Opinion ID: 2276677
Heading Depth: 1
Heading Rank: 3

Heading: Equitable Distribution of AutoBody

Text: Sherman's cross-appeal asserts that the trial court erred in finding that AutoBody, formed after he separated from Barnes, was marital property subject to equitable distribution. Sherman argues that the trial court's determination that AutoBody was marital property is inconsistent with the terms of the in-court agreement concerning the wind-up of FuelLine reached by the parties on May 7, 1996. Under that agreement, each party was to receive FuelLine's list of subscribers and advertisers and each had the opportunity to bid on the FuelLine name and logo and purchase corporation property at fair market value. The intent of the agreement, Sherman contends, was to permit each party to begin a new, separate business. The trial court found that AutoBody was marital property because 1) the funds used by Sherman to begin AutoBody were not his separate property; they were either marital funds reimbursed from his brother and sister-in-law ($14,000), see supra note 4, or received from his mother ($40,000) for an interest in the business, and 2) Sherman used the artboards and layout from FuelLine to create the first editions of AutoBody as virtual clones of the FuelLine magazine, [5] which prior to dissolution was undoubtedly marital property. Sherman disputes the trial court's finding that to the extent Barnes had made contributions to FuelLine, and the extent to which these contributions permitted [Sherman] to establish AutoBody, the new venture was marital property subject to equitable distribution. The party who claims sole and separate ownership has the burden of establishing that the property is his or her separate property. See Jordan v. Jordan, 616 A.2d 1238, 1239 (D.C.1992); see also Hemily v. Hemily, 403 A.2d 1139, 1141 (D.C.1979) (noting threshold requirement for property exempt from distribution is that it be `the sole and separate property' of one spouse). The court assigns each party his or her separate property, see D.C.Code § 16-910(a), and then distributes all other property accumulated during the marriage, i.e. marital property, § 16-910(b). The trial court found that funds Sherman received from his mother and brother to establish AutoBody constituted all other property within the meaning of § 16-910(b). [6] Because the money received from his brother mirrored the amount Sherman had previously given his brother and sister-in-law out of marital funds, the trial court found these funds merely to be a reimbursement of the marital funds and, therefore, not Sherman's sole and separate property. See Cox v. Cox, 639 A.2d 97, 99 (D.C.1994) (A spouse may not circumvent the equitable distribution of the marital estate by concealing marital assets or by manipulating title to them.). This finding is not clearly erroneous. According to the trial court, because the $40,000 given by Sherman's mother to AutoBody was consideration for a one-half interest in AutoBody, it did not qualify as Sherman's separate property by gift or otherwise under § 16-910(a). Although we question whether the evidence established that the $40,000 received by AutoBody from Sherman's mother was intended as an investment reflective of AutoBody's value, see infra Part III. C., the trial court's finding that the funds received by AutoBody from Sherman's mother in exchange for stock was an investment in the company, and not simply a gift to Sherman, is not clearly erroneous. Based on the trial court's finding that the $40,000 from Sherman's mother was an investment in AutoBody, we understand the trial court's reasoning as follows: Because marital funds (the loan to Sherman's brother) and assets (FuelLine's artboards) were used to start up AutoBody, the business was marital property. The $40,000 invested by Sherman's mother was in exchange for a half interest in the business. This established the value of the concern at $80,000, of which the court awarded Barnes $40,000. Although we agree with Sherman that the May 7, 1996, agreement permitted each party to begin a new business, because Sherman began his business, at least in part, with marital assets, we conclude that the trial court's finding that AutoBody was marital property is supported by the record and not clearly erroneous. [7] We now turn to the valuation of that property.
