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The guide to the
domestic relations trial court Bankruptcy Filing Backfires - Charged With $822,500 in
Dissipation
Having
found that the husband’s bankruptcy of his company was unnecessary, Judge
Elizabeth Loredo Rivera charged him with $822,500 in dissipation. The
wife was represented by Joy
Feinberg of Feinberg and Barry, P.C.,
and the husband was represented by David H. Cutler of David H. Cutler &
Associates. This
case was litigated extensively. Pre-trial issues included custody,
visitation/parenting schedule and child-related matters, and determination of
the husband’s income. Trial issues included the valuation of the
husband’s company, determination of the husband’s income, an assessment of
marital assets, the division and distribution of the marital estate, and the
payment of attorneys’ fees. The
parties had three children, namely a daughter age nine and two sons ages eight
and five. The parties stipulated that it was in the best interests of the
minor children that the temporary and permanent custody order (“Co-parenting
Order”) be adopted as the custody order in this case. The
wife was forty-two years old and lived with the parties’ three children in Fox
River Grove, Illinois. She was a full-time obstetric sonographer for 15
years, and earned approximately $90,000.00 per year at Souma Diagnostics.
She had a 401k plan through her employer, a Self-Employment Plan as an
independent contractor through an adjunct of her employer’s business and an
individual Vanguard account. The
husband was forty-two years old and lived in Northbrook, Illinois. He was
an electrical contractor. The husband established Ripec, Inc., an
electrical subcontracting business. The husband was the 100% shareholder of
Ripec, Inc. On April 28, 2009, Ripec, Inc. filed for bankruptcy and became a
defunct company. The husband had an International Brotherhood of
Electrical Workers (IBEW) plan #5 account, a Vanguard IRA account, and an
International Brotherhood of Electrical Workers (IBEW) plan #2 account. Prior Court Orders entered in this matter
contained certain findings and orders pertinent to the decision on the issues
presented to the Honorable
William Stewart Boyd at trial. Of particular significance was the fact
that the orders of Judge
Boyd found that the husband’s asserted income on his tax returns was not
credible. He had a “slush fund” of at least $100,000 per year testified to
by the husband and his stated W-2 wages, guideline support for three children
would be at least $5,000 per month. Judge
Boyd could not determine the husband’s income due to his lack of
credibility and child support was set at $3,279 per month. He also held
the husband in indirect civil contempt of court for his failure to pay $4,000 to
Leslie Starr, the child custody evaluator and was in willful contempt for
failing to pay $8,000 to Jerry Goldberg, the Child Representative. Apart from the orders entered by Judge
Boyd, Judge
Rivera also entered a series of orders that were also pertinent to note.
She compelled the husband to sign a contract for sale of the parties’
former marital residence located in Glenview, Illinois, and ordered the wife to
receive the entire proceeds from the sale of the residence. Upon the
determination of the value of their Northbrook, Illinois residence, an amount
equivalent to the distribution to the wife from the sale of the Glenview
residence would be credited to the husband’s distributive share of the marital
estate. She also entered a preliminary injunction requiring the husband to
return $106,023.48 to the marital estate within ninety days, what he had taken-
violation of a court order. The
husband owned an electrical contracting business, Ripec, Inc. (“Ripec”).
He started Ripec during the marriage on February 2, 2003. The husband
owned 100% of Ripec. It had a small clerical staff, a sales staff
consisting of the husband, and various electricians performing the work.
The electricians generated Ripec’s income. Ripec
had its best year in 2007, earning $2,363,097 in gross receipts. Its gross
receipts in previous years were $1,956,048 in 2006 and $1,479,441 in 2005.
