Opinion issued December 18, 2018
In The
Court of Appeals For The
First District of Texas ———————————— NO. 01-17-00449-CV ——————————— RONALD V. MATHIS, Appellant V. KAREN E. MATHIS, Appellee
On Appeal from the 507th District Court Harris County, Texas Trial Court Case No. 2016-22731
MEMORANDUM OPINION
A trial court granted a divorce to Ronald Mathis and Karen Mathis and
divided the community estate such that Ronald was awarded shares in two closely-
held entities and Karen was awarded an equalized judgment. Smaller-value items
were also divided. The trial court also awarded Karen spousal maintenance. Ronald raises 11 issues in his appeal of the trial court’s judgment. In the first
six issues, he contends that the property division is manifestly unfair and unjust
because the ownership interest in a business was mischaracterized as a community
asset and the ownership interest in that and another business was overvalued; a tax
debt was ignored; a car lease was treated as an asset; money in corporate bank
accounts was treated as a community asset; and finally, given these errors, the
equalized judgment was excessive and erroneous. In a seventh issue, he contends
that the trial court abused its discretion in awarding spousal maintenance. In two
more issues, he challenges the trial court’s order related to insurance policies. And
in the last two issues, he contends that the trial court erred in awarding appellate
fees.
Because both the husband’s and the wife’s opinion on the value of the two
closely-held entities had no evidentiary support, and no other evidence supported
the trial court’s valuation, the trial court abused its discretion in dividing the
community estate. We therefore reverse and remand.
Background
Karen and Ronald Mathis were married in 1980. Both have degrees in
computer programming, but neither pursued a career related to their educational
focus. Ronald played professional baseball for years and now runs two companies
involved in sanctioning youth baseball tournaments. Karen has had little outside
2 employment. Instead, she has focused on raising the couple’s four children, the
youngest of whom is a student and continues to depend on his parents financially.
In 2009, Karen had surgery to correct a herniated disk. The surgery left her
with unrelenting nerve pain, which she describes as feeling “like there’s a clamp”
on her foot. She had a second surgery in 2011 to alleviate the nerve pain, but the
surgery was unsuccessful. Karen takes the maximum daily dose of pain
medications yet is in constant pain.
The same year as Karen’s second surgery, Ronald’s friendship with another
woman began to evolve. According to Karen, Ronald eventually admitted to her
that the relationship had developed into an extramarital affair. At trial, Ronald
disputed Karen’s statement. He testified that the relationship never became
physical. But he admitted that he has maintained some level of relationship with
the woman and her teenage son since 2011. And a handwritten letter Ronald wrote
to the woman that year contains several affectionate references.
In 2016, Ronald filed for divorce. Karen countersued for divorce on the
basis of adultery. They were the only two witnesses at trial. Both testified about
their 37-year marriage, the state of their finances, and their community assets.
Karen testified that the couple’s income has always been primarily from Ronald’s
work—first playing professional baseball, then running two baseball-related
entities. For the last several years, Ronald’s gross income from these endeavors has
3 averaged around $20,000 monthly. Karen has worked part-time in retail the last
couple years, grossing $900 monthly. Since their separation, Karen has found
additional, sporadic work as a standardized patient at Baylor College of Medicine,
at a pay of $20 per hour. Also since their separation, Ronald has expended an
average of $5,000 in community funds each month to pay Karen’s rent and some
of her living expenses.
Both Karen and Ronald testified about the ownership and value of the two
companies Ronald operates. They own Nations Baseball Association LLC, which
according to Karen is a national entity with several, individual part-owners. It
sanctions youth baseball tournaments across the country and pays Ronald $5,000
monthly to “run the company.” According to Karen, when Ronald has not received
his monthly pay, it has been because “he decides not to pay himself.” The couple
also owns South Texas Nations Baseball, Inc., a local affiliated entity that has
provided Ronald an average monthly income of $15,000. According to Karen,
Ronald also pays most of his living expenses through South Texas Baseball,
including meals, clothing, cell phone charges, utilities, and health insurance
premiums. Contrary to Karen’s testimony, Ronald testified that, although these
personal expenses have been paid through the South Texas Baseball bank account,
these personal expenses are later segregated from business expenses for tax and
accounting purposes.
4 Ronald agreed that his monthly gross income has averaged around $20,000
for the past several years. Nonetheless, he testified that the couple is essentially
broke. He said that the family’s expenses exceed his income, so he has “robbed
Peter to pay Paul.” According to Ronald, the couple does not own a home in
Texas, and their home in Arizona has a negative value due to home equity loans
and tax liens. He attributed his decision to end the marriage to his desire to “get
away” from “Karen’s spending habits” so he can have “a reprieve to try to pay
bills” and “make ends meet.” He also acknowledged that, for the past couple years,
he has held his income—community funds—in the South Texas Baseball bank
account so that Karen could not access it.
Ronald agreed with Karen that the couple owns a partial interest in Nations
Baseball and 100 percent of South Texas Baseball. In addition to these two
business assets, the community estate includes a home in Arizona, vehicles, bank
and retirement accounts, and insurance policies. The couple also has various debts
(including credit card debts), and, according to Ronald, a tax lien and a debt to his
mother.
