IN THE SUPREME COURT OF THE STATE OF MONTANA
IN RE MARRIAGE OF
JAMES WARREN DeCOSSE,
and
DOROTHY ANN DeCOSSE,
Respondent, Respondent, and Cross-Appellant.
APPEAL FROM: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin,
The Honorable Thomas A. Olson, Judge presiding
COUNSEL OF RECORD:
For Appellant:
Edmund P. Sedivy, Jr.; Sedivy, Bennett & White;
Bozeman, Montana
For Respondent:
Kent M. Kasting; Kasting, Combs & Kauffman;
Bozeman, Montana
Submitted on Briefs: January 30, 1997
Decided: April 15, 1997
Filed:
Justice Terry N. Trieweiler delivered the opinion of the Court.
James Warren DeCosse filed a petition for dissolution of his marriage to Dorothy Ann
DeCosse in the District Court for the Eighteenth Judicial District ~ I IGallatin County.
Following a nonjury trial, the District Court entered its decree and judgment, m which it
dissolved the parties' marriage and divided their marital assets. James appeals the District
Court's valuation of his interest in the business by which he is employed. Dorothy
cross-appeals the District Court's refusal to consider her need for maintenance in the future,
and the District Court's refbsal to award her attorney and expert witness fees. We reverse in
part and affirm in part the judgment of the District Court and remand to that court for
proceedings consistent with this opinion.
The following issues are presented by the parties:
1. Did the District Court err when it valued James's interest in Gallatin Valley
Fuiniture at $1,060,000 and ordered James to pay Dorothy $522,676 to equalize the marital
property distribution?
2. Did the District Court abuse its discretion when it refused to reserve the issue
of maintenance for future consideration dependent on Dorothy's health?
3. Did the District Court abuse its discretion when it declined to award Dorothy
attorney fees and costs which she incurred responding to James's post-trial motions?
FACTUAL BACKGROUND
Dorothy and James DeCosse were married on July 14, 1973, and separated on
May 26, 1993. At the time of their marriage, James was the manager of his father's busmess,
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Gallatin Valley Furniture, and owned thirty-five shares of stock in the company. When
James's father retired in 1985, Gallatin Valley Furniture entered into a series of redemption
agreements with James's father and mother. Pursuant to those agreements, each of James's
parents agreed to sell 1,640 shares of stock to the corporation at a price of $232 per share.
The total cost was to he paid in installments. Final payment was due by June 28, 2000. In
return, the remaining shareholders--who were James, and his sister and brother-in-law,
Michelle and Dennis Cattin-agreed to several restrictions, including an agreement that the
shareholders would not sell their shares, except to each other, until James's parents were fully
paid pursuant to the terms of the redemption agreements. In addition, the remaining
shareholders executed irrevocable proxies with which James's parents could liquidate the
company in the event of any default in the redemption agreements.
The value of James's parents' stock was determined at the time of redemption by a
certified public accountant, Wayne Neil. In valuing the stock, Neil used the income method
of valuation, which is recommended by the American Institute of Certified Public
Accountants for the valuation of closely held businesses. Pursuant to the income method,
Neil weighted the average earnings of Gallatin Valley Furniture for the five years prior to
redemption, giving the most recent year the greatest weight. He then applied both a high and
low multiple for a return on investment consistent with reports in the National Home
Furnishings Association Manual and multiplied it by the weighted average net equity of the
business to establish normal earnings. By subtracting the normal earnings figure from the
weighted average earnings figure, Neil calculated the excess earnings. Neil then applied a
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capitalization rate--the rate an investor would expect to receive for his risks in the company--
and using both a low of fifteen percent and a high of twenty percent, produced a value for
the goodwill of the company. When Neil added that figure to the total value of the net
tangible assets of Gallatin Valley Furniture, he determined a high and low fair market value
of the business. To determine the per-share value, he divided those figures by the number
of outstanding shares of stock. Neil arrived at the final figure of $232 per share by taking
the median of the high and low figures and applying a twenty percent minority shareholder
discount.
