Valuation of Assets, Business and Investments in Divorce Cases
Valuation of Assets in Divorce Actions
By M. J. Goodwin
On March 5, 2014, the South Carolina Court of Appeals issued its ruling in Teeter v. Teeter, which can be found here: http://www.sccourts.org/opinions/indexCOAPub.cfm The Court affirmed most of the trial court’s ruling, but did reverse the date of the valuation of the husband’s business by three (3) years, which made a more than $30,000 difference in the final ruling.
The opinion discusses the difference in passive and active appreciation and depreciation. This is important to many business owners and investors that are going through the divorce process.
The opinions reads as follows:
“In South Carolina, marital property subject to equitable distribution is generally valued at the divorce filing date. However, the parties may be entitled to share in any appreciation or depreciation in marital assets occurring after a separation but before divorce.” Burch v. Burch, 395 S.C. 318, 325, 717 S.E.2d 757, 761 (2011) (citations omitted); S.C. Code Ann. § 20-3-630(A). The party seeking a deviation from the statutory filing date bears the burden of proof. Burch, 395 S.C. at 329, 717 S.E.2d at 763. “Passive appreciation refers to enhancement of the value of property due solely to inflation, changing economic conditions, or market forces, or other such circumstances beyond the control of either spouse. [A]ctive appreciation, on the other hand, refers to financial or managerial contributions of one of the spouses.” Id. at 325-26, 717 S.E.2d at 761 (citations and internal quotation marks omitted).
It is fairer to value a passive asset at or near the time of the final hearing, because both parties are equally deserving to share in any increase or decrease . . . . [On the other hand,] active assets should be valued at the time of commencement [or filing] of the marital litigation, to enable the person who causes the change in value to receive the benefits of his or her labor and skills or, conversely, to prevent the person who controls the assets from manipulating the value downward during litigation.
Id. at 326, 717 S.E.2d at 761 (alterations in Burch) (quoting Roy T. Stuckey, Marital Litigation in South Carolina 310 (3rd ed., 2001)).
Burch had not been published at the time of the final hearing in this action. However, the passive/active analysis generally applied by our courts prior to Burch and specifically adopted therein is the proper approach for valuing Husband’s business. The family court valued Apex Investors at $74,775.32 based upon a balance sheet prepared by Husband in 2011. Husband argues the correct valuation would have been reflected on the balance sheet he prepared at the time of filing in 2008, which showed a value of negative $784.56.
In determining whether using the 2011 figure was appropriate, we must consider whether the change in value of the business was passive appreciation or active appreciation based upon Husband’s efforts. The change was, according to Husband’s own testimony, a reflection of the changing stock market. Although the business is not a publicly owned company, the fact that it is an investment company means the stock market will affect the transactions clients make and the commission or profit generated for Apex Investors. In that sense, the business could be positively affected by a change in the stock market. However, Husband’s expertise and efforts were required to take advantage of these changes to benefit
Apex Investors. Had Husband not advised clients to make certain transactions at certain times, any benefit of the change in the market would not have been realized within the business. Based on the record before us, we cannot conclude Wife met her burden of establishing the change in the value of Apex Investors was passive appreciation. Therefore, the family court erred in valuing it based on the 2011 balance sheet and should have valued it based on the 2008 balance sheet. After calculating the difference this valuation makes in the overall marital estate, we conclude Wife owes Husband $31,751.95 in order to effectuate the family court’s 55%/45% distribution.”
The Court of Appeals findings in the Teeter case can be applied to similarly situated individuals in other cases. Any case with significant assets and business interests should be sure to have competent, experienced legal counsel for the divorce and asset division process.