Ripec’s gross receipts cited here were based upon its Amended Tax Returns,
which noted an increase in gross receipts each year from the original tax
returns. On April 28, 2009, Ripec filed for Chapter 7 bankruptcy. Significant
testimony was presented regarding the husband’s use of Ripec for personal
expenses. For example, in the months prior to Ripec filing bankruptcy, the
husband withdrew approximately $92,000 from Ripec for personal uses, including
legal fees, cash withdrawals, payment of income taxes, payment of real estate
taxes, and child support payments. These withdrawals stripped Ripec of its
remaining cash. In prior years, Ripec paid for personal expenses of the
family charged on corporate credit cards and paid interest on the second
mortgage on the family’s residence. The
wife argued that the husband deliberately planned to close and bankrupt Ripec to
make Ripec unavailable as an asset for distribution. She further asserted
that the husband’s deliberate bankrupting of Ripec was an effort to avoid his
obligation of child support. The
wife pointed to the testimony of Daniel Breen, an electrical contractor doing
business under the name of Breen Electrical Contracting, Inc. Mr. Breen
testified about a bank account he shared with the husband. Although held
in the name of Breen Electrical Contracting, Inc., the account in effect was a
conduit to receive and disperse funds that were derived from Ripec’s business.
Detailed explanations were made of deposits and withdrawals to and from the
account, but this was a subterfuge to hide the business of Ripec, as the husband
stated, from the International Brotherhood of Electrical Workers and more
significantly from the wife. The husband was using this account as
recently as January 2009, and admitted that this account was not reflected on
Ripec’s books and records. Mr. Breen testified that the account still
held $3,000 - $4,000 of Ripec’s cash. Mr.
Breen further testified to a conversation with the husband that took place
sometime in the Fall of 2007. Although Mr. Breen said he could not
remember the conversation at trial, his recollection was refreshed by the
recitation of his deposition taken on June 10, 2008. At his deposition,
Mr. Breen admitted that 8 to 10 months prior to that deposition, in the Fall of
2007, the husband told Mr. Breen that he intended to end his business. Thus, the
husband’s conversation with Mr. Breen, regarding his plan to shut down Ripec
occurred immediately after the beginning of these proceedings. Even more
significant is that the husband developed his plan to shut down his business
during a period when Ripec was finishing its best year. Judge
Rivera stated that it was clear through Mr. Breen’s
un-rebutted testimony that the husband intended to wind down Ripec’s business
and ultimately shut it down via bankruptcy as a deliberate act to denude the
marital estate of a major asset – Ripec – and to present himself as being
unable to pay child support commensurate to the standard of living established
during the marriage. Ripec filed for bankruptcy on April 28,
2009. The Judge stated
that the inaccuracies and omissions in Ripec’s petition were consistent with
the husband’s lack of credibility on financial issues, and his history of
seeking to hide assets and income. The omissions found in Ripec’s
Petition for Bankruptcy were that the husband failed to list the amounts
allegedly owed to various electrical unions as creditors, failed to list the
account held with Mr. Breen, and failed to list the husband as guarantor for a
Harris Bank loan. The
wife credibly testified that the husband threatened her that if she did not
agree to joint custody, there would be nothing left for her at trial. This
fact, like many others, was un-rebutted by the husband. The husband’s
threat was further evidence of his attempt to deliberately bankrupt Ripec and
avoid a valuation of Ripec. The wife noted that custody was settled by
agreement on April 24, 2009. The wife was awarded sole custody of the
children. Four days later, Ripec declared bankruptcy, an act consistent
with the husband’s threat. The
husband’s own testimony was perhaps the most telling about the reason why
Ripec’s bankruptcy was unnecessary. The husband’s attorney asked him
why Ripec filed for bankruptcy, and he responded that it came out during the
course of this litigation that Ripec was paying cash to its union workers and
therefore had a large union liability. The husband said he met with his
accountant, after which it was determined that Ripec would file amended tax
returns and file for bankruptcy to avoid the union liability. At no point
during this line of questioning did the husband state that Ripec filed for
bankruptcy because it had no business or because its liabilities exceeded its
assets. Similarly, the husband never calculated the alleged union
liability or listed any such sums in Ripec’s bankruptcy petition. The
wife argued that as of December 31, 2007, Ripec was worth $822,500 and still
would be today, had the husband not intentionally wound down its business.
