MICHAEL J. GOODWIN v. MARY GOODWIN
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RENDERED: May 19, 2000; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NOS.
1998-CA-002123-MR & 1998-CA-002159-MR
MICHAEL J. GOODWIN
APPELLANT/CROSS-APPELLEE
APPEALS FROM BOYD CIRCUIT COURT
HONORABLE C. DAVID HAGERMAN, JUDGE
ACTION NO. 1996-CI-01082
v.
MARY GOODWIN
APPELLEE/CROSS-APPELLANT
OPINION
AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
** ** ** ** **
BEFORE:
GUIDUGLI, JOHNSON, AND KNOPF, JUDGES.
KNOPF, JUDGE:
Michael J. Goodwin appeals from the judgment
granting his petition for divorce.
He objects to those portions
of the judgment that value the marital estate--particularly
Michael’s medical practice--and order him to pay maintenance.
Michael contends that the trial court fixed the wrong date for
valuating the marital estate; that it abused its discretion by
including business goodwill and post-decree earnings in the
estate; and that it gave too little weight in its maintenance
determination to the fact that the appellee, Mary Goodwin, is
capable of earning substantial income, not only from her share of
the marital property, but also from employment as a physician in
her own right.
Mary has also appealed.
She contends that the
trial court incorrectly excluded from the marital estate a
portion of the medical practice’s accounts receivable.
For the
following reasons, we agree with Michael that the valuation date
was incorrectly determined, but otherwise we reject these
allegations of error.
Accordingly we affirm in part and reverse
in part the July 22, 1998, judgment of the Boyd Circuit Court.
The parties married in 1980, while both of them were in
medical school.
They saw one another through the rigors of
residency, endured the early years of repaying educational loans
and searching for careers, and then, in 1992, they settled with
their four children in the Ashland, Kentucky, area where Michael
had been recruited to open a practice.
Michael quickly
established himself as an orthopedic surgeon, while Mary, a
pediatrician, withdrew from practice in order to devote more of
her time to the couple’s young children and to managing their
household.
She could well afford to do this, since already by
the end of 1993 Michael’s practice was earning in excess of a
million dollars annually.
The family occupied an $800,000.00
residence and enjoyed other amenities attendant upon Michael and
Mary’s success.
Despite this success, the parties developed differences
which led to their separation in September 1996. Soon thereafter
Michael petitioned for divorce.
An interlocutory decree of
dissolution was entered on February 7, 1997, pursuant to which,
among other things, the parties were granted joint custody of
their children.
The children were to reside with Mary in the
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marital home.
Michael was granted liberal visitation and was
ordered to pay child support in the amount of $6,300.00 per
month.
He was also ordered to make mortgage payments for Mary
and to provide her with maintenance pending final settlement of
the marital estate.
Upon Michael’s motion, the dissolution was
made final by order entered January 28, 1998.
By the same order
the trial court also determined--over Michael’s objection--that
for settlement purposes the estate was to be deemed to have
continued until that day, January 28, 1998.
On May 12, 1998, the
trial court conducted a settlement hearing.
Principally at
issue, as mentioned above, were Mary’s entitlement to maintenance
and the value of Michael’s practice.
The trial court’s
resolution of those issues, by judgment entered July 22, 1998,
has given rise to these appeals.
As the parties acknowledge, our standard of review in
domestic relations cases is generally a deferential one.
Statutory procedures must be observed, and statutory standards
must inform and guide the trial court’s decisions.
But within
those constraints property valuation matters and maintenance
determinations are within the sound discretion of the trial
court.
“In such matters, unless absolute abuse is shown, the
appellate court must maintain confidence in the trial court and
not disturb the findings of the trial judge.”
Clark v. Clark,
Ky., 782 S.W.2d 56, 60 (1990).
With this standard in mind, we turn to the issues on
appeal.
A trial court confronted with the need to value a
marital estate must first determine at what point in time the
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estate ended.
We shall begin with the same question.
Michael
contends that the trial court valued the marital estate as of the
wrong closing date and thus treated as belonging to the estate
earnings of more than $400,000.00 that should have been
characterized as his non-marital property.
As noted above,
Michael initiated this action on November 6, 1996.
An
interlocutory decree of dissolution was entered on February 7,
1997.
Final judgment was entered July 22, 1998.
In the interim,
a dispute arose concerning the effect of the interlocutory decree
on the marital estate.
