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Complexities of Washington Divorce Involving Division of a Business

Divorces can be very complicated when a valuable business is part of the community property.  The party who keeps the business may be unable to pay their spouse’s share immediately, resulting in long-term property distribution payments and interest.

calculatorA Washington appeals court recently addressed these issues in the unpublished case of In Re: Marriage of Cheng.  The wife had graduated from Harvard Business School in 2002 but had not really been employed since.  The husband had a consulting and distance learning company that the court valued at $3.6 million.  The trial court awarded the wife $640,000 in maintenance to be paid over 44 months and a judgment of $1.455 million with 6% interest over 15 years as property distribution. The court also awarded child support greater than the standard calculation.  The husband appealed.

The husband argued that the wife was receiving an improper double recovery.  Trial courts are to consider “all relevant factors including but not limited to” those listed in RCW 26.09.090(1) when considering how much maintenance should be awarded.  The maintenance award must be just, but the trial court otherwise has broad discretion.  One of the listed factors is the division of community property.    If the maintenance and property award are paid from the same asset in a way that unfairly burdens the spouse that is paying, the maintenance may duplicate the property division.

The appeals court distinguished the cases cited by the husband from the current case.  In the previous cases, the assets in question were diminishing.  Here, the asset was an ongoing business.  The appeals court found there would be no double recovery because the value would not be diminished by the maintenance payments.

The husband also alleged the maintenance award was excessive.  He argued the wife was able to support herself.  Additionally, she would receive more than $12,000 in property distribution payments each month.  He also argued that the maintenance award should be based only on his replacement compensation. The appeals court rejected the husband’s argument, concluding the trial court made detailed findings regarding the maintenance, and the husband had not argued they were not supported by substantial evidence.

The husband also argued he should not have to pay interest on the deferred property payments, and alternatively it should be just 3%.  RCW 4.56.110 provides that judgments bear interest at the maximum rate allowed pursuant to RCW 19.52.020.  Generally, the trial court must follow the statute, but it may set a lower interest rate for deferred payments of property distribution in divorce cases if it provides adequate reasons for varying from the statutory rate.

Here, the trial court allowed the deferred payments because the husband could not pay the property distribution immediately.  The court noted the rate “resolves the needs of both parties,” but it did not provide additional reasoning.

The husband argued the projected growth of the company was insufficient to support the 6% interest rate. The trial court, however, had found the company’s revenue would continue to grow.  The trial court found the projection made by the wife’s expert was “overly optimistic but slightly more credible” than that offered by the husband.  The appeals court found the husband had not shown the trial court abused its discretion in setting the rate at 6%.

The husband also argued the trial court erred in not giving him credit in the property allocation for pension and tax payments he made.  The appeals court found the business was required to pay the pension payment under federal tax law.  The business deducted that amount from its 2013 tax liability, and the experts should have considered it in their valuations. The appeals court rejected the husband’s argument that he and the business were “one and the same.”  The appeals court found no abuse of discretion in the trial court’s denial of credit because the payment was attributed to the business.

The husband also argued he was entitled to credit for paying back income taxes.  The trial court found the wife had not benefited equally from the businesses profits after the separation.  The wife’s temporary maintenance payments were only $10,000 per month, while the husband earned over $927,000 from the business that year.  The trial court concluded the husband was not sharing equally with the wife after the separation and did not credit him for the taxes.  The appeals court found no abuse of discretion, noting the trial court had broad discretion to reach an equitable distribution.

The husband further argued the trial court erred in not including the interest as income for the wife in the child support calculation.  RCW 26.19.071 requires the trial court to consider each parent’s income and resources.  “Income” includes income from any source, with no exception for interest earned from deferred property distribution.  The appeals court held the trial court erred in not considering the interest payments as income for the wife.

The husband also alleged an error because the trial court did not impute income to the wife, who he alleged was “voluntarily unemployed.”  RCW 26.19.071(6) requires that income be imputed to a parent who is voluntarily unemployed or voluntarily underemployed.  The voluntary nature of a parent’s unemployment is determined based on a demonstrated ability to find work.  The wife was well-educated but had not been employed for more than 10 years.   She testified she sent out more than 50 resumes and made more than 100 networking contacts.  The trial court found she would need one or two years of retraining.  The appeals court found the trial court was within its discretion to deny the request to impute income under these circumstances.

The appeals court rejected the husband’s argument that the interest and pension payments should be deducted from his income when calculating child support.  The interest payments were not business expenses, and the pension payments were attributed to the business, rather than the husband individually.

The appeals court agreed with the husband, however, that the trial court had not made sufficient findings to support a deviation from the standard child support calculation.  RCW 26.19.020 allows a trial court to exceed the presumptive support amount in the schedule for parents with a combined monthly income of more than $12,000 upon written findings of fact.  The trial court must consider the standard of living and the special medical, educational, or financial needs of the children.  If the court fails to make findings that address the required factors, those findings will not support a deviation from the schedule.  The appeals court found that the trial court only noted that the children needed support in excess of the statutory amount “due to the lifestyle that has been enjoyed by the children.”  The trial court did not address the required factors directly or make express findings regarding the information in the exhibits it referenced.

This case illustrates the broad discretion trial courts have in many aspects of a dissolution.  The court, however, must make the required findings.  The high-asset divorce attorneys at Blair & Kim, PLLC, understand the complexities involved in divorces involving highly valued businesses.  If you are facing a divorce, call us to discuss your case at (206) 622-6562.

More Blog Posts:

Issues that May Arise in Dissolution of Marriage When One Spouse Owns a Business

Property Divided Upon Dissolution

Image: FreeImage.com / Paula Patrocínio

 

 

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