Modern Divorce - The Do-Over For A Better You

Who controls the family business in a divorce?

June 09, 2021 Attorney Billie Tarascio
Modern Divorce - The Do-Over For A Better You
Who controls the family business in a divorce?
Show Notes Transcript

If one spouse owns a business and the other works with it, then what happens when they split up? Or if both own it and one has to leave - suddenly without a job and an income?

So many questions are answered in this important podcast featuring Modern Divorce Host Billie Tarascio and Arizona attorney Darin Colburn who pick apart the strategies and possibilities when valuing and splitting up a business. They cover how to value the business, and whether it's good to pay an expert to do that (watch out for the gotchas!). Also, they talk about how a judge looks at tax returns and whether the deductions you take affect the valuation - and the judge's opinion of you!

This is a fascinating walk through the considerations of splitting a business and what that means for spousal support and more.

Billie Tarascio (00:01):

Hello, and welcome to the modern divorce podcast. I'm your host, Billie Tarascio. I'm the owner of modern law, a family law firm in the Phoenix area. I've been a divorce attorney for more than 15 years. I've got four kiddos and I'm divorced myself. And on this podcast, we're going to cover everything related to divorce. Be it legal issues, financial issues, children issues, blended family issues, counseling mediation, and more. I hope you enjoyed the podcast. Hi

Billie Tarascio (00:29):

There. This is Billie Tarascio back with the Modern Divorce podcast back with another episode, Darin Colburn. Hello, Darin.

Darin Colburn (00:34):

Hi Billie How are you?

Billie Tarascio (00:37):

It's so good. Now you would think that we will be talking about the Bill and Melinda Gates divorce, because that is what everyone is talking about, but we're going to talk about something a little similar, but not exactly on point. We're going to talk about family businesses and when people own a business or one party owns a business or own a business and go through a divorce. And what happens to the operations of the company, because of course that is going to be affecting, um, Bill and Melinda gates who were both working in their foundation, owning their foundation. Now sometimes one person owns it, one person doesn't, um, but it can get really tricky and really messy to figure out how to operate a business during a divorce.

Darin Colburn (01:25):

It sure can. Um, so the first question with any, uh, with any business valuation case is when was the business form, right? And the release in Arizona, because Arizona is community property state. Um, and this question is important because if a business was formed prior to the marriage, um, then it is, uh, maybe consider sole and separate property. And that would certainly impact the extent of the other spouse's interest. Um, if it's open during the marriage is presumed to be community property, which would be subject to an equitable division. Um, now as we'll kind of discuss later, if, if you have a spouse who started a business before you got married, you're not necessarily, um, your claims aren't necessarily zero, there is something called a community lien theory that you can use to assert, uh, to obtain an interest in the new growth that occurred during the marriage. Um, but I think it makes sense first to talk about a scenario where there's no dispute to the businesses community. So in this.

Billie Tarascio (02:34):

Yeah. Yeah. And so, um, I'm glad that you brought that up because from the family law perspective, like that's being analysis, the first, the first question is, is the business community or separate property. That's what we do with all of these pieces of property in business. But the other issue with businesses is that businesses are also governed by their own rules, their operating agreement, their ownership that is different from whether or not the community has an interest. And so one of the other things that we have to do when we have, um, when we have a businesses, we have to figure out well, who owns the business, who's a member, or who's a director who has the authority under the business statutes, which you're entitled time to control and operate in that instance.

Darin Colburn (03:24):

Right. And that's a good point. And I guess it's worth stating that, um, business owners and operators can, uh, contract, uh, for whatever they want. I mean, within reason, as far as how things work within the business, how it's managed, how it's governed, uh, in the absence of an operating agreement or a formal written agreement that outlines those types of provisions, um, they're title 10 and the default, uh, statutes will control. Um, so whether or not you have an operating agreement, um, there's a procedure, um, in, in a set of rules that govern the operation of, of a business.

Billie Tarascio (04:04):

So, and this comes up a lot of times with houses. Like if somebody owns a house before they got married, but then they refinance it and they put the other person on title, then we've got some competing things going on because our general family law analysis as well, it was owned before the marriage. So it's separate property. However, once you put both persons names on it, then it looks like it's been gifted from separate property to community property. Um, is the analysis the same with the company?

