Equalization Payments in an Arizona Divorce | Hildebrand Law, PC

Tue 20th Mar, 2018 Arizona Community Property Laws

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Property Equalization Payment Explained

We want to talk to you about an equalization payment in an Arizona divorce. Sometimes one spouse ends up with more of the property, in terms of the value of the property, in a divorce in Arizona. To be fair and equitable to both spouses, a judge has the authority to order one spouse to make equalization payments to the other spouse to make the division of property fair and equitable.

Calculation of a Property Equalization Payment in Arizona

The calculation of an equalization payment in an Arizona divorce case will be an amount to make the overall property division equal or substantially equal.

Property Equalization Payment for a Business and Other Property

The Arizona Court of Appeals in a memorandum decision in the case of Lee vs. Lee had to address the issues of equalization payments for the division of a business in a divorce in Arizona and whether a court can modify a business appraisal based upon a change in the income or expenses of that business based upon the court’s own findings at trial. The following is the Arizona Court of Appeals decision in the case of Lee vs. Lee.

In the divorce case, Mr. Lee (“Husband”) challenges the superior court’s rulings regarding the treatment of a community business and the award of spousal maintenance. Ms. Lee (“Wife”) cross-appeals the court’s division of community property.

The Court of Appeals vacated the property division orders because the court adopted a business valuation unsupported by the evidence, and potentially double counted community real estate when calculating the appropriate property equalization payment.

Factors Considered in Lee vs. Lee for a Property Equalization Payment

Husband and Wife married in 1991. They thereafter purchased a mail-delivery business, White Mountain Passenger Lines, Inc. (“White Mountain”), and a lot on which to store the company’s vehicles. Wife petitioned for dissolution of the parties’ marriage in 2013.

The matter proceeded to trial in January 2016. The parties’ jointly retained valuation expert, John Casalena, opined that as of December 2014, White Mountain had a fair market value of $173,000. Casalena included the lot in his analysis.

Both parties disagreed with Casalena’s calculation: Husband testified that he believed Casalena’s figure was too high, while Wife testified that she believed White Mountain was worth approximately $1 million. Neither party retained another expert to support their contentions.

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Calculating a Property Equalization Payment in Arizona

The superior court deviated from Casalena’s calculation. The Court did identify one concern in the 2013 corporate tax return for White Mountain. It listed “outside service” of $32,491 in Exhibit 34D and “outside services” of $52,085 in Exhibit 34E. That appears to be a distinction from 2011, and 2012 tax returns.

The court was not convinced those expenses were appropriate deductions for business valuation purposes. For that reason, the Court added them back into the corporate discretionary earnings and recalculated the seller’s discretionary earnings for years 2011, 2012 and 2013 and averaged them out to $63,289.

Using the same multiplier as Mr. Casalena . . . the Court determined the Fair Value of [White Mountain] to be $191,768.

Purpose of a Property Equalization Payment is to Achieve Equity

The court concluded that “the way to resolve the property issues quickly and with the least chance of ongoing litigation is to award White Mountain to Husband, the marital residence to Wife and to use the equity in the lot to achieve equity.”

The court set forth two methods to achieve an equal division:

Plan 1 – The Court will allow Husband to buy out Wife’s interest in the home and commercial property within 120 days by refinancing the home and/or commercial property and paying off all of the couples debts or have those debts put solely in his name, with the exception of a car loan, and pay Wife $127,119.00 for her remaining equity in the home and commercial property.

Plan 2 – If Husband is not able to buy Wife out within 120 days, the marital residence and commercial property are to be sold in a commercially reasonable manner. . . . Upon the sale of either parcel, the above-listed debts, excluding the car payment, are to be paid out of escrow and the parties will divide the remaining equity.

Calculating a Property Equalization Payment in Arizona

Both parties moved to amend the decree under ARFLP 83.

Husband contended that the lot was an asset of White Mountain and thereby should not have been included in the equalization payment. He also argued the court’s valuation of White Mountain was contrary to the evidence.

Wife contended that the court should have implemented an unequal division of community property because Husband wasted community assets. She also sought clarification regarding the two equalization methods, and she sought an increase in the award of attorney’s fees and costs.

The court granted both motions in part, ruling that the lot was a White Mountain asset and increasing Wife’s share of White Mountain to $133,384.

Husband moved for reconsideration, arguing that the court had improperly included the lot in multiple calculations. Husband then timely filed a notice of appeal from the decree as amended, and Wife timely filed a notice of cross-appeal.

The superior court granted a motion filed by Husband but held that it had not counted the lot’s value multiple times: The Court originally ruled that the reasonable value of the business is $191,768.00 excluding the lot.

The Court again recognized that the figure is different from the value proffered by Mr. Casalena, which included the parcel, but found that, after considering the testimony of Mr. Casalena, and the parties, as well as bank records, contracts, and the business practices that Mr. Casalena’s valuation report is valuable and informative but not dispositive.

