Texas Business Dispute Blog

Tuesday, June 24, 2014

Not So Fast, Mrs. Sterling! Part II

By Charles Rubio (Houston) and Ladd Hirsch (Dallas)

Donald Sterling’s racist rant has made him one of the most reviled figures in (or related to) sports in recent years, and resulted in a $2.5 million fine and a lifetime ban imposed on him by the NBA.  In light of the wall-to-wall coverage this story received, few people are unaware that Shelly Sterling, Mr. Sterling’s estranged wife, plans to divorce him.[1]  She delayed filing for divorce, however, to avoid disrupting her attempted sale of the Clippers.[2]  

As this saga has played out, Ms. Sterling negotiated a record setting $2-billion sale of the Clippers to Steve Ballmer, Microsoft’s former CEO.[3]  This deal is not final, however, [4] and it is expected that a sale of this magnitude will take some time to finalize.  In addition, Mr. Sterling is seeking to block the sale of the Clippers and is pursuing litigation against the NBA, while also refusing to pay the fine levied by the NBA or accept the lifetime ban it imposed.[5]

This thorny situation raises far too many legal questions to cover in one or even two blog posts.  There are a few issues we would like to touch on here, however, which we have seen arise in our Business Divorce practice dealing with complex property disputes. 

How Will The Clippers Be Valued in the Sterlings’ Divorce

First, if the Clippers’ sale to Steve Ballmer falls through, how will the Clippers be valued and likely divided in the context of the Sterling’s divorce?  Second, does the $2-billion offer that Mr. Ballmer offered to Ms. Sterling to buy the Clippers represent the true value of this asset for purposes of determining the value of a marital property asset in a divorce? 

These complex issues presented in the Sterlings’ divorce are not unique to California where the Sterlings reside.  New York and Texas are home to some of the nation’s wealthiest couples, and when they divorce, they often face complex property division issues.       

Comparison of Marital Property Division in California, New York and Texas

There are two different systems for classifying marital property in the US: the common law property system and the community property system.  As noted in our earlier post, California applies a community property system, and Texas does, as well.  By contrast, New York relies on a common law property system.[6]   

Generally, the fundamental difference between community and common law property systems is the presumption that applies to property that is acquired by the couple during their marriage.  In a community property regime, property acquired by the couple while married is presumed to be community property, i.e., it’s jointly owned by the couple.  In a common law property system, property that the couple acquires during their marriage is presumed to be separate property, unless there is an agreement providing for their joint ownership. 

Although California and Texas both rely on community property systems, the division of community property in divorce is treated differently by these states.  California law imposes a strict equal division of all community property.[7]  Texas law, on the other hand, allows the court to equitably divide the couple’s community property.[8]  Thus, in Texas, the parties to the divorce may not receive an equal share of the community property. 

New York law provides for an equitable division of marital property upon divorce.  New York courts consider 14 statutory factors to determine how to divide the marital property.[9] These factors include the impossibility or difficulty of evaluating any component asset or any interest in a business, corporation or profession, and the economic desirability of retaining such asset or interest intact and free from any claim or interference by the other party.[10]

Determining Date of Property Valuation

A key issue that arises in valuing a marital asset the couple acquires during the marriage is the date of valuation.   For an asset like the Clippers, the value of the business could change significantly during the course of the divorce proceeding.   In addition, the conduct of the party controlling the business may significantly enhance or diminish its value.   Also, there are many external forces that may affect the value of a business.  As a result, the parties may be motivated to apply an earlier or later valuation date. 

Under California and Texas law, the general rule is that community property is valued at the time of trial rather than the date the divorce is filed.[11]   In certain limited situations, however, the courts may use a different date for valuation to prevent an inequitable result.[12]    

Under New York law, the trial court sets the valuation date for each marital asset.[13] The valuation date may be at any point from the date the divorce is filed to the date of trial, but not before the divorce was filed or after the trial.[14]  While the valuation on the date the divorce is filed has been described as “essential,” another date may be used based on a variety of factors including, whether the change in value was the result of one party’s efforts, whether one of the parties caused waste or dissipation of assets, or whether the change was due to passive market forces.[15]

Offer to Purchase Property

The $2-billion offer to buy the Clippers is record setting.   Nevertheless, if the deal does fall through, the offer will likely have no weight in determining the value of the Clippers for the purposes of the parties’ divorce.   “No rule is better settled in California than the rule that the value of property cannot be proved by . . . offers to buy or sell the property in question.”[16] Similarly, under both Texas and New York law, an offer to purchase property in itself is too speculative to be considered evidence of market value.[17]  

Conclusion

Reading tea leaves is far from an exact science, but if the Clippers’ sale to Mr. Ballmer falls through, California law indicates that the value of the team for the purposes of the Sterlings’ divorce will be determined at the time of the trial rather than the date that one of them files for divorce.  Further, the offer that Mr. Ballmer made to buy the Clippers should not be considered, or even admitted, during the trial as evidence of the value of the team, because California law is clear that evidence of an unaccepted offer may not be considered by the factfinder in determining the value of an asset.

Footnotes

[1] “Donald Sterling introduces a new snag in sale of the Clippers,” June 6, 2014, LA Times, Fox Sports West, located at: msn.foxsports.com/west/story/donald-sterling-introduces-a-new-snag-in-sale-of-the-clippers-060614

[2] See footnote 1 above.  

[3]  Donald Sterling to Sell Los Angeles Clippers to Steve Ballmer, Drop Lawsuit, Wall Street Journal, located at online.wsj.com/articles/ball-is-in-sterlings-court-on-clippers-sale-1401389649

[4] See footnote 1 above.

[5] See footnote 1 above.

[6] Leibowits v. Leibowits, 93 A.D.2d 535, 543, 462 N.Y.S.2d 469, 474 (N.Y. App. Div. 1983).

[7] Cal. Fam. Code § 2601 (“Where economic circumstances warrant, the court may award an asset of the community estate to one party on such conditions as the court deems proper to effect a substantially equal division of the community estate.”

[8] Tex. Fam. Code Ann. § 7.001 (“In a decree of divorce or annulment, the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.”)

[9] N.Y. Dom. Rel. Law § 236(B)(5)(d)(1)–(10).

[10] Id.

[11] Cal. Fam. Code § 2552(a); Grossnickle v. Grossnickle, 935 S.W.2d 830, 837 (Tex. App. 1996).

[12] Cal. Fam. Code § 2552(b) (“Upon 30 days' notice by the moving party to the other party, the court for good cause shown may value all or any portion of the assets and liabilities at a date after separation and before trial to accomplish an equal division of the community estate of the parties in an equitable manner.”); Grossnickle, S.W.2d at 837 (Tex. App. 1996) citing Parker v. Parker, 897 S.W.2d 918, 932 (Tex.App.—Fort Worth 1995, writ denied). 

[13] N.Y. Dom Rel. Law § 236(B)(4)(b).  

[14] J.M.B. v. K.R.B., 38 Misc. 3d 677, 680, 954 N.Y.S.2d 741, 743 (Sup. Ct. 2012).

[15] Id. at 678-79. 

[16] Merchants’ Trust Co. v. Hopkins, 103 Cal. App. 473, 478, 284 P. 1072, 1074 (1930). 

[17] People v. Kirkwood, 200 A.D.2d 409, 606 N.Y.S.2d 612, 613 (1994); Lee v. Lee, 47 S.W.3d 767, 785 (Tex. App. Houston [14th Dist.] 2001, pet. denied) (citing Hanks v. Gulf, Colo. & Santa Fe Ry. Co., 159 Tex. 311, 320 S.W.2d 333, 336–37 (1959)).


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