Active Passive Appreciation – Active Efforts of Individuals

William C. Dameworth
Managing Member
April 5, 2018

As discussed previously, once it has been determined that a separate business interest appreciated in value during a marriage, learned treatises and case law often delineate the active passive analysis into the following elements:

  • Identifying and quantifying market forces that caused the separate property appreciation.
  • Identifying and quantifying the separate property appreciation caused by the active efforts of third party managers, employees or owners (other than the divorcing parties).
  • Identifying and quantifying the separate property appreciation caused by the active efforts of the divorcing parties (typically including efforts of either the business owner spouse or the non-owner spouse).

Learned treatises and case law in equitable distribution jurisdictions typically first determine the part of the separate property appreciation during the marriage that was due to market forces, and remove this appreciation from consideration as it is typically not divisible. Any remaining separate property appreciation during the marriage is then carefully analyzed to allocate the remaining appreciation between the active efforts of third parties and the active efforts of the divorcing spouses. From a conceptual standpoint, some equitable jurisdictions have characterized separate property appreciation during the marriage caused by the active efforts of third parties as being essentially the same as appreciation from market forces, and is therefore typically not divisible.

The allocation of separate property appreciation during the marriage between the active efforts of third parties and the active efforts of the divorcing spouses is a fact specific process that requires researching and investigating factors including but not limited to the following:

  • Obtaining or developing organizational charts of the subject company during the relevant time period.
  • Interviewing managers, employees and owners who have knowledge of the operations of the subject company and the roles of the third parties and the divorcing parties during the relevant time period.
  • Interviewing managers, employees and owners who were present at the Company during the relevant time period and have knowledge of the roles of the third parties and the divorcing parties. Locating these individuals can be difficult if substantial time has passed between the relevant time period and the current active passive analysis date.
  • Locating and reviewing any relevant subject company documents that were prepared during or near the relevant time period.

The above information is then used by the business appraiser to develop a reasonable method to allocate separate company interest appreciation between third parties and divorcing parties. Reviews of learned treatises and case law reveals that, depending upon case facts and the particular jurisdiction, weight can be given to factors including but not limited to the following:

  • The relative control available and exercised by various individuals over the subject company and/or its operations, through ownership and/or management role.
  • The relative positions of authority and/or influence available and exercised by various individuals at the subject company.
  • Relative levels of compensation or levels of company-owned key person life insurance.
  • Specific metrics of the relative share of company performance, such as relative sales or profits of particular business units or lines, that are attributable to specific individuals.

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