Full Opinion (html_with_citations)

                                IN THE
            ARIZONA COURT OF APPEALS
                            DIVISION ONE


                         In re the Marriage of:

                JODI LEE MEISTER, Petitioner/Appellee,

                                   v.

                LUCAS MEISTER, Respondent/Appellant.

                       No. 1 CA-CV 19-0618 FC
                         FILED 12-2-2021


            Appeal from the Superior Court in Maricopa County
                          No. FC 2017-070035
             The Honorable Lisa Ann VandenBerg, Judge

   AFFIRMED IN PART; VACATED AND REMANDED IN PART


                               COUNSEL

Jennings Strouss & Salmon PLC, Phoenix
By Maxwell Mahoney, Norma C. Izzo
Counsel for Respondent/Appellant

Dickinson Wright PLLC, Phoenix
By Leonce A. Richard, III
Counsel for Petitioner/Appellee
                          MEISTER v. MEISTER
                           Opinion of the Court



                                OPINION

Presiding Judge Michael J. Brown delivered the opinion of the Court, in
which Judge D. Steven Williams and Judge Peter B. Swann joined.


B R O W N, Judge:

¶1            Lucas Meister (“Husband”) appeals the superior court’s
decree of dissolution ending his marriage to Jodi Meister (“Wife”), arguing
the court erred in valuing Precision Blasting Services (“PBS”), a business
the couple owned jointly. We conclude the court erred in failing to account
for significant changes in PBS that occurred shortly after the divorce
proceedings began. And because we cannot discern whether the court’s
chosen valuation date and its ultimate division of assets were fair and
equitable, we vacate the portion of the decree valuing PBS, as well as the
related division of assets between the parties, and remand for further
proceedings. We otherwise affirm the decree.

                            BACKGROUND

¶2            Husband and Wife married in 2002. In 2007, Wife and her
brother (“Brother”) formed PBS, but they agreed Husband would manage
the company. The following year, Husband also began working as a
salaried employee for Arizona Drilling and Blasting (“ADB”), a subsidiary
of Fisher Industries, and co-owned by Thomas Fisher (“Fisher”). Husband
managed ADB’s drill and blasting division. In 2010, ADB and PBS entered
a contract (“Blasting Contract”), under which ADB would bid on blasting
projects and direct them to PBS; invoices submitted to ADB would be based
on “cost plus markup.”

¶3            In 2015, Husband and Wife purchased Brother’s 49% interest
in PBS for $795,000,1 and it is undisputed that PBS is community property.
Husband continued as PBS’s general manager, where he ran the day-to-day
business operations, in addition to his continued work as an employee of



1      In November 2017, Brother sued Husband and Wife, claiming they
breached the stock purchase agreement. The lawsuit was eventually
resolved, with Husband and Wife agreeing to pay Brother $420,000, secured
by two deeds of trust.


                                    2
                          MEISTER v. MEISTER
                           Opinion of the Court

ADB. Wife managed PBS’s accounts receivables, payables, insurance,
benefits, and regulatory compliance.

¶4              Husband and Wife separated in August 2016. Husband
incurred substantial business and personal expenses after their separation
and throughout the subsequent divorce proceedings. After mediation
efforts failed, Wife petitioned for dissolution and Husband accepted service
on January 31, 2017. In considering their community property, the parties
contemplated that Husband eventually would buy Wife’s interest in PBS.
As Wife later testified, she was unable to perform her duties at the company
after the divorce proceedings began because Husband harassed her and
“excluded” her from the company. In June 2017, Husband fired Wife from
PBS and she was no longer involved with the business.

¶5             Meanwhile, in late 2016 or early 2017, ADB and PBS were
working on a project in Nevada. The owner of that project contacted Fisher
and informed him that PBS was overbilling for blasting work. In early 2017,
Fisher began an internal investigation and found PBS was marking up its
charges between 30% and 40%. The Blasting Contract did not specify what
markup ADB would pay for PBS’s services, but Fisher was under the
impression that he and Husband had discussed a 5% to 8% markup when
they entered the agreement. As Fisher continued to investigate, he found
that Husband had charged ADB a markup of between 30% and 40% on
other projects.2 On April 27, 2017, Fisher fired Husband from ADB and
terminated the Blasting Contract with PBS, asserting Husband (1) had a
conflict of interest with PBS; (2) had breached his duty of loyalty/code of
ethics as an employee of ADB; and (3) had overbilled invoices submitted to
ADB.3 Termination of the Blasting Contract was a financial blow to PBS
because ADB was its biggest customer, by far. In addition, ADB owed PBS
$980,000 (the “Receivable”) but refused to pay it, which created additional
financial issues for PBS.

