When Business Interests Are Valued Subsequent to the Date of Commencement

Similarly, in Morton v. Morton, 69 AD3d 693 (2nd Dept. 2010), the Second Department reversed the Supreme Court's determination that the husband's interests in multiple business entities that owned commercial real estate properties and acted as the landlord for industrial and manufacturing tenants should be valued as of the commencement date. Despite the fact that the interests were business assets, the husband demonstrated that their decrease in value from the commencement date to the date of trial was attributable to market forces, beyond his control, thereby rendering a trial date valuation the fair and equitable choice.

In a First Department case that addressed the valuation of the husband's ownership interest in movie theaters, Smerling v. Smerling, 177 AD2d 429 (1st Dept. 1991) (also discussed infra), the court upheld a valuation performed at the time of the husband's sale of the business interest, using the actual net cash proceeds as the value rather than the value at the commencement date two years earlier. The Smerling court acknowledged that active assets are generally valued as of the commencement date in order to credit the titled spouse with any appreciation resulting from his or her post-commencement date labors. However, because the business's adjusted cash flow was greater on the commencement date than on the date of sale, it was demonstrated that the increase in value from the commencement date to the date of sale was primarily due to passive market conditions. The rationale for valuing the interest as of the commencement date was therefore not present, and, consequently, the trial court properly used its discretion to select another date that was more appropriate in light of the particular circumstances of this case.

Finally, in Wegman v. Wegman, 123 AD2d 220 (2nd Dept. 1987) (discussed in Part One of this article), the case most commonly cited in support of valuing a business interest as of the date of trial in certain circumstances, the Second Department remitted the matter to the trial court for a new distributive award to be determined consistent with a date of trial valuation of the husband's business. In Wegman, the trial court had improperly valued the husband's business as of the date of the parties' separation, which occurred almost nine years prior to the commencement of the divorce action, where expert testimony presented during trial evinced that the value of the business grew substantially following the parties' separation. The Second Department found that the increase in value following the date of commencement was not due to any factors that could be attributed solely to the active efforts of the husband; rather, it was the result of the marketing of a product that was developed during a period in which the wife made substantial contributions to the economic partnership. By valuing the interest as of the date of separation, the trial court, ” ' so distorted the parties' economic situation as to result in an unfair distribution of assets.” Wegman at 237.

When a Value-Determining Event Occurs Subsequent to The Commencement Date

Finally, courts have also elected to employ a post-commencement date value for purposes of equitable distribution where the business at issue is involved in a sale or merger that occurs subsequent to the commencement date, thereby rendering the date of commencement value inaccurate or speculative, as compared to the later “value-determining” event. For example, in Smerling, the husband's movie theater business was initially valued as of the date of commencement. Then, two years after the action was commenced but prior to trial, the theaters were sold. The First Department upheld the trial court's use of the actual net cash proceeds realized upon sale as the proper indicator of value. The reason for this decision was not only that an analysis of the business's cash flow demonstrated that the appreciation in value was due to passive market forces, but also because the value determined as of the date of commencement two years earlier was merely speculative. As such, the court exercised its discretion and used the later, more equitable, and more precise, valuation date.

In another case concerning the valuation of a business interest that had undergone a “value-determining” event subsequent to the commencement of the action, Weissman v. Weissman, 8 AD3d 264 (2nd Dept. 2004), the Second Department upheld the trial court's valuation of the husband's medical practice as of the date that he merged the practice into another group practice, rather than as of the commencement date. In Weissman, the merger took place only five months following the date of commencement, which may have been a factor in the court's determination to use the later date.

Conclusion

While it may be uncommon to value business interests subsequent to the date of commencement for purposes of equitable distribution, we have seen that there are a number of instances in which a court might determine that it is not appropriate or fair to ascribe a date of commencement value to such assets. Courts have refused to simply categorize all business interests as active assets warranting a date of commencement valuation, but rather, have cited and employed their broad discretion, and have considered the active/passive classification of assets as “helpful guideposts” to be considered when determining the proper valuation date in each particular case.

Courts have found a post-commencement date valuation to be proper where unusual adverse events outside of the titled spouse's control have occurred, such as the loss of a major client, the forced closing or sale of a business, the improper actions of the non-titled spouse, or the titled spouse's disability, which impacts revenue in the year in which the action was commenced. In finding that an adverse event justifies a post-commencement date valuation, courts have required that there be no dissipation or wrongdoing on the part of the titled spouse.

