MEMORANDUM OPINION* BY v. Record No. 0981-13-4 JUDGE D. ARTHUR KELSEY FEBRUARY 25, 2014 JOANNA CAVALLO

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.

* Pursuant to Code § 17.1-413, this opinion is not designated for publication.

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 of these 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 did the 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 v. Vilseck, 45 Va. App. 581, 588, 612 S.E.2d 746, 749

(2005) (quoting Smith v. Smith, 43 Va. App. 279, 286-87, 597 S.E.2d 250, 254 (2004)). Words and phrases used in contracts “‘are normally given their usual, ordinary, and popular meaning.’”

TravCo Ins. Co. v. Ward, 284 Va. 547, 552, 736 S.E.2d 321, 325 (2012) (quoting City of Chesapeake v. States Self-Insurers Risk Retention Grp., 271 Va. 574, 578, 628 S.E.2d 539, 541

(2006)). “That meaning, of course, derives from the text as well as the context of the agreement.” Cabral v. Cabral, 62 Va. App. 600, 610, 751 S.E.2d 4, 13 (2013).

In this case, the contested provision of the premarital agreement gives wife a contractual right, upon divorce, to receive “50% of the net increase in value of Husband’s separate property.” App. at 12. Husband’s “separate property,” to the extent relevant here, was his

ownership interests in four businesses. Thus, the contractual provision “applies only to the increase in net equity” that husband has in the four businesses at issue. Id. To prevail under this provision, therefore, wife had to prove the actual value of the four businesses as a factual predicate to establishing her 50% share of husband’s equity interests in these businesses.

Courts have recognized various methodologies for appraising the value of a business enterprise. See 2 Brett R. Turner, Equitable Distribution of Property §§ 7:19-7:29, at 711-59 (3d ed. 2005). The most common are the income-capitalization, the market-based, and the asset- based models. The income-capitalization model projects future income and discounts it back to present value using a capitalization rate. See, e.g., Owens v. Owens, 41 Va. App. 844, 850, 589

S.E.2d 488, 491 (2003). The market-based approach determines value based on acquisitions of comparable businesses. See, e.g., Bosserman v. Bosserman, 9 Va. App. ^[1], 8, 384 S.E.2d 104, 109 (1989).

The asset-based model, sometimes called the “total value” method, establishes a business’s value by subtracting the business’s liabilities from the value of its assets. See 2

Turner, supra § 7:22, at 723 (In addition to valuing assets, “the court must also value all of the business’ liabilities.”).5 Variations on the asset-based model take into account differing initial

conditions, such as whether the business is a going-concern, is facing imminent liquidation, or whether its assets can be disaggregated to maximize value. See generally Howell v. Howell, 31

Va. App. 332, 339, 523 S.E.2d 514, 517-18 (2000) (“The parties must rely on accepted methods of valuation, but the particular method of valuing and the precise application of that method to the singular facts of the case must vary with the myriad situations that exist among married couples.”).

In litigation involving contested business valuations, the parties usually present appraisal testimony from valuation experts experienced in the pertinent financial and accounting standards.

In this case, however, wife did not present any expert testimony on the value of the businesses in which husband had an equity interest. Instead, apparently believing she was employing an asset- based valuation model, wife’s counsel merely asked husband’s accountant to read into the record

the “total assets” figures on the first page of each of the businesses’ tax returns. The accountant, however, never opined that the “total assets” figures represented the present net values of these businesses. He was never asked that question. The only question he was asked, and the only one he answered, was whether the “total assets” figures represented the value of the businesses’ assets. The issue before the trial court, however, was not the value of the businesses’ assets but the value of the businesses themselves.

The non sequitur in wife’s argument is that one can value a business by appraising its assets while ignoring its liabilities. Her position at trial rested entirely upon this flawed premise.

Each of the tax returns relied upon by wife make clear the “total assets” figures on the first page

of the returns come directly from the attached Schedule L — which identifies itself as the “Balance Sheets per Books.” See, e.g., App. at 293, 320, 406, 478. Without exception, the various Schedule L balance sheets separately state the assets, liabilities, and capital for each business.

To use but one example, Schedule L accompanying Millennium Enterprises, LLC’s federal tax return for 2009 shows “Total assets” at the end of the year valued at $293,164. Id. at

320. But various liabilities in excess of that figure drive the capital account figure to negative $143,854. In other words, the liabilities exceed the assets by $143,854. “Where a business has more debts than assets, its value under the total value method is zero.” 2 Turner, supra § 7:22, at

724. Yet, under wife’s truncated asset-valuation model, the business that year had a positive value of $293,164. This conceptual error was systemic in wife’s valuation argument for all four businesses.

On appeal, wife defends the trial court’s decision by correctly pointing out that husband “presented no evidence of any other value of the assets to the Court.” Appellee’s Br. at 6

(emphasis omitted). Husband should lose on appeal, wife continues, because he “simply did not present an evidentiary case on this point, the main crux of his appeal.” Id. This contention seizes upon an important principle, one crucial to the structure of the appellate process. But its application to this case produces the opposite result than the one wife seeks.

It is true that an appellant, by seeking relief from an appellate court (usually a reversal of the lower court decision), has the burden of persuasion on appeal. As we have often said, “[a]bsent clear evidence to the contrary in the record, the judgment of a circuit court comes to an

appellate court with a presumption that the law was correctly applied to the facts.” Damon v. York, 54 Va. App. 544, 555, 680 S.E.2d 354, 360 (2009) (internal quotation marks omitted). But

this appellate burden of proof, so to speak, incorporates — but does not supersede — the underlying burdens of proof applicable in the trial court. In cases in which a claimant with the burden of proof prevails at trial, the losing party can succeed on appeal merely by showing that

the winner at trial failed to present a prima facie case. It is wholly unnecessary for the challenger on appeal to show that he could have disproved the claimant’s assertions or, for that matter, that the assertions were in fact untrue.

This structural premise undermines wife’s position on appeal. It is irrelevant that husband did not establish the enhanced value (if any) of his equity interests in the four disputed businesses. He was not seeking a contractual award from the trial court. Because wife claimed she had a contractual right under the premarital agreement to a pecuniary award, she alone had the burden of proving both her right to the award and a reasonable basis for the trial court to calculate the amount of the award. Bowers v. Bowers, 4 Va. App. 610, 617, 359 S.E.2d 546, 550

(1987) (“When the party with the burden of proof on an issue fails for lack of proof, he cannot prevail on that question.”); Morris v. Morris, 3 Va. App. 303, 308, 349 S.E.2d 661, 664 (1986).6

Having established neither ground for an award, wife failed as a matter of law to present a prima facie case. See, e.g., Sunrise Continuing Care, LLC v. Wright, 277 Va. 148, 156-57, 671

S.E.2d 132, 136-37 (2009) (failing to “prov[e] with reasonable certainty the amount of damages

and the cause from which they resulted” did not “establish a prima facie claim for breach of contract”); Stockdale v. Stockdale, 33 Va. App. 179, 184, 532 S.E.2d 332, 335 (2000) (stating that a prima facie case is established by “evidence sufficient as a matter of law to enable a

rational fact finder to find that a particular proposition of fact is true”). To prevail on appeal, husband need only persuade us of this conclusion. He succeeded in doing so.

B. WIFE’S CLAIM FOR ATTORNEY FEES

At trial, wife’s counsel sought 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.” App. at 206.7 The fees requested were incurred