In 1985, at the time James's parents executed the redemption agreements, James
owned 466 shares of Gallatin Valley Furniture stock, and Michelle and Dennis Cattin owned
the remaining 466 shares. On June 28,1985, at the same time the redemption agreement was
signed, James, Michelle, and Dennis entered into a shareholders' agreement with Gallatin
Valley Furniture. Pursuant to that agreement, James and Dennis were designated
"shareholder-employees" and Michelle was designated a "shareholder." The agreement
provided that all transfers or other dispositions of corporate stock made during the lifetime
or at the death of a shareholder were subject to restriction. Specifically, the agreement
provided that if a shareholder-employee attempted a "restrictive transfer" or died, retired, or
was disabled, the remaining shareholder-employee was given the first option to purchase the
stock for the price and terms set forth in the agreement. The price per share was originally
calculated at 5230 per share, but the shareholders' agreement provided that the shareholders
would review the price each year. In addition, the agreement provided that if the
A
shareholders failed to recalculate the price of the stock on a yearly basis, the corporation's
accountant would value the stock pursuant to the same method used to calculate the original
stock price. The agreement established fifteen annual installments with an interest rate of
ten percent as the terms of any purchase from one shareholder by another.
At each annual shareholders' meeting from 1985 through 1994, Wayne Neil
recalculated the fair market value of Gallatin Valley Furniture stock pursuant to the income
method of valuation. Each year, the shareholders and directors of the corporation adopted
the fair market value calculated by Neil. At their 1994 meeting, which occurred prior to the
dissolution proceedings at issue in this case, Neil calculated the fair market value of the stock
at $744.85 per share. At that time, James owned 521 shares of Gallatin Valley Furniture
stock and Michelle and Dennis owned the remaining 521 shares.
At the dissolution proceedings in October 1994, Wayne Neil testified for James that
pursuant to the income valuation method James's share of the stock in Gallatin Valley
Furniture was worth $388,066.85 prior to a minority shareholders' discount. However,
Dorothy's business valuation expert, Martin Connell, testified that the value of James's
one-half interest in Gallatin Valley Furniture ranged from S1,171,026.50 to $1,373,544.00,
depending on which of four methods of business valuation were employed. In his final
report, Connell valued the business at $2,650,000. Connell therefore determined that James's
one-half share was equal to $1,325,000. Connell admitted at trial that he did not take the
1985 restrictive shareholders' agreement into account in determining the fair market value
of Gallatin Valley Furniture.
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On May 9,1995, the District Court entered its findings of fact and conclusions of law.
In its findings regarding James's interest in Gallatin Valley Furniture, the court determined
that "[tlhe Shareholder's Agreement has no application to these proceedings." The court
therefore accepted Connell's valuation of Gallatin Valley Furniture, and held that James's
share of the company was $1,325,000 minus twenty percent for minority shareholders'
discount and lack of marketability. Accordingly, the court held that James's share of Gallatin
Valley Furniture was worth $1,060,000. The court awarded James his share of Gallatin
Valley Furniture and ordered James to pay Dorothy the sum of $522,676 to equalize the
property distribution. Based on its substantial monetary property cash award to Dorothy, the
court determined that Dorothy would not be entitled to maintenance. The court further
determined that each party would be responsible for his or her own attorney and expert
witness fees.
ISSUE 1
Did the District Court err when it valued James's interest in Gallatin Valley Furniture
at $1,060,000 and ordered James to pay Dorothy $522,676 to equalize the marital property
distribution?
This Court reviews the factual findings of a district court relating to the division of
marital property to determine whether the court's findings are clearly erroneous. In re
Marriage ofDanelson (1992), 253 Mont. 310,317, 833 P.2d 215,219. We review a district
court's conclusions of law relating to the division of marital property to determine whether
those conclusions are correct. Marriage ofDanelson, 253 Mont. at 3 17, 833 P.2d at 219-20.
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On appeal, James maintains that the District Court's findings of fact regarding the
valuation of his interest in Gallatin Valley Furniture are clearly erroneous. Specifically,
James asserts that the District Court erred when it refused to apply the 1985 shareholders'
agreement in its determination of the fair market value of his shares of stock in the company.
James maintains that he has no interest in Gallatin Valley Furniture other than through his
stock, which cannot be transferred or sold other than according to the terms of the
shareholders' agreement. Because the value of his stock is limited by that agreement to
$310,453.48 for his 521 shares, James contends that the District Court's valuation of his
interest in the business at $1,060,000 is clearly erroneous.
