Business ‘distributed’ without valuation evidence

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Where neither party in this divorce matter presented valuation evidence of a business, the trial court erred by “distributing” the business. The court further erred by dividing the business’s checking account and apportioning several business debts to husband.

Overview

“The parties married in 1995 and had two children. During the marriage, the parties started Falco eMotors, Inc., an American corporation, (Falco) and Falco eMotors Private Limited, an Indian company (Falco India).

“Falco ‘markets and sells electric bike conversion systems’; whereas Falco India ‘manufactures and sells commercial fans’ from India. Husband owned 79% of the Falco shares, and wife owned 21%.

“Both parties also served as directors of Falco; husband was the president, and wife was the vice president.

“On August 1, 2019, the parties separated, and approximately three months later, husband advised wife that she was ‘terminated’ from Falco. He blocked her access to Falco and its emails. Husband also withdrew funds from Falco for personal expenses.

“Wife subsequently filed a complaint for divorce and an emergency motion to enjoin husband from ‘disposing [of] and/or encumbering any assets’ and ‘taking any adverse action against [her] with regard to her position’ with Falco.

“After wife filed her pleadings, husband removed wife as a director of Falco, claiming that she stole money from the company. Husband opposed wife’s emergency motion and denied her claims that he was ‘wasting’ corporate funds. …

“Acknowledging that the circuit court could order husband ‘not to waste’ a business asset, husband argued that there was ‘no authority’ to allow wife to ‘control’ how he used business funds because as president and majority shareholder, only he managed the business.

“Over husband’s objections, the circuit court granted wife’s request. The circuit court did not address wife’s request to reinstate her as vice president of Falco.”

Pendente lite order

“Shortly after wife filed her complaint for divorce, she sought an injunction to preserve the parties’ assets, including Falco. The circuit court entered a pendente lite order enjoining husband from ‘disposing and/or encumbering any assets …, except as necessary in the ordinary course of business and only as mutually and expressly agreed to by the [p]arties.’

“Husband argues that the circuit court exceeded its authority when it placed ‘prohibitions and restrictions’ on the parties’ business by ordering that wife had to approve all corporate expenditures.

“Husband emphasizes that the corporate veil had not been pierced and Falco was a separate corporate entity that was not a party to the divorce proceedings. …

“[T]he circuit court entered the pendente lite order to preserve the marital assets, including Falco. At a subsequent hearing, the circuit court found that the parties owned ‘100 percent’ of their companies and the companies were closely held corporations, ‘controlled’ solely by husband and wife.

“Throughout the pendency of the litigation, the parties disagreed over wife’s involvement and authority in running the parties’ businesses; indeed, the circuit court found husband in contempt when he failed to comply with the pendente lite order by spending corporate funds ‘without mutual and express agreement.’

“At the final hearing, the circuit court found that husband ‘continued throughout this litigation to take actions which diminished the marital estate,’ which it considered when issuing its final ruling.

“On appeal, husband asks this Court to reverse the circuit court’s pendente lite and contempt orders and remand the matter to the circuit court ‘for further proceedings as necessary to undo the damage done to the husband and to Falco USA and Falco India by these improper orders.’

“Husband does not explain what damage he or the businesses sustained as a consequence of the circuit court’s orders, other than that he had to reimburse Falco for funds that he spent without wife’s consent. …

“At this stage of the proceeding, it is ‘impossible’ for this Court to grant the relief that husband requests. … The parties made decisions regarding Falco and its daily activities that cannot be undone now.

“The circuit court considered husband’s actions throughout the pendency of the suit when it issued its final ruling. Therefore, it is not possible for this Court to ‘undo’ the alleged damage to husband, Falco USA, and Falco India. Accordingly, we will not consider this argument.”

Falco valuation and distribution

“Husband argues that the circuit court erred in ‘distributing’ Falco when neither party presented evidence of its value. Husband further contends that the circuit court erroneously divided Falco’s Capital One checking account and apportioned several of Falco’s debts to husband. We agree. …

“Although husband argues on appeal that the circuit court could not distribute Falco without first determining its value, he does not challenge the circuit court’s finding that the shares of Falco were held in the 401(k) or the transfer of those shares.

“Moreover, husband did not appeal the qualified domestic relations order. Considering husband’s concession, we will not review the circuit court’s division of the shares. …

“‘Property which is owned by third parties, including a corporation owned entirely by the parties, is generally not marital property subject to equitable distribution.’ …

“Accordingly, Falco’s Capital One account and debts were not subject to distribution under Code § 20-107.3, and the circuit court erred in distributing them as part of its equitable distribution award. Therefore, we reverse the circuit court’s distribution of the Capital One account and the order directing husband to pay” certain loans.

Wife’s paychecks

“Husband argues that the circuit court erred when it ordered him to pay wife $6,400 for her “post-separation paychecks.” …

“Wife did not raise the issue of her post-separation paychecks in her pretrial equitable distribution submission, nor did she address the issue in her closing argument. … This record contains no evidence to support the circuit court’s ruling that husband had to ‘reimburse’ wife for $6,400 in post-separation paychecks, so we reverse the circuit court’s ruling.

Support

“‘Because we here reverse in part the trial court’s award of equitable distribution, our case law is clear that, on remand, the trial court will also have to thoroughly reassess’ its spousal support and child support awards.”

Affirmed in part, reversed in part and remanded.

Dhawan v. Dhawan, Record No. 0887-22-4, Aug. 1, 2023. CAV (unpublished opinion) (Clements) From the Circuit Court of Loudoun County (Irby). Samuel A. Leven for appellant. Brandy M. Poss for appellee. VLW 023-7-304, 18 pp.