Drumheller v. Drumheller, 07-108.

Citation2009 VT 23,972 A.2d 176
Decision Date06 March 2009
Docket NumberNo. 07-108.,07-108.
CourtUnited States State Supreme Court of Vermont
972 A.2d 176
2009 VT 23
No. 07-108.
Supreme Court of Vermont.
March 6, 2009.

[972 A.2d 179]

Karen McAndrew of Dinse, Knapp & McAndrew, P.C., Burlington, for Plaintiff-Appellee/Cross-Appellant.

Robert F. O'Neill and Megan J. Shafritz of Gravel and Shea, Burlington, for Defendant-Appellant/Cross-Appellee.


¶ 1. DOOLEY, J.

In this contested divorce action, husband challenges several aspects of the family court's division of marital property, arguing that: (1) the court exceeded its authority by reversing, sua sponte, its valuation of husband's interest in a real estate partnership: (2) the court's valuation of the property was not supported by the evidence; (3) the court erred in not applying a minority discount to the value of husband's

972 A.2d 180

interest in the partnership property; (4) the court erred in refusing to consider tax consequences in its valuation of husband's partnership interest and the marital home; and (5) the court's decision to award wife attorney's fees was an error of law. Wife cross-appeals, challenging the court's maintenance award, the valuation of husband's stock in The Lane Press, Inc. (Lane Press), and the court's determination that the education savings funds do not constitute marital property. We reverse and remand the determination that the education savings funds are not marital property; we affirm in all other respects.

¶ 2. Most of the relevant facts are undisputed. The parties were married in 1981 and lived together until the summer of 2004; they raised three children together in that period, one of whom was still a minor at the time of the separation. In September 2004, wife filed for divorce. The primary issues for the family court were the division of marital property and the determination of spousal maintenance.

¶ 3. The parties' largest disagreements concerned husband's interest in Lane Press and his one-third partnership interest in Landrum LLP. Lane Press is a printing business, located in South Burlington, Vermont, that specializes in printing magazines. Lane Press employs approximately 250 people and prints and distributes approximately the same number of magazines. Husband is the chief executive officer of Lane Press, which was previously owned by his father and operated by his brothers. In 1974, husband's father set up an employee stock ownership plan (ESOP) in order to reduce his own tax liability and to serve as a retirement plan for Lane Press employees, who have the opportunity to sell their shares at a fixed price at the conclusion of their employment. The ESOP holds 89.72% of the Lane Press shares, and husband owns the remaining 10.28%. Husband owns some of the ESOP shares and is the ESOP plan administrator, with the power to direct the actions of the ESOP, except with respect to major decisions such as a sale or merger of Lane Press.

¶ 4. At trial, the parties disagreed about the valuation of Lane Press for the purposes of the marital estate, and each side presented expert testimony on the per share value of these shares. Husband's expert, Robert Ireland, had annually valued Lane Press for the last twenty years in order to set a value of the ESOP shares for the purposes of employee retirement. Wife's expert, Joseph Egler, also had extensive experience in the valuation of businesses in general and ESOPs in particular. Although they reached different results, Ireland and Egler both calculated the value of husband's interest in Lane Press by using three independent methods: (1) income capitalization; (2) asset value; and (3) comparison with publicly traded companies in the same industry. With respect to the income capitalization method, both experts arrived at a value of roughly $7 million to $7.5 million, and both agreed that this valuation was too low, given the before-tax profits of the company in the five years preceding.

¶ 5. Consequently, each expert turned to alternative methods of valuation. Egler considered the net asset value of Lane Press by aggregating Lane Press's cash and cash equivalents with the book value of its equipment, less the company's liabilities. The court did not find this method of valuation to be helpful, explaining that "[t]he trouble with the net asset value is that it depends on tax depreciation schedules which have little relation to the market value of the equipment and other assets."

