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| 11 entries found. Viewing page 1 of 1. |
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| 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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| April 07, 2010 |
| When I get MARRIED, how do I avoid my husband's DEBT? |
| Posted By Thurman Arnold |
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Q. Is it possible to avoid any of this debt liability?
A. Yes. First, your separate property doesn't become liable for a spouse's premarital debt simply by marrying. But community property as it comes into being does.
Secondly, to the extent you or your spouse will incur debt during marriage, prior to marriage both can agree to eliminate or restrict the creation of community property as between you. This is accomplished through a prenuptial or premarital agreement. Essentially you agree to restrict or eliminate the creation of community property in the first instance, since that will remain liable for debts incurred prior to (with some exceptions) and during the marriage, and so you can ensure that your separate property remains protected.
None of this applies to debts you jointly incur - the joint credit card, the jointly purchased car, or the jointly refinanced home. This is why creditors try to insist that both spouses sign loans.
But you can modify your behavior in order to protect yourself by not signing. It is possible to enter a post-nuptial agreement which achieves substantially the same thing, although it won't necessarily change the character of debt incurred prior to its signing but it may nonetheless eliminate future community debt by eliminating community property. Remember, as between the two of you, you cannot affect third party's rights who are not parties to your post marital agreement, and to do so may be considered a fraud upon creditors which means the agreement may be set aside and voided. |
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| April 07, 2010 |
| Am I LIABLE for my husband's GAMBLING DEBTS? |
| Posted By Thurman Arnold |
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Q. My husband won't stop gambling. Am I liable for his gambling debts?
A. The community property may be liable as between he and the creditor. As between you and he, unless you consent he may be in breach of his fiduciary duties to you and to the community estate and there may arise a right of reimbursement in favor of the community.
If he is a professional gambler and this is his "work" the outcome may be different. It may depend on whether the community benefited, i.e., if winnings were used to support the community then it may be fair to share the obligation as to "losings".
This right of reimbursement may also be exist if he squandered money on drugs, or prostitutes, and so on - assuming you can prove it and trace the money! One never knows, however, how a judge will treat this on a case by case basis.
Gambling may be a breach of fiduciary duties owing you as a result of your marriage or domestic partnership. Try our search at the top right of the page to learn about those topics.
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| January 18, 2010 |
| Am I LIABLE for my husband's CHILD SUPPORT ARREARS from his first marriage? |
| Posted By Thurman Arnold |
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Q. Can the property I owned before marriage be taken to pay for my husband's unpaid child support from his first marriage?
A. No matter when child support, or spousal support from a prior marriage for that matter, is ordered or modified your separate property is not liable for the debt and you are entitled to be reimbursed if it comes to be used to pay such debts without your consent. Family Code section 915. Community property, on the other hand, is liable for support debts.
However, there may be a right to reimbursement by the community (of which you own half) as against the other spouse's separate property if any of their separate property existed and was therefore available to pay the debt at the time the community paid the obligation.
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| January 18, 2010 |
| Am I liable for my husband's BUSINESS DEBTS? |
| Posted By Thurman Arnold |
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Q. My Husband is being sued for a business debt. I am not named in the lawsuit. Am I still liable? A. You do not need to be named in a lawsuit against your husband to collect a debt incurred by him prior to separation in order to be liable at least to the extent of your interest in the remaining community property. This debt includes any type of claims against him (e.g., a contractor being sued for defective workmanship or a lawyer being sued for malpractice).
However, your separate property cannot be held liable for such a debt, or even for "necessaries of life", unless you are named and joined in the proceedings. You may have reimbursement rights against your Husband or the community in such event.
Please see other blog answers under the "Debt" category for more information. |
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| January 18, 2010 |
| Must I pay any of my husband's STUDENT LOAN if we DIVORCE? |
| Posted By Thurman Arnold |
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Q. If my Husband and I divorce, am I stuck with any of his student loan? A. Most likely not.
