Ryan v. Ryan

Opinion by BECK, Judge:

This case presents the question , of whether in making an equitable distribution award a trial court may order a “buy-out” of stock instead of an in-kind distribution of stock in a closely-held corporation. We conclude that under the circumstances of this case, it was error for the trial court to order an in-kind distribution.

Marie Ryan (wife) and Joseph Ryan (husband) were married for twenty-seven years prior to their final separation in March of 1982. One child was born of the marriage and husband adopted wife’s two children from a previous marriage. All three children are emancipated adults. Both husband and wife are in their sixties. In 1979, husband suffered a stroke and is now confined to a wheelchair.

After hearings before the Master in Divorce, the Master determined that the marital assets, exclusive of income, totalled $1,020,711.00. Husband filed exceptions to the Master’s report, but wife did not. Husband’s exceptions included an exception to the Master’s recommendation that wife be awarded half of husband’s stock in Jefsaba Inc. (Jefsaba), a closely-held corporation.

The trial court accepted the Master’s finding that the major marital asset was husband’s interest in Jefsaba which owns the Holiday Inn in New Hope, Pennsylvania. The master determined that at the time of the hearing, Jefsaba had a net value of $2,448,000, and that husband owned 20 of the 66 outstanding shares of the corporation. Therefore, his interest constituted 30.3% of the corporation’s net value or $741,744.00. The trial court adopted the Master’s recommendation that ten of the shares, or one-half of the marital unit’s total, be transferred to wife.

In his exceptions, husband noted that pursuant to an agreement entered into by the five stockholders of Jefsaba, unanimous consent of all stockholders is required as a condition for any transfer of shares. Noting that this agreement was entered into just eleven days prior to the first scheduled Master’s hearing, the trial court adopted the Master’s view that the agreement was motivated by a desire to thwart wife’s claim in the divorce action. The trial court found binding an earlier agreement which allowed transfer of Jefsaba shares to a member of a stockholder’s immediate family on the condition that the transferred shares be non-voting.

Both parties filed petitions for reconsideration of the trial court’s order. The trial court granted reconsideration and later issued a Supplemental Opinion and Order dated April 8, 1988. In this opinion, the court discussed husband’s contention that the court erred in ordering an in-kind distribution of the Jefsaba stock. In support of his position, husband cited cases from other jurisdictions which recognize the reality that parties who cannot get along as husband and wife are unlikely to do so as business partners.

The trial court reached its decision based upon its belief that Barletta v. Barletta, 506 Pa. 404, 485 A.2d 752 (1984) controlled and mandated in-kind distribution as opposed to a “buy-out” remedy. The court also noted that it would be difficult to value the stock accurately at the time of the court proceeding. The court recognized that the value as determined by the Master at the hearing in 1984 was no longer accurate; implying, thereby, that a buy-out would require further proceedings.

In his report, the Master found that wife was entitled to 25% of husband’s gross income from Jefsaba for the years 1982-1984. The trial court, applying Sutliff v. Sutliff, 361 Pa.Super. 504, 522 A.2d 1144 (1987), aff'd in part and rev’d in part, 518 Pa. 378, 543 A.2d 534 (1988), which was not decided at the time of the Master’s hearing, concluded that wife was entitled to 50% of this income for the years 1982-1984, and denied wife any distribution for subsequent years. The trial court noted that the Master’s report “only dealt with the period 1982-1984, and insufficient information exists in the record to render an award as to subsequent years.”

In her petition for reconsideration, wife sought equitable distribution of the dividends from Jefsaba for years subsequent to 1984. In its supplemental opinion, the trial court held the issue waived based upon wife’s failure to file exceptions to the Master’s report.

Following the entry of the Supplemental Opinion and Order, wife filed the instant appeal and husband filed a cross-appeal.¹

Appeal of Wife

The wife asserts she is entitled to 50% of the dividends from the Jefsaba stock from 1984 through the date of the trial court hearing, July 8, 1987, and that the trial court erred in finding that she was entitled to 50% of the dividends from the, Jefsaba stock only to the date of the Master’s hearing in 1984. In response to wife’s petition for reconsideration, the trial court held that wife waived the issue by failing to file exceptions to the master’s report.

In the second section of this opinion we determine that the trial court erred in ordering an in-kind distribution of Jefsaba stock to wife and that the case must be remanded for a valuation of husband’s Jefsaba stock and a distribution of wife’s share of that value. Given this determination, we find that we need not decide whether wife has properly preserved the issue of her entitlement to dividends accruing past the date of the original master’s hearing in 1984. On remand, wife may seek leave of the trial court to except on this ground nunc pro tunc. Pa.R.C.P. 1920.55. If the trial court again refuses to take testimony as to dividends accruing since mid-1984 and, therefore, refuses to distribute a portion of those dividends to wife, and if wife again appeals that determination, then the difficult waiver problem posed by this case will require decision.