Michael argued that the date of the
interlocutory decree marked the close of the estate and the
valuation date for estate property, but Mary maintained that the
estate continued to exist and to accrue property until entry of a
final judgment.
Somewhat reluctantly the trial court agreed with
Mary, whereupon Michael moved that the dissolution decree be made
final.
An order to that effect was entered on January 28, 1998,
and that date was designated as the close of the estate.
In
anticipation of this appeal and in light of the possibility that
an earlier date should have been adopted, the trial court
requested the parties to prepare schedules valuing the estate
alternatively as of February 7, 1997, and January 27, 1998.1
Michael now duly contends that the date of the
interlocutory decree marked the close of the marital estate.
He
relies on two cases, Clark v. Clark, Ky. App., 782 S.W.2d 56
(1990) and Stallings v. Stallings, Ky., 606 S.W.2d 163 (1980) in
1
These are the dates respectively on which the interlocutory decree was executed and on
which the order making that decree final was executed. Those orders were not entered until the
dates indicated in the opinion.
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which, without comment, the appellate courts seem to have
condoned that procedure.
Mary, on the other hand, cites Putnam
v. Fanning, Ky., 495 S.W.2d 175 (1973) wherein the Court ruled
that a contested dissolution decree did not become effective
until entry of a judgment made final and appealable pursuant to
CR 54.
Confronted with this dilemma, the trial court in this
case acknowledged the practicality of the procedure advocated by
Michael and conceded that such a procedure may well have been
employed in Clark and Stallings, but ruled that, absent an
express holding to that effect, Putnam was controlling.
Although we certainly agree with the trial court that
CR 54 applies to dissolution decrees no less than to any other
sort of judgment, we are nonetheless persuaded that it has read
Putnam too broadly.
That case concerned a contested dissolution.
Here, as in most other divorce cases, the dissolution itself is
not contested.
Rather, the parties have agreed to dissolve their
marriage, but require the court’s assistance in wrapping up their
estate.
Such assistance is governed largely by KRS 430.190.
That statute provides in pertinent part that
all property acquired by either spouse after
the marriage and before a decree of legal
separation is presumed to be marital
property, [unless] [t]he presumption . . . is
overcome by a showing that the property was
acquired by a method listed in subsection (2)
of this section.
One of the exceptions to marital property listed in
subsection (2) is “(d) Property excluded by valid agreement of
the parties.”
An uncontested dissolution decree is, we believe,
a valid agreement by the parties to close the marital estate and
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to exclude from it property thenceforth acquired.
Were it
otherwise, the settlement of marital estates would be unduly
complicated, as in this case, by a needless flux and
uncertainty.
Although it is perhaps good practice to have the
dissolution decree made final, in uncontested dissolution cases
that step is not required in order to close the marital estate
and to fix a date for the commencement of support obligations.
The date so fixed by entry of the dissolution decree is
presumptive and can be modified by valid agreement of the
parties.2
In this case, by February 4, 1997, the date of the
interlocutory dissolution decree, the parties had separated and
had begun fashioning independent lives.
and maintenance orders had taken effect.
Temporary child-support
Under KRS 403.190,
therefore, the marital estate was closed by the uncontested
decree of dissolution and was subject to valuation as of that
date.
The trial court erred by concluding otherwise, but thanks
to its anticipation of this possible result, on remand it need
only modify its judgment in light of the alternative property
evaluations it has found.
Having determined the duration of the marital estate,
we next consider its valuation.
Michael maintains that the trial
court erred in its valuation of his medical practice, Michael J.
Goodwin, M.D., P.S.C..
The court determined that, as of the date
2
In addition to Clark and Stallings, see Turley v. Turley, Ky. App., 562 S.W.2d 665
(1978) and Daniels v. Daniels, Ky. App., 726 S.W.2d 705 (1986) for examples of cases in which
a similar procedure was employed.
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of the dissolution (January 1997), the practice was worth
$1,037,737.00, itemized as follows:
shareholders’ equity
$127,635.003
accounts receivable
$392,437.00
income tax liability
($40,773.00), and
goodwill
$558,438.00.4
Michael quarrels only with the inclusion of a value for
goodwill.
The rest--the equity, the accounts receivable, and the
tax liability (the “book value” of $479,299.00)--is, Michael
contends, the full extent of the practice’s worth.
As Michael acknowledges, this Court has recognized
goodwill as a type of property that is subject to division in
marital dissolution actions.
