Posted on March 7, 2009 by Sandra C. Fava

APPELLATE DIVISION SAYS- MORE INFORMATION NEEDED TO DETERMINE DIVISION OF DEBT

In the recent unpublished Appellate Division matter of McDermott v. McDermott, A-0631-07T1, Decided February 20, 2009, the Appellate Division remanded the matter to the trial court for further proceedings on the amount of loans taken during the marriage from plaintiff's family and the distribution of responsibility for repayment of those loans.

The parties were married for nearly 30 years.  Plaintiff/husband was an attorney with a solo practice and defendant worked at his office for many years, helping to raise their five children and eventually finding employment outside the home with a local school district.  During the marriage, the parties primarily relied upon the income earned from plaintiff's law practice.  This income fluctuated throughout the years, in part due to the economy and in part due to plaintiffs bouts of depression.

During the 15 day trial in this matter, testimony was offered that during the course of the marriage, plaintiff made some unilateral decisions with regards to the parties' finances, including taking loans from his family and purchasing property without notifying defendant, who only found out during trial.  Defendant claimed that she only knew of very few of the loans given by plaintiff's family, however evidence submitted at trial indicated otherwise.  Plaintiff's sister offered credible testimony that the total amount of loans given was $283, 398.50 of which only $6,300 was repaid. 

After the trial, the trial judge issued a written decision, which in part, obligated defendant to repay plaintiff's sister the amount of $57,165.31 as her share of loans made to the marital partnership; valued plaintiff's law practice at $100,000 of which defendant was entitled to half; compelled plaintiff to pay $2,000 per month in limited duration alimony for a period of 6 years; and ordered plaintiff to pay $49,000 of the $80,202.70 counsel fees incurred by defendant in the divorce litigation.

 

Plaintiff appealed claiming that the trial court abused its discretion in requiring defendant to only repay 18% of the loans received from plaintiff's sister considering that defendant received almost 50% of the marital assets the loans preserved; the finding that plaintiff's law practice was valued at $100,000 was contrary to evidence and an abuse of discretion; the alimony award was contrary to evidence and an abuse of discretion; the counsel fee award was not based upon credible evidence, contrary to law and should be vacated; and the trial court's naked conclusions failed to explain many of its decisions therefore the plaintiff requested that the Appellate Division exercise original jurisdiction to decide the issues it reverses.

The Appellate Division affirmed the trial court's findings as to the value of plaintiff's law practice and its distribution, the alimony award and the counsel fee award.

As for the distribution of the loans made by plaintiff's family, the Appellate Division reversed and remanded the trial court's finding of the amount of loans subject to distribution for further proceedings on whether the marital partnership received and was benefited by other loans from plaintiff's family other than those specifically found by the judge. The trial judge found plaintiff's sister's testimony to be credible, however only specifically discussed distribution of two loans, totaling $120,000. Although the trial court's written opinion may be interpreted to have rejected plaintiff's arguments as to the remaining amount of loans taken, the Appellate Division would not base its decision upon such a loose interpretation and remanded for clear findings on this point.

On remand, the trial judge should consider principles established in the Appellate Division case of Monte v. Monte, 212 N.J. Super. 557 (App. Div. 1986) for dealing with marital debt. In Monte, the Appellate Division considered the equitable distribution of marital debt when "[t]he parties' affluent standard of living continued not only during periods of time when earned income was meager but also ...when plaintiff had no income because he was unable to work for over a year." Id. at 566. The amount of debt accrued during that time to sustain the family shall also be considered. The trial judge must consider whether, under the circumstances, defendant must have been aware that there were other loans, assuming there were, and whether they were used to preserve marital assets for her later benefit at the time of equitable distribution.

Lastly, the Appellate Division refused to accept original jurisdiction over the issues remanded. Plaintiff argued that because the trial judge had been moved out of the family division, the Appellate Division should retain original jurisdiction to prevent a new judge, unfamiliar with the case, from hearing the issues on remand. The Appellate Division has held that the transfer of a judge should not "interfere[] with what was required for a fair and just resolution of" a family court matter. O'Brien v. O'Brien, 259 N.J. Super. 401, 405-406 (App. Div. 1992). Despite being transferred from the family division, the trial judge has an obligation to decide the issues on remand and has been instructed to do just that.
 
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Posted on October 10, 2008 by Eric S. Solotoff

Read Mark Ashton's Excellent Blog Entry Entitiled "Do I Need A Business Appraiser? And Just What is a Forensic Accountant?"

Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote an excellent post entitled "Do I Need A Business Appraiser? And Just What is a Forensic Accountant?" on that blog.

To read the complete post, click here.

