Selling property at below market value when encountering cash flow problems not “marital economic misconduct”

Posted Wednesday, September 7th, 2011 by Gregory Forman
Filed under Equitable Distribution/Property Division, Of Interest to Family Law Attorneys, South Carolina Appellate Decisions, South Carolina Specific

The August 31, 2011 Court of Appeals opinion in Nestberg v. Nestberg, 394 S.C. 618, 716 S.E.2d 310 (Ct. App. 2011) is the second of two Court of Appeals opinions from that date in which that court analyzed the issue of marital economic misconduct as applied to equitable distribution of marital assets.

In Nestberg, shortly prior to the parties’ marriage, Husband purchased land.  This property was titled solely in his name and secured by two mortgages in his name.  During the marriage Husband divided the land into fifteen lots, with the intent of keeping one lot as the parties’ marital home.  For five years, the parties used Wife’s salary to help pay these mortgages.  At some point Husband transferred ownership of the remaining fourteen lots to a corporation, Eastview, with the intent of developing and selling these lots.  In December 2006, with the parties still living together, Husband filed for a fault divorce.  He dismissed th action in March 2007.  In May 2007, Wife vacated the marital home and filed for separate maintenance.

Between these two filings, Husband sold six of the Eastview lots at below market value.  He claimed he was doing it because he had cash flow problems and was trying to avoid bankruptcy; Wife claimed he had engaged in economic misconduct to lower Eastview’s value.

At trial, the family court concluded the six lots sold between December 2006 and May 2007 “were sold far below fair market value . . . in contemplation of marital litigation.”  The court adjusted the equitable division based on the finding of marital economic misconduct and awarded Wife attorney’s fees.  Husband appealed.

On appeal, Husband first argued that these lots were never transmuted because both the deeds and the mortgages were solely in his name.   The Court of Appeals disagreed, finding the parties’ use of the marital home and Wife’s payment of the mortgages from her salary for a five year period indicated an intent to treat the property as marital.

However, the Court of Appeals reversed the family court’s finding of economic misconduct.  First the Court of Appeals held that the family court erred in using the December 2006 filing date, rather than the May 2007 filing date, to value the lots, noting “[w]hen there are two filing dates, the court must use the date of the filing of the litigation which lead to the equitable division.”

Next the Court of Appeals reversed the family court’s finding of economic misconduct, holding:

[T]he facts involve challenged business expenditures.  Therefore, the family court must find the allegedly at fault party engaged in willful misconduct, bad faith, intentional dissipation of marital assets, or the like before it may alter the equitable distribution of marital property based on economic misconduct.

The family court made no such finding in this case.  The only factual finding made by the family court is that “these sales were made in contemplation of marital litigation.”  This finding will not support the family court’s decision to alter the equitable distribution.

We find the preponderance of the evidence does not support any of the findings required to alter the equitable distribution of marital property based on economic misconduct.  While most of the lots sold after the December 2006 filing were sold below market value, we find Paul’s [Husband’s] decision to do so was reasonable under the circumstances.  Paul explained his decision as follows:

Well, I was covered up with debt, under financial stress, had no income myself.  Hala quit contributing any income whatever as of January of that year.  So, during that time, I was having to depend on whatever money I could generate from my work or from sales of the lot or whatever.  Someone came along and offered me money for those lots.  I looked at it as an opportunity to pay debt, and that’s exactly what I did.

Similarly, one of Paul’s economic experts testified Paul’s actions in selling the lots for low prices “makes a lot of sense when you look at the financial health of Paul Nestberg individually.  He owed over $150,000 in credit cards.  He didn’t maintain the debts and the lots without going into bankruptcy.  It made it very possible to sell those lots.”  Later in his testimony, the expert said “there would be reason to suspect that the company . . . without selling the lots could not stay in business.”  We agree with the expert that selling the lots below market value made good sense under the circumstances.  Because we find Paul did not engage in willful misconduct or bad faith, did not intend to dissipate marital assets, and did not purposefully reduce the value of Eastview in contemplation of marital litigation, we reverse the family court’s decision to alter the valuation of Eastview.

On remand, the Court of Appeals required the family court to determine the value of Eastview as of May 11, 2007 [the date the second action was filed], and apportion it without any consideration of marital economic misconduct.  Because the Court of Appeals reversed and remanded the equitable distribution determination, it also remanded Wife’s award of attorney’s fees.

Nestberg demonstrates the limitations on “economic misconduct” arguments for equitable distribution when such alleged misconduct stems from business decisions. “[P]oor business decisions, in and of themselves, do not warrant a finding of ‘marital misconduct.’” It requires “some evidence of willful misconduct, bad faith, intention to dissipate marital assets, or the like.”  Nestberg further demonstrates the risks of allowing marital dissolution litigation to be administratively dismissed under the 365 day rule: when a new marital dissolution action is filed marital property will be identified and valued as of the date of the new filing, not the original filing.

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