All in the Family: Minimum business value defined by Court of Appeals

The pandemic has led to shifts in every facet of life, including the frequency of appellate opinions. It’s been a slow few months at the Minnesota Court of Appeals in terms of family law.

Many counties are now warning that recently filed family cases may not see a trial date until 2022. There is a substantial backlog of untried criminal cases. Consequently, the trickling of family appellate decisions is likely to continue for quite some time.

We’ve scratched and clawed to find a couple recent decisions worth noting. Both are unpublished opinions issued on Oct. 12, 2020.

In re the Marriage of Kent

In Kent, Husband and Wife were married in 1998. Wife filed for divorce in 2016. The custody and parenting time issues were resolved by agreement, leaving financial issues for trial. A Sept. 30, 2017, valuation date was established.

In May 2019 the District Court issued its findings and ordered Husband to pay Wife $950 per month in spousal maintenance and a property equalizer of approximately $168,000. The District Court denied Wife’s request for need-based attorney’s fees.

Wife moved for amended findings and a new trial. Her motions were denied.

On appeal, Wife raised 16 challenges to the District Court’s resolution of the property and financial issues. She obtained remand on three.

In the course of equalizing the property settlement, the District Court resolved the parties’ respective interests in their four businesses. Wife argued that the District Court erred by denying her request to apportion the income and distributions realized from one of the businesses between January 1, 2017, and the valuation date.

The Court of Appeals noted that the District Court, in its discussion of Husband’s ability to pay spousal maintenance, found that he withdrew approximately $211,000 from one of the parties’ businesses in 2017.

Judge Lucinda Jessen noted, “The district court did not provide any reasoning for not awarding Wife any share of these funds.” On remand, the District Court was compelled to address whether any of the $211,000 was marital and, if so, address their division.

Wife also argued that the District Court erred in awarding her spousal maintenance in the amount of $950.00 per month.

Wife argued that the District Court erred by considering her gross, rather than net, income. However, the Court of Appeals reiterated that “[t]he District Court would have considered Wife’s net income but Wife did not submit it as evidence at trial.”

Next, Wife argued that the District Court impermissibly required her to invade the principal of her property settlement in order to pay her living expenses.

While finding Husband and Wife were “affluent and enjoyed a comfortable standard of living during the marriage,” the District Court curiously found Wife’s reasonable monthly budget totaled just $4,100.

Judge Jessen opined that because the District Court made no finding concerning the income potentially generated by Wife’s property settlement, the record was incomplete. He suggested “[t]his is especially so considering that no finding was made establishing the marital standard of living.” On remand, the District Court was required to address both issues.

Finally, Wife argued that the District Court erred in denying her request for need-based attorney fees. The Court of Appeals again suggested that remand was appropriate to determine whether the income Wife could generate income from her property settlement was sufficient to pay her fees and costs.

One issue that stands out in the Kent decision involves the fact that the District Court seemingly addressed the standard of living enjoyed by the parties. Described as “affluent” and “comfortable,” it appears the Court of Appeals wanted more.

Perhaps a more objective way of defining the standard of living involves describing the size and number of homes, automobiles and recreational vehicles owned by a couple.

Answers to critical questions might fill the findings in a more concrete way. Where do they shop for groceries and clothing? How often do they travel? Where to? First class? Private school for the kids? What do they do for recreation?

As you prepare for a spousal maintenance trial, spoon feed the information to the Court. And, include bank records and credit card statements to verify. At the very least, your record on the issue will be robust.

In re the Marriage of Henrichs

In Henrichs, Husband and Wife were married for 28 years before their marriage was dissolved. While they were married, the owned a small HVAC business. Husband worked on location while Wife worked in the office. Each received wages and business distributions.

The District Court found Husband’s after-tax income totaled approximately $4,400 per month with a budget of approximately $5,000. Wife was found capable of earning between approximately $15.00 and $23 per hour.

The parties had signed an agreement that the parties’ business would, temporarily, pay Wife $1,000 per month as and for compensation as a business consultant to Husband’s new bookkeeper.

At trial, the District Court found that Husband was not obligated to pay the $1,000 consulting fee because “she had not performed any consulting services.” The District Court awarded Wife $1,500 per month in spousal maintenance for three years.

On appeal, Wife argued that the agreement of the parties merely required her to be “available,” not necessarily require to her perform consulting services. The Court of Appeals determined that the language of the parties’ agreement supported Wife’s contention.

Because the District Court did not make any findings concerning Wife’s availability for services and, instead, focused on actual services rendered, the Court of Appeals reversed.

In addition to the consulting agreement issue, Wife argued that the District Court erred in valuing the business of the parties.

The District Court found that the value of the parties’ business was “zero” because “its assets could be sold for only pennies on the dollar.” However, Husband testified that the business owned three vehicles, with a cumulative value of $18,000.

Consequently, the Court of Appeals held that the District Court erred and “should have found that the value of the business was no less than $18,000.”

Keep in mind that business valuation is more art than science, but there are three options embraced by valuation experts: (1) balance sheet approach; (2) multiple of profits approach; and (3) comparison to other similarly situated businesses recently sold.

In every case, the balance sheet reflects the minimum value of a business. Assets less liabilities constitute business equity.

A balance sheet approach may not necessarily require the involvement of an expert, as the company books and/or tax returns typically include the relevant assets and debts of a business. Start there, particularly with sole proprietorships.

Jason Brown and Cynthia Brown, husband and wife, are the founding shareholders in the Brown Law Offices, P.A., a northwest Twin Cities divorce and family law firm.