Cynthia Kay Kennedy Cloud v. Richard Duane Cloud

Shreveport LA - Divorce lawyer represented plaintiff with appealing a judgment partitioning the community property.

In May 1980, Cynthia and Richard Cloud were married in North

Carolina. In 2002, the Clouds established their matrimonial domicile in

Louisiana. In December 1996, Richard and his three siblings, acting as

settlors, created the Cloud Family Trust. In December 2005, Richard and his

siblings signed the articles of organization of Cumulus Assets, LLC

("Cumulus”), a company formed by their father, Duane Cloud. In August

2009, Cynthia filed a petition for divorce.

In March 2010, a judgment of divorce was signed. The trial court

later rendered an amended divorce judgment allowing Cynthia to resume the

use of her maiden name "Kennedy.” After a hearing officer conference in

January 2014, the hearing officer filed a report regarding Cynthia's rule to

allocate the use of community funds. In July 2014, the trial court appointed

a special master, whose appointment was terminated in May 2017. In

January 2018, Richard filed a sworn detailed descriptive list and Cynthia

filed a detailed descriptive list in February 2018. Each party then filed a

traversal of the other's descriptive list.

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A trial on the partition of community property was held in July 2019,

and the trial court heard oral argument in January 2020. Subsequently, the

trial court issued written reasons for judgment discussing the formation of

Cumulus and finding Richard's interest in the company was his separate

property. The trial court rendered judgment allocating the assets and debts

of the parties, ordering Cynthia to make an equalizing payment in the

amount of $403,980.72 to Richard and ordering the community's former

interest in Capital Innovations, LLC, be conveyed to North Louisiana Bidco,

LLC, in liquidation of the interest. Cynthia appeals the judgment.

DISCUSSION

The plaintiff, Cynthia Kennedy, contends the trial court erred in

finding the ownership interest in Cumulus was the separate property of

defendant, Richard Cloud. Plaintiff argues defendant failed to rebut the

presumption an asset which existed during the community regime is

community property.

Community property comprises property acquired during the

existence of the legal regime through the effort or skill of either spouse,

property acquired with community things or with community and separate

things, property donated to the spouses jointly and all other property not

classified by law as separate property. La. C.C. art. 2338. Things in the

possession of a spouse during the regime of community of acquets and gains

are presumed to be community, but either spouse may prove a thing is

separate property. La. C.C. art. 2340. The community presumption is

rebuttable upon a showing by a preponderance of the evidence the separate

nature of the property. Talbot v. Talbot, 2003-0814 (La. 12/12/03), 864 So.

2d 590. Separate property includes property acquired by a spouse prior to

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the establishment of a community property regime, property acquired by a

spouse with separate things and property acquired by inheritance or donation

to a spouse individually. La. C.C. art. 2341.

In this case, plaintiff points out Cumulus was formed during the

community property regime and argues defendant's position as a manager of

Cumulus means his skill and effort were used in operating the company.

However, the evidence shows Duane Cloud, who was listed as co-manager

of Cumulus, actually carried out the transactions involving Cumulus and was

the source of all the property held by the company. The record contains a

number of assignments and acts of donation transferring mineral interests of

Duane and Martha Cloud to Cumulus and company tax returns for the years

2007 to 2009 show all of the assets held by Cumulus were the result of

property transfers from Duane and Martha Cloud.

Additionally, John Campbell testified by deposition he performed

legal work to assist Duane Cloud to create the Cloud Family Trust and

Cumulus for estate planning purposes. Campbell stated Duane Cloud

wanted to transfer assets to his descendants while he was alive and he

conveyed property to Cumulus for that reason. Campbell testified to his

knowledge all of the assets held by Cumulus had been received from Duane

and Martha Cloud and none of the property had been contributed by

defendant. Thus, defendant produced evidence demonstrating his effort was

not involved in acquiring the property of Cumulus and no community funds

were transferred to the company.

Plaintiff also argues an email she received from defendant in June

2009, regarding his deposit of funds which had been repaid to Cumulus,

shows the company was treated as a community interest. However, the

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referenced email describing defendant's decision to give plaintiff one-half of

funds he received from Cumulus on one occasion does not tend to prove

defendant's interest in Cumulus is community property when considered in

light of the record as a whole.

After hearing the witness testimony and weighing the evidence, the

trial court found Cumulus was created as a means of estate planning

whereby Duane and Martha Cloud donated their property to defendant and

their other children. Property acquired by a spouse by donation to him

individually is deemed his separate property. After reviewing this record,

we cannot say the trial court erred in determining the evidence presented

was sufficient to overcome the presumption of community and to establish

defendant's interest in Cumulus as his separate property. Thus, the

assignment of error lacks merit.

