We often deal with cases in which one or both spouses own a business. In many of those cases, a spouse received their interest in a business prior to the marriage, either from a family member, or otherwise. With regard to premarital assets and/or any other assets that a party claims is exempt, that party must prove that the asset is truly exempt. The inquiry doesn’t end there. If the asset is an active asset, like a business, the other party may share in the increase in value of the business during the marriage. Typically, the non-titled spouse will share in the increase in value if they can show that they contributed to the increase by make financial or non-financial contributions.
An interesting question that is not often discussed is who bears the burden of establishing what the premarital value actually was. That question was recently addressed in Fox v. Fox, an unreported (non-precedential) Appellate Division decision released on April 9, 2019. In Fox, the Appellate Division determined that in that case, the burden was on the business owner to establish the pre-marital value. Specifically, the Appellate Division stated:
… Sculler explains that the non-owner spouse must show that “there has been an increase in value of the asset during the term of the marriage.” 348 N.J. Super. at 381. Naturally, to establish an asset’s appreciation, its value must be established at both the beginning and the end of the valuation period. Sculler can be read to suggest it was Catherine’s burden to prove EBN’s value in 2004.
We do not think such a rule makes sense in this case. General principles suggest that courts must consider the parties’ “comparative interests” and “relative litigational strengths,” their “access . . . to proof[s],” and the “objectives to be served by the evidence,” when assigning the burden of proof. Romano v. Kimmelman, 96 N.J. 66, 89 (1984). Here, Edward contends EBN had value before marriage. In other words, he asserts part of the asset is immune from equitable distribution. Because the burden to establish an asset’s immunity “rest[s] upon the spouse who asserts it,” Painter, 65 N.J. at 214, we hold that Edward must prove that EBN had value in 2004. As it may have been unclear that he had that burden, it is fair to remand to give him an opportunity to present proof as to EBN’s pre-marital value.
While it is interesting that the Court stated that this should be the process “in this case”, the rationale provided suggested that this should be the rule in every case. When would the non-titled spouse have better “access …. to proofs” than the owner of the business? As to the objectives served by the evidence, when would the non-titled spouse’s objective be to show a premarital value. Put another way, despite the holding in the Sculler case that was discussed in the opinion, it seems that if this logical rationale was to be followed, in most of not all cases where a party is claiming the exemption of the premarital value, it will be their burden to establish the value.
There were a few other interesting points that one can take away from this case. First, the court reminded us about what non-financial contributions may look like when it stated:
The non-owner spouse can contribute to an asset’s appreciation in a number of ways. For instance, a non-owner spouse can provide the necessary support that allows his or her partner to devote time and energy to a business. Id. at 339 (concluding that a spouse who “took care of the home, worked part – time and raised [their son]” contributed to an asset’s appreciation).
Second, just because a business is not profitable, does not mean that it has no value. The Court stated, “An unprofitable business may still have a positive fair market value. For instance, a business can have valuable tangible assets or inventory, as well as intangible assets, such as goodwill and customer lists.”
Third, despite the often espoused notion that businesses are never divided 50-50, in this case, the increase in value of the business was, in fact, equally divided and that decision was affirmed by the Appellate Division.
Fourth, in this case, the husband argued that the value as of the date of separation should have been used as opposed to the value as of the date of Complaint which is the norm. That notion was roundly rejected by the trial court and the Appellate Division, who noted that argument is just inconsistent with the law. Rather, the court reminded us again of the exceptions to using date of complaint as the cut-off date when it held:
The Court recognized two exceptions to the Painter rule: first, where the couple physically separated and entered into a written separation agreement, the agreement date governs; second, where the couple separated and actually divided their assets pursuant to an oral agreement, “assets acquired afterwards are not eligible for equitable distribution.”
For the reasons stated above, the Fox case provides many useful reminders regarding the valuation, burden of proof and division of active assets. It also provides the opportunity to remind people that if they want to immunize a premarital business, they should give serious consideration to entering into a prenuptial agreement.
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 Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or email@example.com.