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Recent Posts in Date of Valuation of Assets and Debts Category
| May 24, 2010 |
| What METHODS are used for VALUING BUSINESSES in divorce? |
| Posted By Thurman Arnold |
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Q. I own a business that I began shortly after marriage. Now I am getting divorced. Is this community property even though my partner never worked the business, and if it is what methods might be used to value it?
A. With certain exceptions where, for instance, there has been a transmutation of a community property interest in a business to your separate property per Family Code section 852 (which requires a writing signed by the party adversely affect showing an intent change the character of property from community to separate), all property acquired during marriage through the time, skill and efforts of either spouse is community property. Family Code section 760.
A business begun by one spouse after the date of marriage and before physical separation will need to be divided in a dissolution or legal separation proceeding, and if you and your spouse cannot agree on its value it may need to be evaluated by an expert. This is usually accomplished under the provisions of Evidence Code section 730.
There are a number of methods that can be used to value a business, and depending upon whether the business sells services or products different valuation methods may be more appropriate than others. As a general overview, these include:
- Evaluating sales proceeds
When a business is actually being sold in an arm's length transaction to a third party, the price that a willing buyer will pay and a willing seller accept determines value. This is rare in the case of business valuations, but more common with respect to real property.
The specific asset is valued based upon the actual sales of similar assets or properties with actual sales that can be tracked. With professional practices, this is common with dental businesses which are commonly bought and sold, and so numbers from the sales of other dental practices may be persuasive to a court. Whether this method is useful depends very much on the nature of the business - sometimes there is nothing comparable or little published information about comparable sales. Comparables are also considering in setting the value of real estate.
Sometimes businesses will be cut up into parts that are sold separately. Sometimes the business is valued in terms of what these parts would sell for. It is rarely used except when the parties intend to actually liquidate the company. Liquidation value does not generally include valuing goodwill (because the assumption is there will be no on-going concern). Goodwill is the nightmare component to valuing businesses. Many people in divorce who manage the business believe strongly this is how businesses should be valued (in part because in the absence of an actual sale, it is a fiction to say what a buyer might pay when no such buyers as a practical matter exist).
This relies upon the company records to determine what 'retained value' is. It is rarely used, because it is more a statement of how the company perceives itself, or structured (or even 'cooked') its books, than any objective indication of value.
This is performed through a forensic audit. Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.
This describes a method that includes valuing the business as greater than the sum of its parts. There are a number of factors that are used.
This is the most common method for valuing businesses used in California because courts find it to be most reliable. If you hope to use a different method, you will need to justify why that method is fairer to the out-spouse. This method requires expensive forensics.
It is not uncommon to bifurcate the question of business valuations to try them separately because often this is the thorniest issue to be decided in a dissolution or legal separation proceeding.
The law of business valuations is extremely complex and even contradictory. The purpose of this blog is merely to introduce the concepts. I will develop these themes in more detail in additional family law blogs.
Thurman W. Arnold III
http://www.ThurmanArnold.com |
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| May 19, 2010 |
| When are ASSETS VALUED for purposes of DIVISION in a California DISSOLUTION? |
| Posted By Thurman Arnold |
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Q. My wife and I separated two years ago and we have decided to file for divorce. We don't agree on what date we should be setting the value of some of our property, like the residence where she has been living with the kids all this time. She wants it valued today, since prices are down, but when I left we agreed that she would take it at its value then. That value was substantially higher than today, and I don't think it is fair that I have suffer the decrease in real estate prices. What would a Court do?
A. First, it is always my hope that you and your spouse can agree on as many issues as possible, without court intervention. One never knows for sure what a Court will do, and my experience is that people are far better off working through their disagreements by way of Mediation. One reason why is to ensure you are in charge of your life, not a stranger. It is possible to mediate parts of your divorce.
Still, valuing real property is not a difficult legal issue. Family Code section 2552(a) directs the court to "value assets and liabilities as near as practicable to the time of trial." Time of trial is also the equivalent of the time of settlement - in order words, if you cannot settle your divorce and you take it to a judge, that will be the time of trial so the same rule for the date of valuation should apply to your settlement negotiations.
Family Code section 2552(b), however, gives the court discretion to pick another date before trial for the valuation of property "for good cause" in order to "accomplish an equal division of the community estate ... in an equitable manner." This concept is called an "alternate valuation date." It is often applied in cases of business valuations, which is a complex topic I will separately address, but the basic reasons for the potential different treatment includes the fact that business values can be intentionally depressed by the spouse who controls the assets (and so it may not be fair to apply a lower value) or because the "in-spouse" has contributed substantial value to the company since separation and it is not necessarily fair that the other spouse share those benefits.
