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Lucchesi v. Lucchesi - 2019 - Value of Business at Date of Marriage, Separate Property & Asset Valuation Methods

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JILL SMOTHERS LUCCHESI v. EUGENE ANTHONY LUCCHESI
Appeal from the Circuit Court for Shelby County
No. CT-004818-13 Gina C. Higgins, Judge
IN THE COURT OF APPEALS OF TENNESSEE AT JACKSON
November 13, 2018 Session
No. W2017-01864-COA-R3-CV
Filed 01/23/2019

Robert Vance testified as a forensic CPA and business valuation analyst in this bench trial.

The Lucchesi case was a forensic accountant’s dream engagement in that it brought to bear all of the skills of a forensic CPA and business valuation analyst. My firm, Forensic & Valuation Services, PLC valued a business at date of marriage in 1994 for a divorce occurring in 2016, traced funds in and out of many financial accounts and found $950,000 in undisclosed assets that the trial court ruled as marital and divided, opined on Husband’s “Failure to Preserve the Marital Estate”, figured Husband’s true income for support purposes versus that claimed in discovery and on draft tax returns, opined on his “underemployment”, valued numerous pieces of real estate from assessor records after Husband would not give a value, showed that Husband spent much more money during the pendency of the divorce versus what he claimed were his monthly expenses and testified at a combative deposition and trial.

After nearly three years of contentious litigation, trial was held over nine days in August and September of 2016. Numerous witnesses testified, including Wife’s expert witness, Rob Vance. The trial court entered a 49 page order on August 15, 2017 and classified the parties’ property as separate or marital, then valued and divided the marital assets and debts. The court awarded Wife around $1,662,438 in mostly liquid assets and Husband around $2,896,272 in a mixture of liquid assets and real property. The division for Husband also included a reduction of Wife’s share of the assets by $75,000 that was considered to be his separate property as a credit for the value of his shares at the date of marriage in Delta Wholesale Liquors (“Delta”), a family-owned liquor distributorship in Memphis started by his father. The court also awarded Wife alimony in solido in the amount of $200,000.

Husband appealed, stating the following issues for review:

1. The trial court erred in classifying all the appreciation in the value of Delta as marital property; and,

2. The trial court abused its discretion in its ruling on countless evidentiary issues where said rulings affected the outcome of the trial. Husband’s arguments on appeal were focused on one evidentiary ruling that admitted a report prepared by Vance whereas he sought to exclude three pages of that report which included the values of assets and debts (a.k.a., the marital balance sheet). Husband claimed that Vance was not qualified to give opinions of value for many of assets listed.

Wife stated the following additional issues for review:

1. Did the trial court err by awarding Wife an insufficient amount of alimony in solido?

2. Should Husband be required to pay Wife’s attorney fees and suit expenses on appeal?

Jill Lucchesi (“Wife”) and Eugene Lucchesi (“Husband”) were married in December 1994 in Shelby County. During the marriage, Husband was the operations manager and secretary/treasurer of Delta. In addition to working at Delta, Husband bought, managed, and sold assets, investments, and businesses and described himself as a “venture capitalist” that was good at running businesses.

The appellate court stated: “Germane to the resolution of the issues in the appeal, the trial court made the following adverse credibility determination in its ruling:

  • The court found that Husband and some of his witnesses lack credibility.
  • The court found that Husband was evasive and less than truthful under oath on multiple occasions including, but not limited to, providing false answers in his Answer to Interrogatories filed with the court, testifying untruthfully during the trial in this cause, and responding untruthfully in responsive pleadings filed with the court.
  • Husband’s antics throughout the trial caused the court to also question Husband’s veracity. Husband frequently had vocal outbursts and made hand gestures to witnesses, including Wife during her testimony. The court and counsel for Husband frequently admonished Husband that his behavior was unacceptable in the courtroom, causing the court on one occasion to require Husband to step into the hallway for a timeout of approximately fifteen (15) minutes. Additionally, at one point during Wife’s testimony, the court ordered Husband to remove himself from the line of sight of Wife as she testified, required him to sit by the court’s clerk for a period of approximately one (1) hour.”

