SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-985-00T5
ELLEN BROWN,
Plaintiff-Respondent,
v.
JAMES BROWN,
Defendant-Appellant.
_________________________________
Argued September 20, 2001 - Decided February 28, 2002
Before Judges Cuff, Wecker and Winkelstein.
On appeal from Superior Court of New
Jersey, Chancery Division, Family Part,
Essex County, FM-07-1163-98.
Sheldon A. Weiss and Richard Diamond
argued the cause for appellant
(Diamond & Diamond, attorneys;
Mr. Weiss, of counsel and on the brief;
Mr. Diamond, on the brief).
Howard B. Felcher argued the cause for
respondent.
The opinion of the court was delivered by
WECKER, J.A.D.
Defendant James Brown ("James") appeals from the financial
terms of a divorce judgment, challenging the amounts awarded to
plaintiff Ellen Brown ("Ellen") as permanent alimony, child
support, equitable distribution, counsel fees, and expert witness
fees. In this appeal, we hold that under the rationale of
Balsamides v. Protameen Chemicals, Inc.,
160 N.J. 352, 368
(1999), and Lawson Mardon Wheaton, Inc. v. Smith,
160 N.J. 383,
397 (1999), which adopt the position of the American Law
Institute as set forth at 2 ALI Principles of Corporate
Governance § 7.22(a) and comment e thereto, neither marketability
nor minority discounts apply to the valuation of defendant's 47½%
interest in a closely-held corporation for purposes of equitable
distribution. For this and other reasons, we remand for
reconsideration and further findings with respect to the
equitable distribution of James's interest in his family's
business, as well as the counsel fee and experts' fee awards to
Ellen.
We briefly summarize the relevant background. The parties
were married on August 21, 1975, when James was twenty-two years
old and Ellen was twenty-three. After twenty-two years of
marriage, the parties separated in October 1997. The divorce
complaint was filed in November 1997. The trial took place on
five days between June and November 1999, and the trial judge
issued a thirty-two-page written decision on July 20, 2000. The
judgment of divorce was entered on September 7, 2000.
When the parties married, James had recently graduated from
college and immediately went to work in his family's wholesale
florist business, Union County Florist Supplies, Inc. (Florist),
eventually acquiring a 47½% interest in the firm and becoming an
officer. He has continually been employed by Florist. Ellen
worked full-time as a dental assistant during virtually all of
the marriage and continues in the position she has held for many
years. The parties' only child, Matthew, was born September 6,
1985 and adopted as an infant. The parties agreed to joint legal
custody of Matthew, with Ellen as the primary residential
custodial parent.
The parties owned their own home in Bloomfield, which they
improved over the years. They sent Matthew to a private school,
Montclair Kimberley Academy, as well as to summer camp; generally
took vacations three times per year; and each drove a leased car
supplied by Florist and replaced every three years. In 1998,
James reported W-2 income of $75,000, 1099 income of $75,000, and
interest income of $7,131, all from Florist, and "passive income"
of $8,514 from both Florist and PRJ, a real estate partnership in
which James, his brother Richard, and his mother Patricia each
held a one-third interest. Thus James's income reported in 1998
was in excess of $165,645. Ellen reported W-2 income of
$27,194.99 for 1998. Each party's reported income in 1997 and
1996 was similar to that reported for 1998.
With respect to equitable distribution, the trial judge
adopted Ellen's expert's valuation of James's interest in Florist
as $561,925, which excluded discounts for lack of marketability
and lack of control that James's expert included, and which
omitted any reduction for James's claim that he received his
interest as a gift. The judge awarded Ellen 40% of James's
interest, $225,000, in equitable distribution. The parties
agreed on the appraised value of PRJ's real property and the
partnership's equity therein. After rejecting James's claim that
his one-third interest was a gift and therefore immune from
equitable distribution, the judge awarded Ellen $67,000, 40% of
James's share of the equity in the property.
The parties stipulated the fair market value of the marital
residence at $182,500 and the mortgage balance at $94,000. The
judge awarded James $35,500, approximately 40% of the equity in
the house. Ellen received title to the house subject to the
mortgage and responsibility for repairs to the roof and windows
and for water damage,See footnote 11 thus receiving net value of approximately
$49,700.
In addition to the house and to James's holdings in Florist
and PRJ, the parties' assets subject to equitable distribution
and valued as of the date of the complaint, were:
James's Paine Weber Investment Account $27,000See footnote 22
James's Paine Weber Retirement Account $29,536.82See footnote 33
Ellen's IRA Account $ 6,464
Ellen's Employer's Pension Account $37,284
Household Furnishings $15,000
Ellen's Jewelry $15,320
These assets were ordered divided equally between the parties.
In awarding Ellen 50% of the filing-date balances in James's
Paine Weber accounts, plus "accumulated dividends, interest and
growth . . . to the date of distribution . . . ," the trial judge
found that although James had invaded those accounts during the
course of the litigation with permission of the court, the orders
allowing those withdrawals had reserved a final accounting to the
conclusion of trial, and James "had the financial ability to pay
the attorney fees, reasonable Bar Mitzvah costs; camp and temple
expenses from his income and/or from his mother who paid the camp
and temple costs prior to the parties' marital problems."See footnote 44 The
judge applied the following legal principles:
Marital liabilities as well as marital assets
must be considered when awarding equitable
distribution. Monte v. Monte,
212 N.J.
Super. 557 (App. Div. 1986). "However, if
the debt resulted because the husband
intentionally dissipated marital assets such
intentional dissipation is no more than a
fraud on marital rights and the debt will not
be charged to the wife." Monte, supra. If
the defendant depleted marital assets to
discharge his obligations, he would be
charged with the amount of the depletion.
