Matrimonial Valuation Dates

An Anomalous Case

Mahoney-Buntzman has been certified for review by the Court of Appeals due to a number of interesting issues, such as certain credits given to the wife for the pre-marital or otherwise separate debts of the husband. However, as the case relates to valuation dates of marital assets, the relevant facts of Mahoney-Buntzman are as follows: The husband and his associate formed a corporation during the parties' marriage by the name of EVCI. The corporation had an initial public offering four years before the date of commencement of the parties' matrimonial action, resulting in the husband's receipt of a substantial amount of EVCI stock and options during the parties' marriage. On the date of commencement of the divorce action, EVCI stock was trading at $2.70 per share. Sometime after the date of commencement, the husband sold two large blocks of EVCI stock ' a block of 300,000 shares at a price of $4.00 per share, and a block of 310,000 shares at a price of $11.50 per share. After these stock sales, but still during the matrimonial action, the share price plummeted. As of the last day of the divorce trial, EVCI stock was trading at $1.53 per share. Not shockingly, the husband sought to fix the valuation date for his EVCI stock and options as of the date of commencement of the action, based on the theory that his EVCI holdings were active assets which appreciated after the date of commencement (at least somewhat) due to his efforts.

In its analysis of the issue, the Mahoney-Buntzman trial court reviewed the applicable law in the First and Second Departments concerning the appropriate valuation date of marital property held in the name of one spouse. After a lengthy discussion of the issue, the trial court concluded that First Department cases such as Kerzner v. Kerzner, 264 AD2d 338 (1st Dept. 1999), and Heine v. Heine, 176 AD2d 77, (1st Dept. 1992), supported the husband's position. That position was “that a company's stock will be found to be an 'active' asset when the titled spouse has been actively involved in the management of the company and has had a significant impact upon the value of the stock,” without requiring proof that the titled spouse was solely responsible for the increase in value. However, the Mahoney-Buntzman trial court held that:

As is apparent from the [Second Department] decisions in Breese [Breese v. Breese, 256 AD2d 433 (2nd Dept. 1998)], Barbuto [Barbuto v. Barbuto, 286 AD2d 741 (2nd Dept. 2001)] and Scharfman [Scharfman v. Scharfman, 19 AD3d 474 (2nd Dept. 2005)], in this Judicial Department the burden upon a party arguing that an asset is active, and should be valued as of the commencement of the action, is to prove that any change in value of that asset was due solely to his efforts, to the exclusion of all other factors. Notwithstanding that this standard may limit the situations in which business assets are characterized as “active” to sole proprietorships [citation omitted], this Court is constrained to follow the approach taken by the Second Department.

The Buntzman court proceeded to set the valuation dates of the husband's blocks of EVCI stock as of their (post-commencement) dates of sale, and valued the remaining shares and options as of the last day of trial.

A Good Decision?

Was the Mahoney-Buntzman trial court correct in its reading of Second Department precedent on this issue? The answer is not very clear. It is true that the Breese, Barbuto and Scharfman decisions cited by the Mahoney-Buntzman trial court all employ language stating that the titled spouse had failed to prove a post-commencement change in value due solely to his efforts; however, perhaps the Second Department was somewhat imprecise in its use of language in these cases and did not intend such a literal interpretation of the word “solely.” After all, these cases also cite McSparron and Grunfeld, which warn against employing such rigid rules in the setting of valuation dates for marital assets. For any court to adopt the active/passive test in setting valuation dates and then to insist rigidly that active appreciation must be attributable solely to the efforts of the titled spouse flies in the face of both McSparron and Grunfeld. A strictly literal reading of Breese, Barbuto and Scharfman would mean that it would be virtually impossible for a titled spouse to obtain a valuation date of a marital asset as of date of commencement, since the appreciation of an asset is almost always due to a number of variables, and virtually never solely attributable to individual effort. The proof required to demonstrate such a singular “cause” and “effect” may never be possible in any case.