Allocation of Nephos

Plaintiff contends the trial court erred in failing to assign a value to

Nephos, LLC ("Nephos”), and to allocate the company to defendant.

Plaintiff argues the trial court's division in kind of the community's interest

in Nephos does not achieve finality in the partition of community property.

In allocating assets and liabilities, the court may divide a particular

asset or liability equally or unequally or may allocate it in its entirety to one

of the spouses. The court shall consider the nature and source of the asset or

liability, the economic condition of each spouse and any other circumstances

the court deems relevant. La. R.S. 9:2801(A)(4)(c). A trial court has much

discretion in valuing and allocating assets and liabilities in a community

property partition. Reagan v. Reagan, 52,080 (La. App. 2 Cir. 6/27/18), 250

So. 3d 1122.

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In this case, the evidence presented shows Nephos was a holding

company for the community's 25% interest in North Louisiana Bidco, LLC

("NLB”), a company which had operated under a legislative scheme

allowing certain lenders to obtain tax credits as an incentive to make highrisk loans to businesses in economically disadvantaged areas. For a time,

NLB was successful in raising funds to make loans and generate substantial

sums for distribution to Nephos and then to the community. However, when

this incentive program expired there was a lack of investors and NLB ceased

making loans. As a consequence, at the time of the partition trial NLB was

in a winding-down stage primarily involving efforts to collect payment of

nonperforming loans. Thus, the value of Nephos was uncertain at the time

of trial because it was not known how much of the outstanding loans could

be collected by NLB to enable distributions to its members, including

Nephos.

After considering the existing circumstances, the trial court divided in

kind equally to the parties the community's 98% interest in Nephos. As a

result, plaintiff and defendant each own 49% of Nephos and will receive the

same amount of any distributions from Nephos in the future. We note this

outcome is consistent with the parties' equal sharing of distributions from

Nephos during the divorce proceedings.

Based upon this record and the applicable law, we conclude the trial

court acted within its discretion in ordering the partition in kind of the

ownership interest in Nephos. Thus, the assignment of error lacks merit.

Duty to Preserve the Community

Plaintiff contends the trial court erred in failing to find defendant

breached his duty to preserve the community. Plaintiff argues defendant is

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liable for her financial loss caused by the decrease in value of NLB because

he failed to prudently administer the former community property.

A spouse has a duty to preserve and manage prudently former

community property under his control in a manner consistent with the mode

of use of such property prior to termination of the community regime. He is

answerable for any damage caused by his fault or neglect. La. C.C. art.

2369.3. A spouse who asserts a claim under Article 2369.3 has the burden

of proving the other spouse failed to act prudently to manage and preserve

the community property prior to partition. Ellington v. Ellington, 36,943

(La. App. 2 Cir. 3/18/03), 842 So. 2d 1160, writ denied, 2003-1092 (La.

6/27/03), 847 So. 2d 1269. The trial court's determination as to the merit of

the claim of mismanagement of community assets is subject to the manifest

error standard of review. Ellington, supra.

In this case, plaintiff introduced into evidence financial statements

prepared by defendant showing NLB with a value of $26,356,187 in

November 2009, a value of $14,366,231 in December 2012, and a value of

$5,026,017 in May 2017. Plaintiff also points out three companies, in which

defendant held an ownership interest, failed to repay loans in the total

amount of $6,173,119. Plaintiff asserts the decline in the value of NLB and

the unpaid loans indicate defendant failed to prudently manage community

property under his control.

However, the testimony demonstrates factors other than

mismanagement were the cause of the reduction in NLB's value and the

unpaid loans. Plaintiff's valuation expert, David Johnston, acknowledged

the approximately $8 million in distributions which NLB made to its

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members and the $12 million in charge-offs for nonperforming loans from

2009 to 2018 would be reasons for the decline in NLB's value over time.

Regarding the operation of NLB, defendant's valuation expert,

Benjamin Woods, testified NLB was formed as a business and industrial

development company ("Bidco”) and a certified capital company ("Capco”)

under legislation seeking to increase economic development. Woods

explained these entities gathered funds to make loans to undercapitalized

businesses in economically distressed areas. Woods stated part of the law

allowed insurance carriers to invest in a Bidco/Capco, such as NLB, in

return for state tax credits and the resulting investment "pools” needed to be

decertified by NLB through making qualifying loans so capital could be

distributed to its members.

