McReath v. McReath
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Tracy McReath filed a petition for divorce from Timothy McReath in circuit court. Upon entering the order of divorce, the circuit court divided the marital property and awarded maintenance to Tracy, ordering that Timothy pay Tracy $796,720 to equalize the property division as well as $16,000 per month for twenty years in maintenance. Timothy appealed, arguing that (1) the circuit court erred as a matter of law when it treated Timothy's personal goodwill in his orthodontic practice as divisible property, and (2) the circuit court improperly double counted his personal goodwill in the orthodontic practice when it based Tracy's maintenance award on Timothy's expected future earnings from the orthodontic practice. The court of appeals affirmed, concluding that the personal goodwill was salable and that the circuit court did nor err in its approach in determining the property division and maintenance award. The Supreme Court affirmed, holding (1) the entire value of the salable professional goodwill was properly counted as divisible property in the marital estate, and (2) the circuit court did not double count the professional goodwill from the orthodontic practice in the maintenance award.
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2011 WI 66 SUPREME COURT CASE NO.: COMPLETE TITLE: OF WISCONSIN 2009AP639 In re the marriage of: Tracy J. McReath, Petitioner-Respondent, v. Timothy J. McReath, Respondent-Appellant-Petitioner. REVIEW OF A DECISION OF THE COURT OF APPEALS 2010 WI App 101 Reported at: 329 Wis. 2d 155, 789 N.W. 2d 89 (Ct. App. 2010 Published) OPINION FILED: SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: July 12, 2011 April 13, 2011 Circuit Sauk James Evenson JUSTICES: CONCURRED: DISSENTED: NOT PARTICIPATING: ATTORNEYS: For the respondent-appellant-petitioner there were briefs by Andrew W. Erlandson and Hurley, Burish & Stanton, S.C., Madison, and oral argument by Andrew W. Erlandson. For the petitioner-respondent there was a brief by Richard J. Auerbach and Auerbach & Porter, argument by Richard J. Auerbach. S.C., Madison, and oral 2011 WI 66 NOTICE This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports. No. 2009AP639 (L.C. No. 2007FA208) STATE OF WISCONSIN : IN SUPREME COURT In re the marriage of: Tracy J. McReath, FILED Petitioner-Respondent, JUL 12, 2011 v. A. John Voelker Acting Clerk of Supreme Court Timothy J. McReath, Respondent-Appellant-Petitioner. REVIEW of a decision of the Court of Appeals. ¶1 PATIENCE DRAKE ROGGENSACK, J. Affirmed. We review a published opinion of the court of appeals1 affirming the circuit court's order2 that Timothy McReath (Tim) pay Tracy McReath (Tracy) $796,720 to equalize the property division upon the couple's divorce, as well maintenance. The as $16,000 questions per month presented are: for 20 (1) years in whether the 1 McReath v. McReath, 2010 WI App 101, 329 Wis. 2d 155, 789 N.W.2d 89. 2 The Honorable James Evenson of Sauk County presided. No. entire value interest in of the salable Orthodontic professional Specialists, S.C. goodwill3 can be 2009AP639 of Tim's counted as divisible property in a marital estate, and (2) if the answer to the first question is yes, did the circuit court double count the value of the professional goodwill in Orthodontic Specialists when it based Tracy's maintenance award on Tim's expected future earnings from Orthodontic Specialists. ¶2 We conclude the entire value of the salable professional goodwill was properly counted as divisible property in the marital estate. Moreover, we conclude that the circuit court count did not double the professional Orthodontic Specialists in the maintenance award. goodwill from Accordingly, we affirm the decision of the court of appeals. I. BACKGROUND A. ¶3 Facts This case requires us to review the circuit court's order dividing marital property and awarding maintenance in a divorce proceeding.4 Tracy and Tim were married on August 27, 3 Professional goodwill is the goodwill that is attendant to a professional business. See infra ¶28. As discussed below, for the purpose of property division, some courts and scholars divide professional goodwill into two components: "personal goodwill" and "enterprise goodwill." See infra ¶¶38-39. For reasons set forth below, see infra ¶¶39-41, we do not divide professional goodwill. Therefore, when discussing "professional goodwill" throughout this opinion, we are referring to both components of professional goodwill. 4 The majority of the facts set out below are taken from the thorough factual findings set forth by the circuit court. When we derive facts from elsewhere in the record, we so note. 2 No. 1988. 