In re Marriage of Blackstone

No. 1-94-2780


IN RE THE MARRIAGE OF GEORGIA      )  Appeal from the
BLACKSTONE,                        )  Circuit Court of
                                   )  Cook County.
     Petitioner-Appellee,          )
                                   )
     v.                            )
                                   )
RONALD BLACKSTONE,                 )  Honorable 
                                   )  Shelvin Hall,
     Respondent-Appellant.         )  Judge Presiding.

JUSTICE ZWICK delivered the opinion of the court:
     On October 12, 1989, petitioner, Georgia Blackstone, filed
this action for dissolution of her marriage to respondent, Ronald
Blackstone. After trial, which commenced on January 28, 1992, the
circuit court entered bifurcated interlocutory orders. The first
order, entered on December 21, 1993, valued and divided the marital
property. A second order, entered December 30, 1993, dissolved the
marriage. Subsequently, on February 9, 1994, the trial court
entered final judgment incorporating the earlier rulings.
Respondent filed a post-trial motion which was denied July 15,
1994. He then filed timely notice of appeal.      
     On appeal, respondent argues the trial court abused its
discretion in valuing and distributing the marital estate.
Specifically, respondent argues (1) the trial court improperly
valued three corporations owned by respondent as having a value to
the marital estate of $300,000, when the only expert testimony at
trial indicated that the corporations had a fair market value of $0
and (2) the overall division of marital debts was so
disproportionate as to establish an abuse of the trial court's
discretion.
     The record establishes that the parties were married in
Cincinnati, Ohio, on July 2, 1960. Respondent, in 1968, began
working for R.R. Donnelly Co. in Chicago. In 1984, respondent
started a printing business known as Atrium Graphics. Atrium
Graphics was owned as a partnership between respondent and a man
named Andrew Landum and was located in the State of Illinois
Building. The parties' initial investment in Atrium Graphics was
$105,000, $90,000 of which were proceeds from a Small Business
Association loan.  
     In February, 1985, after discussions with petitioner,
respondent voluntarily terminated his employment with R.R.
Donnelly. He received a severance package which included payment of
his full salary and benefits through the 1985 calendar year. 
     In March of 1985, respondent began preparation for the
purchase of a Wendy's restaurant franchise. The training program
required by the franchisor, Wendy's International, lasted
approximately 14 weeks and required respondent to travel to Ohio.
Respondent testified that he returned to Chicago on the weekends
and spent his time then working with Landum at Atrium Graphics. 
     Subsequently, in 1985, respondent incorporated three
corporations to operate the Wendy's franchise. RJB Properties,
Inc., handled the daily operations of the restaurant. RGJ
Management Company owned the land and the restaurant building 
which were located at 117th and Halsted Streets in Chicago. Two B's
Enterprises, Inc., rented employees to RJB Properties so as to
avoid the higher taxes imposed upon food service employees.
Respondent testified that the couple's initial investment in the
three corporations was "probably between $250,000 and 300,000." 
     In addition to owning and managing the Wendy's restaurant and
Atrium Graphics printing shop, respondent began to make bids on
institutional food services contracts through RJB. Respondent
testified that, by 1991, RJB had submitted 75 to 100 bids for
various institutional contracts, of which 7 or 8 had were accepted
by institutions such as the Cook County Jail, the Cook County
Sheriff's Office and the Chicago Public Schools. RJB also owned and
serviced eight vending machines which dispensed food at CTA train
stations.
     Petitioner, at the time of trial, was earning in excess of
$60,000 per year. In addition, over the course of the marriage, she
had earned substantial retirement benefits. Respondent testified
that he drew no salary from RJB in the first few years of its
operation. In 1990, RJB paid him $24,000. The following year, 1991,
respondent was paid $50,000. 
     Respondent's expert, accountant and attorney James Friel,
prepared a report on the value of RJB. The report stated that
whatever profits were being generated by the food service contracts
were being overwhelmed by the restaurant's continuing and
substantial operating losses. In fact, after reviewing the various
corporate tax returns, Friel concluded that RJB had experienced,
since its incorporation and through the year 1990, a retained
earnings deficit of $475,000. Friel testified this meant the
corporation would have to earn nearly half a million dollars just
to pay off existing liens on its assets or, alternatively, to
achieve a positive book value. He also compared a potential sale of
RJB with records of recent fast-food restaurant sales. His
comparison led him to believe that no buyer would ever be willing
to purchase RJB in light of its operating history and its debt. He
