The Valuation Conundrum: Making Sense of Legal, Factual and Accounting Concepts in Maine Divorce...

Legal Considerations in Valuation and Division of Assets

in Maine

This communication is intended for general information

purposes and as a service to clients and friends of Verrill

Dana, LLP. This publication, which may be considered

advertising under the ethical rules of certain

jurisdictions, should not be construed as legal advice or

a legal opinion on any specific facts or circumstances,

nor does it create attorney-client privilege or an

attorney-client relationship.

Legal Considerations in Valuation and Division of Assets

in Maine

The Valuation Conundrum: Making Sense

of the Legal, Factual, and Accounting

Concepts in Divorce Cases

The Valuation Conundrum: Making Sense of the Legal, Factual, and

Accounting Concepts in Maine Divorce Cases

Karen Frink Wolf, Esq.

Partner, Verrill Dana, LLP

Jonathan M. Dunitz, Esq.

Counsel, Verrill Dana, LLP

Eric Purvis, CPA/ABV, MST, CVA,

Dawson Smith Purvis & Bassett

The Valuation Conundrum: Making Sense of the Legal, Factual, and

Accounting Concepts in Maine Divorce Cases

Today’s Goals

1. Develop strategies for identifying and litigating

business valuation issues in the divorce context;

2. Identify areas in which and expert can assist, and

expert concepts that can assist the trier of fact; and,

3. Learn ways in which the valuation presentations

can persuade the Court or Referee.

Jonathan M. Dunitz, Esq., Counsel

Verrill Dana, LLP

[email protected], (207) 253-4478

Disposition of Property

• Determine what is marital and what is non-

marital

• Determine whether increase in value of

property is marital, non-marital or a

combination of both


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First Three Rules on Dividing

Marital Property

1. Read 19-A M.R.S.A. § 953

2. Reread 19-A M.R.S.A. § 953

3. Re-reread 19-A M.R.S.A. § 953


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Disposition of Marital Property

1. Disposition. In a proceeding for a divorce, for legal separation or for disposition of property

following dissolution of the marriage by a court that lacked personal jurisdiction over the absent

spouse or lacked jurisdiction to dispose of the property, the court shall set apart to each spouse the

spouse’s property and shall divide the marital property in proportions the court considers just after

considering all relevant factors, including:

A. The contribution of each spouse to the acquisition of the marital property, including the

contribution of a spouse as homemaker;

B. The value of the property set apart to each spouse; and

C. The economic circumstances of each spouse at the time the division of property is to become

effective, including the desirability of awarding the family home or the right to live in the

home for reasonable periods to the spouse having custody of the children.

19-A M.R.S.A. § 953(1)(emphasis added)


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Definition of Marital Property

2. Definition. For purposes of this section, “marital property” means all property acquired by

either spouse subsequent to the marriage, except:

A. Property acquired by gift, bequest, devise or descent;

B. Property acquired in exchange for property acquired prior to the marriage or in exchange

for property acquired by gift, bequest, devise or descent;

C. Property acquired by a spouse after a decree of legal separation;

D. Property excluded by valid agreement of the parties; and

19-A M.R.S.A. § 953(2) (emphasis added)


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Definition of Marital Property (Continued)

2. Definition. For purposes of this section, “marital property” means all property acquired by either spouse subsequent to the marriage, except:

E. The increase in value of property acquired prior to the marriage and the increase in value of a spouse’s nonmarital property as defined in paragraphs A to D.

1. “Increase in value” includes:

A. Appreciation resulting from market forces; and

B. Appreciation resulting from reinvested income and capital gain unless either

or both spouses had a substantial active role during the marriage in managing,

preserving or improving the property.

2. “Increase in value” does not include:

A. Appreciation resulting from the investment of marital funds or property in the nonmarital

property;

B. Appreciation resulting from marital labor; and

C. Appreciation resulting from reinvested income and capital gain if either or both spouses had

a substantial active role during the marriage in managing, preserving or improving the

property.


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1. “Increase in value” includes:

A. Appreciation resulting from market forces; and

B. Appreciation resulting from reinvested income and capital gain unless

either or both spouses had a substantial active role during the

marriage in managing, preserving or improving the property.


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2. “Increase in value” does not include:

A. Appreciation resulting from the investment of marital funds or

property in the nonmarital property;

B. Appreciation resulting from marital labor; and

C. Appreciation resulting from reinvested income and capital gain if

either or both spouses had a substantial active role during the

marriage in managing, preserving or improving the property.


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Marital v. Non-Marital

• Increased value that IS NOT marital property: market forces

and reinvested income/capital gain so long as there was no

“substantial active role” managing, preserving or improving

the property.

• Increase value that IS marital property: Investment of marital

funds or property, marital labor, reinvested income/capital

gain where there is a “substantial active role” managing,

preserving or improving the property.


