Fox v. Fox

BLOOM, Judge. By judgment of absolute divorce, the Circuit Court for Prince George’s County terminated the marriage of Arthur V. Fox (hereinafter referred to as “Arthur” or “husband”) and Pamela K. Fox (hereinafter referred to as “Pamela” or “wife”). Neither party was satisfied with the financial aspects of the judgment, and both appealed. All of Arthur’s complaints involve the determination that a corporation, of which he is sole stockholder, is marital property, and the valuation of that property.

He presents to us the following questions: 1. Whether the trial court was correct in ruling that The Chem-Met Co. was marital property. 2. Whether the trial court acted in an arbitrary and capricious manner in increasing the value of The ⁴⁵¹ Chem-Met Company’s inventory by 20% in computing the tangible asset value of the company. 3. Whether the trial court acted arbitrarily or without any factual basis in adjusting the appellant’s compensation and disregarding other expenses in determining the goodwill value of The Chem-Met Company. 4.

Assuming that the capitalization of excess earnings method and the economic adjustments which were made by the appellee are valid, whether the court made an error in computing the goodwill figure for The Chem-Met Company. 5. Whether the trial court committed error in determining that The Chem-Met Company had goodwill. Pamela’s complaints, on the other hand, involved the denial of alimony, suit money, and counsel fees and the valuation of Arthur’s retirement and profit sharing plans. She submits the following questions for our consideration. 1.

Whether the trial court erred in refusing to award appellee alimony or a reservation thereof. 2. Whether the trial court erred when it elected to utilize the values of appellant’s retirement and profit sharing plans as of 30 September 1988, rather than the date of divorce, when determining what portion thereof would be transferred to appellee. 3. Whether the trial court erred when it failed to award appellee attorneys’ fees and suit money. It appears to us that the chancellor may have made an arithmetical error or else misspoke when he determined the value of the corporation’s goodwill.

We believe he also erred in calculating the value of Arthur’s retirement and profit sharing plans (both of which were marital property) by using outdated figures. Accordingly, we shall vacate the monetary award, based on those valuations. Our holding with respect to the monetary award requires that we also vacate the denial of alimony or the reservation thereof as well as the denial of attorney’s fees and suit money and remand to the circuit court for reconsideration. We find no ⁴⁵² error or abuse of discretion with respect to the remaining issues raised by the parties.

Facts The parties participated in a marriage ceremony on 3 May 1974, but the divorce that Pamela had obtained from her first husband in the District of Columbia less than thirty days earlier was not yet final. 1 The parties then went through a second marriage ceremony on 5 July 1974. The trial court in the case sub judice made a factual determination, not challenged by either party, that the lawful marriage occurred on the latter date. For several years prior to his marriage, Arthur worked for Fox Investment Company, formerly known as The Chem-Met Co., a Delaware Corporation, of which his father, Abraham L. Fox, was sole stockholder. On 19 June 1974 (between Arthur’s first and second marriage ceremonies), Arthur, his father, and Raymond Hawryluk, another employee of the Fox Investment Company, acting as incorporators, formed a corporation, The Chem-Met Co., under the laws of the District of Columbia.

The corporation was formed for the purpose of acquiring the assets of Fox Investment Company, it being Abraham Fox’s intention to retire. Apparently, Arthur’s father wanted his son to have a “partner,” or co-owner of the business, and Mr. Hawryluk had been recruited with that goal in mind. Mr. Hawryluk, however, decided not to remain in the business and resigned from it. Succeeding Hawryluk as a prospective co-owner of the business was Arthur's brother, Samuel L. Fox, who eventually agreed to come into the venture as of September 1974.

Arthur and Samuel Fox each put $5,000 into the new corporation and acquired 100 shares of no par value common stock. On 1 October 1974, the Chem-Met Co. acquired ⁴⁵³ the going business and all of the assets of Fox Investment Co. for a total price of $189,000, the payment of which was to be in monthly installments over the course of years. Following a heated quarrel between Arthur and his brother, on 3 September 1981 the corporation repurchased and retired all of Samuel Fox’s stock for $200,000, leaving Arthur as sole stockholder of The Chem-Met Co. Samuel also signed a covenant not to compete, for which he was paid a total of $250,000 in 60 monthly installments. On 8 September 1989, the court issued a judgment of absolute divorce; granted the parties joint legal custody of their minor children, who were to reside primarily with their mother; awarded child support; ordered the husband to pay certain expenses; and denied alimony and counsel fees.

