Source: https://familylaw.typepad.com/virginiafamilylawappeals/property_division_business_property/
Timestamp: 2019-04-25 06:34:14+00:00

Document:
The Court of Appeals upholds a court that treated a stream of payments from the sale of a company as "deferred compensation" and thus applied a coverture fraction to determine what share of them was marital. The husband, who had sold the company, is the one who sought this result, and the wife appealed it. He started and then sold the company during the marriage. The sale agreement spread out the payments to him, and required him to work for the buyer, and not to compete with it. He completed most of those conditions after separation.
The numerator of the coverture fraction the circuit court applied was comprised of the number of days from the date ZipList was founded to the date of the parties’ separation. The denominator of the coverture fraction was comprised of the number of days from the date ZipList was founded to the date of the final payout.
How does stock from a sale, rather than some kind of employee stock ownership or option plan, fit the Code's definition of a divisible deferred compensation plan?, which reads: “The court may direct payment of a percentage of the marital share of any pension, profit-sharing or deferred compensation plan or retirement benefits, whether vested or nonvested, which constitutes marital property and whether payable in a lump sum or over a period of time.”?
As this Court previously stated, “[W]e find no support for the view that the legislature intended to exclude retirement plans, or any other specific type of property, from the overall equitable distribution scheme.” Mann v. Mann, 22 Va. App. 459, 463, - 10 - 470 S.E.2d 605, 607 (1996) (emphasis added) (citing Banagan v. Banagan, 17 Va. App. 321, 325, 437 S.E.2d 229, 231 (1993) (“When pension benefits comprise a ‘portion of the pool of marital assets,’ they are clearly contemplated by the ‘scheme’ of Code § 20-107.3, which is intended to justly distribute the ‘marital wealth of the parties.’”)). See also Cirrito v. Cirrito, 44 Va. App. 287, 292-93, 605 S.E.2d 268, 270-71 (2004) (the Court of Appeals found that the future wages lost pursuant to a non-compete agreement were a substitute for a salary and subject to equitable distribution); see also Luczkovich v. Luczkovich, 26 Va. App. 702, 708-09, 496 S.E.2d 157, 160 (1998) (this Court determined the equitable distribution of severance payments based on whether “the severance pay was intended to compensate the employee for efforts made during the marriage or to replace post-separation earnings”).
But, uh, no one was arguing that this asset should be left out of equitable distribution; the wife was trying to get all of it divided as ordinary marital property rather than deferred compensation.
However, the trial court and the Court of Appeals are on much solider ground when they go on to say that the Stock Purchase Agreement WAS a deferred compensation plan. It included a plan, it paid compensation for the husband's work performed over time, and it deferred that compensation.
Allen v. Allen, 2/28/17, unpublished.
I think mostly this stands as a warning to lawyers, experts, and clients, that if you take a position that is too extreme, perhaps in hopes of influencing the overall outcome in your direction, your position may instead be rejected out of hand as ridiculous, and the outcome may be exactly what your opponent is asking for.
Note to our lay-person and media readers: This case is completely in line with long-standing Virginia case law on valuing businesses. This is NOT an unprecedented move toward Virginia recognizing "human capital" and "earning potential" as something to divide in a divorce. Those things are not divided in Virginia divorces when they are not part of a business that a spouse owns, or owns part of. In fact, when valuing a business interest, you try to measure the litigant's earnings from the business MINUS his earnings from his ongoing personal efforts.
Debts vs. Assets when determining intrinsic value - Va.Ct.App.
