Small Business Divorce Results in Imputed Income

In this divorce matter involving a small business, Avraham Arbely appealed the decision of the judge as to imputation of income to Arbely, thereby increasing his alimony payment, bias by trial judges and other matters. Lea Brandspiegel-Arbely and Avraham Arbely were married in 1989, 2 children were born of the marriage and a final judgement of divorce was entered in 2013 with economic issues reserved for trial which began in November 2013. During the trial of Brandspiegel-Arbely v. Arbely, the plaintiff’s expert, Martin Abo, a certified public accountant (CPA) provided testimony indicating that the defendant’s proofs with regard to income from his business were designed to frustrate the CPA’s efforts at ascertaining the defendant’s actual income and that the defendant apparently underreported a significant amount of cash sales to the IRS. Arbely, who chose to represent himself rather than hire an attorney, challenged the figures and methods of Abo but provided no countervailing evidence. Following trial, the judge found Abo to be credible and further found that Arbely sold the business after the divorce complaint was filed in order to divest himself of his “cash cow” prior to equitable distribution and drew a negative inference against Arbely for refusing to provide Abo with adequate information and found Arbely to be less than credible when testifying. Plaintiff was awarded alimony of $23,000 per year for 14 years based on defendant’s imputed income of $95,000 per year. Plaintiff was also awarded the marital residence, and investment and business properties. The NJ Appellate Division looked to Stenken v. Stenken, 183 N.J. 290 (2005) with regard to the established principle that alimony is designed to assist the supported spouse in enjoying a standard of living after the marriage which is reasonably comparable to that enjoyed during the marriage. Additionally, the Appellate judges looked to Tannen v. Tannen, 416 N.J. Super. 248 (App. Div. 2010) which reaffirmed the long held principle providing for imputation of income in the process of establishing an alimony award. Elrom v. Elrom, 439 N.J. Super. 424 (App. Div. 2015) was used by the Appellate Division in support of the premise that imputation of income is discretionary wherein the trial court must consider the party’s actual earning capacity. Finding no basis to disturb the trial judge’s findings with regard to expert credibility, the N.J. Appellate Division upheld the decision of the court below with regard to alimony, imputed income and all other issues. If you are considering filing for divorce and own a business, or portion thereof, you are facing considerations outside the scope of a typical divorce. Depending upon their own ownership interest in the business, your spouse may fight to obtain increased alimony or funds by disputing the net worth of your business, annual profits and your personal income. Not only can the valuations be tedious and expensive but the results of the court’s findings can have permanent and financially devastating consequences. It is critical that you obtain an experienced divorce attorney familiar with small business divorces. For more information about small business divorce, alimony, child custody, equitable distribution and other family law matters visit DarlingFirm.com. This blog is for informational purposes only and not intended to replace the advice of an attorney.