The trial court granted a divorce on the grounds of Ronald’s adultery. The
trial court specifically found that Ronald “was not a credible witness.” The court
announced a “just and right division of the property” after holding that any interest
either spouse held in Nations Baseball and South Texas Baseball was a community
5 asset and that the businesses were worth $200,000 and $500,000, respectively,
which exactly matched the entities’ values listed in Karen’s submitted inventory.
The trial court awarded the community’s interest in both businesses to
Ronald, and it awarded Karen an equalized judgment of $380,000, which was
heavily linked to the values assigned to the two entities. The trial court also
awarded Karen spousal maintenance of just over $4,000 per month for ten years.
Ronald appeals.
Applicable Law of Division of Community Estate
In a divorce, the trial court orders a division of the parties’ community estate
in a manner that the court deems just and right, having due regard for each party’s
rights. TEX. FAM. CODE § 7.001. The trial court is afforded broad discretion in
dividing the community estate, and we must indulge every reasonable presumption
in favor of the trial court’s proper exercise of its discretion. Schlueter v. Schlueter,
975 S.W.2d 584, 589 (Tex. 1998); Murff v. Murff, 615 S.W.2d 696, 698 (Tex.
1981); Motley v. Motley, 390 S.W.3d 689, 695 (Tex. App.—Dallas 2012, no pet.).
Under the abuse of discretion standard, a lack of legally or factually
sufficient evidence does not constitute an independent ground for asserting error;
instead, it is a relevant factor in determining whether the trial court abused its
discretion. Pickens v. Pickens, 62 S.W.3d 212, 214 (Tex. App.—Dallas 2001, pet.
denied). When a sufficiency review overlaps the abuse-of-discretion standard, we
6 engage in a two-pronged inquiry: (1) whether the trial court had sufficient
information to exercise its discretion and (2) whether the trial court erred in its
application of discretion. Sandone v. Miller–Sandone, 116 S.W.3d 204, 206 (Tex.
App.—El Paso 2003, no pet.). The traditional sufficiency review comes into play
under the first prong. Id.
It is the responsibility of both divorcing spouses to provide the trial judge
with sufficient valuation evidence to enable the court to make a just and right
division of marital property. Murff, 615 S.W.2d at 698–99; Aduli v. Aduli, 368
S.W.3d 805, 820 (Tex. App.—Houston [14th Dist.] 2012, no pet.); Finch v. Finch,
825 S.W.2d 218, 221 (Tex. App.—Houston [1st Dist.] 1992, no writ). If “a party
does not provide values for property to be divided, that party may not complain on
appeal that the trial court lacked sufficient information to properly divide
property.” Deltuva v. Deltuva, 113 S.W.3d 882, 887 (Tex. App.—Dallas 2003, no
pet.); accord Aduli, 368 S.W.3d at 820; Todd v. Todd, 173 S.W.3d 126, 129 (Tex.
App.—Fort Worth 2005, pet. denied). But that rule is not without exception: an
appellate court will not uphold a property division if there is no evidence in the
record to support the trial court’s valuation and division. See Sandone, 116 S.W.3d
at 207–08 (holding that, when both parties fail to put on any valuation evidence, no
“just and right” division can be determined).
7 Lack of evidentiary support will not require reversal, though, if the
challenged property is of such a relatively small value that its grant to one party
cannot be said to have materially impacted the property division or resulted in a
manifestly unjust and unfair division. See Robles v. Robles, 965 S.W.2d 605, 621–
22 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (“If . . . mischaracterized
property had only a de minimis effect on the trial court’s just and right division,
then the trial court’s error is not an abuse of discretion.”); see also Odom v. Odom,
No. 12-06-00218-CV, 2007 WL 677800, at *2 (Tex. App.—Tyler Mar. 7, 2007, no
pet.) (mem. op.); Sandone, 116 S.W.3d at 207–08.
Thus, for significant assets (assets worth enough within the scheme of the
couple’s community estate to materially impact whether a property division is just
and right), there must be sufficient evidence in the record to support the value
assigned; if there is not, the trial court abuses its discretion by not fulfilling its duty
under Family Code section 7.001 to divide the community property in a just and
right manner. Murff, 615 S.W.2d at 698–99; see TEX. FAM. CODE § 7.001. “The
failure of the parties to put on evidence as to value does not absolve the trial court
of fulfilling this duty,” and an appellate court cannot ensure a just and right
division was had if “the trial court has no evidence of what exactly it is dividing”
or the value of the assets to be divided. Odom, 2007 WL 677800, at *2.