Weiss v. Weiss, [
226 N.J. Super. 281 (App.
Div. 1988).] Moreover, a party may not use
marital assets to defray support from current
earnings and thereby defeat a spouse's
interest in the asset at the time of
equitable distribution. Lynn v. Lynn,
165 N.J. Super. 328 (App. Div. 1979).
The parties' only marital debts as of the filing date were
found to be an $18,000 credit card debt and James's $1,500 dental
bill. The trial judge rejected James's claim that he owed his
brother $2,300 and his mother $21,850 as a result of loans he
claimed he needed in order to comply with his support
obligations. The total $19,500 debt subject to equitable
distribution was allocated 24% to Ellen and 76% to James, thus
rejecting James's contention that the credit card debt was not
marital. As James summarizes the award of equitable
distribution, his net cash obligation to Ellen under the divorce
judgment is $261,500.
With respect to alimony, the judge properly considered the
statutory factors, N.J.S.A. 2A:34-23b; the parties' marital
standard of living, consistent with the subsequent decision of
the Supreme Court in Crews v. Crews,
164 N.J. 11 (2000); the
parties' projected budgets; and their respective earnings and
earnings potential. After finding that Ellen had little
likelihood of substantially increasing her earnings in the
future, whereas James had the potential for increasing his income
from Florist, the judge awarded Ellen "permanent alimony in the
amount of $62,500 payable $1,200 weekly," consistent with our
subsequent decision in Cox v. Cox,
335 N.J. Super. 465 (App. Div.
2000). James did not dispute the appropriateness of a permanent
alimony award to Ellen, but only the amount. In setting the
amount of alimony, the judge noted that although James's
"household consists of another 'family' which [he] is
substantially subsidizing from his current income," he did not
provide any information respecting his contribution to his new
partner's living expenses and those of her children.
The judge calculated James's child support obligation under
the Child Support Guidelines at $194 per week. Matthew's private
school expenses of $16,500 per year were allocated 25% to Ellen
and 75% to James, with James to be responsible for 100% of
Matthew's approximately $6,700 in annual hockey expenses and
summer camp. James was to provide medical and dental coverage
for Matthew, and unreimbursed expenses above $250 were to be
allocated 44% to Ellen and 56% to James.
James was to provide security for alimony and child support
by maintaining life insurance in the amount of $500,000 with
plaintiff as the irrevocable beneficiary to secure his alimony
obligation, and by maintaining $150,000 with plaintiff as trustee
for Matthew to secure child support until his emancipation. The
insurance obligation is not challenged on this appeal.
Finally, the judge cited R. 5:3-5(c), Williams v. Williams,
59 N.J. 229 (1971), and D'Onofrio v. D'Onofrio,
200 N.J. Super. 361 (App. Div. 1985), as the basis for a discretionary award of
counsel fees to Ellen based upon "the plaintiff's needs, the
defendant's financial ability to pay, and the parties' good faith
in instituting or defending the action." In addition to the
disparity in income between the parties, the judge emphasized as
a rationale for the fee award
that a sizeable portion of the legal work
performed by the plaintiff's attorney was the
result of the defendant's bad faith in
raising or prolonging issues related to
income, alimony, child support, and equitable
distribution . . . . [and finding] that the
defendant acted in bad faith in
misrepresenting his income, his "immunized"
family business assets (subject to equitable
distribution); his claim of business
discounts not permitted in equitable
distribution evaluations without exceptional
circumstances and his use of marital assets
to pay "expenses" with the intent to deprive
the plaintiff of her right to equitable
distribution . . . .
The judge found Ellen's attorney's certification of services
reasonable and necessary both in the hourly rates and time
expended, and awarded plaintiff $40,250 (less $7,500 previously
paid by defendant pendente lite) against the $65,987.50 claimed
by her attorney for legal fees plus $1,894.90 costs. The judge
also awarded Ellen $18,500 (less $3,500 previously paid pendente
lite) against her accounting expert's total invoice of
$25,050.90, plus $580.90 costs and noted the balance owed to
defendant's accounting expert, $23,000,See footnote 55 from which he
"infer[red] that the plaintiff's expert's fees were both
reasonable as to time and hourly charges."
We do not interfere with the judge's determinations respecting alimony, child support, or the equitable distribution of assets other than defendant's interest in Florist. The judge's findings and allocation of marital assets and liabilities,See footnote 66 other than Florist, are supported by substantial credible evidence, and we defer to those findings. See Pascale v. Pascale, 113 N.J. 20, 33 (1988); Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974); Borodinsky v. Borodinsky, 162 N.J. Super. 437, 443-44 (App. Div. 1978). The trial judge's determinations of alimony and child support are likewise supported by credible evidence in the record, and we defer to those determinations. We recognize however, the interrelationship of equitable distribution, alimony, child support, and fee awards. See John D. Miller v. Margaret C. Miller, 160 N.J. 408, 420 (1999); Gladys Miller v. Jay Miller, 97 N.J. 154, 171 (1984); Stamberg v. Stamberg, 302 N.J. Super. 35, 42 (App. Div. 1997); Koelble v. Koelble, 261 N.J. Super. 190, 192 (App. Div. 1992); Slayton v. Slayton, 250 N.J. Super. 47, 50 (App. Div. 1991). We therefore leave it to the discretion of the Family Part Judge on remand to reconsider alimony and child support determinations in light of any significant changes in equitable distribution to Ellen arising from James's holdings in Florist. See Dotsko v. Dotsko, 244 N.J. Super. 668, 682 (App. Div. 1990); Borodinsky v. Borodinsky, 162 N.J. Super. at 448.
