July 2013 | Issue 68
Background
The marital assets of Rohit and Ilaben Patel included Mr. Patel’s interests in four limited liability companies. Each of these companies was operating or developing a motel in Alabama, Virginia, Maryland or Louisiana. Both parties to the litigation agreed that each of these entities had a negative value, owing to the fact that each had liabilities that exceeded the value of its assets. The Circuit Court of Henrico County Virginia found, however, that for purposes of assigning value to Mr. Patel’s interests in these investments for equitable distribution purposes, each entity should be treated as having a value of zero rather than a negative value. This, of course, increases the overall value of the marital estate. Ms. Patel had been awarded 40% of the marital estate.
Appeal
Mr. Patel appealed this decision to the Court of Appeals of Virginia (Rohit Patel v. Ilaben Patel, Record No. 0875-12-2, April 9, 2013).
The circuit court had held that an offset for the total value of a marital estate based on the negative value of one asset is not recognized in Virginia law governing the equitable distribution of marital property. The appeals court expanded on the rationale of the circuit court’s holding by pointing out that the property at issue includes several companies that own or operate hotels. Companies that are young or expanding “often need to incur… debt… in order to generate a profit or expand operations.” The appeals court went on to say that “simply because a company’s debts exceed its assets at a given point in time does not mean that the company has a negative value. Nor does it mean that the company is incapable of generating profits or that the company does not have a positive cash flow capable of paying off any debt. Instead, it merely shows that at the time of valuation the company has more debt than assets.”
The Personal Liability Argument
Mr. Patel pointed out that he was personally liable for the debt of these companies, and that if they go out of business, he will be liable for the excess of the debts over the assets. Therefore, the excess should count as marital debt.
The appeals court disagreed, pointing out that there was no indication that any of these companies were insolvent or on a path towards bankruptcy at that time. Thus, the court said “the fact that the husband may ultimately be personally liable on the debts at some point in the future is not properly part of the present valuation calculus, as there was no indication that the husband was actually or likely liable for the debts at the time of the evidentiary hearing.”
The Decision
The court of appeals affirmed the judgment of the circuit court.
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