concluded that RJB's fair market value was therefore $0.    
     On cross-examination, Friel admitted RJB's gross sales were
showing a rising trend, but noted that expenses were rising
commensurately. He admitted he did not value RJB's food service
contracts or other corporate assets individually, but had decided
not to do so because their value did not matter in light of the
substantial losses the Wendy's restaurant had incurred. He also
stated he did not evaluate the food service contracts because they
were not automatically renewable and were non-assignable. This
meant they would not be of significant interest to a prospective
purchaser of RJB. 
     Friel stated, also during cross-examination, that he had not
performed any valuation on respondent's other companies, RGJ
Management and Two B's Enterprises. He did not do so because
respondent and respondent's attorney told him these companies had
only minor value. They also told him that they were unwilling to
pay him to perform a business appraisal on these companies. 
     Friel stated he did not focus on the fact that RJB had been
paying down its debts as a factor in determining RJB's fair market
value. He admitted that an "unusual" expense of $126,945 had been
taken by the corporation in 1991 for "professional fees," but said
it was not necessarily an improper charge in light of the company's
significant gross sales which exceeded $4,000,000. Friel denied
that the corporation had any good will.      
     Following testimony and during final argument, petitioner
argued that respondent's shares in the three corporations were
marital property and should be split 50/50. She offered no evidence
of the dollar value of respondent's stock in the companies, but
instead suggested that the court put her in charge of the daily
operations of the various businesses. 
     In his argument, respondent admitted the three corporations
were marital property, but characterized petitioner's suggestion
she be put in charge of the operating the three corporations as
"non-sensical." He instead submitted a proposed division of marital
assets and debts in which he would be awarded all of the corporate
shares of RJB, RGJ Management and Two B's, including their debt. He
suggested that such a division was fair in light of the
corporations' extensive liabilities and his sole involvement during
the course of the marriage in running the businesses. 
     After concluding the proceedings, the trial court issued a its
ruling. The court determined that petitioner's annual salary was in
excess of $60,000 and respondent's salary was $50,000. Neither
party was awarded maintenance as the evidence indicated they were
both self sufficient. The court concluded the three corporations
owned by respondent were marital property and rejected petitioner's
suggestion that she be put in charge of running them because she
had no expertise or experience in doing so. The trial court also
rejected the testimony of respondent's expert witness, James Friel.
The court stated that it found both his testimony and his analysis
of RJB's value to not be credible. The court found that Two B's
Enterprises had no value, but it determined that RJB and RGB
Management, the latter which owned the land and building on which
the Wendy's restaurant was located, had a combined value of
$300,000. Accordingly, the corporate assets and debts were awarded
to respondent. Petitioner was awarded a corresponding offset of
$150,000. The remaining marital assets were divided by the court in
a "Marital Balance Sheet," which we will discuss later in this
opinion.
     Respondent first argues that there is insufficient evidence in
the record to support the court's valuation of the three
corporations. Section 503(d) of the Marriage and Dissolution Act
(the Act) directs the trial court to divide marital property in
"just proportions," after considering all relevant factors
including the contribution made by each party to the acquisition of
the marital property; the duration of the marriage; the parties'
relevant economic circumstances; the age, health, occupation and
needs of each party; and the parties' reasonable opportunity for
future acquisition of assets and income. 750 ILCS 5/503(d) (West
1994). 
     In a dissolution proceeding, the burden of presenting the
court with sufficient evidence to fairly evaluate and divide the
marital property does not fall upon the petitioning spouse alone,
but rather, is an obligation existing with both parties. See In re
Marriage of Courtright, 155 Ill. App. 3d 55, 59, 507 N.E.2d 891
(1987); In re Marriage of Deem, 123 Ill. App. 3d 1019, 1023, 463 N.E.2d 1317 (1984). In this case, however, the record establishes
that neither party met this burden, at least with respect to the
valuation of the three corporations now in dispute.    
     Petitioner failed to offer any evidence of the value of the
respondent's corporate shares, even though she readily recognized
that these shares were one of the marital estate's most significant
assets. Although respondent did offer evidence of the value of his
closely held businesses in the form of expert testimony from James
Friel, the trial court ultimately rejected both Friel's testimony
and his analysis.
