Fraud? Just Before Divorce Husband Sold Company to Brother

Tennessee business valuation law case summary – Respiratory Care Equipment. Tennessee divorce and family law from the Tennessee Court of Appeals.

Hamby v. Hamby, 1998 WL 379192 (Tenn. Ct. App. 1998)

Phyllis and Joseph Hamby were married in 1976 and separated in 1994.  The husband had an associate degree in respiratory therapy, and worked at Copper Basin Medical Center in Cleveland.  He also owned, with his brother Anthony Hamby, a half interest in Cleveland Home Respiratory Care, Inc.  That business provided and serviced respiratory care equipment that patients used in their homes.  The wife filed the divorce action on September 14, 1994.  On November 16, the husband sold his 50% interest to his brother, with an effective date of October 31, for $100,000.  The wife then amended the complaint in the case to include the brother as a defendant.

The wife had an associate degree in nursing.  She worked full time until the birth of the couple’s first child in 1987.  In 1988, she again began working part time.

In arguing for a greater amount of child support, the wife argued that because the husband sold the business, he was willfully and voluntarily underemployed, and that the child support should be based upon potential income, rather than actual income.

The husband testified that he had sold the business because of the long hours and because he wanted to spend more time with his children.  He also offered medical evidence showing that he was clinically depressed before the sale, and was advised to reduce his workload.  The trial court agreed with the husband’s reasons, and based child support on his actual income, rather than the potential income.

The wife also argued that the sale of the business was a fraudulent conveyance.  A conveyance is fraudulent if it is made without fair consideration, leaving the grantor insolvent, or if it was made with the intent to hinder, delay, or defraud creditors.

In order to show the alleged insufficiency of the consideration, the wife offered the testimony of an accountant.  The accountant testified that the fair market value was $1,189,860.  (The name of this accountant is not stated in the appellate opinion.)

The husband’s expert witnesses were Harry Trewhitt, who had been the corporation’s accountant, and Robert Arnett, who did an independent evaluation.  Mr. Trewhitt valued the company at $181,987, and Mr. Arnett valued it at $288,000.

The Court of Appeals held that the trial court had acted within its discretion in evaluating these different opinions, and noted that the different experts disagreed as to the nature of the business, the correct method of valuation to use, and how important the husband’s personal skill and contacts were.  They also differed as to how they viewed the future stability of the industry.

The trial court held, and the Court of Appeals affirmed, that the transaction was not fraudulent, and that $100,000 had been fair consideration for the husband’s share of the company.  The trial court did see “some red flags,” in that the sale was to a family member, and that there had been no agreement not to compete.  Nevertheless, the trial court carefully scrutinized the transaction, and noted that Mr. Hamby had been a very credible witness.  The Court of Appeals affirmed, since the evidence did not preponderate against the trial court’s finding.

See original opinion for exact language. Legal citations omitted.

To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law. To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.

Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues. View his professional biography listing books and articles published on business valuation and forensic accounting and seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville. Contact Us today at (901) 683-1850.