Darin Colburn (04:33):

I think it's slightly, um, I think it's similar, but slightly more complicated than, um, the titling of a house. Usually when a spouse has added to the T added to the title, that's pretty definitive proof that it, um, that it's intended, even if it's not a technically community property, they both have an equal interest, which is essentially as far as outcomes gonna result in the same thing. Uh, and a similar argument I think, could be made as far as, uh, corporations in terms of, um, you know, a person being added as an owner or a member. Um, now usually when you, when you're added as a member, um, you're, you're taking a certain defined stake in the company. Um, and if that stake is not, um, explicitly defined, it may just be, uh, an equal share with the other members. Um, but you know, it's worth noting that some, some businesses, aren't all community, meaning, um, you know, one spouse, your husband or your wife may start a business with are already partners. Maybe it's a friend, maybe it's family member, maybe it's a peer or a colleague. Uh, and maybe the community only has a fractional interest, um, in, in the company, maybe it's 50%, maybe it's a third, maybe it's any other number, right. Um, in, in that you need to determine the value of the business as a whole, and then define what portion of that value, uh, belongs to the community.

Billie Tarascio (06:07):

Sure. And one issue we've got is value what's the buyer, but the other issue we've got is control. So let's say that one spouse owns is the owner, the member of the LLC. Um, and let's say they, they own it by themselves, but it started during marriage. Now this is a community business, right? And many times when you go forward and you, and you talk to the judge and they, and they think of a community business, um, you can get into a situation where is the owner spouse loud to cut out the non-owner stocks, or does that violate on preliminary injunction? Uh,

Darin Colburn (06:50):

Well, I think it depends on, uh, so these questions are very complicated. Uh, it depends on what the impact of the decisions are, first of all. Um, and you kind of put this in your fact pattern, but the answer to this question may be different if both spouses are members of the ELA, uh, of, of the corporation because of the limited liability rules or limited liability company rules in Arizona recently, um, were amended to include a fiduciary duty between members, uh, which is important to understand because you're not necessarily allowed to do, um, um, to take actions which would harm the other members or the corporation as a whole. Whereas the preliminary injunction really just kind of preserves the status quo and prevents you from transferring concealing or otherwise dissipating assets outside of the normal course of ordinary course of business. Um, so you have a lot more leeway under that statute than you would under an obligation.

Darin Colburn (07:54):

That's fiduciary in nature, uh, which is a higher standard. Um, if you're not a member, there's no fiduciary duty. So the court is looking at, are you dissipating the value of the company? Meaning are you, um, being, you know, let's say you go out and, uh, you tell all of your, uh, clients that you're going to start a new corporation under new entity, and they should start doing business with that entity. Um, and all of a sudden, you know, the, you know, you're basically just transferring the revenue stream to a different entity to try to cut your spouse out of, of value. That would be a problem.

Billie Tarascio (08:34):

Yeah. Yeah. And so that's a great point. And I want to talk about that. One thing that a business owner needs to be careful about is just because you run your business into the ground during the divorce does not mean that you won't have to buy out the other spouse because of the data. The valuation is the date of the service up to your business. So that works both ways. On the plus side, it means you are free to grow your business and you won't be penalized by having to buy out the other person because it should be valued as of the date of service. On the other hand, there is no benefit to you in running your business to the ground or opening a competing business and transferring all the, all the customers, because it's going to be valued as of the date, when the customer is still belong to the community visits.

Darin Colburn (09:24):

I that's a good point. And I, I hear that a lot. Well, especially with, um, businesses that are more service oriented because, uh, the, the owner or operator spouse often thinks, well, there's no business without me. So, um, I'll just stop doing work. And then there's no value, uh, for the reasons you described that doesn't work, the valuation is typically going to be as of the date of service, although not always. Um, but that's the general rule we should

Billie Tarascio (09:51):

Talk about that. Is that not always there? There's a couple of things. Um,

Darin Colburn (10:01):

If certain transactions or major fluctuations in value are, uh, perspective, meaning they're going to occur in the future and they were foreseeable, uh, at the time of, uh, divorce then, uh, or at the time of service, then the court may use that later valuation date. Uh, for example, you could have, uh, uh, you, you could have a deals in the pipeline that are anticipated to go through a highly probable, but not, not yet, not yet official. It would be, um, inequitable to not consider those. Um, on the other hand, if you look at like the pandemic, for example, um, that depending on when you filed for divorce during COVID, maybe it was, or wasn't foreseeable, right? So if you filed for divorce in like November of 2000, uh, 19, uh, you really can't go back and argue that the value of the business shouldn't be, should be less because of the pandemic, because none of that was foreseeable.

