Cavallo v. Cavallo

ANTHONY CAVALLO v. JOANNA CAVALLO

Record No. 0981-13-4

COURT OF APPEALS OF VIRGINIA

FEBRUARY 25, 2014

UNPUBLISHED

Present: Judges Kelsey, Alston and Decker

Argued at Alexandria, Virginia

MEMORANDUM OPINION^* BY

JUDGE D. ARTHUR KELSEY

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY

Jan L. Brodie, Judge

John L. Bauserman, Jr. (The Bowen Law Firm, on briefs), for appellant.

Carolyn M. Grimes (Lieblich & Grimes, P.C., on brief), for appellee.

In this divorce case, the trial court awarded $21,000 to Joanna Cavallo (wife) pursuant to a premarital agreement between her and her husband, Anthony Cavallo. The court also awarded wife $10,000 in attorney fees. On appeal, husband argues both awards rest upon a flawed interpretation of the premarital agreement and an incomplete factual record. We agree that the $21,000 monetary award must be reversed in part. Based upon that conclusion, we remand the attorney fee award to the trial court for reconsideration.

I.

The parties married in 2009. Two days before their marriage, they entered into a premarital agreement limiting any future rights to spousal support and equitable distribution in the event of a divorce. In early 2011, husband left the marital home and, in early 2012, he filed for divorce. Wife filed a cross-claim for divorce alleging adultery. Following an evidentiary hearing, the trial court found husband guilty of adultery and granted wife's request for a divorce on this ground. The court also ordered husband to pay child and spousal support.

At the evidentiary hearing, wife claimed the premarital agreement was unenforceable as a matter of law and, thus, she should be entitled to a statutory equitable distribution award under Code § 20-107.3. Wife argued alternatively that the premarital agreement, if enforceable, entitled her to a contractual monetary award in the event of a divorce.

Paragraph 10 of the agreement, entitled "Separate Property of Husband," identified various assets owned by husband prior to the marriage. The agreement provided that, in the event of a divorce, wife

shall be entitled to 50% of the net increase in value of Husband's separate property . . . . Husband shall maintain and continue to own separately the current equity in his separate property. This paragraph applies only to the increase in net equity. For purposes of this paragraph, the increase in value will be determined as of the date of the parties' separation, which forms the basis for the entry of a final decree of divorce. This will not effect [sic] the deductions for determining the "net" increase, which are described below. As referenced above, the definition of "net increase in value of Husband's separate property" includes, but is not necessarily limited to:

1. deductions for all taxes;

2. payment of all debt accumulated during the marriage for family or household purposes;

3. all appraisal, accounting and legal fees necessitated by the valuation and division of property described in this paragraph; and

4. all administrative costs and fees directly related to the management of the separate property.

App. at 12.

Schedule A of the premarital agreement listed husband's separate property. Included on the list were four businesses in which husband had an equity interest: Millennium Entertainment, LLC, in which husband owned a 35.714% equity interest; Cavallo Enterprises, Inc., in which he owned a 50% equity interest; Vintage 51, LLC, in which he owned a 40% equity interest; and Cavallo Gelato, LLC, in which husband's equity interest was never established. Id. at 26, 296, 323, 412. Schedule A also identified the agreed value of each ofthese four businesses at the time of agreement.¹ Vintage 52, LLC, was not listed as husband's separate property in the premarital agreement, but wife introduced tax returns that established husband's 35.714% equity interest in the business. Id. at 483.

Wife sought to prove the then-current value of husband's businesses (and thereby establish her 50% share of any net increase in value) by calling to the stand husband's accountant. Wife's counsel asked the accountant to identify the "total assets" figure mentioned on the first page of the federal income tax returns for Millenium Entertainment, LLC; Cavallo Enterprises, Inc.; Vintage 51, LLC; and Vintage 52, LLC. The figures came from Schedule L on the tax returns, which consisted of IRS standard form balance sheets for the businesses reflecting assets and liabilities, prepared under an accrual basis for Millenium Entertainment, LLC,² and under a cash basis for each of the remaining businesses.³

The accountant went through each business's tax returns for the relevant years and identified the "total assets" figures on the front page of each return. Wife's counsel never asked the accountant for an expert opinion on the actual value of any of the four businesses. Nor didthe accountant imply that the "total assets" figures (without also taking into account each business's liabilities) could serve as a proxy for valuing any of the businesses.

