“Excess Cash” of Professional Practice is not Marital Property in Business Valuation Divorce Case
January 01, 2014 | Business Valuation, Court Decisions, Divorce, Legal Perspective, Professional Practices
The Superior Court’s memorandum opinion in Edkin v. Edkin, No. 2017 MDA 2013 (December 23, 2013) arose from a case involving a veterinary practice in the context of divorce. The wife in Edkin filed a divorce action in 2001. Equitable distribution hearings were held in 2002, 2003, 2004, 2007 and 2009, resulting in a master’s report issued in 2010. Exceptions were argued in 2010 and 2011, resulting in a final decision in mid-2012. Husband filed an appeal raising 16 points of error, as well as a petition for supersedeas that was granted by the trial court.
The business valuation experts in Edkin apparently stipulated to the “net value” of the veterinary practice, and agreed that “excess cash” was held by the business on the valuation date in the amount of $133,703.00. The opinion did not state the valuation date, but if the business was marital (as the opinion suggests) then the proper valuation date would be the date of trial or distribution. The experts agreed upon the amount of “excess cash,” but did not agree as to whether it was “valued as part of the business” or was marital property. The “excess cash” was accumulated during a post-separation period when the owner was paying support. The master designated the “excess cash” as marital property apart from the value of the business, and the trial court affirmed.
What the opinion eventually reveals is that the support order was based not upon the husband’s actual distributions from the business, but instead its net available income (which should include undistributed earnings). This finding is supported by the master’s comment that husband’s income was “not what he takes out,” but the company’s net income; and the Superior Court’s comment that husband received “diminished draws” prior to the valuation date. In designating the company’s excess cash as marital property, the master and trial court erroneously relied upon the opinion of wife’s valuation expert, who explained that if the “excess cash” had been deposited into a bank account instead of being retained by the business, it would have been identified as a marital asset.
That opinion was not accurate. If husband had drawn all of the net available income, paid his support, and then saved some of the income in a bank account, the bank account would have been identified as his post-separation property, not marital property.
Husband was therefore successful on appeal when he argued that counting the “excess cash” as marital property was an impermissible double dip. The Superior Court vacated and remanded that aspect of the trial court’s decision. Yet, this case did not present the typical circumstances that we would label as a “double dip” in divorce. Typically, a double dip occurs when a stream of income that has been capitalized for valuation purposes (such as a pension or post-valuation business earnings) are simultaneously counted as income for alimony or support purposes. That did not occur in this case, as the “excess cash” was accumulated prior to the valuation date. Note that no double dip occurred when the trial court counted the undistributed earnings of the company as income for support purposes, while capitalizing the earnings subsequent to the valuation date as marital property. The “double dip” occurred in this case because the trial court counted the undistributed earnings as income for support purposes prior to the valuation date, and then counted the savings that were generated by the undistributed earnings as marital property.
Another issue in the Edkin opinion helped to drive the point home. The master found that the business kept $23,000 cash in a shoebox prior to separation, which was designated as a marital asset apart from the business itself. Husband argued that the cash should not be counted as marital property because it was used to pay living expenses after separation. However, this does not speak to the legal principle that distinguishes marital property, which is the time when the property was acquired. Since the cash in the shoebox was earned prior to separation, unlike the “excess cash” generated by the business after separation, the shoebox money was marital property.