We now address equitable distribution with respect to James's 47½% interest in Florist. In this appeal, James challenges the trial judge's refusal to credit evidence that his interest was a gift from his parents and to exclude from the marital estate that portion of James's interest in Florist, representing the value of his shares as of the various dates when they were received from his father or his mother. James concedes that as an active asset, the increase in the value of shares that he received as gifts would be subject to equitable distribution. Scherzer v. Scherzer, 136 N.J. Super. 397, 400 (App. Div. 1975), certif. denied, 69 N.J. 391 (1976). James also challenges the trial judge's adoption of Ellen's expert's valuation and rejection of James's expert's valuation, particularly the judge's holding that neither marketability nor minority discounts were appropriate in evaluating James's interest in Florist. Finally, James challenges Ellen's entitlement to 40% of this marital asset because she did not play an active role in the business.
Chait valued the entire business of Florist, as of the date of the complaint, at $1,183,000, and James's 47½% interest at $561,925, taking no discount for marketability or lack of control and assuming that the full value of James's interest was subject to equitable distribution. Barson valued James's 47½% interest in the business as of the date of the complaint at $339,000, after applying discounts of 25% for lack of marketability and 15% for lack of control. Using the same methodology and the same discounts, Barson also valued the shares James acquired from his parents as of the six separate dates of acquisition between 1980 and 1996. Barson then subtracted the $121,000 value he placed on James's shares when acquired, from the $339,000 value he had placed on James's shares at the date of the complaint, leaving $238,000 as the incremental value of James's shares to be included in the marital estate. Neither Chait nor Barson offered an opinion with respect to whether the shares were gifts; each adopted the assumption of the party who retained him.
As the Court recently observed in Balsamides v. Protameen Chemicals, Inc., 160 N.J. 352, 368 (1999) ("Balsamides"), and Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 397 (1999) ("Lawson"), valuation is not an exact science. See also Bowen v. Bowen, 96 N.J. 36, 44 (1984) (quoting Lavene v. Lavene, 162 N.J. Super. 187, 193 (Ch. Div. 1978) (on remand) (Lavene II)); John R. MacKay, II, 2 New Jersey Business Corporations § 14-6(d)(1) (2d ed. 1996) ("MacKay"). Careful analysis on a case by case basis is required, with sensitivity and adjustment for the particular circumstances and the flexibility to deal with extraordinary circumstances. In Lavene v. Lavene, 148 N.J. Super. 267 (App. Div.), certif. denied, 75 N.J. 28 (1977) (Lavene I), where we held that the husband's 43% interest in a closely-held corporation "constitute[d] a distributable asset" and remanded for valuation, Judge Pressler noted:
There are probably few assets whose valuation imposes as difficult, intricate and sophisticated a task as interests in close corporations. They cannot be realistically evaluated by a simplistic approach which is based solely on book value, which fails to deal with the realities of the good will concept, which does not consider investment value of a business in terms of actual profit, and which does not deal with the question of discounting the value of a minority interest.
[Id. at 275.]
With the exception of brief mention in Bowen v. Bowen, 96 N.J. at 51-52, where the parties' experts disagreed respecting the application of a minority discount to the husband's minority interest in a closely-held corporation, and where the wife's expert testified to having "built in a discount" by lowering the multiple of earnings used to determine value; in Lavene I, quoted above; and in Lavene II, 162 N.J. Super. at 202 ("It would not be appropriate to discount defendant's interest in the corporation, notwithstanding the fact that he has only a minority interest"), we find no reported case in New Jersey that addresses the applicability of either minority or marketability discounts in valuing shares in a closely-held corporation for purposes of equitable distribution.
A trial court is free to accept or reject the testimony of either side's expert, and need not adopt the opinion of either expert in its entirety. Carey v. Lovett, 132 N.J. 44, 64 (1993). In fact, the trial judge adopted the Chait valuation with the following explanation:
The court finds that the conclusions of Stephan C. Chait [are] more credible than the conclusions of Kalman A. Barson based on the assumptions each made in arriving at their respective conclusions. After reviewing the testimony of Mr. Barson and the documentary evidence relied upon by him and evaluating his demeanor and credibility as to evaluation conclusion, the court finds his opinion of value not sufficiently reliable and too speculative as to his assumptions to be acceptable. While the court acknowledges the approaches used by both experts as methods of evaluation, the court accepts Mr. Chait's valuation conclusions as more credible as it related to the financial analysis of "Florist"; his adjustments; officer compensation; reasonable compensation; normalization earnings; tax rate; discount rate; discretionary expenses, disuse of discounts, and disuse of "gifting".
Both experts took similar approaches to valuing the business. Each used a weighted average of the results of two valuation methods, the market approach (comparable sales of similar companies) and the capitalization of income approach (placing a present value on the anticipated future income stream). Both gave the income approach substantially more weight than the market approach, Chait using relative weights of 80% for income and 20% for market (a four-to-one ratio), and Barson using 75% for income and 25% for market (a three-to-one ratio). The experts differed somewhat in the capitalization rates they adopted in their income approach valuations (20% for Chait and 25% for Barson). The inverse of the capitalization rate is the multiple applied to a projected future income stream to place a value on the business. Thus Chait's 20% capitalization rate translates to a multiple of five times annual income, whereas Barson's 25% capitalization rate translates to a multiple of four.
