PATRICIA P. HESS v. RALPH C. HESS, III
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RENDERED: March 11, 2005; 2:00 p.m.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2003-CA-002195-MR
AND
NO. 2003-CA-002221-MR
PATRICIA P. HESS
v.
APPELLANT/CROSS-APPELLEE
APPEAL AND CROSS-APPEAL FROM BOYD CIRCUIT COURT
HONORABLE C. DAVID HAGERMAN, JUDGE
ACTION NO. 02-CI-00387
RALPH C. HESS, III
APPELLEE/CROSS-APPELLANT
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
JUDGE.1
COMBS, CHIEF JUDGE; MINTON, JUDGE; MILLER, SENIOR
MILLER, SENIOR JUDGE:
This is an appeal and cross-appeal
arising from a decree of dissolution of the marriage of
Appellant/Cross-Appellee Patricia P. Hess (Patricia) and
Appellee/Cross-Appellant Ralph C. Hess, III (Ralph), entered by
the Boyd Circuit Court on August 2, 2002.
Specifically, the
parties appeal from two Orders of the Boyd Circuit Court: the
1
Senior Judge John D. Miller sitting as Special Judge by assignment of the
Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
Kentucky Revised Statutes 21.580.
first, entered September 3, 2003, adopting the July 14, 2003,
report and recommendations of the Domestic Relations
Commissioner (DRC) and ruling on all issues pertaining to the
distribution of marital assets and debts; and the second,
entered September 19, 2003, overruling Patricia’s Kentucky Rule
of Civil Procedure (CR) 59.05 motion to alter, amend or vacate.
We review questions of fact under the clearly
erroneous standard of CR 52.01 and questions of law de novo.
As
we conclude that the findings of the circuit court are supported
by substantial evidence and are not an abuse of discretion, we
affirm the circuit court.
The parties were married on December 28, 1975, and had
three children during the marriage:
Jennifer, born in 1978;
Chip, born in 1980; and Nicki, born in 1985.
Due to Ralph’s
education and training, the parties moved several times during
the first ten years of their marriage.
During this time Ralph
attended graduate and medical school, completed his internship,
opened a private medical practice, and completed a residency in
emergency medicine.
Also during this time, in addition to
raising the parties’ children, Patricia worked as a licensed
practical nurse (LPN), worked in Ralph’s medical office fulltime and part-time, obtained her real estate license, and
dabbled in MaryKay Cosmetics and Prepaid Legal Plans.
The
parties’ last move was to Ashland in 1992, where Ralph accepted
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a position as an emergency room physician with Ashland Emergency
Medical Associates (AEMA) and where he remains employed.
He
became Board Certified in Emergency Medicine in 1996.
On April 16, 2002, Ralph filed a petition for
dissolution of marriage.
On August 2, 2002, the Boyd Circuit
Court entered a final decree of dissolution of marriage with all
other issues reserved.
On July 14, 2003, following a hearing on
the contested issues, the DRC filed its report and
recommendations.
Both parties filed exceptions.
