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Valuing Business at Liquidation Value
© 2003 National Legal Research Group, Inc.
NORTH DAKOTA: Sommers v. Sommers, 660 N.W.2d 586 (N.D. 2003).
The trial court erred as a matter of law by valuing an orthodontic practice at its liquidation value.
The wife appealed the trial court's evaluation of the husband's orthodontic practice. The trial court rejected the wife's $800,000 going-concern valuation and accepted instead the husband's $168,000 liquidation valuation. The North Dakota Supreme Court found the valuation of the husband's professional practice to be improper, thereby rendering the property distribution clearly erroneous.
While the state supreme court acknowledged that a trial court's valuation of property is a finding of fact that is presumptively correct, it also noted that in valuing a professional corporation a trial court must include at a minimum the interests in office furniture, fixtures, and accounts receivable, as well as the goodwill of the business. Moreover, it recognized that while liquidation value, rather than fair market value, may be appropriate under certain circumstances involving distressed conditions, liquidation value is the least-favored method of valuing any type of marital property in a divorce. Ordinarily, fair market value, which is the price a buyer is willing to pay and the seller is willing to accept under circumstances that do not amount to coercion, is the proper method of valuation. The court further recognized that, in valuing a company that is not going to be liquidated, expenses that would only be incurred if the assets were liquidated should not be deducted and that potential taxes should be considered in valuing marital assets in only limited circumstances, and theoretical tax liabilities that are not going to be incurred because there is not going to be a liquidation should not be deducted.
Looking to the record, the state supreme court cited to testimony by the husband whereby he indicated that he enjoyed his work and would continue until he could not do it anymore, although not at the same schedule. Because the husband was not contemplating liquidating his orthodontic practice anytime soon, the trial court's valuation of that practice, a marital asset, at its liquidation value was clearly erroneous. The court remanded for a redetermination of the property distribution based upon a valuation of the husband's professional practice at its fair market value.
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