Upon separation and dissolution of marriage, a spouse's separate loan is assigned pursuant to Family Code section 2627 and 2641. Subject to certain exceptions, the general rule is "[a] loan incurred during marriage for the education or training or a party shall not be included among the liabilities of the community for the purposes of division but shall be assigned for payment by the party."
The exception is the Court's power to divide the education debt differently if it would "unjust" not to, as where the community has "substantially benefited" from the education or the loan. A presumption exists that no such benefit is derived if the is less than 10 years old at the time the divorce is filed but that the community has substantially benefited if the loan is more than 10 years!
If the student loan money was really used to pay for groceries and rent, for instance, the court may equitably divide the it. |
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| January 18, 2010 |
| Am I LIABLE for my spouse's PREMARITAL DEBT? |
| Posted By Thurman Arnold |
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Q. Am I liable for myspouse's pre-marital debt?
A. Yes, and no. Whether you are liable for debts of your spouse depends on what kind of property exists and is available to satisfy a debt. Community property is liable and therefore available to pay a debt either spouse incurs before marriage and during marriage, regardless which spouse controls that property. Family Code section 910. Community property is all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California. Family Code section 760.
Your separate property is generally not liable for a debt incurred by the other spouse before or during the marriage (your separate property is always liable for your own debts, regardless when incurred). Family Code section 913(b)(1). Separate property is all property you own before marriage and all property you acquire during marriage by gift or inheritance. Family Code section 770. Separate property also includes the rents, profits, and issues from your separate property (i.e., passive separate property increases) and "earnings and accumulations" while you are living apart. An exception to this rule limiting your separate property liability concerns "necessaries of life". Your separate property is liable for these necessaries (food, clothing, shelter, medical) for your spouse even if you are living apart, unless you are living apart under a written agreement that includes a provision for support.
It sometimes happens that a creditor manages to levy against the nondebtor spouse's separate property; if that occurs, the innocent spouse has a reimbursement claim against the community property estate, or, if there is no such estate then against the other spouse's separate property. This reimbursement right must be asserted, as mentioned below, or it evaporates. Also, if you consent to the payment from your separate property you may have made a gift of it for the benefit of the other spouse. Consent would include writing or signing the check to pay the debt from your separate property account. We are not talking here about using separate assets to acquire community property (as in making a mortgage payment); a difficult set of rules apply where property is being "acquired during marriage" which include reimbursement rights.
In order to be mostly protected you need to keep your separate property separate. If you commingle it with the other party's separate property, or with the community, a creditor cannot be expected to know what is yours verses what is both of yours. This separation of finances is always a good idea, and not just for debt purposes. As between you and your spouse if you commingle monies then you may have a right of reimbursement if you can trace the flow of funds.
The rules and consequences differ depending on whether we are talking about you versus a creditor, or you versus the spouse. Q. Is there a time limit on exercising my reimbursement rights? A. You have to seek reimbursement on the earlier date of (a) within 3 years of when you actually know your property was applied to satisfy the other spouse's debt or (b) during a pending dissolution or legal separation proceeding. Family Code section 920(c). Otherwise, reimbursement under these code sections is waived. Depending upon the facts, you may still have a breach of fiduciary duty claim against your spouse that survives up to the point of the dissolution.
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| January 07, 2010 |
| My wife she used her INHERITANCE to buy our home. We are getting divorced. |
| Posted By Thurman Arnold |
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Q. My wife and I separated June 2009. When we purchased our home in March of 1998 (married December1994), she used part of a pre-marriage inheritance from her grandmother to help with the down payment. I have been paying the mortgage since inception. Will she get her inheritance back in our divorce?
A. Are you on title?
Whether or not you were on title when the property was purchased it is community property UNLESS you deeded off when escrow closed or since (but you may still have some reimbursement interests) which may have resulted in a transmutation from community to separate (there is a presumption that the deed off should be set aside unless she can show there was no undue influence when and if you transferred title to her).