8 If there is adequate evidence for the trial court to exercise its discretion in
dividing the property, we proceed to determine whether, based on the elicited
evidence, the trial court divided the property in an arbitrary or unreasonable
manner. Sandone, 116 S.W.3d at 206. The division of community property need
not be equal, and a trial court may consider many factors when exercising its broad
discretion to divide property. Murff, 615 S.W.2d at 699; Barras v. Barras, 396
S.W.3d 154, 163 (Tex. App.—Houston [14th Dist.] 2013, pet. denied). Such
factors include the nature of the marital property; the relative earning capacity and
business opportunities of the parties; the parties’ relative financial condition and
obligations; the parties’ education; the size of the separate estates; the age, health,
and physical condition of the parties; any fault in breaking up the marriage; the
benefit the innocent spouse would have received had the marriage continued; and
the probable need for future support. Murff, 615 S.W.2d at 699; Barras, 396
S.W.3d at 163.
The trial court may also award a money judgment as part of a just and right
division of the community estate. Finch, 825 S.W.2d at 224; Hanson v. Hanson,
672 S.W.2d 274, 278–79 (Tex. App.—Houston [14th Dist.] 1984, writ dism’d).
The trial court may secure the money judgment with an equitable lien in the
community property awarded to the other spouse. See Hanson, 672 S.W.2d at 274;
see also Richard R. Orsinger, Patrice L. Ferguson, & Bryan H. Polk, Dividing
9 Ownership Interests in Closely-Held Business Entities: Things to Know and to
Avoid, 42nd Annual Advanced Family Law Course, Chapter 26 at 28 (State Bar of
Texas 2016).
The party complaining about an improper division of the community estate
has the burden of showing from the evidence that the trial court’s division was so
unjust and unfair as to constitute an abuse of discretion. See Mann v. Mann, 607
S.W.2d 243, 245 (Tex. 1980); Pappas v. Pappas, No. 03–12–00177–CV, 2013 WL
150300, at *1 (Tex. App.—Austin Jan. 10, 2013, no pet.) (mem. op.); Vannerson v.
Vannerson, 857 S.W.2d 659, 672 (Tex. App.—Houston [1st Dist.] 1993, writ
denied).
Ronald raises 11 issues in this appeal, but most center on the classification,
valuation, and division of the community estate. We turn first to the community’s
interest in Nations Baseball and South Texas Baseball.
Classification, Valuation, and Division of Community Interest in Businesses
Ronald runs two businesses: Nations Baseball and South Texas Baseball.
Both are corporate entities.
A. Classification of a family business’s worth
A spouse is entitled to a division of the property that the community owns at
the time of divorce. Mandell v. Mandell, 310 S.W.3d 531, 539 (Tex. App.—Fort
Worth 2010, pet. denied). When the couple owns a family business that is in the
10 form of a corporation, the corporation is treated as a separate legal entity from its
shareholders, officers, and directors. Sparks v. Booth, 232 S.W.3d 853, 868 (Tex.
App.—Dallas 2007, no pet.). Property owned by a corporation is not a divorcing
shareholder’s separate property or community property; instead, it is a corporate
asset. Gonzales v. Dallas Cty. Appraisal Dist., 05-13-01658-CV, 2015 WL
3866530, at *3 (Tex. App.—Dallas June 23, 2015, no pet.) (mem. op.); Mandell,
310 S.W.3d at 539. Thus, a corporate entity’s assets are not subject to community-
property division in a divorce. Mandell, 310 S.W.3d at 539; see Legrand–Brock,
246 S.W.3d at 322. Neither are the future earnings that a corporate entity will pay a
divorcing spouse. Id.; Von Hohn v. Von Hohn, 260 S.W.3d 631, 640–41 (Tex.
App.—Tyler 2008, no pet.).
B. Classification of Nations Baseball1
Nations Baseball is a limited liability company. According to trial testimony,
Nations Baseball is a closely held entity owned by a small number of people,
including Ronald. No party testified that Ronald’s interest in Nations Baseball was
anything other than a distinct asset. But on appeal, Ronald argues that it is not a
distinct entity. He argues that the ownership interest in Nations Baseball is held by
a corporate entity—South Texas Baseball—and is not part of the community
estate. Thus, according to Ronald, the trial court should have only divided South
1 The parties do not dispute the proper classification of South Texas Baseball; its shares are community property. 11 Texas Baseball, not both as distinct entities. Ronald’s argument on appeal is based
on the following statement of law: “While a spouse’s ownership interest in a
corporation can be characterized as either separate or community property,
corporate assets and liabilities are owned by the corporation and, absent a finding
of alter ego, are not part of the community estate.” In re Marriage of Collier, 419
S.W.3d 390, 403 (Tex. App.—Amarillo 2011, no pet.).
At trial, though, Ronald testified that he owns Nations Baseball, along with a
couple other “people.” He described himself as a “shareholder” in Nations
Baseball. He stated that he held 33 percent of the interest in the company in 2013
but that other people have been brought in since then, intimating that his share has
diminished as a result. Ronald never testified what percent of Nations Baseball he
owned at the time of trial. And he never argued that Nations Baseball was anything
other than a distinct asset. Karen also testified that any ownership in Nations
Baseball was held by Ronald as community property. Thus, neither party testified
that Ronald’s interest in Nations Baseball was anything other than a community
interest in a distinct and divisible entity.
