In re Rozdolsky, 2024

In this complex Illinois divorce case, the appellate court wrestled with nine items of appeal from the husband. Included was an appeal by the husband of the value the trial court determined of the husband’s business, Harbortown Industries Inc. This digest will focus on the business value and lightly cover a couple of the other appellate items.

The parties were married in 1994. The husband had substantially more property than the wife prior to the marriage. The husband has worked in the picture frame industry since 1980. In 1997, the husband incorporated Harbortown Industries Inc. Picture frames made up 80% of Harbortown’s products. “Harbortown’s largest customers were Walmart, Target, and Michael’s. Harbortown’s sales ranged from $94.3 million in 2012 to $71.2 million in 2020.” Harbortown’s building and warehouse are in a building owned by a land trust owned by the Parties.

The trial court determined that the marital estate was worth $84,584,310, approximately half being the value of Harbortown, at $42,447,096. The trial court also ordered the husband to pay $1.1 million in attorney and expert fees incurred by the wife because the husband complicated litigation through his refusal to hand over the corporate financial records of Harbortown.

Analysis of the valuation of Harbortown.

The wife retained David Bart, CPA/ABV, of RSM to determine the value of Harbortown. Bart asserted that Harbortown would experience significant growth from 2021 through 2024, broadly following industry outlooks for retail and wholesale. He did not believe the frame industry was a mature and shrinking industry. He valued Harbortown at $60,671,940.

The husband retained Lee Gould, CPA/ABV/CFF, of Gould & Parker Associates LLC, to provide a fair market value of Harbortown. He concluded a value of $20,160,000. He determined that Harbortown’s historic decline in revenue demonstrated that “it wasn’t [growing] as robustly as the industry.” Harbortown was in a niche sector that was declining relative to the overall wholesale and retail sector.

The trial court rejected most of Gould’s opinions citing the following:

1. Using 2020, the pandemic year, as the only year of capitalization;
2. Choosing a 3% growth rate, which is nothing more than inflation;
3. Failure to normalize millions of dollars of expenses;
4.  Using the wrong risk code, an error Gould acknowledged;
5. Use of an outdated and high ratio for determining the common stock equity risk premium;
6. Use of an incorrect debt-to-equity ratio; and
7.  Failure to articulate why he believed the husband’s goodwill in Harbortown represented 30% of the value of the business.

As for Bart, the trial court found his opinions on valuation more credible and his valuation more reasonable but could not fully accept it either because:

1. Bart rejected that Harbortown was not in a mature industry;
2. Bart’s growth rate and sales increase rates were too high;
3. Credit card debt amounting to $60,000 should have been business debt and not  personal debt; and
4. Bart failed to consider the husband’s personal goodwill.

The trial court determined Harbortown’s value, before personal goodwill, was $49,044.000. The trial court also determined personal goodwill was 15%, for a net value, after clarification, of $42,447,096. On appeal, the husband asserted that Bart’s valuation should be disregarded for making numerous errors [outlined above]. The husband contended that the appellate court should reverse and remand with instructions that it adopt Gould’s opinion.

The trial court’s decision as to the value of an asset in a marital dissolution will not be changed unless the determination was against the manifest weight of the evidence. (In re Marriage of Vancura) “A factual finding is not against the manifest weight of the evidence unless the opposite conclusion is clearly evident or the finding is arbitrary, unreasonable, or not based in evidence.” (In re Marriage of Larocque)

Here, the trial court agreed with the husband’s criticisms of Bart’s value. Harbortown was in a mature industry, and Bart should have included other related industries in determining a growth rate. Thus, Bart’s “normalization rates for percentage of growth and percentage of sales were too optimistic.” The same relates to the capitalization rate, which was also too high.

Taking these criticisms into account, the trial court found that Bart’s value was $18 million too high, i.e., it should be at $42.4 million. The trial court noted that “we believe that this case falls well within the general rule that the admission of expert testimony as well as the qualification of the expert in the first instance is within the sound discretion of the trial court and will not be disturbed absent an abuse of that discretion.” The trial court did not err in placing more weight on Gould’s valuation. “Accordingly, we decline to disturb the trial court’s valuation.”

The appellate court resolved the other issues in this case. Please see the opinion for these resolutions. They are not covered here as they rely on legal issues and not issues related to valuation or forensics. Accordingly, we affirm the District Court’s grant of summary judgment to Dr. Vélez and Dr. Mateo.”