Clark v. Clark, supra; Heller v.
Heller, Ky. App., 672 S.W.2d 945 (1984).
Although the concept of
goodwill has resisted precise definition, the general idea is
straightforward enough.
Businesses are often worth more than
their tangible assets alone would suggest.
To explain this
anomaly, economists and accountants have posited the existence of
intangible assets such as a firm’s positive reputation, its
accrued experience as a going concern, its favorable contractual
relationships with suppliers or potential competitors.
“Goodwill” is one of the terms employed in this context to
signify a firm’s value in excess of “book value.”
3
Apparently Michael is the sole shareholder.
4
We infer this amount for goodwill from the other items listed. The trial court, however,
derived the goodwill from the estimated cash-flow deficit between 1991 and 1994 of
$635,300.00. The court’s calculations do not appear in the record.
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That is the situation here.
The trial court found that
book value did not reflect the true worth of Michael’s practice
and that goodwill thus existed in a particular amount.
contests both aspects of this ruling.
Michael
His practice does not
contain any valuable goodwill, he argues; and if it be deemed to
do so, the testimony the trial court relied upon to fix the
amount was not reliable.
We are persuaded by neither of these
contentions.
Michael’s practice generates net revenues in excess of
$1,000,000.00 per year from tangible assets of approximately
$100,000.00.
If those revenues are capitalized at 40%, a figure
fair to Michael, then he would have total assets of
$2,500,000.00, of which $2,400,000.00 would be intangible.
Alternatively, the record also indicates that at the relevant
time a typical net income for orthopedic surgeons was $450,000.00
per year.
If we take from Michael’s million dollar revenue a
generous return to his tangible assets, say $20,000.00, and this
typical net return to the professional of $450,000.00, then we
are left with $530,000.00 as the return to intangibles.
Capitalizing this amount at 40% results in $1,325,000.00 as the
value of those assets.
As Mary’s expert noted, these are
standard techniques for estimating the value of a business and
the amount of the intangible assets therein.
Clark v. Clark,
supra; Heller v. Heller, supra; Berger v. Berger, 648 N.E. 2d 378
(Ind. 1995); In re Marriage of Hall, 692 P. 2d 175 (Wash. 1984).
The trial court did not err, therefore, by determining that
Michael’s practice contains asset value beyond its book value.
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Michael argues to the contrary that his large revenues
derive simply from his personal efforts and skills and not from
any supposed intangible asset.
The trial court’s ruling to the
contrary thus has the effect, Michael contends, of giving Mary an
interest in his future, post-marital earnings, a result which is
contrary to KRS 403.190.
This argument raises a genuine concern,
one that has led some of our sister states not to recognize
business goodwill as an element of marital property or to limit
that recognition strictly.
Strauss v. Strauss, 647 A.2d 818 (Md.
1994); Powell v. Powell, 648 P.2d 218 (Kan. 1982); Holbrook v.
Holbrook, 309 N.W.2d 343 (Wis. App. 1981).
As noted, however, under Heller v. Heller, supra, and
Clark v. Clark, supra, the law in Kentucky, at least as far as
this Court is concerned, is otherwise.
Those cases expressly
distinguish goodwill from both future earnings and professional
degrees and licenses.
To the extent that the trial court
determined that Michael’s practice has a value beyond its book
value, therefore, that excess value was subject to division as
marital property.
The record, furthermore, includes substantial evidence
in support of the trial court’s application of this rule.
There
was competent testimony that a portion of the medical practice’s
mature income is the result of institutional factors--supplier
and referral networks, for example, patient acceptance, billing
expertise, and lack of competition--that were either established
during the marriage by the efforts of the parties or are the
result of the practice’s (and the marriage’s) initial willingness
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to locate in the chosen area.
In light of these factors, the
standard evaluation techniques testified to by Mary’s expert
readily permit the conclusion that the practice’s tangible
assets, even in conjunction with Michael’s skill and dedication,
do not account completely for the practice’s unusually high
earnings.
The trial court did not clearly err, therefore, by
finding that the practice includes an intangible asset or cluster
of assets characterizable as goodwill and subject to disposition
as marital property.
Nor did the court err in determining the amount of that
goodwill.
It relied for that purpose on yet a third technique
for estimating such amounts as presented by Mary’s expert
witness.
