Tennessee appeals court allows slight DLOM in divorce case

BVWireIssue #187-4
April 25, 2018

marital dissolution/divorce
expert testimony, closely held corporation, discount for lack of marketability (DLOM), marital estate, equitable distribution, appreciation, distribution, pass-through entity

Valuators working on divorce cases in Tennessee know that the jurisprudence on the use of the marketability discount has been nebulous. But, as a recent appeals court opinion in a “drawn out” case shows, an important principle has emerged.

It’s important to note that the trial court made its value findings in 2016, thus before a July 2017 amendment (reported here), which specifically addresses the use of discounts by trial courts charged with valuing marital assets to affect an equitable distribution.

‘Characteristics of ownership interest’: In the instant case, the overriding valuation issue has been appreciation. During the marriage, as part of his estate planning, the wife’s father made a gift to the wife in the form of an interest in two pass-through entities. By the time the wife filed for divorce, after 25 years of marriage, the companies had increased in value. The trial court initially concluded the companies and any appreciation in value were separate property. But the appeals court, in its first decision, found the husband was entitled to a portion of the appreciation.

On remand, the trial court said it would rely on the judgment of valuation experts, “[a]bsent clear guidance and articulated policy considerations for the exclusion of marketability discounts otherwise routinely applied in the field of business interest valuations.” Since both experts found a discount for marketability was appropriate to “fairly reflect fair market value,” the court applied a slight DLOM to the wife’s interest in both companies.

The husband challenged the DLOM use in a new appeal. The Court of Appeals noted that, generally speaking, the application of a marketability discount “depends on the characteristics of the ownership interest being valued, not whether the owner of the interest actually intends to sell the interest.” The court went on to say that, in the divorce context, “in many instances, the decision to apply the discount is seen as discretionary” and depended on the facts of the case. In the instant case, based on all of the evidence relevant to the “characteristics of the ownership interest being valued,” the trial court’s use of DLOM was not error, the Court of Appeals concluded.

At the same time, the appeals court agreed with the husband that the trial court’s overall distribution was inequitable. It remanded, ordering the trial court to divide the marital estate in line with the appeals court’s proposed distribution.

A digest of Telfer v. Telfer, 2018 Tenn. App. LEXIS 120 (March 5, 2018), and the court’s opinion, will be available soon at BVLaw.

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