972 A.2d 181

¶ 6. The experts then turned to "guideline company" measurements. This approach, as the court explained, "compares The Lane Press to publicly traded companies in the same industry whose values are known because their share prices are published every day." There were some differences in the method of each expert. In particular, Ireland put greater weight on the results drawn from smaller companies, whereas Egler calculated a straight average based on the results of five companies irrespective of size. The experts also applied different discounts, Egler's due to the fact that husband held only a minority of shares in Lane Press, Ireland's because Lane Press is a closely held company and its shares do not have complete liquidity.

¶ 7. Overall, the court was persuaded by Ireland's valuation of Lane Press. The court explained that it was "primarily persuaded in Mr. Ireland's favor by his focus on income capitalization and the length of his involvement with The Lane Press." The court elaborated further:

Income capitalization appears to the court to be the most accurate way to measure the value of The Lane Press for two reasons. First, measures which depend on book value are inherently unreliable unless the book values are shown to be equal to actual market value for the assets in question. The court has previously discussed this problem. Second, the guideline analysis in this case seeks by necessity to compare a small pool (5 or 6) of large publicly traded companies with a much smaller closely held corporation. By analogy, with enough adjustments for size and location, it is possible to compare a country cottage with Buckingham Palace for purposes of real estate valuation, but the integrity of the exercise suffers as the differences between the two properties widens....

In addition, Mr. Ireland has some twenty years of experience in valuing The Lane Press. It is unlikely that management selects Mr. Ireland every year in order to maximize the value of the company for the benefit of retiring employees. To the extent there is an institutional bias, it is in favor of keeping ESOP values down to a manageable level. Nevertheless, Mr. Ireland brings an outside professional perspective to the valuation every year. His calculation of share values over 20 years show[s] a relatively steady increase .... The length of this experience adds credibility to Mr. Ireland's testimony.

Mr. Ireland's testimony is also bolstered by the minimal use of the minority/liquidity discounts.... [T]he use of higher discount figures tends to push the appraisal values towards the realm of theory and away from actual life experience. In the real world, after all, these shares are not going to be sold. [Husband] has to hold on to them because he needs to control the company in order to earn his income. Starting with a higher figure and discounting it by 30% is inherently less persuasive than starting with a lower figure and discounting it by only 10%.

¶ 8. The court next considered the value of Landrum LLP, a partnership in which husband and his two brothers each own a one-third interest. Landrum owns a large building and land that it leases to Lane Press. Both sides presented the testimony of real estate appraisers as to the value of the Landrum interest. Both experts relied primarily on an income capitalization method, but came out with different answers based on slight differences in their methodology. Husband's expert did not consider the rent actually received by Landrum because the lease was not an arm's-length transaction and therefore did

972 A.2d 182

not reflect the actual rental value of the property. Instead, husband's expert considered the amount of rent that the property would generate if another tenant were in place. Wife's expert relied instead on the actual lease terms to calculate the income stream for the property. Wife's expert then assumed a 5% vacancy rate in the rental property and that Lane Press would remain a tenant on the same terms.

¶ 9. The court accepted the reasoning of husband's expert, stating:

In assigning values to the various assets, the court has to use the same standard of measurement—fair market value— consistently. The exercise requires a certain amount of fiction. As a practical matter, it is unlikely that within the foreseeable future The Lane Press will move from its present location and that Landrum will be faced with the task of refitting the structure to accommodate three tenants. Once the appraiser makes the commitment to arriving at fair market value, however, it is necessary to identify the highest income which the property can generate when offered to tenants in an arm's-length transaction.

¶ 10. Although the parties had other valuable real and personal property, there were no other valuation disputes. Most importantly, the parties agreed that the marital residence had a net equity value of $2,775,000.

¶ 11. The court then moved on to the consideration of the statutory factors pertaining to property division in 15 V.S.A. § 751. Based on its analysis of the statutory factors, the court decided to equally distribute the marital assets.

¶ 12. The court then considered the amount of maintenance it would award to wife. First, it concluded that wife "lacks sufficient income, property or both to provide for her reasonable needs and is unable to support herself at the standard of living established during the marriage." In calculating the necessary amount of maintenance, the court assumed that...

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