Cut Off Dates for The Valuation of Active Assets

This is particularly true in light of the “bright-line” rule of using the date the Complaint for divorce is filed as the usual equitable distribution cut-off date unless it is proved that the marriage had irretrievably broken down prior to filing the Complaint. Pascale v. Pascale, 24 N.J. Super. 429 (App. Div. 1994), aff'd in part, rev'd in part, 140 N.J. 583 (1995). Usually, a court will require: 1) a written separation agreement; or 2) an actual division of assets as proof of this breakdown in order to consider a cut-off date other than the Complaint date. Brandenberg v. Brandenberg, 167 N.J. Super. 256 (App. Div. 1979).

Is it time for the law to be changed so that the date of filing is no longer the presumptive date of valuation for an active asset? Or can a lower percentage be awarded to a spouse to reflect a decline in value from the date of Complaint to the date of division?

Scavone v. Scavone, 230 N.J. Super. 482 (Ch. Div. 1988); (aff'd 243 N.J. Super. 134 (App. Div. 1990) differentiated between active assets, which would be divided as of the date of the filing of the Complaint, where the effort of one party affects value, and the issue of passive assets that would be valued as close to the date of division as possible.

In this economy, rising insurance costs and the implementation of Obamacare is having a negative impact on the value of many medical practices. There are many financial issues to consider. These issues may drag down the value of a medical practice. It is unfair and unrealistic to value a practice at a date a year or two prior to the date of actual division when the value assigned may not reflect actual value. This issue was addressed in Goldman v. Goldman, 248 N.J. Super. 10 (Ch. Div. 1991), aff'd in part, rev'd in part, 275 N.J. Super. 452 (App. Div. 1994), based on the good-faith investment of a party into a car business in which that money was lost. In that case, the business went bankrupt, before the Complaint was filed.

There is no doubt that the circumstances in Goldman were considered “special” and that it dealt with facts that were easier to quantify. Id. at 16. In Goldman, the owner spouse reached an agreement with the bank shortly before trial. Therefore, both parties agreed that the car dealership had no value at all on the date of trial. Obviously, most cases are not as clear cut, and there is always a litany of arguments on both sides as to what, if anything, caused the value of a business to decline after the date a divorce complaint was filed.

These issues also arose in Agarwal v. Agarwal, No. A-0581-06T3, 2009 WL 1650161 (N.J. Super. Ct. App. Div. June 15, 2009), where the New Jersey Appellate Division reviewed the Superior Court's decision to value the owner spouse's medical practice in 1998 ' more than six years after the divorce Complaint was filed. The Appellate Division found that the practice was an active asset and would usually be valuated on the date of filing the Complaint. However, because the Superior Court failed to provide justification for variation from the usual rule, the Appellate Division remanded to the trial court to make further clarifications. On remand, the court determined that the valuation date was proper because neither party objected at the time of valuation and because the defendant's own experts valued the business after the plaintiff's findings were made earlier in 2004. Agarwal v. Agarwal, No. A-0581-06T3, 2011 WL 6141452 (N.J. Super. Ct. App. Div. Dec. 12, 2011). This result establishes that the rigid adherence to the presumption of date of filing can increase litigation and impede judicial economy.

Additionally, in Christopher v. Christopher, No. A-6444-06T3, 2009 WL 1918080 (N.J. Super. Ct. App. Div. July 7, 2009), the Appellate Division upheld the Superior Court's valuation of the husband's medical practice as of the date of filing pursuant to Painter, where the husband had tried to indicate that the practice was worth less than it was by exaggerating the stage of negotiations to sell part of the practice to another partner. The Appellate Division refused to change the valuation date to the date of final judgment, because the reduced value of the practice “was altered by agreements designed to manipulate [Husband's] ownership interest in the practice in order to deny defendant her rightful share of the marital asset.” This case illustrates the importance in allowing courts to conduct analysis on a case-by-case basis.

Arguing the Cut-off Date

Of course, it could be argued that using a cut-off date later than the filing date would serve to allow the non-owner spouse to reap the gains of work efforts of the working spouse if the value of the business increased. This, however, is not the premise of this article.

