Clark v. Clark

• Decision Date: 13 May 2020
• Docket Number: Opinion No. 27969,Appellate Case No. 2019-000442
• Citation: 843 S.E.2d 498,430 S.C. 167
• Court: South Carolina Supreme Court
• Parties: George Wetherill CLARK, Respondent-Petitioner, v. Patricia Brennan CLARK, Petitioner-Respondent.

430 S.C. 167

843 S.E.2d 498

George Wetherill CLARK, Respondent-Petitioner,

v.Patricia Brennan CLARK, Petitioner-Respondent.

Appellate Case No. 2019-000442

Opinion No. 27969

Supreme Court of South Carolina.

Heard December 12, 2019

Filed May 13, 2020

David Collins, Jr., of Collins Law Firm, of Greenville, Ken Lester and Catherine Hendrix, of Lester & Hendrix, of Columbia, all for Petitioner/Respondent.

David Wilson, of Wilson & Englebardt, LLC, of Greenville, for Respondent/Petitioner.

JUSTICE HEARN :

In this cross-appeal concerning the apportionment of marital assets, the issues before the Court emanate from the valuation of a minority interest in a family-held business. Specifically, the question is whether the court of appeals erred in its handling of the family court's application of two discounts when determining the fair market value of a 25% interest for purposes of equitable apportionment—one for marketability and the other for a lack of control. Relying on Moore v. Moore , 414 S.C. 490, 779 S.E.2d 533 (2015), the court of appeals rejected the marketability discount but applied the lack of control discount. We now affirm in part and reverse in part, reiterating that the applicability of these discounts is determined on a case-by-case basis.¹

FACTS

George and Patricia Clark married in 1987 and filed for divorce twenty-five years later in 2012 after Husband discovered Wife had a multi-year affair with one of Husband's employees. The parties initially met while they attended college at Emory University, and they married after graduation. The couple had three children and lived in Greenville at the time of the divorce. Early on, Husband worked in sales with several different companies, but he eventually joined the family business, Pure Country, Inc.

Pure Country is located in North Carolina and specializes in custom tapestry blankets, afghans, pillows, tote bags, and other gift apparel. Husband's father established the company during the late 1980s, and it steadily grew. Along with his father, Husband's mother, sister, aunt, and niece also worked at the company. Husband's mother and father each owned a 37.5% interest in the Pure Country, and Husband's sister had the remaining 25% interest. However, approximately six weeks after Husband decided to join the business, his mother unexpectedly died of a heart attack. After the mother's death, Husband's father assumed her interest, meaning he had 75% while Husband's sister retained her 25% interest. Husband continued to work without any stock ownership. However, during this time, Husband's sister and brother filed a lawsuit against the father, alleging he was not competent to act in any capacity at Pure Country. When Husband supported his father, he was sued as well. Ultimately, the father transferred his 75% stock ownership to Husband, which the family court found was a gift and therefore nonmarital property.² During this time, the parties settled the lawsuit, as the sister sold her 25% interest to Husband for $400,000, to be paid over a fourteen-year period. As a result, the present value was approximately $98,000.

A year later, in 2006, several tragedies occurred, as Husband's brother and father died. Early in the summer of 2006, Husband's father was diagnosed with pancreatic cancer

. During this time, his brother went missing, although the family did not initially realize this. Instead, Husband's sister informed everyone that their brother was busy—first saying he was on a ski trip and then that he had gone to Florida. Eventually, Husband grew concerned, and in September, police discovered part of the brother's remains in a shallow grave at his sister's house in North Carolina after one of her neighbors threatened to call police upon seeing what appeared to be a grave. Ultimately, the sister's husband was convicted of second degree manslaughter, and the sister pled guilty to accessory after the fact to second degree manslaughter in North Carolina.

As the marriage grew more strained, Wife asked Husband whether he would be amenable to her having a "sex surrogate." While both acknowledged conversations about a sex surrogate occurred, Husband claimed he rejected the idea, with Wife's paramour contending Husband knew and condoned the arrangement. From 2008-2012, Wife had an affair with Michael Thorstad, an employee of Pure Country. During this time, Wife approached Husband about obtaining equity in the business. In October 2009, Husband transferred a 25% interest to her, and the corresponding stock agreement contained a restriction that limited any subsequent sale to the business, other shareholders, or immediate family members. Eventually, in early 2012, Husband found a salacious picture on Wife's phone from Thorstad. In April of that year, Husband filed for divorce.

