Case Summary: CAVENEY V. CAVENEY, NO.10-O-599, January 12, 2012

Tuesday, January 24, 2012

After a mid-length marriage, the wife filed for divorce.  The parties had two minor children at the time of divorce.  After a trial, the trial judge awarded primary custody of the minor children to the wife, divided the parties’ assets equally and ordered the husband to pay $940/week in alimony and $500/week in child support to the wife.  In addition, the husband was found in contempt for certain provisions of the divorce agreement.  The husband appealed this matter.  The appellate court affirmed the contempt judgment and the divorce judgment with exception to the valuation of the wife’s business interests, which was remanded to the Probate Court for Further proceedings.

The Husband was the owner of two companies, New England Technical Sales (“NETS”) where he owned 50% of the shares of NETS, and Online Marketing Solutions (“OMS”) where he owned 40% of the shares of OMS.  The husband earned a base salary of $100,000 from NETS and the parties stipulated that his interest in NETS was worth $21,000.  The husband did not take a draw from OMS but the parties stipulated that his share of the interest in OMS was $71,000.  The husband also made loans to his companies in the amount of $675,000, and these loans were reflected on his financial statement accordingly.  The trial judge further found that the husband’s “true income” was approximately $200,000 because his business paid for his rent, mortgage and other personal expenses, which were not included as income on his financial statement.  The trial judge found that the husband’s testimony was not credible with respect to his finances.

The wife was the primary homemaker and caretaker of the parties’ minor children.  She had a master’s degree in science education and was employed part-time as a biology teacher.  The wife had ownership interest in three closely held S corporations – she had 24.75% of nonvoting stock in each company.  The wife’s interests were given to her from her father and she had the same ownership interests as her three sisters.  The trial judge adopted the wife’s expert’s values of her ownership interests.  

The parties both made substantial contributions to the marital estate.  The parties enjoyed a “high station in life” that the husband was able to maintain post separation but the wife could not.  Thus, the trial judge divided the marital estate equally and ordered to husband to pay $940/week in alimony and $500/week in child support.  In addition, the husband was ordered to pay $175,000 to the wife as legal fees and costs.

As mentioned above, the husband takes issue with the values of the wife’s business interests.  First, he challenges the fact that the valuation date was altered during a motion for limine on February 13, 2009, the second day of trial.  The trial judge did not abuse her discretion because the husband had the wife’s business valuations prior to the first day of trial, and the wife’s expert did not testify until the third day of trial held on April 1, 2009.  The husband had plenty of time to prepare his cross-examination and the trial judge did not abuse her discretion.

The wife’s expert utilized the “adjusted net asset method” to value her business interests.  This method “takes the book value of the assets, writes those assets up to market, what they could be sold for in the marketplace—not liquidated but sold in a reasonable time frame—and subtracts all liabilities associated with them.”  The wife’s expert also applied a 15% discount for “lack of control” and a 30% discount for “lack of marketability” to determine the value of her interest.  The trial judge’s adoption of the adjusted net asset method was not clearly erroneous, however, applying the “lack of control” discount and “lack of marketability” discount was the basis for the husband’ challenge on appeal.  The husband relies on Bernier.  As found in Bernier, the “lack of marketability” discount is utilized to adjust” for a lack of liquidity in one’s interest in a closely held corporation” because of the shortage of potential buyers for the companies are being sold and converted to cash.  Bernier also held that no discount “should be applied absent extraordinary circumstances.”  The wife argued the due to her “lack of control” she could not convert her interests in the companies for cash, and thus, it was appropriate for her expert to apply the discounts in his valuations.  However, given the fact that the wife’s companies were not for sale or that a sale was in the near future, it was error for the trial judge to adopt the wife’s expert’s valuations.  Consequently, this portion of the divorce judgment was vacated and remanded to the Probate Court, and all other aspects of the divorce judgment and contempt were affirmed.