What is reasonable is that the courts should no longer treat the date a Complaint for divorce is filed as the presumptive cut-off date. Perhaps a better and more equitable procedure would be to have a valuation prepared as of the cut-off date, with a subsequent or trial amendment prepared, if necessary. In circumstances where a business has been negatively affected by economic circumstances out of the business operator's control, the burden should not be on the owner spouse to rebut a presumptive value as of the cut-off date.

Such a concept would also serve to protect both the non-owner and owner spouses. What if the value of the business increases due to national or international economics? It could be argued that this is similar to a passive increase, no different from a bank account or real estate that increases in value by the date of distribution.

The inquiry in this article goes further than the Goldman case, and addresses instead the issue of whether the value of a medical practice at the time of the Complaint should always be utilized later when so many extrinsic factors are weighing heavily on it. These factors are independent of the owner spouse and serve to affect the value of the practice negatively, potentially despite herculean efforts of the owner spouse.

New York Courts

Unlike the courts in New Jersey, New York courts have been willing to allow flexibility in valuation methods. While New York has not abandoned the active/ passive differentiation, judges are granted discretion to determine the most just time for valuation of marital assets. In McSparron v. McSparron, 87 N.Y.2d 275, 288, 662 N.E.2d 745, 752 (1995), the New York Court of Appeals (highest state court) identified the differences between valuation methods for active and passive assets and concluded that the methods may be too rigid and should be used as “guideposts” rather than bright-line rules. In this case, the husband's law license would have been considered an active asset, yet the court found that its valuation should not necessarily be determined by the commencement of filing, since “one of the apparent goals of using the date of the action's commencement for measuring the assets' worth, i.e. preventing the licensed spouse from unilaterally manipulating the asset's value, may not be relevant in this case, where the actions of the non-licensed spouse may have undermined the license's residual economic value.”

Similarly, in Naimollah v. De Ugarte, 18 A.D.3d 268, 270, 795 N.Y.S.2d 525 (2005), a state appellate court applied the “guidepost” approach to active/passive appreciation and acknowledged that where “a business suffers 'losses due to adverse forces outside the spouse's control,' a trial date valuation may be appropriate.” Id. (citing Grunfeld v. Grunfeld, 255 A.D.2d 12, 17, 688 N.Y.S.2d 77 [1999], mod. on other grounds 94 N.Y.2d 696, 709 N.Y.S.2d 486, 731 N.E.2d 142 [2000]).

In Mahoney-Buntzman v. Buntz-man, 11 Misc. 3d 869, 813 N.Y.S.2d 874 (Sup. Ct. 2006), a state trial court examined a dispute over whether stock options should be characterized as passive or active assets and whether the date of valuation should be the commencement of filing, trial date, or some date in between. The court recognized the significance of the date of valuation because in this specific case, the value of stock had increased substantially between the commencement of the action and the trial court. The court cited Wegman v. Wegman, which acknowledged the possible injustice of valuating certain assets at different times “[i]f an asset increased in value due to market forces or inflation, valuation as of the date of commencement of the action would result in a windfall to the titled spouse and injustice to the other.” Ultimately, however, the court found that the defendant bears the burden to establish whether an asset is active or passive, even though the court then has discretion to set the date of valuation.

In Morton v. Morton, 69 A.D.3d 693, 892 N.Y.S.2d 518 (2010), the New York appellate court reversed the trial court's valuation of defendant's business as of the date of filing. The business consisted of multiple entities that owned commercial real estate properties. The husband was able to present evidence that the decreased value of the assets since the date of filing was due to market forces and not due either to dissipation or waste by the defendant. Agreeing with this argument, the court assigned the date of valuation as the trial date.

However, in Bean v. Bean, 53 A.D.3d 718, 860 N.Y.S.2d 683 (2008), the appellate court upheld the trial court's valuation of the owner spouse's business as an active asset as of the date of commencement of filing. The court recognized the general rule that active assets are valued as of the date of filing, when to change the date of valuation to the trial date (on the eve of trial) would be prejudicial to the plaintiff.

