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How the Fair Value of a Business Interest is Determined in a New Jersey Divorce for Purposes of Equitable Distribution

In 1971, New Jersey enacted Divorce Reform Legislation thereby placing in the forefront  an “Equitable” standard for the distribution of property when people divorce, replacing the long previously held universal rule that when people divorce, property is divided according to title to the property.  Although this new order was revolutionary, the concept of Equitable Distribution was introduced into our legal lexicon without definition or guidance.  The statute was purposely designed to allow this new concept to evolve by case law rather then legislative fiat.  As one of the first states to adopt a “modern” concept of property distribution, the courts in New Jersey  became a laboratory, honing the concept and its application to the myriad of assets and factual patterns that exist in marriages and domestic partnerships.

The Supreme Court is the highest court of our state.  The decisions of the Supreme Court are binding on all lower courts.  In the case of  Painter v. Painter, 65 NJ 196 (1974), the Supreme Court of New Jersey established that the most liberal definition of property was to be utilized in determining what property ought to be distributed pursuant to a divorce and, that generally, the acquisition period for marital property subject to equitable distribution would be from the date of a ceremonial marriage until the date that the complain for divorce is filed.   During the same Court Session, in Rothman v. Rothman, 65 NJ 219 (1974), the Court established the methodology to be utilized in dividing eligible assets which is: (1) establish the specific property subject to division; (2) value the identified property; and (3) find the best means to allocate the property between the parties.

For over 35 years, the firm of James P. Yudes, PC has contributed to the debate surrounding our Equitable Distribution Statute.  Our attorneys have written statutes and court rules and for over 20 years have contributed to the dialogue through the  Yudes Family Law Citator, a multi-volume set commenting on every marital and domestic union decision since 1947.  We have also contributed to the formation of case law by succeeding in obtaining significant reported decisions in our state courts as well as the Federal Court of Appeals which have moved and developed the law.  Among these cases is the decision in Dugan v. Dugan , 92 NJ 423 (1983).  The Dugan case established that marital property included the value of a law practice that could not be sold but which had value to its owner.  Having identified the practice, the court indicated that the asset would be valued by looking to the value of tangible and intangible assets including the concept of “good will”.  Before Dugan, it was thought that all marital assets would be valued in a matrimonial litigation predicated on the asset’s fair market value.  Dugan introduced a new concept into the dialogue.  The concept that in order to be fair to the non-titled spouse, a value other than “fair market value” needed to be utilized when valuing and equitably distributing business interests.

“Fair market value” is the value assigned to a property predicated upon what a willing buyer would pay for the item and which price would be acceptable to a willing seller in an open market without compulsion.  Mr. Dugan, an attorney and a sole practitioner, was not selling his business.   The ethical rules at that time made the sale of a solo attorney’s legal practice nearly impossible.  Yet this law firm had value – to Mr. Dugan.  He had a better reputation than his peers.  He earned more money than them.  His business would arguably continue to grow and,  therefore, the value of the business to him would increase over time. Hence,  he was compelled to share his good fortune with his wife.  New Jersey did not have a name for this new concept of value when the Dugan decision was penned.

Over time, forensic accountants and legal experts debated what rule of valuation  Dugan and it progeny created.  Ultimately, the American Institute of Certified Public Accountants (AICPA) coined the term “Fair Value”.  In coining the term, the AICPA wisely indicated that there was no single definition as to what constituted “Fair Value,” rather, it was determined by the law of each individual State.

The first decision in New Jersey to introduce the concept of Fair Value into the dialogue of matrimonial litigation was the case of  Brown v. Brown, 348 N.J. Super. 466 (2002).    The Appellate Division, our middle level court, pointed out that “Fair Value” is not the same as “Fair Market Value” as “Fair Market Value” equates with the market’s determination as to value, whereas “Fair Value” looks to the value of the entity to the holders  which may be greater or less then “Fair Market Value.”  Certainly, Dugan is a situation where the value of his law practice was greater to Mr. Dugan was greater than the value of his law practice in the marketplace.  So too, in  Piscopo v. Piscopo, 231 N.J. Super. 576 (Ch. Div. 1988), a Trial Judge recognized that Joe Piscopo’s celebrity was more valuable to him than could be measured by the market.  However, the value of a business interest is not always of greater value to the holder than the market value.  Sometimes the value to the holder of he business is actually less than the fair market value.   For example, in Stern v. Stern, 66 N.J.340 (1975), the New Jersey Supreme Court, in dealing with the value of a large law practice, recognized that when one’s right to realize value from one’s ownership interest in a business is controlled by a fully integrated and historically followed exit agreement, that the value created by the agreement would control the valuation.  So too in, Seiler v. Seiler, 308 N.J. Super 474 (App. Div. 1998), an insurance agency which was a captive of a single institutional insurer was found to have no value for marital purposes.

The rule of thumb in all of these cases is that the value ascribed to an entity must be fair to all concerned.  The titled spouse should be neither oppressed nor should his or her spouse be deprived of fair compensation for the marital effort that contributed to the success of the enterprise.  The ultimate aim of a distribution scheme is to create an economic sharing of the financial successes of the marriage  in  recognition of the Supreme Court’s mandate in Rothman, which is that marriage is a shared enterprise and that Equitable Distribution is the vehicle through which spouses share the bounty of the success of that shared enterprise.

Although we have come a long way in developing approaches to valuing  the assets of a marriage or a domestic partnership, there are still questions to be answered.  Approaches to valuation vary with fact patterns and the sophistication of the attorneys and  forensic experts called upon to determine value.  Having said that, ultimately values must make sense in the real world and must pass what accountants often refer to the proverbial “smell test”, meaning: Does the final result reflect a reasonable approach to valuing the entity in question?  Fairness and equity demand that those involved in the valuation process strike a delicate balance between the rights of the affected spouses.

In dealing with valuation issues, it is important that your lawyer understand the many valuation approaches utilized by accountants and business appraisers in determining Fair Value.  In navigating business valuations the lawyer needs to have the facility to interact with the business appraisers, regardless of discipline, and instruct them as to how the law intersects with the facts of your case in determining what value is fair.  Our lawyers work with a team of highly skilled experts to build for you an effective approach to valuing the business at issue in your matter.  We make sure that the valuation approach utilized makes sense based on the facts of your case.  We understand the law and financial theory which is why so many business professionals refer their clients to us.