EDITORS NOTE:  Forensic accountants are also used in matrimonial cases to reconstruct income, prepare lifestyle analyses (how the people spent their money), to trace income to make sure it is all accounted for, to trace premarital assets to establish exemption or partial exemption, to value stock options and other compensation and for other similar tasks.  In complex cases, forensic accountants, the divorce attorneys and of course, the client, work together as a team.  The key is to select the right expert and there are many excellent ones that we work with.  - Eric Solotoff

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Posted on March 27, 2008 by Eric S. Solotoff

IS UNIFORMITY IN BUSINESS VALUATIONS UPON US? - THE NEW AICPA BUSINESS VALUATION STANDARDS

            On June 21, 2007, the American Institute of Certified Public Accountants, “AICPA”, released the Statement on Standards for Valuation Services No. 1 (SSVS No. 1) – Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (“Standards”). These standards are effective for all valuation engagements accepted on or after January 1, 2008. The purpose of these Standards is to improve the consistency and quality of practice among CPAs that perform valuation services. The Standards were developed because Congress, government agencies and regulators have recently focused their attention on valuation issues, as well as the increasing demand for valuation services over the past 20 years. 

            The Standards specify two types of engagements: valuation engagements and calculation engagements. Valuation engagements would typically be the one required in a divorce matter.

            In determining whether the valuation engagement can reasonably be expected to be completed with professional competence, the standards require that the valuation analyst consider, at a minimum, the following: (a) the subject entity and its industry; (b) the subject interest; (c) the valuation date; (d) the scope of the valuation engagement (including the purpose of the engagement, any assumptions or limiting conditions that are expected to apply to the valuation, the applicable standard of value (i.e. fair market value or fair value) and premise of value (i.e. going concern), the type of report to be issued, the intended use and users and the restrictions on the use of the report); and (e) any governmental regulations or other professional standards that apply to the entity to be valued or to the valuation engagement.

            Additionally, in understanding the nature and the risks of the valuation services to be provided, the standards require that the expert should consider: (a) the proposed terms of the engagement; (b) the identity of the client; (c) the nature of the ownership interest, including control and marketability issues; (d) the procedural requirements of the valuation and whether they will be limited by either the client or circumstances beyond the client’s control; (e) the use and limitations of the report and the conclusion or calculated value; and (f) any obligation to update the valuation.

           

          Under the Standards, the accountant is permitted to rely on the work of a third party specialist, such as a real estate or equipment appraiser and has the option of appending the specialist’s report within their valuation report.

           In performing a valuation engagement, the standards require the CPA to analyze the subject interest (considering many of the factors previously addressed); consider and apply appropriate valuation approaches and methods and prepare and maintain appropriate documentation. The analysis of the subject interest should include financial information for the relevant period such as historical and prospective financial information, comparative summaries of financial statements, comparative common size financial statements, tax returns, information on owners compensation and key man life insurance, advantageous or disadvantageous contracts, contingent or off balance sheet assets or liabilities and information regarding prior sales of the entity. Additionally, non-financial information must be considered such as the nature, background and history of the entity, the facilities, the organizational structure, the management team, classes of equity ownership interests and the rights attached thereto, products or services, or both, the economic environment, the geographic markets, the industry markets, key customers and supplies, competition, business risks, strategy and future plans and the governmental and regulatory environment.

          In performing the valuation, consistent with past practices for a typical valuation, the accountant should consider the three most common valuation approaches: the income approach, the asset approach and the market approach. While using the capitalization of benefits method (an income approach), the accountant should consider normalizing adjustments, non-recurring revenue and expenses, taxes, capital structure and financing costs, appropriate capital investments, non-cash items, qualitative judgments for risks used to compute discount and capitalization rates and expected changes in future benefits. When performing a discounted future benefits analysis (also an income approach), the accountant must consider forecast/projection assumptions, forecast/projected earnings or cash flows and the terminal value. When using the asset approach, the assets and liabilities must be identified, the assets and liabilities must be valued and the liquidation costs must be considered. In using the market approach (i.e. looking for comparable sales), the accountant must consider qualitative and quantitative comparisons, whether the data reflects arms-length transactions and prices and the dates and relevance of the market data.

        The accountants are also required to consider valuation adjustments such as discounts (lack of marketability or lack of control) and premiums. Though consideration of these adjustments is seemingly required, it will be interesting to see how this is applied in New Jersey since discounts are disfavored in matrimonial valuations.

        Subsequent events that were not known or knowable as of the valuation date are not to be considered. This is significant as there was considerable debate in the valuation community about the appropriateness of using subsequent events. 

         The Standards, in large part, comprehensively state what the more skilled accountants have been doing for some time. However, another benefit of the Standards, aside from uniformity, is the creation of a road map to use both to be sure that your valuation expert’s report is as unassailable as possible, and to provide fodder for cross-examination of the adverse expert.

          For a full version of the Standards from the AICPA web site, click here.
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