Ronald’s late argument regarding the proper characterization of Nations
Baseball has insufficient evidentiary support to conclude that the trial court erred
in its findings. Ronald did not testify that South Texas Baseball owns the relevant
interest in Nations Baseball, and the record includes some documentary evidence
12 to support each possible theory of ownership. For example, the trial evidence
includes a 2015 K-1 tax filing that lists Nations Baseball as an asset of South Texas
Baseball and states that South Texas Baseball owns a 19.2 percent interest in the
other entity. Also, Ronald’s inventory refers to Nations Baseball as a “closely held
business interest[]” that is “taxed as a partnership” and “held by” South Texas
Baseball. It further refers to South Texas Baseball as having a “sole asset” of
“19.2% member interest in Nations Baseball.” This evidence supports Ronald’s
assertion on appeal that the relevant ownership percentage in Nations Baseball is a
corporate asset belonging to South Texas Baseball (which is undisputedly a
community owned entity) and is not a directly divisible community asset belonging
to the divorcing spouses.
But another trial exhibit, Nations Baseball’s Statement of Assets, Liabilities
and Equity, states that the entity has close to $329,000 in equity and identifies the
members and their distributions and capital as follows:
Member distribution – Ron Mathis (88.20) Member’s Capital – Don 37,796.64 Member’s Capital – Ron 37,796.64 Member’s Capital – Sean 37,796.64 Member’s Capital – Steve 38,328.66
13 This document suggests individual ownership of Nations Baseball, which is
consistent with Ronald’s trial testimony that he owns the partial interest in Nations
Baseball, making it a distinct entity subject to a just and right division.
There is some evidence to support classification of Nations Baseball as a
corporate asset held by the community-owned South Texas Baseball entity and
other evidence to support classification of the relevant ownership interest in
Nations Baseball as a divisible community asset partially owned by Ronald.
Because the trial court was presented with conflicting documentary evidence and
Ronald’s own testimony supports the conclusion that he individually owns the
partial interest in Nations Baseball, we conclude that the trial court did not err in
classifying the ownership interest in Nations Baseball as a distinct and divisible
community asset. See Newberry v. Newberry, 351 S.W.3d 552, 564 (Tex. App.—
El Paso 2011, no pet.) (holding that trial court did not abuse discretion in accepting
some witness testimony and rejecting other, contrary evidence in dividing
community estate).
C. Valuation and division of interest in two companies
Ronald contends that the trial court erred in valuing Nations Baseball and
South Texas Baseball and in dividing the community estate based on the erroneous
valuations.
14 1. Valuation evidence
a. Nations Baseball
During her trial testimony, Karen valued the interest in Nations Baseball at
$500,000 and stated that she reached that figure by taking “two and a half times
how much it pays” Ronald. Both parties agree that Ronald earns $60,000 annually
($5,000 monthly) from Nations Baseball; therefore, it is unclear how Karen arrived
at a valuation of $500,000. Karen’s inventory did not match her testimony. There,
she valued the interest in Nations Baseball at $200,000 (and valued South Texas
Baseball at $500,000).
Ronald listed Nations Baseball on his inventory as having a value of zero
dollars. That valuation was based on his view that Nations Baseball’s operating
agreement prohibits him and other owners from selling their interest in the entity.
We discuss this agreement in more detail below but note here that, while the
agreement places restrictions on the members’ ability to demand the purchase of
their shares, it does not prevent the members from selling their shares to interested
and approved buyers. The agreement contemplates such a sale by setting forth a
method to determine the value of shares to be sold. On cross-examination, Ronald
conceded that he does not know what the shareholder agreement allows regarding
assignment or transfer of members’ shares.
15 The Nations Baseball checkbook register for 2016 shows consistent
payments from Nations Baseball to South Texas Baseball throughout the year,
averaging more than $25,000 monthly. There was no testimony concerning how
these payments impact the value of Nations Baseball or South Texas Baseball.
b. South Texas Baseball
Karen’s inventory listed South Texas Baseball at a value of $200,000. Karen
did not explain how she arrived at that figure. In fact, she did not testify about this
entity’s value at all. She did testify that the couple holds 100 percent interest in the
entity and that it pays Ronald an average of $15,000 monthly ($180,000 annually).
Like with Nations Baseball, Ronald’s inventory listed the value of South
Texas Baseball at zero dollars. Ronald testified that South Texas Baseball does not
have any value apart from his daily work, for which he is paid an income. Further,
according to Ronald, it had no sale value. He testified that the other Nations
Baseball owners would not have any interest in owning South Texas Baseball
because “their contacts, their people that they know, their teams, their coaches that
they are familiar with are in their areas. And . . . it would be like starting all over if
they came down here” and tried to operate the South Texas Baseball entity.
Karen disputed Ronald’s testimony, stating that she believes South Texas
Baseball could be sold “to the right person” so long as Nations Baseball approved
16 the sale. Ronald then agreed that South Texas Baseball might be an attractive
business for a local high school baseball coach.
When asked about a hypothetical scenario in which he moves out of state,
Ronald acknowledged that he would attempt to sell South Texas Baseball for a
profit, not shutter the business. In discussing that scenario, Ronald testified: “I
don’t have any idea what I would ask” as a sale price; “I don’t even know what it’s
worth”; and “I’ve never really thought about it.”
