Articles

Divorce Case Spotlights Complexities of Double-Dipping Analysis

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Courts sometimes have difficulty determining an appropriate allocation of assets in a divorce.

The division of assets in a divorce is vital to the financial futures of the spouses. A fair division of assets is required under New York state equitable distribution law. For many couples, a professional practice (think doctor, lawyer or accountant) or a business is a key asset in their divorce. While not a New York case, Oudheusden v. Oudheusden was an interesting read for those of us seeking to better understand this topic. 

In this Connecticut case, the husband defendant, whose marriage had been dissolved, appealed to the Appellate Court a judgment of the trial court. The trial court had awarded his wife $18,000 per month in permanent alimony that could not be modified or changed in duration or amount. The trial court found the husband’s gross annual income of $550,000 was completely derived from his two closely held businesses, which were valued at $904,000.

As part of its financial orders, the court awarded 50 percent of the fair market value of the two businesses to each party, ordering the defendant to pay the plaintiff $452,000. The court awarded 100 percent ownership of both businesses to the husband. 

Income vs. Profit

On appeal to the Connecticut Appellate Court, the husband claimed that the trial court impermissibly double-counted his income by considering it both for the purpose of valuing his businesses and in making its maintenance award.

The Appellate Court reversed in part the trial court’s judgment and remanded the case for a new hearing on all financial issues. The Appellate Court concluded that the trial court had abused its discretion in failing to issue equitable orders and to consider, with respect to its maintenance award, the possibility that the husband, who was 58 years old at the time of the dissolution and had a history of alcohol abuse, could become ill or might want to retire, or that his businesses could fail to prosper through no fault of his own.

The Appellate Court further determined that the trial court had engaged in double-counting. The plaintiff wife then appealed to the Connecticut Supreme Court. 

Double Reversal

The judgment of the Appellate Court was affirmed by the Supreme Court with respect to its determination regarding the trial court’s financial orders but reversed with respect to its determination that the trial court improperly double-counted the value of the defendant’s businesses for purposes of the property division and alimony awards. The case was remanded to the Appellate Court with direction to remand the case to the trial court for a new hearing on all financial issues.

The case is Oudheusden v. Oudheusden, (SC 20330, Connecticut Supreme Court, Apr. 27, 2021). Read the decision here. For additional blog posts on divorce-related topics, click here, here or here.

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If you require assistance with the valuation of a business or determination of reasonable compensation in a matrimonial matter, please contact Advent for trusted guidance.  

Valuations in Divorce Cases Can be Tricky

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Business valuations completed in connection with divorce proceedings can be especially complex. Photo by Kelly Sikkema on Unsplash

The South Carolina State Supreme Court weighed in recently on the long-simmering tension between recognized standards of business valuation and the goal of equity in dividing marital assets in divorce proceedings.

The decision In Clark v Clark (Appellate Case No. 2019-000442), addresses the division of marital assets, specifically the valuation of a minority interest in a family business. The Supreme Court reiterated a lower court’s assertion that the applicability of discounts for lack of control (DLOC) and marketability (DLOM) are to be determined on a case-by-case basis, then affirmed one part of that court’s ruling regarding discounts and reversed another.

The Family Business

George and Patricia Clark were married in 1987. During the marriage, Mr. Clark began working for the family business, Pure Country, a manufacturer of custom tapestry blankets and other items. His father founded the business and eventually transferred his 75 percent interest in it to Mr. Clark. A family court determined at the time that the transfer was a gift, and therefore the interest was not marital property. Mr. Clark purchased the remaining 25 percent of the business from his sister. In 2009, he transferred a 25 percent interest to Mrs. Clark. The related stock agreement limited any subsequent sale of that interest to other shareholders, immediate family members or the business.

In 2012, Mr. Clark filed for divorce. Both spouses hired experts to value Mrs. Clark’s interest in the business. The husband’s expert applied a DLOC and a DLOM. In support of the DLOM, she noted that the sale of interests in privately held companies require more time and resources and involve higher transaction costs than do sales of publicly traded interests. She also considered the restrictive language in the stock agreement from the 2009 transfer.

The wife’s expert applied a smaller DLOM, but later argued that the value should not be discounted at all. He did not apply a DLOC.

The family court found the husband’s expert more credible and agreed with her use of discounts. While it did acknowledge the “debate as to whether … discounts should apply in a divorce setting as the business is actually not being sold,” the court recognized that the valuation standard in such cases is fair market value, which assumes a hypothetical transaction between two willing parties. 

Mrs. Clark appealed the decision to the court of appeals, which agreed that a minority shareholder would not have control over the company and therefore upheld the family court’s decision to apply a DLOC, but reduced the size of the discount. The court of appeals rejected the DLOM, noting the husband did not intend to sell the business and relying on a precedent set in Moore v Moore. “To the extent the marketability discount reflected an anticipated sale, Moore deems it a fiction South Carolina law no longer recognizes.” The court found that because the husband did not plan to sell the business, the restriction on transfers of stock was moot. 

The decision compelled both parties to file appeals to the State Supreme Court.

Split Decision

The husband argued that the court of appeals erred in rejecting the DLOM when each party’s expert had applied one. The wife contended that the DLOM should not be considered because a DLOM accounts for the higher transaction costs inherent in the sale of an interest in a private company, and her husband did not intend to sell.

The Supreme Court affirmed the family court’s decision to apply a DLOM and a DLOC and the appeals court’s decision to reduce the DLOC. The decision states that a party’s interest in a closely held company is valued based on its fair market value, which has been well established as “the amount of money which a purchaser willing but not obligated to buy the property would pay an owner willing but not obligated to sell it, taking into account all uses to which the property is adapted and might in reason be applied.”

That said, the court acknowledges the tension between this principle of valuation and “the desire to fairly and justly apportion marital assets.” The court refuses to draw a bright line on the issue, stating that the applicability of such discounts is to be determined on a case-by-case basis.
The Supreme Court’s decision was not unanimous. Two of the five justices issued a dissenting opinion rejecting the application of either discount, stating that “under certain facts, faithful adherence to the concept of fair market value must yield to reality.”

The decision, while not directly applicable to New York cases, speaks to the complexities involved in divorce-related valuations and the need for valuation professionals to weigh competing considerations. If you have questions regarding the valuation issues in a divorce or another context, Advent’s professionals are here to help.

Read the Decision

You can read the rather colorful decision here:

https://adventvalue.com/wp-content/uploads/2020/06/Op.-27969-George-W-Clark-v.-Patricia-B-Clark.pdf