Judge Won’t Knock Husband in the Head w/ Asset Division & Alimony

Tennessee business valuation law case summary – trophies and engraving business. Divorce and family law from the Court of Appeals.

Lydia Ann Bishop Watkins v. William C. Watkins, Jr. – the issue of debt when valuing a business in divorce (from 2004)

Lydia Ann Bishop Watkins (“wife”) filed for divorce from William C. Watkins, Jr., (“husband”) after 35 years of marriage. The trial court  awarded wife a divorce and distributed the marital property.

This litigation began in March of 2003 when wife filed a complaint seeking a divorce from husband on the ground of adultery. In the alternative, wife claimed that irreconcilable differences had arisen between them. The parties had no minor children when the case was tried. Wife sought a divorce, an equitable division of the marital property, alimony, and payment of her attorney fees. Husband denied committing adultery and claimed he was entitled to a divorce based on wife’s alleged inappropriate marital conduct. In the alternative, husband also claimed that irreconcilable differences.

The trial was held in late 2003, and when the divorce was granted, both parties were 55 years old and in relatively good health. Husband was employed with the U.S. Department of Agriculture (“USDA”) since 1970. Husband had a high school education and some college credits. His base salary was $53,000, although with overtime he earned in excess of $80,000 in 2002.

Wife graduated from high school and attended two years of business college. Prior to moving to Tennessee in 1986, she worked approximately 13 years for a grain elevator company as a bookkeeper and accountant. In 1986, husband’s employment required the parties to move to Tennessee. Approximately six to eight months after moving to Tennessee, the parties opened a business in Middlesboro, Kentucky, known as First Place Trophies.  They sold trophies and provided engraving and screen printing services. Wife worked only at First Place Trophies for the next 17 years and continued to work there at the time of trial. Wife was almost exclusively responsible for running this business on a day to day basis.

The trial court awarded wife a divorce based on husband’s admitted adultery and  concluded that the contributions of each of the parties to the marriage and acquisition of assets had been relatively equal. As to the property distribution, the trial court  awarded wife the marital residence and all of the equity in the residence, but also held her responsible for the mortgage. The home was valued at $130,000 with an outstanding mortgage of 53,972.34—a net award as to the house of $76,027.66. She was awarded the household furnishings which the trial court valued at $20,000. The trial court also awarded wife $ 11,000 in the Farmers Bank account, as well as her pension plan from a previous employer which entitled her to $ 125 per month at retirement.

The trial court determined the business was worth $425,000, but had debt totaling $200,000, which resulted in a net value of $225,000. The business’ liquidated value was judged to be between $125,000 and $150,000.  Wife was awarded the entire interest in the business and was responsible for the business debts.

Husband was awarded the $50,975 in his thrift savings plan and a vehicle valued at $ 7,500. The amount of husband’s projected future monthly retirement benefit from his civil service plan was approximately $3,000. The trial court determined that the combined present value of husband’s thrift account and his civil service retirement was $117,604.  Husband was awarded all of his retirement benefits with one exception.

The primary disagreement between the parties was whether the values assigned by the trial court for the business included the $200,000 debt. Husband claimed that these values encompassed the debt, so the business was a net asset to wife in the stated amounts. Wife, however, said that the values assigned by the trial court  did not take into account the debt and claimed the $200,000 in debt should be subtracted from the values assigned by the trial court, resulting in the net value of the business of only $ 25,000, and its liquidated value of a net liability of between $50,000 to $75,000.

The value of the marital property awarded to husband at the time of the trial was $125,104—adding the current value of his retirement plans ($117,604) and the car ($7,500). If husband was correct that the trial court included the business debt when assigning values to the business, wife’s property award would include: the net value of the business ($225,000), the net value of the marital residence ($ 76,027.66), the household furnishings ($20,000), and the $11,000, all of which totaled $332,027.66. If the appellate court accepted husband’s argument that the trial court considered the debt when valuing the business, and it considered the liquidated value of the business as opposed to its net value, then wife’s property award would be between $232,027.66 and $257,027.66. The appellate court noted that the totals do not include two items—a current value for wife’s pension from her previous employer as no such value was assigned to that asset by the trial court and any social security retirement that wife may receive.  For the two years prior to trial, wife paid into the social security retirement system via withholdings from her paychecks from the business. There was no testimony at trial regarding the current value of wife’s social security retirement benefits, if any, or the amount wife could expect to receive at retirement.  The court of appeals emphasized that point because husband’s civil service retirement was a benefit he was to receive in lieu of social security retirement and was the largest component of his property award. As husband’s civil service retirement was properly considered in determining his overall property award, it was only fair, the appellate court reasoned, to also consider wife’s social security retirement.

