ONE'S MAIDEN VOYAGE through the "sea of valuation" is nothing
less than a thought-provoking adventure in which one can be increasingly
adrift. Valuation is by far one of, if not the greatest, challenges to an
attorney preparing a divorce case for trial under the Equitable Distribution
Law. To ascertain effectively and properly the appropriate date to use in
presenting proof of value of marital property is a task not to be
underestimated. The problem begins to unfold at its conception. While not
unmindful of a cut-off date for the acquisition of marital property, [FN1] the
Legislature failed to specify a valuation date. Factor into this the burden
being on the non-title holding spouse to identify and value marital property
as a predicate to the court making a property distribution. [FN2] Add to that
the many rules contained in the less than clear, indeed perhaps contradictory
cases. There's the rub.
Section 236(B) of the Domestic Relations Law defines "marital
property" as what is acquired "during the marriage" and before "the
commencement of a matrimonial action." [FN3] It provides that in determining
an equitable distribution, the court is to consider, among other things,
income and property at the time of the commencement of the action [FN4] and
loss of inheritance and pension rights, "upon dissolution of the marriage as
of the date of dissolution." [FN5]
The lack of statutory definition of the valuation date prior
to 1986, compelled the courts to fix valuation dates: the date of the
commencement of the husband's pre-equitable distribution action that was
joined for trial with the wife's equitable distribution action, despite the
husband withdrawing his action at the commencement of trial [FN6]; one month
prior to trial [FN7]; the time of trial, [FN8] and the date of the
commencement of the action. [FN9] The sole undisputed area seems to be with
regard to retirement benefits, which should be valued as of the date of the
commencement of the action. [FN10] This result is confusing because DRL s236
(B)(5)(d)(4) requires the court, in determining an equitable distribution, to
consider the loss of pension rights upon dissolution of the marriage as of the
date of the dissolution. [FN11]
Lawyers beware. One court has held the applicable date to be
the date contained in the defendant's affidavit of net worth because no
evidence was presented by either party as to the husband's assets when the
action was commenced. [FN12] In Ward v. Ward, [FN13] the court held that
because the wife was granted leave to discontinue her 1978 divorce action
without opposition, the proper valuation date was 1980, the date of second
commenced action for divorce. [FN14]
Economic Status at Time of Trial
In Roffman v. Roffman, [FN15] the court held that the
determination of the value of the marital property should reflect the economic
situation of the parties at the time of the trial. For that reason, the court
used the most "current available valuation" for each item of property. It
reasoned that if marital stock holdings decreased in value after the
commencement of a divorce proceeding, it would be unjustifiable to penalize
the party holding title by treating the former value as an available resource.
The court noted, however, that waste or dissipation of property would present
a different situation.
One court even held that the cut-off date for marital property
was the date that a previously dismissed action for divorce was commenced.
[FN16]
As the court may not make a physical distribution of marital
property without first determining the value of each marital asset, [FN17] it
is important to be prepared to present evidence of value at trial or for
purposes of settlement discussions, knowing which date to use. Notwithstanding
the importance of knowing which date is the appropriate date to use, the
Legislature originally left it to the discretion of the courts to choose the
appropriate valuation date. Naturally, this caused confusion.
In 1986, the Legislature attempted to remove some of the
guessing regarding valuation dates by amending DRL [FN18] to add Subdivision
4-b to DRL s236 (B). It provides:
As soon as practicable after a matrimonial action has
commenced, the court shall set the date or dates the parties shall use for the
valuation of each asset. The valuation of date or dates may be anytime from
the date of commencement of the action to the date of trial.
The language is intended to allow the court to set more than
one valuation date where necessary due to the nature of the assets. The
Assembly Memorandum in Support of the Legislation provides:
In addition, the Court is not precluded by this language from
requiring valuations of assets which were transferred, dissipated or
encumbered by a spouse attempting to hinder equitable distribution. Finally,
the Court is not constrained under this language from changing a valuation
date for good cause once it is set. [FN19]
While the amendment establishes the legislative intent that
the trial court, in the exercise of its discretion, fix the valuation date or
date for marital assets, the key words are "as soon as practicable."