On September
3, 2003, the circuit court entered its order, sustaining certain
of Ralph’s exceptions, overruling all others, and accepting the
DRC’s report and recommendations as follows:
1) With regard to the Beaver, West Virginia,
condominium serving as residence for the
parties’ daughter while attending college
(valued at $65,000.00 with a mortgage of
$60,000.00), consistent with the parties’
proposals, that it be sold and the proceeds
evenly split;
2) With regard to the former marital
residence (valued at $215,000.00 with a
mortgage of $214,000.00), Ralph proposed it
be sold but consistent with Patricia’s
proposal it was awarded to Ralph along with
the debt;
3) With regard to the vehicles:
a) In accord with Patricia’s proposal,
that Patricia have ownership, possession,
and financial responsibility for the costs
of ownership of the 2000 Jeep Grand Cherokee
which she drives, with the exception that
Ralph was responsible for the remaining debt
approximating $13,460.00;
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b) In accord with Patricia’s proposal,
that Ralph have ownership, possession and
responsibility of all costs of the 1995
Toyota Tacoma pickup which he drives (valued
at $5,000.00 with no debt);
c) In accord with Patricia’s proposal,
that Ralph have ownership and responsibility
for the three remaining vehicles driven by
the parties’ children (two 1998 Jeep Grand
Cherokees and a 1998/1999 Chevrolet Tahoe,
all with debt corresponding to their value,
and each with debt of $10,000.00 to
$11,000.00);
4) With regard to the furniture in Ralph’s
apartment and condominium (agreed value
totaling $3,000.00), that Ralph takes
ownership and possession;
5) With regard to the furniture in the
former marital residence (agreed value of
$20,000), and her account with Community
Trust Bank (valued at $1,000.00), that
Patricia take ownership and possession;
6) With regard to Ralph’s Fifth Third Bank
checking account (valued at $7,000.00),
Ralph’s life insurance policies (the only
one with cash surrender valued at
$14,161.20), and Ralph’s interest in AEMA
(valued at $125,000.00, including $48,000.00
attributable to goodwill), that Ralph take
ownership and possession but Ralph to pay
Patricia $73,000.00 representing one-half
compensation for her interests in the Fifth
Third Bank Account, the cash value in the
life insurance policy and AEMA;
7) With regard to Ralph’s retirement account
and the 401K in Ralph’s name, both managed
by Merrill Lynch (valued at $172,545.46 and
$53,796.62), and the 401K at Fifth Third
Bank (valued between $7,300.00 and
$7,400.00), Patricia to receive one-half
(approximately $116,846.04);
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8) With regard to the credit card debt of
$62,000.00, Ralph to be responsible for all
of it;
9) With regard to maintenance, Ralph to pay
Patricia the sum of $4,000.00 per month
until further orders of the court;
10) With regard to expert witness fees,
Ralph to be responsible for Patricia’s
expert witness fees and $17,000.00 of
Patricia’s attorney fees;
11) With regard to the costs of the hearing,
Ralph to be responsible for payment; and
12) With regard to Ralph’s items received
from his family and his tools, that Ralph
takes possession.
On September 19, 2003, Patricia’s CR 59.05 motion was overruled.
Patricia filed a notice of appeal on October 15, 2003, and Ralph
filed a notice of cross-appeal on October 20, 2003.
Before us, the issues on appeal and cross-appeal
relate to the amount and duration of maintenance and the
valuation of the medical practice.
Patricia’s appeal claims an
abuse of discretion as to the amount of maintenance, and Ralph’s
cross-appeal claims an abuse of discretion as to the duration of
the maintenance.
Patricia’s appeal and Ralph’s cross-appeal
both claim error by the circuit court in the valuation of the
medical practice, specifically issues as to tax credit,
assessment of collection rate, and percentage assigned to the
collection rate, and valuation of goodwill associated with the
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practice.
Because the issues on appeal and cross-appeal address
mutual issues, this Court will address the issues
simultaneously.
Patricia first argues an abuse of discretion by the
circuit court with regard to the award of maintenance of
$4,000.00 per month to her, arguing that the circuit court’s
award was based on an erroneous finding of fact that Ralph
earned $15,000.00 monthly in gross income and that the amount
was insufficient.
Ralph disagrees with Patricia’s
characterization of the circuit court’s finding of his income,
and additionally cross-appeals on the duration of the
maintenance award, which entitled Patricia to maintenance “until
further orders of the Court.”
The amount and duration of maintenance is within the
sound discretion of the circuit court.
S.W.2d 928 (Ky. 1990).
Gentry v. Gentry, 798
The award of maintenance is governed by
KRS 403.200 which states in relevant part:
(1)
(T)he 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...
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(2)
The maintenance
amounts and for
the court deems
considering all
including:
order shall be in such
such periods of time as
just, and after
relevant factors
(a)
The financial resources of the
party seeking maintenance,
including marital property
apportioned to him, and his
ability to meet his needs
independently...;
(b)
The time necessary to acquire
sufficient education or training
to enable the party seeking
maintenance to find appropriate
employment;
(c)
The standard of living established
during the marriage;
(d)
The duration of the marriage;
(e)
The age, and the physical and
emotional condition of the spouse
seeking maintenance; and
(f)
The ability of the spouse from
whom maintenance is sought to meet
his needs while meeting those of
the spouse seeking maintenance.
In Perrine v. Christine, 833 S.W.2d 825, 826 (Ky.