2009AP639 Three children, all of whom were minors at the time the divorce proceedings were initiated, were born of their marriage.5 ¶4 In 1991, Tim received his dental degree, and in 1993, he received a master's degree in orthodontia. Accordingly, most of Tim's dental education was pursued during the marriage. Tim took out student loans to fund his education, all of which were repaid with marital funds. ¶5 Upon receiving his masters in orthodontia, Tim worked as an associate at Orthodontic Specialists for two years. Tim then purchased the Baraboo and Portage locations of Orthodontic Specialists from Dr. Grady. ¶6 Tim paid approximately $930,000 for the two locations of Orthodontic Specialists. A portion of this purchase price was attributed to a noncompete agreement that Dr. Grady signed and to transitional services that Dr. Grady provided Tim. Specifically, Tim testified that $100,000 was for the physical assets, corporate name, and corporate goodwill. $830,000 was for, as Tim described, "Dr. The remaining Grady's name, the noncompete clause, and the employment agreement that Dr. Grady would stay on to introduce me to his existing patients, [and] to counsel me through the process of learning how to do business." ¶7 With regard to the noncompete agreement, Tim testified that he would not have purchased Orthodontic Specialists for as high of a price as he did without 5 a noncompete agreement The McReaths' eldest child has since reached the age of majority. 3 No. 2009AP639 because, "[Dr. Grady] could have just opened up a business just down the street and I'm assuming that he would have taken not only the majority of patients with him but the majority of the future patients in the area." Tim also testified that he was not aware of any transaction in the field of orthodontics, for any substantial agreement. value, that took place without a noncompete According to Tim, "the name of the practitioner is always weighted very heavily as opposed to the goodwill or the value of the name of the practice or corporation." ¶8 Tim Specialists historically has since worked he as the purchased averaged a it 60-hour sole owner from Dr. work of Grady. week. Orthodontic Tim has This is significantly more than the average orthodontist who works only 35 hours per week. Recently, Tim has reduced the number of hours he works to approximately 45 hours per week. Tim has no plans to sell or dispose of his practice. ¶9 Tim has been very successful in operating Orthodontic Specialists. His annual gross business revenues in the five years leading up to the divorce ranged from $1.6 million to in excess of $1.8 million. In the same five years, Tim received an average yearly net cash flow from Orthodontic Specialists of 4 No. $697,522.6 2009AP639 Notably, Orthodontic Specialists maintains the only orthodontic offices in Baraboo and Portage. ¶10 The success of Orthodontic Specialists has resulted in a relatively high standard of living for the McReath family. They have significant assets and little, if any, personal debt. ¶11 Unlike Tim, Tracy does not have a professional degree. She is a high school graduate with some college credits, but no college degree. Tracy worked outside the home while Tim was attending dental school. Throughout much of their marriage, however, Tracy worked as a homemaker and the primary caretaker for the couple's children. Specifically, she was completely out of the workforce from 1993 to 2000. performed some Specialists. per year. financial and clerical From 2000 to 2008, she duties for Orthodontic In this position, she was paid $15,000 to $16,000 The circuit court found Tracy has a current earning capacity of $14.50 per hour, or $30,160 annually. B. ¶12 Procedural History On May 16, 2007, Tracy filed a petition for divorce in Sauk County Circuit Court. Upon entering the order of divorce, 6 The circuit court found the income calculations conducted by Tracy's expert to be correct, and rejected those conducted by Tim's expert. The circuit court's finding that Tim's expert had made an incorrect income valuation was based on the fact that Tim's expert limited his calculations to one year, 2007, which happened to be the worst financial year for Tim in the preceding five years. On appeal, Tim does not challenge the income calculations adopted by the circuit court. 5 No. the circuit court, among other things, divided 2009AP639 the marital property and awarded maintenance to Tracy.7 ¶13 Regarding the marital property division, with the exception of the value of Orthodontic Specialists, the parties stipulated to the value of their marital assets. They also stipulated to a division of assets with a balancing payment. Hearings were held on the appropriate fair market valuation of Orthodontic Specialists, $1,058,000. This was the value given by Tracy's expert, Craig Billings (Billings). and resulted in a valuation of The court rejected the $415,000 valuation of Tim's expert, Dennis Ksicinski (Ksicinski).8 ¶14 Having valued Orthodontic Specialists at $1,058,000, the court turned to dividing the assets. The court found that 7 The parties entered into a stipulated agreement regarding the custody and physical placement of their three children. 