Darin Colburn (11:07):

Uh, if you file for divorce in April, um, maybe that's a different story, right? So, but really foreseeability, uh, is the key factor there also, um, it depends on the nature of the business because businesses, you know, some businesses sell goods, some business to sell services, some businesses are, are merely just, uh, holding entities for assets. Um, and in, in that case, um, you know, if the value of the business is tied more towards labor, um, then the date of service is the right way to value it because any increase in value is going to be so tied with the, uh, the operator spouses labor after the date of service, that, that the other foster didn't have to get a cut of that, but let's say you own a business, uh, in the business is for example, just a holding company for rental properties. Uh, the tenants already there, they've already signed a lease money's already coming in, um, and just market, uh, market performance, you know, with the housing market increases the value of, uh, the prospective value of the property or rents. It, it may make sense to choose a later date, um, than the date of service, because the change in value had had nothing to do with anyone's labor or input, uh, or effort. It just kind of a static in the same way that a court looks at a gains and losses for a retirement account when the, those gains and losses are passive.

Billie Tarascio (12:42):

Yeah. Um, and I, and I hope what people are understanding is just how complicated this is. And there are, there are valuation issues. There is, um, figuring out what is the key to the growth, isn't it labor, or is it market forces? Um, and there's what was known and knowable at the date of service versus what happens in the future. Um, but one of the most difficult things for a couple to deal with is sometimes it can take a year to get a divorce, especially if you have a complicated financial transaction, couple of new divorce, and if you own a business together, then that is usually a complicated financial transaction. So, you know, let's say you've got something like a roofing company, and dad is the general contractor, and mom owns all the books. If mom's name isn't on corporate documents, then can, and should dad cut mom out of the business? You're asking my opinion legally is he can't deduce that. Well,

Darin Colburn (13:47):

All of these, um, the thing that's complicated is a lot of the different issues intertwined with each other. So on one hand, um, you know, if she's not a member of the corporation, there, there's no like ongoing duty to include that person in the operations, but there are other duties and issues that could be related, for example, the duty of disclosure, um, right. Which is required to the court. So when you're involved in a divorce proceeding and there's a business you're required to disclose certain information to the other party, um, that's going to continue, regardless of whether the other spouse has an active interest in running the business. Um, however, would be, you know, disclosure rules are going to be more limited than a if, uh, you know, you have an operating agreement that requires, um, a fiduciary duty. Um, the other thing to consider is spousal maintenance.

Darin Colburn (14:47):

So, um, you know, you may kind of cut like depends on what you mean by cut the other spouse off out of the business, if you're the primary breadwinner. Um, and your income has historically gone into a joint account and your spouse is a stay-at-home spouse with, uh, caring for the children. Um, if by cutting off that spouse, you mean, uh, no longer providing any financial support, that's a separate issue. You can do it. Uh, but that spouse can file for temporary orders and ask for spousal maintenance. And the court may say, yeah, um, you don't have an obligation to include her in the business, but you do have an obligation to support her financially or him financially based on the historical, uh, you know, dynamics during the marriage among

Billie Tarascio (15:32):

Other things. And now it would be the correct way to do it. The court order, the owning earning spouse to pay spousal maintenance. The court should not order the owning, operating, um, spouse to maintain employment or maintain, uh, you know, a certain duty within the company, because that's where that line is on where title 10 and your operating room that really kicks in versus failing court, which can tell any spouse to pay spousal maintenance or to continue paying the bills in the house. But really the court shouldn't tell you how to run your business. And this is just such a fine line. Um, and I don't know that people always know what they can and should ask when they go to court, especially if they're representing themselves.

