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Popowich v. Korman

May 13, 2010

WENDY S. POPOWICH, PLAINTIFF-RESPONDENT,
v.
JASON KORMAN, DEFENDANT-APPELLANT.



Judgment, Supreme Court, New York County (Joan B. Lobis, J.), entered December 18, 2006, insofar as appealed from as limited by defendant-appellant's brief, awarding plaintiff a money judgment of $1,844,931 plus statutory interest on her cause of action for repayment of certain loans and a distributive award of $886,907, and awarding defendant no share of the value of plaintiff's brokerage account and $30,000 representing a five-months' share of the appreciation of the value of the New York townhouse, modified, on the law and the facts, to vacate the money judgment and dismiss the cause of action for repayment of the loans, to reduce the distributive award of $886,907 to $560,747, to award defendant $253,751 representing 15% of the value of the brokerage account, and to increase defendant's share of the appreciation on the townhouse to $54,000, and otherwise affirmed without costs. The Clerk is directed to enter an amended judgment accordingly.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Friedman, J.P., McGuire, Acosta, DeGrasse, Freedman, JJ.

350290/01

Certain loans made by plaintiff are central to this appeal. Plaintiff contends that the loans were made to defendant, but defendant contends that the loans were made to California Direct Limited (CDL), a corporation he formed and partially owns. As discussed below, because it would avail plaintiff nothing if we were to regarded the loans as loans to defendant, we will assume without deciding that the loans were made to CDL.

Supreme Court erred in determining that plaintiff's separate property included the right to repayment of the loans, as she "failed to demonstrate that the loans were not made with marital funds" (Sagarin v Sagarin, 251 AD2d 396, 396 [2d Dept 1998]). To the contrary, as Supreme Court found in its decision, plaintiff's separate property was commingled with marital property in the brokerage account of plaintiff from which the loans were made. Of course, plaintiff's separate property was the source of the loans made prior to the marriage, but it is undisputed that the premarital loans were repaid in full. Accordingly, as Supreme Court should have concluded that the brokerage account in plaintiff's name was marital property (see Pullman v Pullman, 176 AD2d 113 [1st Dept 1991], Kirshenbaum v Kirshenbaum, 203 AD2d 534, 535 [2d Dept 1994]), it also should have concluded that the right to repayment of the loans was marital property. Notably, because marital property and plaintiff's separate property were commingled in the brokerage account, Supreme Court correctly concluded that two properties, a beach house and a townhouse purchased in whole or in part with funds from the brokerage account, were marital property subject to equitable distribution. For the reasons discussed below, although the right to repayment of the loans is marital property, a remand for the purpose of conducting further proceedings to value this asset is not warranted.

Supreme Court also erred in concluding that defendant was liable to plaintiff for repayment of the loans. Because the written guaranty requires defendant to repay the loans, it is an agreement that makes "provision for the ownership, division or distribution of separate and marital property" (Domestic Relations Law § 236[B][3]). The guaranty was executed by defendant during the marriage, but was not "acknowledged or proven in the manner required to entitle a deed to be recorded" (id.). Accordingly, the clear terms of the statute render it unenforceable (Matisoff v Dobi, 90 NY2d 127 [1997]). Contrary to Supreme Court's reasoning, the "commercial background of both parties" is of no moment (id. at 132 ["the plain language of Domestic Relations Law § 236(B)(3) . . . recognizes no exception to the requirement of formal acknowledgment"]).

Nor can defendant be held liable for repayment of the loans on the alternative ground that he, as Supreme Court wrote, "ran the corporations [CDL and a related entity] as his alter ego, while disregarding corporate forms." Neither CDL nor the related entity, after all, were made parties to this action (see Stewart Tenants Corp. v Square Indus., 269 AD2d 246, 248 [1st Dept 2000] ["An action to pierce the corporate veil requires that the purported dummy corporations be parties, even if the parent corporation is alleged to be the one which unjustly retains the funds"]; see also Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 144 [1993] ["to pursue (the individual) under the doctrine of piercing the corporate veil presupposes that the corporation is liable"] [internal quotation marks omitted]). Our decision in Goldberg v Goldberg (172 AD2d 316 [1st Dept 1991], lv dismissed 78 NY2d 1124 [1991]) is not to the contrary; the husband was not held liable for any obligations of the "alter ego corporations" (id. at 316) on account of his misuse of those entities. We need not determine whether defendant also is correct in urging that plaintiff failed to show that he perpetrated a wrong against her through his alleged domination of the corporate entities (see id. at 316-317).

Using the income capitalization method of valuation, the neutral expert valued CDL as of the commencement date of the action at $1.3 million; defendant's expert did not dispute the reasonableness of this valuation or the methodology. The court found that the fair market value of CDL was $1.3 million and that plaintiff was entitled to a distributive award of 40% of its total value or $520,000. As defendant correctly maintains, however, the parties collectively owned 85% of CDL, with third parties owning the rest. Accordingly, the value of this marital asset should have been fixed at $1,105,000 (85% of $1.3 million), and the CDL component of the distributive award to plaintiff should have been $442,000 (40% of $1,105,000). To correct this oversight, we reduce the distributive award to plaintiff by $78,000.