Realistically, it is not practical to fix valuation dates early on in the
litigation. No simple mechanism has been established for doing so, nor is it
practical to do so until all of the marital assets have been identified and
the action is ready for trial. The only effective means is to move to fix the
valuation date or dates. In many cases the action will be delayed for years
awaiting a determination of an appeal from an order fixing valuation dates, as
an order fixing valuation date is automatically appealable. [FN20]
The 1986 amendment to DRL s236, Part 8, Subdivision [4] [b],
does alleviate some of the confusion because it establishes limitations that
require the court to fix the valuation date at or before trial, somewhere
between the date of the commencement of the matrimonial action and the date of
trial. The court may not fix the valuation date before the commencement of the
action [FN21] or after the date of trial. [FN22]
Active Passive Approach
Since 1986, courts have struggled with the problem of fixing
the appropriate valuation date under the facts and circumstances of each case
and have dealt with such matters on a case-by-case basis. Only pensions and
retirement benefits continue to be valued as of the date of commencement of
the action. [FN23] Recently, "general rules" have evolved, with courts
adopting an "active-passive" approach to the fixation of the valuation date.
In Wegman v. Wegman, [FN24] the Second Department held there
can be no strict rule mandating the use of a particular valuation date as the
trial court must have the discretion to select a date appropriate to the case
before it, in light of the particular circumstances presented. It adopted the
general rule that:
In many cases, valuation of marital assets as of a date as
close to the time of trial as practicable will result in an award which is
fair to both parties. As has heretofore been pointed out, there frequently may
be a substantial lapse of time between the date of commencement of the action
and the date of trial. For example, in the case before us, three and one half
years elapsed between the commencement of the action by Mrs. Wegman in July
1981 and the trial of the economic issues in March 1985. During a delay of
this kind, many assets, particularly business, such as that involved in the
case at bar, may experience fluctuations that might dramatically change the
logic of the distribution. Under such circumstances, the valuation of assets
close to the time of trial, may result in the formulation of an award
consistent with the purpose of equitable distribution and insure that each
spouse receives a fair share of the family assets accumulated while the
marital relationship endured. However, in other cases, circumstances may exist
which would justify the use of a valuation date closer to the time of the
commencement of the action. As we have already mentioned, a sharp increase in
the value of a marital asset due solely to the efforts of the other spouse
might be such a circumstance. Similarly, the dramatic reduction in value due
to disposition or wasteful conduct of the other spouse might justify the use
of a date earlier than the date of trial. These examples, of course, are not
exclusive.
In Siegel v. Siegel, [FN25] the same court held that the
husband's businesses should be valued as of the date of commencement, rather
than the date of trial, where the corporate debt was much larger at the date
of trial and this "might be more attributable to the Plaintiff's diversion of
equity from the corporation to himself, rather than to neutral economic
forces." It also held that the tangible real and personal property of the
parties should be valued at the time of trial because, as a general rule,
tangible assets such as real estate or art work, as opposed to intangible
property such as an interest in any business, are less susceptible to having
their apparent value manipulated by any party.
In Marcus v. Marcus, [FN26] the Second Department held that
using a date of trial valuation date for the majority of marital assets was
proper because most of the assets appreciated significantly during the
three-year hiatus between the commencement of the action and trial "as the
result of marital influences."
Rigid View
In contrast to the flexible approach of the Second Department,
the Third Department has taken a more rigid perspective, holding that "unless
doing so would be patently inequitable, valuation of marital property is
properly fixed at the commencement of the action." [FN27]
In Rosenstock v. Rosenstock, [FN28] the Third Department
concluded it was not patently inequitable to value the assets as of the date
of commencement of the action in February 1982. The financial issues were
tried in January 1985. The Supreme Court valued the non-business marital
property as of April 1983 and the business marital property as of December
1983. The Appellate Division held the valuation dates to be error, stating
that no persuasive argument was made why it would be patenty inequitable to
value the marital property as of the date the action was commenced.
Patelunas v. Patelunas [FN29] was an action commenced in
February 1981 and the financial issues tried in February 1987. The Third
Department held it to be error to value the marital home as of the date of
commencement of the action. Distinguishing its holding in Lord, [FN30] the
court reasoned that such a date is "patently inequitable" where six years
elapsed between commencement of the action and the trial and there had been
nearly a six-fold increase in the net value of this asset due to overall
market actively, not attributable to the husband's efforts. These special
circumstances extant, the court has the valuation should be as close to the
time of trial as possible. [FN31] Here the parties were divorced in 1981, and
the husband remained in the home, paid all expenses and collected all rents
from the income-producing apartments during that time.