Then Ronald was asked about selling his interest in Nations Baseball, to
which Ronald testified that Nations Baseball “could” have some value if he “stuck
around for a while and tried to train somebody” to operate the business properly,
that he “would establish some kind of figure” as a sale price if he tried to sell it to
one of the other part-owners, that he likely “would talk to somebody that might
know a little bit more about it so that [he] could have a better idea” of its value,
and that he did not, at the time of trial, “know what that figure would be.”
Neither party submitted South Texas Baseball corporate governance
documents into evidence, but Ronald did submit some bank statements listing a
balance for one South Texas account of $102.37 and for the other of $7,197.29.2
2 The trial court characterized the money held in these two South Texas Baseball bank accounts as distinct community assets separate from the value of South Texas Baseball and, therefore, divisible. The first account is at Chase Bank and has a balance of $102.37. The second account is at Frost Bank and has a balance of $7,197.29. Neither Ronald nor Karen testified about these two accounts. 17 In the end, Ronald agreed that, although he listed the values for the two
entities as zero dollars, the two entities “possibly” do have some value to a
potential buyer, although he “never really thought about” what that value might be.
Neither party presented expert testimony on the valuation issue. Ronald and
Karen were the only trial witnesses to discuss valuation.
2. Methods to determine the value of closely held entities
The parties agree that both these entities are closely held and that at least one
of them should be part of the division of the community estate. There are multiple
methods of establishing the value of community property. We consider whether the
Ronald’s inventory lists both accounts as belonging to South Texas Baseball. A bank statement from Chase Bank was admitted into evidence. It lists the accountholder as South Texas Baseball. A bank statement from Frost Bank was also admitted into evidence. It too lists the accountholder as South Texas Baseball. Karen’s inventory is consistent with Ronald’s. She designated both accounts as “business ST Nations” and listed their balances as “unknown.” She never testified that these were anything other than the corporate accounts of South Texas Baseball.
Corporate assets and liabilities are owned by the corporation and, absent a finding of alter ego, are not part of the community estate. Reid Rd. Mun. Util. Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846, 854 (Tex. 2011) (stating that “shareholders of a corporation are not owners of corporate assets”); see In re Marriage of Collier, 419 S.W.3d 390, 403 (Tex. App.—Amarillo 2011, no pet.); Thomas v. Thomas, 738 S.W.2d 342, 343 (Tex. App.—Houston [1st Dist.] 1987, writ denied). Karen did not argue alter ego, and the trial court’s findings and conclusions fail to mention that or any other theory that might transform South Texas Baseball’s corporate assets into divisible community property. On this evidence, there was insufficient evidence to list the balances in these two corporate accounts as distinct, divisible community assets. 18 parties presented sufficient evidence to permit the trial court to have determined
the value of either South Texas Baseball or Nations Baseball.
a. Market value
As a general rule, the method to value community property that is to be
divided in a divorce proceeding is “market value.” R.V.K. v. L.L.K., 103 S.W.3d
612, 618 (Tex. App.—San Antonio 2003, no pet.); Mandell, 310 S.W.3d at 536.
“Fair market value” is defined as “the price at which [property] would change
hands between a willing seller, under no compulsion to sell, and a willing buyer,
under no compulsion to buy, with both parties having reasonable knowledge of
relevant facts.” Id.
The Property Owner Rule permits a property owner who has satisfied the
requirements of Rule 701 “to testify to the market value of his property.” Redman
Homes, Inc. v. Ivy, 920 S.W.2d 664, 669 (Tex. 1996) (concluding that property
owner’s testimony provided legally sufficient evidence of market value of owner’s
personal property). An owner’s testimony about market value is, however, subject
to some limitations. Porras v. Craig, 675 S.W.2d 503, 504 (Tex. 1984).
One limitation is that the owner-witness must testify about the property’s
market value, not some other valuation method. See Accurate Precision Plating,
LLC v. Guerrero, No. 01-14-00706-CV, 2015 WL 7455826, at *3 (Tex. App.—
Houston [1st Dist.] Nov. 24, 2015, pet. denied) (mem. op.) (limiting Property
19 Owner Rule to real and personal property that “has a market value” after noting
that rule is based on presumption that property owners are familiar with their
property and market for its potential sale); see also Natural Gas Pipeline Co. of
Am. v. Justiss, 397 S.W.3d 150, 155 (Tex. 2012).
Another limitation is that the owner-witness must present evidence of their
“personal familiarity with both the property and its value.” Reid Rd. Mun. Util.
Dist. No. 2 v. Speedy Stop Food Stores, Ltd., 337 S.W.3d 846, 852 (Tex. 2011).