8 In accepting Billings' valuation, the court highlighted that Billings had "provided a comprehensive and thorough evaluation" of the business and "[h]is conclusions were supported by direct work with the practice including a site visit or visits, conversations with [Tim, a] review of the financial records" and "external information sources unique to the profession such as surveys and professional journal data." The court found Ksicinski's valuation problematic because, among other things, Ksicinski relied significantly on information provided by Tim and did little independent or critical analysis; Ksicinski used only financial data from 2007 (one of Orthodontic Specialists' worst financial years in terms of net income) in making his valuations; Ksicinski did not look to outside sources and industry norms to support his conclusions; and Ksicinski's valuation was not supported by the record given the fact that Tim had bought the practice in the 1990s for over $900,000 and the business grossed in excess of $1.6 million per year. 6 No. 2009AP639 there was no reason to deviate from the presumption of equal property division in Wis. Stat. § 767.61(3) (2009-10).9 combined the $1,058,000 valuation of Orthodontic It then Specialists with the other, stipulated to, assets in the marital estate. Because, among other assets, Tim was the stipulated owner of Orthodontic Specialists, Tim's total assets exceeded Tracy's by $1,593,440. As such, to equalize the property division, the court awarded Tracy $796,720, to be paid at the rate of no less than $80,000 per year plus accrued interest. ¶15 Next, to set maintenance, the court used Tim's average annual earnings from Orthodontic Specialists over the preceding five years, i.e., $697,522. However, because the $697,522 salary was based on Tim working 50-70 hours per week, the court adjusted the figure to reflect a 40-hour work week. Consequently, the court set Tim's expected annual income from Orthodontic Specialists at $465,000 (rounded). Next, the court took its finding that Tracy had a current earning capacity of $14.50 per hour, or $30,160 annually. these income available to calculations the parties, to the The court then added other specifically sources rental and of income investment income, and found that Tim's total annual income was $535,806 (or $44,650/month) and Tracy's total annual income was $75,944 (or $6,328/month). 9 All subsequent references to the Wisconsin Statutes are to the 2009-10 version unless otherwise indicated. 7 No. ¶16 2009AP639 With these figures in hand, the court considered the statutory factors set forth in Wis. Stat. § 767.56 in deciding whether to award maintenance.10 In considering these factors, the court found that it was unlikely that Tracy would ever have Tim's earning standard of marriage. capacity living or an income comparable to that that would allow enjoyed for during a the The court also underscored that Tracy had contributed to the dental education and increased earning capacity of Tim. Based on these findings, the court awarded Tracy maintenance in the amount of $16,000 per month for a period of 20 years. ¶17 Tim appealed and the court of appeals affirmed. McReath v. McReath, 2010 WI App 101, 329 Wis. 2d 155, 789 N.W.2d 89. Tim argued that the circuit court erred as a matter of law when it Specialists treated as his divisible personal11 property. goodwill Id., in ¶1. Orthodontic The court of appeals affirmed on the basis that the personal goodwill was salable, as evidenced by the fact that Tim himself had paid for the personal goodwill of Dr. Grady when he bought the orthodontic practice and the reality that any hypothetical buyer would demand a noncompete agreement. Id., ¶¶17-18. Because 10 See infra note 17 and the accompanying text for a list of the Wis. Stat. § 767.56 factors and a discussion of maintenance awards in Wisconsin. 11 The court of appeals uses the term "professional goodwill" to describe what we later discuss as "personal goodwill," and the term "corporate goodwill" to describe what we later discuss as "enterprise goodwill." See infra section II.B. To avoid confusion, we use the terms we employ herein to describe the court of appeals decision. 8 No. there is no rule excluding salable goodwill from 2009AP639 divisible property, the court of appeals concluded that the circuit court did not err when it included personal goodwill in the marital estate. Id., ¶19. ¶18 Additionally, Tim argued that the circuit court improperly double counted his personal goodwill in Orthodontic Specialists. The goodwill, he averred, was counted first when it was considered a divisible asset. It was then counted a second time when maintenance was awarded based on his earning capacity that was calculated, Id., ¶32. goodwill. in part, circuit his personal The court considered three alternatives to address Tim's double counting concerns. Tim, using courts could exclude First, as suggested by all personal goodwill, regardless of