Barnes argues that the trial court's refusal to credit her valuation testimony in effect disallowed the testimony and that there was no requirement that she testify to the underlying facts or data because she was testifying as an expert. Barnes further argues that the trial court committed legal error by refusing to credit her valuation of AutoBody, finding it unreliable because it was not based on any recognized valuation method. Barnes testified that the net profit per month of AutoBody was $30,000 to $34,000 (approximately $400,000 per year), and that based on such net profit, the quality of the AutoBody newspaper, the loyalty of its customer base, and its anticipated revenue, the company had a total present value of $1.75 million to $2 million. Barnes' figures for AutoBody were culled from bank statements and cancelled checks for July, August, and September 1996. Barnes tallied the expenses of AutoBody using checks from Sherman's subpoenaed bank records; on the revenue side, she relied on invoices, and, where no invoice was produced, by counting the ads in the AutoBody newspaper and computing the amount of billables using the official AutoBody rate card. Barnes turned her $400,000 annual projected net profit figures for AutoBody to a present value of the going concern of $1.75 to $2 million based on the amount of sales and the percentage of net profit recouped over a period of years. Barnes argues that the trial court disallowed her testimony. We disagree. The trial court in fact overruled a motion to strike her testimony. [8] Barnes' valuation testimony was accepted into evidence by the trial court, which deemed it consistent with well-settled precedent that an owner is competent to testify as to his opinion of the value of his or her own company. See, e.g., Independence Fed. Sav. Bank v. Huntley, 573 A.2d 787, 788 (D.C.) (per curiam), cert. denied, 498 U.S. 853, 111 S.Ct. 148, 112 L.Ed.2d 114 (1990); Hartford Accident and Indem. Co. v. Dikomey Mfg. Jewelers, Inc., 409 A.2d 1076, 1079 (D.C.1979). Cf. BRETT R. TURNER, EQUITABLE DISTRIBUTION OF PROPERTY, § 7.05, at 513 (2d ed. 1994) (The nonowning spouse may testify to the value of an asset if he or she has had some exposure to the asset during the marriage. Such testimony is similar to the testimony of the owning spouse . . . . (footnote omitted)). Rather than disallow Barnes' testimony, the trial court simply did not credit her valuation, stating that the Court agrees with [Barnes] that she is qualified to assess the value of AutoBody, but does not credit the validity or the accuracy of her valuation method. [9] The trial court noted specifically that, in calculating net profit, Barnes failed to consider any salary for Sherman, did not factor in taxes, and did not account for the significant drop in accounts receivable after September 1996. The trial court also rejected Barnes' valuation because her simplistic analysis does not comport with the requirements of the earnings or market value approach, noting that Barnes provided no objective basis on which she capitalized gross revenue as a multiple of two (or five times net earnings) to arrive at her valuation of AutoBody. Cf. TURNER, supra, § 7.08, at 542 (number by which earnings capitalized generally determined by an expert accountant). [10] Given these deficiencies, the trial court, as the arbiter of the credibility of witnesses, could reasonably reject Barnes' nonexpert valuation. See Hawkins v. United States, 663 A.2d 1221, 1230 (D.C.1995) ([W]hen it comes to assessing the credibility of witnesses, we are particularly deferential to trial courts.); see also Preston v. Preston, 767 S.W.2d 618, 620 (Mo.Ct.App.1989) (The trial court is free to believe all, part or none of the testimony of a witness even if such testimony is uncontroverted.). Accordingly, the trial court did not abuse its discretion in refusing to credit Barnes' valuation testimony.
