Dallas Divorce Law Blog : Dallas Texas Divorce Lawyer & Attorney : O'Neil Anderson Law Firm : TX Child Support & Custody Issues

Calculating the value of a business can be one of the most important parts of a divorce because a closely-held business may be one of the most significant assets of the marital estate.  The best approach to such valuation is to hire an independent business appraiser—a CPA with an Accredited in Business Valuation (ABV) credential or a certified professional, like a Certified Business Appraiser (CBA) or someone recognized by the American Society of Appraisers (ASA).  Such expert will begin by obtaining all business books and records, tax returns, and financial statements and reports for at least the last five years.

Using this data, the appraiser will determine the company’s intangible and tangible net assets, an appropriate rate of return for them, and will calculate excess earnings in accordance with various accepted methods.

After finding a proper capitalization rate for the excess earnings (that which remains after taking into account normal costs, return on assets and salaries), the appraiser can place a value on the most contentious aspect of business valuation, the intangible asset known as “goodwill.”

"Commercial goodwill” is the capacity of a business to attract new customers, or keep old ones due to great locations, a reputation for superior service or skill, or anything else that influences a person, supplier or other business to continue a commercial or professional relationship. “Personal goodwill” describes the nontransferable ability of an individual to attract and maintain customers or clients due to his or her skill or reputation for honesty, intelligence, craftsmanship.

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Dallas divorce attorney, Michelle May O’Neil, prevailed in the El Paso Court of Appeals opinion issued on February 24, 2010, in Cause No. 08-07-00228-CV, In the Interest of P.L.H., S.L.H., and C.H.H., Minor Children.  The Court overruled all seven of Appellee’s issues on appeal, upholding the judgment of the trial court, including the entry of death penalty sanctions against Mother, denial of Mother’s request for a continuance,  judgment against Mother for $60,000 in attorney’s fees incurred by Father, and a credit in Father’s favor for over $32,000 for prior overpayments of child support.

The parties were originally divorced in Oklahoma in 2000, via a Final Decree of Divorce that improperly omitted the requisite finding for child support under Oklahoma law. Unaware of this deficiency, Father paid child support from 1999 through 2004 in the amount of $981.46 per month. In 2004, the error was corrected by the Oklahoma Court’s entry of a nunc pro tunc Final Decree of Divorce, ordering Father to pay $481.20 per month, instead of $981.46. In 2005, Father filed a Petition to Modify in Dallas, which by that time had become the county of the children’s residence. Mother filed her own counter petition in the Dallas court as well, seeking to drastically reduce Father’s possession time and to increase child support. Mother then requested the Oklahoma Court to decline jurisdiction in favor of the Dallas court as to all issues regarding child support and custody.

A year after the Oklahoma court declined jurisdiction over all child support and custody issues, Mother went back to Oklahoma and obtained entry of another nunc pro tunc order, this time the changes had the effect of increasing Father’s child support obligation.  At trial, Mother attempted to argue the validity of this second nunc pro tunc order in the Dallas court. But the trial judge found that, since the correction involved a “judicial” rather than “clerical”, and since the Dallas court had already assumed jurisdiction of all issues involving child support and custody at the time the second nunc pro tunc was entered, the Oklahoma court lacked jurisdiction to make such substantive changes. The second nunc pro tunc was, therefore, void. The Court of Appeals affirmed this ruling on appeal.

The jurisdictional issue regarding the second nunc pro tunc was the most complex of the seven issues presented. The other six issues on appeal concerned mainly Mother’s repeated failure to follow the orders of the trial court and the Rules of Civil Procedure.

Here, the appellate court upheld the trial court’s imposition of death penalty sanctions against Mother as the result of her failure to comply with the pretrial scheduling order were proper. Based on Mother’s history of discovery abuse throughout the course of the litigation, and her failure to comply with the trial court’s orders, the El Paso Court of Appeals found the trial court’s decision to exclude Mother’s trial exhibits was not excessive. The Court’s opinion further states, “[t]he record demonstrates that the trial court considered, and imposed, lesser sanctions when earlier discovery abuses arose, without success. Accordingly, the court’s decision to impose a Rule 215.2(b) sanction was not an abuse of discretion.”

The appellate court also upheld the trial court’s denial of Mother’s requested continuance of trial. Mother’s Motion for Continuance was not verified or supported by an affidavit, as required by the Texas Rules of Civil Procedure. Mother acknowledge that although her Motion for Continuance was procedurally defective, the circumstances of her case, specifically that she was representing herself pro se, made a continuance appropriate regardless of procedure. The appellate court disagreed.

Mother also attempted to argue on appeal that the child support credit Father received was a debt previously discharged by Mother in bankruptcy. Not withstanding the substantive argument against this issue, the appellate court found that Mother failed to properly plead, and, therefore, waived, the affirmative defense of discharge in bankruptcy per Texas Rule of Civil Procedure 94. Therefore, the appellate court did not even reach the merits of Mother’s argument on this issue, overruling the issue on Mother’s pure procedural deficiencies.  

