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Bowen v. Bowen

Decided: April 16, 1984.


On certification to the Superior Court, Appellate Division.

For reversal and remandment -- Chief Justice Wilentz and Justices Clifford, Schreiber, Pollock, O'Hern and Garibaldi. For affirmance -- None. The opinion of the Court was delivered by O'Hern, J.


[96 NJ Page 39] This case concerns the valuation and equitable distribution of a spouse's minority stock interest in a closely held corporation. The specific question is whether a court, in effecting distribution of the assets, and faced with difficulty in fixing value, should permit the stockholder husband to retain ownership of all of the stock and award the wife an equitable one-half interest in the stock. We hold that a court should not and reverse the judgment below.

The parties were married in 1955 and had four children. At the time of trial, three children were emancipated and an 18-year-old son was beginning college. During the early years of the marriage, the plaintiff worked and helped to put defendant through engineering school. After graduation, defendant worked for Union Carbide until 1971, when he left to take a position with a small manufacturing corporation. In 1973, he and two other employees of that company formed the Polycel Corporation, of which he is now a 22% shareholder. He became a full-time employee of Polycel in 1976. Polycel is engaged in plastics manufacturing and is located in a rented factory in Bound Brook. In 1979, its gross sales were over $3,000,000 and its net income was $144,235.

The parties separated in March 1979. The plaintiff continued to live in the family home. At the time of trial she was employed as a secretary. The major assets of the parties were the family home in Hillsborough and the 22% interest in Polycel.

In view of the length of the marriage and the contributions of both, the court directed that the marital assets be divided equally between husband and wife. The family home was to be sold as soon as possible, and after payment of the expenses of sale, previously incurred college debts, and certain other debts, the net proceeds were to be divided equally.

Concerning the equitable distribution of the defendant's 22% interest in Polycel Corporation, the court, confronted with testimony valuing the stock anywhere from a minimum value of $70,854 to a maximum of $338,279, concluded that determining the fair market value of the stock solely from the valuations made by the accountants would be nothing more than conjecture. It ordered what it recognized to be "an entirely new and more practical scheme of distribution." It directed that the defendant retain all of the stock, but that the plaintiff be awarded an "equitable one-half interest in said stock." Defendant was to retain all indicia of ownership, including the right to vote at shareholders' meetings, but he was to share with the

plaintiff all dividends and proceeds from the sale or transfer of any stock.

To prevent avoidance of dividends by payment of excessive salaries, bonuses, or fringe benefits, the court fixed the then current amount of these items, $48,000 per year, as base compensation to the defendant and ordered that all future income in excess thereof be deemed stock dividends to be divided between the parties. The court ordered that one-half of the gross amount of such dividends was to be paid by the husband to the plaintiff with each to pay his or her own taxes. The judgment also required defendant to report annually to plaintiff the total of all benefits and expenses received by him and paid for by Polycel that might be used for both business and personal reasons. These were presumed to be 40% attributable to business with the balance regarded as a dividend. The other officers and directors were to be informed of the judgment and notified that they would be personally responsible to the plaintiff for any losses she might sustain as a result of a sham agreement between the parties disposing of the husband's interest.

The judgment also provided rehabilitative alimony in the amount of $300 per month for three years, $700 per month permanent alimony, and $200 per month child support.

In an unreported decision, the Appellate Division affirmed the judgment on the basis of the trial court's opinion. We granted the defendant's petition for certification. 94 N.J. 548 (1983).

The dispute here is not over the general principles applicable to such cases. The trial court recognized the controlling principles of Borodinsky v. Borodinsky, 162 N.J. Super. 437 (App.Div.1978), which bear restating here:

It seems almost doctrinal that the elimination of the source of strife and friction is to be sought by the judge in devising the scheme of distribution, and the financial affairs of the parties should be separated as far as possible. If the parties cannot get along as husband and wife, it is not likely they will get along as business partners. [ Id. at 443.]

In Borodinsky, the issue was the value of an auto repair business, Belmont Brake, which was wholly owned by the husband. The divorce judgment awarded the wife a 50% interest in the stock of Belmont Brake. The trial court arrived at the conclusion to distribute the stock in kind since it could not put a value on the business. In the court's opinion, "the witnesses, including accountants, could not or did not supply sufficient information so that the judge's determination as to value would constitute more than conjecture." Id. at 442. The husband argued that the disposition would inexorably lead to a corporate deadlock with the possibility of dissolution and forced liquidation. The Appellate Division found the method of distribution arbitrary and capricious in light of the situation of the parties and the distribution techniques that were available in order to achieve a reasonable result.

The difference between Borodinsky and this case is that here the husband retained the same role in the close corporation as he had before. There would be no occasion for deadlock or forced liquidation or dissolution.*fn1 He would continue to be a successful wage earner. The result proposed by the court is not without its interesting aspects. Nonetheless, in our view, the disadvantages of the continuing relationship between the parties outweigh the problems of proof that confront a court in such a situation.

The restrictions may inhibit the corporation's ability to conduct its affairs without judicial supervision. In reality the husband would become an 11% owner. Although there would be no occasion for deadlock, the court has created a new interest in the corporation, something the other shareholders did not want, as evidenced by their buy-sell ...

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