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Appreciated Value

“The disposition of appreciated value of nonmarital

property is generally not an all-or-nothing proposition.

We differentiate ‘between the increase in value

attributable to marital effort and that ‘attributable to the

inherent value of the property and the economic factors

affecting it,’ preserving the latter as separate property.’

Attribution of appreciated value to marital labor or

market forces is a factual determination, and a 100%

apportionment to either separate or marital property is

not precluded where factually warranted.”

Warren v. Warren, 2005 ME 9, ¶35, 866 A.2d 97, 104

(emphasis added) (internal citations omitted).


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Burden

"The burden of establishing that the

value of separate property increased

during marriage is on the party

asserting the increase.”

Warren, 2005 ME ¶ 26, 866 A.2d at

103 (internal citations omitted).


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Burden Shifts

When the party seeking to prove that an increase in value is marital

property establishes an increased value, “the burden shifts to the party

urging that the increase in value is not marital property to demonstrate

that the increase resulted from factors listed in section 953(2)(E)(1).”

Warren, 2005 ME ¶ 26, 866 A.2d at 103 (internal citations omitted).


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Failure to Meet Burden

"When faced with evidence that fails to provide the court with a meaningful

basis to undertake the analysis required by 19-A M.R.S. § 953(1), the court

must consider the applicable burden of proof. If the evidence in the

record…[is] inadequate to provide a basis for any reasoned finding upon a

particular issue, the issue should be resolved against the party with the burden

of proof.”

Ayotte v. Ayotte, 2009 ME 20, ¶ 7, 966 A.2d 883, 885 (citations omitted)


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Failure to Meet Burden

Where the party claiming a marital interest in the increased value of the property

failed to show “an appreciation in value of nonmarital real property during the

marriage…the presumption of a marital component did not arise….”

Miliano v. Miliano, 2012 ME 100, ¶ 26, 50 A.3d 534, 543.

Where the party claiming that the increase in value is non-marital “fails to sustain

the burden of establishing that the increase resulted from market forces or passively

reinvested income, the statutory presumption compels a finding that the increase in

value of the separate property is marital.”

Warren, 2005 ME ¶ 26, 866 A.2d at 103 (internal citations omitted).


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What Meets the Burden?

“The amount of the increase in value is an essential element of

the proof. It is not sufficient ...to merely opine that a property is

more useful, efficient, accessible, secure, or aesthetically

pleasing due to post-marital investments of effort or funds. Such

bare-bones evidence deprives the court of a critical element in

the analysis….[The Court] cannot arbitrarily establish values in

the absence of evidence…nor can it arbitrarily set aside

nonmarital property or divide marital property based on its

finding of a marital component of value without making

supportable findings of fact quantifying that value.”

Miliano, 2012 ME 100, ¶ 25, 50 A.3d at 542-543.


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But the Parties Can’t Afford Experts

The Law Court understands that there are instances in

which parties cannot afford experts:

“we recognize the difficulty of presenting a thorough

business valuation when the parties have few

discretionary assets, a court acts well within its authority

in reaching findings and dividing the property as best it

can when presented with limited information about a

business’s value.”

Bond v. Bond, 2011 ME 54, ¶ 14, 17 A.3d 1219, 1222.


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Meeting Burden Without Experts

Because the parties in Bond presumably could not afford experts, the Law

Court found that the parties satisfied their burden by providing the trial

court with:

the approximate value of the real estate upon which the business operated;

information about the current amount of the corporate debt; the tax returns

of the business over the last several years, which included the value of the

inventory; and a recent history of a reduction in the business’s work force.

Bond, 2011 ME 54, ¶ 11, 17 A.2d at 1222


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Doesn’t the Court Just Average the

Experts Opinions

It depends:

The Law Court has “noted that when the court is

presented with two appraisals as to the value of

property that the parties agree is marital and

should be equitably divided between them, a

mere averaging of the two may not be

acceptable….”

Findlen v. Findlen, 1997 ME 130, ¶ 12, 695 A.2d

1216, 1220.


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Does the Court Have to Pick One or

the Other Valuation?“any estimate that is within the range of expert opinion is valid provided the

presiding justice reached his own conclusion through an independent review of the

evidence. Here, the trial court took several factors into account, including income

and salary figures, corporate balance sheets, profit and loss statements, the loss of

two recent accounts, offers to purchase the corporation, and the two expert

appraisals. Because the court determined that value of the corporation after an

independent review of the evidence, and because that value is within the range of

expert opinion, the court’s decision was not clearly erroneous.”

Robinson v. Robinson, 2000 ME 101, ¶ 12, 751 A.2d 457, 460.


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Goodwill Hunting

What? The $1,000,000 professional practice owned by my client’s

soon-to-be former spouse has only $200,000 of marital property? Is

that possible? Following Ahern v. Ahern, that result is absolutely

possible.


