When a divorce involves a business of one or both spouses that is community property, issues of valuation arise, including how and when the business is valued. California’s Second District Court of Appeals recently considered the question of when a business is valued.
Husband and Wife divorced in April 2012, after entering into a written settlement agreement related to the division of their community property and the payment of spousal support. They weren’t able to agree on one issue, however: what to do with the small heating and air-conditioning company that the former spouses owned and operated together. Husband managed the company’s day to day work, while Wife was in charge of the business’s marketing and finances.
According to the Court, Husband “frustrated” Wife’s attempts to get information about the business by ousting her from her job, filing for bankruptcy, and refusing to produce financial records or to be deposed about the company’s financial health. He also transferred assets from the business to another business owned by a former employee and managed by Husband. Because of these actions, the trial court eventually decided to value the business based on what it was worth in May 2012 instead of setting the value at the time of a trial on the issue nearly two years later. The court accepted a valuation prepared by business broker and accountant Rodd Feingold, who set the value at about $470,000. Although a separate appraiser – Phillip Sabol – said the company was only worth $47,000, the Court rejected that valuation because it didn’t take into account the business’ goodwill and tangible assets. The court awarded the business to Husband and ordered him to pay Wife half of its value.
Affirming the decision on appeal, the Second District said the trial court didn’t abuse its discretion by setting the business valuation date at May 2012. Although state law generally requires a court to set the valuation at a date as close to the trial as possible, it also allows for an alternative valuation date when necessary to divide property in an equitable manner. Here, the Court said there was good cause for going with the earlier valuation date. The company was still a “going concern” at the time that the divorce was granted, according to the Court, and it had revenue of more than $1.6 million. Husband then fired Wife from the company, filed for bankruptcy, and refused to provide any information about the business’ financial situation. “These findings support the court’s conclusion that good cause existed for an alternative valuation date,” the Court concluded.
As this case shows, it can be difficult to untangle community business interests in the aftermath of a divorce. If you’re considering a divorce in California or facing community property issues after a divorce, it is important to seek the advice and counsel of an experienced family law attorney. With offices throughout the Bay Area, California divorce lawyer Lorna Jaynes provides innovative legal tools to resolve family law disputes without the bitterness and acrimony engendered by the adversarial process.
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