In Ducharme v. Ducharme, [FN32] the wife brought the action in
1980. The husband brought a separate action in 1984. The Third Department held
that although it was error to classify marital property as of 1984, the error
was harmless because all of the assets that came into existence between 1980
and 1984 were traceable to a 1980 marital asset or an automatic accretion.
During this period the parties filed joint tax returns. Concluding it was not
error to value the assets at the time of trial, the court reasoned it would be
"inequitable" to value them as of 1980, where the husband kept all of the farm
profits during this period and the farm increased in value. It was under his
complete control during this period. In modifying, the court agreed with the
husband that the marital debts should also be valued as of the date that the
martial assets were evaluated.
The Fourth Department in Hutchings v. Hutchings, [FN33] held
that as a general rule, the value of the marital residence should be fixed as
of the time of trial. Here, two years passed since the date of commencement
and the trial court did not give any reasons for its selection of that date to
value the marital residence and Defendant's condominium. This was held to be
an abuse of discretion.
Workable Solution
The last pronouncement in this area is the decision of the
Appellate Division, First Department, in Greenwald v. Greenwald, [FN34] which
offers a workable and well-thought out solution to the problem, adopting an
"active- passive" approach. The appeal presented a challenge to the trial
court's distribution of marital assets on a 50-50 basis where the parties had
separated in 1980 seven years prior to the commencement of the action and
according to the husband, the parties marital assets increased in value during
that time by nearly $7 million, without contribution thereto, either direct or
indirect, by the wife. The parties were married 20 years prior to their
separation.
The parties worked in related fields -- he in media, she in
advertising. Even after the husband left the marital home, the parties
continued to maintain a close business and personal relationship. They spoke
regularly by telephone and frequently met for lunch or dinner, discussing
their respective careers and seeking each other's advice and guidance. In at
least one instance, at the husband's request, the wife interviewed a
prospective company employee; in another, she gave the husband a new
psychographic study for use by his company salesman.
Although not cohabitating, the relationship basically remained
unchanged since their separation in 1980. At the time of the parties'
separation, the son was 16 years of age, and the wife was a $125,000-per-year
executive. The son continued to live with the wife. On March 10, 1982, the
son, then 18, attempted suicide; the wife took him to a residential treatment
program in Houston. In November that year, she was terminated from her
executive position because of the time she was devoting to him. After his
return from Texas, the son resumed living with the wife. During this period,
the wife attended daily support meetings, accompanied the son on psychiatric
visits, engaged tutors for him and helped him with his studies. He lived with
her on and off until December 1986.
After a trial in 1989, the court awarded the wife 50 percent
of the marital property accumulated to the date of the commencement of the
action and half the shares of stock in a company Employee Stock Ownership Plan
Trust Fund (ESOP) account held by the husband or, in the event of termination
of the plan (as had happened), payment of half of the proceeds of the sale of
such shares. It evaluated the marital assets already in the wife's control at
$2,217,556 and those in the husband's control at $11,083,529 and, in addition,
directed the husband to pay her a distributive award of $4,432,986 and to
transfer $434,974 to her from his individual retirement accounts to effectuate
an equal distribution.
The court's decision was rendered five months after the
trial's conclusion. During this time the husband allegedly suffered a
substantial change in financial circumstances due to market conditions beyond
his control, which he claimed was incorporated into the judgment without
consideration of the attendant tax implications, resulting in a financial
windfall to the wife well in excess of 50 percent of the marital assets
awarded. The husband moved for renewal, reargument and reconsideration as well
as a reopening of the trial and modification of the decision so as to rectify
the situation. In addition to alleging reliance on stale valuation figures
from the trial notwithstanding a significant downturn in the securities market
that substantially reduced the value of certain of his assets, the husband
also claimed that the court evaluated his employee stock option plan as an
active asset while distributing it as a passive asset by imposition of a
Qualified Domestic Relations Order. The trial court denied the motion in its
entirety.
The husband argued on appeal that, for all practical purposes,
although the parties were married for 27 years, the marital partnership
terminated in May 1980 when, after 20 years of marriage, he left the marital
residence. The husband ignored the wife's significant post-separation
contributions to the marriage and her self-sacrifice in that regard. During
the seven-year span, as well as throughout the marriage, she was the primary
caretaker of the parties' son.