The husband alternatively argued that (a) Ripec had no value because it was
bankrupt, and (b) Ripec’s value could not be $822,500 because any value to
Ripec was all personal goodwill. He also argued that, had Ripec operated
appropriately or fairly, it would not have shown as much value as it did at
first glance. The wife pointed to the testimony of Michael
Goldman. Mr.
Goldman was qualified without objection as an expert in: 1.) business
valuation, 2.) fraud examination; and 3.) bankruptcy insolvency services.
In his report, Mr.
Goldman valued Ripec at $822,500 as of December 31, 2007.
He used the Income and Market methods to value Ripec. Mr.
Goldman testified extensively that the revenues, receipts and
value of Ripec as reflected on its QuickBooks records were inaccurate due to
Ripec’s common practice of not recording corporate revenue on Ripec’s tax
returns and its books and records. However, Mr. Goldman only relied on the
self-reported amounts on the corporate tax returns and the “Quickbooks”
records of Ripec. Mr.
Goldman stated that in fraud cases such as this, no reliance
could be made on the accuracy of the “second set of books” when trying to
determine a value for the corporation. Ripec maintained a “slush fund” where
the company would take checks received from various jobs, cash them, not record
them on its records, and pay its electricians in cash. Not only was this
practice improper, it was also fraudulent. The Judge noted with
incredulity the husband’s admissions to what the wife maintained constituted
bank fraud, tax fraud, and pension fraud. The husband’s actions were
calculated to prevent a fair distribution of marital assets. The
husband’s admissions were not the least bit remorseful; they were not the
least bit expiative. Purely and simply, he was caught, and he admitted it.
These admissions only underscored the husband’s lack of truthfulness and
credibility. Judge
Rivera did not accept or believe that corporate funds from the
“slush fund” were not used personally by the husband. The
husband’s testimony was completely incredible that corporate funds
deliberately cashed by the husband were nearly exactly equal to the cost of
labor used which was never recorded in the books and records of Ripec. The
husband’s answer that he thought they were in his QuickBooks records was vague
and evasive; there was shown no such evidence to support his testimony. The
wife also argued that in 2007, there was evidence of additional funds being
brought into the corporation on Ripec’s second set of books received into
evidence. It was unclear when, or if, the practice of cashing corporate
checks off the books ceased. There was no evidence that the practice
ceased; e.g. the second set of books was never updated, and there was no reason
to believe that from the last entry in the “slush fund” – March 7, 2007
– (approximately six months prior to the institution of these proceedings)
there would have been any reason for the “slush fund” to have been
terminated. Thus, it appears that the husband’s self-serving testimony
that he put “everything on the table” is in fact a further deception on his
part. Mr.
Goldman testified that Ripec was saleable before it was
deliberately wound down. He said that there would need to be a short
period where the husband would introduce the new owner to the existing suppliers
and customers of Ripec, and then a smooth transition could be made to the new
owner. The Judge
was persuaded that the value of Ripec was not – as the husband claimed –
comprised only of his personal goodwill. Mr.
Goldman found that the Capitalization of Earnings Approach was
the most appropriate for Ripec. As a check on the validity of the
Capitalization Approach, Mr.
Goldman valued Ripec using Bizcomps, a market data information
source. Because the underreported income on Ripec’s books and records
was a conservative estimate of valuation, and the inherent variation in the
business practices of the companies reported in Bizcomps, Mr.
Goldman weighted the difference between the two valuation
approaches in favor of Ripec’s admittedly underreported financials.Mr.
Goldman ultimately concluded that Ripec was worth $822,500 as of
December 31, 2007. Since
December 31, 2007, the date of Mr. Goldman’s valuation, Ripec filed for
bankruptcy. The husband argued, unsupported by any expert or credible
testimony, that Ripec was worth only the net cash value of its assets.