This Court has addressed the issue of the effect of a restrictive shareholders'
agreement on the valuation of an interest in a closely held corporation on two occasions. In
In re Marriage ofJorgensen (1979), 180 Mont. 294, 590 P.2d 606, we upheld a district
court's determination of the fair market value of stock in a closely held corporation at a price
fixed by a restrictive shareholders' agreement. We held:
In considering the range of values which the evidence offered, it is
apparent the District Court did not abuse its discretion in fixing the value of
the shares at . . . the amount decided upon by all the shareholders.
especially applicable in view of the fact that any shareholder wishing to
transfer the same is presently bound by the terms of the agreement. As long
as the agreement is operative no shareholder can go upon the market and
obtain more for his shares. Each shareholder is restricted to the price and to
the purchasers set forth in the agreement.
Marriage ofJorgensen, 180 Mont. at 300, 590 P.2d at 61 0 (emphasis added). In addition,
in In re Marriage ofMcLean (1993), 257 Mont. 55,61,849 P.2d 1012, 1015-16, we upheld
a district court's determination that one party's interest in a law firm did not include the value
of the goodwill of a partnership interest where that party had entered into a good faith
agreement with the law firm to disclaim any interest in that goodwill. In neither case,
however, were we faced with the situation, as here, in which the district court did not
consider the effect of a negotiated shareholders' agreement on a company's value.
A majority of jurisdictions holds that a restrictive agreement, while not conclusive
evidence of the value of an interest in a closely held corporation, is a factor that must be
considered by a trial court in the stock valuation process. See, e.g., i n re Marriage of
Micalizio (Cal. Ct. App. 1988), 199 Cal. App. 3d 662, 675-76; Stearns v. Stearns (Conn.
1985), 494 A.2d 595, 598; In re Marriage ofPetterson (Minn. Ct. App. 1985), 366 N.W.2d
685,688; Amodio v. Anzodio (N.Y. 1987), 509 N.E.2d 936,936-37; Poore v. Poore (N.C.
Ct. App. 1985), 331 S.E.2d 266,270; Buckl v. Buckl (Pa. Super. Ct. 1988), 542 A.2d 65,70;
Suther v. Suther (Wash. Ct. App. 1% I), 627 P.2d 110,113. In Amodio, the New York Court
of Appeals held:
There is no uniform mle for valuing stock in closely held corporations.
. . . Whatever method is used, however, take into consideration
inhibitions on the transfer of the corporate interest resulting from a limited
market or contractual provisions. If transfer of the stock of a closely held
corporation is restricted by a bona fide buy-sell ageement which predates the
marital discord. the price fixed by the agreement. although not conclusive. is
a factor which should be considered.
Amodio, 509 N.E.2d at 936-37 (citations omitted) (emphasis added). In that case, the New
York Court of Appeals held that the trial court properly disregarded the testimony of the
plaintiff's expert, who did not consider the restrictions set forth in the shareholders'
agreement in his analysis of the value of the corporate stock. Because the only other
evidence of the corporation's value was the stock price value set forth in the shareholders'
agreement, the New York Court of Appeals held that that value was conclusive as "the only
evidence in the record of [the corporation's] actual value." Amodio, 509 N.E.2d at 937.
We agree that James's only ownership interest in the Gallatin Valley Furniture
business is represented by the stock which has been issued to him. Furthermore, so long as
the existing shareholders' agreement is in effect, James cannot transfer his stock for more
than the price set forth in that agreement. Therefore, we hold that if the shareholders have
employed an accepted method of valuation and there is no evidence that the valuation was
undertaken in bad faith or for the purpose of avoiding marital or debtorJcreditor
responsibilities, there is a presumption that the valuation of stock set forth in a shareholders'
agreement is the real value of a shareholder's interest in a closely held corporation.
In this case, Dorothy's expert testified that he did not consider the 1985 shareholders'
agreement in any of the four methods he used to calculate the value of James's interest in
Gallatin Valley Furniture. Therefore, pursuant to the reasoning of,4inodio, the only evidence
before the District Court of the stock's "actual value" was Neil's valuation in the amount of
$3 10,453.48. That value, negotiated in a good faith arms-length transaction, represents the
price to which James would be limited should he attempt to transfer or sell his stock to
satisfy the judgment against him. It also represents the amount that would have passed to
James's estate had he died while married to Dorothy during that period of valuation. See
Marriage ofJorgensen, 180 Mont. at 300,590 P.2d at 610.