Classification of the Appreciation in Value of Husband’s Shares of Delta as Marital Property

The central issue was the trial court’s classification of the appreciation in value of Husband’s shares of Delta as marital property. It is undisputed that at the time of the marriage: a) Husband and three other siblings each owned 103.25 shares, one brother owned 309.75 shares and an aunt owned 186.00 shares for a total of 1,012.00 shares; b) Husband and his two brothers bought out three of the four remaining shareholders in 1996 and each of these siblings owned 103.25 shares just as did Husband; c) the aunt sold her 186.00 shares in 1997 for $860.22 per share, or $160,000.

What was not disclosed in great detail in the appellate decision was how we came about valuing Husband’s interest at the date of marriage at $75,000. The Lucchesis were married late in 1994 and seven family members owned 100% of stock in Delta at that date. Husband and three other siblings each owned 103.25 shares, one brother owned 309.75 shares and an aunt owned 186.00 shares for a total of 1,012.00 shares. The company was struggling and had cash flow problems, so three of the siblings sold their respective 103.25 shares for $726.39 per share, or $75,000, for each in 1996 under a Stock Purchase Agreement which required the company to repurchase the shares. The entire company would have been worth approximately $735,000 using the $726.39 price per share times 1,012.00 shares. After the aunt sold her 186.00 shares in 1997, Husband and two brothers emerged as equal one-third owners with 103.25 shares each. How the one brother that owned 307.75 shares ended up with only 103.25 shares was never explained. The 1996 sales was the closest arm’s length “actual transaction“ to the 1994 date of marriage; therefore, we used $75,000 as Husband’s value.

Husband and his two brothers sold the entire company in February 2012 to Kahn Ventures, Inc. for $11,500,000. Husband’s one-third netted out to be $3,699,984. The court concluded that the $3,624,984 increase in value ($3,699,984 less $75,000) of Husband’s shares of Delta during the marriage was marital property, subject to equitable division. The ruling was of course important in that all of the real estate and financial investments made by Husband with the proceeds after the sale in 2012 retained the separate to marital ratios of 98% marital and 2% separate. The trial court gave Husband a $75,000 “Adjustment” or credit for the value of Delta at date of marriage, which is the method we suggested, rather than allocate a 98%-2% ratio to each asset.

Also undisputed was the fact that Husband worked at Delta during the marriage; however, he insisted that the increase in value of the stock during the marriage was not due to any contribution or actions on his part, but rather by market forces. He contends that he was not actively involved in Delta and “did not fulfill his role at Delta because he was too busy working his deals and running his other business ventures,” and therefore, the increase in value was not marital property. The record showed that Husband held the title of Senior Vice President and Chief Operating Officer, handled communications with the buyers and brands, and handled the negotiations for the sale of the business in 2012. He was a member of the executive management team and testified that he and his brothers ran Delta and worked hard to build on the success of their father. The trial court ruled that it was clear that both Husband and Wife substantially contributed to the preservation and appreciation of Husband’s interest in Delta during the marriage through the date it was sold.

At trial, Husband’s expert valuation analyst opined with a Calculation Engagement that the range of values of the company in 1994 was somewhere between $4.7m to $1.7m. The expert applied the February 2012 Kahn Ventures, Inc. transaction multiples of Price to Revenues, Price to Gross Profit and Price to EBITDA to the similar figures in the 1994 financial statements. He stated under cross examination on the witness stand that he had never applied current multiples to 18-year-old financials before the Lucchesi engagement. The expert also admitted on the stand that an “actual transaction” executed at arm’s length is a good indicator of value and the 1996 sale of shares of $75,000 each between the three siblings was an “actual transaction”.