¶6         With no business from ADB, PBS’s gross revenues and net
income dropped dramatically over the remainder of 2017 and declined


2      PBS’s annual gross revenues from 2013 to 2015 averaged almost
$6,000,000, generating an average net income of about $300,000. In 2016,
gross revenue rose to more than $9,000,000, with a net income of $1,085,038.
3      Nothing in the record before us reveals any judicial determination
that Husband breached the Blasting Contract, or that he engaged in
tortious, fraudulent, or otherwise criminal conduct in connection with the
overbilling issue.


                                     3
                          MEISTER v. MEISTER
                           Opinion of the Court

further in 2018. Starting in the summer of 2017, Husband sold some
company equipment so PBS could continue to operate even though doing
so violated the superior court’s temporary orders, which barred the sale of
any company assets without Wife’s consent. The sales netted around $1.4
million. In November, Wife sought a contempt order, asserting she did not
know what Husband was doing with the proceeds and he was improperly
using PBS’s funds for his personal use.

¶7            Husband and Wife each hired experts to offer opinions as to
PBS’s value. Wife hired Lynton Kotzin, whose valuation had formed the
basis for the parties’ purchase of Brother’s interest in PBS in 2015. Kotzin
opined that the proper valuation date was March 31, 2017 because that was
an end-of-quarter-date close to the date of service. According to Kotzin, on
that date PBS was worth $2,646,000. He relied primarily on the “single-
period capitalization method” for his valuation because he anticipated that
PBS’s future performance “will not differ significantly from historical
financial results.” Kotzin acknowledged that PBS lost ADB as a customer
within a month after March 31, that ADB had been the source of roughly
90% of PBS’s revenue, and that PBS would not collect the Receivable. But
Kotzin opined it was inappropriate to consider those facts in valuing the
company because they were neither “known [n]or knowable” on March 31,
2017.

¶8             Husband hired Mark Hughes, who opined that PBS should
be valued as of December 31, 2017, when the full consequences of PBS’s
falling out with ADB had become apparent. Hughes valued PBS’s fair
market value at $1,120,000. Hughes also challenged Kotzin’s valuation on
four grounds, summarized as follows: (1) termination of the Blasting
Contract was known or knowable as of March 31, 2017 because Fisher was
investigating PBS’s billing practices; (2) Kotzin erred by relying on a 31.9%
gross profit margin projection (with $9.2 million revenue) in perpetuity; (3)
Kotzin did not account for increased risk based on Fisher having obtained
its own blasting permit in 2015; and (4) Kotzin should not have included
the Receivable in projected revenues, given that PBS had written it off on
its 2017 tax return.

¶9             According to Hughes, the $420,000 payment the parties owed
to Brother in settlement of an unrelated litigation, supra ¶ 3 n.1,
demonstrated the reasonableness of the December 31, 2017 valuation. And
in a later valuation, Hughes believed that due to further declining revenues,
PBS’s fair market value at the end of 2018 was $120,000.




                                     4
                           MEISTER v. MEISTER
                            Opinion of the Court

¶10           At the March 2019 trial, the superior court admitted
numerous exhibits and heard testimony from Wife, Husband, and their
experts. In the resulting decree, the court found in part that given “the lack
of known or knowable changes” occurring before Husband’s termination
from ADB, and PBS’s loss of the Blasting Contract, it would be inequitable
to use Hughes’s valuations, particularly the 2018 valuation, given the time
between date of service and Husband’s “actions/control of PBS thereafter.”
The court therefore found that Kotzin’s valuation provided the most
relevant picture of PBS at the time of service of Wife’s petition. The court
also concluded Wife made a prima facie showing to support her waste
claim, which Husband failed to rebut, and that the waste claim was
“granted and embedded in the distribution of property.”