This third method, called the replacement method,
purports to estimate the amount above book value a willing buyer
would pay for an established practice such as Michael’s in lieu
of starting his own practice from scratch.
This method is based
on the fact that businesses typically require a period of years
to begin generating the revenues they are capable of generating,
and so the opportunity to bypass those years of uncertainty and
lesser earnings has a value.
By comparing Michael’s net cash
flow during the practices’s first three years with the cash flow
during an average mature year, Mary’s expert witness estimated
the value of these “lost earnings” to be $635,300.00.
Although
apparently not as common a technique for estimating goodwill as
the two techniques described above, there was sufficient proof of
this method’s recognition among accountants and sufficient
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explanation of its underlying rationale to justify the trial
court’s reliance thereon.
Clark v. Clark, supra.
Michael complains that Mary’s expert misapplied this
replacement method by failing to account properly for the medical
practice’s accounts receivable; indeed, Mary’s expert
acknowledged that his application of the method deliberately
deviated in regard to accounts receivable from the method of a
chief author in the field.
Michael has failed to show, however,
that the deviation led to a prejudicially erroneous result.
On
the contrary, this method resulted in a goodwill value far
smaller than any of the other valuation techniques presented at
the hearing.
Absent such a showing of prejudicial error, the
deviation goes only to the weight of the expert’s testimony,
which was for the trial court to determine.
Clark v. Clark,
supra; cf. Sharp v. Sharp, 449 S.E.2d 39, (N.C. App. 1994)
(observing that the mere assertion that an opposing expert “did
it wrong” does not thereby render the expert’s testimony
inadmissible or immaterial).
Mary raises another valuation issue.
In calculating
the book value of Michael’s medical practice, the trial court
deducted approximately $320,000.00 as income tax due to be paid
on accounts receivable.
Mary has cross-appealed on the ground
that this deduction was erroneous.
She argues that, because the
practice is not being liquidated, its assets, including its
accounts receivable, are not to be adjusted for tax purposes but
are to be given 100% of their value.
In support of this argument
Mary cites Stern v. Stern, 331 A. 2d 257 (N.J. 1975), in which
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the New Jersey Supreme Court disallowed a similar deduction from
a partnership’s accounts receivable in anticipation of the income
taxes the divorcing partner would eventually pay.
The value of the [accounts receivable] is in
no way diminished by the fact that defendant
may thereafter be called upon to pay an
income tax resulting in substantial part from
his receipt of income from the partnership. .
.
Id. at 261.
The trial court rejected this argument and explained
that the income tax liability in this case was sufficiently
definite to permit accounting for it as a deduction from
Michael’s practice.
The gravamen of this issue, as we understand it, is
whether, at the valuation date, there was a marital liability for
income taxes.
We agree with the trial court that there was, that
the tax liability, as calculated by the parties, was certain
enough at the date of valuation to be included within the marital
estate notwithstanding the fact that technically the liability
had been deferred.
That liability, therefore, was then correctly
set off against the medical practice’s accounts receivable.
result is not inconsistent with Stern v. Stern, supra.
This
That
decision is premised upon the observation that the partnership’s
assets were not to be set off against the divorcing partner’s
individual and uncertain future liabilities.
Those liabilities,
the court noted, could be recognized for the sake of the divorce
in other, more appropriate ways.
Here, the tax liability was
presently fixed and certain; there was no more appropriate way to
account for it than simply to deduct it from the receivables.
The trial court did not err, therefore, by doing so.
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Finally, we come to the question of maintenance.
Under
this state’s statutory domestic relations scheme, once the
property division has been effected and child custody and support
provided for, the trial court considers maintenance with an eye
to ensuring the parties’ successful transition to independence
and to salvaging to the extent possible the reasonable
expectations engendered by the marriage.
In this case, the trial
court awarded maintenance to Mary of $7,500.00 for forty-eight
months and $2,040.00 for an additional forty-eight months.
Michael contends that Mary is not entitled to maintenance at all.
As noted, discussion of this issue begins with KRS
403.200, which instructs the trial court to determine first
whether an award of maintenance is reasonably necessary.
Only if
the party seeking maintenance can demonstrate a reasonable need
for it, must the court then determine the award’s appropriate
amount and duration.
In the words of the statute,
the court may grant a maintenance order for
either spouse only if it finds that the
spouse seeking maintenance:
(a) Lacks sufficient property, including
marital property apportioned to him, to
provide for his reasonable needs; and
(b) Is unable to support himself through
appropriate employment or is the custodian of
a child whose condition or circumstances make
it appropriate that the custodian not be
required to seek employment outside the home.
