The reported Virginia case of Patel makes important points about business valuation in equitable distribution (“ED”).  Patel v. Patel, Record No. 875-12-2 (VA App., April 9, 2013).

            Husband alleged his hotel and LLC interests were worthless or under water despite his earning $30,000.00 a month.   This did not ingratiate him with the Court of Appeals; he lost every argument.  Wife received 40% of the assets, $7,000.00 a month in spousal support, and $1,245.00 in monthly child support.

            Here are the rules applied in this decision:

1.            Experts are fact witnesses.  Trial courts may pick and choose among expert opinions so long as their reasons for doing so are not “plainly wrong” or lacking evidentiary support.  Smith v. Board of Supervisors, 201 Va. 87, 91, 109 S.E.2d 501, 505 (1959).   Howell v. Howell, 31 Va. App. 332, 341, 523 S.E.2d  514, 519 (2000).  Here, the parties had a total of five experts, and the Circuit Court’s decision to adopt the reasoning of the two hired by the wife is affirmed on appeal.

2.            Business valuation for ED may be based on net equity without considering revenue or difficulty of sale.

            Considerations underlying spousal support are “wholly different”.  Stumbo v. Stumbo, 20 Va. App. 685, 691-92, 460 S.E.2d 591, 594-95 (1995) (quoting Brown v. Brown, 5 Va. App. 238, 246, 361 S.E.2d 364, 368 (1987)).

3.            If fair market value minus debt yields a negative number as the equity in marital property, then the “Intrinsic” value for ED is not negative; it is zeroHodges v. Hodges, 2 Va. App. 508, 515 (1986).

            This makes sense.  Otherwise, a party might walk away from a negative number after divorce by obtaining a bankruptcy discharge.  Furthermore, startups often appear to have a negative net worth early in their existence due to fixed costs like equipment, inventory, advertising and marketing.  Even when liabilities exceed assets, many companies are profitable and not insolvent.

4.            Husband’s contention that the trial court should have disregarded his personal loans to his zero-value companies is disingenuous.  The Court of Appeals affirmed the propriety of including the promissory notes as marital assets in ED.

            If the rule were otherwise, business people approaching divorce would loan cash to their enterprise whenever it had a negative net worth, get the resulting payment obligation valued at “zero” in ED, and then reclaim their cash after the divorce was final.

5.            It is acceptable practice in calculating self-employment income for support purposes to average three (3) years of earnings.  In Patel, the lower court was smoothing-out the impact of non-recurring special depreciation losses that husband had subtracted from income.

Read about significant bias among psychological experts in the courtroom, in this news report published April 15, 2013: