Valuation in the Face of Insubstantial Proof
July 29, 2019 § Leave a comment
There is plenty of case law holding that the chancellor may rely on the parties’ evidence submitted at trial to value marital assets and make equitable distribution, even when that evidence is less than substantial. I posted on the subject here and here, and in other posts.
That precedent did not persuade the COA, however, in Mark Chism’s appeal from the chancellor’s ruling in the divorce case he filed against his wife, Landaria. In Chism v. Chism, decided June 4, 2019, the COA reversed and remanded the chancellor’s decision that adopted Landaria’s valuation of the parties’ jointly-owned chicken-wing business. Chief Judge Barnes penned the court’s opinion:
¶20. Mark argues that the chancellor erred in accepting Landaria’s valuation of the couple’s business without sufficient proof and therefore led to an inequitable division of the marital property. Thus, Mark claims the entire financial award must be reversed and remanded.
¶21. To resolve property division, the chancellor must: “(1) classify the parties’ assets as marital or separate, (2) value those assets, and (3) divide the marital assets equitably.” Burnham v. Burnham, 185 So. 3d 358, 361 (¶12) (Miss. 2015). Equitable division of property is governed by the factors articulated in Ferguson v. Ferguson, 639 So. 2d 921, 929 (Miss. 1994). The third Ferguson factor asks the chancellor to consider “[t]he market value . . . of the assets subject to distribution.” Ferguson, 639 So. 3d at 929. Three methods of valuation may be used to determine the market value of a business for this purpose: “(1) an asset-based approach, in which assets and liabilities are evaluated, (2) a market-based approach, in which the market is surveyed for similar sales, or (3) an income-based approach, in which a value is placed on earning potential.” Lacoste v. Lacoste, 197 So. 3d 897, 907 (¶34) (Miss. Ct. App. 2016) (citing Singley v. Singley, 846 So. 2d 1004, 1011 (¶18) (Miss. 2002)).
Regardless of what method an expert might choose to arrive at the value of a business, the bottom line is one must arrive at the “fair market value” or that price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.
¶22. The chancellor found the total value of all marital property, including the business, was $1,176,598. Landaria was awarded fifty-percent of that value. Taking into account the Ferguson factors and distribution of other marital property, Landaria was ultimately awarded $521,299. Mark does not dispute that the chicken-wing business was a marital asset. However, he maintains that because the business was the couple’s main asset and source of income, a more specific business evaluation was necessary for an equitable distribution of marital property.
¶23. The chancellor found that the parties owned Memphis Best Wings. Although Mark had operated another chicken-wing business prior to the marriage, he started this new business jointly with Landaria during the marriage, and both parties contributed. In fact, Landaria quit her job as a teacher to work at the restaurant as a paid employee. However, not surprisingly, she was dismissed upon the parties’ separation. These facts are uncontested. The chancellor found the business’s value was $1,000,000 according to Landaria’s unsupported testimony and Rule 8.05 estimate. No details of how she arrived at this valuation were provided, and Mark did not even list the business on his Rule 8.05 form. The chancellor found that the business had “grown into a very substantial and profitable” one. He stated the $1,000,000 figure “has not been disputed” by Mark, who did not rebut this estimate at trial or offer his own estimate. Yet, there was no testimony from Landaria about how she arrived at that value for the business. Landaria even admitted, when asked by the chancellor, that her stated value was “just [her] estimate.” However, Mark’s 2014–2016 tax returns, provided during discovery, were admitted into evidence and included his profit and loss income statements. These evidence net profits of $60,291; $48,543; and $63,516, respectively, which does not appear to support a $1,000,000 valuation. [Fn omitted] During his examination of Mark, Landaria’s counsel tried to show that Mark was “keep[ing] the cash out of the business [account].” A photograph was entered into evidence showing Mark and his sister sitting at a table with a pile of cash on it, but none of these bills appear to be large ones. Statements showed that Mark made few cash deposits to the bank each month, but he maintained that he bought supplies and paid bills with the cash and did not keep it for personal use. Additionally, the chancellor speculated that the couple was not reporting all of their cash earnings from the business but using this money to fund their extravagant lifestyle.
¶24. In Mark’s post-trial motion to reconsider, he argued the chancellor erred by appointing a business-valuation expert, and Mark moved to designate Robert Vance as such an expert. Vance submitted a valuation report which came to the conclusion that Memphis Best Wings had a fair market value of $1,898 as a going-concern entity, excluding goodwill. Vance used the asset-based approach for his valuation, claiming that the market-based approach and the income-based approach are inappropriate because they imply the existence of goodwill in the value of a business, which is prohibited under Mississippi law, citing Lacoste and Singley v. Singley, 846 So. 2d 1004, 1011 (¶18) (Miss. 2002). Landaria moved to strike the expert’s testimony and opinion because discovery had been completed for well over a year. Mark moved to proffer it, and a hearing was held on the matter. Although the chancellor denied Mark’s motion to reconsider, he allowed the expert’s proffered testimony and business valuation report, dated April 3, 2018, for identification purposes.