Darin Colburn (16:25):

Right. Uh, and it's conceivable that you would want to, you know, again, it depends on because there are also businesses that are run jointly in that case. Um, and when, I mean run, there's a difference between being an employee, which Arizona is an at-will, uh, state employment state, which means that there's no, uh, continuing obligation to employ somebody. You can terminate somebody at any, any time an employee can quit at any time subject to certain, um, you know, rules. There are some that, you know, you can't, you can't fire somebody because of their race, sex, gender, you know, certain protects protected classes. Um, but you know, if somebody is a member of the LLC and this historic, you know, has an as similar stake as you, or even a stake, um, you probably can't just cut that person out completely. So it really is something where a people, I guess we should talk about what happens, uh, because sometimes when you have a partnership where one spouse is involved in the business, the other isn't, uh, in the, the spouse that is involved in the business has other partners, uh, or, um, members with an equity interest, uh, the operating agreement, which is the written agreement that, that governance, how the business is managed and operates, uh, may have a provision in there about what happens with, um, the owner shares or interests in the event of a disillusion, or what happens with that spousal shares that can get really, really interesting, um, because, uh, things you want to look for, um, did both spouses sign, the operating agreement, did one spouse sign the operating agreement?

Darin Colburn (18:16):

Um, does it even really matter because the, at the end of the day, the court, regardless, I mean, so what's interesting, nothing's impossible when you walk into a courtroom, that's why you need an attorney, uh, right. Like anything really can't happen if you're not prepared, even sometimes when you aren't prepared. Um, but, uh, in most cases, the court is going to value the business, um, and then assign an interest based on the percentage of ownership, regardless of what the contract says. Right? So even if the, uh, even if the operating agreement says in the event of a divorce, Oregon, to value your interest, uh, by, you know, X, Y, and Z procedure, um, the court's not necessarily bound to that. Maybe the court is bound to it. If everyone's signed that mean both spouses assigned it, they had representation. I, and it was deemed fair, but you'd have to analyze it as a, uh, as an agreement that was made during the marriage, which has its own separate set of rules, kind of like a prenuptial

Billie Tarascio (19:21):

Agreement. Sure. Yeah, absolutely. Any agreement between parties about specific property, does it have to be analyzed as a post-nuptial agreement? Does it are only postnuptial agreements titled as such analyzed with the scrutiny that comes [inaudible]? So

Darin Colburn (19:46):

Not all agreements entered in between spouses are considered posting up nuptial agreements. I don't have the exact definition off the top of my head, but I believe it is something like if any agreement that, uh, substantially or significantly impacts the spouse's property or, or debt rights that is entered into during the marriage, uh, would be considered a postnuptial agreement. Um, now there are some things that are going to be lesser, right, but the whole concept here, and then we may have talked about this before. Um, you know, there's this whole body of contract lawyer, you know, uh, in this country, you're allowed to contract freely with people. Uh, however, the courts have looked differently, um, at contracts that are formed between people that have, um, other legal duties and obligations to each other. So there's something called, uh, for most contracts between, you know, uh, John Smith and, um, you know, Jane DOE, right.

Darin Colburn (20:49):

Um, you know, to strangers, it's considered an arms length transaction, uh, because they don't know each other, they don't have any other obligation or conceit competing forces was spouses. It's not knots, it's not considered arms length, um, because, um, you have certain legal duties in, and in fact, again, this word fiduciary duty, uh, comes to mind, uh, to your spouse. Um, so that's something you have to take into consideration, uh, as far as contract law, because normally what may be good to do to another person who's a stranger isn't acceptable to do to a spouse, even if they signed the document.

Billie Tarascio (21:29):

Absolutely. So I, the reason I want to start with this is because it's, it's so complicated. When is the date of the evaluation? Doesn't matter, what happens before or after? What about operating the business during the actual divorce? Like in the, in the example of the roofer general contractor husband and the bookkeeping wife, if there is so much conflict between the two of them that operating the business becomes impossible then, and many times, um, the non owning bookkeeping spouse ends up getting pushed out and she gets compensated through style of maintenance. But then when the owner has to go then hire a bookkeeper, the, the money available for spousal maintenance goes down, does he still have an obligation to support her at the same level, not in Arizona and Arizona after that service of the petition, unfortunately, or fortunately, I don't know. We don't have this concept of the status quo should be maintained during the pendency of the divorce. And so the non-owner spouse really can find themselves in a cash crunch.

