Kaye v. Kaye

• Decision Date: 16 July 1984
• Citation: 102 A.D.2d 682,478 N.Y.S.2d 324
• Parties: Elayne KAYE, Appellant, v. Robert KAYE, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 324

478 N.Y.S.2d 324

102 A.D.2d 682

Elayne KAYE, Appellant, v. Robert KAYE, Respondent.

Supreme Court, Appellate Division Second Department.

July 16, 1984.

Colton, Weissberg, Hartnick, Yamin & Sheresky, New York City (Marian F. Dobbs, New York City, of counsel), for appellant.

Stanford G. Lotwin, P.C., New York City (Norman S. Heller, Brooklyn, of counsel), for respondent.

BROWN, Justice.

At issue on this appeal is the extent to which the financial affairs of closely-held corporations are to be disclosed in evaluating and distributing the shares of such corporations as marital property under the Equitable Distribution Law.

The plaintiff wife commenced this divorce action in 1982 after 17 years of marriage, claiming abandonment and adultery. In addition to dissolution of the marriage, she sought maintenance and support for herself and her two children and equitable distribution of the marital property, virtually all of which is held in her husband's name. Among other assets of the parties, and of particular relevance on this appeal, is the defendant husband's minority interest in three of four closely-held family corporations which are involved in the sale of women's uniforms. The husband is a 40% shareholder in two of the corporations and holds 12% of the shares in the third. The balance of the stock in the corporations is held by defendant's brother and father. Defendant's father, however, is the sole shareholder in the fourth corporation. According to plaintiff, the interrelated businesses of these corporations showed combined net sales for 1981 in excess of $32,000,000. In his financial affidavit, defendant valued his holdings in the three corporations at approximately $1,035,000 and listed his total net worth at approximately $1,500,000.

Plaintiff initiated disclosure by serving interrogatories upon defendant seeking both personal financial information and financial information with respect to the four closely-held corporations. In particular, she sought the following information in paragraphs (e), (f), (h) and (i) of interrogatories numbered 1 through 4 with regard to each of the four closely-held corporations:

"(e) list the names, addresses and account numbers of any banks in which the corporation has or had savings or checking accounts during the period of the marriage;

"(f) are there any agreements between yourself and the corporation or any other shareholder(s)? If so, describe all oral agreements and annex copies of all written agreements;

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"(h) Annex copies of the corporate income tax returns for the years during which you acquired your interests in the corporation and for the years 1963 and 1964;

"(i) Annex copies of the corporate net worth statement and balance sheets for the years during which you acquired your interest in the corporation and for the years 1963 and 1964".

In response, defendant made the instant application for a protective order as to certain of the interrogatories including the interrogatories quoted above, arguing, inter alia, that they were unduly burdensome and, further, that those interrogatories seeking discovery with respect to the records of the four closely-held corporations--other than to the extent they sought disclosure of payments actually made to him--were improper since he was only a minority shareholder in three of the corporations and had no interest at all in the fourth.

Special Term granted substantially all of the relief which defendant requested, including vacating paragraphs (e), (f), (h) and (i) of interrogatories numbered 1 through 4, as well as certain interrogatories requesting discovery regarding defendant's personal finances. Citing this court's decision in Rubin v. Rubin, 87 A.D.2d 587, 447 N.Y.S.2d 762, Special Term reasoned with regard to the requests for corporate disclosure that since defendant was only a minority shareholder, an extensive audit of corporate finances was not warranted and disclosure should be limited to payments actually made to defendant. The court also limited the period of permitted disclosure to the three years immediately preceding the commencement of the divorce action and, in order to expedite discovery, sua sponte directed the parties to proceed directly to depositions upon oral examination and circumscribed the records to be produced at those depositions.

Plaintiff now appeals from so much of Special Term's order as "granted defendant's motion for a protective order, as limited discovery to a three-year period, and as directed an examination before trial under certain terms". We modify by reinstating all of the interrogatories concerning the three corporations in which defendant is a shareholder, by authorizing limited disclosure concerning the fourth corporation in which defendant has no ownership interest, and by striking those provisions which limit the period of disclosure to the three years immediately preceding the commencement of the action, and direct the parties to proceed to an examination before trial.

