Court Opinion

ID: 9586604
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:13:16.227915+00
Date Added: 2024-06-11T17:32:44.897573
License: Public Domain

McHUGH, Justice,
concurring:
The majority opinion, with respect to the issue in this case, may have the effect of removing the “equitable” from our equitable distribution statute. Consequently, I concur only with the majority’s ultimate judgment that this case be reversed and remanded.
Unfortunately, the majority opinion will not assist the trial court in applying appro*632priate principles in equitable distribution proceedings. It leaves the trial court to speculate on what factors should be considered in determining net value. Although beginning with the correct premise and hinting at the correct conclusion, the majority opinion shies away from providing any practical guidance which trial courts must have. This can be a troublesome area of the law, and this Court should be more explicit in providing direction for the trial court in this respect.
This case presents this Court with an opportunity to provide guidance to trial courts throughout the state on how to arrive at net value for equitable distribution purposes, a task that the legislature did not take on in the enactment of W.Va. Code, 48-2-32(d)(l) [1984].
The first sentence of syllabus point 3 of the majority opinion states: “The fair market value of a closely held corporation or other business is not necessarily equivalent to its ‘net value’ under W.Va.Code, 48-2-32(d)(l) (1984).” (emphasis supplied) Therefore, the majority opinion apparently recognizes that the debts of a business may reduce the market value of the business, and thus, will cause market value to not equal net value. However, in very uncertain terms, syllabus point 3 falls short of stating why there may be a variance between market value and net value. This syllabus point merely suggests the obvious, that net value relates to the debts of the corporation, but the syllabus point fails to articulate what should be done with such debts. This cursory treatment will lead to confusion on the part of the trial court in adjudicating equitable distribution matters.
As stated in the majority opinion, the general rule in valuing any asset is set forth within syllabus point 3 of LaRue v. LaRue, 172 W.Va. 158, 304 S.E.2d 312 (1983): “In computing the value of any net asset, the indebtedness owed against such asset should ordinarily be deducted from its fair market value.” (emphasis supplied) This fundamental principle, however, is ultimately disregarded by the majority with respect to the facts of this case, involving the valuation of a closely held corporation. Rather, the majority opinion provides little to no guidance as to how a trial court is to determine net value for purposes of W. Va. Code, 48-2-32(d)(l) [1984].
North Carolina’s equitable distribution statute, as noted in the majority opinion, uses the term “net value,” and, like our statute, fails to define its use. Relegated to a footnote in the majority opinion is the decision of a North Carolina court which has addressed the issue of the meaning of “net value” as it is used in that state’s statute. “[W]e give the term ‘net value’ its ordinary and commonly understood interpretation: i.e., market value, if any, less the amount of any encumbrance serving to offset or reduce market value.” Alexander v. Alexander, 68 N.C.App. 548, 550-51, 315 S.E.2d 772, 775 (1984).
The majority opinion points out that this definition, by the North Carolina court, was applied in the context of a marital residence, thus apparently attempting to support its earlier assertion that “valuing assets becomes more difficult when the asset is part of a more complex entity, such as an on-going business.” This bald assertion does not persuade. Rather, it obscures the intended result. There is no support for the majority’s implication that the arrival at net value should be accomplished by means other than that which would be utilized for a marital residence. In this respect, the majority’s assertion is pure ipse dixit. While it may be true that the valuation of a business is more complex for an accountant in determining market value, our concern lies with the statutory requirement of determining net value for equitable distribution purposes.
The Wisconsin Supreme Court, in Wahl v. Wahl, 39 Wis.2d 510, 159 N.W.2d 651 (1968), approved the trial court’s consideration “that the stock of the [closely held] corporation was worth as much as its assets, less its liabilities.” Id. at 514, 159 N.W.2d at 653 (emphasis supplied). There, the trial court utilized Revenue Ruling 59-60,1959-1 C.B. 237, before deducting liabilities to arrive at net asset value.