Other States

Other states have also departed from the bright-line rules. In Ohio, a domestic relations court has discretion in selecting an appropriate valuation date for marital property. In Brightman v. Brightman, No. 54871, 1989 WL 4152 (Ohio Ct. App. Jan. 19, 1989), the court determined that the date of trial, rather than the date of separation, was the proper date of valuation. Specifically, the defendant argued that valuating his medical practice as of the date of trial was incorrect. However, the Ohio Court of Appeals upheld the trial court's determination because the court found that the success of the defendant's practice was due in part to the contributions from the marriage.

In Montana, valuation is conducted at the date of dissolution rather than separation except for unique circumstances. In In re Marriage of Swanson, 220 Mont. 490, 716 P.2d 219 (1986), the court did not find sufficient circumstances to adjust the valuation date for valuation of the husband's medical practice or retirement funds.

Similarly, in Tennessee, valuation is conducted at a date closest to dissolution. Therefore, in Brooks v. Carter, No. 02A01-9709-CV-00225, 1999 WL 43278 (Tenn. Ct. App. Feb. 2, 1999), the court of appeals agreed with the defendant that the trial court should have established the wife's interest in the husband's medical practice as of the date of divorce.

Other Factors

Hospitals are buying out practices. They are paying doctors salaries, but are not paying significant amounts for the practices themselves. This erodes the value of the remaining independent practices because they cannot compete with a full-service hospital. Further, the value of the remaining practices will be watered down as the need for acquisition diminishes.

Insurance companies are paying less for services. Presently, different insurance companies pay different amounts for the same services, leaving practitioners unable to predict the amount of payments they will receive for the same service. This lack of continuity creates insecurity and instability in the expectations of the doctor. Further, the decrease in reimbursement rates by private insurance companies has been dramatic over the last decade or so.

Insurance companies are more conservative about coverage. The volume of testing is more limited. There is more paperwork, more processing/bookkeeping, employees and costs associated with obtaining coverage. Moreover, it is more time consuming to obtain approval for treatment. In the past, insurance companies would rely on the doctor's judgment, but often that is no longer sufficient. Instead, significant documentation and substantiation may be required. Doctors have been forced to increase the number of back-office staff, who are not producing revenue.

There are problems that are industry-wide across the country. When practice revenue is down, doctors earn less. If a service is not covered, patients in a poor economy will hesitate to initiate unreimbursed treatments.

A small business owner may not be seeing the same volume of business, or if he is, net revenue may be down. As long as the business owner or doctor is making the same effort, why should we use a cut-off date in advance of distribution when the change may be significant? Should this affect the percentage of distribution or should this affect value?

What happens when the two numbers are very disparate? Although it is improving, the real estate industry is still down. Can a construction company be valued as it might have been several years ago? Sometimes cases can go on for an extensive period of time, especially with the suspension of trials that some counties in New Jersey have seen. While “best practices” dictate that all cases are to be resolved within one year, very often this does not take place, especially in highly contentious or complex cases. It would cause prejudice to the active participant in the entity if the inflated value is used rather than the actual value at the time of division.

Conclusion

If the economy continues to be unpredictable, is it fair to use a value a year or two before distribution when the changes in the industry or business are completely outside of the control of the business owner? The medical industry is a prime example of this. The industry is constantly changing, and in many ways, the changes are negative for the practitioner.

The ultimate goal in resolving any matrimonial matter is fairness and equity. Using values that do not reflect actual value causes an unfair result. While it may be reflective of value at a prior time, it does not reflect what each party walks away with upon divorce.

It may very well be time to modify the presumption of the valuation of an active asset at the time of the Complaint to reflect the reality of the economic world around us. A common sense case-by-case consideration of this issue, at least in this economy, should take place. Although the analysis may be more time-consuming, the result will be reflective of reality.

'

Lynne Strober, a member of this newsletter's Board of Editors, is Chair of the Family Law Department, Mandelbaum Salsburg, P.C. Charlotte Howells, a law clerk at the firm, assisted in the research for this article.

'

It is long established under New Jersey law that the cut-off date for equitable distribution of an active asset is the date of the filing of the Complaint. The law in New York, however, allows some flexibility, and other states have departed from the bright-line rule.