Although the facts of this case are somewhat complex, the principles attorneys, as well as their clients, can take away from it are simple. Review orders carefully either before or as soon as you possibly can after entry, especially divorce decrees and child support orders, because you might not have jurisdiction to correct substantive mistakes later on. Be careful what you ask for, like Mother’s request here that the Oklahoma court decline jurisdiction, because you just might get it. Also, play by the rules, the rules of civil procedure and the orders of the court, failing to do so could result in stiff penalties, like the death penalty sanctions entered here. Along those same lines, while legal representation may seem expensive to pro se litigants, the price you pay in the long run if you choose to represent yourself without knowing the rules could be much greater.

Congratulations to Michelle May O'Neil on another successful appeal for her client!

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Recently I had a potential Dallas divorce client present the following scenario to me.  Wife was involved in an at-fault car accident.  Wife is sued by the other driver.  Husband is concerned that the person his wife was in an accident with will go after "all" the property they own, even husband's prized baseball card collection he had before marriage.  The question then became, can they take my separate property for my wife's negligence?

There are two steps for determining what marital property can be seized and sold to satisfy a liability created during marriage.  First, determine whether the property in question (to be seized) falls within an overall class of marital property that would be liable for or exempt from seizure under the Texas Family Code. 

For a debt arising out of a tort (in this case negligence in a car wreck) the at-fault spouse's separate property can be seized to satisfy the debt.  In contrast, the separate property of the not-at-fault spouse (in this case, Husband's beloved baseball card collection he owned prior to marriage) is not subject to seizure to satisfy the debt arising out of the tort.

So, bottom line, the answer is NO.  The separate property of a not-at-fault spouse is not subject to seizure for a liability arising out of a tort committed by the other spouse. 

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In any divorce where one of the spouses owns a business interest, that interest must be valued.  Usually in Dallas County Texas divorces, the attorneys will hire a forensic business valuation expert with ABV accreditation to perform such valuation services.  That expert will need certain documents in order to perform his valuation, including:

Financial Statements for Typical Corporation

• Balance sheets, income statements of changes in financial position, and statements of stockholders’ equity for the last five fiscal years.
• Income tax returns for the same years
• Latest interim statements and interim statements for comparable period(s) of previous year

Other Financial Data

• Summary property, plant, and equipment list and depreciation schedule
• Aged accounts receivable summary
• Aged accounts payable summary
• List of marketable securities and prepaid expenses
• Inventory summary, with any necessary information on inventory accounting policies
• Synopsis of leases for facilities or equipment
• Any other existing contracts (employment agreements, covenants not to compete, supplier agreements, customer agreements, royalty agreements, equipment lease or rental contracts, loan agreements, labor contracts, employee benefit plans, and so on)
• List of stockholders, with number of shares owned by each
• Schedule of insurance in force (key person life, property and casualty, liability)
• Budgets or projections, for a minimum of five years (if management prepares)
• List of subsidiaries and/or financial interests in other companies
• Key personnel compensation schedule, including benefits and personal expenses

Company Documents

• Articles of incorporation, bylaws, and any amendments to either
• Any existing buy-sell agreements, options to purchase stock, shareholder agreements, restrictions on transfer, or rights of first refusal
• Franchise or operating agreements, if any

Other Information

• Brief history, including how long in business and details of any changes in ownership and/or any bona fide offers recently received
• Brief description of the business, including position relative to competition and any factors that make the business unique
• Marketing literature (catalogs, brochures, advertisements, and so on)
• List of locations where company operates, with size and recent appraisals
• List of competitors, with location, relative size, and any relevant factors
• Organization chart
• Résumés of key personnel, with age, position, compensation, length of service, education, and prior experience
• Personnel profile: number of employees by functional groupings, such as production, sales, engineering/R&D, personnel and accounting, customer service/field support, and so forth
• Trade associations to which the company belongs or would be eligible for membership
• Relevant trade or government publication (specially market forecasts)
• Any existing indicators of asset values, including latest property tax assessments and any appraisals that have been performed
• List of customer relationships, supplier relationships, contracts, patents, copyrights, trademarks, and other intangible assets
• Any contingent or off-balance sheet liabilities (pending lawsuits, compliance requirements, warranty or other product liabilities, estimate of medical benefits for retirees, and so on)
• Any filings or correspondence with regulatory agencies

Download pdf here: Preliminary Documents and Information Checklist for Business Valuation of Typical Corporation or Business Entity

View online here:  Preliminary Documents and Information Checklist for Business Valuation of Typical Corporation or Business Entity

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I recently had a potential new client ask me how long they have to wait before the court can enter a divorce decree.  As a Dallas divorce attorney, I get this question a good bit.  Because of the frequency I receive this questions, I felt it would be a good idea to post the basis of Texas family law jurisdiction and the "waiting period" required before a court can enter a divorce decree.  