Courts have also applied a post-commencement date valuation of business interests where the post-commencement date change in value is the result of the non-titled spouse's contributions or passive market forces, as may be the case where the value of the particular business interest is essentially that of the real estate that it owns. Finally, courts have utilized a post-commencement date valuation of a business interest where the interest was sold or merged subsequent to the commencement date, on the basis that the commencement date value was therefore merely speculative.

Furthermore, some cases that warrant a valuation subsequent to the date of commencement may not fall neatly into the categories outlined above, but the court, in its discretion, may nonetheless find that a later valuation is appropriate. For example, in Maddalena v. Maddalena, 217 AD2d 606 (2nd Dept. 1995), the parties had attempted to reconcile several times during the year after the divorce action was commenced. Even after the wife had abandoned such efforts and attempted to move the matter toward resolution, the husband caused several delays that resulted in the trial commencing approximately four years after the action had been filed. Accordingly, the Second Department affirmed the trial court's selection of a valuation date approximately two years subsequent to the date of commencement, but two years prior to the date of trial, in order to equitably distribute the parties' closely held corporation, noting that “A court possesses discretion and flexibility in selecting valuation dates that are appropriate and fair under the circumstances. The court's discretion is limited only by the requirement that the valuation date be sometime between the date of the commencement of the action and the time of trial.” Maddalena at 606.

In light of the foregoing, practitioners should evaluate the facts and circumstances incident to the business interest at issue that are available to them at the outset of the case, before the presumptive valuation date is stipulated to or set by the court. Of course, because events that occur after the date of commencement may warrant a subsequent valuation, this issue must continue to be reevaluated throughout the pendency of the action as relevant facts and circumstances occur up to the time of trial.

In last month's issue, we discussed at length how, when the value of a business interest is impacted by adverse events subsequent to the date of commencement outside of the titled spouse's control, courts have recognized that it would be inequitable to ascribe a date-of-commencement value. Let us now address two other scenarios where valuing a business interest as of the commencement date value would unfairly prejudice one party because the change in value is in no way attributable to the titled spouse's active efforts. In both scenarios, courts have appropriately valued the business interest as of a date subsequent to the date the action was commenced. First is the situation in which the value of the interest either increases or decreases as a result of passive market forces. And second, courts have valued business interests as of a date later than the date of commencement if the value is increased due to the efforts and contributions of the non-titled spouse.

Passive Market Forces or The Efforts of the Non-Titled Spouse

In Breese v. Breese , 256 AD2d 433 (2nd Dept. 1998), the Second Department vacated the trial court's order setting the valuation date of the husband's real estate development corporation as the date of commencement, finding that the business should instead be valued as of the date of trial. The court noted that the value of the business was “essentially that of the real property which it owns,” and the husband failed to demonstrate that any change in value was due to his efforts, rather than market forces. Likewise, Lampard v. Lampard , 219 AD2d 835 (4th Dept. 1995), concerned, among other things, the distribution of the husband's interest in a real estate venture that owned the building where he practiced medicine. There, the Fourth Department found that the lower court had erroneously used the date of commencement for purposes of valuing the real estate venture, rather than employing a date of trial valuation. While the court does not set forth the specific reasons for its reversal, we can posit that, inasmuch as the entity's value was determined by the underlying value of the real estate it owned, the increase or decrease of which was entirely a result of market forces, a trial date valuation was found appropriate.

Similarly, in Morton v. Morton , 69 AD3d 693 (2nd Dept. 2010), the Second Department reversed the Supreme Court's determination that the husband's interests in multiple business entities that owned commercial real estate properties and acted as the landlord for industrial and manufacturing tenants should be valued as of the commencement date. Despite the fact that the interests were business assets, the husband demonstrated that their decrease in value from the commencement date to the date of trial was attributable to market forces, beyond his control, thereby rendering a trial date valuation the fair and equitable choice.

In a First Department case that addressed the valuation of the husband's ownership interest in movie theaters, Smerling v. Smerling , 177 AD2d 429 (1st Dept. 1991) (also discussed infra ), the court upheld a valuation performed at the time of the husband's sale of the business interest, using the actual net cash proceeds as the value rather than the value at the commencement date two years earlier. The Smerling court acknowledged that active assets are generally valued as of the commencement date in order to credit the titled spouse with any appreciation resulting from his or her post-commencement date labors. However, because the business's adjusted cash flow was greater on the commencement date than on the date of sale, it was demonstrated that the increase in value from the commencement date to the date of sale was primarily due to passive market conditions. The rationale for valuing the interest as of the commencement date was therefore not present, and, consequently, the trial court properly used its discretion to select another date that was more appropriate in light of the particular circumstances of this case.