Chait and Barson also differed somewhat in the extent to which they added back to income excess business expenses of the company (largely for excess officer compensation and personal expenses paid for officers) to calculate true net income. It is plain, however, that the magnitude of the disparity between the values these two experts placed on James's interest in Florist arose largely out of their respective approaches to the two legal issues we have identified _ (1) application of marketability and minority discounts and (2) gifting. When we eliminate the marketability and minority discounts from Barson's valuation, we find the two experts' conclusions as to the value of James's interest as of the filing date substantially closer than originally appears. Whereas Chait valued James's interest at $561,925, Barson's value, if we add back the twenty-five percent marketability discount and the fifteen percent minority discount that he applied, would have been $500,000.See footnote 77 The difference between Ellen's 40% share under Chait's valuation (rounded to $225,000) and under Barson's valuation (rounded to $200,000) is accounted for by the several judgment calls involved in each expert's approach. We are hard- pressed to interfere with the trial judge's adoption of Chait's judgments, separate and apart from the gift issue _ on which each expert merely adopted the assumption of his own client.
The trial judge's overall conclusion with respect to the weight and credibility to be given to the experts' respective opinions _ that Chait's opinion should be adopted in its entirety and Barson's disregarded _ actually reflects the judge's view of the discounting and gift issues, which we now address.
James, his brother Richard, and his mother each testified that the elder Browns, as the original owners of all 100 shares of Florist, intended to give the business to their sons; gave their shares away without compensation as part of their own estate plan; and never intended anyone else, including their daughters-in-law, to own the business. In light of that testimony, which was not contradicted by Ellen, it is impossible to accept the trial judge's conclusion that James offered no evidence of a gift. On the contrary, we are satisfied that James met his burden of proving by a preponderance of the evidence that his shares were gifts, and that their values when received must be excluded from equitable distribution.
In reaching that conclusion, we note the absence of any substantial evidence to rebut James's evidence that his shares were received as gifts from his parents as part of their own estate planning. Ellen argues on appeal that modest salary payments to James's father and mother after the stock transfers, payments that were unrelated to their actual work in the business, contradict the claimed gifts. We fail to see the logic in that argument. Moreover, our conclusion is influenced by Ellen's acquiescence in the gifting plan. The record establishes that the elder Browns gradually divested themselves of their 100 shares in Florist by directly and indirectly giving an equal number of shares to James and to Richard on six separate dates, totaling 47½ to each.See footnote 88 It is undisputed that their father, Albert Brown, first transferred twenty-two shares to each of them; that in 1990, 1991 and 1992, Patricia Brown, their mother, transferred three shares each to James, to Ellen, to Richard, and to Richard's wife, Gloria; that each of the wives then transferred the shares she received to her husband; that in 1993, Patricia Brown transferred one share each to James, Ellen, Richard and Gloria, and again Ellen transferred the share she received to James, and Gloria transferred her share to Richard; and finally, that in 1996, Patricia Brown transferred 3½ shares each to James and to Richard.
Barson admitted that there was no evidence that either James's father or his mother ever filed a gift tax return, which would have been required for any gift with a value in excess of $10,000. He also admitted that Patricia Brown's transfers to James's and Richard's wives were intended to keep the gifts under the maximum allowed free of gift tax. Whether James's parents breached any tax reporting or tax payment obligation arising from those transfers does not affect the character of the transfers as between parent and child, absent evidence that the shares were acquired as anything other than gifts.
The value of James's shares as of the dates they were received as gifts must be deducted from the complaint-date value to calculate that portion of James's interest in Florist that is subject to equitable distribution. We stress that the valuation of Florist, and thus of the shares when received by James, must be determined in accordance with our holding that neither marketability nor minority discounts are appropriate. In other words, the valuation approaches for each date must be consistent with the approaches taken for the complaint-date valuation.
In light of our conclusion respecting the gift issue, James's litigation posture on that issue does not support the finding of bad faith on his part nor a lack of credibility on the part of his expert.
James contends that the trial judge erred in rejecting the applicability of marketability and minority discounts in valuing his interest in Florist. We disagree.
The Supreme Court recently addressed the applicability of marketability and minority discounts in valuing a less than controlling interest in a closely-held corporation. See Balsamides, 160 N.J. at 352, and Lawson, 160 N.J. at 383. "A minority discount adjusts for lack of control over the business entity on the theory that non-controlling shares of stock are not worth their proportionate share of the firm's value because they lack voting power to control corporate actions. . . . A marketability discount adjusts for a lack of liquidity in one's interest in an entity, on the theory that there is a limited supply of potential buyers for stock in a closely-held corporation." Lawson, 160 N.J. at 398-99. Whether marketability or minority discounts are appropriate to the valuation of a less than controlling interest in the entity are questions of law which we review de novo, giving no special deference to the trial judge's determination. Balsamides, 160 N.J. at 372-73; Lawson, 160 N.J. at 398.