A suit for divorce must be filed in a county where the suit can be properly maintained.  Under the Texas Family Code, a suit for divorce is proper in the county where the parties have lived for the past 90 days.  In addition to the 90 day requirement, at least one of the parties has to have been a resident of Texas for the past 6 months.  Note that only one party to the divorce is required to meet the 6 month and 90 day residency requirements in order to bring a suit for divorce. 

Once the residency requirements are met, the next step is to file a suit for divorce in the appropriate county.  Once the suit is on file for at least 60 days, the court can enter a final decree of divorce. 

In sum, assuming the residency requirements are satisfied, the "quickest" someone can get a divorce in Texas is 60 days after they have filed their suit for divorce. 

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When spouses own a business and they are getting divorced, the value of the business becomes a major focus of the division of property.  Dallas Texas Board Certified Divorce Lawyer Michelle May O'Neil explains the concepts of valuation of a closely-held business entity that affect and even minimize the value of a closely-held business entity:

Valuing a business is a complex, and often expensive part of a divorce.  A business consists not only of tangible assets like buildings, bank accounts, inventory, tools, fixtures, furniture and machinery; but also, intangible ones such as mortgages, leases, patents, trademarks, unlisted stock, skilled labor, accounts receivable and most notably, “goodwill.” A business is valued usually based on the fictional assumption of a sale between a willing buyer and willing seller.

The most common legal concept that affects the value of a closely-held business is the distinction between the personal goodwill and commercial goodwill of the business.  The personal goodwill is that goodwill attributable to the person of the business owner.  Take a small bookkeeping firm, for example, owned by a wife.  Most of her clients do business with her company because they like her and trust her work.  her business has no reputation separate from her.  That value of the business attributable to her presence is personal goodwill.  The value of a business attributable to personal goodwill is the spouse's separate property.

Commercial goodwill, on the other hand, is that  goodwill that exists independent of the business owner.  It is the independent reputation of the ABC Company that exists separate from the business owner.  The value of a business attributable to the commercial goodwill is community property if the business would otherwise be community property.

Also diminishing the value of a business is the frequent occurance where a business remains subject to the control of multiple owners.  This discounts the value to any one of the owners for lack of control.

Another factor that decreases the value of a business involves marketability, which is defined as the ability to convert an investment into cash quickly at a known price and with minimal transaction costs. The more difficult a business would be to sell, the greater the discount for marketability.

Many businesses have "Buy/Sell Agreements".  These cannot be relied upon to calculate a business' value.  Such agreements typically protect the majority partner interests and rarely reflect actual value.

The best way to approach valuation of a business entity in a divorce is to hire an independent business appraiser—a CPA with an Accredited in Business Valuation (ABV) credential or a certified professional, like a Certified Business Appraiser (CBA) or someone recognized by the American Society of Appraisers (ASA).

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Divorce is a hard enough time but when you own your own business, managing your divorce and keeping your business alive can be extra challenging.  Here are some tips from Board Certified Dallas Family Lawyer Michelle May O'Neil of O'Neil Anderson:

• Be an open book.  Don't try to hide anything from your spouse.  When discovered, the divorce judge may very well impose greater punishment than the value hidden.
• Hire a good forenic accountant to evaluate the business.  If the business is community property, the value of the business to the community estate will be an essential question in the divorce.
• Know the difference in personal goodwill and commercial goodwill and how that difference may affect the consideration of your busines sin the division of your community estate and divorce.
• The declining economy may have removed much of the liquidity from your business, which may affect the cash available to pay the increased expenses of separating and paying divorce lawyers.
• If both spouses work in the business, it is best to pick one who will stay in the business and one who will exist.  Rarely can people who cannot stay married to each other remain business partners.

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Dallas Divorce Lawyer Michelle May O'Neil is presently featured with the nationally recognized Featured Legal Guide on www.avvo.com, a directory of lawyers across the country.  Her article on Valentine's Day Tips From A Dallas Texas Divorce Attorney discusses ways to keep a marriage together and avoid divorce, with tidbits from her 18 years experience as a divorce lawyer in the DFW metroplex area of Dallas, Texas.  The article is also featured in the Avvo Advocate electronic newsletter with legal advice for everday life.

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As Dallas Divorce Lawyer, I frequently am asked questions that touch on "legal separation" and its place in Texas family law.  Texas law does not recognize legal separation as a status, so in Texas, you're either married you are aren't.  The other day I had someone ask me whether she could marry someone who was legally separated from his spouse in another state.  To answer this question, we need to look at who can and cannot get married in Texas.

Under the Texas Family Code, same-sex couples, persons related to each other, and currently married persons cannot get married.  Under the question presented, the answer hinges on whether a person who is legally separated in another state is still consider "married" for purposes of Texas law.  Because Texas does not recognize legal separation as a status, then the person seeking marriage is still technically married to their "former" spouse in the jurisdiction they are legally separated in.  Therefore, the marriage cannot occur.

Under Texas law, a marriage is considered void and of no effect if either party to the marriage is currently married.  As a side bar, there is one small exception to this rule -- couples who are currently married to each other can obtain a marriage license.  In essence this exception allows couples to "legally" renew their wedding vows. 

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