Darin Colburn (22:37):

Yeah. And again, you can see coordinate intervention on all of these things. So there are, there's a way to, uh, resolve these, but preparation is key because, you know, when you're trying to get relief from a court during the pendency of an action. So while it's going on, um, that's called temporary orders. And in practice, most of the time you get an hour, sometimes you can ask for more, but in reality, most of the time you get an hour. So if you're dealing with a complicated organization, remember this is an hour for the entire hearing, which means that you each get 30 minutes to put on your case that involves, uh, any witnesses and exhibits. Um, so you better be very, very prepared to make your argument because it's very easy for the judge to be confused or not have enough information to render a decision that is favorable to you. Um, w w w which kind of benefit the, um, the owner's spouse, I think to some degree

Billie Tarascio (23:35):

Usually, yeah. Usually in families, it can go

Darin Colburn (23:38):

Both ways, right. Because especially because, um, again, you know, again, it all depends on the business, but if you're, um, you know, lawyer's going to call whatever numbers are, uh, are favorable to their client, to the court's attention. Uh, and maybe that's a revenue, right? Gross revenue, sales, receipts, how much money is coming in the door. And, you know, there's some businesses that it can look like it's pretty darn profitable. Um, but you have to look at the other side of the equation. What is the, what are the costs of goods sold? What are the expenses of the business? Um, because maybe the business has a lot of sales, but a low profit margin. Um, and if, if one lawyer is pointing out the gross sales and you never talk about the expenses, the judge may be misinformed and think there's lots of money to go around.

Darin Colburn (24:26):

When in fact there isn't, or, you know, you can have an attorney that focuses on the expenses, but there's no discussion about the fact that a lot of these expenses are personal in nature, right. Uh, in terms of what's reported on the tax returns. So you really have to dig into these things deeply, um, so that you can be prepared to summarize them for the court. Uh, usually for temporary orders, like a written in your pretrial statement, your written arguments, the court are going to be very important, um, because you're just not going to have time to get through testimony on each issue.

Billie Tarascio (24:59):

I completely agree with you. And I think these are some of the hardest cases, the pretrial statement for the temporary orders on a complicated divorce is one of the most challenging things that you can do as an attorney, because you have to condense your argument. It must be brief, concise, and clear, even when it's complicated, because it's really is your first impression in front of a judge. So we talked about like this, this very difficult period of time when you're not yet divorced, and we've talked about the date of valuation, but if you are the, let's take it from both perspectives. If you were the owning spouse, what do you want to do in terms of getting a valuation? Do you even want to get evaluation, or is it better to just let your spouse do it?

Darin Colburn (25:52):

So again, I think it depends like the classic lawyer answer. Um, if, if you're going to take the position that the business has no value, um, and you think that that's a credible argument, meaning you actually believe it, uh, I'm on the firm belief that prompt and complete disclosure, uh, is, is better than holding information back. Because again, if you're, if you're saying the business is operating at a loss and it's true, why wouldn't you over disclose things? So you can, because you, you want to be able to prove that, right. And when you hold information back, uh, in, in that circumstance, it always makes the other spouse think that you're hiding something for a reason. Um, and oftentimes clients are, I mean, they're human beings, right? They they're just uncomfortable with disclosing information to this, their other partner. I mean, their spouse, or they're going through divorce with, but if you really think that your business has no value, disclose everything and disclose it early, um, so that you can make that abundantly clear to other side. Um, if you think that it's a business has a lot of value, um, you may be better off just doing nothing, right? Uh, I mean, do what you're required to. I'm not saying do nothing, do what you're required to, but don't go above and beyond that because, uh, the, the judge is tasked with determining how much the business is worth and how much the business is worth is not dependent on what you or your spouse think it is worth. It's dependent on actual

Darin Colburn (27:29):

Accounting principles. And so if nobody's retained an expert to tell the court what it's worth, um, then the judge may have a hard time making a decision, uh, which again, not always, but usually it's going to benefit the owner's spouse.

Billie Tarascio (27:46):

Yeah. These are hard decisions. And I completely agree with you, if you think that your business has no value, or you want to present an, you want your position to be that the business has no value. Um, this is an interesting thing. And what it means, what you're essentially saying is this business doesn't make more money than I would get if I were working for somebody else in a nutshell. Right. Right.