An equitable distribution requires the court to consider the current values of the marital property, such that upon distribution, each party's needs are adequately addressed. McDiarmid v. McDiarmid, 649 A.2d 810, 813 (D.C.1994). Here the trial court considered evidence of the value of AutoBody from three sources: Barnes' testimony that AutoBody was worth $1.75 to $2 million, Sherman's testimony that AutoBody had a negative value, and the transfer of a one-half interest in AutoBody to Sherman's mother for $40,000. Unable to credit either of the widely disparate valuations of AutoBody offered by Barnes and Sherman, the trial court instead awarded Barnes $40,000, based on what Sherman's mother paid for a fifty-percent interest in the company, delivered to her two days prior to commencement of the divorce trial. See TURNER, supra, § 7.04, at 510 (In some cases, however, the court may have difficulty believing that either party's position is correct. Thus, the law permits the trial judge to make his or her own valuation.). Barnes argues that the transaction between Sherman and his mother was a sham and should not be used as the basis for an equitable award of AutoBody. Sherman also argues that the trial court's valuation is flawed. Although both sides argue that the trial court's decision was arbitrary, we are not thus bound to reverse or remand. The scope of this court's review is circumscribed in cases tried by a trial court without a jury: [w]hen the case was tried without a jury, the court may review both as to the facts and the law, but the judgment may not be set aside except for errors of law unless it appears that the judgment is plainly wrong or without evidence to support it. D.C.Code § 17-305(a) (1997). We noted in McDiarmid that there are a variety of acceptable methods of valuing the goodwill of a professional practice, and no single method is to be preferred as a matter of law. 649 A.2d at 815. Rather, [t]he selection of a valuation method is within the discretion of the trial judge. Id. Similarly, a number of different methods are available for determining the fair market value of a close corporation, see TURNER, supra, § 7.04, at 509, though some valuation methods may be more appropriate than others for a particular form of enterprise, or in valuing particular elements of the enterprise, Arnold H. Rutkin, Valuation of a Closely Held Corporation, Small Business or Professional Practice, in 2 VALUATION AND DISTRIBUTION OF MARITAL PROPERTY, § 22.08, at 22-103 (Matthew Bender 1996). Nevertheless, we will permit the trial court[] to accept any reasonable method which is supported by the evidence. TURNER, supra, 7.04, at 509; see also De Liedekerke v. De Liedekerke, 635 A.2d 339, 341 (D.C.1993) (In a divorce proceeding the trial court has discretion over the method by which the division of property will be effectuated.). Although we recognize that in a matter such as this exactitude is not possible, Rogers v. Rogers, 296 N.W.2d 849, 853 (Minn.1980) (en banc), and notwithstanding the trial court's considerable discretion in choosing a valuation method, the method it chooses must allow the trial court to arrive at a distribution of marital property that, based on the evidence, is equitable, just and reasonable. D.C.Code § 16-910(b). The trial court must engage in a conscientious weighing of all relevant factors, statutory or otherwise, before reaching a conclusion about the proper distribution of the property, Burwell v. Burwell, 700 A.2d 219, 225 (D.C.1997) (per curiam), but not limited to those [factors] enumerated in that section. Bernard v. Bernard, 730 A.2d 663, 665 (1999) (internal quotation omitted). Relevance . . . is a function of the particular evidence before the trial court and the issues arising therefrom. Id. (internal quotation and alteration omitted); see also Bowser, 515 A.2d at 1130 (the relevant factors will vary in each case). In this case the trial court did not consider all relevant factors in coming to its valuation of AutoBody. The trial court's method of determining Barnes' equitable portion of the business was to award Barnes one-half of $80,000, Sherman having admitted, contrary to his testimony that AutoBody had negative value, that one-half the business was worth $40,000 by giving his mother a fifty-percent interest in AutoBody for that amount. Where the owning spouse himself or herself has valued the business in an arm's-length transaction with a third party, that valuation will be highly persuasive. TURNER, supra, § 7.08, at 541 (emphasis added); cf. Square 345 Associates Ltd. Partnership v. District of Columbia, 721 A.2d 963, 973 (D.C.1998) (the authorities uniformly agree that [a]s a matter of simple common sense, a recent arm's length sale. . . is extremely probative evidence of fair market value) (quotation omitted). Although the trial court's determination was based on record facts, the trial court made no finding that the $80,000 valuation reasonably reflected an accurate market value of AutoBody as can be assumed when the value is set in an arm's-length transaction. [11] Given the timing of the transmittal of the fifty-percent interest two days before trial, and that the transaction on which the trial court's valuation was based was consummated between a mother and son, where considerations other than objective valuation may prevail, absent a trial court finding to the contrary, the record does not support that $80,000 represents a fair valuation. [12] Because the trial court fail[ed] to consider all the relevant factors, we cannot determine whether the court properly exercised its discretion and achieved an equitable result. Burwell, 700 A.2d at 223. [13] We reverse the trial court's order insofar as it concerns the amount of the equitable award resulting from Barnes' marital interest in AutoBody and remand for further proceedings consistent with this opinion. So ordered.