whether it is salable, from property division. Id., ¶¶35-46. The court rejected this alternative. Second, also salable personal compensate by maintenance. alternative. ¶19 suggested by goodwill making Id., a Tim, circuit in divisible downward ¶¶47-49. The courts Id., ¶46. could property, include and adjustment when court rejected also then awarding this Id., ¶49. Third, the court considered Tracy's suggested approach that it characterized as: [enterprise] and "include all salable goodwill, both [personal], as a divisible asset and then, essentially, ignore the fact that Tim's earnings are intertwined with part of the divisible assets." Id., ¶50. Having rejected the two approaches advocated by Tim, the court adopted Tracy's approach, opining that there was no "existing rule precluding 9 No. this approach." Id. 2009AP639 Accordingly, the court of appeals affirmed the property division and maintenance awarded. ¶20 We granted review and now affirm the court of appeals. II. A. ¶21 of DISCUSSION Standard of Review The division of marital property and the calculation maintenance are matters typically discretion of the circuit court. left to the sound Rohde-Giovanni v. Baumgart, 2004 WI 27, ¶17, 269 Wis. 2d 598, 676 N.W.2d 452; Cook v. Cook, 208 Wis. 2d 166, 171, 560 N.W.2d 246 (1997). a circuit court's discretionary We do not disturb determinations about property division and the calculation of maintenance unless the court erroneously exercised Wis. 2d 598, ¶17. its discretion. Rohde-Giovanni, 269 A circuit court erroneously exercises its discretion if it makes an error of law. presented here concern whether incorrect legal standards in the Id., ¶18. circuit dividing marital The issues court applied property and calculating maintenance. ¶22 When an issue of law arises while we are reviewing a circuit court's exercise of discretion, we review that issue independently, but benefiting from the analyses of the court of appeals and circuit court. Id., ¶19; Marder v. Bd. of Regents of the Univ. of Wis. Sys., 2005 WI 159, ¶19, 286 Wis. 2d 252, 706 N.W.2d 110. Moreover, in deciding legal issues, we uphold the circuit court's findings of fact unless they are clearly erroneous. Phelps v. Physicians Ins. Co. of Wis., Inc., 2009 WI 74, ¶34, 319 Wis. 2d 1, 768 N.W.2d 615. 10 "[T]he valuation of No. marital assets is a finding of fact." 2009AP639 Liddle v. Liddle, 140 Wis. 2d 132, 136, 410 N.W.2d 196 (Ct. App. 1987). B. ¶23 Chapter Marital Estate and Goodwill 767 of the Wisconsin Statutes, "Actions Affecting the Family," sets forth how a presiding court should divide the marital estate upon divorce. Wisconsin Stat. § 767.61(1) requires the court to divide the property of the parties upon divorce. Section 767.61(2) identifies property that is subject to division by describing the limited types of property that generally are not subject to division on divorce.12 The property subject to division is considered the marital estate for purposes of property division upon divorce. Steinke v. Steinke, 126 Wis. 2d 372, 380, 376 N.W.2d 839 (1985). 12 Excluded property includes: property shown to have been acquired by either party prior to or during the course of the marriage . . .: 1. party. As a gift from a person other than the other 2. By reason of the death of another, including, but not limited to, life insurance proceeds; payments made under a deferred employment benefit plan, as defined in s. 766.01(4)(a), or an individual retirement account; and property acquired by right of survivorship, by a trust distribution, by bequest or inheritance or by a payable on death or a transfer on death arrangement under ch. 705 3. With funds acquired in a manner provided in subd. 1. or 2. Wis. Stat. § 767.61(2)(a). If excluding this property "will create a hardship on the other party or on the children of the marriage," the court may nonetheless divide the property in a "fair and equitable manner." § 767.61(2)(b). 11 No. ¶24 2009AP639 When engaged in dividing the marital estate, a circuit court is to proceed under the presumption of equal division. Wis. Stat. § 767.61(3). "effectuates the contribution to policy Dividing that the marriage each and the spouse that each estate makes a spouse compensated for his or her respective contributions." 126 Wis. 2d at 380-81. equally valuable should be Steinke, We have explained the rationale behind equal division when one spouse leaves the work force to care for the couple's domestic needs: Part of the rationale in creating the presumption of equal property division is that the homemaking partner has contributed services which have enabled the financially supporting partner to achieve his or her station in life, and in so doing the homemaking partner has lost ground in the job market. Id. (internal quotation marks and citation omitted). Despite the presumption of equal division, the court has the discretion to alter the distribution after considering numerous factors.13 13 Those factors, enumerated in Wis. Stat. § 767.61(3), are: (a) (b) party. The length of the marriage. The property brought to the marriage by each (c) Whether one of the parties has substantial assets not subject to division by the court. (d) The contribution of each party to the marriage, giving appropriate economic value to each party's contribution in homemaking and child care services. (e) The age and physical and emotional health of the parties. 