Standards of Value and Personal Goodwill and Double Dipping in Divorce Cases
Personal goodwill is like clover. Once it gets started, it just seems to grow and spread. New cases come out almost monthly, and new issues arise while old ones seem to keep burning. Let’s take a look at some of the issues, new and old, that are simmering in the personal goodwill cauldron.
DIFFERENT STANDARDS OF VALUE
Shakespeare told us, “What’s in a name? That which we call a rose by any other name would smell as sweet.” What we find in standards of value regarding personal goodwill, however, is just the opposite. Shakespeare meant that the essence of a rose never changed. It doesn’t matter what it is called but what it is. The courts, especially in divorce matters, however, have called fair market value and other standards of value almost everything except what they are. This is especially true in the handling of personal goodwill. This has led to great confusion not only in the courts, but often among business valuation experts too. Complicating the matter is the fact that divorce is a state-by-state and sometimes a jurisdiction-by-jurisdiction matter, so a definition or a case result isn’t always what it seems.
Indiana, for example, uses a fair market value (FMV) standard of value in determining the value of a business (see Yoon v. Yoon, 711 N.E.2d 1265 (Ind. 1999)). But in Yoon the court excluded all personal goodwill, including salable personal goodwill. In an FMV valuation, the salable personal goodwill would likely be included in the value of the business enterprise through the assumption of a covenant not to compete (CNTC). However, Yoon excluded both salable and pure (i.e., non-salable) personal goodwill. Dr. Yoon was a sole practitioner plastic surgeon, so there might have been little enterprise goodwill in existence. However, succeeding Indiana cases based on Yoon have not distinguished between salable and non-salable personal goodwill and have excluded both.
Tennessee also adopts an FMV standard for determining the value of a business interest in a divorce proceeding. In a recent case, McCarter v. McCarter, 2014 Tenn. App. LEXIS 778 (Dec. 1, 2014), both the trial court and the appellate court allowed for the exclusion of all personal goodwill as a non-marital asset. The wife’s expert argued for the inclusion of some of the goodwill as being enterprise goodwill, but the courts opined that because McCarter was a sole practitioner (a licensed auctioneer) there could not be any enterprise goodwill. Once again, whether by design or not, the principles of FMV were violated. However, the appellate court did clarify that enterprise goodwill could exist, “where the practitioner has one or more partners or pre-established contracts that could be assumed by another practitioner.” In Mauceri v. Mauceri, 199th District Court, Collin County, Texas, No. 199-50537-2013 the court awarded a value of the business of $292,000, which included the value of salable personal goodwill by virtue of an assumed covenant not to compete. Without a s worth only $141,000. Wife’s expert argued that the FMV of a business would already exclude personal goodwill, so to discount the value of the business for a lack of a CNTC would not be a fair result. The court was thus persuaded and adopted the $292,000 value. Here is a case where the FMV was actually correctly interpreted in a state where previously both salable and non-salable personal goodwill had been excluded. (See Guzman v. Guzman, 827 S.W.2d 445
The state of Virginia presents us with another interesting take on standards of value and personal goodwill. In Howell v. Howell, 31 Va. App. 332, 523 S.E.2d, 514 (2000) the appellate court first emphasized that clearly the standard of value in a Virginia divorce proceeding is intrinsic value. “The standard in equitable distribution, intrinsic value, looks to the value to the parties to the divorce action.” Notwithstanding that statement, Virginia excludes personal goodwill from the marital estate. Once again we have a state professing an SOV which differs from the reality of its application.
IMPORTANCE OF LOCAL CASE LAW
There are many more examples in other states of the application of determining the value of a business interest in a divorce differing from the espoused SOV. That is why, if you are in a jurisdiction where you are not familiar with the valuation procedures, you should always consult with the attorney to obtain clarification. It also is helpful to consult with another disinterested valuation expert familiar with the jurisdiction to confirm the local interpretation. Some years ago there was an effort underway to develop a national SOV for divorce valuation. Obviously, that was never going to happen. Our system of independent state governments makes a uniform system impossible. That is not necessarily a bad thing, but it does require the valuation expert to recognize that a case in one state might not be at all applicable in another state.
The basic principles of valuation are applicable, but there are these differences, highlighted in the personal goodwill situation, that make generalization impractical. Regardless whether, as a valuation analyst, you believe something to be inequitable or “wrong” (i.e., as it relates to general valuation principles), the valuation analyst must recognize what is going on in the local jurisdiction. I have been criticized for saying “when in Rome do as the Romans do,” but it is truly applicable, in my opinion, in divorce valuation. Failure to follow the local case law can result in a fatal result for your client. However, there is nothing wrong with the valuation analyst providing the court with two conclusions of value, one comporting with prior case law and another advocating the new position the valuation analyst is promoting.
Having said that, it does not mean that you cannot lobby the court for a new approach in a given jurisdiction. That is what happened in Mauceri in Texas and in McReath1 in Wisconsin. In both of these cases, the prior case law excluded salable personal goodwill from the marital estate.
This is an issue that, like so many in the divorce arena, starts with a whimper and grows into a full-blown storm. Double dipping arises in states where there is both equitable distribution of marital property and alimony, support, or maintenance payments to one of the spouses. The concept of double dipping seems to be mostly a case-law concept. Its avowed purpose seems to be to fix a perceived inequity that the law has created. In Ohio, for example, the courts perceived a statutory purpose that property considered in the distribution of the marital property (estate) not also be included in the determination of support payments to the non- business owner spouse.
In Heller v. Heller,2 the Ohio Supreme Court affirmed the principles outlined in some prior Ohio cases of “double dipping.” In essence, double dipping— as explained in Heller— espouses that, “[t]rial courts may treat a spouse’s future business profits either as a marital asset subject to division, or as a stream of income for spousal support purposes, but not both.” In Bohme,3 “the Tenth District discern[ed] a statutory mandate to keep marital property division and spousal support separate, and to consider the potential ‘double dip’ when ruling upon these issues in cases where one spouse’s ownership interest in a going concern is discounted to present value and divided, and where excess earnings arising from that ownership interest will constitute part of that spouse’s stream of income into the future.”
Even though the Appellate Court in Bohme found no double dip with reasoning that resulted in an equitable distribution of the marital assets (in their view), it did not change the basic concept as explained above, i.e., when the value of a business included in the marital assets includes a future stream of income– entity goodwill– the support payments cannot include such future income in its determination.
So what happens to personal goodwill in the double-dipping concept? If the personal goodwill is not included in the value of a business in determining the marital estate, then it is theoretically at least fair game in determining the support payments. In a state where personal goodwill is included in the value of a business for determining the marital estate, then the future earnings from that personal goodwill cannot, in theory, be included in the support payments.
As Bohme demonstrates, however, the double-dip concept is fluid as are many concepts in divorce valuation. It once again show that divorce proceedings are essentially equity proceedings, and the equity is as determined by the judge.
1 McReath v. McReath, 2010, WL 2943198 (Wis. App.) (July 29, 2010) ; Supreme Court July 12, 2011.
2 Heller v. Heller, 195 Ohio App.3d 541, 2011-Ohio-5364.
3 Bohme v. Bohme, 2015, Ohio App. LEXIS 325 (Jan. 30, 2015).
Contact: L. Gail Markham, CPA/ABV/CFF, CFE, CFP® Certified Family Civil Mediator Litigation, Forensic Accounting and Mediation Services Partner
By Scott R. Saltzman, CPA, CVA, ASA, MAFF Saltzman, LLC, Denver, CO
Building Value, Volume XIV, Issue II