On June first, 2010 the Colorado Supreme Court handed down it's long awaited ruling on In re Marriage of Thornhill,Case No. 08SC777.

Two legal issues were decided in Colorado Family Law.

1. Valuation of closely held business assets: Marketability Discounts can apply.
Often times, when you are dividing a marital estate in a divorce matter, a question arises as to the value of one spouse's share in an ongoing business enterprise. If that ownership share was generated during the marriage, then it is a marital asset and subject to division. When a business share is in a company that is not traded on the stock market, there may be no ready trading market for those shares. A marketability discount adjusts the value of specific shares downward to reflect the fact that there is no ready trading market for the shares.

In the Thornhill case, the husband had started and owned shares in an oil and gas service company that was not publicly traded. The Company was valued at 2.5 million, however, the Trial Court had agreed to a Marketability Discount of 33% which brought the value down to 1.625 million for the purpose of division of the marital estate. The wife argued that a Marketability Discount should not occur in a divorce matter (comparing it to minority shareholders when they are being forced out). The Appellate Court disagreed and so did the Supreme Court holding that the Trial Court does have the discretion to use a Marketability Discount if the circumstances warrant it.

2. The Parties' current "Standard of Living" should be looked at as part of the Threshold Test for awarding Maintenance:
When determining if Maintenance should be awarded, the Court looks in part at the following:
a. Whether the spouse seeking maintenance lacks sufficient property, including marital property apportioned to him or her, to provide for his or her reasonable needs, and
b. Is unable to support himself or herself through appropriate employment or is the custodian of a child whose condition or circumstances make it appropriate that the custodian not be required to seek employment outside the house.

The Trial Court in Thornhill considered whether Wife could "maintain her lifestyle" as part of the initial determination that she was entitled to maintenance. The Court of Appeals held that the Court should not have considered her current lifestyle or current standard of living in making that determination. They decided that the Court should only have looked at the standard of living to determine the amount of Maintenance but not for the initial determination of entitlement to Maintenance.

The Colorado Supreme Court overturned the Court of Appeals on this issue. They have made it clear that "the parties' standard of living during the marriage is in fact an appropriate-- and even necessary-- starting point for the trial court's determination of a particular spouse's reasonable needs or whether a spouse would be able to support herself through appropriate employment." In re Marriage of Thornhill, No. 08SC777,(Colo. 2010).

Here is a possible example: Lets say that a couple is getting divorced after 20 years of marriage. The wife works full time at 100,000 per year but her husband has made over one million dollars per year for the last two years. If the parties' standard of living was one that reflected their recent combined income at the time of divorce, then this would be relevant in the Court's determination of the wife's eligibility for Maintenance even though she is able to care for herself at her current income level. The parties' current standard of living is relevant to determining her reasonable needs. The term "Reasonable" is in light of their current standard of living.

If you have further questions about how this case might apply to your situation, feel free to visit our website or call our offices at 303-329-3802 and ask for Leslie Matthews.

Businesses are Marital Property
If you are married in Colorado and you or your spouse own a business, that business is all or in part marital property. If the business was opened during the marriage it is all marital property. It does not matter if your name is listed as an owner or not.

Business Valuation is often a Difficult Task
One of the more difficult parts of a divorce process is to place a monetary value on the marital business for purposes of dividing the business between the parties. This is called the Business Valuation Process. Experts typically need to be hired to accomplish this task and, depending on the size, type and level of complexity of the business, it can become a large, difficult and expensive project.

The recent implosion of the US and world financial markets and the demise of the real estate bubble, have caused a recession that has affected most businesses in the US. This has caused a new problem for valuing businesses for the purposes of divorce.

Past Business Valuation Techniques often don't fit in Today's Economic Enviroment
In the past, Business Valuations have used techniques that are based on the presumption that the historical performance of the business is a good indicator of the future trajectory of that business. Fundamentally, the mathematical models assume incremental improvement over time. Typically, the evaluator will look at the last five years of the business to determine the present value. Even if the current year shows a lower profit level, it will be factored in with the prior four years. The result may be a valuation that is out of sync with the realities of what the recession has done to the present and future revenue forecasts for your business.