12 No. ¶25 marital Property estate valued should be for the valued at purpose its of fair 2009AP639 dividing market value. (f) The contribution by one party to the education, training or increased earning power of the other. (g) The earning capacity of each party, including educational background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children and the time and expense necessary to acquire sufficient education or training to enable the party to become self-supporting at a standard of living reasonably comparable to that enjoyed during the marriage. (h) The desirability of awarding the family home or the right to live therein for a reasonable period to the party having physical placement for the greater period of time. (i) The amount and duration of an order under s. 767.56 granting maintenance payments to either party, any order for periodic family support payments under s. 767.531 and whether the property division is in lieu of such payments. (j) Other economic circumstances of each party, including pension benefits, vested or unvested, and future interests. (k) The tax consequences to each party. (L) Any written agreement made by the parties before or during the marriage concerning any arrangement for property distribution; such agreements shall be binding upon the court except that no such agreement shall be binding where the terms of the agreement are inequitable as to either party. The court shall presume any such agreement to be equitable as to both parties. (m) Such other factors as the court may in each individual case determine to be relevant. 13 the No. Liddle, 140 Wis. 2d at 138. that property will bring 2009AP639 "Fair market value is the price when offered for sale by one who desires but is not obligated to sell and bought by one who is willing but not obligated to buy." ¶26 Id. In this case, the issue is whether the entire value of the salable professional goodwill in Orthodontic Specialists is included in the marital estate subject to division under Wis. Stat. § 767.61. Subsection 767.61(2) does not explicitly exclude professional goodwill from the divisible marital estate. Consequently, we turn to the applicable case law and policy considerations to decide whether the entire value of the salable professional goodwill is subject to property division. ¶27 point. Defining professional goodwill is a necessary starting In 1967, we recognized divisible marital asset. 155 N.W.2d 130 a business's goodwill as a Spheeris v. Spheeris, 37 Wis. 2d 497, (1967). In doing so, we underscored the difficulty in defining the concept, but set forth the following definition: In its broadest sense the intangible asset called good will may be said to be reputation; however, a better description would probably be that element of value which inheres in the fixed and favorable consideration of customers arising from an established and well-conducted business. Id. at 504 Similarly, (footnote the court and of internal appeals quotation has advanced marks omitted). the following definition: The advantage or benefit which is acquired by an establishment beyond the mere value of the capital 14 No. 2009AP639 stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partiality or prejudices. Holbrook v. Holbrook, 103 Wis. 2d 327, 345, 309 N.W.2d 343 (Ct. App. 1981) Stated (citing another 38 way, Am. Jur. goodwill 2d., "[a] is Goodwill § 1 business's (1968)). reputation, patronage, and other intangible assets that are considered when appraising the business, [especially] for purchase; the ability to earn income in excess of the income that would be expected from the Black's business Law viewed Dictionary as 763 a mere collection ed. 2009). (9th of assets." Simply stated, goodwill is "an asset of recognized value beyond the tangible assets of [a business]." Taylor v. Taylor, 386 N.W.2d 851, 857 (Neb. 1986). ¶28 inhere Originally, in businesses it was professional depend professional. on the posited that businesses skill and goodwill because not professional reputation Holbrook, 103 Wis. 2d at 346. did of the However, courts and scholars now recognize goodwill in professional businesses. See, e.g., id. at 347-49; Peerenboom v. Peerenboom, 147 Wis. 2d 547, 550-52, 433 N.W.2d 282 (Ct. App. 1988); Golden v. Golden, 75 Cal. Rptr. 735, 737-38 (Ct. App. 1969); Christopher A. Tiso, Present Positions on Professional Goodwill: More Focus or Simply More Hocus Pocus?, 20 J. Am. Acad. Matrimonial L. 51, 52 (2006) [hereinafter "Tiso, Present Positions"]. 