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COURT OF APPEALS OF VIRGINIA Present: Judges Annunziata, Clements, and Kelsey Argued at Salem, Virginia EWELL JAMES OWENS v. Record No. 3140-02-3 OPINION BY JUDGE D. ARTHUR KELSEY DECEMBER 16, 2003

THELMA JOSEPHINE WADE OWENS FROM THE CIRCUIT COURT OF BUCHANAN COUNTY Michael L. Moore, Judge Robert M. Galumbeck (Dudley, Galumbeck, Necessary and Dennis, on brief), for appellant. Monica Taylor Monday (Robert B. Altizer; Gentry Locke Rakes & Moore; Gillespie, Hart, Altizer & Whitesell, P.C., on brief), for appellee. Ewell James Owens appeals four aspects of the trial court's equitable distribution award in this divorce case. He claims the trial court erred by failing to (a) apply a minority discount to his stock in a closely held company, (b) reduce the award to account for tax consequences that would arise upon a future sale of the stock, (c) adjust the award to back out his personal wages from the company that had been previously incorporated into the cash-flow valuation model, and (d) allow him more than four months to pay the cash award before docketing the monetary judgment against him. Finding that the chancellor did not abuse his discretion, we affirm. I. When reviewing a chancellor's decision on appeal, we view the evidence in the light most favorable to the prevailing party, granting her the benefit of any reasonable inferences. Congdon v. Congdon, 40 Va. App. 255, 258, 578 S.E.2d 833, 835 (2003). "That principle

requires us to discard the evidence of the appellant which conflicts, either directly or inferentially, with the evidence presented by the appellee at trial." Id. (citations and internal quotation marks omitted). Ewell Owens ("husband") and Thelma Owens ("wife") married in 1989. By final decree dated October 30, 2002, the trial court granted wife a final divorce on no-fault grounds. The chancellor heard ore tenus evidence regarding equitable distribution of the marital property. Neither party sought spousal support. The marital property included, among other things, husband's shares in Dominion Office Products, Inc., a closely held corporation started by husband and his brother in 1989. They own equal shares of the business. To assist in the venture, wife signed promissory notes guaranteeing the loans for start-up capital. When the company failed to produce income in the first few months, wife returned to full-time employment as a nurse to support the family, which included their two children and two children from husband's prior marriage. Wife also maintained health insurance for the entire family from 1989 to 1997. While working part time, wife attended law school at Appalachian School of Law. After passing the bar in 2000, wife took a job working at a law firm in Abingdon, Virginia, earning $50,000 a year. Dominion Office Products, Inc. operates as a retail office supply and equipment business that also provides maintenance and repair services. Husband is president of Dominion, and his brother is secretary and treasurer. Husband also works as one of five salesmen for the company, while his brother manages the office. As equal owners, husband and his brother over the years have received the same salary and drawn the same bonuses twice a year. Their income from the business has grown steadily from about $77,000 each in 1999, to $85,000 each in 2000, and then to almost $90,000 in 2001. The company has never declared any dividends. It leases its

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premises from J&E Leasing L.L.C. ("J&E"), another company owned equally by husband and his brother. At trial, the chancellor received differing expert opinions from accountants hired by husband and wife to value Dominion.1 Both accountants employed variations of the capitalization-of-earnings approach. Wife's accountant, Raymond Froy, used a "monthly net revenue" model that produced a total value of $1,067,527 and an alternative "owner's cash flow" model that resulted in a total value of $1,255,853. This latter model extrapolated equity value by capitalizing earnings using a multiple of 3 against an adjusted annual revenue stream. Froy testified that he would not reduce this valuation figure (either for a minority discount, potential tax liabilities, or husband's salary adjustments) because such changes presuppose a sale of the shares -- an assumption Froy said he did not make. Froy also pointed out that, at the end of the most recent financial reporting cycle, the company had about $140,000 cash-on-hand after the payment of officers' salaries. The average monthly income had increased over the past three years by 42%. The company, Froy concluded, was "[v]ery profitable." Husband's expert, Steve Wood, also served as the company's accountant. He too used the "owner's cash flow" model and produced two values: $871,320.68 with a multiple of 2, and $1,163,923.52 with a multiple of 3. Wood, however, then adjusted these valuations by reducing them with a one-third minority discount ($145,074.89 and $193,793.27 respectively), a further reduction for estimated capital gains tax ($74,825.75 and $99,953.39 respectively), and an adjustment for the husband's salary ($100,000 and $150,000 respectively). These changes reduced the husband's share of the multiple 2 valuation figure to $115,759 and the multiple 3 figure to $138,215.10.