¶11           In dividing the principal assets and liabilities, the court
awarded PBS to Husband at a value of $2,646,000 and ordered him to pay
the $420,000 note to Brother. The court awarded Wife another community-
owned company, MEI-D, which owns the real property and the building
where PBS currently operates, with a net value of $590,000. The court
divided the proceeds of the sale of the marital residence, $341,909.90,
equally between Husband and Wife but awarded them to Wife as a partial
offset against the value of PBS. The court then ordered Husband to pay
Wife an equalization payment of $647,000 and ruled that Wife’s contempt
claim was moot. Husband timely appealed.

                               DISCUSSION

¶12           Husband argues the superior court abused its discretion
because the record does not support its choice of a valuation date and the
date the court selected results in an unfair division of property. We review
a court’s decision on the value of a business in a divorce proceeding for an
abuse of discretion. Schickner v. Schickner,
237 Ariz. 194, 197, ¶ 13
 (App.
2015). A court abuses its discretion when it rules without competent
evidence or commits a legal error in making a discretionary decision.
Engstrom v. McCarthy,
243 Ariz. 469
, 471, ¶ 4 (App. 2018).

¶13           Community property must be divided “equitably, though not
necessarily in kind, without regard to marital misconduct.” A.R.S. § 25-
318(A). The superior court is not “bound by any per se rule of equality,”
but rather has “discretion to decide what is equitable in each case.” Toth v.
Toth,
190 Ariz. 218, 221
 (1997). While community property generally
implies equal ownership between both spouses, and an equal distribution
may often be the most equitable, “there may be sound reason to divide the
property otherwise.”
Id.
 For example, the court may consider “excessive


                                      5
                           MEISTER v. MEISTER
                            Opinion of the Court

or abnormal expenditures” to reach an “equitable division of community
property.” Martin v. Martin,
156 Ariz. 440, 447
 (App. 1986) (citing § 25-
318(C)).

¶14            The superior court has wide discretion in apportioning
community property under § 25-318. In re Marriage of Berger,
140 Ariz. 156, 168
 (App. 1983). The court’s discretion includes the ability to choose a
valuation date for community assets, such as a shared business. See Sample
v. Sample,
152 Ariz. 239, 242
 (App. 1986). In Sample, this court recognized
that the equitableness of property distribution is “the very touchstone of a
proper apportionment,” and as such, the “trial court must be allowed to
utilize alternative valuation dates.”
Id.
 To resolve the appeal before us, we
must assess whether the superior court’s choice of a valuation date reached
an equitable result that “stand[s] the test of fairness on review.”
Id.
(quotation and citation omitted). We construe all reasonable inferences in
favor of sustaining the court’s decision. Berger,
140 Ariz. at 168
.

       A.     Selecting a Valuation Date

¶15            The superior court adopted Kotzin’s proposed valuation date,
in part, because it was closest in time to the date Husband accepted service
of the petition for dissolution. Neither party has cited, nor have we found,
any Arizona authority mandating or even suggesting a community asset
must be valued at or near the date of service. The absence of a specific
standard, or even a presumption, in Arizona is consistent with many other
jurisdictions that grant courts broad discretion to determine a valuation
date. See, e.g., Thomas v. Thomas,
580 S.E.2d 503, 506
 (Va. Ct. App. 2003)
(“[I]n the interests of just and fair results, the trial court should choose the
valuation date which is most likely to provide the most current and accurate
information available . . . .”); Tummings v. Francois,
82 So. 3d 955, 960
 (Fla.
Dist. Ct. App. 2011) (noting that a valuation date for community property
is determined by what is “just and equitable under the circumstances”).

¶16             Some jurisdictions, however, follow the rule that property
should be valued as of the date of the property division hearing or trial. See,
e.g., Miller v. Miller,
105 P.3d 1136, 1143
 (Alaska 2005); Morgan v. Morgan,
854 P.2d 559, 563
 (Utah Ct. App. 1993). Nonetheless, even in those
jurisdictions, a court may use an alternate date as long as it makes specific
findings on the record explaining why that date is more likely to reach an
equitable result. See, e.g., Ogard v. Ogard,
808 P.2d 815, 820
 (Alaska 1991)
(noting that if the court chooses a different date than the date of trial, it
should make “specific findings” to support that date); Morgan,
854 P.2d at 6
                            MEISTER v. MEISTER
                             Opinion of the Court

563 (“[T]he trial court’s findings must be sufficiently detailed to explain its
basis for deviating from the general rule.”).