Clearly, such a rigid rule makes no sense at all, and is contrary to the concept of equitable distribution. Why should the non-titled spouse share in the appreciation of an “active” marital asset when most of the appreciation is due to the efforts of the titled spouse? Moreover, adopting such a bright-line test leads to absurd results if we are consistent and apply such a “sole cause” test to the depreciation of an “active” marital asset as opposed to the appreciation; that is, would the Second Department hold that where an active asset depreciates substantially after the date of commencement, it must be valued as of the date of trial, unless the depreciation is due solely to the actions of the titled spouse? What if the depreciation was only mostly (but not solely) due to the malevolent actions of the titled spouse? Will he or she escape responsibility for such dissipation in that event? Of course not.

Conclusion

Without addressing the appropriateness of the specific outcome in Mahoney-Buntzman, we are now left with Second Department approval of a decision that unequivocally holds that a titled spouse must prove that his efforts were the sole cause of any post-commencement appreciation of a marital asset in order to obtain a valuation date as of the date of commencement. Hopefully, we have not yet heard the end of this story, and the Court of Appeals can enlighten us with regard to this valuation date quandary.

Benjamin E. Schub, a member of this newsletter's Board of Editors, is a member of Berman, Bavero, Frucco & Gouz, P.C., located in White Plains.

Ask any experienced matrimonial lawyer in New York State what valuation date should be used in valuing marital property, and the answer will inevitably be the same: “active” assets (i.e., those whose value depend on the labor of the titled spouse) should be valued as of the date of commencement of a matrimonial action, and “passive” assets (i.e., those whose value depend solely on market forces) should be valued as of the date of trial. Indeed, the case law generally holds this to be true, based on the theory that, with respect to an active asset, a titled spouse should be prevented from manipulating its value after the date of commencement of a matrimonial action, and should also be entitled to the results of his or her post-commencement efforts with respect to the asset to the exclusion of the non-contributing spouse. S ee e.g., Wegman v. Wegman , 123 AD2d 220, 509 NYS2d 342 (2nd Dept. 1986); McSparron v. McSparron , 87 NY2d 275 (1995); Greenwald v. Greenwald , 164 AD2d 706 (1st Dept. 1991).

Passive Assets

With respect to a passive asset, the case law holds that neither spouse should experience a windfall or suffer an injustice due to post-commencement fluctuations in the asset value that are beyond their control. Id. However, that being said, it is critical to bear in mind the admonition of the New York Court of Appeals, as expressed in Grunfeld v. Grunfeld , 94 NY2d 696 (2000), that the active/passive formulations “may prove too rigid to be useful in particular cases” and “should be regarded only as helpful guideposts and not as immutable rules of law.” Grunfeld , at 707 (citing McSparron). McSparron and Grunfeld both stand for the proposition that the appropriate valuation dates for marital property are left to “the sound discretion of the trial courts, which should make their determinations with due regard for all of the relevant facts and circumstances [citation omitted].” McSparron at 287. In other words, the ultimate decision by any court must be based on the principles of equity that are a foundation of the equitable distribution statute. However, it is questionable whether the current state of the law in the Second Department follows the equitable principles set forth in the McSparron and Grunfeld decisions, particularly after the trial court decision in Mahoney-Buntzman v. Buntzman , 13 Misc.3d 1216(A) (Sup. Ct., Westchester Cty., 2006), affirmed in 2008 by the Second Department ( Mahoney-Buntzman v. Buntzman , 51 AD3d 732 (2nd Dept. 2008)) without addressing a troublesome conclusion reached by the nisi prius court.

An Anomalous Case

Mahoney-Buntzman has been certified for review by the Court of Appeals due to a number of interesting issues, such as certain credits given to the wife for the pre-marital or otherwise separate debts of the husband. However, as the case relates to valuation dates of marital assets, the relevant facts of Mahoney-Buntzman are as follows: The husband and his associate formed a corporation during the parties' marriage by the name of EVCI. The corporation had an initial public offering four years before the date of commencement of the parties' matrimonial action, resulting in the husband's receipt of a substantial amount of EVCI stock and options during the parties' marriage. On the date of commencement of the divorce action, EVCI stock was trading at $2.70 per share. Sometime after the date of commencement, the husband sold two large blocks of EVCI stock ' a block of 300,000 shares at a price of $4.00 per share, and a block of 310,000 shares at a price of $11.50 per share. After these stock sales, but still during the matrimonial action, the share price plummeted. As of the last day of the divorce trial, EVCI stock was trading at $1.53 per share. Not shockingly, the husband sought to fix the valuation date for his EVCI stock and options as of the date of commencement of the action, based on the theory that his EVCI holdings were active assets which appreciated after the date of commencement (at least somewhat) due to his efforts.

