July 27, 2010
MARTA STRAFACI, PLAINTIFF-RESPONDENT,
JAMES P. STRAFACI, DEFENDANT-APPELLANT.
On appeal from Superior Court of New Jersey, Chancery Division, Family Part, Middlesex County, No. FM-12-763-07D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted April 27, 2010
Before Judges Wefing, Grall and LeWinn.
Defendant appeals from certain portions of the judgment of divorce entered on January 6, 2009, and certain portions of the subsequent order entered on March 6, 2009, denying his motion for reconsideration. After reviewing the record in light of the contentions advanced on appeal, we affirm in part and reverse in part.
The parties were married in September 1970 and had two children during the course of their marriage, a son, James A. Strafaci, and a daughter, Michelle Strafaci. In October 2006, plaintiff filed her complaint, seeking a divorce. The litigation was unfortunately acrimonious; although only three witnesses testified, plaintiff, defendant and their son James A., the matter took nine days to try to conclusion. The principal dispute at trial and on appeal is the valuation of Jameer International, Corp. ("JIC"), a business that the parties started in the mid-1980s. At the time plaintiff filed for divorce, plaintiff and defendant each owned 50% of the stock of JIC and each worked in the business; plaintiff was vice-president and secretary, defendant president and treasurer. Defendant was clearly the moving force behind the business when it started and was responsible for generating business.
JIC is in the business of distributing electronic circuit boards for use in various devices. It originally served as the United States representative for Compeq, obtaining purchase orders for Compeq and coordinating shipments from Compeq to the buyer. JIC would receive a commission on these sales. JIC's relationship with Compeq ended with litigation in the early 1990s. Plaintiff contended the litigation was ruinous for JIC, while defendant said it was a success. The trial court did not resolve that dispute factually.
After the relationship with Compeq ended, defendant created a similar relationship for JIC with a Taiwanese company, Century Circuits, Inc. ("CCI"). JIC had a contract as CCI's sales representative in the United States. It took purchase orders for circuit boards, coordinated shipment of the completed boards and received a commission for its efforts. JIC's principal clients were Siemens and Kimball Electronics.
The parties' son, James A., joined JIC in January 1999. He had worked as a consultant for the business for several months prior to that, installing a computer system, which the company had not previously had. His title with the business was operations manager, but he assumed responsibility in a number of spheres, which had the unfortunate result of creating increasing friction between himself and defendant, his father, to the point that their relationship eventually ruptured completely. He sought to move the business in a new direction, away from its commission-based relationship to one in which it purchased circuit boards on its own behalf and then resold them, making its profit on the difference between the purchase price from CCI and the sales price to the end user. This change in business focus led to increased revenue for the company. It also resulted in the company having a greater need for warehouse space than it had previously and the company, which the parties had previously run from their home, moved to new quarters.
Some of the friction between the two men was the result of the son seeking to change the nature of the business his father had built up, and some was due to the father's difficulties in operating under the computerized systems which the son had installed. Plaintiff and James A. said that defendant was becoming forgetful and unable to grasp aspects of running the business and would then seek to inject himself into ongoing matters, causing disruption and confusion. James P. said the problems were due to plaintiff and James A. deliberately not copying him on e-mails in an effort to keep him in the dark. Some of the friction, in addition, was undoubtedly due to defendant's unhappiness at certain personal choices his son had made, specifically with his marriage.
The parties had various discussions with James A. about his purchasing the company. With respect to JIC, two evaluations of the company were made, both prior to plaintiff filing her divorce complaint. The first, by Everingham & Kerr, Inc., reported that the fair market value of JIC's common stock was $1,010,000 as of October 31, 2005. That led to James P.'s proposal to sell the company to his son for $500,000.
James A. countered with $400,000, and a second valuation, by Bederson & Company, LLP, was performed as of March 31, 2006. This appraisal reported two different values, one using the income method, of $350,000 and another, using the market approach, of $1,250,000 to $1,300,000. This latter figure included good will which, according to the report, consisted of the relationship James P. had developed and maintained with CCI. James A. was unwilling to pay anything for that good will and in September 2006 offered $350,000 to purchase all the stock of JIC. While this was acceptable to plaintiff, it was not acceptable to defendant. These discussions eventually broke down completely, principally over two issues: the price James A. would pay and defendant's desire to retain some role with the company until he became sixty-five. Defendant was diagnosed with bladder cancer in 2005, and he was concerned about his ability to obtain health insurance on an individual basis in light of that health history. He wished to retain a relationship with the company so that he could be covered under its group health insurance plan until he qualified for Medicare. Because of their deteriorating business and personal relationship, James A. was unwilling to permit defendant to remain with JIC in any capacity. There is no need to burden this opinion with the acrimonious and insulting e-mails each exchanged with the other and about one another to JIC's principal supplier, CCI during this period.