Since Ripec filed for bankruptcy, the husband argued that its assets were
worthless. Mr.
Goldman was questioned extensively regarding the effect of the
bankruptcy on his valuation. Mr.
Goldman testified that Ripec did not meet the two classic
definitions of bankruptcy; (A) its liabilities exceeding its assets, or (B) an
inability to pay its debts as they became due. First,
Ripec’s bankruptcy petition listed accounts payable as approximately $7,400;
whereas Ripec’s books listed accounts payable at approximately $15,000.
Mr. Goldman determined that Ripec’s total assets as of April 28, 2009 were
approximately $87,000. Second, Mr.
Goldman noted that Ripec paid its bills mostly on time.
That was not typical behavior for a company filing for bankruptcy.
According to Mr.
Goldman, companies typically exhibit a “thrashing” pattern of
payment, meaning that they pay some vendors in advance, and then switch between
vendors. That pattern was not present with Ripec. Mr.
Goldman concluded that Ripec did not need to file for
bankruptcy. He further opined that the business was intentionally winding
down; there was no trashing behavior as typically seen in bankrupt companies,
and Ripec was able to complete its jobs. Mr.
Goldman noted that Ripec simply stopped taking new jobs.
He concluded that his opinion as to the value of Ripec, $822,500, remained
unchanged. Mr.
Goldman’s testimony in this regard was persuasive. Judge
Rivera considered the husband’s attempts to place before her
the general economic circumstances of the country since 2008. No competent
evidence, however, was presented as to the specific effect the economy may or
may not have had in regards to Ripec. There was more than ample evidence
that Ripec did not have to file for bankruptcy. The
husband’s second argument as to the value of Ripec was that even if Ripec had
value, it was all the personal goodwill of the husband, and thus had little to
no value divisible in this case. The wife argued that the husband’s
theory was misplaced. The wife pointed to the fact that the husband
conceded that he personally performed less than one-sixth of the total labor
that generated the revenue of Ripec. The electricians generated Ripec’s
revenue. Mr.
Goldman testified that goodwill did not figure into his
valuation. Mr.
Goldman also testified that an orderly transition of the
workers, contacts and suppliers to a theoretical purchaser undercut the
husband’s theory that the value of Ripec was all personal goodwill.
There was no other testimony from Mr.
Goldman regarding goodwill. Accordingly, the husband’s
argument of Ripec’s value being all personal goodwill is not supported by the
evidence. The
case law on personal goodwill versus enterprise goodwill as it currently existed
in Illinois did not adequately cover the fact matter of this case. The
cases of Zells, Schneider,
Head II, Claydon, Phillips, Tietz,
and Courtwright all involved the
professional practice of various lawyers, dentists, doctors, and physical
therapists. In re Marriage of Zells,
143 Ill. 2d 251 (1991), In re Marriage of
Schneider, 214 Ill. 2d 152 (2005), In re Marriage of Head II, 273 Ill. App. 3d 404 (1st Dist.
1995), In re Marriage of Claydon,
306 Ill. App. 3d 895 (4th Dist. 1999), In re
Marriage of Phillips, 244 Ill. App. 3d 577 (4th Dist. 1993), In
re Marriage of Tietz, 238 Ill. App. 3d 965 (4th Dist. 1992), In
re Marriage of Courtwright, 155 Ill. App. 3d 55 (3d Dist. 1987).
The chief source of income of each of those practices was the personal services
of the professional. In
contrast, the income of Ripec was generated by a series of electricians directed
by the husband, and Ripec’s revenues were dependent on the electricians’
services and labor. Admittedly, the husband developed the contacts and
accounts; however, those were transferable and not wholly dependent on the
husband’s active participation in Ripec. One Illinois case touched upon
a nonprofessional practice: In re Marriage of Talty, 166 Ill. 2d 232 (1995). Talty
involved a two-person automobile dealership. 166 Ill. 2d 232.
