How COVID-19 is Affecting Divorce Assets — And What Can Be Done About It
Coronavirus is impacting every aspect of our lives and in ways that require more than just social distancing and “washing your hands.” This pandemic has had a disastrous effect on our economy, unemployment rate, financial markets, and real estate values.
When it comes to divorce and the equitable distribution of marital assets, the valuation of such assets are key factors in the fair resolution of the case, whether by a trial or negotiated settlement. If your pending divorce involves the valuation of business interests or related assets that were or are being appraised as of a date prior to COVID-19, a potential for injustice or inequity may exist as a result of the post-valuation impact of this pandemic. Here’s how:
Valuation Dates & Subsequent Events
Many divorce cases involve the valuation of business interests that were acquired or have appreciated during the marriage. These business interests include all types of family businesses, professional practices/services, real estate holding companies, as well as their assets—tangible and intangible. These types of assets must be valued and distributed in a divorce. In order to do so, the valuation expert must be instructed by the court and/or the parties’ attorneys as to the specific date to be used for the particular valuation. This is known as the “valuation date.”
In a New York divorce case, the valuation date must be on or between the date of the commencement of the divorce action and the date of the trial. Usually, business and other such assets that are actively operated/managed by a spouse are valued as of the date of commencement. Passive assets or those assets that fluctuate in value primarily due to market conditions are valued as of the date of the trial.
Valuation professionals are bound to value business interests and other assets as of the valuation date, and they should consider only circumstances existing at the time of the valuation date and events occurring up to the valuation date.
Obviously, an event that could affect the value of a business or business interest may occur subsequent to the valuation date; such an occurrence is referred to as a “subsequent event.” Subsequent events are indicative of conditions that were not known or knowable at the valuation date, including conditions that arose subsequent to the valuation date. The valuation would not ordinarily be updated to reflect those subsequent events or conditions. Moreover, the valuation report would typically not include a discussion of those events or conditions because valuation is performed at a certain point in time—the valuation date—and the events occurring subsequent to that date are not relevant to the value determined as of that date.
Four Ways COVID-19 Has Affected Valuation of Business Interests
Some examples of the ways in which COVID-19 has had an impact on the valuation of these assets include the following:
- Actual and expected revenues and earnings may have decreased due to forced COVID-19-related closures or decreases in customer/client demand;
- Significant increase in sales may result for businesses benefitting from the pandemic and uncertainties regarding future stability;
- Uncertainties exist as to if and when a particular business can be expected to restaff, reopen, and attain pre-COVID-19 levels. Additionally, with respect to a business valuation expert’s reliance on historical earnings data and historical market transactions (during periods of stable growth economies) as a predictor of future earnings and growth in the post-Covid 19 climate;
- Questions regarding the amount of money and working capital required to facilitate the re-growth of the business due to problems in supply chains, an increase in interest-bearing debt, employee costs, and other continuing expenses.
How to Avoid Injustice With These Types of Valuations
Divorce courts are courts of equity, meaning they are charged with the obligation and responsibility to do what is fair and right. Likewise, the distribution of marital assets between spouses in a divorce is called “equitable distribution.” If an asset that has been valued prior to the time that this pandemic became known or knowable (as discussed above) greatly decreased in value because of this event, the COVID-19 pandemic, equity would not be served if a court was to make a distributive award based upon that value.
This is especially so when such an award is beyond the owner-spouse’s ability to pay. Accordingly, it is of utmost importance that the court is made aware of the gravity of the situation in any particular case so that it can decide whether or not to direct the expert to prepare either an updated valuation using a different date or a second, separate valuation based upon a later date in order to afford it and/or counsel the opportunity of having and considering the impact of this pandemic upon the asset distribution in a given case.
In doing so, one might first look to see if there is any mention of the subsequent event(s) in the valuation expert’s report or ask the expert to include such a reference if it has not been included. In these situations, the valuation expert may exercise the option, which is not a requirement, to disclose a subsequent event in a valuation report; however, ethical and procedural rules make it clear that the valuation expert must indicate that the disclosure of the subsequent event is presented for informational purposes only and that it does not affect the analyst’s determination of value as of the valuation date.
To the extent that the analyst decides to disclose a subsequent event, these rules state that the disclosure should be made in a section of the valuation report that is separate from the valuation analysis and conclusion.
The purpose of discussing a subsequent event is to provide meaningful information to counsel and the court as of the valuation date. The description of the subsequent event may confirm the information or conditions that were known or knowable as of the valuation date. Or, the description of the subsequent event may inform the intended user that information or conditions have changed between the valuation date and the date of issuance on the valuation report. Such a change in conditions may inform the intended user that the analyst’s determination of value as of the valuation date may no longer be applicable by the date of issuance on the valuation report or later.
However, the expert cannot disclose what their valuation would have been if the data upon which the valuation was changed due to this subsequent event. In other words, the valuation would not be updated to reflect any change in value from the valuation date as a result of the subsequent event or condition. The valuation analyst should not disclose or discuss the impact that subsequent events would have on any aspect of your valuation report or conclusion of value because the impact was not known or knowable as of the previously selected valuation date.
If the valuation expert does this, it can certainly facilitate a stipulation between counsel or the success of a contested application or motion to the court for an order which mandates the expert to update or provide a separate report with a valuation date that may be fair to the parties in the particular date.
Of course, if the valuation expert is unwilling or unable to discuss such a change of circumstances and opposing counsel refuses an acceptable stipulation, court intervention in the form of motion practice must be considered.
These are unique times with emerging issues for those going through a divorce. It is of the utmost importance that they explore new and alternative solutions to ensure that the distribution of their marital assets is fair and just.
Please stay safe and healthy during this difficult time.
James J. Nolletti, Esq.
Founder, Nolletti Law Group
Fellow, American Academy of Matrimonial Lawyers
Fellow, International Academy of Family Lawyers