MEMO

To: Ms. Christina Jo Bertuca

From: Student #1

Date: May 2, 2008

Re: Bertuca v. Bertuca, No. M2006-00852-COA-R3-CV, 2007 WL 3379668 (Tenn. Ct. App. Nov. 17, 2007). Click here for decision.

Background

Christina Jo Bertuca (“Ms. Bertuca”) was granted a divorce from her husband Theodore Bertuca (“Mr. Bertuca”) by a Tennessee court on June 23, 2005. At that time Mr. Bertuca held a 90 percent ownership stake in Capital Food Services (“CFS”), a Tennessee general partnership that owned and operated seven McDonald’s franchises in Wilson County, Tennessee. After hearing testimony from three valuation experts the trial court concluded that the value of CFS was $1 million. Therefore, the value of Ted’s was $900,000, and under the laws of Tennessee Christina Jo was entitled to half that amount, or $450,000. The court ordered Mr. Bertuca to pay this sum in 84 equal monthly installments without interest. The parties cross-appealed.

The Court of Appeals, reviewing the trial court valuations de novo, admitted that it was “uncertain” how the trail court arrived at its conclusion that CFS was worth $1 million. Thus, the appellate court made its own determination of the value of Mr. Bertuca’s interest using the capitalization of income method, and concluded that Mr. Bertuca’s interest in CFS had a value of $702,768.

Based on its finding, the appellate court affirmed the trial court’s judgment but adjusted the value of Ms. Bertuca’s share to $351,345.50 (one-half of the adjusted value of Mr. Bertuca’s interest). The court ordered Mr. Bertuca to pay Ms. Bertuca her share in 84 equal monthly installments without interest. Relying on Price v. Price, 472 S.W.2d 732 (Tenn. 1971), the court declined to grant post-judgment interest on the theory that a party is not entitled to interest on a judgment until the party becomes entitled to use the money, which, according to the trial court’s decree, would not occur until each installment becomes due. However, as explained below, we believe the appellate court erred by failing to award post-judgment interest to Ms. Bertuca.

Issue Presented: Post-Judgment Interest

a.  Generally

Ms. Bertuca is entitled to post-judgment interest for two reasons: (1) to account for the time value of money, and (2) to compensate her, as a creditor of CFS, for the use of her money. Post-judgment interest is a question of law, which is reviewed de novo. Myint v. Allstate Ins. Co., 970 S.W.2d 920, 924 (Tenn.1998).

Tennessee law requires interest to be paid on every judgment at a rate of 10 percent per year from the time of the judgment. Tenn. Code Ann. §47-14-121 to -122 (West 2007). Furthermore, despite the trial court’s reliance on Price, payment of interest on an award payable in installments is contemplated by statute. See Tenn. Code Ann. §29-30-312. This provision authorizes, in the case of tort claims against the state, the payment of post-judgment interest on the unpaid balance at the rate of 6 percent per year when the award is payable in installments.

b.  Time Value of Money

Current dollars are worth more than future dollars. As a result, at the end of seven years the money that Ms. Bertuca will have received pursuant to the appellate court’s order will be worth less than $351,345.50. Exactly how much less is a function of the rate at which we discount future cash flows back to today’s dollars. This discount rate varies depending on various risk factors, including inflation, opportunity costs, the risk of non-payment, and others.

For example, assuming a conservative discount rate of 3.1 percent, the rate of inflation, the present value of Ms. Bertuca’s award is only $315,473.89. Assuming a discount rate of 5.2 percent, the current prime rate, the present value of Ms. Bertuca’s award is only $293,487.16. Assuming a discount rate of 11.3 percent, the average return of the S&P 500 index over the last three years, the present value of Ms. Bertuca’s award is only $242,045.37.

The court can avoid this time value of money problem by ordering a lump sum payment to Ms. Bertuca in the amount of $351,345.50. However, the court’s reason for structuring the settlement was to avoid harming Mr. Bertuca’s business. Such a large lump sum outflow could threaten the viability of the business, and thus Mr. Bertuca’s livelihood. Therefore, because a lump sum payment is not feasible, the court should order that Mr. Bertuca pay Ms. Bertuca in 84 equal monthly installments of no less than $4,658.28 each. This payment amount assumes the most conservative discount rate—3.1 percent, the rate of inflation. However, a more reasonable discount rate would be 10 percent because CFS is a small business operation with no stable earnings history and little management depth; plus, Mr. Bertuca’s interest has low liquidity. Hence, the risk of non-payment is a real concern. Based on this 10 percent discount rate, Ms. Bertuca’s monthly payment amount should be $5,832.75. Note that 10 percent is the interest rate authorized by statute. See Tenn. Code Ann. §47-14-121.

3.10% / 10%
FV of award in 7 years / $351,345.50 / $351,345.50
No. of payments / 84 / 84
Monthly payment amt / $4,658.29 / $5,832.75

c.  Compensation

Furthermore, Ms. Bertuca is entitled to post-judgment interest as compensation for the use of her money. The structured nature of this settlement grants CFS a $351,345.50 interest-free loan. Mr. Bertuca should pay—in the form of post-judgment interest—for the privilege of using Ms. Bertuca’s money to run CFS for the next seven years. Ms. Bertuca is due a return on her investment, just as any corporate bond holder would be. Based on the nature of the risk, a holder of CFS corporate debt—which is what Ms. Bertuca would become under the current order—could reasonably expect to receive a 10 percent return on her investment. As noted above, CFS is a small business operation with no stable earnings history and no management depth. Furthermore, as also noted above, an investment in CFS is not highly liquid as McDonald’s Corporation places strict requirements on the sale and financing of its franchises. Assuming a 10 percent return on her seven-year corporate bond (i.e., CFS pays 10 percent interest on its loan), Ms. Bertuca should receive $5,832.75 per month for the next seven years. Note that this amount is the same as the figure calculated in section (b) above.

Value
Loan amount / $351,346
Annual interest rate / 10.00%
Payments per year / 12
Number of years / 7
Total number of payments / 84
Monthly Payment / $5,832.75

d.  Defendant’s Argument

The defendant’s primary argument will concern setting the rate. He will argue that 10 percent is an inflated assessment of the risks associated with the business. However, for the reasons stated above we believe 10 percent is a reasonable rate—not only because of the nature of the risk but also because it is the rate authorized by statute. See Tenn. Code Ann. §47-14-121.

The defendant also may argue that the award is not a loan at all because the award is based on the projected future earnings of the business. On this theory Ms. Bertuca would not be entitled to anything until the business makes a profit. However, such a theory misconstrues the nature of the award. This judgment is not an equity investment—whose return would be tied directly to the earnings of the business. Instead, this is a debt owed to Ms. Bertuca, and under Tennessee law as well as the most fundamental principles of finance, she is entitled to repayment of the principal with interest.

Conclusion

For the reasons stated above, we recommend appealing the appellate court decision.

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