If wife was correct in her argument that the trial court  did not take into account the business debt when assigning the values to the business, then the overall property distribution would be dramatically different, the court of appeals said. While husband’s overall award would remain the same, wife’s total award would be reduced by $200,000.  Thus, when considering the overall net value of the business, her award would total $132,027.66. When considering the liquidated value of the business, wife’s total would be reduced further to between $32,027.66 and $57,027.66. Relying on these figures, wife claimed the overall property distribution was inequitable.

In support of her argument that the trial court did not take into account the business debt, wife claimed that in April 2004, she sold the business for $183,000, but the purchaser did not assume any of the $200,000 debt for which wife was responsible—wife claimed to have sold the business for a net loss of $17,000.  Based on the sale price, wife argued that the trial court could not have included the business debt when it assigned values to the business.  The court of appeals rejected her argument as she offered no evidence that the sale was commercially reasonable and at trial wife testified that the gross sales for the business in 2002 were $425,721. The sales in 2002 averaged about $35,475 per month. Wife was running the business at the time of trial when she was awarded the entire interest in the business. She testified that the inventory in the store as of three weeks prior to the trial was $282,717.48, which represented the cost of the inventory, as opposed to its retail value. At that same time there was $200,000 in debt. Wife sold the business 5 ½ months after the trial, and the appellate court determined that if sales in late 2003 and early 2004 were roughly the same as they were in 2002, wife would have had gross sales totaling over $195,000 in the 5 ½ months after the trial and before the sale.  W made no mention of what happened to the money, if any, generated from post-trial sales up until the time the business was sold.  Since wife claimed the business debt remained the same throughout this 5 ½ month period, wife certainly did not use the funds to pay off any of the debt.  The court of appeals disagreed with here argument and questions its evidence.

Business Debt

Wife testified at trial, before she knew who would receive the business in the property division, that the cost of the inventory in the business was $282,717.48. Wife also testified that the equipment in the business was worth over $70,000, and she believed the value of the goodwill to be $50,000. This information was relied upon by Ralph Carter (“Carter”), a CPA and the only expert witness to testify at trial. According to Carter, the business had $282,717 in inventory, $70,770 in equipment and fixtures, $ 14,500 in accounts receivable, goodwill worth $50,000, cash in the amount of $4,000, and a pick-up truck worth $4,000.  This added up to gross assets of $425,987. According to Carter, the business also had $200,000 in corresponding debt, resulting in a net value of $225,987.  Based on the testimony of wife and Carter, it was abundantly clear to the appellate court that the trial court did consider the business debt when it determined that the business had a net value of $225,000, and a liquidated value of $125,000 to $150,000.

From a percentage standpoint, wife was awarded 72.6% of the marital property, and husband was awarded the remaining 27.4%. Using the liquidated value of the business instead of the net value, wife’s total award was between $232,027.66 and $257,027.66, the court of appeals said, which was between 65% and 67.3% of the total property.

When making the property distribution, the trial court discussed all of the relevant factors contained in the Tennessee Code.  One of the many factors to be considered is the overall health of the parties. At trial, wife claimed that due to her age (55) and her health, she no longer was able to run the business and intended to sell it.  Because of this, the parties and the trial court discussed both the business’ net value as well as its liquidated value.

Wife testified that she had lymphedema, a condition which affects her lower extremities. Wife sought to admit into evidence a letter by a physical therapist discussing wife’s current condition, and husband did not object to the admission of this document, as he believed it helps his position.  The trial court said it was not going to give a lot of weight to the document, as there was no doctor or the deposition of a doctor available.  The trial court found that wife’s health was not so poor that she could not continue to operate the business successfully.  The court of appeals held the evidence support that conclusion.

After considering the trial court ‘s overall property distribution in light of the various factors set forth in the statute, the court of appeals was unable to conclude that the property distribution was inequitable or that the trial court otherwise abused its discretion when distributing the parties’ marital property.  It affirmed the trial court ‘s distribution of the marital property.

The court of appeals said that the trial court was clearly troubled by wife’s position that she wanted the business sold, which would eliminate her $46,800 in annual income, and at the same time be awarded $ 2,500 per month in alimony so she could pay her basic bills.  According to the trial court , “It’s sort of like you want your cake and [to] eat it too, saying, Well, let’s just liquidate it and let’s knock him in the head and take half his retirement and everything else.” The trial court  specifically found that wife’s current income from the business was sufficient to pay her monthly expenses.

While the appellate court understood her desire to retire and have husband fund her retirement by paying her alimony while he continues to work, it saw no reason under the statute or case law to grant that wish. Because the trial court concluded that wife’s physical condition did not prevent her from operating the business, a conclusion the court of appeals affirmed, the trial court acted within its discretion when it considered wife to have an annual income of $46,800 when it was in the process of determining whether alimony should be awarded to wife.

The judgment of the trial court  was affirmed and the case was remanded to the trial court  for collection of the costs below.

No. E2003-03050-COA-R3-CV (Tenn. Ct. App. Dec. 14, 2004)

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 Germantown, Tennessee and serves West Tennessee and Nashville. Contact Us today at (901) 683-1850.