The majority opinion in this case does acknowledge that Revenue Ruling 59-60 is *633one way of valuing a closely held corporation. Revenue Ruling 59-60 sets forth eight factors to be analyzed:
(a) The nature of the business and the history of the enterprise from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.
The factors considered under Revenue Ruling 59-60 are supported by several authorities. See, e.g., In re Marriage of Moffatt, 279 N.W.2d 15, 19 (Iowa 1979); Nardini v. Nardini, 414 N.W.2d 184, 190 (Minn.1987); Bowen v. Bowen, 96 N.J. 36, 51, 473 A.2d 73, 80-81 (1984); Wallace v. Wallace, 733 S.W.2d 102, 107-08 (Tenn.Ct.App.1987), permission to appeal denied (Tenn. June 22, 1987); L. Golden, Equitable Distribution of Property § 7.08 (1983); Perocci & Walsh, Putting a Value on: Closely Held Corporations, Fam.Advoc., Summer 1979, at 32; Close Corporations: Valuation Issues, Equitable Distribution J., Feb. 1986, at 13.
Undoubtedly, there are many approaches to valuing a business. These approaches, in turn, lead to differing market values. They are independent of net value. As indicated by the precedents cited in the majority opinion, accountants and valuation experts normally do have various , opinions as to how to arrive at market value.
The issue in this case is whether liabilities should be deducted from the market value to arrive at net value of a closely held corporation for equitable distribution purposes. LaRue, Alexander and Wahl provide guidance on this point. The cases cited in the majority opinion do not address this issue. They deal with the various approaches to calculating market value, not net value. The treatise on business acquisitions discussed in the majority opinion is also inapposite. For equitable distribution purposes, there is no need to assume a sale between the spouses. The only question is: “net value” is market value “net” of what? The majority opinion does not clearly answer this question. Its discussion only obfuscates, especially the second sentence of syllabus point 3, which apparently equates market value and net value.
The majority opinion looks to the analogy of business acquisitions and the negotiable responsibility for debts between the buyer and seller. In the context of equitable distribution, however, the distribution is only of the net worth or “equity,” with a sharing of both asset valuations and liability amounts. On a related point, the reference near the end of the majority opinion to the lack of evidence on the appellant’s obligation to pay the mortgage and other liabilities is curious. In the first place, the appellee did not cross-assign as error the deduction of the mortgage payable. In the second place, the corporation is responsible for those liabilities; if there is any personal liability therefor, both spouses should share the liabilities for “net value” purposes, as both spouses, for those purposes, share the market value of the assets.
The determination of “net value” of a closely held corporation or of any other marital asset for equitable distribution purposes is somewhat comparable to the distribution of net proceeds at the “closing” of a sale of realty. Initially an appraisal will be performed to determine the market value of the realty. At that point there are various techniques to arrive at market value, and the amount of any outstanding debt on the realty owed by the seller is not considered, as it is irrelevant to the market value of the property. However, in distributing the net proceeds of the sale at the closing, the amount of any outstanding debt on the property owed by the seller is deducted from the market value of the *634realty to arrive at the net proceeds due to the seller. In short, the seller receives the monetary equivalent of his or her equity in the realty.
Due to its failure to provide guidance for trial courts in determining net value, the majority opinion may allow accountants and valuation experts to express differing opinions on not only market value but also on net value, a term that is foreign to them and not defined for them.
In summary, the majority opinion is problematic in several ways: (1) it provides little to no guidance for a trial court to determine net value of a closely held corporation for equitable distribution purposes; (2) it will very likely saddle one party with the payment of debts incurred in the operation of the business, while the other party enjoys the benefit of half of the corporation’s value before a substantial amount of liabilities are even considered; and (3) it may allow accountants and valuation experts to express differing opinions on how to arrive at a net value figure, which, under LaRue, Alexander and Wahl is a straight-forward calculation once market value is determined.
Based upon the foregoing, I concur only with the majority’s ultimate judgment that this case be reversed and remanded.
I am authorized to state that Chief Justice NEELY joins me in this concurring opinion.