Therefore, because the District Court accepted Dorothy's expert's valuation, which
was prepared without reference to the 1985 shareholders' agreement, and because the District
Court refused to take that agreement into account when it valued James's interest in the
business, we hold that the District Court's finding that James's interest in Gallatin Valley
Furniture was $1,060,000 is clearly erroneous. We remand this case to the District Court
with instructions that James's interest in Gallatin Valley Furniture should be valued at
$3 10,453.48. We further instruct the District Court to equitably divide the parties' property
and assets, pursuant to $40-4-202, MCA, based on this valuation, and to reassess Dorothy's
need for maintenance in light of the corrected value of the marital estate and the manner in
which it is redivided. Based on our holding that the District Court erred when it valued
James's interest in Gallatin Valley Furniture without reference to the pre-existing
shareholders' agreement, we do not reach Dorothy's claim on cross-appeal that she is entitled
to attorney fees she incurred in connection with this appeal.
ISSUE 2
Did the District Court abuse its discretion when it refused to reserve the issue of
maintenance for future consideration dependent on Dorothy's health?
We review a court's award of maintenance or failure to award maintenance to
determine whether the court abused its discretion. In re Marriage of Smith (1993), 260
Mont. 533, 535, 861 P.2d 189, 190.
The District Court based its decision to deny maintenance on the following finding:
In view of the substantial assets being received, most of which are
income-producing, this is not an appropriate case to award [Dorothy] separate
maintenance. The distribution of the property coupled with her earnings, will
enable [Dorothy] to maintain a reasonable standard of living. The court
declines to keep the issue of Euture maintenance open, as requested by counsel
for [Dorothy].
Although (prior to our decision regarding the valuation of James's business interest),
Dorothy did not dispute the court's decision not to award her maintenance, she contends that
the District Court erred when it failed to recognize that her ongoing health problems might
necessitate a need for maintenance in the future. Dorothy maintains that, based on her health
problems--which include neuromuscular damage, back problems, a benign tumor in her liver,
and a chemical imbalance--the District Court should not have precluded her from requesting
an award of maintenance in the future, depending upon complications which could arise in
her health situation. We will consider this issue, even though the District Court has been
instructed to reconsider its maintenance decision, because we do not know what the outcome
of that reconsideration will be, and because, depending on the District Court's decision, this
issue may still be relevant.
Section 40-4-208, MCA, provides that a district court may, in certain instances, order
a modification of a maintenance provision in a decree of dissolution. That section provides
in relevant part:
(1) Except as otherwise provided in 40-4-201(6), a decree may be
modified by a court as to maintenance or support only as to installments
accruing subsequent to actual notice to the parties of the motion for
modification.
(2) (a) Whenever the decree proposed for modification does not
contain provisions relating to maintenance or support, modification under
subsection (1) may only be made within 2 years of the date of the decree.
(b) Whenever the decree proposed for modification contains provisions
relating to maintenance or support, modification under subsection (1) may
only be made:
(i) upon a showing of changed circumstances so substantial and
continuing as to make the terms unconscionable;
(ii) upon written consent of the parties; or
(iii) upon application by the department of public health and human
services, whenever the department of public health and human services is
providing services under Title IV-D of the federal Social Security Act . . . .
In In re Marriage of Cooper (1985), 216 Mont. 34,37,699 P.2d 1044, 1046, we held:
A petition for modification with respect to maintenance must be
considered by the District Court if it is filed within two years of the date the
decree is rendered, regardless of whether the decree contains provisions for
maintenance or whether maintenance payments are currently being paid. If
two years has expired since the dissolution decree was rendered, modification
is still possible when the decree contains a provision relating to maintenance.
When maintenance payments are currently mandated under the decree, a
modification petition must be considered by the District Court.
(Emphasis added.)
We conclude that a district court's obligation to entertain a motion to modify its prior
decision regarding maintenance is defined by statute and not by the decree for which
modification is sought.
For example, pursuant to the District Court's original decree of dissolution, entered
December 1, 1995--which did not contain a provision awarding Dorothy maintenance--
Dorothy would have been able to petition that court for modification of its decision not to
award maintenance until December 1, 1997, regardless of language to the contrary in the
court's findings of fact and conclusions of law. Section 40-4-208(2)(a), MCA. In light of
this Court's decision to remand this case to the District Court for reconsideration of marital
property division and maintenance, however, that date is no longer applicable. If, on remand.
the District Court reaffirms in its amended decree that Dorothy is not entitled to maintenance,
Dorothy can still move for modification of maintenance within two years of the date of that
amended decree, pursuant to (j 40-4-208(2)(a), MCA. If, however, the District Court
determines in its amended decree that Dorothy is entitled to maintenance, Dorothy will have
an unlimited time in which to file her motion for modification of maintenance, pursuant to
(j 40-4-208(2)(b), MCA. In either case, the District Court will be required to entertain
Dorothy's motion for modification of maintenance, pursuant to (j 40-4-208, MCA.