In addition, James P. wanted to structure the sale in such a way as not to favor his son over his daughter, both of whom, he felt, should share equally in the business he had built up over the years. James P. proposed that James A. pay $500,000 over a ten-year period, in return for 100% of the stock and that James P. would use that money, in turn, to provide for the couple's daughter. James A. wanted to purchase the company outright, to end all involvement with his father. Plaintiff was unwilling to have the proceeds from the sale of the business used to provide for their daughter, who, she felt, had had no involvement in the business.
In 2006, and for reasons which are not entirely clear from the record, CCI had problems meeting delivery dates for circuit boards that JIC had purchased from it and, in turn, contracted to resell to its customers.*fn1 Because of these delays on the part of CCI, the circuit boards could not be shipped by sea from Taiwan and arrive in time for delivery to JIC's customers. In order to avoid liability claims from JIC customers who would have to shut down production lines for lack of the circuit boards, James A. authorized shipment by air, which involved a considerable increase in cost. This led to a dispute between JIC and CCI as to which company should shoulder this burden. By the time of trial, that issue remained unresolved. The uncertainties caused by CCI's delays also led to Siemens being no longer willing to do business with JIC, leaving Kimball at that point as JIC's principal client.
Although plaintiff worked in the business from the start, she had not taken an active role in its management. She handled the various bookkeeping responsibilities, depositing collections and paying bills. After James A. installed the computer system, which included putting the company's financial records on QuickBooks, she learned how to maintain the books under the new system.
She did, however, wish to retire. When discussions first got underway about selling the business to James A., it was with the idea that both plaintiff and defendant would retire. It is not entirely clear whether defendant's change of heart about retirement was due to his desire to assure his health insurance coverage or because he wished to continue working. Plaintiff, however, did not want to continue working and as the friction between father and son escalated, she allied herself with her son, which contributed to the discord. When, for example, James P. would ask her for certain records, plaintiff would not supply copies, taking the position that since he held the position of treasurer, he should be able to retrieve them himself through QuickBooks. James A. resigned from JIC in October 2007. Although plaintiff never submitted a formal notification, she left JIC a short time thereafter.
At approximately the same time, plaintiff moved out of the marital residence and into an apartment owned by James A. She paid the first month's rent with JIC funds and thereafter from her own account. Defendant remained in the marital residence and, in accordance with past practice, paid the expenses of maintaining the marital residence with JIC funds.
Defendant testified that the business of JIC had fallen off significantly since the two appraisals had been performed. He said that by the time the trial was underway, the business had no real value. He said that CCI had formed a new entity to deal directly with Kimball, in an evident attempt to shut out JIC as the middleman and that he was working to prevent that from happening; he was unsure if he would be successful in that. He was also attempting to generate new business, and he was unsure whether those efforts would be successful.
During the course of the marriage, the parties acquired property in Manahawkin, in Lyndhurst, and in Florida, as well as the marital residence, located in South Plainfield. They agreed on the valuation and distribution of most assets, with the exception of JIC. With respect to the Lyndhurst property, which was a commercial property burdened by a long-term lease, the parties agreed to retain it for the present time and divide the rental income equally. They also agreed on the sale of the other properties, with an equal division between them.
The litigation of this matter was complicated both by the intense personal animosity and by the number of counsel involved. Plaintiff consulted with divorce counsel as the marriage was foundering and then with other attorneys at that same firm who specialized in business matters. That led to the initiation of litigation in the Chancery Division, naming both James P. and JIC as defendants. JIC, in turn, had to retain its own attorneys in that suit, and incurred counsel fees of $66,635.52 until the Chancery action was eventually consolidated with the matrimonial litigation.*fn2 Later, plaintiff's original matrimonial attorneys sought leave to withdraw, and plaintiff then retained her present counsel.
During the pre-trial phase of this matter, the trial court ordered that a third evaluation of JIC be performed. This, however, never occurred. Plaintiff attributed this to the expense, defendant to the change in the nature of the business in the interim, from distribution back to commission-based. Neither party at trial produced an expert witness to testify on the subject of JIC's value.
As we noted earlier, only plaintiff, defendant and their son, James A., testified at the trial. The trial court, in its written statement of reasons, noted that it did not find any of them credible and, in particular, considered plaintiff the least credible of the three.