This is because the Property Owner Rule “falls within the ambit of Rule 701” and
therefore is based on the presumption that property owners ordinarily have
personal knowledge of their property and its market value. Id. at 853. In other
words, the rule is premised on the assumption that property owners will “have a
sound basis for testifying as to its value.” Speedy Stop Food Stores, Ltd. v. Reid
Rd. Mun. Util. Dist. No. 2, 282 S.W.3d 652, 657–58 (Tex. App.—Houston [14th
Dist.] 2009), aff’d, 337 S.W.3d at 858. While the Property Owner Rule permits
either spouse to opine on the value of a community asset, the rule applies only if
the owner demonstrates familiarity with both the asset and its market value. Reid,
337 S.W.3d at 853. A property owner demonstrates the requisite qualifications to
testify as to a property’s value if the owner’s testimony includes factors relevant to
the market value, versus what might be better considered intrinsic or personal
value. Charles Clark Chevrolet Co. v. Garcia, No. 13-08-00633-CV, 2010 WL
20 1407103, at *3 (Tex. App.—Corpus Christi Apr. 8, 2010, no pet.) (mem. op.). If
the property owner cannot satisfy these requirements, the owner’s opinion on the
asset’s value is conclusory and no evidence.
Karen did not specify whether she was relying on market value or some
other valuation method. The evidence cannot support her valuation figures as a
market value for several reasons. First, Karen testified that she reached her value
for Nations Baseball by taking “two and a half times how much it pays him.” But
that value is far more than Ronald’s annual $60,000 salary from that entity. Also,
she gave no basis at all for her valuation of South Texas Baseball at $200,000.
Even if we were to assume she confused the two entities, the math does not work. 3
Second, Karen failed to establish the economic integrity of using a valuation model
that is based on two and one-half times the salary of a part-owner. Third, Karen did
not present any evidence that she was familiar with either closely-held entity. She
did not testify that she had any involvement in their operations, reviewed their
financial or other records, or attended meetings with either entity’s accountants or
other owners. She did not testify concerning any future plans or strategies for
either company or compare their current and past operations or income or
competitors (or the lack of other competitors) in the marketplace. Fourth, Karen
3 The values Karen listed in her inventory were $500,000 and $200,000. Ronald’s annual income from one entity was $180,000 and from the other entity was $60,000. Neither income multiplied by two and one-half equals $500,000 or $200,000. 21 did not account for the restrictions on the sale of the couple’s share of Nations
Baseball.
Examples of additional information that could be relevant to value but for
which Karen did not state any familiarity or knowledge include (1) general market
conditions for determining the value of a closely-held entity, (2) general market
conditions for determining the value of an entity with a comparable income stream,
(3) general market conditions for determining the value of an entity engaged in a
similar business, (4) the appropriate multiplier to be used in determining value and
whether that multiplier should be based on income alone or include other factors
such as interest, taxes, and depreciation, (5) the appropriate discount rate to be
used when the corporate documents restrict a sale, (6) the value of the corporate
assets or the amount of its liabilities, and (7) details regarding the 2013 prior sale
by a shareholder and whether the company has increased or decreased in value
since that sale.4 While we are not holding that an owner-witness must be familiar
4 A former part-owner of Nations Baseball left the company in 2013 and sold his 40 percent ownership to the three remaining members. The amount the former member was paid for his shares was based on an appraisal, though there was no evidence of how that appraisal was performed or by whom. Ronald testified that the part-owner was paid “per the appraisal” in the amount of $120,000 for his 40 percent interest. That equals $3,000 for each percent ownership in Nations Baseball. The other owners agreed to the sale price, and each purchased one-third of the seller’s 40 percent interest, thereby increasing Ronald’s stake in Nations Baseball to 33 percent ownership. But no one asserted that this appraisal remained accurate at trial, likely because there were no documents introduced showing the financial condition of Nations Baseball in 2013 and comparing it to its financial condition at the time of trial. See Mandell, 310 S.W.3d at 537 (explaining that 22 with these specific matters to be familiar with a company’s value, the owner-
witness must articulate some evidentiary basis to show familiarity not just
generally with the company but with its value. Karen did not. Her evidence cannot
support the trial court’s valuations under a market value method.
The most significant reasons that Karen’s valuations cannot be supported
using a market value method are that Nations Baseball and South Texas Baseball
are closely held entities and that the sale of their shares was restricted. Market
value is not an appropriate valuation method when the property being valued is
community-owned shares in a closely held entity that are subject to sale
restrictions. Mandell, 310 S.W.3d at 537. In that situation, the fair market value is
zero, but there are other valuation methods that may be used to determine the value
of an interest in a closely held entity. Id.
b. Other valuation methods
Having determined that the evidence does not support the values for these
entities using a market value method, we briefly identify a number of alternative
options for determining the values of these two entities, recognizing that there may
be other options as well. One option is to show the actual value of the property to
the owner. Id.; R.V.K., 103 S.W.3d at 618. Actual value of community stock is
“comparable sales” valuation method compares property to “similar, recently-sold property, and values the to-be-valued property in relation to the recent sales prices for similar property”).
23 shown by evidence of benefits derived from stock ownership, “such as driving a
new automobile, having health insurance paid for by the company, having a
company-financed life insurance policy, belonging to a country club at company
expense, or gaining any other similar financial benefit.” Mandell, 310 S.W.3d at
537. But neither party presented evidence of the monetary value of these benefits
separate from Ronald’s income. Nor did either party attempt to tie these benefits to
a valuation opinion for either entity.