The $75,000 value at date of marriage was fairly well established after Husband’s expert’s testimony and the trial court made that ruling and added: “Moreover, notwithstanding the familial relationships between the siblings, this court finds it incredible that the siblings would agree to accept $75,000 for shares that would realistically have been worth close to $500,000 based upon [opposing expert’s] calculations.” The appellate court held that the trial court did not err in holding that the increase in value of Husband’s shares in Delta was marital property subject to equitable division.

Using Appraisals Made by the County Tax Assessor as Current Values for Real Estate

Husband contends that the court erred in its valuation of several marital assets, specifically several pieces of real estate located in Shelby, Cheatham and Hardin counties. The court adopted the opinion of Wife’s expert, Rob Vance, as to the value of the real estate, which were based on the appraisals made by the respective county tax assessors. Husband contended that the court erred in adopting these values because Vance “was not qualified in the field of real estate appraisals.” The use of a tax appraisal to value a property has been held to be competent evidence of value of real property. See Hancock v. Hancock, No. E1999-01003-COAR3-CV, 2000 WL 224366, at *3 (Tenn. Ct. App. Feb. 28, 2000).

At trial and on appeal Husband contends that Vance was not competent to testify as to the value of real estate because such testimony was outside his area of expertise. The court overruled the objection, holding that Husband would be able to cross-examine Mr. Vance on those matters, which his counsel proceeded to do. Counsel did not dispute Mr. Vance’s qualifications as an expert and the court accepted him as such. The appellate court no error in Vance’s utilization of the tax appraisals as the basis of his opinions of value and no error in the court’s adoption of those values for the real property.

The appellate court stated: “The testimony of Mr. Vance cited by Husband in his brief does not reveal a lack of trustworthiness in the underlying tax appraisals, such that we could conclude that the trial court abused its discretion in admitting Mr. Vance’s opinion of value; rather, in the testimony, Mr. Vance merely identifies the source and content of the particular records upon which he based his opinions.” Husband offered no written proof such as an appraisal by a private real estate appraiser, only his personal opinions of value based upon condition of the property and current market conditions.

Husband Offered No Explanations or Proof on Many Marital Assets and Debts

On many occasions thought the pendency of the case and before trial, Vance and his staff posed many questions to Husband, sent multiple document deficiency lists and authored deposition questions through Wife’s counsel so as to establish the value or even the very existence of assets found in Husband’s records. Husband offered only “Draft” tax returns during discovery for 2012-2014. The returns were unfiled and unsigned by the filer. His reason for not finalizing the returns is allegedly due to his accountant passing away prior to the due date of the 2012 return; however, he never explained why he did not hire another accountant to finalize the returns. The draft returns did not claim numerous sources of income we found in our investigation. We attempted to reconstruct Husband’s income for support purposes based upon the information provided and requested clarification on many unidentified and random deposits and disbursements in his bank accounts. He was questioned about the transactions during his deposition but he did not recall most of it and was mostly unresponsive. The trial court ultimately divided nearly $950,000 of marital assets we found that were not disclosed by Husband. A few of the assets noted in the appeal:

Real Estate on Forest Hill Road

The trial court valued this property at $816,600 based upon Vance’s value derived from the tax assessor. Husband contested the valuation and claimed the property was worth $465,000 due to it being in “extremely poor condition.” Husband also argues that the court erred in not taking into consideration a second mortgage of $200,000 he had purportedly taken out on the property. Husband introduced a $200,000 promissory note and deed of trust, both of which were executed in August 2010. The deed of trust does not show that it was recorded but states that the balance was due and payable on August 17, 2014. Husband testified that he never made any payments on the note even though it called for payments of interest until maturity. The appellate court stated: “Given the adverse credibility finding the court made with respect to Husband and his failure to introduce proof that the indebtedness still existed when he testified in 2016, we find no error in the court’s disregard of Husband’s testimony about this alleged mortgage” and also found no error in the asset value.

