Divorce Roundup
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A roundup of recent divorce cases reveals key practice points on the qualification of experts, the relevance of industry evidence, the credibility of client-provided data, and more:
5. Error in valuating only underlying property in family LLC. Elliott v. Elliott, 2011 WL 3889181 (Mass. App. Ct.)(Sept. 6, 2011)
The couple in this case didn’t own many assets and were substantially in debt when they divorced in 2009. However, the husband did own a 25% interest in a family limited liability company (FLC), which held the parents’ vacation property on Martha’s Vineyard, valued at $6.4 million.
The trial court found that even after the parents passed away, the husband’s ability to make any significant money from the FLC was speculative. Nevertheless, the court also found that requiring the wife to wait for any future disbursements from the FLC meant that she would effectively receive little or nothing from the husband’s interest. As a result, the trial court ordered a present distribution, requiring the husband to pay the wife over $360,000 as her share of his 25% interest in the FLC, and the husband appealed.
Held: The trial court had no evidence of “the value of the husband’s minority interest in a limited liability corporation, owning and managing real estate, with very significant restrictions,” the appellate court observed. This paucity of evidence left the trial court “at a significant disadvantage.” As a result, the appellate court vacated the order and resubmitted the case for a hearing on the value of the husband’s LLC interest.
6. ‘One size fits all’ rejected for valuing stock options. In Farmer v. Farmer, 2011 WL 3929114 (Wash.) (Sept. 8, 2011), the Washington Supreme Court considered a wife’s measure of “damages” after her husband fraudulently exercised her share of stock options awarded in divorce. During the parties’ 2006 divorce, the couple agreed to divide the non-transferable stock options equally, with the husband retaining possession but the wife having the right to choose when to exercise her share. However, approximately one month after filing the agreement with the court (but before entry of a decree), the husband unilaterally cashed in all the options, netting nearly $450,000 after taxes. The wife immediately moved the court to re-open the decree and submitted an affidavit from a CPA, whose analysis of the husband’s company stock over the prior 10 years revealed an annual rate of return of just over 20%. By assuming this constant rate of return and that the wife would hold each of her options until the very last day before expiration, the expert calculated her losses at just over $617,000, which the court awarded her.
Held: The court of appeals confirmed the trial court decision, and upon the husband’s appeal to the state Supreme Court rejected the husband’s “proposal for a single, categorical rule for measuring the value of stock options when the stock price increases after conversion,” the six-member majority wrote. The divorce precedent did not mandate such a “one size fits all” rule.
7. Use of Business Reference Guide upheld in valuing PT practice. In re Marriage of Bauer, 2011 WL 4337093 (Cal. App. 4 Dist.)(Sept. 16, 2011)(unpub.)
In this divorce, the parties first retained a joint forensic expert, who valued the husband’s physical therapy (PT) practice between $450,000 and $547,000. He also attached to his report a copy of the Business Reference Guide: The Essential Guide to Pricing a Business, which states that, as a rule of thumb, a multiplier of .60 to 1.00 of annual collected fees may be an appropriate multiplier to determine the value of a physical therapy practice. The joint expert believed that a lower multiplier of .42 applied to the husband’s practice, which equated to approximately 5 months of practice income. The wife’s expert, meanwhile, said the firm merited a multiple of 1.0 because of its historic growth rates, good location, and well-established business. Further, a multiple of 1.0 would still be in the “mid-range” for this particular business. After hearing all the evidence, the trial court accepted the BRG’s general rule of thumb method, explaining that, in this case, the practice was in a good location, was well-known in the medical community with a broad referral base, and had an established core of experienced employees, but it adopted the 1.0 multiple used by the wife’s expert. It also looked at the firm’s gross profits for the prior four years, ranging from $885,000 to $1.08 million, and used the average to value the firm at $1.05 million. On appeal, the husband challenged the trial court’s reliance on the BRG on four grounds: 1) lack of foundation for the author’s expertise; 2) lack of evidence that the joint expert included the guide’s method in his appraisal or that the court understood it; 3) lack of support that the BRG method was “reasonable”; and, 4) the guide did not take into account the same negative factors that the joint expert cited in support for a lower multiplier.
Held: The appellate court rejected all these reasons. The trial court used a “legitimate method of evaluation,” it held. The Business Reference Guide was part of the report submitted by the joint expert, an “undisputed expert” whose testimony provided foundation for the guide’s method.
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