15 When goodwill No. inheres in a professional business, classified as "professional goodwill." it most is 2009AP639 properly Tiso, Present Positions, at 52. ¶29 As aforementioned, we recognized goodwill as part of the divisible marital estate as early as 1967. order to calculate Mr. Spheeris's net worth In Spheeris, in for the divorce judgment, the circuit court included the value of the goodwill attributable to the retail discount store owned by Mr. Spheeris. Spheeris, 37 Wis. 2d at 503. Mr. Spheeris did not challenge the inclusion of goodwill as a divisible marital asset; rather, he challenged the valuation of the goodwill by use of predictive formulas, absent a sale of the business. words, Mr. [goodwill] Spheeris is argued through a that "the purchase voluntary arm's-length transaction." ¶30 sale in Id. at 506. only price way to agreed In other establish upon in a Id. We disagreed, holding that there need not be an actual order to business's goodwill. determine the existence and value of a We stated: It is true that the best indicator of [goodwill] would be such a purchase price. However, there is no authority in Wisconsin that would either proscribe or preclude the use of mathematical computations to determine the value of [goodwill]. Actually, the employment of such mathematical formulas in determining [goodwill] appears to be widespread. Id. We opined further that when determining the value of goodwill, there are no prescribed formulas the circuit court must apply. Id. 16 No. ¶31 While subsequent Spheeris Wisconsin cases professional practices. in a large law firm. involved have a commercial recognized 2009AP639 business, goodwill in In Holbrook, Mr. Holbrook was a partner Holbrook, 103 Wis. 2d at 330. The court of appeals considered whether the circuit court had erroneously determined that the goodwill in Mr. Holbrook's partnership interest in the law firm was a divisible marital asset. 344. Id. at In concluding that the circuit court did err, the court began its discussion with a blanket statement that, standing alone, would imply the court was prohibiting any inclusion of professional court goodwill stated, the divisible are "[w]e in not persuaded marital that estate. the The concept of professional goodwill as a divisible marital asset should be adopted in Wisconsin." ¶32 Id. at 350. However, the court's subsequent discussion focused on its assumption that professional goodwill cannot be sold, and "accrues to the benefit of the owners only through increased salary." Id. goodwill in professional For instance, the court compared the professional Mr. degree. Holbrook's It partnership opined that interest "[l]ike an to a educational degree, a partner's theoretical share of a law firm's goodwill cannot be exchanged on an open market: it cannot be assigned, sold, transferred, conveyed or pledged. . . . In both cases, the 'asset' involved is not salable and has computable value to the individual only to the extent that it promises increased future earnings." omitted). Moreover, Id. the at 351 court 17 (emphasis underscored added) that, (footnote apart from No. 2009AP639 receiving the value of his capital account, Mr. Holbrook was "[e]thically and contractually . . . prevented disposing of his interest" in the firm. ¶33 Accordingly, Wisconsin from otherwise Id. at 352. courts considering the valuation of professional goodwill subsequent to Holbrook have limited Holbrook's assertion that professional goodwill is not part of the divisible marital estate to situations where the professional goodwill is nonsalable. For example, in Peerenboom, the court of appeals concluded that the goodwill in a divorcing marital spouse's asset. dental Peerenboom, practice 147 could Wis. 2d at be a 552. divisible The court distinguished Holbrook: Holbrook . . . involved the division of an individual lawyer's interest in a large law firm. The court explained that due to ethical and contractual considerations, his interest in the law firm's goodwill could not be exchanged or sold on the open market. The court concluded therefore that it would be inequitable to compel "a professional practitioner to pay a spouse a share of intangible assets at a judicially determined value that could not be realized by a sale or another method of liquidating value." . . . In contrast, in this case the record shows no ethical or contractual barrier to [Dr. Peerenboom's] disposing of his interest in his dental practice. Accordingly, to the extent that the evidence shows that the goodwill exists, is marketable, and that its value is something over and above the value of the practice's assets and the professional's skills and services, it may be included as an asset in the marital estate and be subject to division. Id. at 551-52 (quoting Holbrook, 103 Wis. 2d at 351). 