The general rule we deduce from Lawson and Balsamides is that in a statutory appraisal for purposes of determining the fair value of shares owned by a dissenting shareholder, N.J.S.A. 14A:11-1 to -11 (as in Lawson), or for valuing shares in a court- ordered buy-out resulting from an oppressed shareholder situation, N.J.S.A. 14A:12-7(1)(c) (as in Balsamides), neither a marketability nor a minority discount should be applied absent extraordinary circumstances. See MacKay § 14-6(d)(2)(d) (Supp. 2001). The functional similarity of these two discounts has been recognized by the American Law Institute. 2 ALI Principles of Corporate Governance § 7.22(a) ("ALI Principles").
Although in Balsamides the Court found a 35% marketability discount appropriate, whereas in Lawson the Court disallowed any discount, the Court enunciated its application of "the same guiding principle" in both cases _ "a marketability discount cannot be used unfairly by controlling or oppressing shareholders to benefit themselves to the detriment of the minority or oppressed shareholders." Lawson, 160 N.J. at 407-08; accord Balsamides, 160 N.J. at 378-79. The unfairness of using those discounts lies in the potential for depriving minority shareholders of the full proportionate value of their shares and enriching majority shareholders by allowing a buy-out of minority interests at bargain prices. Lawson, 160 N.J. at 402.See footnote 99
In Balsamides, the extraordinary circumstance that warranted use of a marketability discount was that it was the oppressing 50% shareholder who was to acquire the shares of the oppressed 50% shareholder, and equity demanded that the oppressor not be rewarded for his conduct by allowing a buy-out at a discounted price. In Lawson, the Supreme Court found no comparably extraordinary circumstance and rejected use of the discounts where discounting would have allowed the oppressive majority shareholder to buy out minority owners at less than full value.
The ALI's rationale for the fair value, no-discount rule, a rationale adopted in Lawson and Balsamides, is that neither the dissenting (minority) shareholder, nor the oppressive (majority) shareholder, nor a veto-wielding (50%) shareholder, can be allowed to exploit the very situation that triggered the right to an appraisal, thereby capturing more than a proportionate share of the corporation's value and depriving other shareholders of their fair share.
In Lawson, the Court expressly adopted the approach of § 7.22(a) of the ALI Principles:
"The fair value of shares [subject to statutory appraisal rights] should be the value of the eligible holder's . . . proportionate interest in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability."
[160 N.J. at 403.]
That position is elaborated in comment e to ALI Principles,
§ 7.22(a):
Some decisions have upheld the subtraction of
a minority discount from the value of shares
held by small stockholders on the theory that
non-controlling stock is worth less than its
proportionate share of the corporation's fair
value. Other decisions have accepted a
functionally similar adjustment to reflect
the non-marketability of minority shares.
However, both Delaware and Maine have
recently and properly rejected the use of any
such discount. See Cavalier Oil Corp. v.
Harnett,
564 A.2d 1137 (Del. 1989); In re
Valuation of Common Stock of McLoon Oil Co.,
565 A.2d 997 (Me. 1989). See Reporter's Note
4. Section 7.22(a) follows these
jurisdictions in requiring the appraisal
court to value the firm as a whole, not
specific shares, and to allocate that value
proportionately, absent extraordinary
circumstances. Any contrary rule would
require the court to undertake a complicated
and ultimately speculative inquiry, which
could produce disparate awards depending on
the number of shares held by otherwise
similarly situated dissenting shareholders.
Similarly, the status of shares as
"restricted securities" for purposes of the
federal securities laws should not affect
their valuation under the proportionate
interest standard of § 7.22(a).
It has been said that the very purpose of the appraisal
remedy for dissenting shareholders would be undermined by
application of a minority discount to the value of their shares.
Robert B. Heglar, Rejecting the Minority Discount, 1
989 Duke L.J.
258, 266-75 (1989). There is a recognized risk of double-
counting by an expert, that is, of duplicative reductions in the
value of a minority interest in a closely-held business, as a
result of increasing the capitalization rate (and decreasing the
valuation multiple) to account for limited marketability, and
then in addition applying a "marketability discount" to the value
derived from capitalizing income. See Balsamides, 160 N.J. at
379-81; McKay, § 14-6(d)(2)(d) at 36 (Supp. 2001).
In his capitalization of income approach to valuation, Chait
took into account an "equity risk" over a "safe," "risk-free"
investment, such as a twenty-year United States Treasury bond; a
"small company risk" (based upon a comparison of small and large
company public stocks); and a "specific company risk," all of
which he factored into his determination that a twenty percent
capitalization rate was appropriate. Barson's income approach to
valuation also took into account both small company risk and a
"small company risk premium" when he determined to use a twenty-
five percent capitalization rate. Thus the additional twenty-
five percent discount Barson applied for lack of marketability
appears to double-count the same risk, a factor that further
justifies eliminating that discount.
Although the Court's holdings in Lawson and in Balsamides
directly addressed the use of a marketability discount, in each
case the Court also discussed the use of a minority discount.
Lawson, 160 N.J. at 401-03; Balsamides, 160 N.J. at 373-75. We
recently denied the application of both marketability and
minority discounts where no extraordinary circumstances were
proven. Casey v. Brennan,
344 N.J. Super. 83 (App. Div.),
certif. granted, ___ N.J. ___ (2001), and certif. denied, ___
N.J. ___ (2001). We held in Casey that dissenting shareholders
exercising their right to a statutory appraisal pursuant to
N.J.S.A. 14A:11-7(1), as well as those dissenting shareholders
whose rights on being cashed out arose under common law, all were
entitled to their proportionate shares of the value of the whole
corporation, and not merely a discounted price for their minority
holdings. 344 N.J. Super. at 111-12.
