Family Law

HOW WILL THE COURT VALUE YOUR BUSINESS?

By Fox Rothschild

In this changing economy, how will the courts value your business? Will the Court use the date you separated from your spouse or the date that the assets and debts are divided?

Unless one of the limited exceptions exists, the courts will value a marital business as close to the date of distribution as possible. While the Divorce Code does not explicitly state the date to use to value the marital assets, the courts hold that using the date of distribution value effectuates economic justice between the parties. Sutliff v. Sutliff, 543 A.2d 534, 536 (1988); Smith v. Smith, 904 A.2d 15, 18 (Pa. Super. 2006); Nagle v. Nagle, 799 A.2d 812, 820 (Pa. Super. 2002) citing Diamond v. Diamond, 519 A.2d 1012 (Pa. Super. 1987). In Sutliff, the court stated that 'a valuation date reasonably proximate to the date of distribution must, in the usual case, be utilized' because 'it is inconceivable that the requirement that the distribution be made in such proportions as the court deems ‘just' could be satisfied without reference to the current values of the assets.' Sutliff v. Sutliff, 543 A.2d 534, 536 (1988).

The court recognized the importance of using the date of distribution value, as opposed to the date of separation value, by commenting, 'to distribute property without regard to those fluctuations would be illogical, and would undermine the legislative intent of making the equitable distribution process responsive to the contemporaneous needs and financial situations of the parties' Sutliff v. Sutliff, 543 A.2d 534, 537 (1988). This is particularly important in this economic climate given that the values for most assets have decreased.

Additionally, the court can only value the marital assets on the date of separation when limited circumstances exist. Smith v. Smith, 904 A.2d 15, 19 (Pa. Super. 2006); Litmans v. Litmans, 673 A.2d 382 (Pa. Super. 1996). The court confines the exceptions to situations where (1) one spouse consumes or disposes of marital assets or (2) there are other conditions that make a current valuation difficult. Smith v. Smith, 904 A.2d 15, 19 (Pa. Super. 2006) citing Benson v. Benson, 624 A.2d 644 (Pa. Super. 1993).

For example, in McNaughton v. McNaughton, 603 A.2d 646 (Pa. Super. 1992) the court valued the marital real estate as of date of distribution, but valued the husband's marital business at the date of separation because the husband controlled the business, the business was difficult to value after separation, and the husband influenced the business's value by lowering its value. See also Benson v. Benson, 624 A.2d 644 (Pa. Super. 1993).

Additionally, in Adelstein v. Adelstein, 553 A.2d 436, (Pa. Super. 1989), the husband owned one-half of a corporation, but after the date of separation, the other owner received additional shares of stock (without consideration), granting him a much larger ownership percentage of the corporation. The court noted that the existence and nature of marital property is determined as of the date of separation and that an attempt by shareholders to rearrange their respective interests did not affect the ownership interest that existed on the date of separation. Thus, the court valued the husband's ownership interest as one-half of the corporation as of the date of separation and would not support the husband's efforts to minimize his ownership interest.

So, unless one of the limited exceptions exists, the court will value a marital business as of the date of distribution.

Full post as published by Pennsylvania Family Law on April 28, 2009 (boomark / email).