1992), the Supreme Court stated:
Under this statute, the trial court has dual
responsibilities: one, to make relevant
findings of fact; and two, to exercise its
discretion in making a determination on
maintenance in light of those facts. In
order to reverse the trial court’s decision,
a reviewing court must find either that the
findings of fact are clearly erroneous or
that the trial court has abused its
discretion.
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The DRC, after hearing testimony, and the circuit
court, after hearing arguments and considering the DRC’s report
and recommendations, found that an award of maintenance was
appropriate based on the following:
[Patricia] is employed as a billing
clerk by the Urology Center of Northeastern
Kentucky, earning $9.50 per hour. (She
started at $9.00 per hour in March 2002).
Based on a forty hour week, [Patricia’s]
gross income is $1,647.00 per month while
[Ralph’s] current gross monthly salary draw
from AEMA is $15,000.00 per month.
(Previously his draw was $11,800.00. The
physician-owners determine what their
individual monthly draw is. However, it
must be approved by a vote of the “owners”
and obviously it must be reasonable
considering the individual’s portion of the
expenses, etc.)
[Patricia] worked as an LPN prior to
the parties’ marriage in 1975 and for
several years thereafter. She became a
licensed real estate agent in Michigan after
she attended real estate school (although
she testified that the only property she
sold was their home when they moved from
Michigan), sold prepaid legal plans, Mary
Kay cosmetics, served as a volunteer
cheerleading coach and basketball coach,
volunteered to break down charts in the ER
for AEMA working everyday for 3 months at
one time and in the summer of 2001 typed
[Ralph’s] transcriptions.
[Patricia] alleged that she is unable
to work as an LPN both because of the number
of years out of the profession and the
physical demands of such a job. [Patricia]
testified that she had been diagnosed with
Lupus in 1988. However, [Patricia]
acknowledged that after being diagnosed she
continued to play tennis 3 to 4 times per
week until three or four years ago.
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However, she actually stopped playing then
due to a stress fracture in her foot. She
does not and has not seen a physician on a
regular basis since being diagnosed in 1988.
(She does not nor did she receive
therapeutic massages as listed in her
expense schedule.)
The parties’ former marital residence
is a home with approximately 2,600 square
feet with an additional finished basement.
There is also a pool and hot tub. The home
was purchased in July 1993 for $170,000.00.
The mortgage payments are currently
$1,916.00 per month. As noted previously,
the parties stipulated a value of
$215,000.00 for the former marital
residence. The payoff on the mortgage on
the property is approximately $214,000.00.
Therefore, not only is there little or no
equity in the house, if the parties use a
realtor to sell, it is likely that the
parties will actually owe money at the
closing.
A review of [Patricia’s] monthly
claimed expenses of $11,179.00 includes a
mortgage of $2,000.00, utilities, two cell
phones, car payment, clothing of $1,000.00,
travel expenses of $750.00 per month,
retirement investment of $500.00, $350.00
per month for pets, lawn care of $400.00,
therapeutic massages, etc. During the
parties’ separation, [Ralph] paid
approximately $3,600.00 to or on behalf of
the parties’ children for apartments,
condominium mortgage, allowances, and
another $5,400.00 on the former marital
residence, utilities, cars, etc. and
$1,200.00 in maintenance to [Patricia].
The parties are the parents of three
children with the youngest scheduled to
graduate from high school in late May, 2003.
As a result, there is no issue with respect
to custody or child support. However,
despite the ages of the two older children,
a great deal of money is spent on supporting
them. Not only are the children provided
with vehicles, but a condominium was
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purchased for the oldest as well as
furnishings; rent on an apartment for the
parties’ son was paid; and substantial
allowances were provided to all three
children in addition to paying for
insurance, cell phones, tuition, books, etc.
[Ralph] is still paying the expenses for
Jennifer, age 25, who is scheduled to finish
school this year as a physician’s assistant.
He was also paying expenses for Chip, age
23, the parties’ son, until he recently
decided to quit school at Marshall
University after attending four years with
no degree. Chip is now employed, however,
from [Patricia’s] testimony it appears that
she still believes that Chip must be taken
care of.