Divorcing With A Small Business

Business partner disputes can become so contentious as to lead to dissolution of the business or expulsion of a partner, and things can become even more complicated in the event the business partners are divorcing spouses. Many small businesses are started by one spouse and ultimately, as the business grows, both spouses become full-time employees. With these businesses starting as a simple idea that grows, it is rare to find an operating agreement in place. During divorce it often becomes impracticable for the parties to cooperate on any level as a result hurt feelings and the raw emotions which arise thereafter. Limited Liability Company (LLC) is one of the most common forms of business today. Formerly governed by the Ne w Jersey Limited Liability Company Act (LLCA), partners could be removed from the business for enumerated reasons including wrongful conduct, significant breach of the LLC's operating agreement or it unreasonable to expect the business to continue with the member involved. The LLCA was replaced by the Revised Uniform Limited Liability Company Act (RULLCA) in 2013, leaving the expulsion provisions substantially intact as can be seen by review of N.J.S.A. 42:2C-46(e). The unpublished case, IE Test LLC v. Carroll, A-6159-12T4, 2015 N.J. Super. Unpub. LEXIS 567 (Mar. 17, 2015), heard in the Essex County Chancery Division, was a case of first impression in New Jersey regarding removal of a member of an ongoing and viable LLC that the other members wished to continue. The members failed to enter into an operating agreement upon formation of the business, leaving the N.J. Appellate Division to interpret N.J.S.A. 42:2B-24(b)(3)(c) noting that expulsion of a member does not require past wrongful conduct but rather charges the court with determining whether it is feasible for the business to continue with any viability if the member is not expelled. The court found that the it need not find it impossible for the business to continue but rather that the business cannot carry out its purpose without substantial dysfunction if the member remains. The NJ Appellate Division also looked to Gagne v. Gagne, 338 P.3d 1152 (Colo. Ct. App. 2014), wherein the Colorado Court of Appeals interpreted the same factors as wet forth in RULLCA resulting in a 7 factor test for determining whether expulsion is appropriate. The factors set forth in Gagne include 1) whether management is unwilling or unable to reasonably promote the reasons for which the company was formed; 2) whether there was misconduct on the part of the member the others are seeking to expel; 3) whether the members are clearly unable to work together for the benefit of the company; 4) whether there is a deadlock between the members; 5) whether there are provisions in the operating agreement that can resolve a deadlock; 6) whether the business remains viable; and 7) whether it will be financially feasible to continue the company after any harm from the dispute and payment to the expelled member. After considering the language of N.J.S.A. 42:2B-24(b)(3)(c), the factors set forth by the Colorado Court of Appeals in Gagne and the fact that the members had failed to prepare an operating agreement to govern their acts, the N.J. Appellate Division upheld the decision of the Essex County Chancery Division Judge that the minority member should be expelled. If you are involved in, or considering, divorce and own a small business with your spouse, it is critical that you speak with an experienced attorney to ensure you are aware of your rights. Whether you will be paying or receiving alimony or child support, the continued viability of the business will likely be critical to your and your family's economic future. For more information about small business divorce, high net worth divorce, partner and shareholder agreements or other matters involving divorce or business in New Jersey visit DarlingFirm.com. This blog is for informational purposes only and not intended to replace the advice of an attorney.

Complicated Divorces Can Grow From Business Ownership

Whether you are a contractor, an accountant, a professional entertainer or operate a manufacturing plant, your spouse or civil union partner can seek a portion of your business proceeds and assets in a highly contested divorce. When one or both parties to a divorce owns a small business, the business can complicate divorce proceedings as the divorcing couple attempts to equitably distribute assets. During divorce proceedings, a party may seek an interest in the business and substantial alimony which will allow them to continue to enjoy the lifestyle provided by the hard work of the business owner during the marriage. A divorce can create major issues for the business owner and their business partners. New Jersey courts provide for wide discovery rules. Judges can authorize either party to request a very wide scope of documents and information regarding the business and its value. Further, this means that all of the documents, unless there is a confidentiality order, will become part of the public record. If business information becomes public record it will become available for all competing businesses to view which may result in the loss of your business' competitive advantage. In addition, courts will attempt to ascertain the fair value of the business which is distinguished from the fair market value of the business. This process can become very complicated. The valuation of the business will depend a great deal on the business' demonstrated cash flow, assets, accounts payable and receivable statements, payments of insurance, travel, vehicle expenses and other typical business write-offs as well as payment of pension plans to employees, and other factors. During the divorce, a party may seek an equitable interest in the business. It is difficult to determine just how much of an interest a spouse is entitled to because, as previously mentioned, there are factors such as the fair value of the business which are specific and particular to each individual situation. Even if a business was started before the parties were married, or the owner became the owner through an inheritance, the other party is entitled to seek an equitable interest in the appreciation in the value of the business that occurred during the marriage and even the term prior to the marriage where the parties lived together as a family depending on the facts. Cash flow from a closely-held or family owned business is often the main or sole source of income for a person, a family,or families. Whether you are the business owner or the supported spouse, it is critical that you obtain experienced legal counsel to guide you through discovery, the business valuation process and the divorce itself. For more information about small business divorce, alimony, equitable distribution or other family law matters in New Jersey visit NJCivilUnionLaw.com and HeatherDarlingLawyer.com. This blog is for informational purposes and in no way is it intended to replace the advice of an attorney.