The Auction Method of Equitable Distribution (February 2002)
Material for National Business Institute Lecture, February 2002; Published in the Fall 2006 Volume of the American Journal of Family Law
“Fair market value is the price a willing buyer would pay and a willing seller would accept in the ordinary course of business when neither person is being compelled to act.” City of North Charleston v. Claxton, 315 S.C. 56, 431 S.E.2d 610, 612 (Ct.App. 1993). It is amazing how this simple principal is forgotten when parties attempt to equitably divide property.
I once handled an appeal in which one of the issues was the valuation of the marital home. It was one of the nicest homes in a very small community and the husband’s family had actually built the home over a period of years, though the wife remained in the home pendente lite. The parties’ experts had wildly varying valuations of the home: wife and her expert giving it a ridiculously low value; husband and his expert giving it a more reasonable value.
Husband’s attorneys did a remarkable job trying the case but they failed to ask wife a very simple and obvious question: “Would you be willing to allow your husband to keep the house at the price you value it?” The answer would have been obvious (when my client offered to buy the house at almost 20% over wife’s valuation she refused) and it would have destroyed wife’s argument on the value of the house better than producing a mountain of appraisals. Had husband been asked if he would purchase the property at the valuation he was claiming, he might well have answered yes.
Reading this transcript made me realize how ridiculous it is to have a bunch of testimony or appraisals on the value of most marital property. If value is the price a willing buyer and a willing seller would reach on the item, then simply have the parties bid on the item and award it to the highest bidder. By this method most marital property can be divided in a quick and effective manner.
In the example of the marital home above, had the court awarded the property to the husband and valued it for equitable distribution at the value he placed on it, both parties would have been better off. Wife, whose value on the property was almost $50,000.00 lower than husband’s, would get a $25,000.00 windfall (if her claim on the home’s value was accurate) and husband would get the property at the value he wanted.
Auctioning off marital property forces both parties to be reasonable on their valuations. A party seeking to keep property at a low value runs the risk of being outbid and not keeping the property. A party seeking to saddle the other party with property at a high value runs the risk of keeping the property at its high valuation.
An example: husband and wife are bidding on husband’s gun collection. You represent wife. Husband decides he is not going to bid much for the guns because he knows wife does not want them. The bidding stops at $200.00 even though wife knows the guns are worth more than that. How do you advise wife?
You tell wife to buy the guns and pawn them. If they are worth much more than $200.00 she makes a tidy profit. If they are not worth more than $200.00 she should not complain about the value husband is giving them. The nice thing about this auction method it is requires parties to “put their money where their mouth is.”
Assume wife bids the guns up to $500.00 and you now represent Husband. “Aw,” he complains, “she is just bidding a lot because she knows I want the guns.” How do you advise husband?
You ask him, can you get the same guns for less than $500.00? If not, do you want the guns? If he says the guns are not worth $500.00, tell him to let wife keep the guns and buy new guns. She has now overspent on guns to spite her husband but he gets the last laugh as he can replace the guns at a lower cost then they cost his wife. If he says the guns are worth at least $500.00 and that he wants them, he should keep bidding.
The beauty of this method is that people quickly settle on the true value of items and that a spiteful bidder often pays for his or her spite. A party who overbids, thinking the other party will overpay for the property, may find the bid accepted and the other party purchasing similar property for less elsewhere.
At the end of the auction, one should have a table much like the one below:
MARITAL PROPERTY TABLE IN HUSBAND V. WIFE
If the parties had intended a 50/50 split on the marital estate, husband would end the auction by writing wife a check for $368.57, which would give both parties marital property worth $8,549.57. However a 50/50 split of property is not required to make the auction work. If the parties had agreed on a 60/40 split for wife, husband would write wife a check for $2,078.48. This is because the total marital property is worth $17,099.14. Sixty percent of that figure is $10,259.48, so wife needs $2,047.48 to bring her up to that figure.
The auction method can even be used for dividing marital debts as it was in the example below:
MARITAL PROPERTY TABLE FOR HUSBAND V. WIFE, II