In the absence of expert testimony on value, the trial court selected $400,000, the initial offer of James A., as the most reasonable approximation of the corporation's value. It directed defendant to purchase plaintiff's one-half interest in JIC for $200,000, payable over four years. It also directed that James P. was to be solely responsible for JIC's debts and tax obligations. It rejected defendant's argument that plaintiff had an obligation to return to JIC to assist with straightening out its records.
During the course of the trial, both parties sought reimbursement from the other for expenses incurred after plaintiff took up a separate residence. Plaintiff contended that the effect of defendant paying his living expenses at the marital residence from JIC was to charge her for one-half those expenses since she was a one-half owner of JIC; this, she said, was inappropriate. Defendant, on the other hand, said he should not be responsible for all the carrying costs for the marital residence because plaintiff had the right to live there and had simply elected not to. The trial court directed that both reimburse one another for their proportionate share of the marital funds each had used for living expenses and directed that defendant would be wholly responsible for the future expenses of the marital residence until it was sold. It also noted that each had received substantial assets as part of the equitable distribution and thus awarded no alimony. It directed that each would be responsible for his or her own counsel fees.
Defendant has appealed from certain aspects of the trial court's judgment, particularly its conclusions with respect to JIC. We note first the principles which guide our consideration of defendant's arguments.
"The goal of equitable distribution . . . is to effect a fair and just division of marital assets." Steneken v. Steneken, 367 N.J. Super. 427, 434 (App. Div. 2004), aff'd as modified, 183 N.J. 290 (2005). In fixing an equitable distribution award, a trial judge enters upon a three-step proceeding. Assuming that some allocation is to be made, he must first decide what specific property of each spouse is eligible for distribution. Secondly, he must determine its value for purposes of such distribution. Thirdly, he must decide how such allocation can most equitably be made. [Rothman v. Rothman, 65 N.J. 219, 232 (1974).]
An award of equitable distribution is left to the discretion of the trial court and will not be disturbed on appeal "as long as the trial court could reasonably have reached its result from the evidence presented, and the award is not distorted by legal or factual mistake." La Sala v. La Sala, 335 N.J. Super. 1, 6 (App. Div. 2000), certif. denied, 167 N.J. 630 (2001).
Defendant complains that the trial record does not support the $400,000 figure selected by the trial court as the value of JIC for purposes of equitable distribution. He also contends that the value of the corporation had declined precipitously since plaintiff filed her complaint for divorce and that she should share in that loss, in accordance with Goldman v. Goldman, 248 N.J. Super. 10, 14-16 (Ch. Div. 1991), aff'd in part, remanded in part, 275 N.J. Super. 452 (App. Div.), certif. denied, 139 N.J. 185 (1994).
We are sympathetic to the quandary in which the trial court found itself. The parties turned to the court to determine the value of the principal marital asset and yet neither provided any real evidential support to the trial court. The problem was compounded by the fact that neither party adhered to a consistent litigation goal as the matter unfolded, as well as by the hostility to the other neither was able to suppress.
"[V]aluation is not an exact science." Brown v. Brown, 348 N.J. Super. 466, 477 (App. Div.), certif. denied, 174 N.J. 193 (2002). "There are probably few assets whose valuation imposes as difficult, intricate and sophisticated a task as interests in close corporations." Ibid. (quoting Lavene v. Lavene, 148 N.J. Super. 267, 275 (App. Div.) certif. denied, 75 N.J. 28 (1977)).
In our judgment, Goldman, supra, is distinguishable from the present matter and thus does not control the analysis. In Goldman, supra, for instance, there was no dispute that the asset in question, an automobile dealership, which had significant value when defendant filed her complaint for divorce, had no value by the time the matrimonial matter was tried. 248 N.J. Super. at 13. Plaintiff husband had transferred it to the bank in exchange for a release of liability from the debts of the business. Ibid. Here, there was no such agreement. In Goldman, plaintiff husband contended that value of the business was destroyed by a collapse in the stock market, and defendant presented no proof that it failed as a result of his poor judgment or mismanagement. Id. at 17.
Here, defendant contended that JIC's difficulties, at least in part, were due to plaintiff and James A. trying to exclude defendant from the company's affairs, while plaintiff argued they were due in large measure to defendant's declining abilities as well as to his unfamiliarity with the computerized financial systems James A. had installed. Defendant also contended that CCI was seeking to deal directly with customers, circumventing JIC entirely. The trial court did not make specific findings on those issues.