Talty did not address the
dealership’s financial arrangements. Talty
is silent as to whether the dealership had a revenue stream that was
wholly dependent on anything other than the Talty brothers. Talty
did, however, note that “to the extent that goodwill inheres in
the business, existing independently of [husband’s] personal efforts, and will
outlast his involvement with the enterprise, it should be considered an asset of
the business, and hence of the marriage.” Talty
at 240. Here, Ripec’s income was generated by the
electricians, and Ripec’s revenues were dependent on the electricians’
services and labor. The husband’s contacts and accounts were
transferable and not wholly dependent on the husband’s active participation in
Ripec. Judge
Rivera rejected the husband’s argument that even if Ripec had
value, it was all personal goodwill. She found that the husband’s theory
of the business having personal goodwill was unsupported by competent evidence. The Judge was
left with the predicament of how to value a corporation that was consciously
bankrupt by its owner. The resolution was clear. The husband
deliberately destroyed the on-going business of Ripec. Ripec’s value
before he embarked upon that course of conduct was $822,500. Accordingly,
the husband was assigned as to his distributive share of the marital estate the
entire value of Ripec as of December 31, 2007. It was overwhelmingly clear
that the husband dissipated the marital estate of all value of its most valuable
asset, Ripec. In determining an equitable division of the
marital estate between the parties, the Judge considered
the twelve factors provided in Section 503(d) of the IMDMA. In particular,
she noted the wife’s preservation of marital property; the husband’s
dissipation of marital property; and the custodial provisions for the children. The Judge awarded
each party fifty percent of the marital estate, with a cash payment to balance.
The husband’s share of the marital estate, however, was subject to several
adjustments. The cash and retirement accounts in the marital estate had a total
approximate value of $336,460. Of those amounts, the wife was awarded
$261,670. During the pendency of this divorce case, the parties sold their
Glenview residence. By agreement, the wife was awarded the entire proceeds
from the sale of the Glenview residence, being $653,308. The wife
testified that she used those funds to purchase her home in Fox River Grove, pay
attorneys’ fees, pay the expert custody evaluator in this matter, make repairs
and improvements to her new home and support the minor children during periods
of time when the husband failed to pay support. The wife was awarded the
Fox River Grove residence in its entirety. Further, if not already paid,
each party was responsible for reporting and paying one-half of the total
capital gains resulting from the sale of the Glenview residence (the wife
reported and paid her portion, the husband did not). The
parties owned a residence located in Northbrook, Illinois, in which the husband
lived. The property was owned free and clear of any mortgage debt.
The residence was stipulated to be sold, pursuant to the April 6, 2009 Order.
The Northbrook residence was required to be listed for sale until sold.
The proceeds were to be distributed with the husband receiving $653,308 subject
to various adjustments and offsets owed the wife. From those proceeds, the
wife was to receive $370,567 which was in part based on the Judge’s award to
the husband the bankrupt company valued at $882,500. The husband’s award
was further reduced by the award of $82,500 to Feinberg & Barry, P.C. and
$100,000 to be set aside for a 503(g) fund to ensure the payment of the
husband’s child support. Judge
Rivera set out to distribute the marital estate on a 50/50
basis. Each of the parties were awarded $1,133,044 in equities. However,
the husband’s present distribution was reduced by the value placed upon Ripec,
Inc., misspent funds, advances, dissipation, and attorney’s fees which
exceeded $1 million. Judge
Rivera also addressed the issue of maintenance, child support, a
503(g) trust and attorney’s fees. Her analysis, findings and
determinations will be published in a forthcoming issue of the Digest. According
to David Cutler, the Husband's attorney, the Judgment is being appealed. For more information, see Cook County
Docket Number 07 D2 30434 Content © 2010-2011. The Illinois Divorce Digest, Inc. All rights
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