PROPERTY DIVISION – VALUATION – BUSI­NESS PROPERTY – EXPERTS. It’s well-es­tab­lished that when there’s a battle of the experts, a trial judge who wants to pick his own number, and not adopt in toto the answer of either expert witness, can do so. And so a Henrico judge did not err in cherry-picking one element from one expert’s testi­mony, and another from another’s, and mixing and matching ‘em to get his own number. Put another way, the judge has broad discretion to resolve a con­flict be­tween expert witnesses on valuation issues. A recent case involved, for the most part, hotel-owning corpo­rations. The analysis is fairly abstract and alt­hough one of the experts produced from his calcula­tions a “net equity value,” before isolating the hus­band’s share from those of his partners to get a “pro rata eq­uity value,” and then gave it a discount for mi­nority-fraction ownership, it was, after all, “intrinsic value” that the judge wanted. That was not any more lucidly defined or explained here than it was in the Howell case, wherein it was hard to perceive it as an­ything but a rubber yardstick. But of course the Court of Appeals here quoted Bosserman to the effect that that means what it is worth to the owner.
But, the explanation continues, precise adaptation of any valuation method “to the facts of the case must vary with the myriad situations ... among married couples.” Indeed. So in other words, you’re right. The rule is that it’s whatever the judge says it is. And God forbid he or she should neglect to say, “I’m using intrinsic value” before saying “it’s worth X.” Here, in the evaluation of two companies, two experts, with an income approach, determined the values of the hotels the companies operated. The third came up with full value of the companies themselves, and dis­counted the husband’s share of ownership for his fractional interest. The trial court adopted the first two experts’ appraisal for the hotels, then used the third one’s method to value the companies (which owned cash assets too), and subtracted their debts, but did not discount, as the third expert did, the value of husband’s share. This was consistent with intrinsic value (of course). (After all, what isn’t?) The non-liquid nature of husband’s interest was considered when making the ultimate equitable distribution. The two hotels had a negative value, but the judge found zero values for them. When the debts of an asset ex­ceed its value, it’s worth zero, the Court said. An off­set to the total marital estate value for the neg­ative value of one asset “is not recognized in Virginia law” for equitable distribution of marital property (except for cases of proved dissipation), the Court explained. Maybe in most cases, husband argued, but when the business owner might be personally liable for the companies’ debts, not. The Court of Appeals rejected that.
Ultimately, having laws, and especially appellate case law, is about the precise meaning of words, isn’t it? And perhaps what is really meant by the Court of Appeals’ use of “intrinsic value” is not “its value to the owner,” but “its theoretical value to an owner sit­uated as this one is (an owner in this owner’s situa­tion).” It would, then. still seem to be a strange thing to ask of an expert witness, who after all (I mean come on, really) is supposed to give an objective an­swer, according to that scientific Daubert standard. Otherwise, if you are going to use a legal standard like “intrinsic value” for the valuation of real estate,corporations, or material goods in lawsuits, we might as well be like the unlettered peasant or the village moron scratching his head, cudgeling his brains and stammering when he is brought up before the Lord of the Manor for poaching leverets (or grousing in the goody, or whatever). This isn’t exactly like the prin­ciple of the Twelve Tables at work here.
The Court held that the fact that the husband may possibly, at some future time, find himself personally liable is not properly a part of a marital property val­uation and division. The Court also includes a very helpful discussion articulating and explaining “going-concern value.” This was another part of the refuta­tion of husband’s argument about personal liability for defaults. The Court of Appeals cleverly recog­nizes that cases like Hodges involved an erroneous argument by one side that sought to get blood out of the other side’s non-existent turnip, which might be a remedy when dissipation is alleged and proved, but when not, not. The Court adds that “unfortunately, Hodges is silent as to the reasoning behind its hold­ing. However, the rationale of the Court’s decision in Hodges becomes clear in the context of a case such as this.” It explains that “simply because a company’s debts exceed its assets at a given point in time does not mean that the company has a negative value. Nor does it mean that the company is incapable of gener­ating profits or that the company does not have a positive cash flow capable of paying off any debt. Instead, it merely shows that at the time of valuation the company has more debt than assets.” The Court noted that at least one other jurisdiction treats in­debted marital property this way, citing Kline v. Kline, 581 A2d 1300 (Md. App., 1990). Thus, it says, the circuit court “was not plainly wrong in finding that the loans were ‘valid debts incurred by going concerns.’” Patel v Patel, 61 Va. App. 714, 740 S.E.2d 35 (4/9/13).