A second valuation option is the comparable-sales method, which compares
the property being valued with similar, recently sold properties. Id. But the parties
did not attempt to set a value based on this method either.
Yet another valuation option is to consider whether the corporate documents
specify a method of valuing the company. See Beavers v. Beavers, 675 S.W.2d
296, 299 (Tex. App.—Dallas 1984, no writ) (holding that, based on buy/sell
agreement, book value was appropriate method to value stock); see also Mandell,
310 S.W.3d at 541 (relying on shareholder agreement as evidence of stock value
for closely held entity subject to stock-sale restrictions). This option also was not
used at trial.5
5 According to Ronald, after the part-owner sold his interest in Nations Baseball in 2013, the remaining owners decided to have corporate documents drafted that would limit their ability to demand a purchase of their shares. At first, Ronald testified that the agreement wholly prevented him from selling his shares in 24 3. Whether the trial court erred in its valuation
The trial court categorized the interest in Nations Baseball and South Texas
Baseball as two separate assets owned by the couple, and the trial court valued
those interests in the same amount that Karen listed in her inventory—$200,000
and $500,000, respectively—without Karen providing any explanation for her
valuation method. She testified (erroneously) that her valuation was based on a
mathematical formula (2.5 × annual income) but never explained why she picked
that particular formula. Why not four times annual income or a single year’s
income? What about a discount for lack of marketability? The record answers none
of these questions.
Karen argues that Ronald waived his ability to challenge the valuations
because he did not provide competing valuations. He responds that he did offer a
valuation for both entities: zero dollars. And he argues that stating a value of zero
Nations Baseball. But Ronald later conceded that he is not sure what the agreement allows regarding the assignment or transfer of shares.
Article 12.2 of the shareholder agreement provides that, in the event of a dissociation of a member, the company has the right to purchase the member’s shares “at a purchase price equal to the Computed Value of the Company multiplied by the Member’s Profit Percentage” upon certain terms and conditions. The term computed value is found in the definition section of the agreement and is defined as follows: “Any actions by the company or individual owners that require a valuation of the company will be done by Bill Dale of Enterprise Value Consulting, LLC to calculate this value.” There is no indication in the record that Bill Dale has performed a valuation calculation at anyone’s request or that the parties were pursing this avenue of valuation.
25 dollars is not equivalent to providing no valuation. In principle, we agree. The
cases on which Karen relies for her waiver argument involve a party failing to
appear, failing to submit an inventory, or failing to provide any response when
questioned about the value of an asset. See Bello v. Bello, No. 01-11-00594-CV,
2013 WL 4507876 (Tex. App.—Houston [1st Dist.] Aug. 22, 2013, no pet.) (mem.
op.); Aduli, 368 S.W.3d at 805; Deltuva, 113 S.W.3d at 882. Ronald, in contrast,
provided a proposed value: he said it was zero dollars. And, to the extent Ronald
was testifying about the shares’ market value—although it is not clear from the
record that he was—case law supports an assertion that the market value of shares
in a closely held company that are subject to sale restrictions is zero dollars. See
Mandell, 310 S.W.3d at 537. But, as previously discussed, market value is not an
appropriate valuation method when the community owns shares in a closely held
entity and the sale of shares is restricted. Id. In that situation, another valuation
method must be used. Id. Yet Ronald offered none. Nor did the rest of his
testimony support the valuation he suggested. He testified as follows about the
entities’ values:
“I don’t even know what it’s worth.”
“I don’t have any idea what I would ask [for it if trying to sell it].”
“I don’t know. I’ve never really thought about it.”
26 Ronald’s testimony establishes that he did not endeavor to fulfill his obligation to
provide the trial court with needed valuation evidence. Murff, 615 S.W.2d at 698–
99; Aduli, 368 S.W.3d at 820. He did not offer any expert testimony or reports. He
did not offer corporate documents or financial records into evidence to support a
valuation. He asserted a zero valuation for both entities even though he grosses
over $20,000 monthly from these entities and, in addition to that money, Nations
Baseball has paid his South Texas entity, on average, $24,000 monthly in 2016 and
South Texas Baseball’s bank account has funded some of the couple’s normal
living expenses. Further, Ronald testified that these entities had zero value while
also testifying that, if he were trying to sell his interests, he “would attempt” to
make money on the sales.
Ronald argues that he had no obligation to provide the trial court with
evidentiary support to permit the trial court to determine a value of the
community’s assets and to divide the community estate; he argues that he could
rest on his valuation of “zero value” because of the lack of a market value. We
disagree. Both parties had an obligation to provide the factfinder with evidence of
the companies’ values. Murff, 615 S.W.2d at 698–99; Aduli, 368 S.W.3d at 820.
Ronald, who handled the entities’ daily operations, was particularly in a position to
provide the trial court with valuation information. He did not. Yet we cannot agree
that his failure is equivalent to what occurred in the cases on which Karen relies,
27 i.e., failing to appear, file an inventory, or respond to valuation questions.