The parties do not dispute on appeal any aspect of the valuation or distribution of the stock shares in J&E Leasing L.L.C. -3-

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Wood supported his position on the minority discount by asserting that any equity interest in a closely held company less than 51% should be considered a "minority interest" and should be discounted in value by one third to reflect the absence of decisionmaking control. The amount of the discount turns, Wood stated, on "the amount of control that the person has over the corporation." Because Dominion has two equal owners, he concluded, "no one has a majority interest in this corporation." If he were "advising a potential buyer," Wood explained, he would calculate a minority discount into the purchase price of a 50% equity interest in Dominion. With respect to the capital gains tax, Wood agreed that the equitable distribution award standing alone had no tax consequences. But if husband had to sell his shares of the company to a third person to raise funds to pay a cash award, Wood pointed out, a capital gains tax would be assessed against him as the seller. Absent such a sale, he conceded, no capital gains tax liability would accrue because no taxable gain would be realized. Wood also advocated backing out of the valuation model the portion of husband's salary attributable to his salesman position as well as the portion of his brother's salary attributed to his manager's position. Wood argued that upon a sale of the company the new owner would likely replace husband and his brother with two new employees. As Wood explained it: "The theory was that if they were not there running the business, someone would have to be paid to do their jobs and that was the basis for reducing the salaries." Wood thus added $100,000 to the revenue column (before applying the multiplier), a figure roughly representing a $50,000 salary for husband and his brother. When asked about the "intrinsic value" concept used in domestic relations law and the various market-driven models used in commerce, Wood said he would only "tentative[ly] agree"

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that a distinction should exist between the two. In his way of thinking, "the only way to come up with a value of something is what is it worth if you sell it." The chancellor heard considerable testimony on whether it would be necessary for husband to sell his shares in the company. Wood testified that husband would likely "have to either borrow money or sell a part of his interest in the company" to pay any significant cash award ordered by the court. At no point in his testimony, however, did Wood state that a reasonable loan could not be obtained from either Dominion, J&E, or an institutional lender. Nor did he specifically say that, even with a loan, a partial sale would still be probable. And he never testified that a sale of all shares would be required. Finally, Wood offered no suggestion that any independent business reason (unrelated to the divorce) would make a sale likely. "We hope not to sell the business," Wood explained. When questioned about a possible sale of the business, husband testified that he would not ask his "brother to do that because of the effort he's put forth in that business." Like Wood, husband offered no information about the availability of any loans on the open market secured by a stock pledge from Dominion or J&E or whether he could borrow funds directly from either of his corporations to create liquidity. Nor did he or Wood testify about what portion of his Dominion stock might be liquidated and how a partial sale of that stock would affect the various discounts requested. After hearing this evidence, the chancellor accepted the lower of the two valuation figures offered by husband's expert. This placed the company's value at $871,320 (using a multiple of 2) and made husband's 50% interest worth $435,660. The court refused, however, to reduce this figure with the three adjustments requested by husband and recommended by Wood. Dominion, the court noted, was "being valued for equitable distribution purposes, not for sale."

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No evidence persuaded the chancellor that a sale was probable, much less necessary. Husband filed a motion to reconsider, which the trial court denied. In its final decree, entered on October 30, 2002, the trial court distributed to husband his shares in Dominion (valued at $435,660) and J&E (valued at $80,428), one-half of the retirement and investment accounts, and various personalty. The court distributed to wife the marital residence (valued at $110,000), one-half of the retirement and investment accounts, and various personalty. The final decree also awarded $196,700 to wife and ordered that the docketing of this monetary judgment against husband be deferred for four months following the final decree.

II. We begin with the governing standard of review. A decision involving the equitable distribution of marital property "rests within the sound discretion of the trial court," Mir v. Mir, 39 Va. App. 119, 125, 571 S.E.2d 299, 302 (2002) (citation omitted), and can be overturned only by a showing of an abuse of that discretion. "An abuse of discretion can be found if the trial court uses `an improper legal standard in exercising its discretionary function,'" Congdon, 40 Va. App. at 262, 578 S.E.2d at 836 (citation omitted), because "a trial court `by definition abuses its discretion when it makes an error of law,'" Shooltz v. Shooltz, 27 Va. App. 264, 271, 498 S.E.2d 437, 441 (1998) (quoting Koon v. United States, 518 U.S. 81, 100 (1996)). A trial court also abuses its discretion by failing "to consider the statutory factors required to be part of the decisionmaking process," Congdon, 40 Va. App. at 262, 578 S.E.2d at 836-37 (citing Rowe v. Rowe, 24 Va. App. 123, 139, 480 S.E.2d 760, 767 (1997)), or by making "factual findings that are plainly wrong or without evidence to support them," id. at 262, 578 S.E.2d at 837 (citing Northcutt v. Northcutt, 39 Va. App. 192, 196, 571 S.E.2d 912, 914 (2002)). When a chancellor hears evidence ore tenus, we give his findings "great weight" on appeal, -6-