Here you might argue that you and your spouse reached a verbal agreement to divide all your assets two years ago if that is in fact what you did, in order to hold to those values. But verbal agreements are difficult to prove if they are not admitted by the other party, absent witnesses and she will continue have various defenses where she was not independently advised before reaching agreement.
Most courts are going to value passive assets like houses or investments or pensions at the time of trial. That does not mean that post-separation increases in value, like increased equity by paying down principal on a mortgage, or contributions to a pension after the date of separation, will not be reimbursed to one or the other of you to compensate the separate property (post-separation) contributions.
If you do seek an alternate valuation date, you need to file a Notice of Motion to Bifurcate the issue (FL-315), along with the accompanying declaration establishing why this is more fair and appropriate than the basic rule. These forms appear in our Family Law Form Library.
A bifurcation is essentially a request of the court to carve off one or more issues in the divorce for separate trial or adjudication. It is often used where a call needs to be made on one issue that, once decided, will assist in resolving other aspects of the case.
Thurman W. Arnold III
http://www.thurmanarnold.com |
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| January 17, 2010 |
| Why is the date of PHYSICAL SEPARATION legally important? |
| Posted By Thurman Arnold |
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Q. Why is the idea of 'physical separation' important in California?
A. The idea of "physical separation" is one of the most important concepts to California law. If you think that the presumption that all property acquired during marriage is significant, the notion of physical separation is every bit if not more important. This appears to be one of the best kept secrets of California family law.
Physical separation is the date that the marriage ends, for most practical purposes. The date of physical separation is the date that community property ceases to accumulate. Family Code section 771 states "The earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, while living separate and apart from the other spouse, are the separate property of the spouse."
Once spouses separate, all their earnings and everything that is acquired with those earnings are separate property of each spouse, respectively.
Similarly, upon separation each spouse is no longer liable for the debts of the other spouse. The community estate is liable for a debt incurred by either spouse "during marriage". During marriage "does not include the period during which the spouses are living separate and apart before a judgment of dissolution ... or legal separation...." FC section 910. An exception exists as to "necessaries" except to the extent that the parties are living separate by agreement and whether or not support is stipulated by that agreement. FC section 4302.
Separation is of critical importance to the expanding interpretation and growing field of the law of fiduciary duties. The duty of confidentiality that arises because of the marital relationship by legislative fiat ( Family Code section 721) and which gives rise to major exposure for the conduct of spouses with regard to property and money, ceases at separation - meaning spouses no longer have the expectation and right of relying upon one another as trusted partners. Fiduciary duties continue pursuant to FC sections 1100 et seq. and sections 2100 et seq. as to assets that already exist, or can be considered marital opportunities arising after separation, until the time each asset in question is divided by agreement or court adjudication. Fiduciary duties are land mines. A good example of the consequences for breach of fiduciary duty is the Rossi case, where a wife who won the lottery and then filed for divorce the next day claiming she and her husband had already separated. She fails to list the lottery winnings in her paperwork, and refused to disclose it to the husband later claiming, among other things, that she had been a victim of domestic violence. Because the husband had no idea about the lottery winnings, he did not dispute the divorce or wife's asserted date of separation until much later when one day he received a letter intended for the wife by a company offering to buy out the winnings. He called the State Lottery Board, and then filed a motion to set aside the divorce degree and for damages for wife's fraud and breach of fiduciary duty. The court ordered the wife to disgorge all her winnings (100%) and pay them over to the husband.
The separation date is crucial to understanding reimbursement claims relating to payment on joint and separate debts, or in fixing rights to real property. For instance, California law provides that the community has an interest in the appreciation of a residence which is owned, meaning title is held, in one spouse's name alone where principal on a mortgage is being paid down. This is called the Moore-Marsden approach to equitable reimbursement. If the house appreciates after separation, the titled spouse may want to argue that all that appreciation belongs to them. Date of separation becomes important to the date of valuing the real estate and determining the relative principal loan amounts.
It is crucial where businesses are involved, regardless whether they are corporations, mom and pop shops, or sole proprietorships. For instance, what happens when a spouse who controls or who is the business, which was established before or during the marriage, continues to derive income from it after the parties separate? Maybe the business goes up in value. Perhaps it goes down in value through market factors, or maybe even the spouse intentionally drives it into the ground in order to reduce the amount that will be ordered to buy out the other spouse's interest. In all these situations a date of separation determination is crucial.
Another common area where it comes up in with regard to pensions, whether they be defined benefit plans or contributive benefit plans. Whatever accrues to the spouse who holds the pension by way of his post-separation contributions belongs to them.
Date of separation is also critical to determining the length of the marriage for purposes of spousal support or alimony rights. It is a snapshot in time with huge ramifications. It is critical that you hire an attorney who understands how to litigate and present the facts of physical separation.
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