If you went on title when the house was purchased - or if you since had your name added for any reason (estate planning, refinances) afterwards then a transmutation has occurred - and the house is or remains community property, subject to a Family Code section 2640 reimbursement to her for the separate property contribution (inheritance - and assuming it was not commingled first). Of course, she has to assert that right to be entitled to it.
It doesn't matter who paid the mortgage, so long as it was paid from community earnings during the marriage.
There is a very important concept under California Law involving what is generally known as Moore-Marsden apportionment. It applies to a common situation where a home is acquired before marriage, title is in the name of the acquiring spouse alone, and during the marriage and up to separation or divorce filing the mortgage is paid down with community funds.
Where this occurs the community estate acquires a legal, reimbursable, interest in what would be otherwise be entirely the separate property of the titled spouse IF community funds (earnings of either spouse, for instance, or both) are used to make the mortgage payments. The idea is that joint funds are being used to benefit a separate property interest, i.e., the separate property equity. Many legal scholars consider this to be a breach of fiduciary duty - that whenever one or the other spouse's separate property interests are increased with community funds, or community time, skill, and efforts of either spouse during the marriage, the community is disadvantaged and that this disadvantage violates the statutory duties of the parties that place the party's joint interests above their separate interests.
The formula for apportionment is that the community acquires a pro tanto (dollar for dollar) interest in the ratio that principal payments on the purchase price made with community property bear to payments made with separate property. Hence, any increase in value (appreciation) must be apportioned accordingly between the separate property and the community property estates upon separation or dissolution.
Note that this only applies to separate property owned prior to marriage with a mortgage that was paid during marriage where an equity position has been increased. For instance, if a mortgage exists but it is an interest only mortgage, payments during marriage do not reduce principal. Therefore, the separate interest of the owner spouse is not improved because the debt remains exactly the same. As a general rule, the amounts paid for interest, taxes, and insurance on the house are disregarded since that portion does not to contribute to the capital investment.
Also, it assumes that the mortgage was paid with joint (community) funds, or that the funds used were so commingled that the "separatizer" is unable to trace them to a separate property source (meaning they don't have records showing where each payment was made or are unable to provide a recapitalization of the source of the funds). If your husband reduced the mortgage throughout the marriage but he did it with an account that was his separate property then the community would not have this reimbursement right.
The Moore Marsden formula requires a number of bits of information at important points in time to be properly calculated. These include: a) what was the original purchase price; b) what was the original mortgage and downpayment; c) what was the property worth at the date of marriage (DOM); d) what was owed to the lender at that time; e) what was the property worth at the date of separation; f) what was owed at that time; g) what is the property worth on the date of the calculation (i.e., the trial date); h) and what is the principal pay-off at that time?
This is agood example of why family law and divorce cases can become quite expensive. Obtaining these records, particularly if you are the 'out spouse' can be difficult, and sometimes a forensic accountant is the best option for calculating these apportionments. Find a local CPA with family law experience to help you trace the funds. You need an experienced family law attorney for these types of matters as well.
In your case, with a lengthy marriage and little owing, you have significant Moore Marsden entitlements. |
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| January 06, 2010 |
| My Husband Is Receiving A PERSONAL INJURY SETTLEMENT. Am I Entitled To Any of It? |
| Posted By Thurman Arnold |
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Q. My Husband is receiving a large settlement for an auto accident he was in. If we divorce, am I entitled to 1/2 of the settlement?
A. Probably not, but maybe.
Personal injury awards in California are community property if the injury occurs before separation no matter when the settlement comes in. Family Code section 780. However, Family Code section 2603 states:
(a) "Community estate personal injury damages" as used in
this section means all money or other property received or to be received by a
person in satisfaction of a judgment for damages for the person's personal
injuries or pursuant to an agreement for the settlement or compromise of a
claim for the damages, if the cause of action for the damages arose during the
marriage but is not separate property as described in Section 781, unless the
money or other property has been commingled with other assets of the community
estate.
