Starling v. Starling, 2013 Va. App. LEXIS 248 (Sept. 10, 2013) (slip op.)

Because the trial court found neither spouse’s expert offered a convincing valuation for a family business, it opted to adopt the liquidation value the company’s CPA proposed. On appeal, the husband contested both the trial court’s classification of the business as hybrid property as well as its valuation.

Who generated increase in value? In 1981, one year before he married, the husband and his father started a business providing motors and pumps for industrial and mining use. The husband was actively involved in running, managing, and staffing the business during the marriage. At the divorce trial, the couple’s daughter testified that the husband “spent long hours at the company.” His sister said, “[The husband] runs the company,” acting as “the supervisor and a worker.” One of the husband’s own experts stated the husband’s father worked on average only 20 hours per week, and one of the wife’s experts noted that the father was “mostly retired or not rendering any substantial service.”

Both spouses retained business appraisers to calculate the value of the business, and the trial court also heard from the company’s CPA.

The husband’s expert valued the business at $224,000. The wife’s attorney asked him about intrinsic value—the applicable standard of value in the state (Virginia)—and challenged his valuation claiming the business grossed $2.1 million and had $700,000 in assets. The expert countered that it also had over $266,000 in liabilities.

The wife’s expert said that in 1981 the company showed $12,000 in gross business, which by 2009 had risen to $1.8 million. He valued the company at $1.1 million. He suggested that in a case such as this, where “there’s no ready market as would be the case with a publicly traded stock, the intrinsic value is essentially the same thing as fair market value.”

On the other hand, the company’s CPA said that as of 2009 the company was worth $400,000 based on the company’s liquidation value. This included “the cash, the receivables, the equipment at its appraised value less the cost of disposing of it, the inventory that was appraised, less the cost of disposing of it, less the accounts payable at the end of May 31st, 2009.”

The trial court made two determinations regarding the business related to its classification and its valuation.

1. Classification. The business was a hybrid, including both separate and marital property, the court found. Specifically, whatever value the company had before the marriage belonged to the husband as separate property, but any increase in value during the marriage was marital property. The testimony of the wife’s expert showed that the company’s value grew substantially during the marriage. Moreover, testimony from other witnesses proved that the increase was largely due to the husband’s efforts, rather than his father’s. Therefore, the community had a right to the increase in value.

2. Valuation. Next, the trial court found that the spouses’ experts failed to provide “convincing valuations.” The figure the husband’s expert set down was “far less than the value of [the company’s] hard assets if they were to be liquidated.” In contrast, the wife’s expert proposed a value that was “anomalously high because it does not seem to give due credit for the risks this company faces and will continue to face.”

Instead, the trial court used the 1982 and 2009 values of the hard assets, which the witnesses (the wife’s expert and the CPA) put at $30,609 and $400,000, respectively. The value of the hard assets was a little over $369,000, the court determined. Accordingly, the marital share was approximately $184,600, and the wife’s half was worth over $92,300.

No ‘convincing’ expert valuations. The husband appealed to the Virginia Court of Appeals, attacking both the trial court’s classification and its valuation. The appellate court dealt with the arguments quickly.

As to the classification, the husband claimed that the entire business was separate property because any increase in value stemmed from his father’s efforts. He, the husband, “did nothing more than the rest of his crew.”

The appeals court disagreed. There was sufficient evidence for the lower court’s finding that the husband’s efforts were significant and instrumental in the increase in value, it said.

As to the valuation, the reviewing court found that, even if expert testimony was the preferable method for valuing marital property, the trial court was not required to “accept as conclusive the opinion of an expert.” Because neither expert testimony was persuasive, it properly relied on other information the parties presented to determine the company’s value. Accordingly, the Court of Appeals declined to upend the trial court’s decision.