Michael, noting that Mary has been apportioned liquid
assets of almost a million dollars plus equity in the marital
residence of approximately $200,000.00, jewelry, automobiles, and
child-support of $6,300.00 per month, argues that Mary has
sufficient property to meet even her own estimate of her
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reasonable expenses.
In addition to which, he insists, Mary
could, in a matter of months, renew her professional credentials
and resume earning an income easily large enough to support
herself.
The trial court’s maintenance award was, then,
according to Michael, an abuse of discretion.
We disagree.
As substantial as Mary’s resources are, they are to be
weighed here against the reasonable expectations engendered by
the marriage.
Lovett v. Lovett, Ky., 688 S.W.2d 329 (1985);
Casper v. Casper, Ky., 510 S.W.2d 253 (1974); McGowan v. McGowan,
Ky. App., 663 S.W.2d 219 (1983).
Those expectations include far
more than the capacity to meet expenses.
The trial court did not
abuse its discretion by determining that Mary could reasonably
expect to postpone her return to full-time employment until her
children need less of her attention and that, in the meantime,
she could reasonably expect Michael’s assistance in preserving
the opportunities, including some of the investment
opportunities, she enjoyed prior to the divorce.
Counter to this conclusion, Michael insists that the
trial court failed to support its maintenance award with
sufficient findings of fact as required by CR 52.
Michael’s
assertion, however, begs the question it is meant to answer.
If
we assume, as Michael would have us do, that an award of
maintenance is inappropriate unless it be shown that Mary could
not meet her expenses without such an award, then, yes, the trial
court’s findings are wanting.
The trial court’s findings do not
show that, without maintenance, Mary will be unable to afford her
reasonable expenses.
As we have explained, however, Mary’s
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expenses are not the measure of “reasonable need” in this unusual
case.
The measure, rather, is Mary’s reasonable expectation of
sharing in the wealth her efforts have helped to create.
Against
this standard, the trial court’s findings, summarized above, and
its conclusions based thereon fully satisfy KRS 403.200 and CR
52.
Similarly inapt factually are the cases Michael has
brought to our attention.
In Richie v. Richie, Ky. App., 596
S.W.2d 32 (1980), for example, this Court reversed an open-ended
award of maintenance because the record indicated that the
recipient spouse should have expected to return eventually to
full self-support.
Mary’s award, of course, is not open ended.
Rather, it ends in eight years, when the children will have
attained their majorities, and Mary can be expected to devote
full attention to providing for herself.
To the extent that
Richie may stand for a more general limitation on the right to
maintenance--say, that ordinarily maintenance should not
substitute for support the recipient spouse could, with
reasonable effort, provide for her- or himself--we do not quarrel
with the general rule.
This general limitation on the right to
maintenance, however, is not applicable in these circumstances,
where the marital estate provides for far more than what is
ordinarily understood as the divorcing couple’s “reasonable
needs.”
Sayre v. Sayre, Ky. App., 675 S.W.2d 647 (1984) and
Inman v. Inman, Ky. App., 578 S.W.2d 266 (1979) are similarly
distinguishable.
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In sum, except for its decision to leave open the
marital estate until the dissolution decree had been made final
and appealable, the trial court’s handling of this difficult case
comports well with both the letter and the spirit of KRS Chapter
403.
It divided fairly this gifted couple’s marital property and
ensured through a reasonable award of maintenance that each party
will retain the ability to provide abundantly for their children,
both now and in the future, and will likewise retain the
opportunity to engage at a high level in their chosen careers.
For these and the above reasons, we affirm the July 22, 1998,
judgment of Boyd Circuit Court in all respects except its
adoption of January 27, 1998, as the closing date of the marital
estate.
The closing date should have been February 7, 1997, the
day the uncontested dissolution decree was entered.
Accordingly,
we reverse the judgment to that extent and remand for an
appropriate adjustment of findings, conclusions, and awards.
ALL CONCUR.
BRIEFS FOR APPELLANT/CROSSAPPELLEE:
BRIEFS FOR APPELLEE/CROSSAPPELLANT:
Gordon J. Dill
Ashland, Kentucky
Robert L. Woolery, II
McKenzie, Woolery, Emrick &
Webb, P.S.C.
Ashland, Kentucky
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