New Jersey Courts

If we go back to Rothman v. Rothman , 65 N.J. 219 (1974) and Painter v. Painter , 65 N.J. 196 (1974), which required that the assets be ascertained, valued and divided, the cut-off date for equitable distribution has always presumptively been the date of the filing of the Complaint. The question is ' is that still fair and equitable when there is an industry-wide reduction in value that continues after the filing of the Complaint? This article uses the medical profession as an example.

This is particularly true in light of the “bright-line” rule of using the date the Complaint for divorce is filed as the usual equitable distribution cut-off date unless it is proved that the marriage had irretrievably broken down prior to filing the Complaint. Pascale v. Pascale , 24 N.J. Super. 429 (App. Div. 1994), aff'd in part, rev'd in part, 140 N.J. 583 (1995). Usually, a court will require: 1) a written separation agreement; or 2) an actual division of assets as proof of this breakdown in order to consider a cut-off date other than the Complaint date. Brandenberg v. Brandenberg , 167 N.J. Super. 256 (App. Div. 1979).

Is it time for the law to be changed so that the date of filing is no longer the presumptive date of valuation for an active asset? Or can a lower percentage be awarded to a spouse to reflect a decline in value from the date of Complaint to the date of division?

Scavone v. Scavone , 230 N.J. Super. 482 (Ch. Div. 1988); (aff'd 243 N.J. Super. 134 (App. Div. 1990) differentiated between active assets, which would be divided as of the date of the filing of the Complaint, where the effort of one party affects value, and the issue of passive assets that would be valued as close to the date of division as possible.

In this economy, rising insurance costs and the implementation of Obamacare is having a negative impact on the value of many medical practices. There are many financial issues to consider. These issues may drag down the value of a medical practice. It is unfair and unrealistic to value a practice at a date a year or two prior to the date of actual division when the value assigned may not reflect actual value. This issue was addressed in Goldman v. Goldman , 248 N.J. Super. 10 (Ch. Div. 1991), aff'd in part, rev'd in part, 275 N.J. Super. 452 (App. Div. 1994), based on the good-faith investment of a party into a car business in which that money was lost. In that case, the business went bankrupt, before the Complaint was filed.

There is no doubt that the circumstances in Goldman were considered “special” and that it dealt with facts that were easier to quantify. Id. at 16. In Goldman, the owner spouse reached an agreement with the bank shortly before trial. Therefore, both parties agreed that the car dealership had no value at all on the date of trial. Obviously, most cases are not as clear cut, and there is always a litany of arguments on both sides as to what, if anything, caused the value of a business to decline after the date a divorce complaint was filed.

These issues also arose in Agarwal v. Agarwal, No. A-0581-06T3, 2009 WL 1650161 (N.J. Super. Ct. App. Div. June 15, 2009), where the New Jersey Appellate Division reviewed the Superior Court's decision to value the owner spouse's medical practice in 1998 ' more than six years after the divorce Complaint was filed. The Appellate Division found that the practice was an active asset and would usually be valuated on the date of filing the Complaint. However, because the Superior Court failed to provide justification for variation from the usual rule, the Appellate Division remanded to the trial court to make further clarifications. On remand, the court determined that the valuation date was proper because neither party objected at the time of valuation and because the defendant's own experts valued the business after the plaintiff's findings were made earlier in 2004. Agarwal v. Agarwal, No. A-0581-06T3, 2011 WL 6141452 (N.J. Super. Ct. App. Div. Dec. 12, 2011). This result establishes that the rigid adherence to the presumption of date of filing can increase litigation and impede judicial economy.

Additionally, in Christopher v. Christopher, No. A-6444-06T3, 2009 WL 1918080 (N.J. Super. Ct. App. Div. July 7, 2009), the Appellate Division upheld the Superior Court's valuation of the husband's medical practice as of the date of filing pursuant to Painter, where the husband had tried to indicate that the practice was worth less than it was by exaggerating the stage of negotiations to sell part of the practice to another partner. The Appellate Division refused to change the valuation date to the date of final judgment, because the reduced value of the practice “was altered by agreements designed to manipulate [Husband's] ownership interest in the practice in order to deny defendant her rightful share of the marital asset.” This case illustrates the importance in allowing courts to conduct analysis on a case-by-case basis.

