PA Superior Court Addresses Valuation of Real Estate Partnership in Divorce

The valuation of marital assets can be one of the most contentious and litigated issues in a divorce. This is particularly true when one spouse owns a business. In such a case, experts are often hired by the parties to provide an opinion as to the value of the business. Not surprisingly, the opinions of the experts can be very different.

In the recently reported decision of Brubaker v. Brubaker, the Pennsylvania Superior Court addressed valuation issues surrounding a spouse’s interest in a real estate partnership.

The husband in Brubaker obtained an option to purchase farm property during the marriage. He, along with two partners, made the purchase and at the time of the equitable distribution hearing, the land was under development and known as the VERDE project. During the marriage, the husband contributed over $515,000 of marital funds for his capital contribution to the project. At the time of the parties’ separation, site preparation and construction was just underway. 

The husband was the day-to-day manager of the VERDE project and was paid a net monthly income of over $8,000. Upon completion of the project, the former farm property was to hold a six-building apartment complex worth over $19 million in which the husband would hold a one-third interest.   

The parties’ experts agreed during the equitable distribution hearing that the VERDE project’s debts exceeded the present value of the development. Further, the project was unlikely to have positive cash flow until the completion of the fourth (of six) buildings. The husband argued that the value of VERDE was $0. The equitable distribution master (affirmed by the trial judge) determined that the marital value of the husband’s interest in the real estate partnership was $515,000, or his original capital contribution.   

The husband appealed the trial court’s decision since the project’s debts exceeded the present value of the development. The Superior Court affirmed the trial court. Specifically, the Superior Court found that the trial court acted within its discretion in relying on the value of the husband’s initial contribution to the project as agreed upon among the husband and his partners. The wife thereby received compensation for her contributions during the early, pre-separation phase of the VERDE project, but the husband will still reap the benefits of the project if, through his post-separation efforts, the project reaches its anticipated value and revenue stream.

The Superior Court held that since the project was conceptualized and created by the husband during the marriage, marital funds were used to acquire the option to purchase the property. The wife supported the husband in the endeavor and suffered a reduced standard of living (and incurred marital credit card debt to meet their basic needs), it would not be equitable to value the project at $0.  The husband stands to gain an interest valued possibly in excess of $1 million as well as a substantial income stream. In other words, the only reason the husband was in any position to make a significant amount of money is that he, in effect, sold marital assets to buy into the limited partnership.

The effect of Brubaker is that the husband had to pay the wife for her share of an asset that everyone seemed to agree had no value at present. Sometimes in cases like this, a court will require the non-business owner spouse to receive her share of the business if and when there is a value to the asset in the future. This seems to be a more logical and equitable solution.

Every divorce and every business is different. Valuation of business interests is a common component of high net worth divorces in Pennsylvania. Choosing the right attorney to understand and potentially litigate these issues is crucial. The attorneys at Shemtob Draganosky Taylor Stein, PC are well versed in business valuation issues and handle these matters regularly.