[Patricia] acknowledged that a lot of
money went to the children, stating that
“the children are my life.” Although
[Ralph] earned a reasonably substantial
income, it is clear that it was insufficient
to maintain three separate households, four
car payments, insurance on five vehicles
with three drivers under the age of 25, an
unknown number of cell phones, not to
mention the clothes, pets, tuition, and all
of the extras for the children.
Quite simply, the parties have lived
way beyond their means for years.
[Patricia] is now 48 and [Ralph] is 52.
Even if [Patricia] could go back to work as
an LPN immediately, it is unlikely that she
could make much more than she does working
as a billing clerk. In reviewing her work
history, it appears that after she stopped
working as an LPN and until her current job,
[Patricia] has not seriously sought
employment although she has briefly explored
several opportunities in sales.
Based on all the foregoing, the
Commissioner finds that [Patricia] is
currently unable to adequately support
herself through employment even including
her portion of the marital property assigned
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to her.2 As a result, an award of
maintenance is appropriate.
Neither parent has a legal obligation
to continue to financially support their
children. The decision to do so must be an
individual choice for each parent after
considering the resources each has
available. Therefore, [Patricia] cannot
include expenses for the children in her
budget and expect [Ralph] to provide the
funds.
Therefore, based on all of the
foregoing, the Commissioner finds that an
award of $4,000.00 per month in maintenance
coupled with [Patricia’s] current income,
will allow [Patricia] to meet her needs and
allow her to maintain somewhat the same
standard of living which she previously
enjoyed.
A maintenance award will not be upheld if the findings
of fact upon which the award is based are clearly erroneous.
Powell v. Powell, 107 S.W.3d 222, 224 (Ky. 2003).
If, however,
the trial court’s findings of fact are not clearly erroneous,
the amount and duration of maintenance is within the sound
discretion of the trial court.
24, 26 (Ky.App. 1994).
Russell v. Russell, 878 S.W.2d
Hence, “we cannot disturb [the
maintenance determinations] of the trial judge unless the
discretion is absolutely abused.”
Platt v. Platt, 728 S.W.2d
542, 543 (Ky.App. 1987).
2
Patricia’s portion of the marital property is $20,000.00 in furniture from
the former marital residence; a 2000 Jeep Grand Cherokee; $73,000.00 from
one-half of Ralph’s cash, life insurance and AEMA interest; and approximately
$166,846.04 from one-half of Ralph’s retirement accounts. Ralph’s portion
additionally includes four vehicles; vehicle debt approximating $40,000.00;
$3,000.00 in furniture from the apartment and condominium; $62,000.00 in
credit card debt; and a majority of the costs of the dissolution proceeding.
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KRS 403.200 seeks to enable the unemployable spouse to
acquire the skills necessary to support himself in the current
workforce so that he does not rely upon the maintenance of the
working spouse indefinitely.
(Ky.App. 1990).
Clark v. Clark, 782 S.W.2d 56, 61
However, “in situations where the marriage was
long term, the dependent spouse is near retirement age, the
discrepancy in incomes is great, or the prospects for selfsufficiency appears dismal,” our courts have declined to follow
that policy and have instead awarded maintenance for a longer
period or in greater amounts.
Id.
Further, KRS 403.200
specifically states that the trial court should consider the
standard of living to which the parties are accustomed in
determining the amount and duration of the award.
“It is
especially acceptable for the trial court to consider the impact
of the divorce on the nonprofessional’s standard of living and
award an appropriate amount that the professional spouse can
afford.”
Clark, 782 S.W.2d at 61; Powell, 107 S.W.3d at 224.
In this case, the marriage was long term, 26 years,
and the discrepancy in income is great.
Patricia has not
participated to a great extent in the work force during those
twenty-six years, and especially not in the most recent fifteen,
instead focusing on maintaining the home and raising the
parties’ children.
Her current annual gross earning capability
is in the $20,000.00 range.
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On the other hand, Ralph’s earning capacity is far
better.
The circuit court’s finding that he had a gross monthly
draw from AEMA of $15,000.00 is supported by testimony before
the DRC and from the DRC’s painstaking analysis of evidence and
testimony from both of the parties’ experts which will be
addressed in greater detail below.