Once the value of the parcel was placed back into the business, the Court determined that the value of the corporation is increased to $266,768.00 upon further consideration the Court found Husband was correct that the overall value of the properties remained the same. . . . For all of the foregoing reasons the Court affirmed Wife’s judgment for her share of the corporation in the amount of $95,884.00.

Husband contends that the superior court erred by deviating from Casalena’s opinion of White Mountain’s value and by including the lot’s value in both the White-Mountain valuation and the equalization payment calculation.

The Arizona Court of Appeals will review a business value determination in a divorce proceeding for an abuse of discretion. Schickner v. Schickner, 237 Ariz. 194, 197 (App. 2015).

The Arizona Court of Appeals will defer to the superior court’s factual findings unless they are clearly erroneous. Id. A finding is clearly erroneous if no substantial evidence supports it. Id. at 197–98. The court was free to give Casalena’s opinion “whatever weight it thought best.” City Consumer Servs., Inc. v. Metcalf, 161 Ariz. 1, 5 (1989).

Here, the court modified Casalena’s opinion on the ground that it improperly omitted certain amounts that White Mountain deducted on its tax filings for “outside services.”

Casalena testified that those amounts were misclassified and unusually high. But he also explained that the amounts had no bearing on his assessment of the company’s value, and no other evidence established their relevance.

Though the court was free to reject Casalena’s opinion in whole or in part, it could not adopt a modified version of his opinion in the absence of evidence to support the modified value. Accordingly, because no other evidence bore on the issue, the court’s “outside services” adjustment was an error.

Further, on this record, the Arizona Court of Appeals could not determine whether the court improperly included the lot in both the business valuation and the equalization-payment scheme.

Casalena’s opinion included the lot, but the court later indicated, by its amendment to the decree and in its ruling on reconsideration, that it had omitted the lot when modifying Casalena’s opinion.

That modification to Casalena’s opinion, however, was nowhere stated in the original decree or explained in the later orders. The court may well have omitted the lot in the first instance, but on this record, we are ill-equipped to confirm whether that was the case.

And if the court did not omit the lot, its inclusion in the equalization payment calculation was an error. The Arizona Court of Appeals vacated the court’s orders regarding division of the community property The appellate court remand the case back to the trial court so the trial court may determine White Mountain’s value based on the evidence, and establish and explain an equalization scheme that accounts for the lot’s value once.

Equalization Payments in an Arizona Divorce

Impact of a Property Equalization Payment on Spousal Maintenance

Husband also appealed the trial court’s award of spousal maintenance to Wife.

Husband contended the $1,600 monthly award, when combined with the $1,500 monthly property equalization payment exceeded his ability to pay and ignores the substantial assets Wife was given in the decree. But the decree leaves unclear whether, or for how long, Husband must pay both amounts.

While the decree required Husband to pay $1,600 per month for 60 months, it also provided that Husband’s maintenance obligation would be reduced to $600 per month “once [Wife] receives her equity in the home and commercial property” and that further reductions may be appropriate “[o]nce she begins receiving regular monthly payments from her share of the Corporation.”

Impact of a Waste Claim on a Property Equalization Payment

Wife first contended that the superior court should have awarded her half of approximately $75,000 in “abnormal expenses” she contended Husband incurred using White Mountain accounts.

The superior court must divide community property “equitably, though not necessarily in kind” absent a compelling reason to do otherwise. A.R.S. § 25-318(A); Kelly v. Kelly, 198 Ariz. 307, 309 (2000).

The court may, however, consider waste, including “excessive or abnormal expenditures,” when apportioning community property. A.R.S. § 25-318(C); Gutierrez v. Gutierrez, 193 Ariz. 343, 346 (App. 1998).

The appellate court will review the evidence in the light most favorable to upholding the court’s distribution and will affirm if it is reasonably supported by the evidence. Boncoskey v. Boncoskey, 216 Ariz. 448, 451 (App. 2007).

Wife presented evidence showing that Husband incurred significant personal expenditures on White Mountain accounts. Husband, however, testified that after Wife filed for divorce, he reimbursed the company in full for his personal expenditures.

The court reviewed the relevant evidence and determined it could not find “that those amounts were not either paid back to the Corporation or counted as part of Husband’s compensation as an employee.”

The court had the discretion to accept Husband’s testimony on those matters. See Vincent v. Nelson, 238 Ariz. 150, 155 (App. 2015) (“[T]he family court is in the best position to judge the credibility of witnesses and resolve conflicting evidence, and appellate courts generally defer to the findings of the family court.”).

Arizona Property Equalization Attorneys

If you have questions about equalization payments in an Arizona divorce case, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have decades of combined experience successfully representing clients in community property and family law cases.

Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.

Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona community property or family law case around today.

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