Divorce and Family Businesses
North Carolina divorce laws allow equitable distribution of marital and divisible property, and that sometimes includes family businesses. There are many stipulations and specific requirements for determining whether an asset can be divided between spouses and what percentage each spouse will be awarded, including:
- When the property was acquired
- With what funds it was acquired
- How it was acquired
- Who managed or dealt with the asset the most
- What other assets each spouse has
Not only can one spouse’s family business potentially be eligible for equitable distribution in a final divorce decree, but an interim distribution is also something to be aware of.Brown v. Brown (NC App. 1993)
In Brown v. Brown, Wife filed for divorce against Husband and sought alimony, possession of the marital home, and equitable distribution of the couple’s property. Because Husband was an equal partner in a construction company, Wife amended her complaint to include the other partners as defendants because she believed she had an equitable interest in property titled in the owners’ names. The court dismissed the claims regarding properties titled in the individual owners’ names. The construction company and any property jointly titled in Husband and one other owner’s names remained part of the case.
As an interim distribution, the trial court ordered Husband to pay Wife $400,000 and granted a lien against Husband’s property should the amount not be paid. The court also ordered that Husband’s construction company would be liable for the $400,000 if Husband did not pay. The defendants appealed this decision.
While interim distribution of marital property is allowed in North Carolina, the trial court did not have the authority to order a lump sum of cash when the cash itself was not a marital asset. The appeals court determined that interim distribution is limited to in-kind transfers, such as transferring a marital bank account to allow the other spouse access to funds.
Since there was no evidence that the parties’ marital assets included $400,000 in cash, the trial court erred in ordering that amount to be paid to Wife. In order to comply with the order, Husband would have been forced to access non-marital assets or sell his share of the construction company. Liquidating his portion of his family business would be prejudicial to Husband, causing long-term financial harm due to the loss of his primary source of income.
The appeals court suggested an alternative interim distribution that would be allowed under North Carolina statute – transfer of all or some of Husband’s 50% interest in the construction company to Wife.
A spouse’s share of a family business may be eligible for distribution either as an interim or final order. However, as Brown v. Brownshows, forcing liquidation of a business to comply with a monetary award is not allowed under North Carolina law.
There is no standard or universal method for handling family businesses in equitable distribution cases, which can make preparing for the final outcome challenging. We are North Carolina family law specialists with extensive experience in complex divorce cases. If you are ready to speak with a Greensboro divorce attorney about how your divorce could affect a family business, call us at 336.272.9122.
** After Brown, the North Carolina legislature amended the Equitable Distribution Act to provide for an interim allocation in the form of a distributive award making the issue discussed in Brownmore difficult and convoluted. Please ask to speak with Ms. Woodruff if you have concerns in your equitable distribution about joining corporations to the equitable distribution action.