In its decision, the court adopted an "active-passive"
approach, valuing "active" assets at the date of commencement and "passive"
assets as of the date of trial.
With regard to the valuation of the shares of the ESOP, the
Appellate Court said:
As to the valuation of the shares, courts have consistently
recognized that assets such as undeveloped real estate or mutual funds, which
appreciate in value strictly as a result of random market fluctuations or the
efforts of others, constitute passive assets, while assets that appreciate due
to the efforts of the titled spouse are active. (See, Price v. Price, 113 AD2d
299, 307-308, affd. 69 NY2d 8, 18; Jolis v. Jolis, 98 AD2d 692; Nolan v.
Nolan, 107 AD2d 190). Passive assets should generally be valued as of the
trial date so as to prevent a windfall to the titled spouse if the asset has
increased in value; active assets should generally be valued as of the
commencement date of the action in order to benefit the titled spouse, since
any appreciation in value is the product of that spouse's labors. (See, Wegman
v. Wegman, 123 AD2d 220, 234, 236).
The court agreed that the ESOP was an active asset that should
be valued as of the date of commencement and modified the judgment
accordingly. It also held that a stock brokerage account was an "active" asset
to be valued at commencement and a limited partnership interest was a
"passive" asset to be valued at trial.
With regard to stock brokerage accounts, the court noted:
Any increase or decrease in value was due to the husband's
investment strategy and decisions, not mere market conditions. In that regard,
however, we are of the view that for purposes of determining whether an asset
is active or passive, it is of no significance that the financial decisions
were made exclusively by the titled spouse's financial advisor. Though he/she
acts through an agent, the decisions are still those of the titled spouse and
the results, be they beneficial or adverse, are the product of his/her labors,
not random market fluctuations.
Insofar as an investment in a limited partnership was
concerned:
The trial court properly found this asset to be passive in
nature since the husband's interest was that of a limited partner, who had no
voice in partnership's investments or trades. While a general partner may have
a fiduciary duty to a limited partner, the former is to the latter's agent.
Thus, any appreciation in value was purely passive.
The Appellate Division rejected the husband's contention that
the trial court conveniently failed to consider the tax consequences of its
distributive award, because he "failed to offer any evidence on this issue."
It distinguished its holding in Teitler v. Teitler, [FN35] where both parties
submitted post-trial briefs on the subject and the record made it clear that a
substantial tax liability would accrue upon the sale of a townhouse valued at
$1 million.
It also rejected the husband's argument that the trial should
have been reopened because certain assets declined in value by a total of $1.9
million during the 10-month period after the trial. It stated that, however
unfortunate, this is an irrelevant circumstance, as DRL s236(B) (4) (b)
provides that "[t]he valuation date or dates may be anytime from the date of
commencement of the action to the date of the trial." Thus, post-trial changes
in value may not be considered.
FNa Dr. Doris Jonas Freed is of counsel to the law firm of
Brandes, Weidman & Spatz P.C. in Manhattan. Joel R. Brandes and Carole L.
Weidman are partners in the firm, which maintains law offices in New York City
and Garden City, N.Y. Dr. Freed and Mr. Brandes are fellows of the American
Academy of Matrimonial Lawyers and are co-authors with the late Henry H.
Foster of Law and the Family, New York (Lawyers Co-operative Publishing Co.,
Rochester, N.Y.) Ms. Weidman is a co-author with Dr. Freed and Mr. Brandes, of
the annual supplements to Law and the Family, New York.
FN1 See New York Domestic Relations Law s236 (B)(1)(c).
FN2 See D'Amato v. D'Amato (2d Dept.), 96 AD2d 849,466 NYS2d
23.
FN3 DRL s236 (B)(1)(c).
FN4 DRL s236 (B)(5)(d)(1).
FN5 DRL s236 (B)(5)(d)(4).
FN6 See Muller v. Muller, 116 Misc2d 660, 456 NYS2d 918.
FN7 See Kobylack v. Kobylack, 110 Misc2d 402, 442 NYS2d 392,
mod (2d Dept.) 96 AD2d 831,465 NYS2d 581, revd 62 NY2d 399, 477 NYS2d 109, 465
NE2d 829, on remand (2d Dept.) 111 AD2d 221, 489 NYS2d 257.