In today's business climate, it is necessary to find ways to craft an equitable division of a business with the uncertainty of the business environment in mind. Coming to a bottom line figure to use for division may produce an unfair result on either side. On the one hand, the business could be valued too high because the valuation is based on past years and the person running the business has to pay out, to the other spouse, a large amount that is inconsistent with the current conditions and possible future of the business. On the other hand, the business could be in dire straits at the time of the divorce and therefore valued low, yet have a business rebound in one to three years. This leaves the spouse who did not run the business in a position of getting too small a value because he or she just happened to divorce during a recession slump. We are just not as sure these days what the future will bring.

Flexible Solutions for Today's Economy
One solution being used by family attorneys and business evaluators these days is to look outside the box at more flexible solutions. You have to tap into more complex solutions more often used when a business partnership or other entity is dissolving or when there is a buy out of one of the owners. Some solutions that are being looked at are Earn Out Options, Liquidating Events, Stock Sharing Provisions and more.

Without getting into the complexities of corporate law, the bottom line here is that you have to craft a solution that can be flexible, at least into the near future of the business. If you reach a bottom line figure and leave it at that, you may be setting this couple up to have to go back to court time and again as business conditions change. Also, if the business soars back to health in short order following a low valuation settlement number, you might leave the non-business spouse without recourse.

The Need for Protective Provisions and Professional Oversight
In order to have flexibility built in to the separation agreement, there is probably going to be a need for a professional to have some oversight over watching the business results over time and key business changes to assure that there is no "funny business" going on with accounting to skew the numbers as you move forward. There may also be a need for business oriented provisions to be placed in the settlement agreement to assure that the non-business spouse's interest in the business is protected into the future outlined in the agreement. Maintenance/Alimony may have to go to a sliding scale to avoid the attorneys fees it would take to go back to court over and over as the business re-stabilizes. There are a number of avenues to take for overseeing the future of the business. These avenues can run from working together with a financial expert in periodic review meetings to mediation or to working with a Special Master.

Consider Collaborative and Creative Solutions
The need for flexibility in the division of business interests needs to be considered in today's business climate when contemplating a divorce. Creating and maintaining a collaborative atmosphere to come up with a flexible solution is best given the lack of stability in today's business environment. The more creative the couple is willing to be in problem solving the uncertainty of the business's future the more likely they can come to a result that is equitable.

Every business and business sector is unique. You will need to work with your attorney and the appropriate experts to come up with a solution for business valuation in your particular case. There are still cases where a bottom line value can be reached, but in today's economy it is wise to look into flexible solutions as an option.

The other day a women called me and wanted to get some advice about how she should proceed with her divorce. She had been married for 20 years during which time she stayed home and raised children while her husband worked full time making around 500,000 dollars a year. She had recently gone back to school, started to work and was making 34,000 a year. They still had two children at home that were teenagers. Her husband wanted to mediate the divorce and wanted to split everything 50/50.

She said that her husband did not want to spend money on the divorce and she felt that she did not want to either. An understandable position. However, there are some cases where it is important to invest in getting to a fair settlement, an equitable settlement. In my opinion the scenario above is one of those cases.

Splitting up a marital estate in Colorado is to be done "equitably" which does not necessarily mean equally. Maintenance is given or not given by the courts based on a "reasonable needs" test. As you can see both of these standards allow for a lot of latitude in a court's decision. What is "equitable" or fair and what is "reasonable" are interpretations of the facts and there are no formulas to follow. If your case did end up in court, you would want a strong advocate to present the facts and your position to the court.

So, before going to a mediation, if that is what the couple chooses to do, the wife needs to spend the time and money to get a good idea of what her position might look like if she were to end up before a court. Then she can go into the mediation fully prepared and educated.

No settlement discussions or mediation should take place before all financial information required under Colorado statutes has been exchanged. Once the petition for divorce is filed there is a 40 day period from the date the other party is served where financial information must be exchanged. Financial Affidavits will have to be filed with the court during this time period. Once the full financial picture is disclosed, you need to sit down with your attorney and decide if there is a need for a financial expert to work with the numbers to come up with an equitable settlement offer. These financial experts are often called Certified Divorce Financial Analysts and their expert testimony is very valuable if you had to go to court. You may also need to have an expert hired to assess the value of a business or do some other form of investigative accounting. This type of pre work will allow you to enter into negotiations or mediation with full disclosure and the information you need to come to an equitable settlement.

