Smith v. Smith, 2024
This case involved an appeal of a Chancery Court decision in a divorce case in Mississippi. The wife was the appellant in this case. Two major issues were on appeal. The first dealt with child custody, which we will not cover in this digest, and the second dealt with whether one of the husband’s two businesses was separate property or marital property. The appellate court also affirmed how goodwill, both personal and entity, was treated in a divorce in Mississippi, i.e., they were both excluded from the marital estate.
Facts and history.
The couple, Smitty (the husband) and Jessy (the wife), were married in 2007. The husband owned and operated two businesses. The divorce complaints were filed beginning in October 2019.
Property division. In 1995, the husband started a landscaping business known as Horticulture Services LLC, which continued in operation throughout the marriage. In 2010, the husband started a second business, Midway RV and Boat Storage LLC. The chancellor valued the businesses under a single valuation. While the wife urged the use of the income approach, the chancellor utilized the asset approach to determine the value. “[T]he chancellor found that an asset-based approach was more appropriate because it excluded goodwill and because the evidence was insufficient to establish an income-based valuation.” (Editor’s note: Pointing out once again that the court, in making a determination, can only rely on evidence presented in the case.) The chancellor also noted that he did not use the wife’s values because she valued items at their cost rather than their fair market value. The Chancery Court also found that both businesses were separate property. On appeal, the wife argued, among other things, that the Chancery Court erred in determining that both of the husband’s businesses were separate property; by assigning a combined value for the two businesses; and by using an asset-based approach to value the businesses.
Classification of the businesses.
The first step in dividing the marital estate is classifying the assets as separate or marital property. (Pearson v. Pearson) Marital property is defined as “any and all property acquired or accumulated during the marriage.” (Hemsley v. Hemsley) “A business interest owned prior to marriage is the separate property of the owning spouse, at least to the extent of its value at the time of the marriage.” (Dean v. Dean) “Appreciation of a separate business interest, which occurs during the marriage and is attributable to the efforts of either spouse, is marital property.” (Dean v. Dean) “If the appreciation was caused by other forces, such as inflation or third-party efforts, then the entire asset remains separate.” (Editor’s note: It is not clear from these two quotes whether appreciation caused in part by one of the parties can be bifurcated between separate and marital or not.) The burden of proof was on the nonowning spouse.
On appeal, the wife asserted that the value of Horticulture Services increased “significantly during the marriage” but offered no proof at trial as to the amount of the increase. Thus the chancellor did not err in finding that no part of Horticulture Services was marital property. However, Midway presented a different problem since it was started during the marriage, in 2010. “Midway offers storage for RVs and boats in two large buildings. The property also has an office building and other smaller buildings.” The entire property was appraised at $659,000, and the net equity was $367,993. The husband failed to prove that Midway was not marital property.
The husband argued that the wife was not entitled to any part of the Midway value since she had little to no involvement in it. However, “[w]e assume for divorce purposes that the contributions and efforts of the marital partners, whether economic, domestic or otherwise are of equal value.” (Hemsley) The fact that the wife might have played only a minor role in Midway’s operations did not mean that it was not a marital asset. The husband provided no evidence that he acquired his interest in Midway with separate assets or due to efforts other than his own. Therefore, Midway should be classified as a marital asset. On remand, the chancellor must make a new equitable distribution of the marital estate that includes these (Midway) assets.
Valuation of the businesses.
The husband argued that the Chancery Court erred in determining a joint value for Horticulture Services and Midway and by using an asset-based approach. The chancellor was responsible for determining the value of the marital assets. In the case of a business value, the three common approaches to value can be used to determine the “market value.” “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.” (Dean) A determination of value did not require expert testimony but can be taken from the financial disclosures of the parties.
“If a party fails to provide accurate or sufficient information or cooperate in the valuation of an asset, the chancellor is entitled to proceed on the best information available to him or her.” (Lageman v. Lageman) The fair market value of an asset was a question for the trier of fact. The chancellor found the wife’s suggestion to use an income-based approach “problematic” and used an asset-based approach instead. The Chancery Court explained:
[T]he Mississippi Supreme Court has emphasized that valuation of a business must not include goodwill, and it must be based on the business’s fair market value. Fair market value without goodwill is the value of the assets. Second, the income approach uses goodwill as a key component of its analysis. Third, the income approach requires projection of future income applying factors and formulae beyond the expertise of this court and requiring data not in this record. The court finds that using the asset approach to valuation is most appropriate in this case, and it can be accomplished with the data in the record.
The chancellor listed the assets of Horticulture Services and Midway without specifying to which business and determined a value of $425,893. Since the wife used the original cost from a depreciation schedule for her asset values, those values were not used. The chancellor mostly took the husband’s values for equipment, etc., for Horticulture Services and the Midway asset. The real estate value was taken from the report of a court-appointed appraiser. The appellate court determined that the Chancery Court did not err in its use of the asset-based approach nor abused his discretion.
On remand, the Chancery Court must determine the value of the Midway assets and add them to the marital estate. The Chancery Court was “reversed with respect to the equitable distribution of the marital estate. The case is remanded for a new equitable distribution of the marital estate, including Midway and the associated real property.”