¶17           Notwithstanding these different approaches to selecting a
date of valuation, we see no reason to disturb the general principles
recognized in Sample that (1) the court’s choice of a valuation date should
generally be dictated by pragmatic considerations, and (2) the decision
must comport with principles of fairness and equity. See Sample, 152 Ariz.
at 242–43 (rejecting the argument that “precedent compels the adoption of
a valuation at dissolution formula”); see also § 25-318(A). Generally
speaking, the term “equitable” sufficiently encompasses the notions of
fairness and equity as described in Sample, because “’[e]quitable’ means just
that—it is a concept of fairness dependent upon the facts of particular
cases.” Toth,
190 Ariz. at 221
. Achieving an equitable distribution of the
marital assets is also the touchstone of § 25-318(A).

¶18           Simply stated, in a dissolution proceeding the superior court
has wide discretion to choose a business’s valuation date, so long as the
ultimate valuation is equitable. See Sample, 152 Ariz. at 242–43. The court
certainly may use the date of service, or a date near the date of service, as a
starting point in choosing the valuation date. See id. at 242 (“Indeed, it
would contravene the very purpose of A.R.S. § 25-318(A) for this court to
develop a general valuation rule . . . .”). But the court must select a different
date when necessary to ensure an equitable result.

¶19           Here, PBS lost the Blasting Contract and the Receivable less
than four weeks after the March 31, 2017 valuation date, and almost two
years before trial. Notwithstanding these significant events, the superior
court found the March 31, 2017 date offered the “most relevant picture of
the PBS business at the time of termination of the community” because it
was close to the date of service and accurately reflected the parties’ joint
participation in the business at the time. Further, the court also reasoned
that Wife was not responsible for the loss of the Blasting Contract and was
not involved in the business thereafter. But PBS losing the Blasting Contract
and the Receivable is attributable to Husband’s conduct before the date of
service; specifically, he was fired by ADB, the Blasting Contract was
terminated, and he was notified the Receivable would not be paid due to
alleged overbilling practices that occurred during the marriage. Also, even
if Husband was solely responsible for the loss of the Blasting Contract, Wife
was working for PBS when the alleged overbilling occurred, and the
community received the fruits of Husband’s overbilling when ADB paid
PBS’s increased markups. As explained more fully below, we conclude the



                                       7
                           MEISTER v. MEISTER
                            Opinion of the Court

court erred in failing to properly factor these events into its valuation of
PBS.

       B.     Foreseeability

¶20            Husband argues the superior court’s valuation date and
division of property does not satisfy Sample’s fairness test because the court
effectively ignored PBS’s loss of income from ADB after March 31, 2017. He
asserts the valuation date is unfair because he was awarded PBS—an entity
that lost 95% of its revenue from the termination of the Blasting Agreement,
due to Husband’s alleged overbilling—and must now pay Wife the value
of the asset as if it still had the same level of revenue.

¶21            In her answering brief, Wife does not address (1) the
substantial change in PBS’s financial picture that occurred just weeks after
the March 31, 2017 valuation date when ADB terminated the Blasting
Contract; (2) the Receivable that PBS could no longer collect; or (3) whether
the valuation date was unfair because it was based on the much higher
levels of revenue PBS generated when it was charging a 30–40% markup on
its projects. Instead, Wife contends the superior court had sufficient
evidence to determine that the loss of the Blasting Contract and the
Receivable were not known or knowable (foreseeable) as of March 31, 2017.

¶22           As Husband contends, while the superior court recognized
that termination of the Blasting Agreement and the Receivable
“dramatically impacted the future revenue stream of PBS,” the court did
not account for these significant events when it chose a valuation date.
Instead, the court concluded it would be “inequitable” to use Hughes’s
valuation date because the loss of the Blasting Contract and the Receivable
were not “reasonably foreseeable.” But the court failed to explain, and the
record does not reveal, how the lack of foreseeability about losing the
Blasting Contract and Receivable justified valuing the company as of that
date.

