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The case of King v. King (2022) shows us several important lessons when it comes to dividing family businesses in the context of divorce. In this post, we will summarize the facts of this case and then discuss two pertinent issues: asset classification and asset valuation.
Facts of the Case
The husband and wife married in 2004. Well before that, the husband’s family (i.e. his mother and father) established a successful seafood market and restaurant in Baltimore County. The husband’s parents created these family businesses in 1963, and continuously built them up over time. In 2005, the husband’s father and the husband created a new corporation to operate these family businesses. Initially, the husband acquired a 25% share of the company, and the father had the other remaining 75%. Then, in 2006, the husband acquired 50% additional stake, and his sister acquired the other 25% when the father exited the company.When the wife and husband decided to divorce in 2019, two key issues arose: (1) Was any of the husband’s interests in the business “marital property” and, if yes, how much? And, (2) if the husband’s interests were marital property, what is the value of those interests?
First Issue: Classification of the Asset as Marital / Separate
The husband’s argument was simple: both the initial stake (of 25%) and the additional acquisition (of 50%) were both “gifts” and, consequently, would be classified as separate property. However, the wife highlighted several critical facts surrounding the situation to make the counterargument. The wife claimed that the husband’s actions supported the classification of marital property. When the husband acquired the additional ownership shares in 2006, for instance, the wife testified that the husband “bought” those additional shares; furthermore, the organizational documents of the entity stated that the husband purchased his original stake of 25%. Essentially, the facts and circumstances surrounding the situation pointed to a traditional sale, rather than a gift, and so the classification was ultimately settled on marital property.
Second Issue: Valuation of the Asset
On top of the classification, the other major issue, in this case, was the valuation of the business. This is where things can quickly become tricky, because there can be multiple valuation approaches to a given business, and different approaches can be equally valid. The husband’s valuation placed the business’s value at $0, and this was because the business’s liabilities exceeded its current assets. However, an expert for the wife testified against this valuation and argued that the correct “fair market value” of the business was actually $226,000. Ultimately, the court determined that the valuation of the husband’s expert was simply not reasonable, and ordered a new valuation based on this conclusion.In the end, we can see the attempts of the husband in this case as last-minute efforts to preserve as much of his business for himself, rather than efforts to achieve a truly just outcome. The husband had clearly expended considerable time and energy on the business during the marriage, even though the business was initially created by the husband’s family. Furthermore, the husband’s argument that his shares were gifts were not properly supported by the evidentiary record. More than anything, these facts simply show that the husband had not contemplated divorce at the time he married, nor at any time when he was still building up the seafood businesses. In the end, there was no way to divide things based on the husband's assertions.
Contact the Murphy Law Firm for More Information
If you’d like to learn more, reach out to The Murphy Law Firm today by calling 240-493-9116.
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