With the enactment of the Equitable Distribution Law (Domestic Relations Law, § 236, part B), profound changes were engendered in the standards which govern the disposition of property upon the dissolution of a marriage (see, generally, Conner v. Conner, 97 A.D.2d 88, 468 N.Y.S.2d 482). Under equitable distribution, upon the dissolution of the marriage, accumulated marital property must be distributed without regard to title (Domestic Relations Law, § 236, part B, subd. 1, par. c), based upon a consideration of ten specifically enumerated factors (Domestic Relations Law, § 236, part B, subd. 5, par. d). The statute also provides that where the court determines that distribution of an asset, such as an interest in a corporation, would be appropriate, but impractical, burdensome or contrary to law, it may make a distributive award in lieu of directly transferring or liquidating such an asset (Domestic Relations Law, § 236, part B, subd. 5, par. e). Further, the statute mandates that, in making a distribution of marital assets or providing for a distributive award, the court must set forth the factors considered, and the reasons for its decision (Domestic Relations Law, § 236, part B, subd. 5, par. g).

To fulfill its mandate to equitably distribute the marital assets and to be able to properly set forth both the factors considered and the reasons for its decision, the court must be provided with the relevant financial information necessary to fix the value of those assets. Broad pretrial disclosure which enables both spouses to obtain necessary information regarding the value and nature of the marital assets is critical if the trial court is to properly distribute the marital assets. As this court pointed out in Ahern v. Ahern, 94 A.D.2d 53, 56, 463 N.Y.S.2d 238:

"Pursuant to this statutory scheme it is quite clear that the parties 'must be prepared to present evidence' (Roussos v. Roussos, 106 Misc 2d 583, 585) regarding the exact nature and value of the marital property in order to assist the court in reaching its determination. Accordingly, it has been held that both parties in a matrimonial action governed by the Equitable Distribution Law are now entitled to: 'a searching exploration of each other's assets and dealings at the time of and during the marriage, so as to delineate the extent of "marital property", distinguish it from "separate property", uncover hidden assets of "marital property", discover possible waste of "marital property", and in general gain any information which may bear on the issue of equitable distribution, as well as maintenance and child support. The entire financial history of the marriage must be open for inspection by both parties. It is simply no longer true that the current financial status of the parties is all that counts' (Roussos v Roussos, 106 Misc 2d 583, 584-585 supra; see, also, Gueli v Gueli, 106 Misc 2d 877 Fay v Fay, 108 Misc 2d 373 Litman v Litman, 115 Misc 2d 230) ".

To this same end, the Equitable Distribution Law expanded the types of monetary awards which may be provided to a needy spouse to carry on or defend a matrimonial action to encompass not only pendente lite counsel fees, but also awards to provide for the services of accountants and appraisers in recognition of their vital role in this often sophisticated and complicated process (Domestic Relations Law, § 237, subd. see, also, Conner v. Conner, 97 A.D.2d 88, 468 N.Y.S.2d 482, supra; Ahern v. Ahern, supra; Gueli v. Gueli, 106 Misc.2d 877, 435 N.Y.S.2d 537).

The process of evaluating a closely-held corporation where such corporation or a part thereof is a marital asset, necessarily complicates the court's task even further. Due to the inherent nature of such corporations, in which ownership is generally vested in a small group of stockholders and in which the shares are not usually salable, the value of the shares therein often cannot be measured by objective evidence of fair market value, i.e., "the price for which the property would sell if there was a willing buyer who was under no compulsion to buy and a willing seller under no compulsion to sell" (see Keator v. State of New York, 23 N.Y.2d 337, 339, 296 N.Y.S.2d 767, 244 N.E.2d 248). One commentator on the problem has noted that "the property is not freely exchanged, as is the usual case with stock of closely held corporations, valuation not only demands considerable judgement but also invites dispute" (Foster, N.Y. Equitable Distribution Divorce Law, p. 376). The methods of making an evaluation in these circumstances are not exact since neither book value, nor sales of stock when they occur, may prove to be reliable indicators of real worth (see Welch, Discovery and Valuation in a Divorce Division Involving a Closely-Held Business or Professional Practice, 7 Comm.Prop.J. 103, 114-115; Perocchi and Walsh, Putting A Value On: Closely Held Corporations, 2 ABA Fam.Advoc. 32, 33).

One of the most widely accepted...