Finally, in Wegman v. Wegman, 123 AD2d 220 (2nd Dept. 1987) (discussed in Part One of this article), the case most commonly cited in support of valuing a business interest as of the date of trial in certain circumstances, the Second Department remitted the matter to the trial court for a new distributive award to be determined consistent with a date of trial valuation of the husband's business. In Wegman, the trial court had improperly valued the husband's business as of the date of the parties' separation, which occurred almost nine years prior to the commencement of the divorce action, where expert testimony presented during trial evinced that the value of the business grew substantially following the parties' separation. The Second Department found that the increase in value following the date of commencement was not due to any factors that could be attributed solely to the active efforts of the husband; rather, it was the result of the marketing of a product that was developed during a period in which the wife made substantial contributions to the economic partnership. By valuing the interest as of the date of separation, the trial court, ” ' so distorted the parties' economic situation as to result in an unfair distribution of assets.” Wegman at 237.

When a Value-Determining Event Occurs Subsequent to The Commencement Date

Finally, courts have also elected to employ a post-commencement date value for purposes of equitable distribution where the business at issue is involved in a sale or merger that occurs subsequent to the commencement date, thereby rendering the date of commencement value inaccurate or speculative, as compared to the later “value-determining” event. For example, in Smerling, the husband's movie theater business was initially valued as of the date of commencement. Then, two years after the action was commenced but prior to trial, the theaters were sold. The First Department upheld the trial court's use of the actual net cash proceeds realized upon sale as the proper indicator of value. The reason for this decision was not only that an analysis of the business's cash flow demonstrated that the appreciation in value was due to passive market forces, but also because the value determined as of the date of commencement two years earlier was merely speculative. As such, the court exercised its discretion and used the later, more equitable, and more precise, valuation date.

In another case concerning the valuation of a business interest that had undergone a “value-determining” event subsequent to the commencement of the action, Weissman v. Weissman , 8 AD3d 264 (2nd Dept. 2004), the Second Department upheld the trial court's valuation of the husband's medical practice as of the date that he merged the practice into another group practice, rather than as of the commencement date. In Weissman, the merger took place only five months following the date of commencement, which may have been a factor in the court's determination to use the later date.

Conclusion

While it may be uncommon to value business interests subsequent to the date of commencement for purposes of equitable distribution, we have seen that there are a number of instances in which a court might determine that it is not appropriate or fair to ascribe a date of commencement value to such assets. Courts have refused to simply categorize all business interests as active assets warranting a date of commencement valuation, but rather, have cited and employed their broad discretion, and have considered the active/passive classification of assets as “helpful guideposts” to be considered when determining the proper valuation date in each particular case.

Courts have found a post-commencement date valuation to be proper where unusual adverse events outside of the titled spouse's control have occurred, such as the loss of a major client, the forced closing or sale of a business, the improper actions of the non-titled spouse, or the titled spouse's disability, which impacts revenue in the year in which the action was commenced. In finding that an adverse event justifies a post-commencement date valuation, courts have required that there be no dissipation or wrongdoing on the part of the titled spouse.

Courts have also applied a post-commencement date valuation of business interests where the post-commencement date change in value is the result of the non-titled spouse's contributions or passive market forces, as may be the case where the value of the particular business interest is essentially that of the real estate that it owns. Finally, courts have utilized a post-commencement date valuation of a business interest where the interest was sold or merged subsequent to the commencement date, on the basis that the commencement date value was therefore merely speculative.

Furthermore, some cases that warrant a valuation subsequent to the date of commencement may not fall neatly into the categories outlined above, but the court, in its discretion, may nonetheless find that a later valuation is appropriate. For example, in Maddalena v. Maddalena , 217 AD2d 606 (2nd Dept. 1995), the parties had attempted to reconcile several times during the year after the divorce action was commenced. Even after the wife had abandoned such efforts and attempted to move the matter toward resolution, the husband caused several delays that resulted in the trial commencing approximately four years after the action had been filed. Accordingly, the Second Department affirmed the trial court's selection of a valuation date approximately two years subsequent to the date of commencement, but two years prior to the date of trial, in order to equitably distribute the parties' closely held corporation, noting that “A court possesses discretion and flexibility in selecting valuation dates that are appropriate and fair under the circumstances. The court's discretion is limited only by the requirement that the valuation date be sometime between the date of the commencement of the action and the time of trial.” Maddalena at 606.

In light of the foregoing, practitioners should evaluate the facts and circumstances incident to the business interest at issue that are available to them at the outset of the case, before the presumptive valuation date is stipulated to or set by the court. Of course, because events that occur after the date of commencement may warrant a subsequent valuation, this issue must continue to be reevaluated throughout the pendency of the action as relevant facts and circumstances occur up to the time of trial.