During the course of the eight-day trial, both parties called expert witnesses as to the value of Pure Country and Wife's 25% equity interest. Husband's expert was Catherine Stoddard and Wife's final expert was Marcus Hodge. Stoddard applied three different methods to value the business—the asset, market, and investment approaches. The asset approach consists of calculating the underlying assets and liabilities of the company. The market approach compares the business to other similar companies that have traded in private markets, and the income approach calculates the expected future economic benefits of ownership.

Under the income approach, Stoddard initially valued the 25% interest at $116,365. Importantly, she then applied a 35% marketability discount to account for several factors. Because Pure Country is a privately-held company, a buyer cannot purchase the interest on a publicly-traded market. Therefore, the sales process involves higher transaction costs, as it usually takes more time and energy to find a broker and a willing private investor. Further, Stoddard testified that a closely-held corporation is less marketable and less liquid than a publicly traded business. Particularly relevant here, she also considered the stock agreement from the 2009 transaction that transferred the 25% interest to Wife. That agreement specifically provided:

4. Transfer of Stock

(a) General Rule. Unless otherwise provided in a bylaw adopted by the shareholders, no interest in Shares may be transferred, by operation of law or otherwise, whether voluntary or involuntary.

(b) Exception. Subsection (a) shall not apply to a transfer:

(1) To the corporation or to any other shareholder of the same class of shares.

(2) To members of the immediate family of a shareholder or to a trust all of whose beneficiaries are members of the immediate family of a shareholder. The immediate family of a shareholder shall include only lineal descendants (George P Clark, Abigail B Clark, Elizabeth M Clark) and spouses of any lineal descendants.

Stoddard cited this restriction as the reason she arrived at a higher marketability discount than she usually would apply.

Under the asset approach, she valued the entire company at $736,000 and applied both a marketability discount and a lack of control discount. As a result, she opined the 25% value was $83,724. Finally, under the market approach, she valued the 25% interest at $65,430. She weighed each method, and ultimately opined the value was $75,000, which included both a marketability and lack of control discount.

Conversely, Wife's expert, Hodge, opined the total value of the company was $1.8 million. Hodge also applied a marketability discount—finding a 26% reduction appropriate—but later suggested the value should not be discounted. Unlike Stoddard, Hodge's valuations addressed the value of the company as a whole rather than specifically analyzing the effect of owning a minority interest. Hodge noted, "I valued 100 percent of the equity in Pure Country." In response to whether he valued the 25% interest, he stated, "I did. And it's just a straight 25% interest."

The family court found Stoddard to be more credible, as she thoroughly explained the basis of her opinions, providing the reasons she chose to apply the discounts. Further, the court rejected Hodge's opinion, which compared Pure Country to other purportedly similar businesses, finding, "The problem...is the lack of evidence as to whether the mills [Wife's expert] compared with [Pure Country] are in fact comparable in scope, size, and lines of manufacturing." The court acknowledged the "debate as to whether...discounts should apply in a divorce setting as the business is actually not being sold." However, it correctly recognized that the valuation standard is to determine an asset's fair market value, which assumes a hypothetical sale between a willing buyer and seller. Accordingly, the court agreed with Stoddard and found the value of the 25% interest was $75,000.

On appeal, the court of appeals affirmed in part and reversed in part. Clark v. Clark , 425 S.C. 453, 463, 823 S.E.2d 200, 205 (Ct. App. 2018). The court rejected the marketability discount, relying on Moore . Because there was no evidence that Husband intended to sell the business, the court noted, "[T]o the extent the marketability discount reflected an anticipated sale, Moore deems it a fiction South Carolina law no longer recognizes." Id. at 463–64, 823 S.E.2d at 205. Further, concerning the stock restriction that limited transferability to immediate family members, the court stated,

If, though, Husband has no plans to sell PCI then the stock restriction's effect on value is just as phantom as the discount rejected in Moore ; both concern liquidity, which Moore held irrelevant to the fair market value of a closely held business for equitable distribution purposes when one spouse intends to retain ownership. We therefore hold use of the marketability discount improper under these specific facts.

Id. at 464, 823 S.E.2d at 205–06.

Conversely, the court of appeals affirmed the family court's decision to apply a lack of control discount because a minority shareholder would not have...