In Casey, after discussing the holdings of Lawson and
Balsamides with respect to the marketability discount, and
relying in part upon the reasoning of the Delaware Supreme Court
in Cavalier Oil Corp. v. Harnett,
564 A.2d 1137, 1144 (Del. 1989)
(the object of the statutory appraisal is "to value the
corporation itself, as distinguished from a specific fraction of
its shares as they may exist in the hands of a particular
shareholder"), we found "no reason to distinguish, for these
purposes between marketability and minority discounts and . . .
conclude[d] that minority discounts likewise are not to be
applied in a valuation proceeding." 344 N.J Super. at 112.
Statutory appraisal rights accorded to dissenting
shareholders in New Jersey (and in most states) include the right
to a determination of the "fair value" (not "fair market value")
of their shares. N.J.S.A. 14A:11-3; see Bobbie J. Hollis, II,
The Unfairness of Applying Lack of Marketability Discounts to
Determine Fair Value in Dissenter's Rights Cases,
25 J. Corp. L. 137, 139 (1999), explaining the distinction between "fair value"
and "fair market value":
"Fair value" is not the same as, or short-
hand for, "fair market value." "Fair value"
carries with it the statutory purpose that
shareholders be fairly compensated, which may
or may not equate with the market's judgment
about the stock's value. This is
particularly appropriate in the close
corporation setting where there is no ready
market for the shares and consequently no
fair market value.
A closely-held corporation is one that has
few shareholders and little market for the
stock, or one that has an integration of
ownership and management. When appraising
shares of a close corporation, fair value
cannot be fairly equated with the company's
fair market value. Close corporations by
their nature have less value to outsiders,
but at the same time their value may be even
greater to other shareholders who want to
keep the business in the form of a close
corporation.
[Footnotes omitted.]
The "fair value" concept is inherently inconsistent with
discounting value to reflect limited marketability. That which
has been labeled a "marketability discount" reflects the
theoretically limited market for the sale of a privately-held,
small business. That which has been labeled a "minority
discount" reflects a theoretically more limited market for sale
of a non-controlling interest in such a business. The
significance of a limited market is that the asset is illiquid.
Both discounts represent an attempt to account for the fact that
unlike shares in a publicly-traded company, shares in a closely-
held corporation have limited liquidity.
But liquidity is of little consequence here. As between
James and his brothers, the only other shareholders, there is no
evidence of a contemplated sale of all or part of the business,
forced or otherwise. All of the evidence supports the likelihood
that the business will continue under the present ownership for
the foreseeable future, with James and Richard each continuing to
be the active owners and officers, each holding 47½% of the
outstanding shares, and Gilbert holding the remaining 5%.See footnote 1010 The
distinction between fair value and fair market value appears to
us equally applicable in the valuation of one spouse's interest
in his family's closely-held corporation for purposes of
equitable distribution.See footnote 1111
Given the Court's adoption of the "proportionate share"
approach to valuing the interest held by a dissenting or an
oppressed shareholder, any dispute among the existing
shareholders would presumably see James either buying out his
brothers' interests or selling his own at a proportionate share
of fair value, with no discount for lack of control. Indeed, the
statutory protections for dissenting shareholders, as interpreted
in Lawson, demonstrate that the value of James's minority
interest in Florist, vis-à-vis his brothers (the only other
shareholders), is protected by the fair value rule itself. That
is, if he were to find himself at irreconcilable odds with his
brothers, he could force a statutory appraisal in which each bloc
would be valued at a proportionate share of the whole.
Unlike Balsamides, Lawson, and Casey, no actual transfer of
shares is involved in this equitable distribution case. That
distinction makes the marketability discount even less
appropriate than in the statutory appraisal or deadlock contexts,
since no sale of the business appears likely in the foreseeable
future. We see no reason to reward the spouse who holds title to
the shares by allowing him to retain the value of the entire bloc
at a bargain "price," that is, crediting the non-owner spouse
with less than the owner's proportionate share of full value when
determining equitable distribution of the marital assets. Here,
allowing the marketability or minority discounts would unfairly
minimize the marital estate to Ellen's detriment and is
inconsistent with the concept of equitable distribution. While
"there is no ready market for the shares and consequently no fair
market value" of Florist, James's shares in the going concern
have value to him and to his co-owners that does not depend upon
a theoretical sale to an outsider and has not changed as a result
of the divorce complaint or judgment.
The ALI cautions that valuation contexts other than
dissenting shareholder appraisal rights, such as tax valuations,
may warrant a different approach to discounting, ALI Principles §
7.22, comment e at 325-26. However, we see no reason for a
different approach in equitable distribution. Even James's
expert, Barson, admitted that the value of a minority bloc of
stock is not to be discounted for lack of control under New
Jersey's "fair value" statutes. He did not offer any explanation
for adopting a different rule for purposes of equitable
distribution. While Barson cited a controlling shareholder's
"power to change the bottom line" as one rationale for applying a
discount here, no single shareholder controlled Florist or its
officers' bottom line.
The record before us reveals no extraordinary circumstances
related to the operation or control of Florist to warrant a
discount from the fair value of the company for lack of
marketability, or a discount from the value of James's interest
for his minority bloc. Under these circumstances, and consistent
with the reasoning of our Supreme Court, we see no reason to
reduce the proportionate value of James's 47½ shares (47½%) for
lack of liquidity (marketability discount) or lack of control
(minority discount).