FN8 See Stein v. Stein, 192 NYLJ, Aug. 19, 1984, at 12, col. 3
(Sup. Ct. Suffolk Co.) (valuing husband's business at time of trial); Barton
v. Barton, 187 NYLJ, May 20, 1982, at 10, col. 6 (Sup. Ct., NY Co.) (setting
present value of the marital residence at the time of trial).
FN9 See Bentley v. Knight (3d Dept.), 92 AD2d 638, 459 NYS2d
935.
FN10 See Majauskas v. Majauskas, 61 NY2d 481, 474 NYS2d 699;
Damiano v. Damiano (2d Dept.), 94 AD2d 132, 463 NYS2d 477; Bentley v. Knight
(3d Dept.), 92 AD2d 638, 459 NYS2d 935; Largiader v. Largiader, __ AD2d __,
542 NYS2d 789; Thomas v. Thomas, 145 AD2d 477, 535 NYS2d 736.
FN11 See DRL s236 (B)(5)(d)(4).
FN12 See Weinstock v. Weinstock, 190 NYLJ, Dec. 15, 1983, at
13, col. 4 (Sup. Ct., Queens Co).
FN13 Ward v. Ward (3d Dept.), 94 AD2d 908, 463 NYS2d 634.
FN14 See Ibid., at 909, 463 NYS2d at 636.
FN15 Roffman v. Roffman, 124 Misc2d 636, 476 NYS2d 713.
FN16 See Seldon v. Seldon, 191 NYLJ, June 21, 1984, at 11, col
2 (Sup. Ct., NY Co.).
FN17 Rodgers v. Rodgers (2d Dept.), 98 AD2d 386, 470 NYS2d
401; Capasso v. Capasso, 119 AD2d 268, 506 NYS2d 686; Damato v. Damato (2d
Dept.), 96 AD2d 849, 466 NYS2d 23.
FN18 Laws 1986, Ch 884, s2.
FN19 See New York Assembly Memorandum in Support of
Legislation.
FN20 See CPLR s5701(a). It has been held that an order denying
a motion to fix valuation dates is not appealable because a party is not
aggrieved by such an order as it effects no substantial right. Eizien v.
Eizien, 149 AD2d 783, __ NYS2d __. See also Sanford v. Sanford, __ AD2d __ 536
NYS2d 530 (2d Dept., 1989) affirmed order fixing valuation date of properties
as of date of commencement.
FN21 Weinroth v. Weinroth, 146 Misc2d 98, 549 NYS2d 576,
Greenwald v. Greenwald __ AD2d __, 565 NYS2d 494, (1st Dept., 1991).
FN22 Siegel v. Siegel, 132 AD2d 247, 523 NYS2d 517 (2d Dept.,
1988).
FN23 Cohen v. Cohen __ AD2d __, 547 NYS2d 85 (2d Dept., 1989)
held that it was improper to value a pension as of the date of trial. It
should be the date of commencement. See also Glassberg v. Glassberg, __ AD2d
__, 556 NYS2d 772 (2d Dept., 1990).
FN24 123 AD2d 220, 507 NYS2d 342, motion gr. amd __ AD2d __,
512 NYS2d 410.
FN25 __ AD2d __, 523 NYS2d 517 (2d Dept., 1987).
FN26 135 AD2d 261, 137 AD2d 131, 525 NYS2d 238 (2d Dept.,
1988).
FN27 Lord v. Lord, 124 AD2d 930, 508 NYS2d 676 (3d Dept.,
1986) [error to value Mercedes at time of trial]; Reina v. Reina __ AD2d __,
544 NYS2d 895 (3d Dept., 1989).
FN28 __ AD2d __, 531 NYS2d 133 (3d Dept., 1988).
FN29 __ AD2d __, 527 NYS2d 325 (3d Dept., 1988).
FN30 124 AD2d 930, 508 NYS2d 676.
FN31 Citing Wegman v. Wegman, 123 AD2d 220, 507 NYS2d 342,
motion gr. and __ AD2d __, 512 NYS2d 410.
FN32 __ AD2d __, 535 NYS2d 474 (3d Dept., 1988).
FN33 __ AD2d __, 547 NYS2d 970 (4th Dept., 1989).
FN34 __ AD2d __, 565 NYS2d 494 (1st Dept., 1991).
FN35 156 AD2d 314, app dismd. 75 NY2d 963.
4/23/91 NYLJ 3, (col. 1)
END OF DOCUMENT