Therefore, to the extent that the District Court concluded it did not have to reconsider
marntenance after the entry of its decree and judgment, we conclude that the court erred.
However, in light of our resolution of Issue 1, and the fact that any future motion for
modification is controlled by statute, we conclude that error was harmless.
ISSUE 3
Did the District Court abuse its discretion when it refused to award Dorothy attorney
fees and costs she incurred in her response to James's post-trial motions?
A district court's decision to award or not to award attorney fees is largely
discretionary. We will not disturb a district court's judgment related to the issue of attorney
fees absent an abuse of that discretion. In re Marriage of Swanson (1986), 220 Mont. 490,
496, 716 P.2d 219,223.
In this case, Dorothy contends that the District Court abused its discretion when it
declined to award her attorney and expert witness fees which she incurred in order to respond
to James's post-trial motion to amend the District Court's findings of fact and conclusions of
law. Dorothy maintains that the District Court had authority, pursuant to $40-4-1 10, MCA,
to award her post-trial costs for James's allegedly meritless motion to amend.
Section 40-4-1 10, MCA, provides:
The court from time to time, after considering the financial resources of both
&, may order a party to pay a reasonable amount for the cost to the other
party of maintaining or defending any proceedings under chapters 1 and 4 of
this title and for attorney's fees, including sums for legal services rendered and
costs incurred prior to the commencement of the proceedings or afker entry of
judgment. The court may order that the amount be paid directly to the
attorney, who may enforce the order in his name.
(Emphasis added.) Pursuant to that section, the District Court is required to "consider[] the
financial resources of both parties" when it decides whether costs and attorney fees should
be awarded. In the underlying dissolution action in this case, the District Court concluded
that:
Each party has been awarded substantial property interests some of
which have significant fitture earning potential. Consequently, each party has
the means, resources and ability to pay hisiher own attorney'siexpert witness
fees and costs without assistance from the other.
Although we conclude that the District Court did not abuse its discretion when it
declined to award attorney fees and costs to Dorothy based on its division of property in its
original decree, we do not know what the parties' property or income will be following the
amended decree, and therefore, hold that Dorothy is not precluded from raising the issue of
attorney fees on remand so that it can be considered in light of the parties' actual "financial
resources."
CONCLUSION
We reverse the District Court's valuation of James's interest in Gallatin Valley
Furniture, and remand to that court for entry of judgment consistent with this opinion, and
for redistribution of the parties' marital assets and reevaluation of Dorothy's need for
maintenance, fees, and costs in light of this holding. In addition, we conclude that any future
application or motion for modification of whatever decision the court makes regarding
Dorothy's need for maintenance is controlled by § 40-4-208, MCA, notwithstanding language
to the contrary in the court's decree or judgment.
We Concur: A
Justice Karla M. Gray, specially concurring,
I concur in the Court's opinion on issues two and three and specially concur on issue
one, regarding the valuation of James' interest in Gallatin Valley Furniture. In that regard,
I agree with our adoption of the Amodio rationale and, as a result, with our conclusion that
Neil's valuation of James' interest was conclusive on the District Court because it was the
only valuation in evidence which took the restrictive shareholders' agreement into account.
1disagree, however, with the Court's creation of a presumption that the valuation of
stock contained in a shareholders' agreement is the real value of a shareholder's interest in
a closely held corporation if the shareholders have employed an accepted method of
valuation and there is no evidence that the valuation was undertaken in bad faith or for the
purpose of avoiding marital or debtoricreditor responsibilities. I see no need for such a
presumption in light of the fact that there is no uniform rule for valuing stock in closely h
corporations. See Amodio, 509 N.E.2d at 936. So long as the valuation method used takes
into consideration inhibitions on the transfer of such stock arising from limited marketability
or restrictions in a shareholders' agreement, there is no reason for this Court to give favored
treatment to the valuation contained in the shareholders' agreement by according it a
presumption of "real value."