Given the purpose of equitable distribution to fairly divide
the accumulated wealth of a marital partnership, and that the
purpose of valuing the shareholder spouse's interest is to
determine the non-owner spouse's fair share of other marital
assets; where the shareholder will retain his shares and the
divorce will not trigger a sale of those shares, lack of
liquidity does not affect the fair value of the minority
interest. Neither discount is appropriate.
We therefore find no legal error in the judge's holding
marketability and minority discounts inapplicable in this case,
and we affirm the trial judge's determination that there are no
"extraordinary circumstances" to warrant use of those discounts.
However, because there has been little in the way of case law
respecting that issue in the context of equitable distribution,
we cannot agree with the judge's finding that Barson's use of
those discounts or defendant's contentions respecting the
discounts amount to "bad faith" as a factor in awarding Ellen
professional fees.
We find no merit in James's contention that Ellen is not entitled to 40% of Florist because she was not active in the business. See R. 2:11-3(e)(1)(E). The theory of equitable distribution is that marriage is a partnership whose assets should be fairly and equitably distributed when the partnership breaks up. E.g., Pascale v. Pascale, 140 N.J. at 609; Portner v. Portner, 93 N.J. 215, 219 (1983); Rothman v. Rothman, 65 N.J. 219, 229 (1974). There is ample support for the trial judge's finding that Ellen fulfilled that partnership role: Although the defendant was the primary wage earner, it is clear that the plaintiff made substantial contributions to both the defendant's earning power and to the acquisition and preservation of the marital property. . . . In light of both the plaintiff's financial and non-financial contributions, the court finds that she was not only a partner, but an equal force, in the marriage and made substantial contributions to the economic betterment of the parties' marriage.
Indeed, in his written summation, James proposed allocating to Ellen an amount equal to 45% of the $238,000 incremental value that Barson placed upon James's interest in Florist. Allowing Ellen 40% of that portion of James's interest in Florist that is determined to be part of the marital estate is well within a reasonable exercise of judicial discretion, and we will not interfere.
We now address equitable distribution of James's one-third interest in the real estate partnership, PRJ, which owns the property in Linden that is now occupied by Florist. PRJ's three equal partners are James, his brother Richard, and Patricia Brown (James's and Richard's mother).
James contends that his interest in PRJ was received as a gift from his father and is therefore immune from equitable distribution. The trial judge rejected that contention. James argues that the Linden property owned by PRJ was purchased in PRJ's name with the proceeds of the sale of the Staten Island property formerly occupied by Florist and allegedly owned by James's father. We agree with the trial judge that the record does not support that argument.
The testimony and the documentary evidence are inconsistent, and neither supports the gift claim. The RESPA statement for the July 10, 1987 purchase of the PRJ property in Linden reflects a purchase price of $1,099,400, plus closing costs and related expenses that bring the total to $1,115,351. The purchase was financed by PRJ's assumption of an Economic Development Authority (EDA) loan of $602,996, a $300,000 mortgage loan from the seller, and the balance paid in cash. The source of the cash portion of the purchase price is not identified in the record.
The Staten Island property apparently consisted of three parcels, each of which was titled in the name of Florist when it was sold to a third party. Florist sold the first parcel, 87 Grove Avenue, on September 22, 1987, for $285,000 in an all cash sale, two-and-one-half months after PRJ took title to the Linden property. Florist sold the second parcel, 78 Faber Street, for $150,000 on September 1, 1988, receiving $30,000 as a cash deposit and taking back a mortgage to secure the remaining $120,000 due. Florist sold the third parcel, 97-99 Grove Avenue, on January 26, 1996, taking back a mortgage for the entire purchase price, $60,000. These two mortgages are carried as assets on Florist's books.
James himself testified that he considered Florist and PRJ as a single entity.See footnote 1212 If corporate funds or corporate credit was used to purchase the partnership property, then James's acquisition of a one-third interest in PRJ was not a gift, but a distribution from Florist. Apparently based upon these facts, the trial judge concluded that James "produced no credible evidence as to immunize his interest in PRJ Associates from equitable distribution." In other words, the trial judge found that James did not meet his burden of proving that the real estate purchased by PRJ in 1987 constituted a gift from his father. We defer to that finding, which is supported by the record, and we affirm the trial judge's conclusion that James failed to prove that his interest in PRJ was acquired by gift.
The parties agreed on the equity in the property, and thus on the value of James's one-third share. That share was properly included in the marital estate, and we are satisfied that distributing 40% ($67,000) to Ellen was a reasonable exercise of discretion.
The trial judge's award of counsel fees and expert witness fees was grounded largely upon a finding of bad faith on James's part in regard to equitable distribution of his interests in Florist and PRJ. Because we do not find support in the record for the judge's findings that James acted in bad faith respecting those two assets, the fee awards must be vacated and considered anew on remand. By vacating these awards, we do not suggest that no fee award to Ellen is appropriate, or that the Court may not have grounds for a substantially similar award. The court must, however, consider all of the WilliamsSee footnote 1313 factors in light of the entire record and its final decision on all other financial issues.
We reject defendant's request that we exercise our original jurisdiction to determine the disputed valuation issues other than the gift and discounting issues addressed in Parts II B, II C, and III of this opinion. We also reject defendant's request in the alternative that any issues remanded to the Family Part be assigned to a different judge. The mere fact that a judge has issued legal rulings or made factual findings in a case does not warrant reassignment in the event of reversal and remand. However, where findings of credibility respecting the testimony of key witnesses have been made, and where a significant portion of those findings have been found unsupported by the record, fairness dictates a fresh look. See Luedtke v. Shobert, 342 N.J. Super. 202, 219 (App. Div. 2001) ("[I]t would place the court in an untenable position to now have to reevaluate a case in which it had already expressed a preference for one of the experts over the other.")
