributions represented an exchange of Roy's
separate property stock for BTH's cash assets.
(5) See generally Harris, 765 S.W.2d at 802;
Fuhrman, 302 S.W.2d at 212; Wells, 288 S.W.2d at
265.

Stace
argued to the trial court that the Tenth Court of Appeals remanded the
case so the trial court could listen to her expert's testimony regarding
characterization and tracing.
(6) Stace argues in this Court that because Roy did not present
characterization evidence on remand, Roy failed to rebut the community
property presumption. Stace quotes from the Tenth Court of Appeals's
opinion, which stated, "It is unclear from the record how many shares, if
any, were relinquished in connection with each cash payment."
LeGrand-Brock, 2005 WL 2578944, at *1. She argues that Roy's
failure to present any additional evidence on remand means there is no
evidence to support the trial court's conclusion that the payments were in
exchange for the stock.

The Tenth
Court of Appeals's opinion also noted, however, that the board of
directors passed a resolution to dissolve BTH on February 15, 1999, and
that BTH received a certificate of dissolution on October 31, 2001 from
the State of Delaware. Id. Stace's expert testified:

Once the
dissolution was passed the shares were to be cancelled. They could not
have been transferred once they were cancelled . . . . It doesn't matter
whether the shareholders turn in their stock certificates for cancellation
or they are just assumed cancelled. The payout of all retained earnings
and profits renders them worthless and the corporation files its
termination with the State as was done here.

She
testified, "There was ultimate cancellation of the stock . . . when all
matters were done[,]" and although she had no knowledge as to whether the
stock was cancelled, "[t]here should have been[]" and although she had
"not seen them," she was "sure there probably was."

BTH was
dissolved. The controlling facts in this case were not controverted by
Stace's expert on remand, but were in material respect conceded. The
number of shares exchanged for each liquidating distribution is not
determinative. As Stace's expert testified, the stock was ultimately
rendered worthless by the dissolution. Roy's separate-property stock
ownership included the right to share in the distribution of the
corporation's assets on dissolution. See Mischer v. Burke, 456
S.W.2d 550, 554-55 (Tex. Civ. App.--Houston [1st Dist.] 1970, writ ref'd
n.r.e.).

The
characterization of the distributions based on the uncontroverted evidence
was a matter of law for the court to decide. See, e.g., Pace v.
Pace, 160 S.W.3d 706, 712 (Tex. App.--Dallas 2005, pet. denied)
(uncontroverted evidence showed house was purchased with wife's separate
fund); Harris, 765 S.W.2d at 802-03 (undisputed evidence showed
husband received partnership interest in prior divorce). Although Stace's
expert labeled the cash distributions as "liquidating dividends," and
expressed her opinion that liquidating dividends should be treated like
cash dividends paid by a going corporation, the witness's conclusion on an
issue of law is not controlling. See Greenberg Traurig of N.Y., P.C.
v. Moody, 161 S.W.3d 56, 95 (Tex. App.--Houston [14th Dist.] 2004, no
pet.) ("It is not the role of the expert witness to define the particular
legal principles applicable to a case; that is the role of the trial
court. . . . As such, an expert may not usurp the trial court's role in
trying the case."). Roy had no need to present expert testimony on the
law. His argument and brief were sufficient to present the legal question
to the trial court.

The trial
court properly characterized the liquidating distributions as Roy's
separate property. Stace's issues are overruled. The trial court's
judgment is affirmed.

AFFIRMED.

DAVID GAULTNEY

Justice

Submitted on October 11, 2007

Opinion Delivered January 24, 2008

Before McKeithen, C.J., Gaultney and
Kreger, JJ.

1. As part of the plan of liquidation, Roy also
received 740.5 shares of stock in BTH Property Services, Inc., a
wholly-owned subsidiary of BTH Holdings. The parties stipulated that this
stock was Roy's separate property.

2. With regard to the distribution of assets, the
current statutes cited contain no substantive changes from those
applicable in 1999.

3. A "liquidation dividend" is defined as "[a]
dividend paid to a dissolving corporation's shareholders, [usually] from
the capital of the corporation, upon the decision to suspend all or part
of its business operations." Black Law's Dictionary 513 (8th ed. 2004).

4. However, stock received as dividends are treated as
a mutation of property and take the character of the stock from which they
originated. Tirado v. Tirado, 357 S.W.2d 468, 473 (Tex. Civ.
App.--Texarkana 1962, writ dism'd).

5. Although not governing on the issue of state law
presented in this case, the Internal Revenue Code's tax treatment of
liquidating distributions seems comparable. The Internal Revenue Code
states, "Amounts received by a shareholder in a distribution in complete
liquidation of a corporation shall be treated as in full payment in
exchange for the stock." 26 U.S.C. § 331(a) (2002); see also generally
Hellmich v. Hellman, 276 U.S. 233, 235, 48 S.Ct. 244, 72 L.Ed. 544
(1928) ("A distribution in liquidation of the assets and business of a
corporation, which is a return to the stockholder of the value of his
stock upon a surrender of his interest in the corporation, is
distinguishable from a dividend paid by a going corporation out of current
earnings or accumulated surplus when declared by the directors in their
discretion, which is in the nature of a recurrent return upon the stock."
(citing "Regulations 45, 1919 ed., 237, 240")).

6. Stace did not object at trial to the trial court
proceeding as if the expert testimony would supplement the record already
before the trial court from the previous proceeding. See Tex. R.
App. P. 33.1(a).