Arguing the Cut-off Date

Of course, it could be argued that using a cut-off date later than the filing date would serve to allow the non-owner spouse to reap the gains of work efforts of the working spouse if the value of the business increased. This, however, is not the premise of this article.

What is reasonable is that the courts should no longer treat the date a Complaint for divorce is filed as the presumptive cut-off date. Perhaps a better and more equitable procedure would be to have a valuation prepared as of the cut-off date, with a subsequent or trial amendment prepared, if necessary. In circumstances where a business has been negatively affected by economic circumstances out of the business operator's control, the burden should not be on the owner spouse to rebut a presumptive value as of the cut-off date.

Such a concept would also serve to protect both the non-owner and owner spouses. What if the value of the business increases due to national or international economics? It could be argued that this is similar to a passive increase, no different from a bank account or real estate that increases in value by the date of distribution.

The inquiry in this article goes further than the Goldman case, and addresses instead the issue of whether the value of a medical practice at the time of the Complaint should always be utilized later when so many extrinsic factors are weighing heavily on it. These factors are independent of the owner spouse and serve to affect the value of the practice negatively, potentially despite herculean efforts of the owner spouse.

New York Courts

Unlike the courts in New Jersey, New York courts have been willing to allow flexibility in valuation methods. While New York has not abandoned the active/ passive differentiation, judges are granted discretion to determine the most just time for valuation of marital assets. In McSparron v. McSparron , 87 N.Y.2d 275, 288, 662 N.E.2d 745, 752 (1995), the New York Court of Appeals (highest state court) identified the differences between valuation methods for active and passive assets and concluded that the methods may be too rigid and should be used as “guideposts” rather than bright-line rules. In this case, the husband's law license would have been considered an active asset, yet the court found that its valuation should not necessarily be determined by the commencement of filing, since “one of the apparent goals of using the date of the action's commencement for measuring the assets' worth, i.e. preventing the licensed spouse from unilaterally manipulating the asset's value, may not be relevant in this case, where the actions of the non-licensed spouse may have undermined the license's residual economic value.”

Similarly, in Naimollah v. De Ugarte , 18 A.D.3d 268, 270, 795 N.Y.S.2d 525 (2005), a state appellate court applied the “guidepost” approach to active/passive appreciation and acknowledged that where “a business suffers 'losses due to adverse forces outside the spouse's control,' a trial date valuation may be appropriate.” Id . (citing Grunfeld v. Grunfeld , 255 A.D.2d 12, 17, 688 N.Y.S.2d 77 [1999], mod. on other grounds 94 N.Y.2d 696, 709 N.Y.S.2d 486, 731 N.E.2d 142 [2000]).

In Mahoney-Buntzman v. Buntz-man , 11 Misc. 3d 869, 813 N.Y.S.2d 874 (Sup. Ct. 2006), a state trial court examined a dispute over whether stock options should be characterized as passive or active assets and whether the date of valuation should be the commencement of filing, trial date, or some date in between. The court recognized the significance of the date of valuation because in this specific case, the value of stock had increased substantially between the commencement of the action and the trial court. The court cited Wegman v. Wegman, which acknowledged the possible injustice of valuating certain assets at different times “[i]f an asset increased in value due to market forces or inflation, valuation as of the date of commencement of the action would result in a windfall to the titled spouse and injustice to the other.” Ultimately, however, the court found that the defendant bears the burden to establish whether an asset is active or passive, even though the court then has discretion to set the date of valuation.

In Morton v. Morton , 69 A.D.3d 693, 892 N.Y.S.2d 518 (2010), the New York appellate court reversed the trial court's valuation of defendant's business as of the date of filing. The business consisted of multiple entities that owned commercial real estate properties. The husband was able to present evidence that the decreased value of the assets since the date of filing was due to market forces and not due either to dissipation or waste by the defendant. Agreeing with this argument, the court assigned the date of valuation as the trial date.

However, in Bean v. Bean , 53 A.D.3d 718, 860 N.Y.S.2d 683 (2008), the appellate court upheld the trial court's valuation of the owner spouse's business as an active asset as of the date of commencement of filing. The court recognized the general rule that active assets are valued as of the date of filing, when to change the date of valuation to the trial date (on the eve of trial) would be prejudicial to the plaintiff.