Darin Colburn (28:15):

Well, um, there are a couple of different visits, a good time to segue. There are a couple of different methods that you can look at to value a business. Um, the first would be like the asset approach, which is essentially looking at the book value and assigning a value to the business based on what somebody would pay in the market for the actual,

Billie Tarascio (28:36):

The actual, yeah. So you got equipment, then the analysis isn't, could I make this much money working somewhere else, then the analysis might be, but what about all the vehicles you own? And the equipment like that has a value.

Darin Colburn (28:50):

Right? And so if you, if you think about it, do you want to, if you want a store that still sells bike groups, bicycles, um, you know, that may, it may make sense to like, if you're prime the primary or a source of your income, it's just selling goods. It makes sense to, to value the inventory and put a lot of weight on that approach, because that's kind of how it works. Right. But if you're in a law firm, right, I've got a computer, right. You can put a price tag on my computer, but, um, that's not really where the value is generated. Yeah.

Billie Tarascio (29:25):

Right. Or if you own a, if you own a pool repair or a pool service company, or a pest service company. Right. You know, yes. You've got some, some chemicals and maybe a car, but really what you're making your money on is this ongoing service that you get paid for or income.

Darin Colburn (29:45):

Right. And, and, and so the approach that you alluded to, which is, I think in terms of what we deal with the most common is generally referred to as the income approach. And you're looking at, um, you know, the earnings that the person. Yeah. So again, if you, let's say you have, uh, an auto shop repair business and, um, you know, you make, uh, you make $200,000 a year. Um, and if you had to hire your replacement, you would make a hundred, you'd have to pay them a hundred thousand dollars a year. Well, you're kind of by virtue of owning that business, instead of working for somebody else, doing your same job, you're making an extra a hundred thousand dollars a year. That's, what's getting capitalized in terms of like what that's, what is being assigned value in terms of the overall value of the business, or there's a different way of looking at it in terms of, uh, what's called a discounted cash flows, basically trying to define in real time what the present value of the money that the, uh, that the business is going to take in is, and there's reasons why you would do use different options, but th those are the most common.

Darin Colburn (31:00):

And then there's also, what's called the market approach. Uh, and this is really good in industries where sales and transactions of certain types of businesses are very common. And this is looking at like, uh, think of it kind of like, um, and this is oversimplified, but, um, uh, uh, uh, in real estate you have the, um, the cops that the realtor, they look at what other houses in the neighborhood all four recently. And if you have enough for volume and sales, you can reasonably predict what the business would sell for. So, uh, in certain industries where, uh, businesses or business interests exchange hands frequently, it's, it's really easy to look up the data and, and assign a value that way. Um, so those are the, those are the three major approaches. Oftentimes it's kind of a combination of all of them. Yeah.

Billie Tarascio (31:51):

So, so you're looking at all these things, like how much, how much does my business own and stuff? How much does my business earn an income? How much does my business have coming in and contract revenue? And if you're going to argue that it's worth nothing, because those things are low, then I agree with you completely. You want to disclose as much as you possibly can early, because it does not make sense for you to pay $10,000 for a business valuation. And there's always a risk that the business owner could be ordered to get a business valuation and pay for it. So to mitigate that risk, you want to be able to give everything you possibly can to the other side. So then if they ask for a business valuation, or they ask you to pay for it, you say, Hey, this is not necessarily, you have everything you need. It's not worth it. If you want to get a business valuation, you're doing it. But if that spouse, if the other can, can credibly argue that you are withholding information, I think you're much more likely to be ordered to pay for that business valuation.

Darin Colburn (32:47):

Right. Right. And if you are the spouse, uh, on the other side, you want to do everything you can to get evaluator appointed. Because again, ultimately it, if the judge doesn't have an expert, I mean, somebody who's qualified from an accounting perspective to tell the court what the value of the business is, then you're up the Creek without a paddle on either side. Um,

Billie Tarascio (33:13):

Yeah. So ask early, if you are the person who does not have the business, but, you know, what's creating Buku bucks or, you know, it owns expensive specialized equipment. You really probably want to file a motion very early on, on the case, asking for an evaluator to be appointed and the owning spouse to pay for it waiting too long is not your friends. Now, if you have a business and you know, it's worth a lot, then there's risk. You know, what makes more money for you than you would make. Otherwise, you know, you own expensive equipment, you have risk. And if you know that your spouse is going to get a business valuator, then you really need to be thinking about who you're going to get divided your business, because there's a lot you can do to influence the value of your business based on the evaluator you choose the experts you choose.