¶23           We express no opinion on whether the valuation of a business
for any other purpose should turn on whether a specific event is foreseeable
as of the date of valuation. But when a court is valuing a community asset
in a dissolution proceeding it triggers different considerations, and
otherwise “standard” valuation approaches must yield to the overarching
principles of equity. Here, although both experts seemed to agree that
foreseeability was a necessary consideration, neither party has cited, nor
has our research revealed, any authority suggesting that foreseeability
should have controlled the court’s choice of a valuation date. While



                                      8
                           MEISTER v. MEISTER
                            Opinion of the Court

foreseeability may be a relevant factor in some cases, it cannot trump the
question of whether the selection of the valuation date must produce an
equitable result. In the absence of any finding about the equitableness of
the March 31 date here, and the lack of specific evidence supporting such a
finding, the court abused its discretion to the extent it selected the valuation
date based on Kotzin’s opinion that termination of the Blasting Contract
and nonpayment of the Receivable were not foreseeable.

¶24            The superior court appears to have concluded that Husband’s
management decisions after he took control of the business meant that he
should bear all responsibility for any events affecting PBS that occurred
after the valuation date. But we cannot see how the court’s finding that the
loss of the Blasting Contract and Receivable were not foreseeable justifies
that conclusion. The court found that the events occurring after March 31,
2017, were “the product of Husband’s personal mismanagement/poor
decisions,” explaining that he unilaterally took large cash distributions,
increased his salary, closed bank accounts, canceled Wife’s company credit
card, blocked her access to financial accounts, and sold $1.4 million in
company equipment without Wife’s consent and in violation of court
orders. The court then selected Kotzin’s proposed valuation date,
apparently to compensate Wife for the financial consequences of Husband’s
conduct after loss of the Blasting Contract and Receivable. Husband’s
business decisions, management, and excessive spending after these events
may have a direct correlation to the decline in value of PBS, particularly in
light of the court’s finding that he was not credible in describing his efforts
to maintain PBS as a going concern. But neither the record nor the court’s
ruling show how Husband’s poor management or wasteful spending
impacted the value of PBS to such an extent that it was appropriate to
disregard PBS’s losses of 95% of its business and almost $1 million in
accounts receivable.

       C.     Waste

¶25           Husband also argues the superior court erred in selecting a
valuation date based on waste, which the court and Wife seem to define as
his business misconduct relating to the overbilling of ADB. Husband
contends he rebutted Wife’s prima facie claim for waste and the community
should be liable for the losses associated with the termination of the
Blasting Contract because the community benefitted from the alleged
overbilling that gave rise to the termination. Wife does not address the
waste claim on its own but contends the valuation date is fair under Sample
because Husband engaged in misconduct, which she describes as
“contemptible conduct and pillaging of the parties’ business.” According


                                       9
                            MEISTER v. MEISTER
                             Opinion of the Court

to Wife, the court’s waste findings were based not on overbilling but solely
on Husband’s misconduct after the valuation date; specifically, his violation
of court orders when he had exclusive control of PBS.

¶26           The determination of waste, also referred to as dissipation, is
governed by § 25-318(C), which permits the court to consider “excessive or
abnormal expenditures, destruction, concealment or fraudulent disposition
of community, joint tenancy and other property held in common.” See also
Martin v. Martin,
156 Ariz. 452, 458
 (1988). The spouse alleging abnormal
or excessive expenditures has the burden of making a prima facie showing
of waste. Gutierrez v. Gutierrez,
193 Ariz. 343, 346, ¶ 7
 (App. 1998). When a
spouse makes that showing, the burden shifts to the spending spouse to
rebut the showing of waste “because all of the evidence relative to the
expenditures is generally within the knowledge, possession, and control of
the spending spouse.”
Id.
 at 346–47, ¶ 7.

¶27            If a court finds a party committed waste that reduced the
value of a community business, it may consider such waste in selecting a
valuation date for the business. See, e.g., Fuchs v. Fuchs,
276 A.D.2d 868
, 869–
70 (N.Y. App. Div. 2000) (affirming the court’s earlier valuation date “based
on its determination that a wasteful dissipation of marital assets had
occurred”); Wright v. Wright,
737 S.E.2d 519, 534
 (Va. Ct. App. 2013) (“[A]n
alternate valuation date may be necessary due to the dissipation of marital
assets by one of the spouses after the separation of the parties.”). On the
other hand, if a court finds that waste did not affect the value of the business
but did impact other marital assets, the court “may, when apportioning the
community property, award money or property sufficient to compensate
the other spouse for that waste.” Hrudka v. Hrudka,
186 Ariz. 84, 93
 (App.
1995), superseded in part by statute on other grounds; see also Helland v. Helland,
236 Ariz. 197, 201, ¶ 17
 (App. 2014) (“When the court determines one spouse
has wasted or dissipated marital assets, it may apportion the community
property in a manner designed to compensate the other spouse for the
waste.”).