We conclude, therefore, that the circuit court
properly considered the factors set forth in KRS 403.200(2),
and, based upon the length of the marriage, the discrepancy in
income, and the quality of life enjoyed by the parties during
the marriage, the circuit court did not abuse its discretion in
its maintenance award.
With regard to Ralph’s argument that the circuit court
erred by setting the duration of maintenance “until further
orders of the court,” we further conclude that the circuit court
did not err.
Pursuant to Combs v. Combs, 622 S.W.2d 679, 680
(Ky.App. 1981), this Court construes this as a permanent award
of maintenance that may be rebutted.
In Combs, the Court
indicated that the duration of maintenance must have a direct
relationship to the period over which the need exists and the
ability to pay.
As in Combs, Ralph failed to rebut Patricia’s
showing that her needs do not have the potential to be
materially different anytime soon or that she will become more
self-sufficient anytime soon.
As indicated above, in situations
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such as herein, courts have upheld maintenance for longer
periods than that initially deemed necessary to allow the spouse
the time to acquire the skills necessary to support themselves.
Clark, 782 S.W.2d at 61.
Although Patricia has prior skills as
an LPN and in sales, given her age, health, and time out of the
workforce, the duration of the maintenance herein does not
amount to an abuse of discretion.
Next Patricia argues error in the valuation of Ralph’s
interests in AEMA, and both argue error in the assessment of
goodwill.
First, we disagree with Patricia’s argument that the
circuit court erred in using the date of dissolution to assign a
value to Ralph’s interests in AEMA.
Upon review of the DRC’s
analysis, we can find no error in use of this date as the date
of valuation.
Armstrong v. Armstrong, 34 S.W.3d 83, 86 (Ky.App.
2000).
We review Patricia’s next arguments, relating to the
valuation of Ralph’s interest in AEMA, under the clearly
erroneous standard.
It is axiomatic that the findings of fact
of the circuit court shall not be set aside unless clearly
erroneous, and due regard shall be given to the opportunity of
the circuit court to judge the credibility of the witnesses.
52.01.
CR
Findings of fact are not clearly erroneous if supported
by substantial evidence, the test of which is, whether when
taken alone, or in the light of all the evidence, the findings
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have sufficient probative value to induce conviction in the
minds of reasonable men.
Kentucky State Racing Commission v.
Fuller, 481 S.W.2d 298, 308 (Ky. 1972).
The circuit court’s judgments and valuations in an
action for divorce will not be disturbed on appeal unless it was
clearly contrary to the weight of the evidence.
Heller, 672 S.W.2d 945 (Ky.App. 1984).
Heller v.
Thus, it is the duty of
this Court to examine the methods used by the circuit court to
see if it clearly erred in valuing AEMA’s assets.
Clark, 782
S.W.2d at 58-59.
There is no single best way to value the business
interest of a spouse.
The task of the appellate court is to
determine whether the circuit court’s approach reasonably
approximated the net value of the interest.
Id. at 59.
Patricia’s principle objections to the circuit court’s
valuation of Ralph’s interest in AEMA are that the circuit court
erred in assessing AEMA’s value by reducing AEMA’s accounts
receivable and cash on hand by Ralph’s effective tax rate of
45%; erred in the assessment of AEMA’s collection rate at 31.5%;
erred in assessing a rate of 6.056150% to Ralph’s interest in
accounts receivable and cash on hand; and both Patricia and
Ralph contend error in the valuation of goodwill.
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We conclude that the circuit court did not err in the
valuation of Ralph’s interest in AEMA, including goodwill, and
therefore adopt the DRC’s discussion of these issues:
[Ralph] has been an emergency room
physician since July 1992 when the parties
moved to Ashland. He received board
certification in emergency care in 1996.
Prior to beginning his residency in ER
medicine, [Ralph] worked approximately two
years as a general practitioner beginning in
1981.
He, along with eleven other physicians,
own Ashland Emergency Medical Associates,
Inc., (“AEMA”), which staffs the emergency
room for King’s Daughters Medical Center,
(“KDMC”), in accordance with an agreement
signed October 27, 2000, effective January
1, 2001 through December 31, 2004. (That
agreement terminated a prior agreement dated
July 27, 1998.)
