Valuation date is critical in property division

Sometimes a division of property in divorce is quite simple. The value of assets is very straightforward and splitting them is easy. But some assets can be much tougher to value and the issue can become quite contentious. This is particularly true when dealing with spouses’ interests in a business. That’s when the importance of the valuation date comes into play, as a recent Florida case indicates.

In that case, a couple with two children was divorcing. The husband had ownership interests in three companies that operated a number of restaurants across the state. At one point during the proceeding, a trial judge assessed the value of the couple’s marital estate as of the date the divorce petition was filed. But when the court issued its judgment, it used a later date to value the couples’ business interests. This difference mattered because the business earned significant profits between the two dates.

The husband argued that the wife shouldn’t be entitled to share in these “post-valuation” profits.

An appeals court agreed and reversed the trial court, holding that these profits shouldn’t be divided between the husband and wife.

A case in Minnesota, however, had slightly different facts and a slightly different result. The husband in that case ran a successful gelato company. In 2008, he and a business partner bought a majority interest in the company and set up a limited liability company to hold his interest. He transferred 20 percent of his interest to trusts created for his children, with the rest held in his own name.

Over the next few years, the value of his share in the gelato company grew significantly. Meanwhile, a parent company was established and the husband held in interest in that company too. Soon the members of the parent company, including the husband, sold all of the parent company’s assets, including the gelato company, to Unilever, a big multinational corporation.

The husband filed for divorce in 2014, around the time the Unilever deal closed. The LLC that the husband set up received about $70 million up front plus a right to a percentage of future “earn out” payments from Unilever based on future sales.

During the divorce, the wife demanded a cut of the earn-out payments as part of the property division. A trial judge, using the date of the closing as the valuation date, said “that only the up-front payment could be divided. Any future “earn-out” payments were the husband’s non-marital property, according to the court.

But an appeals court reversed the decision. According to that court, the earn-out payments were built into the price of the deal and should have been considered as part of the value as of the purchase date. Now the husband will have to split these payments with his ex-wife.

All of these types of issues are very complicated, and a divorce court in one state won’t necessarily treat them the same as a divorce court in another. So if you have complicated property arrangements, such as interests in businesses that are structured in unconventional ways, it’s important to discuss all your options with a family law attorney.