The neutral expert valued two other marital assets related to CDL: the CDL "Directors' Loan Account," representing, as the court stated, "money advanced to CDL" (by plaintiff, defendant and another CDL-related entity), and Calitalia, an entity founded by defendant that served as a vehicle for charging defendant's annual management fees to CDL. The expert valued the Directors' Loan Account at $330,000 and Calitalia at $620,400. The valuation of Calitalia reflected the book value of its sole asset, the receivable from CDL for accumulated unpaid management fees, after discounts to account for both the possibility CDL would be unable to pay and taxes Calitalia would owe if CDL did pay. However, because it found that defendant's expert "was persuasive in his testimony that the value of CDL already included the Directors' Loan Account," the court "d[id] not attribute a separate value to the Directors' Loan Account." Accordingly, with respect to the Directors' Loan Account and Calitalia, the court ruled that the amount of the distributive award to which plaintiff was entitled was $248,160, 40% of the value of Calitalia.

We agree with Supreme Court that the reasoning of defendant's expert is persuasive. We also agree with defendant, however, that his expert's reasoning applies with equal force to Calitalia, and for this reason we reduce the distributive award to plaintiff by $248,160. As defendant's expert explained, the $1.3 million valuation of CDL makes sense only if both "liabilities" of CDL are reclassified as CDL equity and subsumed within the $1.3 million valuation. Only on that basis would the debt to equity ratio of CDL justify the capitalization rate that the neutral expert employed, a rate that is essential to the $1.3 million valuation. That valuation, as defendant's expert testified, "encompasses all the assets and all [the] liabilities of CDL . . . includ[ing] what we know as due to . . . shareholders, called the Directors' Loan [A]ccount, and the payable to Calitalia." Thus, the separate valuation of Calitalia reflects what amounts to a form of double counting*fn1. Without recapitulating every aspect of the reasoning of defendant's expert, we note that we also find persuasive his testimony that a hypothetical buyer of CDL would not pay $1.3 million for it if it were obligated to pay off the "liability" to Calitalia over a five-year amortization period. If CDL were so obligated, there would not be nearly enough cash flow both to pay Calitalia and provide the buyer with a reasonable return on investment. Relatedly, moreover, in computing the annual after-tax profit of CDL, the neutral expert did not allow for an expense attributable to CDL's payment of the accumulated management fees. We also note that Supreme Court's disparate treatment of Calitalia and the Directors' Loan Account may reflect a misrecollection of defendant's position, the expert's testimony or both. In its written decision, after all, the court stated that defendant valued Calitalia at $620,400, and made no mention of either defendant's expert's testimony that Calitalia's value should be included in the value of CDL or any tension between its treatment of Calitalia and the Directors' Loan Account.

As noted earlier, the parties' right to repayment of the loans to CDL is a marital asset. At this juncture, we can more easily explain our determination not to remand for the purpose of further proceedings to value this asset. In the first place, plaintiff has not asked that we direct such a remand in the event we agree with defendant that it is a marital asset. Second, we cannot perceive any rational basis for treating this asset differently than Calitalia and the Directors' Loan Account, i.e., for concluding that its value should not be subsumed within the value of CDL. Third, because it appears that the value of CDL would have to be reduced in the event this asset were to be separately valued, we doubt that any net benefit flowing to plaintiff, the party with the greater equitable share of both assets, would compare favorably with the costs of further proceedings in this already costly and protracted litigation (see Wechsler v Wechsler, 58 AD3d 62, 78 [1st Dept 2008], appeal dismissed 12 NY3d 883 [2009]).

The court found both that the value of plaintiff's brokerage account as of the commencement of the action was $1,691,673.51 and that the increase in value of the account during the marriage, $528,022, was marital property. Without explanation, however, the court failed to make any equitable distribution of this marital asset to defendant. We agree with defendant that this was error (see Domestic Relations Law § 236[B][5][c]). And, as already discussed, we also agree with defendant that, because of the commingling in the brokerage account of plaintiff's separate property with other property acquired during the marriage, the entire account should be deemed marital property. We disagree, however, with defendant that he should be awarded the same percentage share of this account, i.e., 30%, that the court awarded him of the other marital property acquired through plaintiff's direct efforts. On the facts of this case -- including plaintiff's proof of the value of the brokerage account at the time of marriage, the appreciation of the securities due to passive economic forces, the substantial gifts during the marriage to plaintiff from her parents, the substantial sums from the account advanced directly to CDL and the evidence that, as Supreme Court aptly stated, "plaintiff not only was the financial engine of this marriage, but . . . was also the primary caretaker of the parties' son" -- we find that an award of 15%, or $253,751, of the total value ($1,691,673) of this marital asset is appropriate.

Because the parties bought the New York townhouse in July 2000 and defendant moved out of the house in April 2001, the court erred in awarding defendant only five months' worth of the appreciation on the value of the house. Accordingly, we ...


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