Watts v. Watts, 40 Va. App. 685, 690, 581 S.E.2d 224, 227 (2003); King v. King, 40 Va. App. 200, 212, 578 S.E.2d 806, 813 (2003), because, unlike us, he has the "opportunity to see and hear that evidence as it is presented," Thomas v. Thomas, 40 Va. App. 639, 644, 580 S.E.2d 503, 505 (2003) (quoting Sandoval v. Commonwealth, 20 Va. App. 133, 138, 455 S.E.2d 730, 732 (1995)) (internal quotation marks omitted). In this respect, his findings have the "same weight as a jury verdict" and are entitled to the same level of deference. Chesterfield Meadows Shopping Ctr. Assocs., L.P. v. Smith, 264 Va. 350, 355, 568 S.E.2d 676, 679 (2002). For these reasons, we will not decide any appeal "on the basis of our supposition that one set of facts is more probable than another." Fox v. Fox, 41 Va. App. 88, 96, 581 S.E.2d 904, 908 (2003) (citation and internal quotation marks omitted). III. A. Minority Interest Discount

Virginia's equitable distribution law employs the concept of "intrinsic value" when determining the worth of certain types of marital assets. See Howell v. Howell, 31 Va. App. 332, 339, 523 S.E.2d 514, 517 (2000). "Intrinsic value is a very subjective concept that looks to the worth of the property to the parties." Id. It cannot be limited by objective criteria commonly used in open market transactions: The item may have no established market value, and neither party may contemplate selling the item; indeed, sale may be restricted or forbidden. Commonly, one party will continue to enjoy the benefits of the property while the other must relinquish all future benefits. Still, its intrinsic value must be translated into a monetary amount. The parties must rely on accepted methods of valuation, but the particular method of valuing and the precise application of that method to the singular facts of the case must vary with the myriad situations that exist among married couples.

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Id. at 339, 523 S.E.2d at 517-18; Bosserman v. Bosserman, 9 Va. App. 1, 6, 384 S.E.2d 104, 107 (1989) (observing that Virginia courts "must determine from the evidence that value which represents the property's intrinsic worth to the parties"). The intrinsic value principle applies to stock in a family owned company. Closely held shares may be subject, for example, to mandatory buy-out provisions at artificially low prices. Such provisions "do not necessarily represent the intrinsic worth of the stock to the parties" and thus are "not conclusive as to the value of the stock." Bosserman, 9 Va. App. at 6, 7, 384 S.E.2d at 108. The marketability restriction should be viewed simply as one factor in the valuation model. Id. Further, when the controlling interests in a family company oppress a minority shareholder or use a "substantial amount of the corporation's assets" for their own personal benefit, the trial court may take that fact into consideration in determining the value, if any, of the minority interest. Jacobs v. Jacobs, 12 Va. App. 977, 979, 406 S.E.2d 669, 671 (1991). But when no evidence suggests that the stock should be "discounted because it represented a minority holding," Bosserman, 9 Va. App. at 9, 384 S.E.2d at 110, the trial court should give the stock its proportionate value. In this case, husband argues that the chancellor "misinterpreted" the meaning of a minority interest and that "anything less" than a 51% interest should be deemed a minority interest requiring -- as a matter of law -- the application of a minority discount. We disagree. When analyzed under the intrinsic value approach, husband's position as a 50% owner does not necessarily mandate the use of a minority discount. Though husband's brother serves as office manager, no evidence suggested the brother ever used this position to exercise authoritarian control of the company or in any way to imperil husband's equal share of the distributive profits. Nor did any evidence show that the brothers have ever disagreed about the strategic direction of the company or disputed among themselves the management of the finances. -8-

While the potential for disharmony always exists between co-owners, so too do legal and equitable remedies. Virginia law requires all directors to exercise their fiduciary duties to preserve the best interests of the corporation, Code

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