     So long as the trial court's valuation of marital assets is
within the range testified to by expert witnesses, it will not
ordinarily be disturbed on appeal. In re Marriage of Olson, 223
Ill.App.3d 636, 646, 585 N.E.2d 1082 (1992); In re Marriage of
Brooks, 138 Ill. App. 3d 252, 486 N.E.2d 267 (1985). It follows
that when the trial court renders a valuation that is outside the
expert testimony presented at trial, we have the obligation of more
carefully scrutinizing the trial court's determination. This is
because evidence of both the marital and nonmarital assets of the
parties must be shown on the record in order for a reviewing court
to determine the propriety of the division of marital property.
Deem, 123 Ill. App. 3d at 1023. After carefully scrutinizing the
record to determine whether the trial court's valuation in this
case can be supported by the evidence presented, we conclude that
it can not. 
     The only credible evidence which might support a valuation of
$300,000 was respondent's testimony that the couple had capitalized
the corporations with between $250,000 and $300,000 when the
corporations were formed in 1985. This was, however, more than six
years before the trial. It is established that there is no
particular relationship between the stated capital of a corporation
at the time it is incorporated and the corporation's fair value
after several years in operation. See In re Marriage of Weiss, 129
Ill. App. 3d 166, 173, 472 N.E.2d 128 (1984); In re Marriage of
Olsher, 78 Ill. App. 3d 627, 636, 397 N.E.2d 488 (1979). Returning
petitioner's share of the couples' initial investment to her six
years later, as if nothing had happened in the intervening period
of time, is necessarily arbitrary, particularly when the only
testimony on the financial health of RJB, the most significant
corporation, suggested it had suffered severe financial problems. 
     We sympathize with the trial court's dilemma in not having a
satisfactory valuation of the three corporations at the close of
the trial. We also agree that splitting the stock and awarding the
day-to-day management of the three corporations to petitioner, as
she had requested, was not an ideal disposition under the facts
presented. Such a ruling would be contrary to the Act's general
policy of severing the economic ties which exist between the
parties. In re Marriage of Isaacs, 260 Ill. App. 3d 423, 431, 632 N.E.2d 228 (1994); In re Marriage of Banach, 140 Ill. App. 3d 327,
331, 489 N.E.2d 363 (1986); but see In re Marriage of Simmons, 87
Ill. App. 3d 651, 657, 409 N.E.2d 321 (1980)(dividing stock between
divorcing spouses upheld where complaining spouse insisted at trial
that corporation's value was $0). Nonetheless, it is the duty of
the trial court, as finder of fact, to determine which experts and
testimony to believe. Doser v. Savage Manufacturing and Sales,
Inc., 142 Ill. 2d 176, 196, 568 N.E.2d 814 (1990). Once the court
made a specific finding that the only witness to offer evidence on
the valuation issue was not credible, there was a necessary failure
of the proof, and any valuation made by the court without a
financial analysis of the health of the corporations was
necessarily arbitrary. See Deem, 123 Ill. App. 3d at 1023.
     Petitioner argues that we should affirm the trial court's
judgment with respect to the value of respondent's corporate
shares, despite her failure to put in evidence on the question of
valuation, by relying upon the court's decision in In re Marriage
of Bauer, 138 Ill. App. 3d 379, 485 N.E.2d 1318 (1985). In Bauer,
as here, the petitioner failed to offer expert testimony on the
value of her spouse's closely held corporation. The respondent, in
contrast, offered an expert who valued the corporation at $1,000.
The expert based this valuation on the cost of incorporating the
business and the initial value of the corporation's capital stock.
Bauer, 138 Ill. App. 3d at 383. He opined that there were no other
significant corporate assets because the business was solely
dependent upon the personal efforts of the respondent. The court
rejected the expert's testimony, but, despite the lack of a
credible expert evaluation, determined that the corporation had a
value to the marital estate of $66,000. The appellate court
affirmed, finding this valuation could be supported, in part, by
trial exhibits which detailed the corporation's financial history
and the salaries that had been paid to respondent by the
corporation over a period of years.     
     We find Bauer to be distinguishable because the proof in here
is substantially different. In Bauer, the petitioner worked at a
significantly smaller business consisting of a single corporation
which had no employees, besides the respondent. In contrast,
petitioner here owned and operated three corporations with
managers, dozens of employees, real estate, and gross sales in
excess of $4,000,000 annually. Although the court in Bauer
apparently believed it was reasonable to affirm the trial court's
valuation of respondent's business at $66,000 based on the evidence
presented to it, such an approach is not reasonable in this case. 
     On review of a case such as this, where the record does not
