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Business Valuation - Intangible Assets, Goodwill and Accounts Receivable
© 2004 National Legal Research Group, Inc.
OHIO: Jacobs v. Jacobs, 2003 Ohio 3466, 2003 WL 21500026 (Ct. App. 2003).
The trial court erred by failing to include in the value of a business non-goodwill intangible assets such as temporary investments and retained earnings. It also erred by applying a discount for bad debts twice to accounts receivable due within 120 days. The trial court did not err by refusing to find that the husband was guilty of dissipation, where his stock market losses resulted from poor investment decisions made in good faith and not from any desire to harm the wife. The trial court did not err in holding that a transfer of a car to the wife was intended as a gift, even though the husband asked the wife if she was having an affair before making the gift, and the wife untruthfully answered "no."
The parties were granted a divorce, and a distribution of marital assets was made. Both parties appealed. The wife complained of the trial court's error in valuing the husband's interest in his medical practice as well as its failure to consider the husband's misconduct in the dissipation of marital assets. The husband argued that the court below had erred in the classification of a motor vehicle, which was titled jointly in the names of the parties, as separate property. He also challenged the trial court's allocation of the couple's residence to the wife as marital property, arguing that a portion of that asset was his separate property.
As to the alleged error in the valuation of the husband's interest in his medical practice, the appellate court agreed with the wife's contentions. The trial court looked only to the husband's portion of the outstanding accounts receivable to fix a value on his share. Even if the practice had no tangible physical assets of worth, as the court below concluded, it did have other intangible assets, such as temporary investments, prepaid taxes, and equity in the form of retained earnings. Moreover, the method actually used to calculate the husband's portion of the accounts receivable was faulty. The lower court reduced the total amount due in current accounts receivable by applying a "historic collection rate." While such a factor in and of itself was not erroneous, this methodology in the current case constituted "double-dipping" in that it applied the rate against accounts within the first 120 days and then again to total accounts due and owing. This was an improper valuation method.
The wife's second ground for error was the trial court's failure to find that the husband perpetrated financial misconduct. It is true, stated the court, that if a spouse engages in financial misconduct, including the dissipation, destruction, concealment, or fraudulent disposition of assets, a court may compensate the offended spouse with a greater award of marital assets. See Ohio Rev. Code Ann. 3105.171(E)(3). The wife's first claim in this regard was that the husband lost hundreds of thousands of dollars in erratic stock tradings and poor investments. The appeals court was not persuaded that the husband's conduct here amounted to financial misconduct. It held that the statute should apply only if the spouse engaged in some type of wrongdoing. There must be a clear showing that the offending spouse either profited from the alleged misconduct or intentionally defeated the other spouse's distribution of assets. Investing, even poor investing, is neither wrongdoing nor financial misconduct, and the court would not construe the statute so broadly so as to include investment mistakes. While the husband could have been labeled an aggressive investor and there was proof that he lost money in some of his investments, there was no evidence that the investment losses were purposely incurred. There was, added the court, every indication that the husband suffered losses equal to the wife's. The court's conclusion was further buttressed by the fact that not all of the husband's "risky" investments lost money. It also noted that the wife never complained when in the past the husband's investments made substantial profits. The wife's second claim was that the husband failed to keep adequate records as to the whereabouts of assets and that this failure was evidence of financial misconduct. The appellate court also rejected this contention. While it acknowledged that the husband was not the most accurate recordkeeper, it did not follow that he was guilty of financial misconduct. The parties had considerable financial assets which were held in a variety of accounts. The burden of proving financial misconduct was on the complaining spouse. The trial court apparently concluded that the wife had failed to meet that burden. There was no error in that determination below, and certainly no abuse of discretion, which is the standard employed in reviewing a decision with regard to financial misconduct.
As to the husband's appeal, his first allegation of error related to the trial court's classification of an automobile as the wife's separate property. The vehicle was purchased for approximately $84,000. Both parties' names appeared on the purchase invoice and the title. The wife argued, nevertheless, that the car was a gift from the husband and should be treated as her separate property. The trial court, after considering conflicting evidence, determined that a gift had been made and awarded the automobile to the wife as her separate property. The appellate court rejected the argument of the husband that the joint titling of the vehicle was determinative of its status as marital property. While joint ownership is some evidence as to whether a gift was intended or not, title is not dispositive. The court also rejected the husband's argument that because the wife was having an affair at the time that the "gift" of the vehicle was made no gift occurred because fidelity was an implied condition for any gift made during the marriage. The court found no basis in the law for this novel contention. Although it found it to be a closer question, the court also denied the husband's assertion that the gift of the vehicle could be vitiated on account of fraud because of the wife's infidelity. While acknowledging that a completed inter vivos gift may be revoked if shown to have been fraudulently induced, the court held that not all of the elements of a fraud claim had been established. Even admitting the wife's lack of fidelity and the wife's misrepresentation with regard thereto and the husband's injury, evidence as to the wife's intent and the husband's reliance upon her misrepresentation was less than certain. The husband failed to meet his burden of proving fraud by clear and convincing evidence.
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