In its analysis of the issue, the Mahoney-Buntzman trial court reviewed the applicable law in the First and Second Departments concerning the appropriate valuation date of marital property held in the name of one spouse. After a lengthy discussion of the issue, the trial court concluded that First Department cases such as Kerzner v. Kerzner , 264 AD2d 338 (1st Dept. 1999), and Heine v. Heine , 176 AD2d 77, (1st Dept. 1992), supported the husband's position. That position was “that a company's stock will be found to be an 'active' asset when the titled spouse has been actively involved in the management of the company and has had a significant impact upon the value of the stock,” without requiring proof that the titled spouse was solely responsible for the increase in value. However, the Mahoney-Buntzman trial court held that:

As is apparent from the [Second Department] decisions in Breese [ Breese v. Breese , 256 AD2d 433 (2nd Dept. 1998)], Barbuto [ Barbuto v. Barbuto , 286 AD2d 741 (2nd Dept. 2001)] and Scharfman [ Scharfman v. Scharfman , 19 AD3d 474 (2nd Dept. 2005)], in this Judicial Department the burden upon a party arguing that an asset is active, and should be valued as of the commencement of the action, is to prove that any change in value of that asset was due solely to his efforts, to the exclusion of all other factors. Notwithstanding that this standard may limit the situations in which business assets are characterized as “active” to sole proprietorships [citation omitted], this Court is constrained to follow the approach taken by the Second Department.

The Buntzman court proceeded to set the valuation dates of the husband's blocks of EVCI stock as of their (post-commencement) dates of sale, and valued the remaining shares and options as of the last day of trial.

A Good Decision?

Was the Mahoney-Buntzman trial court correct in its reading of Second Department precedent on this issue? The answer is not very clear. It is true that the Breese, Barbuto and Scharfman decisions cited by the Mahoney-Buntzman trial court all employ language stating that the titled spouse had failed to prove a post-commencement change in value due solely to his efforts; however, perhaps the Second Department was somewhat imprecise in its use of language in these cases and did not intend such a literal interpretation of the word “solely.” After all, these cases also cite McSparron and Grunfeld, which warn against employing such rigid rules in the setting of valuation dates for marital assets. For any court to adopt the active/passive test in setting valuation dates and then to insist rigidly that active appreciation must be attributable solely to the efforts of the titled spouse flies in the face of both McSparron and Grunfeld. A strictly literal reading of Breese, Barbuto and Scharfman would mean that it would be virtually impossible for a titled spouse to obtain a valuation date of a marital asset as of date of commencement, since the appreciation of an asset is almost always due to a number of variables, and virtually never solely attributable to individual effort. The proof required to demonstrate such a singular “cause” and “effect” may never be possible in any case.

Clearly, such a rigid rule makes no sense at all, and is contrary to the concept of equitable distribution. Why should the non-titled spouse share in the appreciation of an “active” marital asset when most of the appreciation is due to the efforts of the titled spouse? Moreover, adopting such a bright-line test leads to absurd results if we are consistent and apply such a “sole cause” test to the depreciation of an “active” marital asset as opposed to the appreciation; that is, would the Second Department hold that where an active asset depreciates substantially after the date of commencement, it must be valued as of the date of trial, unless the depreciation is due solely to the actions of the titled spouse? What if the depreciation was only mostly (but not solely) due to the malevolent actions of the titled spouse? Will he or she escape responsibility for such dissipation in that event? Of course not.

Conclusion

Without addressing the appropriateness of the specific outcome in Mahoney-Buntzman, we are now left with Second Department approval of a decision that unequivocally holds that a titled spouse must prove that his efforts were the sole cause of any post-commencement appreciation of a marital asset in order to obtain a valuation date as of the date of commencement. Hopefully, we have not yet heard the end of this story, and the Court of Appeals can enlighten us with regard to this valuation date quandary.

Benjamin E. Schub, a member of this newsletter's Board of Editors, is a member of Berman, Bavero, Frucco & Gouz, P.C., located in White Plains.