Coronavirus is impacting us in ways that require more than just social distancing and “washing your hands.” When it comes to divorce and the equitable distribution of marital assets, the valuation of such assets are key factors in the fair resolution of the case. If your pending divorce involves the valuing of business interests or related assets that were being appraised before COVID-19, a potential for injustice or inequity may exist. Here’s how:
Events Occurring After the Valuation
Many divorce cases involve the valuing of business interests that were acquired or appreciated during the marriage. These business interests include all types of family businesses, professional practices/services, real estate holding companies, as well as their assets—tangible and intangible. In order to go forward with the distribution, the expert must be instructed as to the specific date to be used for the particular valuation. This is known as the “valuation date.”
Usually, business and other such assets that are actively operated/managed by a spouse are valued as of the date of filing of a divorce complaint. Passive assets or those assets that fluctuate in value primarily due to market conditions are valued as of the date of the trial.
Valuation professionals are bound to value business interests and other assets as of the valuation date, and they should consider only circumstances existing at the time of or leading up to this date.
Obviously, an event that could affect the value of a business after the valuation date, or “subsequent event,” with such event not being known or knowable at the valuation date. The valuation would not ordinarily be updated to reflect those subsequent events. Moreover, the valuation report would typically not include a discussion of those events or conditions because the events occurring after the valuation date are not relevant to the value determined as of that date.
Four Ways COVID-19 Has Affected Valuation of Business Interests
COVID-19 has impacted the valuation of these assets as follows:
- Actual and expected revenues and earnings may have decreased;
- Significant increase in sales may result for businesses benefitting from the pandemic;
- Uncertainties exist as to if and when a particular business can be expected to restaff, reopen, and attain pre-COVID-19 levels;
- Questions regarding the amount of money and working capital required to facilitate the re-growth of the business.
How to Avoid Injustice With These Types of Valuations
Divorce courts are courts of equity, meaning they are charged with the obligation and responsibility to do what is fair and right. Likewise, the distribution of marital assets between spouses in a divorce is called “equitable distribution.” If an asset that has been valued prior to the time that this pandemic became known or knowable (as discussed above) greatly decreased in value because of this event, the COVID-19 pandemic, equity would not be served if a court was to make a distributive award based upon that value.
Your attorney might first look to see if there is any mention of the subsequent event(s) in the valuation expert’s report or ask the expert to include such a reference if it has not been included. Please know that ethical and procedural rules make it clear that the valuation expert must indicate that the disclosure of the subsequent event is presented for informational purposes only and that it does not affect the analyst’s determination of value as of the valuation date.
The purpose of discussing a subsequent event is to provide meaningful information to counsel and the court as of the valuation date. Such a change in conditions may inform the reader that the analyst’s determination of value as of the valuation date may no longer be applicable.
It is important to remember that the expert cannot disclose what their business valuation would have been due to this subsequent event. In other words, their report would not be updated to reflect any change in value from the valuation date as a result of the subsequent event or condition because the impact was not known or knowable as of the valuation date.
The party can file a motion with the court for an order which mandates the expert to update or provide a separate report with a valuation date that may be fair to the parties in the particular date.
These are unique times. It is of the utmost importance that attorneys explore new and alternative solutions to ensure that the distribution of a client’s marital assets is fair and just.
Ronald Lieberman, Esq. is a shareholder and partner at ALBFRM in Southern New Jersey. He shares your concerns about COVID-19 and its impact on your family law matter. Our firm is here to help you deal with your matter and to address the unique events we are all facing. We are also monitoring the situation regarding the New Jersey Courts and will keep you informed as we learn more information.