Working with your attorney and a Certified Divorce Financial Analyst or other expert may look like you are spending quite a bit of money up front, but it can be a very worthwhile investment in the long run if you can come to an informed and equitable settlement rather than going into negotiations less prepared.

This is not true in every case, but for those cases where there has been a long term marriage, a large discrepancy in income, significant assets and a spouse who has a substantial income,it can be the one key investment that supports the long term well being of the party earning significantly less or who has no income in the marriage.

If the facts of your case seem to fit with the above example, it is a wise idea to seek legal advise before negotiating any settlement with your spouse.

In a recent Colorado Court of Appeals case, a husband appealed the finding by the divorce court that some of the stock options earned by his wife were earned prior to marriage and were therefore separate property and not subject to division of the marital estate.

The relevant facts in In re the Marriage of Powell, No. 06CA1369 are that the marriage occurred on September 23, 2000 and that the stock options were granted to the wife on February 27th, 2001. The wife argued that the stock options were awarded in 2001 but that these options were for services rendered in 2000 and that the options were earned at the time the services were rendered. The District Court agreed and prorated the options as separate for services rendered before the date of the Marriage.

The Colorado Court of Appeals disagreed. The wife's stock option plan stated that the committee "may" issue the stock options. The Court held that the wife had no enforceable property right at the time the services were rendered because the committee had no obligation to issue a stock option at that time. The Court held that the option was not "earned income" until it was granted on February 27th, 2001. Since the couple was married on that date, the stock options were marital property.

One other finding of the Court of Appeals in this case is of note. The husband was a homemaker inside of this marriage. The value of his contribution to the marital estate as a homemaker was not taken into consideration by the trial court. This decision was upheld because the trial court had weighed the factors dictated by statute. Also, the husband had owned a home before he married but conveyed it into joint tenancy with the wife following the marriage. He argued on appeal that it was inequitable for the trial court to award the wife 60 percent of his premarital home. The Court of Appeals affirmed the lower court in stating that once conveyed, the home was part of the marital estate and subject to equitable distribution as part of the overall estate and that it did not matter that the origin of the home was husband's separate property.

Information for this entry was gathered from 38 Colorado Lawyer, No. 4, pg 140, April 2009.

Q: What happens if you have divorced your spouse and then later find out they did not tell you about certain assets that they owned during your marriage that you were unaware of?

A: If the omitted or misstated information would materially alter the property settlement then you can set aside the final decree and re-open the case for a period of five years from the date of the final decree.

Under the Colorado rules that govern in divorce cases, C.R.C.P. 16.2(e)(10) states that it is the duty of both parties to a divorce case to provide full disclosure of all material assets and liabilities. If the disclosure contains misstatements or omissions that materially affect the division of property then the Court maintains the jurisdiction to reopen the case for five years following the entry of the final decree.

This law went into effect for Domestic Relations Cases filed on or after January 1st, 2005 and for post decree motions filed on or after January 1st, 2005.

In the recent case of In re the Marriage of Roberts and Lipson, No. 07CA0903, The Colorado Court of Appeals found that the wife could re-open the case because her motion to set aside the separation agreement was filed after January 1st, 2005, even though the original case for decree of legal separation was initiated prior to January 1st, 2005. The motion to set aside the decree is a post decree motion and rule went into effect for post decree motions before she filed it. The date the underlying case was initiated was not relevant.

In this Case, the husband had stated that his interest in a limited liability corporation was worth $663,000. This LLC owned a 5.41% interest in certain stock. The Wife alleged in her motion to set aside that the Husband's financial disclosures omitted to disclose that his ownership interest in the stock had a minimum value of $20 million, and that he was aware of the minimum value at the time.

The Court of Appeals held that the Wife had a right to re-open the case because her motion to set aside was brought after January 1st, 2005 and the Husband's omission, if proved, would materially affect the property distribution in the Case.

Information for this entry was gathered from 37 Colorado Lawyer, No. 10, pg124, Oct. 2008