Darin Colburn (34:04):

Right. I, I agree with that. Um, also, you know, oftentimes business owners will point to tax turns cause people aren't always, uh, well, first of all, accounting print, uh, accounting principles are different for tax purposes, um, than they are for like the purpose of valuing a business in terms of true economic benefit. Um, for example, oftentimes on taxes, you can deduct depreciation, you can deduct all kinds of, you know, really intangible costs. Um, but, but sometimes, you know, I've seen a lot of, um, sole proprietorships. So business owners who are just on their own, uh, report, low-income on a taxes, but then you, you start to look at their affidavit of financial information or their bank statements, and you're looking at, okay, you say that you made $20,000 last year. Um, but your mortgage is $2,200 a month. So how does that make sense? Because like, that's more than your total income, right? And that's when you know that there's some issues there in terms of, uh, the accuracy of the documentation, which means that the valuation is going to be a lot more expensive, but also probably very necessary. Um,

Billie Tarascio (35:26):

Yeah. And I'll tell you, that's a red flag for judges when judges see tax returns that are very low and lifestyles that are very expensive. Um, I've seen judges in that case immediately say, Hey, this isn't honest, I don't trust this. And now there's already a presumption that you're dishonest. So you really want to get out ahead of that as you possibly can.

Darin Colburn (35:53):

Absolutely. Yep, absolutely.

Billie Tarascio (35:56):

And one of the ways you can do that is by selling one of the ways you can do that is by settling on a temporary basis and not bringing that in front of the judge before you go to trial before your orange juice business valuation, before you're ordered to spend a lot of money. So before you make these decisions about what to do in litigation, you really want to make sure that you hired an attorney like Darren, who knows businesses inside now, and then you want to make some strategic decisions about how to mitigate your risk. Okay. Yeah,

Darin Colburn (36:22):

Absolutely. And, um, the other thing that's important to consider is that you can be

Billie Tarascio (36:26):

Really creative in settlement discussions when it comes to businesses. Um, and the court is usually pretty cookie cutter.

Darin Colburn (36:34):

Um, so what I mean by that is, you know, what is going to happen, uh, if you go to trial, right? Conceptually the court could in theory, order the parties to sell the business, but that's very rare, um, very, very rare. Um, and again, it would depend on the type of business. Um, so that's not really a viable complicit. It doesn't really give you any kind of, uh, advantage over a settlement unless the, the terms are horrendous, uh, because you have no idea what you're going to get until itself, right. Which is kind of you're in the same framework is just trying to reach resolution on the mountain. Um, more than likely the court is going to assign a value and then enter judgment, uh, for that value. Now, if the, if the rest of the community, meaning the rest of the property has enough equity to cover the cost of the buyout, then that can, there's no risk or concern there because, you know, if the court determines that, um, that your share of a business is $200,000 and you know, your, your home's got $500,000 in equity.

Darin Colburn (37:42):

Well, we can just offset that and guarantee that you get your piece of the pie. That is the ideal scenario. But if you're, um, if the rest of the community doesn't have enough assets to cover the potential value of the business, then what you may end up with is a piece of paper that says the business owner owes you money, right. Uh, which can, uh, which can create its own set of problems. And you can end up in court trying to collect on that, um, collect on that piece of paper. Whereas in settlement, you can really define what is the amount of the buyout, uh, what are we going to offset against each other? What are the payment terms, right? You, uh, in what are the remedies? If somebody defaults, you can be a lot more creative and comprehensive interpreting not only determining what the value is, but also how you're going to actually recover it because it's few and far between where people, uh, on a busy business that has substantial value, where they have enough cash sitting around to just cut the other person to check if that's you great, come see us.

Darin Colburn (38:50):

We'll take care of you. No problem.