Woods testified the law allowed NLB to take an equity ownership

interest in a company to which it was loaning money to help the company

qualify for a loan. Woods stated these related party loans helped NLB to

make qualifying loans and decertify the investment pools. Woods explained

almost all lenders like NLB began to wind down after 2010 when the

legislation providing tax credits expired and as a result NLB now has mainly

nonperforming loans which are difficult to collect. Woods stated during the

stage of winding down, NLB has been collecting loans and distributing

money to its members so one would expect the total equity of NLB to

decline over time.

Richard Cloud testified related party loans were permitted under the

Bidco/Capco legislation. Cloud stated the related party loans to the

companies at issue were made in an effort to help the businesses become

profitable, but also to enable NLB to decertify millions of dollars in the

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investment pools and thereby make cash distributions to its members,

including Nephos.

Although the value of NLB declined from 2009 to 2018 as shown by

plaintiff, the record does not support plaintiff's assertion such a decline in

value was caused by defendant's mismanagement. Rather, the trial court

heard testimony explaining such a reduction in value was to be expected

given the winding down of NLB's operation, the difficulty in collecting

higher risk loans and the distribution of significant funds to NLB's

members. These distributions enabled Nephos to make substantial cash

distributions to the community. We note Nephos distributed approximately

$827,000 to plaintiff from the filing of the divorce petition in August 2009

to the time of trial in July 2019.

Based upon the evidence presented, plaintiff has not satisfied her

burden of proving defendant failed to act prudently in a manner consistent

with the mode of use of the community property under his control prior to

the termination of the regime. Thus, we cannot say the trial court erred in

denying plaintiff's claim alleging defendant failed to preserve community

property. The assignment of error lacks merit.

Valuation of Capital Innovations, LLC

Plaintiff contends the trial court erred in assessing a value of zero to

Capital Innovations, LLC, a community asset. Plaintiff argues the trial court

should have accepted her expert's valuation of the company.

Generally, the trier of fact is entitled to hear and weigh expert

testimony in the same manner as any other evidence. Reasonable and wellfounded opinion should be considered. Ellington, supra. The effect and

weight to be given an expert's testimony depends upon the validity of the

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underlying facts relied upon by the expert and rests within the broad

discretion of the trial court. Ellington, supra.

In this case, the record shows Capital Innovations, LLC ("Capital

Innovations”), is a holding company which owns interests in Acadiana

Building Components ("Acadiana”), Craig Taylor, Inc. ("CTI”), and

Universal Electric Supply, LLC ("Universal”). Plaintiff's expert, Johnston,

testified he estimated the value of Capital Innovations using the total values

of the companies as of 2009. Johnston stated he determined the value of

Acadiana by taking the assets listed in the 2009 tax return and adding back

the amount of depreciation for a building it owned. Johnston testified for the

values of CTI and Universal, he took the assets listed on their 2009 tax

returns and added back the amount of the loan each owed to NLB, making

the assumption CTI and Universal would not need to repay those loans,

based on their reserve status noted in a 2018 audit report for NLB.

However, Johnston stated in determining the value for these companies in

2018, he did not add back the loan amounts but instead accepted the report

of Woods, who assessed Acadiana, CTI and Universal with zero value.

Treating each company's outstanding debt as an asset, Johnston opined

Capital Innovations' value was $3,054,311, based on the estimated values of

the companies.

Defendant's valuation expert, Woods, testified he determined the

value of the three companies as of December 2017. Woods stated his

analysis indicated Acadiana, CTI and Universal each had negative member

equity and as a result, the value of each company was zero. Woods

explained the value of Capital Innovations, as a holding company, was based

on the value of its investments. Woods opined in this situation, the value of

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Capital Innovations was zero, based on the negative equity of each company

in which it held an interest.

The trial court shall value the community assets at the time of trial on

the merits, determine the liabilities and adjudicate the claims of the parties.

La. R.S. 9:2801(A)(4)(a). In determining the value of the community assets,

the trial court considered the opinions of the experts and the documentary

evidence presented. The testimony demonstrates the experts agreed Capital

Innovations held interests in companies with zero value at the time of the

partition trial.

Based upon the evidence contained in this record, we cannot say the

trial court erred in assessing Capital Innovations with zero value. Thus, the

assignment of error lacks merit.

For the foregoing reasons, the trial court’s judgment is affirmed.

Costs of this appeal are assessed to the appellant, Cynthia Kennedy

(formerly Cloud).



AFFIRMED.