The North Carolina Court of Appeals recently voided an entire equitable distribution judgment because the trial court denied a motion to add as a party a revokable trust alleged to be a necessary party, even though the motion was made more than three months after the conclusion of the equitable distribution trial. In Wenninger v. Wenninger, decided May 7, 2024, the appellate court held that the equitable distribution judgment was void for lack of a necessary party because the parties in the equitable distribution proceeding stipulated that items of property titled in the name of the trust were marital property, even though the trial court refused to distribute the items because they were not owned by either party.
A pretrial order entered by the trial court identified the parties’ stipulations and allegations as to marital property. The order listed three bank accounts and one car that the parties stipulated were titled in the name of a revocable trust. The parties also stipulated that two of the bank accounts were marital property, but they disagreed over the classification of the last bank account and the car.
At the conclusion of the equitable distribution trial, the trial court announced that the property titled in the name of the trust would not be distributed in the final judgment because the property “was not owned by the parties on the date of separation” and the trust “was not a party to this lawsuit.”
More than three months later, the husband filed a motion requesting that the trust be added as a necessary party. The appellate opinion makes no reference to any allegation by husband regarding why the trust property should be classified as marital property; there is no mention of a claim that a constructive trust should be imposed on the property to grant either party equitable ownership of the trust property or of any other legal theory under which the property titled in the name of the trust could be classified as marital property.
The trial court denied the motion on the basis that neither party moved to join the trust before the verdict was rendered. The trial court entered the equitable distribution judgment which did not distribute any of the property owned by the trust and husband appealed.
The lack of a necessary party renders a judgment void.
The court of appeals held that the trial court had no discretion to deny the husband’s motion to add the trust as a necessary party because any judgment entered without a necessary party is void. According to the appellate court, the trial court had the obligation to join the trust “ex mero motu” at any point in time when the trial court determined that the trust was a necessary party. The failure to add the necessary party rendered the entire judgment void.
Why was the trust a necessary party in this case?
The court of appeals explained that “when a third party holds legal title to property which is claimed to be marital property, that third party is a necessary party to the equitable distribution proceeding, with the third party’s participation limited to the ownership of that property.” (quoting Nicks v. Nicks, 241 N.C. App. 487 (2015)). According to the appellate court, the trust was a necessary party because the parties stipulated that property titled in the name of the trust was marital property in the pretrial order, and because the trial court has a “mandatory duty to classify and distribute property that all parties agree is subject to equitable distribution.”
Does this mean third parties or entities must be added whenever the trial court determines property is not owned by one or both of the parties?
It is clear that when a party requests in a pleading that the court impose a constructive trust or a resulting trust on property titled in the name of a third party or an entity such as a trust or an LLC, or when a party requests that a transfer of property to a third party or entity be set aside as a fraudulent transfer so that the property can be brought into the marital estate, the third party or entity must be joined as a party before the court can litigate that claim. See Upchurch v. Upchurch, 122 N.C. App. 172 (1996) and Nicks v. Nicks, 241 N.C. App. 487 (2015)
But in the Wenninger case, there is no indication that any such claim was made by either party and unlike in Nicks v. Nicks, 241 N.C. App. 487 (2015), the court of appeals does not point to any evidence in the record that would support such a claim.
In Weaver v. Weaver, 72 NC App 409 (1985), Ms. Weaver purchased a piano during the marriage with marital funds. The husband claimed that the piano was marital property, but the trial court determined that the parties gifted the piano to their children before the date of separation and therefore did not distribute the piano in the equitable distribution judgment. When the husband appealed, the court of appeals affirmed the trial court, holding that evidence was sufficient to show that the children rather than the parties owned the piano on the date of separation.
Despite the allegation by husband that the piano was marital property, the court of appeals in Weaver did not void the equitable distribution judgment because the children were not brought into the action as necessary parties. There was no claim that the transfer to the children should be set aside, so the trial court had the authority to determine that neither party owned the piano without joining the actual owners of the property.
The only difference between Weaver and Wenninger appears to be the stipulation of the parties in Wenninger that the property of the trust was marital property. Even though the trial court did not distribute the property titled in the name of the trust, the court of appeals held that the fact that the parties agreed that the property was marital required the court to join the trust as a necessary party, despite the lack of any claim by the parties that would support taking title away from the trust and vesting it in the parties.
So, I hope we don’t interpret the Wenninger opinion too broadly. I believe Weaver still is good law. Absent a stipulation such as the one in Wenninger, there is no need to join third parties or entities unless there is a claim that will support vesting title, either equitable or legal title, in one of the parties to the equitable distribution action.