Pursuant to that agreement AEMA was
obligated to provide eleven (11) full time
physicians for the ER based upon annual
emergency room visits of 50,000 per year
with an additional physician for each
increase in annual visits of 4,700. Each
full time physician is required to be board
certified (or obtaining board certification)
in emergency medicine, family practice,
pediatrics or internal medicine (with a
physician certified in emergency medicine on
duty in the ER at all times). AEMA is
required to replace a departing physician
within six months.
In the first year of the agreement, as
there were only eight full time physicians
in AEMA, KDMC agreed to help recruit
physicians for AEMA and guarantee a salary
of at least $240,000.00 per year plus pay
relocation costs, etc.
The agreement requires AEMA to provide
emergency services to KDMC employees and
visitors who are injured on the premises and
waive any professional fees for that care
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“to the extent and in proportion to the
degree that [KDMC] charges are reduced or
waived.” It is also specified that all
patient care records are the property of
KDMC. AEMA is prohibited from providing
emergency room staffing to any other
facility within a 50 mile radius.
The By-Laws for AEMA provide that a
physician can become a shareholder following
one year of continuous full-time employment
by the corporation and paying the sum set in
the employment agreement for one share of
stock. However, the employment agreement in
use in 2001 (only signed by three of the
twelve shareholders) sets no amount for a
buy in. In fact, the only “money” the
agreement actually addresses is what moneys
can be expected upon termination of
employment (the amount attributable to the
physician in his/her profit center less a
proportionate share of expenses) (Several
physicians have left the practice over the
last several years and there has been no
compensation other than what was actually
earned while practicing. In addition,
several physicians have come into the
practice and have not paid any funds for a
“share” of the corporation.)
Since January 2001, AEMA has been
responsible for its own billing and
collection which it contracts out to
ProBill. Each physician-owner’s
compensation is based on that physician’s
percentage of billing to the whole on a four
month rolling average. That percentage is
then applied to the overall collections to
determine what amount is placed or assigned
to that physician’s “profit center”. [Due
to the low collection rate (approximately
one third) for billing in the ER and to
prevent “picking patients” based on the
likelihood of payment, the overall
collection rate is used.]
As [Ralph’s] portion of AEMA is a
marital asset, the fair market value must be
determined. Goodwill in a professional
organization is a factor to consider in
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arriving at the value of a medical practice.
In the seminal case of Clark v. Clark,
Ky.App., 782 S.W.2d 56 (1990), the Court
noted that there is no single best method in
valuing the net value of a business
interest. The Court commented that
capitalization of excess earnings is widely
accepted. However, the Court further noted
that there are a number of acceptable
methods.
In Clark, the Court enumerated the four
steps involved in the capitalization of
excess earnings method: (1) a determination
of the earnings of a professional of
comparable experience, expertise, education
and age as an employee in the same general
locale; (2) determine and average the
professional’s net income before federal and
state income taxes for a period of
approximately five years; (3) compare the
actual average with the employee; and then
(4) multiply the excess by a capitalization
factor.
Both [Ralph and Patricia] called expert
witnesses to testify as to the fair market
value of [Ralph’s] interest in AEMA. Robert
E. DeLawder (“DeLawder”) of DeLawder &
Associates testified for [Ralph] and Michael
B. Mountjoy (“Mountjoy”) of Carpenter,
Mountjoy and Bressler, PSC testified for
[Patricia]. DeLawder placed the fair market
value of [Ralph’s] interest at $77,000.00 on
July 31, 2002 (which included no value
assigned to good will) while Mountjoy found
[Ralph’s] interest in AEMA to be $544,000.00
on August 31, 2002, which included
$366,000.00 attributable to good will.
(Mountjoy used July 31, 2002 in valuing
[Ralph’s] interest in the primary assets of
AEMA.) Following is the Commissioner’s
analysis.
AEMA is medical practice with no
patient base. The physicians do not have
ownership interest in the medical records of
the patients whom they treat. It is
extremely doubtful that a patient would
choose to come to the ER of KDMC because of
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[Ralph] or any of the other physicians which
comprise AEMA. However, a patient may come
to the ER because of the other specialists
that practice at KDMC or have privileges
there.
The rate of collections for services
rendered in an ER is less than optimal,
considering that all patients must be
treated regardless of their ability to pay.