The court reserved ruling on all other property and financial matters. On 12 October, the court ordered that the parties’ house be sold after certain repairs and improvements were made; again denied alimony and reservation of alimony; ordered that a certain bond and 600 shares of Cache stock owned by the husband be sold and the proceeds divided between the parties; granted the wife a monetary award equal to one-half of the value of The Chem-Met Co. as determined by the court and entered a monetary judgment in that amount; and ordered that the sums of $2,183.50, representing one-half of the value of the husband’s IRA, $112,439, representing one-half of the value of the husband’s profit sharing plan as of 30 September 1988, and $135,057.08, representing one-half of the value of the marital portion of the husband’s pension plan as of 30 September 1988, be transferred to the wife. 2 The court ⁴⁵⁴ having theretofore ordered the husband to pay some $6,666 in counsel fees, judgment was entered against him in that amount. As noted supra, the only issues raised in the cross-appeals from the final judgment involve (1) the determination that the husband’s corporation was marital property and the valuation of that property, which resulted in a monetary award of $337,064, which was reduced to a judgment; (2) denial of alimony, suit money, and counsel fees; and (3) valuation of the husband’s profit sharing and pension plans. Additional facts relating to these issues will be set forth in the discussion to follow.

I We now turn our attention to appellant’s first issue. Was the chancellor correct in ruling that The Chem-Met Co. was marital property? Md.Family Law Code Ann., § 8-201(e), defines the term “marital property” as used in the Property Disposition in Annulment and Divorce Act, §§ 8-201 through 8-213: (e) Marital property. — (1) “Marital property” means the property, however titled, acquired by 1 or both parties during the marriage. (2) “Marital property” does not include property: (i) acquired before the marriage; (ii) acquired by inheritance or gift from a third party; (iii) excluded by valid agreement; or (iv) directly traceable to any of these sources.

During the trial the argument centered around two dates or events counsel regarded as critical: incorporation of The Chem-Met Co. on 19 June 1974 (prior to the valid marriage of the parties) and acquisition by the corporation of the ⁴⁵⁵ business and assets of Fox Investment Company on 1 October 1974 (subsequent to the marriage). The Chem-Met Co. was incorporated in and pursuant to the laws of the District of Columbia. Neither party gave notice of intention to rely upon foreign law pursuant to Md.Code (1989 Repl.Vol.), Cts. & Jud.Proc. Art., § 10-504, so we presume the laws of the District of Columbia, as to the effect of filing articles of incorporation on the creation of a corporation, to be the same as those of Maryland.

See Coppage v. Resolute Ins. Co., 264 Md. 261 , 285 A.2d 626 (1972); Dialist Co. v. Pulford, 42 Md.App. 173 , 399 A.2d 1374 (1979). And under Maryland law, the filing of articles of incorporation is conclusive evidence of the formation of the corporation. Cardellino v. Comptroller of the Treasury, 68 Md.App. 332 , 511 A.2d 573 (1986).

Arthur argues that he formed and acquired the corporation before he was married, so by definition the corporation is nonmarital property. Md.Code (1984), Fam.Law Art., § 8-201(e)(2)(i). Pamela’s contention, on the other hand, is that the date of formation of The Chem-Met Co. is unimportant because the corporation had no value until it acquired the business and assets of Fox Investment Company on 1 October 1974. Addressing Pamela’s contention first, we point out that it was based upon a fallacy.

There is nothing in the record to indicate that Fox Investment Company sold its business and assets to The Chem-Met Co. for less than full value. As of 1 October 1974, therefore, when The Chem-Met Co. acquired assets worth $189,000 it simultaneously acquired a liability in the form of a promissory note for the same amount. The net value of the corporation remained the same, its initial capitalization. Arthur’s argument was also based upon a fallacy.

The date the corporation came into existence is immaterial. In view of the fact that all of the testimony, especially that which pertained to value, referred to the corporation, the business it operated, and the assets of that business, it is ⁴⁵⁶ easy to see how the parties lost track of the fact that with respect to The Chem-Met Co., what Arthur owned, either as marital or nonmarital property, was the capital stock of the corporation. 3 The critical consideration, therefore, is when he acquired that stock. There is no direct evidence on this point in the record. Neither party thought to introduce the stock certificate or certificates issued to Arthur, or the stock ledger of the corporation, or the minutes of the organization meeting or of any meeting of the directors, or bank records, or cancelled checks, or any document that might reflect when Arthur subscribed for, paid for, or was issued stock in The Chem-Met Co. Purchase, payment, or acquisition of stock in the corporation was never mentioned by Arthur during his testimony.