Real Estate owned by Atled Investments, LLC

Husband and his two brothers each own one-third of Atled Investments, LLC, which owned two condominiums on Quince Road and a cabin near Pickwick Lake. Vance et al. found evidence of a third, “Unnamed Condominium” owned by Atled that had been depreciated and deducted on the tax return of the LLC for many years but had not been disclosed by Husband. The trial court valued the two Quince Road condominiums $67,500 and $52,500 based upon Vance’s value derived from the tax assessor. The appellate court found no error in the valuation of these properties.

The trial court also adopted Vance’s valuation of the Unnamed Condominium at $60,000 based upon an average of the current values of the other two condominiums since the three addresses were within the same complex. The trial court stated: “Husband submits that the unnamed condominium no longer exists and has been sold . . . [but that] Husband introduced no proof evidencing the sale. . . ”; after acknowledging the information on the tax returns, the court held that “[t]his property no longer exists and the likelihood [is] that the listing was an error.” Despite the belief of non-existence, the court included the condominium in its division of marital property. The appellate court remanded the issue for the trial court to determine whether the condominium existed on the date of trial and, if so, to set a value and make such adjustments to the overall division of property if necessary.

Royalties from a Patent

Husband owned an interest in royalties generated from a patent, which the trial court valued at $61,250. W.M. Barr is a manufacturer which holds the rights to manufacture products protected the patent. W.M. Barr offered Husband $175,000 in 2016 to extinguish and transfer his royalty rights but he and his partner rejected the offer. Vance valued the asset at $61,250 based 35% of the $175,000 offer. The 35% was derived from Husband’ tax return wherein he indicated that he distributed 65% of the royalties to “somebody else.”

Husband did not testify or offer any other proof as to his opinion of value other than in his brief which contains a “Marital Balance Sheet,” that listed the value at $0. The appellate court stated that Vance’s opinion is supported by the evidence in the record, and found no error in the valuation.

Investment in CGN Energy, LLC

Husband invested $150,000 in CGN Energy during the pendency of the divorce and did not disclose it in discovery. Vance found evidence of this investment while scouring cancelled checks and found one payable to CGN for $150,000 that cleared in July 2014. The memo line indicated the check was buying 25% of something illegible. Husband claimed the investment was worth little if anything. At trial, Vance was cross examined extensively with the questions insinuating the check was for an “oil investment” and the value had fallen precipitously due to the recent drop in oil prices.

Vance sought more information from Husband about the investment which he did not provide. In light of Husband’s failure to respond, Vance used the initial investment of $150,000 as his opinion of value. The appellate court stated: “…we discern no infirmity in Mr. Vance’s use of the amount of the initial investment as his opinion of value of this marital asset. To adopt Husband’s argument would effectively reward him for his failure to produce the information which was sought by Wife; this court will not countenance such a result. Mr. Vance’s opinion was factually based, inasmuch as the amount of Husband’s investment is evidence of the value that Husband placed on the venture.”

Other Investments Valued at Cost with No Proof of Value from Husband

During the marriage, Husband invested $50,000 into a real estate partnership and $25,000 into an import company formed to market a vodka brand. As with other assets, I requested information about these investment from Husband through counsel, which was never provided. As with several other assets, we valued them at the amount of Husband’s initial investment. Husband contended that the asset were worth considerably less, but with no proof. The appellate court again gave deference to the court’s adverse credibility finding with respect to Husband’s testimony and find no error in the court’s valuation of these assets as Husband did not attempt to prove the value. Another investment we found that was not disclosed by Husband but was not mentioned in the appeal, was a $50,000 investment in Cornerstone Cellars, LLC, a California winery being promoted by a Memphis doctor. We found this asset in the same manner as with CGN Energy, LLC in that we discovered a cancelled check for $50,000 with a memo description of “Equity/Capital Investment for Ownership Interest” that cleared in January 2013. Fairly straightforward. Husband claimed it was worth zero. Once again, Husband produced no proof of a zero value and the trial court ruled it be marital at a $50,000 value.