Billie Tarascio (38:51):

Okay. One more question. I know we're going along, but this is it's, it's so interesting. And it really, it matters so much to people who are in these situations. But one more question, let's say you're in a position where you get a judgment against you to buy somebody out on your community business. And you've got a building that you own. That's your separate property that has $500,000 of value in it. Can the court order you to sell your separate property or give a spouse an interest or leaning on somebody separate property to satisfy a community property judgment?

Darin Colburn (39:30):

Yeah, I think so. I think it's debatable, but, but I think the court can do it.

Billie Tarascio (39:38):

Yeah. Okay. I think you're right, because I know for sure, if you have a spousal maintenance judgment, when we put a lien, you can get a lien on somebody's retirement account. So even, yeah. So I mean, somewhere together that money is probably fair game. Um, okay. This has been fabulous. I know we've gone long, but it's been a fabulous discussion. Next time. I want to talk to you about astronomical spousal maintenance orders that are non-modifiable and what people can do about them. Cause we've had a couple of those come in and those are right up your alley as well. So we should definitely talk about that, but thank you so much for your time today, Darren, and we will talk again soon.

Darin Colburn (40:20):

Absolutely. And, um, I'd like to kind of revise because I just took a look at the statute, the court

Billie Tarascio (40:26):

That's what you were doing.

Darin Colburn (40:29):

You can put a lien on separate property to secure payment of certain things, including, you know, allocation of community property. The question is, um, you know, how do you get that lien to turn into a sale of a house? And I think eventually you can get there, but you have to go through other steps.

Billie Tarascio (40:49):

Okay. So, so that's important. That means if you have separate property, it's not fair game in a divorce. It's not fair game. There's a way that, uh, you're, you know, the non separate property owning spouse might be able to attach a mean or the court might be able to attach to mean that they might eventually get paid off, but it's not like you can be forced to sell your separate property to buy other stuff. That's a big deal. It's important.

Darin Colburn (41:11):

Yeah. And I mean, eventually, I mean, if, if somebody, there are ways that you can take a lean and for somebody to sell a house, but you have to go through a different,

Billie Tarascio (41:20):

Right. It's like a whole foreclosure process. Right.

Darin Colburn (41:23):

You also have to, I mean, sometimes you ask the judge to do something and they just do it. And if the other person doesn't object, then, uh, it ends happening.

Billie Tarascio (41:33):

What if that person were to sell their separate building and have money in the bank, but it was separate money. Could the court order you to give that to them?

Darin Colburn (41:44):

Yeah. And the court can definitely, I think, freeze the transaction, uh, and, and have the funds hold held in trust. I think, I think so, uh, in the reality is if you're trying to make moves, uh, to try to avoid payment, um, like that it may end up not being a good thing for you depending on the circumstances.

Billie Tarascio (42:07):

Yeah. But it may also give you, put you in a position where you can negotiate a buyout that works for you, or that is something you can live with as opposed to just handing over all your cash. So it's just important that you know, all of the options. And so you can be creative and come up with hopefully a solution that works for everybody because typing money never works. But structuring yourself in a way that you can all live with is, is in my opinion, a best guess.

Darin Colburn (42:33):

That should definitely be the goal. Um, and sometimes people just disagree. Somebody thinks the business is worth $2 million. Some someone thinks it's worth 200 and that matters. And it's hard. Uh, in that case, the judge is probably there's no middle ground, right. There's no reasonable compromise.

Billie Tarascio (42:49):

Yeah. That's, it's the battle of the experts. Yeah.

Darin Colburn (42:53):

And in that case, it just makes sense to put your head down and get everything ready to go to trial. So, uh, next time we can talk about what happens if there's a separate business and it goes up in value during

Billie Tarascio (43:06):

Ooh. Yeah, that's true. That's a whole nother topic. We will talk about it. All right. Thanks Darin.

Billie Tarascio (43:12):

Thanks so much for listening to the modern divorce podcast. Remember anything you've heard today or anything you read online is not the replacement for actual consultation with an attorney and does not create an attorney-client relationship. Even if you've called in and spoke to you, you are anonymous and we don't have your details and you've not become a client of modern law. However, we would love to speak with you, or you should seek out the advice of legal counsel counseling or any other expert near you. If you have an idea for a show topic, or you need to speak in Arizona, you can reach me at info. I N F o@mymodernlaw.com.