PROPERTY DIVISION – MARITAL OR SEPARATE – GIFT OR SALE? — NOMINAL SALES WITH TOKEN CONSIDERATION. In an opinion concerning transfers of at least three kinds of stock from a family corporation to a husband, the Court of Appeals found gifts instead of sales, and reversed as plainly wrong the trial court’s classification of the stock as marital. This was in Sfreddo v. Sfreddo, 59 Va. App. 471, 720 S.E.2d 145, 26 VLW 984 (1/24/12). The stock of a family chemical business was owned by the husband, his brother and their mother. The circumstances created some confusion as to how much of a sale this was and how much it was actually a gift, but there seems to have been no question that the transfer was to the husband alone, and not to the couple. The corporate minutes labeled the transfer of “Triple S Co.” stock as a sale and there was token consideration reflected, and for that reason the trial court found it was not a gift, as husband had failed to prove corporate intent to make a gift. It sounded that way because the corporation issued new stock to him and redeemed the mother’s shares. That showed an intent of husband’s mother to make a gift of Triple S stock to him, and the trial court found no evidence that there was not delivery and acceptance. The Court of Appeals observed that there had been no evidence after the transfer of commingling, transmutation, or joint titling of the stock to the couple. This was not good enough for the trial court, and it found no showing by the husband of corporate donative intent. The appellate court differed. Since the corporation is but a fictitious entity, the intent of the Board of Directors is necessarily the intent of the corporation, the Court of Appeals said. It found corporate intent to give the shares clearly present, and the trial court decision clearly wrong and unsupported by the evidence. The Court of Appeals chose to disregard the corporate-minutes labeling and the token consideration in view of other circumstances. Using the corporate minutes the Court of Appeals found that the redemption of the mother’s stock was followed by the sale of 200 shares to the husband at a $1.00 a share, which was not at all fair market value. Not only that, but husband’s new shares would constitute half the company. When half the company was sold in 2003 it went for $1.5 million, and that supported a finding that the remaining 200 shares were worth $7,500 per share on the date of trial. Not only that, but all three directors testified that they considered the transfer a gift, and the trial court itself had specifically found that the mother’s intent as to the shares she conveyed was to make a gift, so intent was proved by clear and convincing evidence and the trial court was plainly wrong to find no gift. Nominal consideration makes no difference because the Court of Appeals, to find a valid sale, is looking for a “bargained-for” exchange. The Court recited a lot of corporate law principles, with ample citations, including the one that intent of the sole stockholder can evidence intent of the corporation. Though the husband also contended on appeal that the trial court erroneously valued his stock in “APS Investments,” which he owned with his brother, the Court of Appeals upheld the valuation because all APS owned was a single piece of property and one bank account, and considering the value of the stock, the trial court had been well within its discretion.
PROPERTY DIVISION — CLASSIFICATION, VALUATION AND DISTRIBUTION REQUIRE­MENTS — STIPULATIONS — AGREEMENTS. An agreement at the beginning of an equitable distribution trial as to how a holding company would be valued and divided, and by whom, will be effective to control the proceedings, and a wife’s later argument, that the trial judge erred in letting the company be disposed of the way they agreed, got nowhere in the Court of Appeals. The husband and wife had agreed that the LLC should be divided per its Operating Agreement, and that included letting a mutually-agreed-upon CPA not only value it but divide it by percentages of interest. Thus it hardly made sense to come back and argue that the judge ignored the requirements of §20-107.3 by not going through the identification-classification-valuation-distribution ritual. A more interesting point in this case is that the Court of Appeals also rejected the wife’s argument that 20-107.3A requires that the judge individually classify and hang an individual price tag on each item of property. The appellate court doesn’t interpret it that way. And it does not just say that it wasn’t required in this case because all the judge had to do was follow the stipulated proedure. It expressly says that “we find no such requirement in that Code section.” Pascarella v. McCoy, unpublished, 25 VLW 1102 (1/11/11).

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