¶25. This Court and the Mississippi Supreme Court have reversed the chancellor when evidence on the valuation of the business in property distribution was insufficient. In Lacoste, this Court reversed and remanded a business valuation which the chancellor based on the previous year’s profit/loss statement. Lacoste, 197 So. 3d at 908 (¶38). Like here, the business was considered the couple’s main asset and source of income. Id. at 907 (¶34). However, the parties failed to present sufficient evidence to value the business by the approach the chancellor deemed best (the income-based approach). Id. at 908 (¶37). While we found “the chancellor did the best she could with the evidence presented,” this Court nonetheless found it necessary to reverse because of lack of support for the valuation. Id. at 909 (¶42). In Mace v. Mace, 818 So. 2d 1130, 1133 (¶¶13, 16) (Miss. 2002), the Mississippi Supreme Court reversed the chancellor on the value placed upon a husband’s medical practice which was a marital asset. The value of $144,000 was determined solely by the husband’s testimony, did not appear to be based upon any reliable method, and it was unclear what physical assets were included in the valuation. Id. at 1134 (¶15).
¶26. Moreover, this Court, following the Mississippi Supreme Court’s directions, has stated that “the foundational step to make an equitable distribution of marital assets is to determine the value of those assets based on competent proof.” Dunaway v. Dunaway, 749 So. 2d 1112, 1118 (¶14) (Miss. Ct. App. 1999) (citing Ferguson, 639 So. 2d at 929). As stated earlier, the chancellor must determine the “fair market value” of the business, using one of the three approaches: an asset-based approach, a market-based approach, or an income-based approach. Lacoste, 197 So. 3d at 908 (¶34) (quoting Singley, 846 So. 2d at 1011 (¶18)).
¶27. Not all approaches will be applicable for all businesses. For example, in Lacoste, the chancellor found an asset-based approach was inapplicable because the business had few assets, owned little equipment, and had no employees or training facility. Lacoste, 197 So. 3d at 908 (¶36). The market-based approach was also ruled out as no comparable business sales were introduced, and the business’s success was largely due to the reputation of the owner and marketing. Id. The chancellor, therefore, considered only the income-based approach as appropriate. Id. at (¶37). We found, however, that given the drastic income fluctuations and possibility that income “may be intertwined with goodwill, as the business hinge[d] on [the husband’s] reputation and personal efforts,” the case had to be remanded for further evaluation. Id. at 910 (¶45).
¶28. Here, the chancellor was unable to adopt any of the three approaches as none were presented to him. Landaria offered only an unsupported estimate on her 8.05 form and testimony. Mark did not provide any value for the business on his Rule 8.05 form or give any testimony as to its value. As established in Lacoste and Mace, the chancellor should require that the parties utilize a reliable method of valuation and support it with adequate proof, or prove valuation through expert testimony. See Lacoste, 197 So. 3d at 910 (¶46); Mace, 818 So. 2d at 1134 (¶15). If they fail to offer such proof, the chancellor may appoint an independent valuation expert. Id. Accordingly, we reverse the chancellor’s $1,000,000 valuation of Memphis Best Wings and remand for further proceedings.
What this portion of the opinion omits is that Mark failed, refused and neglected to provide financial proof sufficient to value the business, and was even jailed for contempt for non-cooperation in discovery. He went through a succession of lawyers. It seems to me that he had his chance to offer proof of the value of of his business, but he chose to play cat-and-mouse games with Ladaria and the court. Unfortunately, those shabby tactics served him well on appeal. He actually benefitted from his evasion of discovery by getting a second bite at the apple.
Contrast the court’s treatment of Mark’s coyness with values and the suggestion that the trial judge should appoint an expert with this language from Kimble v. Kimble, a COA case decided only 14 days after Chism:
¶8. “[T]he foundational step to make an equitable distribution of marital assets is to determine the value of those assets based on competent proof.” Dunaway v. Dunaway, 749 So. 2d 1112, 1118 (¶14) (Miss. Ct. App. 1999) (citing Ferguson, 639 So. 2d at 929). “[I]t is incumbent upon the parties, and not the chancellor, to prepare evidence touching on matters pertinent to the issues to be tried.” Benton v. Benton, 239 So. 3d 545, 548 (¶11) (Miss. Ct. App. 2018). When “a party fails to provide accurate information, or cooperate in the valuation of assets, the chancellor is entitled to proceed on the best information available.” Id. The chancellor possesses sole authority to assess both the credibility and weight of witness testimony. Culumber v. Culumber, 261 So. 3d 1142, 1150 (¶24) (Miss. Ct. App. 2018). [My emphasis]
Admittedly, Kimble involved valuation of vehicles, not a business, but sometimes it’s difficult here at grass-roots level to figure out where we are supposed to draw the line. I posted about Kimble here.