Alimony

The parties have been married for over twenty years, and Wife had not been employed full-time outside of the parties’ home since the birth of their son in 2000. The trial court found that Wife had a monthly need of approximately $12,000 but had earning potential of at least $2,500, but Husband clearly had the ability to earn far more money than Wife. The trial court ultimately imputed Husband’s income at $27,000.00 per month after considering testimony from me about his income potential, finding $100,000 of willful underemployment and considering Husband’s expressed plan to “earn more income after the parties’ divorce”. Husband was offered a job by Kahn Ventures to stay with Delta paying $100,000 per year following its sale in February 2012 similar to offers made and accepted by his two brothers. Husband declined to accept the job, stating that he could make more money elsewhere. In their depositions, both brothers acknowledged Husband could have continued working for Kahn and the offer was valid. The trial court ruled that Husband failed to provide any proof of comparable income to replace that salary, thus found him to be willfully underemployed as to this amount.

The trial court found that Wife would deplete her share of the marital estate unless she was awarded some form of alimony, did not consider whether an award of short term alimony would be appropriate. Rather, in lieu of Husband paying alimony in futuro to Wife, the court ordered Husband to pay Wife the sum of $200,000 in one lump-sum payment as alimony in solido. The trial court stated: “This lump sum alimony in solido is to assist Wife with the payment of litigation expenses incurred unnecessarily due to Husband’s conduct of delay and failures to comply with repeated request during the course of the trial.”

The appellate court agreed with Wife that, on the record presented, the amount of alimony awarded was insufficient and supported further inquiry upon remand as to whether an award of rehabilitative and/or transitional alimony would be appropriate. If not, the trial court should consider an additional award of long term support, in light of Wife’s demonstrated need.

The appellate court noted that Wife’s counsel fees were $272,000 as of the time of trial, and ruled: “Based upon the division of property in this case, it appears that, in order to pay her attorney’s fees Wife would deplete a significant amount of her resources. Accordingly, it is appropriate that the award of alimony in solido be increased to $300,000, to cover the amount of attorney’s fees and costs Wife incurred” [emphasis added].

Conclusions of the Appellate Decision

The appellate court affirmed the trial court’s classification, valuation, and division of marital assets, with the exception of the unnamed condominium and ordered a remand for further findings, valuation, and division, if necessary. They also increased the award of alimony in solido by $100,000 to $300,000 and remanded for further consideration of whether an additional award of rehabilitative or transitional alimony is warranted.

Forensic Accounting Affirmations from the Appellate Decision

  1. The more a party misbehaves during the pendency of the divorce and especially during the trial will negatively affect the property division and alimony award.
  2. An arm’s length “actual transaction” of shares of stock sold between family members can be considered proof of value at the date of marriage.
  3. An expert witness and counsel should consider the practical aspect of claiming that siblings would agree to accept $75,000 for shares that would have been theoretically worth close to $500,000 based upon your calculations.
  4. An expert witness/valuation professional should consider very carefully whether to issue a Calculation Engagement report for a case that is probably going to trial.
  5. Using values of real estate from the county tax assessor’s appraisal is sufficient and usable at trial if the party in control of the asset offers only his personal opinions of value based upon condition of the property and current market conditions and no written proof such as an appraisal by a private real estate appraiser.
  6. An expert witness is not required to be a certified real estate appraiser if offering proof of the value of real estate from the county tax assessor’s appraisal.
  7. A party that is claiming to owe a debt, but has never made a principal or interest payment on it must prove the funds were actually received and for what purpose.
  8. It is not unreasonable for an expert witness to use the cost of an asset or investment if the party that bought it refuses to offer proof of its existence such as an LLC agreement or proof of current value.
  9. A party that turns down a job offer for $100,000 with claims of being able to make more with their “venture capitalism” should actually go about trying to earn that money and not invest in rental properties that garner no rent.
  10. A party will probably be assessed attorney’s fees and expert witness costs if he fails to disclose $950,000 of marital assets the expert ultimately uncovers.