One Indiana Court of Appeals case (Crider v. Crider) brings to light an all-too-common problem in divorce cases: The judge awards the non-business owner an “equalization payment” as part of the couple’s settlement. But the equalization award may be unrealistic for these basic reasons:
1. The owner’s business interests are illiquid, making it difficult for the owner to pay the equalization payment in the short-term (which is often what is ordered by the court).
2. The court may assign values to the business interests that are not in line with their fair market value. When this happens and the assigned values are too high, the liquidity issue is exacerbated.
Case in Point
In Crider, the husband (Jeffrey) owned a number of business interests, primarily related to real estate construction and development. The operating company was a corporation that was involved in road and other construction. Most of the other entities were limited liability companies (LLCs) that held real estate in various stages of development.
In a battle of four experts — two business valuators and two real estate appraisers — the judge arrived at opinions regarding the aggregate values that resulted in a directed equalization payment from the husband to the wife of approximately $4.75 million.
There were a number of contentious issues regarding the values. With the real estate holding companies, the primary difference related to whether the properties should be considered short-term or long-term projects, given the state of the economy. Christina’s real estate appraiser prevailed, resulting in an assigned value that was more than five times the appraised value estimated by Jeffrey’s expert.
When it came to the operating business, the value of its Bond Anticipation Notes (BANS), which was reported at $5.8 million on the balance sheet, became a major point of contention. Christina’s expert valued the BANS at book value. However, Jeffrey’s expert valued the BANS at $1.15 million, based on subsequent tax increment financing (TIF) bonds issued and the depressed value of the real estate on the valuation date. The trial court sided with Christina’s expert, even though he admitted that book value might not be indicative of fair market value.
As a result, the parties’ marital estate was valued at more than $11 million. Jeffrey was order to pay Christina an equalization payment of roughly $4.75 million due in 180 days, with 8 percent interest beginning to accrue after 90 days. The equalization payment was collateralized with Jeffrey’s business interests. The Indiana Court of Appeals upheld the values of the business interests and the accruing of interest. (Crider v. Crider, Court of Appeals of Indiana, Nos. 53A05-1307-DR-358, 53A04-1401-DR-26, 8/26/14)
Liquidity Concerns
In Crider, the courts sided almost exclusively with Christina’s expert. Whether right or wrong, Jeffrey was required to make a large equalization payment, even though he was awarded illiquid business interests in the settlement. The value of his assets was imbedded primarily in a construction company and real estate holding companies with interests in undeveloped or partially developed land. He didn’t own a controlling interest in any of these businesses, which further complicates the payout and increases the illiquidity of his interests.
In order to make the court-ordered equalization payment, Jeffrey essentially has two options: borrow funds or transfer some of the ownership in the entities to Christina. However, if Jeffrey attempts to borrow funds to pay of the equalization payment, he may not be able to find a lender who agrees with the court’s appraised values without heavily discounting his interest for its lack of control. Conversely, in-kind distributions — especially when they involve minority interests in closely held businesses — are generally not desirable for either spouse in a divorce.
Ask an Expert
Illiquid assets with speculative values complicate divorce cases. In their sincere efforts to equitably distribute marital property, courts may inadvertently create even greater inequity with equalization payments — which may lead to ongoing litigation. A litigation support professional can help judges understand these issues and brainstorm better, more equitable solutions.
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