Big Surprise: Mortgage Business Bankrupt!

June 28, 2008 | Blog, Business Valuation, Court Decisions

Icon for author Brian Vertz Brian Vertz

In Wilson v. Wilson, 2008 WL 2312726 (Ky.App.2008), a man started a mortgage brokerage business with his high school sweetheart in 2004. Soon the business blossomed, and so did the romantic relationship between the man and his classmate, who unfortunately was not his wife. The business expanded from Kentucky to Florida and paid all of the classmate’s living expenses. Soon the business floundered, the man bought out his partner, and he filed for divorce and bankruptcy. A discharge order was entered shortly thereafter, the bankruptcy court finding that the business was insolvent and no assets existed.

In the divorce action, a court-appointed valuation professional determined the value of the business as an ongoing concern as of September 2005, one year before the bankruptcy. The trial court accepted the valuation but assigned no value to the business as marital property, since it was bankrupt and worthless a year later. The business owner’s wife appealed, arguing that it should be assigned the value given by the expert.

On appeal, the Kentucky Court of Appeals affirmed, holding the trial court did not commit an error by assigning no value to the bankrupt business. The expert and the court did not seem to violate the principle that facts not known or knowable on the date of valuation may not be considered. Rather, the date of the expert’s valuation did not appear to coincide with the date used by the court. The lesson, perhaps? Make sure the date of expert’s valuation is the same date that the court will consider at trial.

Under Pennsylvania law, the same result probably would have occurred. Under Sutliff v. Sutliff, 518 Pa. 378, 543 A.2d 534 (1988), the proper date for valuing marital assets is presumed to be the date of distribution. There are cases, however, in which the courts of Pennsylvania have adopted an earlier date, such as where there has been intentional dissipation of marital assets. See, Nagle v. Nagle, 799 A.2d 812 (Pa. Super.2002); Smith v. Smith, 653 A.2d 1259 (Pa.Super. 1995). For some reason, the Kentucky courts rejected that logic.

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