During closing arguments, wife's counsel argued that the "accountant testified that the IRS tax returns he prepared and submitted to the IRS for [husband] contained a balance sheet and a statement of the net value of assets." Id. at 192 (emphasis added). Wife's counsel then took the IRS total assets figures from the tax returns, calculated the increase in value, determined husband's equity interest in the increased value, and then requested from the court an award of 50% of that increase pursuant to paragraph 10 of the premarital agreement.

Wife's counsel also argued for an award of attorney fees based upon the "prenup, because we are seeking to enforce it. This is an enforcement action. There is a term in the prenup to enforce it for her to have attorneys fees." Id. at 206. Counsel, however, further explained:

His conduct has created a massive amount of attorneys fees. At least 50 percent of the attorneys fees in this case have been spent on trying to get him to answer discovery and figure out his income. The property issues are actually small, maybe only 15 percent, the custody about 35 percent. So that's what we're seeking Your Honor.

Id. at 207.

In reply, husband's counsel argued that the "total assets" figure on the tax returns did not take into account the liabilities of each of the businesses and, thus, could not be the basis for valuing husband's equity interest in the businesses. Because wife presented no other evidence sufficient to establish the value of the businesses, husband's counsel argued, she could not succeed in her claim under paragraph 10 of the premarital agreement for 50% of any alleged increase in husband's equity interests in the businesses. Husband argued against an award of attorney fees on the ground that wife could not succeed with her claim under the premarital agreement, and, in any event, the agreement waived any future claims for attorney fees.

In its ruling, the trial court held the premarital agreement was enforceable. Thus, the agreement — not the equitable distribution statute — governed the parties' property rights. Addressing paragraph 10 of the agreement, the court acknowledged that there was "no reliable evidence of any current values or of any increase or decrease in values of the [businesses] other than tax returns for the business[es]." Id. at 229. The court said the absence of more reliable evidence was "due in great part" to husband's earlier failure to make complete disclosures during discovery. Id.⁴ The court later commented, "In looking at the value of these businesses, the tax returns and the checks were of little help without the business records." Id. at 233.

Lacking better evidence of the businesses' values, the court stated it was at the "very least skeptical about what the tax returns tend to show." Id. at 235. Despite these findings, the court adopted wife's "asset value" methodology and awarded her $21,000 on her claim under paragraph 10 of the premarital agreement. Id. The total monetary award under the premarital agreement also included 50% of the undisputed increase in value of husband's whole life insurance policy, which amounted to $3,087.50. Id. at 234; Appellant's Br. at 12.

Concerning wife's claim for attorney fees, the trial court stated that the fee affidavit from wife's counsel (seeking fees in excess of $40,000) made it "difficult . . . to tell what attorney's fees were for what, i.e., specifically motions to compel." App. at 239. The court nonetheless awarded $10,000 in attorney fees to wife, finding it "fair considering the relative incomes of the parties, their current assets and the equitable distribution of the property under the prenup." Id.

The court's final divorce order incorporated these rulings by reference. Id. at 47.

II.

On appeal, husband contends the trial court erred as a matter of law in making a monetary award to wife pursuant to paragraph 10 of the premarital agreement and likewise erred in awarding her $10,000 in attorney fees. We agree with his first argument and withhold judgment on his second.

A. WIFE'S CLAIM UNDER THE PREMARITAL AGREEMENT

Code § 20-150 provides that parties may enter into premarital agreements with respect to "'[t]he disposition of property upon separation [or] marital dissolution.'" Gaffney v. Gaffney, 45 Va. App. 655, 666, 613 S.E.2d 471, 477 (2005) (alteration in original) (quoting Code § 20-150); see also Code § 20-107.3(I) ("Agreements, otherwise valid as contracts, entered into between spouses prior to the marriage shall be recognized and enforceable."). A premarital agreement dictating the distribution of marital and separate property, if legally valid, supersedes the remedies available under the equitable distribution statute and precludes a trial court from tailoring a discretionary monetary award to the statutory factors outlined in Code § 20-107.3(E).

In Virginia, premarital agreements "'should be interpreted and enforced no differently than any other type of contract.'" Vilseck...