A few weeks ago, I posted a piece on this blog about the business valuation concept known as reasonable or replacement compensation. After that post, I received an email from a well known business valuation expert, Sam Rosenfarb of Rosenfarb LLC, with an attachment containing an article that he wrote regarding the issue of the change of value of a business after the date of Complaint for Divorce. That article along with the ever growing backlog in the family courts created by the budget crisis and other factors got me thinking more about this topic. In some counties, it may be more than three years to get a trial date at this time.
Why is this important? In New Jersey, passive assets (e.g. real estate, bank accounts) are typically valued as of the date of distribution. On the other hand, active assets, such as a business, where the value could be tied to the efforts of the business owner, are typically valued as of the date of the divorce Complaint. As such, in your typical case, the increase or decrease in value post-complaint is not considered though there is an ability to raise the issue in extreme circumstances.
This issue was relevant in a case that both Sam and my prior firms were involved in where it took nearly a decade for the case to get to trial and where the business increased in value substantially over that time. That case started before New Jersey implemented "Best Practices" wherein, systemically, the goal was to get all cases resolved in a year. Even cases that were more complicated and which had business valuation issues, could usually get a trial date within 18 months. As such, the days of the 4 year, 5 year or longer case, where changes in value would likely occur, became less the norm as they had been before "Best Practices."
Backlogs are now increasing as there are less judges available to try divorce cases. As a result, the issue of active vs. passive change in value while a divorce case is pending may become more prevalent.
In these cases, lawyers and experts may need to scrutinize if there was a change in value, and if there was a change, why it occurred. Some might argue that to the extent that the change is value is due to passive reasons, such as market forces, that the date of complaint valuation date may not be fair to use. Some, including Sam, posit that perhaps the active change in value should not be considered for purposes of equitable distribution, but the passive piece, might possibly be considered. The process is seemingly a two step one. First, determine whether there was a change in value and second, determine the reason, for the change in value. Of course, as Sam notes, the causes of a change in value may not be subject to precise determination.
In practice, there will seemingly be a discovery fight if the non-titled spouse wants to get post-complaint information to perform a second valuation. The owner spouse will, no doubt, argue that this is active, that this will increase the costs and that this will delay the resolution. On the other hand, the eleventh factor in the equitable distribution statute is "the present value of the property." As such, whether or not the increase in value is distributable, it remains a factor that the court must consider.
In any event, as this may return to the forefront as an issue to consider, divorce attorneys and their experts must be prepared to address it.
Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501 or firstname.lastname@example.org.