support any valuation of a very substantial marital asset, we
conclude that the only reasonable course is for us to order further
proceedings at which sufficient evidence on the question of
valuation can be presented. Further, to achieve a just
apportionment, modification of the trial court's previous 
distribution is authorized as part of our mandate if, upon remand,
such modification is dictated by the evidence elicited on the
revaluation. In re Marriage of Boone, 86 Ill. App. 3d 250, 252, 408 N.E.2d 96 (1980). Accordingly, we reverse and remand the case so
that the trial court can take additional evidence on the valuation
and apportionment issues.
     Although our decision to remand the case for further
proceedings would appear to moot respondent's remaining argument
that the trial court's division of marital property was so
disproportionate as to require reversal, we elect to address
respondent's second issue. We do so both because it likely that,
absent comment, many of the arguments made on appeal will be again
presented to the trial court on remand; in addition, we find it
necessary to correct errors made by the trial court in presenting
as part of its order a balance sheet which we find to have been the
source of some confusion between the parties.
     In both the trial court and on appeal, respondent has advanced
the unwavering position that, because there is no market for his
shares of RJB stock, and because the corporation has a substantial
negative book value, RJB's shares must necessarily be valued at $0.
Respondent implies that, if his expert's testimony had been
credible, it would be per se error for the trial court to fail to
do so. As the trial court implicitly recognized in disregarding
Friel's analysis, however, such a narrow view of valuation is not
proper.
     The appraisal of a closely held corporation is as much an art
as it is a science. There are simply no precise rules for fairly
evaluating such businesses in the dissolution context. Bauer, 138
Ill. App. 3d at 385; In re Marriage of Mitchell, 103 Ill. App. 3d
242, 430 N.E.2d 716 (1981). Despite the fact that closely held
corporations may be without established market value, they may,
nevertheless, possess an ascertainable value with respect to the
division of marital property. In re Marriage of Thomas, 239 Ill.
App. 3d 992, 608 N.E.2d 585 (1993); Bauer, 138 Ill. App. 3d at 385.
In valuating a closely held corporation, an expert witness may take
a deduction for its unmarketability, but such a deduction is not
mandatory. Zokoych v. Spalding, 123 Ill. App. 3d 921, 937, fn. 4,
463 N.E.2d 943 (1984).
     Nor has "book value" been found to be a particularly good
measure for appraising the fair value of a corporation. In re
Marriage of Reib, 114 Ill. App. 3d 993, 1000, 449 N.E.2d 919
(1983); Beerly v. Department of Treasury, 768 F.2d 942 (7th Cir.
1985). Indeed, in Beerly, the court characterized book value as
being a "virtually meaningless index" for purposes of arriving at a
fair appraisal.
     Our point is simply that it would be a mistake, on remand, for
either petitioner or respondent to focus myopically on any given
valuation method or financial aspect of the three corporations in
arguing its fair value to the marital estate. On remand, the
question of whether the businesses could be successfully sold to a
third party and at what price that sale might take place is clearly
relevant. So too is the corporation's "book value." Nonetheless,
the determination of these considerations is not in itself
dispositive of any ultimate issue in the case.
     Our second observation concerns the trial court's "Marital
Balance Sheet," a document first created by respondent and then
modified by the trial court in rendering its decision. Our
criticism of this document is that it has presented a misleading
picture of the marital estate, possibly substantially overstating
the actual debts of the parties. The Marital Balance Sheet is set
out by the trial court in its ruling in the following format:                              MARITAL BALANCE SHEET
----DESCRIPTION---------           VALUATION      --------AWARD---------
                                                  HUSBAND        WIFE
                                   ASSETS
 1. Wife's Pension                 256,860                       256,860
 2. NY Life Insurance                6,720                         6,720
 3. Minnesota Mutual                 7,116                         7,116
 4. Aetna                           11,300                        11,300
 5. Kemper                           3,370                         3,370
 6. Wife's IRA                     Unknown                          100%
 7. Three Corporations             300,000        300,000
 8. Offset award for 3 Corps       150,000                       150,000
 9. Jewelry                          6,720                         6,720
10. Respondent's Soc. Security      82,730         82,730
11. 17708 Cherrywood Lane (Equity)  70,000         70,000          
12. L.A. Condo (Equity)             87,000         44,000         43,000
13. Donnelly Retirement             19,296         19,296
14. Stocks                          17,796         17,796

