In this last blog of an eight (8) part series we are examining the case
law and methodology for calculating the value of a community lien on a
sole and separate business.
Under Arizona law, generally a business or interest that you have in a
business acquired or owned prior to the marriage is yours and your spouse
has no legal
ownership claim to it, but the marital community and your spouse may still have a legal,
equitable lien against your business based on the efforts made by you during the
marriage to operate this business and grow it – your work and efforts
during the marriage are considered
In the previous three blogs, we discussed different ways that an expert
will arrive at a value for a business. Here, the business is sole and
separate. In this scenario, there will be two values calculated –
one for the business on the date of marriage and a second for the value
of the business at the end of the marriage (usually the date of service
for the divorce petition, but can be set at the different time depending
on the circumstances).
The difference in those two values will be the key to figuring out whether
or not an equitable community lien exists.
The equitable interest or lien on a sole and separate business will only
apply if there has been an increase in value of the sole and separate
business during the marriage. Any increase attributable to the “community efforts” will
be allocated or apportioned between the two spouses in a divorce.
Rueschenberg v. Rueschenberg, 219 Ariz. 249, 254, 196 P.3d 852, 857 (App. 2008).
Click here to read Court’s Opinion
If the business has increased in value during the marriage, then a calculation
must be done to determine the amount of the increase in value attributable
to community efforts and whether the community has received adequate compensation
for those efforts.
This is the crux of the calculation set forth in the Cockriel/Rueschenberg
line of cases. For example, let’s say that your sole and separate
business was valued at $100,000 on or about date of marriage and is now
two (2) years later, at the time of divorce, worth $300,000 – an
increase in value of $200,000.
A valuation expert and/or the Court will look at two main items in analyzing
the community interest in this increase in value.
First, we need to see if you have been compensated for your efforts during
the marriage, i.e., were you taking a salary or receiving draws or other
compensation during this time; how much this compensation was; and how
does it compare with compensation for others in that type of business
or field for a like position.
Second, we will need to calculate a reasonable rate of return for your
initial sole and separate investment in the business. That rate of return
can vary greatly depending on the circumstances of the business and can
be a major point of contention.
For the purposes of our example, let’s say you paid yourself a salary
of $50,000 a year and this salary was commensurate with the going expected
salary in that type of business and position. And the rate of reasonable
return for your investment was set at 10% per annum. So, if the increase
in value was $200,000, you would have expected $40,000 as a reasonable
return on your prior investment, leaving $160,000 of the increase as attributable
to community efforts and subject to a community lien.
Based on your salary, the community was compensated for $100,000 of this
during the two years of marriage leaving only $60,000 subject to a community
lien to be allocated accordingly. Under this scenario, your spouse is
entitled to $30,000 as and for their share of the community lien on the
increase in value in your sole and separate business.
An experienced attorney well versed in Arizona law on this topic can be
invaluable in saving you not only time but money on this issue by guiding
you to the right experts, countering the other side’s arguments,
and achieving an appropriate resolution to the case. If you would like
to work with one of our experienced divorce attorneys, please call
OWENS & PERKINS at480.994.8824 to schedule your free 30 minute consultation.