AEMA can also be forced to treat some
patients without assessing any professional
service fees at all (or at a reduced rate at
the discretion of KDMC) pursuant to their
contract. However, AEMA has no shortage of
patients, also because of the very nature of
an emergency room.
As a result, although not a typical
medical practice, it is appropriate to
evaluate [Ralph’s] interest in AEMA to
determine if there is goodwill.
[Ralph’s] gross income (and the figure
used by the experts except as noted) for
1998 was $238,676.00; 1999 was $163,700.00;
2000 was $311,431.00; 2001 was $466,887.00;
and for 2002 it was $262,617.00 according to
[Ralph’s] W-2, but $285,242.00 as projected
and used by Mountjoy. (In addition, [Ralph]
worked some shifts in the emergency room at
a Kanawha County hospital earning additional
income in 2002 which Mountjoy also included
in calculating [Ralph’s] excess earnings.
However, inclusion of [Ralph’s] additional
earning outside AEMA is inappropriate for a
determination of excess earnings. It is
also inappropriate to “project” income when
the actual figures are available.)
For the years 2002 and 2001, Mountjoy
used $210,597.00 as the comparable
professional earnings to compare with
[Ralph’s] gross income for those years. He
used $198,423.00 for 2000; $186,663.00 for
1999 and $176,217.00 for 1998. These
figures represent the mean average for all
emergency room physicians as determined by
the Medical Group Management Association for
1998 through 2001. However, DeLawder used
the 75th percentile (rather than the 50th
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percentile used by Mountjoy) for his
professional compensation comparison and
further adjusted that figure by taking into
consideration the geographic location and
single specialty versus multiple specialty
group which resulted in a much larger
comparable professional earning for each
year. DeLawder also projected the
comparable earnings for 2002 based on
historical data while Mountjoy made no
adjustment for 2002, but simply used the
same figure as 2001.
Based on the direction in Clark,
Mountjoy’s use of the mean average for all
emergency room physicians is inappropriate
as it does not take into consideration
[Ralph’s] board certification, years of
experience, or the locale in which he
practiced. However, DeLawder’s use of the
75th percentile due to [Ralph’s] experience
and certification along with the other
adjustments may have overly inflated what an
ER physician with similar experience,
training, etc., in this area would make.
Of note in determining a comparable
professional income is the fact that as of
January 1, 2001, KDMC was willing to
guarantee a starting salary of $240,000.00
for an emergency room physician (board
certified or eligible for certification) for
AEMA with no requirement of prior
experience. Also, based on the $120.00 per
hour rate that [Ralph] was paid in West
Virginia, assuming working 15 shifts per
month at approximately ten hours per shift,
the annual income is $216,000.00 and working
twelve hours per shift, the resulting annual
income is $259,200.00.
Therefore, the Commissioner finds that
the more appropriate figures to use are a
combination of those used by the two experts
with DeLawder’s figures given more weight
than Mountjoy’s.
In calculating the average excess
earnings, Mountjoy used a weighted average
assigning a multiple of 5 to the 2002 excess
earnings, 4 for 2001, etc. Calculating
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excess earnings as a purely academic
exercise, DeLawder used a straight average.
However, a simple review of [Ralph’s]
income for the years 1999, 2000 and 2001
indicate that obviously there were problems
over that period of time. [Ralph]
testified, and [Patricia] agreed, that
[Ralph] got behind on his charts in 1999.
As a result, he was not paid until the
charts were brought up to date (AEMA policy,
not KDMC). [Ralph] ultimately received his
compensation for 1999; it was simply delayed
for a period of time. This resulted in
lower figures for 1999 and overly inflated
figures for at least 2000.
Also worthy of consideration is the
fact that there were only eight full time
physicians with AEMA near the end of October
2000 with a patient load in the ER that
required eleven physicians (according to the
contract with KDMC). Pursuant to that
contract, three additional full time ER
physicians were scheduled to be hired over a
period of twelve months. As a result it was
necessary in 2000 and 2001 for each of the
physicians in AEMA to see more patients at
that time than when AEMA became fully
staffed.