As we have explained, we view the judge's adoption of Chait's valuation testimony as largely a result of his view of the two legal issues which we have now determined. On balance, we are satisfied that the trial judge will be guided by our decision and can fairly reconsider the valuation of the marital portion of James's interest in Florist, as well as counsel and expert fees. Alimony or child support may warrant modification in light of the final decision on equitable distribution. See Bowen v. Bowen, 96 N.J. at 52-53; Dotsko v. Dotsko, 244 N.J. at 682. The trial judge will be in the best position to consider any such modification.
Affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.
Footnote: 1 1 The judge found that James had received insurance proceeds
between $3,200 and $3,400 to cover the repairs, but had not given
the funds to Ellen to do so. Thus James actually received
approximately $38,800 on account of his share of the marital
residence.
Footnote: 2 2 This account was entirely depleted by James during the
course of this litigation, allegedly to pay for accountants and
lawyers for himself and Ellen, and for Matthew's Bar Mitzvah.
Footnote: 3 3 This account was partially depleted by James during the
course of this litigation, also allegedly to pay for accountants,
lawyers, and Matthew's Bar Mitzvah.
Footnote: 4 4 We recognize that James's mother had no obligation to
continue those gifts. However, after James testified that his
mother continued to advance those expenses, but did so as loans
rather than as gifts, the judge disbelieved James's claim that he
was indebted to his mother to repay those amounts.
Footnote: 5 5 The record does not reveal defendant's expert's total
invoice or defendant's counsel fees.
Footnote: 6 6 Defendant provided no evidence to rebut plaintiff's claim
that the credit card debt was subject to equitable distribution.
Footnote: 7 7 This is how we calculated Barson's value with the
disputed discounts added back. Recall that Barson used a three-
to-one weighted average of his income approach value ($266,000
after reductions by both a 25% marketability and a 15% minority
discount) and his market approach value ($637,000 after reduction
only by a 15% minority discount).
In order to add back both discounts to Barson's income
approach (25% for marketability and then 15% for a minority
interest), the formula is:
.85 I (.75 I) = 266,000
.6375 I = 266,000
I = 417,000,
where "I" equals the undiscounted income approach value.
To add back the minority (15%) discount to Barson's market
approach, the formula is:
.85 M = 637,000
M = 749,000,
where "M" equals the undiscounted market approach value.
Finally, the three-to-one weighted average of Barson's
undiscounted approaches to valuation is:
Income approach value I 417,000 x 3 = 1,251,000
Market approach value M 749,000 x 1 = 749,000
2,000,000
2,000,000 divided by 4 = 500,000
Footnote: 8 8 Gilbert received the other five shares.
Footnote: 9 9 A review of cases in other states involving valuation
of shares in a closely-held corporation reveals no uniformity
respecting use of minority or marketability discounts, whether in
the context of statutory appraisal, corporate dissolution, or
equitable distribution. Nevertheless, New Jersey's adoption of
the ALI's no-discount-absent-exceptional-circumstances rule
appears to be the majority position. See MacKay § 14-6(d)(2)(d)
(Supp. 2001); Barry M. Wertheimer, The Shareholders' Appraisal
Remedy and How Courts Determine Fair Value,
47 Duke L.J. 613, 654
(1998). For a survey of cases addressing the use of a minority
discount in valuing minority interests in a statutory appraisal
or dissolution action, see Christopher Vaeth, Propriety of
Applying Minority Discount to Value of Shares Purchased by
Corporation or its Shareholders From Minority Shareholders,
13
A.L.R.5th 840 (1993).
Footnote: 10 10 There is a restriction on the transfer of shares to any
non-family member. There is also a buy-sell agreement requiring
that in the event of the death of Richard or James, the survivor
is to purchase the shares of the decedent at a price to be
periodically agreed upon or, in default of a current agreement,
at a price to be negotiated. In the event of Gilbert's death,
Richard and James are to purchase his shares. The experts and
the parties agree that the last price set forth in the agreement
is not controlling, and neither expert relies upon it.
As in Bowen v. Bowen, 96 N.J. at 46-47, the shareholders'
buy-sell agreement does "not control because it did not
contemplate the circumstances when the stockholder's status with
the corporation and his fellow stockholders was to remain the
same."
Footnote: 11 11 We do not address here a situation where the spouses
together are the sole shareholders in a closely-held corporation
subject to equitable distribution. See, e.g., Fisher v. Fisher,
568 N.W.2d 728, 731 (N.D. 1997). In Fisher, the North Dakota
Supreme Court rejected a wife's contention that the value of her
minority interest in a family business owned with her husband
should be discounted from a proportionate fraction of the
corporation's agreed value, thereby increasing the share of other
assets required to equalize her share of the marital estate. The
Court held that the wife would be adequately protected by her
statutory right to receive "fair value" for her shares.
Footnote: 12 12 Florist has been paying rent to PRJ in an amount
sufficient to cover the mortgage, which both experts agree
exceeds the market value of the leasehold by $33,000 per year.
Each of the experts added back $33,000 to Florist's net income
for purposes of the capitalization of income approach to
valuation.
Footnote: 13 13 Williams v. Williams,
59 N.J. 229 (1971).