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Goodwill Hunting

Since Ahern was decided in 2008, the law in Maine has been that

“[a]s a general principle, the personal goodwill of a professional

practice…is not a species of property.” 2008 ME 1, ¶ 14, 938

A.2d 35, 39.

As a result, “personal goodwill [is] not subject to distribution as

property.” Id., 2008 ME 1, ¶ 15, 938 A.2d at 40. The reason

stated for excluding goodwill from distributable property is that

the “goodwill value” of a professional practice is “attributable to

the [professional’s] skill and reputation. As such it is not readily

transferable or realized because it is contingent on future events

such as [the professional’s] willingness and ability to participate in

a sale of the practice.” Id.


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Keep Hunting Goodwill

Although the value of personal goodwill is no longer

considered property subject to distribution, it remains

important:

It is relevant to establishing the professional’s “earning

capacity for purposes of determining support issues. “ Ahern,

2008 ME 1, ¶ 14, 938 A.2d at 39 (citing 19-A M.R.S.A. §

951-A(5)).

“It may also be relevant to establishing a professional’s

‘economic circumstances…at the time the division or

property is to become effective’ for the purpose of arriving at

a just division of the parties’ marital property.” Ahern, 2008

ME 1, ¶ 14, 938 A.2d at 39-40 (citing 19-A M.R.S.A. §

953(1)(C)).


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Attributes Indicating Personal Goodwill

• Ability, skill and judgment

• Work habits

• Age and health

• Personal reputation

• Personalized name

• Marketing and branding

• In-bound personal referrals

• Closeness of contact

• Personal nature of services


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Attributes Indicating Enterprise Goodwill

• Enterprise staff

• Business reputation

• Business name

• Marketing and branding

• Business location

• Multiple locations

• System and organization

• In-bound referrals

• Repeating revenue stream


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Dividing A Small Business in Divorce

• In Maine, the division of marital property must

avoid, if possible, a continued business or financial

relationship between the parties. Berry v. Berry,

658 A.2d 1097, 1099 (Me. 1995)

• As a result, “[i]t is within the court’s power to

provide other means of distribution of the marital

property to avoid future conflicts between the

parties” where the court finds that it cannot

accurately value the asset. Smith v. Smith, 1997

ME 29, ¶ 4, 690 A.2d 970, 972 (citations omitted).


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Be Sure to Value the Correct

Ownership Interest

• Issue: client owns a share of a general partnership that owns a share of a limited

real estate partnership.

– Value of the real estate alone is likely not sufficient to establish the value of

the ownership interest.


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Be Sure to Value the Correct

Ownership Interest

If your expert values only the real estate, not the entity that owns the

real estate, you could be leaving money on the table. For example, if

there are cash accounts that are not included, the value will be reduced.

It is not the court’s job to find out what is missing.


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More Than A Divorce May

Be Necessary• Issue: Both parties own an interest as general

partners of a limited partnership. The limited

partnership agreement provides that the removal of

a general partner causes the dissolution of the

entire partnership unless the limited partners agree

to continue the partnership.

Or

• Issue: One party transfers marital property to an

LLC owned by that party and others, but not the

spouse.


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Be Necessary

• “The [Maine Limited Liability Company] Act does not

recognize the divorce of one or more of the parties who

created an LLC as a basis for dissolution.” Ahern, 2008 ME

1, ¶ 20, 938 A.2d at 41.

• The district court “lacks personal jurisdiction over [the LLC]

and [a third party] because they are not parties to the divorce

action.” Howard v. Howard, 2010 ME 83, ¶ 12, 2 A.3d 318,

322.


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Be Necessary

• Where the issues involve an entity or persons over whom the

family division of the district court does not have jurisdiction,

the appropriate action is to bring a separate action, likely

declaratory judgment action, to resolve ownership issues and

consolidate (but not join) the two actions. See, Howard, 2010

ME 83, ¶ 18, 2 A.3d 318, 323; see also Efstathiou v. The

Aspinquid, Inc., 2008 ME 145, ¶ 5 and n. 1, 956 A.2d 110,

114.


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QUESTIONS?Karen Frink Wolf, Esq.

Partner, Verrill Dana, LLP

[email protected]

(207) 253-484

Jonathan M. Dunitz, Esq.

Counsel, Verrill Dana, LLP

[email protected]

(207) 253-4478

Eric Purvis, CPA/ABV, MST, CVA

Dawson Smith Purvis & Bassett

[email protected]

(207) 874-0355 ext. 311

mailto:[email protected]



The Valuation Conundrum: Making Sense of Legal, Factual and Accounting Concepts in Maine Divorce...

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Transcript of The Valuation Conundrum: Making Sense of Legal, Factual and Accounting Concepts in Maine Divorce...