Husband’s Cross-Appeal

Husband asserts that the trial court erred in ordering an “in-kind” distribution of the Jefsaba stock: (1) where neither party sought this remedy; (2) where it would be unwise to force the parties into a business relationship; and (3) where the trial court erred in its interpretation and application of Barletta²

Husband claims that neither party in this case requested an in-kind distribution. In support of this contention, husband notes that during the Master’s hearing, wife produced testimony as to the value of the stock pursuant to a “buy-out” remedy. In addition, wife’s post-trial memorandum on “the issue of equitable division of marital property” included a category entitled “assets in name of husband” under which was listed: “Jefsaba, Inc. stock, value as determined by Master.” Husband also points out that in her post-trial memorandum, wife acknowledged that it is “not practicable to order the transfer of one-half of the stock of JEFSABA.” Instead, wife suggested that husband pay her one-half of the value of the stock.

In response to husband’s contention, wife admits that she considered a “buy-out” as a possible remedy. She acknowledges that such a suggestion appeared in her post-trial memorandum. However, wife now asserts that based on Barletta, the “unreasonableness of a buy-out, with the inherent problems of valuation involved, became obvious.”

Our review of the trial court opinions makes clear that the in-kind distribution in this case was ordered because the trial court interpreted Barletta as mandating in-kind distribution over the remedy of a “buy-out.” We believe that the trial court read Barletta too broadly.

In Barletta, the trial court ordered the husband, over his objection, to “buy-out” his wife’s interest in certain marital personal property, all of which was readily severable. 506 Pa. at 408, 485 A.2d at 754. The Pennsylvania Supreme Court reversed the trial court and concluded that under the facts of Barletta, such a “buy-out” was improper. The assumption underlying the Barletta decision was that the spouse would have to sell the personalty, in a declining market, in order to satisfy the obligation under the equitable distribution order.

Initially, we note that contrary to the trial court’s conclusion in the instant case, Barletta does not mandate in-kind distribution. The Barletta Court itself concluded:

We are not saying that the remedy of ordering a ‘buy-out’ is prohibited by statute ... we can envision situations where the distribution of marital property would be truly impracticable or economically unwise.

506 Pa. at 409, 485 A.2d at 754. The Barletta court held that the personal property in that case should have been divided between the parties and not distributed to one spouse because the personalty “was readily severable and we believe capable of being divided without destroying its relative value.” 506 Pa. at 408, 485 A.2d at 754. The Barletta Court concluded that “in the context of the present case, the remedy of a ‘buy-out’ was an abuse of discretion.” Id. Subsequent cases interpreting Barletta, such as Bold v. Bold, 374 Pa.Super. 317, 542 A.2d 1374 (1988), and Wolf v. Wolf, 356 Pa.Super. 365, 375, 514 A.2d 901, 906 (1986), note that under Barletta, a court may resort to a “buy-out” remedy where it makes specific findings as to why the marital property cannot be divided.

In the instant case, the facts differ considerably from those in Barletta. Neither party objected to the “buy-out” remedy. Stock in a closely-held corporation, although personalty, is different in nature from the type of personal property involved in Barletta. As we noted, the Barletta court was concerned with the fact that husband would have been forced to sell the personalty in order to satisfy the equitable distribution order. In the instant case, husband is ready, willing and able to satisfy a “buy-out” order.

Perhaps the most notable difference between these two cases is that in Barletta, the in-kind division of the personalty does not pose the problems which division of the stock in a closely-held corporation poses. The division of the in-kind personalty in Barletta permitted each party to go his and her separate ways. An in-kind division of stock in a closely-held corporation will usually force the parties into a continuing relationship. On policy grounds it is unwise to make business partners of individuals who are unable to live together as husband and wife. In the absence of special circumstances, the courts should not place divorced parties into the position where they have a continuing economic relationship with one another. Even assuming that an in-kind distribution of the stock will not bring husband and wife into daily contact, an in-kind distribution necessitates a lingering connection between two parties who obviously wish to sever their ties.

We have already determined that Barletta permits a “buy-out” in appropriate situations, and that this case presents a situation where a “buy-out” remedy is warranted. We therefore conclude that the trial court erred in ordering an in-kind distribution. We remand in order that a hearing may be conducted to determine the value of the Jefsaba stock so that husband may “buy-out” wife’s interest.

The order of the trial court is reversed and the case remanded for proceedings consistent with this opinion. Jurisdiction relinquished.

CIRILLO, President Judge, files a dissenting opinion.

1 . Jefsaba has filed an appellate brief on the issue of whether in-kind distribution of its stock to the wife was proper. Since Jefsaba was not a party below, its participation in this appeal is improper and will not be considered: We note that wife’s petition to join Jefsaba at the trial level was denied.

2 . Husband asserts that we should consider the 1988 Amendment to Section 401(d) of the Divorce Code which specifies that marital property may be subject to remedies other than in-kind distribution:

“In a proceeding for divorce or annulment, the court shall, upon request of either party, equitably divide, distribute or assign, in-kind or otherwise, the marital property between the parties ..." (emphasis in amendment.)

Pa.Stat.Ann. title 23, § 401(d) (as amended). Because of our resolution of this issue under Barletta and its progeny, we find it unnecessary to pass on the retroactivity of this amendment.