¶28           Here, the superior court’s analysis relating to waste, or
misconduct, cannot be sustained because we are unable to determine how
its waste finding affected the chosen valuation date, the resulting value of
PBS, or the ultimate property distribution. Contrary to Wife’s assertions,
the court’s general finding—that Husband’s waste is “embedded” into in
the overall “distribution of property”—provides no reasonable basis for us
to determine whether the court’s valuation of PBS was equitable.




                                        10
                           MEISTER v. MEISTER
                            Opinion of the Court

¶29           The superior court seems to have agreed with the position
Wife takes on appeal, finding that Husband committed waste “with respect
to PBS” and that PBS’s financial losses after March 31 occurred because of
Husband’s personal mismanagement and poor decisions. For example, the
court appeared to base its “waste” finding, at least in part, on the following:
Husband sold PBS equipment in defiance of the court’s orders and without
Wife’s consent; he paid himself $16,666 as his monthly salary ($200,000 a
year); and, using PBS credit cards, he spent tens of thousands of dollars on
personal items with business funds. The court also referenced Husband’s
expenditures of approximately $13,000 a month for his $3 million home, but
the court did not address whether any community funds were spent in
acquiring the home, account for the substantial mortgage owed on the
home, or otherwise explain how Husband’s monthly expenses factored into
its waste finding. Further, the July 2017 temporary orders set Husband’s
annual salary from PBS at $200,000, as reflected in the joint pretrial
statement. At the very least, the court abused its discretion to the extent it
concluded Husband’s salary was wasteful.

       D.     Equitableness Review

¶30           The decree the superior court entered lacks sufficient analysis
to permit us to decide whether its valuation of PBS and its ultimate division
of assets were equitable under Sample and § 25-318(A). Absent a proper
request from a party that triggers mandatory “separate findings of fact and
conclusions of law,” no bright-line rule exists as to what a court must
include in addressing whether a selected valuation date is equitable. See
Ariz. R. Fam. Law P. 82(a)(1). That being said, if Sample is to have any
meaning, the court must provide enough analysis, however labeled, to
allow an appellate court to fulfill its obligation to decide whether the
valuation date, and resulting property distribution, withstand the test of
equity and fairness. See Sample, 152 Ariz. at 242–43 (holding that § 25-318(A)
“provides that the selection of a valuation date rests within the wide
discretion of the trial court and will be tested on review by the fairness of
the result”). When the court’s ruling lacks such analysis, we cannot merely
presume that the valuation complies with Sample and § 25-318(A).4




4     Specific analysis addressing the test of equitableness may not always
be required. For example, if reasonable evidence is readily apparent from
the record that the selected date of valuation and resulting value are



                                      11
                           MEISTER v. MEISTER
                            Opinion of the Court

¶31            On remand, the superior court should address, in addition to
any other relevant matters: (1) how the loss of the Blasting Contract and the
Receivable affected the value of PBS; (2) selection of a valuation date that is
supported by sufficient evidence and analysis to allow meaningful
appellate review; (3) the value of PBS as of the valuation date; (4) the
amount Wife was harmed by Husband’s wasteful business practices after
service of the petition in terms of causing a decrease in the value of PBS; (5)
the amount Wife was harmed by Husband’s wasteful spending of other
community funds; (6) calculation of appropriate offsets, if any; and (7) how
the ultimate property distribution is equitable.

                               CONCLUSION

¶32            We vacate the court’s valuation of PBS and remand for
clarification and additional analysis consistent with this opinion. The court
may permit the parties to present additional evidence appropriate to
achieve an equitable division. We affirm the rest of the decree except as the
superior court may find necessary to modify the property division to
account for changes in the value of PBS. In our discretion, we deny both
parties’ requests for attorneys’ fees and costs under A.R.S. § 25-324(A).




                          AMY M. WOOD ‱ Clerk of the Court
                          FILED: AA




equitable, then an appellate court presumably can still meet its obligation
under Sample.




                                        12