(b) Community estate personal injury damages shall be
assigned to the party who suffered the injuries unless the court, after taking
into account the economic condition and needs of each party, the time that has
elapsed since the recovery of the damages or the accrual of the cause of
action, and all other facts of the case, determines that the interests of
justice require another disposition. In such a case, the community estate
personal injury damages shall be assigned to the respective parties in such
proportions as the court determines to be just, except that at least one-half
of the damages shall be assigned to the party who suffered the
injuries.
Hence, the court has discretion to divide community personal injury damages by assigning it all to the injured party. As a practical matter, this is usually what does happen. Still, Family Code section 781 provides certain reimbursement rights to the community for payments made from the community.
Lesson: Don't avoid settling your case just because you think you should get 1/2 of what your spouse recovered. You might get something, but the expense outweighs the risks. Judges are inclined to award PI damages to the injured spouse.
By the way, if the other spouse (here, you) caused the injuries, a different outcome might result. Also, different rules can apply to worker's compensation recoveries.
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| August 20, 2009 |
| Can you give me a MOORE MARSDEN Analysis on My SEPARATE PROPERTY HOME? |
| Posted By Thurman Arnold |
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Q. Can you please help. I understand a Moore-Marsden analysis needs to be performed on my house in my pending divorce, but my attorney can't explain it to me. These are the facts. On 1/1/02 I put my wife on the title to the property. This is what happened.
Purchase price 6/92 |
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$164,875 |
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Date of Marriage 5/15/94 Market value |
$190,000 |
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Transmuted Market Value 1/1/2002 |
$245,000 |
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Market value 4/7/2008 |
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$612,000 |
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Down payment |
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$54,875 |
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Principle Payment from separate prop. |
$6,836 |
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Principle Payments from community |
$20,197 |
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Frederic, in San Dimas
Frederic:
Here is an illustration of how the calculation works. Please see my FAQ on Moore Marsden generally. As you can see, it is complicated.
You will need to get some further data: we need to the payoff balances on the date of marriage; the date of the transmutation (when your wife went on title), the date of separation, and the date of trial - which is the final valuation date - once it is set.
If the transmutation is set aside (based upon a presumption of undue influence that your Wife violated FC section 721(b) which she has the burden of rebutting by establishing a fair consideration for the title change) - it will be a straight Moore-Marsden plus Family Code section 2640 or Epstein reimbursements for certain post DOS expenses. Therefore, one scenario is:
Assuming $ 54,875 DP and 6,836
pre-marital principal reduction (you will need
the actual pay-off information) 25,125 pre-marital appreciation (which you can establish with you own
testimony based upon your opinion of value as an
owner) and (20,197) principal reduction from the DOM to the DOS (again you will want
to have the actual pay-offs on the alternate dates
but am going with your given assumptions here)
then: $54,875 [DP] PLUS $89,803
[SP Loan of $110,000 minus $20,197 CP payments]
= $144,678 DIVIDED BY $164,875 [purchase price]
= 's a 87.75 SP Interest
and
$20,197 divided by $164,875="12.25%" CP interest
NEXT $54,875 [DP]
6,836
--- (plus post DOS loan payments which I don't
see broken out so assume zero here) $61,711 PLUS 25,125 (premarital appreciation) PLUS 315,900 [87.75% of post-DOM appreciation to present assuming $550,000 today
and not the $500,000 equals $550,000 less 164,875
less $25,125="$360,000]" - appreciation percentage of H's SP interest ='s $402,736 (H's SP share)
COMMUNITY: $20,197 plus 12.25% of 360,000=" $44,100"
plus 20,197="$64,297" TOTAL CP INTEREST BEFORE REIMBURSEMENTS
divided by 2 = $32,148 equalization to W
EXCEPT at a minimum you get FC section 2640 reimbursements for the special assessments meaning deduct one-half of the $11,597 paid out from her equalization.
i would have to do another analysis assuming a valid transmutation.
I hope this helps more than confuses! |
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