Other States

Other states have also departed from the bright-line rules. In Ohio, a domestic relations court has discretion in selecting an appropriate valuation date for marital property. In Brightman v. Brightman, No. 54871, 1989 WL 4152 (Ohio Ct. App. Jan. 19, 1989), the court determined that the date of trial, rather than the date of separation, was the proper date of valuation. Specifically, the defendant argued that valuating his medical practice as of the date of trial was incorrect. However, the Ohio Court of Appeals upheld the trial court's determination because the court found that the success of the defendant's practice was due in part to the contributions from the marriage.

In Montana, valuation is conducted at the date of dissolution rather than separation except for unique circumstances. In In re Marriage of Swanson, 220 Mont. 490, 716 P.2d 219 (1986), the court did not find sufficient circumstances to adjust the valuation date for valuation of the husband's medical practice or retirement funds.

Similarly, in Tennessee, valuation is conducted at a date closest to dissolution. Therefore, in Brooks v. Carter, No. 02A01-9709-CV-00225, 1999 WL 43278 (Tenn. Ct. App. Feb. 2, 1999), the court of appeals agreed with the defendant that the trial court should have established the wife's interest in the husband's medical practice as of the date of divorce.

Other Factors

Hospitals are buying out practices. They are paying doctors salaries, but are not paying significant amounts for the practices themselves. This erodes the value of the remaining independent practices because they cannot compete with a full-service hospital. Further, the value of the remaining practices will be watered down as the need for acquisition diminishes.

Insurance companies are paying less for services. Presently, different insurance companies pay different amounts for the same services, leaving practitioners unable to predict the amount of payments they will receive for the same service. This lack of continuity creates insecurity and instability in the expectations of the doctor. Further, the decrease in reimbursement rates by private insurance companies has been dramatic over the last decade or so.

Insurance companies are more conservative about coverage. The volume of testing is more limited. There is more paperwork, more processing/bookkeeping, employees and costs associated with obtaining coverage. Moreover, it is more time consuming to obtain approval for treatment. In the past, insurance companies would rely on the doctor's judgment, but often that is no longer sufficient. Instead, significant documentation and substantiation may be required. Doctors have been forced to increase the number of back-office staff, who are not producing revenue.

There are problems that are industry-wide across the country. When practice revenue is down, doctors earn less. If a service is not covered, patients in a poor economy will hesitate to initiate unreimbursed treatments.

A small business owner may not be seeing the same volume of business, or if he is, net revenue may be down. As long as the business owner or doctor is making the same effort, why should we use a cut-off date in advance of distribution when the change may be significant? Should this affect the percentage of distribution or should this affect value?

What happens when the two numbers are very disparate? Although it is improving, the real estate industry is still down. Can a construction company be valued as it might have been several years ago? Sometimes cases can go on for an extensive period of time, especially with the suspension of trials that some counties in New Jersey have seen. While “best practices” dictate that all cases are to be resolved within one year, very often this does not take place, especially in highly contentious or complex cases. It would cause prejudice to the active participant in the entity if the inflated value is used rather than the actual value at the time of division.

Conclusion

If the economy continues to be unpredictable, is it fair to use a value a year or two before distribution when the changes in the industry or business are completely outside of the control of the business owner? The medical industry is a prime example of this. The industry is constantly changing, and in many ways, the changes are negative for the practitioner.

The ultimate goal in resolving any matrimonial matter is fairness and equity. Using values that do not reflect actual value causes an unfair result. While it may be reflective of value at a prior time, it does not reflect what each party walks away with upon divorce.

It may very well be time to modify the presumption of the valuation of an active asset at the time of the Complaint to reflect the reality of the economic world around us. A common sense case-by-case consideration of this issue, at least in this economy, should take place. Although the analysis may be more time-consuming, the result will be reflective of reality.

'

Lynne Strober, a member of this newsletter's Board of Editors, is Chair of the Family Law Department, Mandelbaum Salsburg, P.C. Charlotte Howells, a law clerk at the firm, assisted in the research for this article.

'