All of these factors combined caused
the figures for at least 1999, 2000 and 2001
to be skewed. Therefore, it was
inappropriate to give any more weight to one
year than another during this three year
period. It appears that 1998 and 2002 were
more representative of the actual earnings
of [Ralph] and should therefore given
slightly more weight. (If [Ralph’s] income
for 1999 and 2000 is averaged, the result is
a figure consistent with [Ralph’s] earnings
for 1998. Also calculating [Ralph’s] 2001
income based on a “normal” work load,
[Ralph’s] income would have been less than
his actual earnings.)
Based on all the foregoing, the
Commissioner finds [Ralph’s] modified
weighted average excess earnings to be
approximately $14,000.00. Using a cap rate
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of 33.33%, the same rate utilized by both
Mountjoy and DeLawder, the goodwill in AEMA
attributable to [Ralph] is $48,000.00.
Mountjoy determined that the value of
[Ralph’s] interest in AEMA was $178,000.00
while DeLawder placed the value at
$77,000.00. Both of these figures were
based primarily on [Ralph’s] percentage of
the accounts receivable after allowance for
that portion which is uncollectible.
In reviewing the calculations, Mountjoy
used 8.29% (or [Ralph’s] charges for January
through December 2002 as compared to the
total charges for the year). That is
inappropriate as the amount assigned to each
owner-physicians’ profit center is
calculated on a four month rolling average,
not an average for the year (i.e. for the
month of April 2002 he was entitled to only
5.41% of the funds actually collected, but
for the month of May 2002 he was entitled to
6.39020% of the funds collected). In
addition, had [Ralph] left the practice in
July 2002 (the date for valuing purposes),
he would have been entitled to receive
compensation for four months thereafter or
through November 2002 using the average of
his last four months rolling average (or
6.056150% which is the average of the
rolling averages for the months of April,
May, June and July).
Applying the correct percentage to
Mountjoy’s figures after adjustments for the
month of December, the result is within a
few thousand dollars of DeLawder’s.
Based on all the foregoing, the Commissioner
finds that the fair market value of [Ralph’s] interest
in AEMA, including $48,000.00 attributable to
goodwill, is $125,000.00.
We recognize that the DRC heard testimony from experts
whose methods and calculations produced a variation in the
estimated value of the business, $77,000.00 to $178,000.00.
This simply illustrates that there is no single best
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mathematical formula for precisely calculating the value of a
medical practice.
The DRC established a value of $125,000.00,
which falls within the range of values established by the expert
witnesses.
“Although not calculated with mathematical
exactitude, [this] figure clearly falls within the range of
competent testimony.”
Underwood v. Underwood, 836 S.W.2d 439,
444 (Ky.App. 1992), overruled in part on other grounds by
Neidlinger v. Neidlinger, 52 S.W.3d 513 (Ky. 2001).
With regard to the use of the 45% tax credit in the
calculation of accounts receivable and cash on hand, expert
testimony clearly supported use of this percentage.
With regard
to the use of 31.3% for the collection rate on the accounts
receivable, testimony based on information from the billing
agency clearly supported this conclusion.
With regard to the
use of 6.056150% as the rate to be applied to Ralph’s interest
in the accounts receivable and cash of AEMA, the findings are
clearly supported by an analysis based on testimony from several
sources as to AEMA’s operations.
And, with regard to goodwill, Patricia’s expert found
$366,000.00 in goodwill, while Ralph’s expert found goodwill
valued at zero.
After analyzing testimony from both experts,
the DRC concluded that although this was not a typical medical
practice, it was still appropriate to evaluate Ralph’s interest
in AEMA to determine the existence of goodwill and after
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analysis based on the experts’ testimony assessed a goodwill
value of $48,000.00.
We conclude that the findings of fact made
by the DRC in its valuation of AEMA were not clearly erroneous,
and that the method used in arriving at the valuation was not an
abuse of discretion.
For the foregoing reasons, the orders of the Boyd
Circuit Court, entered September 3, 2003, and September 19,
2003, are affirmed.
ALL CONCUR.
BRIEFS FOR APPELLANT/CROSSAPPELLEE:
BRIEFS FOR APPELLEE/CROSSAPPELLANT:
R. Stephen McGinnis
Greenup, Kentucky
Kent Masterson Brown
Christopher J. Shaughnessy
Lexington, Kentucky
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