Accordingly, we hold that Ronald has not waived his ability to challenge the
valuations on appeal.
Karen’s inventory listed a value for each entity. Ronald’s did too. But a
sworn inventory is “simply another form of testimony” that must be supported by
other evidence. Viera v. Viera, 331 S.W.3d 195, 207 (Tex. App.—El Paso 2011, no
pet.); see Cox v. Cox, No. 01-15-00063-CV, 2016 WL 4055079, at *2 (Tex.
App.—Houston [1st Dist.] July 28, 2016, no pet.) (mem. op.) (discussing sworn
inventory in light of local Harris County rules that require divorcing parties to
incorporate detailed information about assets and liabilities). Neither party
provided the trial court with a basis for the valuations they suggested. Nor did they
submit, for example, appraisals, expert reports, or financial data to support their
valuation testimony.6 Their inventories, as a result, were conclusory and provided
6 At oral argument, Karen argued that a trial exhibit listed the value of the “Mathis Interest in Nations Baseball” at $99,000 and supports a conclusion that the entity’s value is at least $99,000.
This exhibit lists the price paid by Ronald and his Nations Baseball co-owners when they purchased in 2013 the 40 percent ownership interest previously held by another co-owner. The exhibit divides that purchase price by the percentage of total shares that were purchased, then it multiples that amount by the percentage of shares owned by “Mathis” at some point—though not necessarily at the time of trial—to reach a total value of “Mathis interest” of $99,000. There is no evidence to support a conclusion that the shares at the time of divorce (2017) were worth the same amount as when they were purchased from the co-owner (2013). Nor is there evidence that the co-owners would offer a similar purchase price to Ronald given the changes to the operating agreement discussed during trial. Moreover, 28 insufficient evidentiary support for the trial court’s determination of the entities’
values and the community estate’s value as a whole. See Wilson v. Wilson, 132
S.W.3d 533, 538 (Tex. App.—Houston [1st Dist.] 2004, pet. denied) (“Given the
dearth of evidence identifying, describing, and valuing the community estate, we
hold that there is insufficient evidence to support the division of assets.”); see also
Pickens, 62 S.W.3d at 214 (stating that, under abuse-of-discretion standard,
evidentiary sufficiency is relevant factor in determining whether trial court has
abused its discretion). As a result, we conclude that the trial court abused its
discretion in ordering a division of the couple’s community assets given the
magnitude of the assets in question compared to the entire community estate. See
Sandone, 116 S.W.3d at 207–08 (explaining that “[w]ithout the ability to
determine the size of the community pie, we can make no determination that the
slices awarded to each spouse were just and right” and holding that trial court
abused its discretion in dividing property without sufficient evidence); see also
Finn v. Finn, 658 S.W.2d 735, 746 (Tex. App.—Dallas 1983, writ ref’d n.r.e.)
(stating that, “without a proper valuation the trial court could not properly exercise
its discretion in making a ‘just and right’ division of community property”); Mann,
607 S.W.2d at 245 (noting need to determine value of community property subject
there is no evidence that the “Mathis interest” in Nations Baseball remained 33 percent at the time of trial. Neither party testified that it was. This document, without more, cannot support a valuation of the parties’ financial interest in Nations Baseball. 29 to just and right division and affirming trial court’s appointment of master in
divorce that “involved numerous complex issues,” including valuation of assets
without regular market value).
Conclusion
We affirm the portion of the trial court’s judgment that grants a divorce. We
reverse the division of property. In a divorce proceeding, a trial court must order a
division of the community estate in a manner that the court deems just and right.
The parties did not provide the court with sufficient evidence, including valuation
evidence, to perform this task. In the end, both Nations Baseball and South Texas
Baseball were assigned valuations without sufficient evidentiary support. This was
error.
When a trial court commits error in dividing property in a divorce, a court of
appeals is not permitted to render a different division or to remand only certain
portions of the marital property for a new division; rather, the reviewing court must
remand the entire community estate for a new division. Jacobs v. Jacobs, 687
S.W.2d 731, 733 (Tex. 1985). Therefore, we reverse in its entirety the property
division of the trial court and remand that issue for further proceedings consistent
with this opinion, which necessarily includes proceedings concerning the value of
the community estate and any equalized judgment. See Quigley v. Willmore, No.
09-08-00517-CV, 2009 WL 4062180, at *6 (Tex. App.—Beaumont Nov. 25, 2009,
30 no pet.) (“It is difficult to justify the use of a money judgment to achieve an
equitable division of the estate without proper evidence of the value of the
estate.”); see also Finn, 658 S.W.2d at 746–47 (improper valuation required
remand of entire property division); Hanson, 672 S.W.2d at 278 (considering
nature and type of property in estate in determining whether use of money
judgment appropriate to balance award of assets).
Because we are reversing and remanding, it is unnecessary to reach any
other appealed issues in this case. See TEX. R. APP. P. 47.1.
Harvey Brown Justice
Panel consists of Chief Justice Radack and Justices Brown and Caughey.