                         TOTAL:  1,018,908        533,822        485,086   
     
                                      DEBTS

 1. Kodak                           81,000         40,500         40,500
 2. Mary Ferguson                   14,500          7,250          7,250
 3. First Bank of Oak Park         250,000        250,000         
 4. First Bank of Oak Park           7,000          7,000
 5. First Bank of Oak Park           8,000          8,000
 6. Austin Bank                     15,000         15,000
 7. RJB Properties                  11,000         11,000
 8. Atty Mahar                       5,500          5,500
 9. Wendy's International           21,734         21,734
10. Lease AM (equipment)            32,535         32,535
11. Delavant (royalties)             7,602          7,602
12. Wendy's (WNAP)                   3,801          3,801
13. State payroll tax                4,284          4,284
14. Misc. vendors (A/P)              8,118          8,118
15. Wendy's Co-op                   56,427         56,427
16. Canteen Corp.                  140,021        140,021
17. Offset to petitioner(3 corps.) 150,000        150,000

 * Dissipation by petitioner        12,500                        12,500        

                           TOTAL:  829,022        768,772         60,250 

               NET TOTALS:  189,886       (234,950)       424,836

     Our objection to this document is that nearly all of the
debts listed as marital debts do not actually belong to the
marital estate. Rather, the debts were incurred by the various
corporate entities which are necessarily separate and distinct
legal entities (RJB, RGJ Management and Two B's). The record
indicates that when the court attributed a $300,000 asset value
to the "Three Corporations," the court intended for this value to
be a net value. Thus, the $300,000 valuation already incorporates
within it the effect of any associated corporate debt. Including
the debts of the corporations again individually on this balance
sheet therefore overstates the debt.    
     The error in this regard appears to be traceable to
respondent's pre-trial memorandum in which he lists all of the
corporate debts in this way, as if all of the corporate and
partnership debt were part of the marital estate. Accounting for
business debt in this way, however, results in making it appear
as if the respondent is assigned 93% of all the marital debt
simply because he has been awarded possession of the three
corporations, while petitioner has been assigned only 7% of the
marital debt. This error accounts for almost all of the
"disproportionate" distribution of which respondent now
complains.
     We recognize that, in preparing his pre-trial memorandum,
respondent may have accounted for corporate debt in this way not
to deliberately mislead the court, but rather, because many or
all of these debts may have been personally guaranteed by one or
both of the parties. In such a case, the potentiality exists that
whatever debt remains unpaid would, ultimately, become the
obligation of one or both of the parties. Nonetheless, contingent
liabilities are not fairly treated as marital debt, and we find
it to be error to treat them as such. If, on remand, the parties
wish to account for contingent liabilities, they must do so in
such a way so as to not overstate their potential personal
liability. Cf. Covey v. Commercial National Bank, 960 F.2d 657
(7th Cir. 1992) (court may find value of contingent liability by
first determining likelihood that contingency will occur and
discounting liability accordingly); but see In re Marriage of
Zells, 197 Ill. App. 3d 232, 237, 554 N.E.2d 289 (1990), affirmed
in part, reversed in part, 143 Ill. 2d 251, 572 N.E.2d 944
(1991)(husband's contingent legal fees not properly considered
asset of either marital estate, or of law practice from which it
is derived, because contingent fee represents merely an
unenforceable expectation of future income).
     Finally, we are compelled make one final note. In his pre-
trial memorandum, petitioner valued the petitioner's interest in
a New York Life Insurance policy as having a value to the marital
estate of $2,304. In the trial court's "Marital Balance Sheet,"
however, the court valued this policy at $6,720, the same value
the court placed upon the petitioner's jewelry. There appears to
be nothing in the record to support a valuation of $6,720 for the
New York Life insurance policy, and we cannot help but wonder
whether the court has inadvertently duplicated the $6,720 entry
in preparing the balance sheet. We point this out only to suggest
that the court may wish to revisit this issue on remand.
     In sum, we reverse and remand the case for further
proceedings at which the trial court may take additional evidence
so as to properly value respondent's three corporations and re-
calculate the debt properly attributed to the marital estate. In
recalculating the valuation of marital assets and debts, the
court may adjust its previous distribution as it believes is
just. We note, however, that the court must make its re-valuation
as of the date of dissolution, not the date of re-trial. In re
Marriage of Rossi, 113 Ill. App. 3d 55, 60, 446 N.E.2d 1198
(1983); Brooks, 138 Ill. App. 3d at 260. 
     For the foregoing reasons, the judgment of the circuit court
of Cook County with regard to the valuation and apportionment of
the parties' marital assets and debts is reversed and remanded
for further proceedings as consistent with this opinion.
     Reversed and remanded.
     RAKOWSKI, J., and LEAVITT, J., concur.