The deposition testimony of Samuel Fox, admitted in evidence, established that he acquired his stock in September 1974, but there was no direct testimony as to when Arthur acquired stock. A reasonable inference may be drawn, from all of the circumstances surrounding the formation of The Chem-Met Co., that Arthur did not acquire his stock until September 1974, when his brother, Samuel, joined the venture. The corporation was formed for the sole purpose of acquiring the ongoing business founded by their father. Abraham Fox apparently did not want Arthur to be the sole owner, so Mr. Hawryluk was recruited.

Mr. Hawryluk went to work for Fox Investment Company and was one of the incorporators of The Chem-Met Co., but decided not to join Arthur in purchasing the business. That is the reason Samuel Fox was invited to join the venture. Logically, until Samuel came aboard, thus inducing Abraham to go through with his plan to sell the business and retire, there would have been no reason for Arthur to put any money into the new corporation. ⁴⁵⁷ Since the evidence and logical inferences that may be drawn therefrom support a finding that Arthur’s shares of stock in The Chem-Met Co. were acquired during the marriage, the chancellor’s determination that it was marital property was not clearly erroneous. Consequently, it will not be set aside.

Md.Rule 8-131(c). II Arthur’s remaining assertions of error all relate to the evaluation of The Chem-Met Co., which, as we have noted supra, was equivalent to the evaluation of his shares of stock in the corporation. Five expert witnesses testified as to the value of the company; two of them testified as to the value of the real estate owned by The Chem-Met Co. Arthur’s appraiser testified that the land had a value of $99,000. Pamela’s appraiser assigned to it a value of $200,250.

The trial court found the land to be worth $150,000; neither party contests that finding in this appeal. Three experts testified as to the value of the other tangible assets as well as the goodwill of The Chem-Met Co. Arthur’s first expert concluded that the net tangible assets of The Chem-Met Co. were worth $274,686 and that there was no goodwill of value. His second expert concluded that the value of the physical assets (excluding real property and inventory) was $83,395. He further opined that the value of the business, excluding real estate, was $159,000.

Pamela’s expert, on the other hand, testified that The Chem-Met Co. had tangible assets valued at $474,028 and goodwill valued at $372,876. At the conclusion of all the evaluation evidence, the chancellor, accepting the opinion of Pamela’s expert, Mr. Capron, except as to the value of the corporate real estate, found that the land and other tangible assets were worth $424,128. The chancellor rejected Mr. Capron’s evaluation of the goodwill of the company. His comments indicate to us that ⁴⁵⁸ he did so because he was persuaded that some substantial part of what Mr. Capron valued as goodwill of The Chem-Met Co. was really goodwill solely attributable to Arthur Fox rather than to the company.

What he said, however, appears to us to be somewhat at variance with what he did. He said: The goodwill of this company as everyone who has listened to any part of this case sees Mr. Arthur Fox, that without Mr. Fox you do not have Chem-Met Co. — But this goodwill simply is alone, without his chemist, without the net worth that his father had successfully created and without the help that his brother had added to it. Is his goodwill alone worth $372,876? The court finds that his [sic] worth less than that, which was stated by Mr. Murphy.

But the court finds in this case that the goodwill of Mr. Fox was worth $250,000, making a total value of the company of $724,128. The final figure was later amended to $674,128 to correct an error stemming from the chancellor’s trial notes. These comments seem to indicate that of the $372,-876 figure assigned by Mr. Capron to goodwill, the court found that $250,000 represented what Arthur, personally, was worth to the company. If that were the case, however, the appropriate conclusion would be that the company’s goodwill was worth $122,876 ($372,876 less $250,000).

But instead of adding $122,876 to the value of the tangible assets, the chancellor added $250,000 to arrive at a total value for The Chem-Met Co. Arthur questions whether the chancellor erred in computing the goodwill figure (Issue 4). We are not sure. Was this apparent discrepancy a slip of the tongue as to what the chancellor found to be worth $250,000 — Arthur’s personal value to the corporation which would not be company goodwill — or the company goodwill after subtracting that which was personal to Arthur? Or did the chancellor simply add the wrong figures to the value of the tangible assets?

Since we cannot tell precisely what the chancellor intended, and since the amount of the monetary award granted to the wife was clearly based upon the ⁴⁵⁹ total value assigned to the corporate assets, we shall vacate the monetary award of $337,064 and remand for clarification, correction, or reconsideration. Issues II and III raised by Arthur question whether the chancellor acted arbitrarily or capriciously with respect to valuation of inventory and goodwill. The short answer to both of those questions is “No.” Mr. Capron, called as a witness by Pamela, qualified as an