If the trial court had selected the figures in either of the two evaluations, or had decided to average them, defendant would have had to pay a larger sum to plaintiff. It was defendant who was asserting that JIC had no value by the time of trial, and he did not establish that fact by a preponderance of the evidence.
The parties created the record before the trial court and must bear the consequences of that record. It was not unreasonable, on the basis of that record, for the court to have selected the initial offer of $400,000 as JIC's value. The trial court could not simply conclude that there was a failure of proof by both parties and leave them where they started, locked into a dysfunctional relationship with spiraling legal fees.
We turn then to the second aspect of the trial court's decision with respect to the distribution of JIC, that defendant was to be wholly responsible for both its debts and any outstanding tax obligations. As to these, we are satisfied the trial court erred.
The trial court did not give a complete explanation for its conclusion with respect to JIC's debts, noting only that defendant would be the sole owner and thus should be solely responsible for the obligations. Plaintiff was a partial owner at the time certain of these obligations were incurred, and there was no evidence that defendant acted in bad faith in accumulating expenses for JIC. To the extent that JIC's debt burden was the result of James A.'s decision to employ air freight to ship product, we can perceive no basis to place the entire burden on defendant. Absolving plaintiff of any responsibility for JIC's debts has the overall effect of increasing the price defendant must pay.
We turn now to the trial court's treatment of JIC's tax liabilities. By the time of trial, defendant had not arranged for JIC to file its necessary tax returns, contending that he required plaintiff's assistance in unraveling JIC's books to do so. Part of the relief he requested at trial was an order compelling plaintiff to assist him in this task. The trial court refused this relief, and defendant argues on appeal this was error. We disagree.
The trial court was acutely aware that these two parties were simply unable to cooperate with one another in any meaningful way. Having plaintiff take up any task with respect to JIC would inevitably result in further arguments and discord. The trial court was entirely correct in refusing this request. Defendant must hire the appropriate person to attend to this task.
The trial court provided no substantive explanation, moreover, for its conclusion that defendant is to be wholly liable for JIC's tax obligations. There was no real record presented at trial as to what tax liabilities confronted JIC and what amount represented payment of taxes and what represented payment of interest and penalties for late filing. If any of JIC's tax obligations represented the latter, we would concur that defendant, who was responsible for any late filings, should bear the burden. To the extent they represented taxes payable in the ordinary course, plaintiff should be responsible for her respective share.
We turn now to the remaining issues defendant raises on appeal, none of which, in our judgment, requires extended discussion. As we noted earlier, plaintiff filed a separate Chancery action in which she named JIC and her husband as defendants; she sought relief as an oppressed minority shareholder, N.J.S.A. 14A:12-7, for breach of fiduciary duty and conversion. JIC retained its own counsel and incurred significant counsel fees as a result. Defendant contends this litigation was unnecessary and that the trial court erred in denying his request that plaintiff be responsible for the entirety of these fees. We disagree.
We note first that the record contains an order entered in the Chancery Division making JIC responsible for the payment of these fees. Defendant provides no explanation for how the judge who presided over the matrimonial litigation could disregard this order. More importantly, defendant could have moved at the outset either to dismiss the Chancery suit or to join the two matters and thus reduce the expense to JIC, and yet he evidently failed to do so. We perceive no basis to modify the trial court's judgment on this question. The practice of the parties was to deposit into a joint account the rental income earned from the Lyndhurst property and to use the funds in that joint account to pay certain expenses. Defendant testified at trial that plaintiff had recently withdrawn $14,636.14 from that joint account and appropriated the funds for her own expenses. Plaintiff did not deny doing so. Defendant sought a credit for one-half that amount, which the trial court denied, saying only that plaintiff had the right to these funds.
We infer from the context in which the issue was presented and decided that the trial court denied this credit as a method of equalizing responsibility between the parties for their shelter expenses, defendant using JIC's funds to cover his expenses in connection with the marital residence. From our reading of the record, we have concluded that the trial court's treatment of this issue was to give plaintiff a double credit because the trial court at another juncture awarded her $9,000 to reimburse her for defendant's use of JIC to pay the costs of maintaining the marital residence. Defendant is entitled to a credit of $7,318.07.
Finally, we perceive no merit to defendant's remaining arguments, that he should not have to reimburse plaintiff for his use of JIC's funds to pay for his shelter expenses and that she is obligated to contribute one-half of the expenses of maintaining the marital premises until it is sold. R. 2:11-3(e)(1)(E).
The judgment under review is affirmed in part and reversed in part, and the matter is remanded for entry of an amended judgment.