18 No. ¶34 2009AP639 Similarly, in Sommerfield v. Sommerfield, 154 Wis. 2d 840, 454 N.W.2d 55 (Ct. App. 1990), the court of appeals held that the circuit court erred when, for the purpose of setting the value of Mr. Sommerfield's disregarded the expert goodwill. Id. at witness's 852-54. accounting valuation Starting of with practice, the the it practice's premise that goodwill can be a marketable asset, the court underscored the expert's opinion that a noncompete agreement covering two years would be the normal condition under which a practice like Mr. Sommerfield's would be sold. Id. at 853. was a no evidence that such noncompete Concluding that there agreement would be unenforceable, the court held that the circuit court erroneously found that there was not separate, marketable goodwill in Mr. Sommerfield's practice that could be included in the divisible marital estate. ¶35 In Id. at 854. accordance with previous Wisconsin case law, we conclude today that when valuing a business interest that is part of the marital estate for purposes of divorce, a circuit court shall include the value of the salable goodwill attendant to the business interest.14 professional In addition to the above discussed case law, this conclusion is supported by 14 In the case before us, there was no contention that the business interest in Orthodontic Specialists was not part of the marital estate. Rather, the issue presented turned on how that interest was to be valued. However, there may be occasions when the issue is whether the business interest should be included in the marital estate in the first instance. See Steinmann v. Steinmann, 2008 WI 43, ¶¶28-29, 309 Wis. 2d 29, 749 N.W.2d 145. 19 No. Wis. Stat. § 767.61 and the policy 2009AP639 considerations behind § 767.61. ¶36 First, while Wis. Stat. § 767.61(2) excludes specific property from the marital estate, professional goodwill is not listed therein. the marital Moreover, under § 767.61(3), we presume that estate should be divided equally. As aforementioned, the presumption of equal division recognizes the contributions of each spouse to the marriage, including a homemaker spouse's lost earning capacity from being out of the job market. developed Where during the the salable marriage, it professional defies the goodwill is presumption of equality to exclude it from the divisible marital estate. As one court has explained: [T]he wife, by virtue of her position of wife, made to that [goodwill] value the same contribution as does a wife to any of the husband's earnings and accumulations during the marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business. Golden, 75 Cal. Rptr. at 738.15 ¶37 In sum, pursuant to Wis. Stat. § 767.61, Wisconsin case law and the policy supporting the presumption of equality in the division of the marital estate, we hold that a circuit court shall include salable professional 15 goodwill in the In Golden v. Golden, 75 Cal. Rptr. 735 (Ct. App. 1969), the non-professional spouse was the wife. We recognize that the roles could easily be reversed, with the non-professional spouse being the husband. 20 No. 2009AP639 divisible marital estate when the business interest to which the goodwill is attendant is an asset subject to § 767.61. ¶38 Tim urges us professional goodwill and "enterprise" to require circuit courts to into two subgroups, "personal" goodwill, and to a create approach taken by some courts and goodwill presumption personal goodwill is excluded from the marital estate. an divide scholars. that This is See Tiso, Present Positions, at 53. ¶39 goodwill When professional goodwill is so divided, enterprise is characterized as "[g]oodwill in a professional practice . . . attributable to the business enterprise itself by virtue of its existing arrangements with suppliers, customers or others, and its anticipated future customer base due to factors attributable to the business." Id. (quoting Yoon v. Yoon, 711 N.E.2d 1265, 1268 (Ind. 1999)); see also May v. May, 589 S.E.2d 536, 541-42 (W. Va. 2003). Personal goodwill, on the other hand, is characterized as the goodwill that is "attributable to the individual owner's personal skill, training or reputation," i.e., it is "the goodwill that depends on the continued presence of a particular individual." Id. (quoting Yoon, 711 N.E.2d at 1268-69); see also May, 589 S.E.2d at 542. ¶40 Some courts that divide professional goodwill into enterprise and personal goodwill have concluded that enterprise goodwill is included in personal goodwill is not. the divisible marital estate, and This conclusion is based in large part on the belief that enterprise goodwill is salable, while personal goodwill is not. For instance, in Yoon, the Supreme 21 No. 2009AP639 Court of Indiana included enterprise goodwill in the divisible estate, explaining that while "[i]t is not necessarily marketable in the sense that there is a ready and easily priced market for it, [] it is in general transferable to others and has a value to others." Yoon, 711 N.E.2d at 1269. With respect to personal goodwill, however, the Yoon court explained that because personal goodwill depends on the continued presence of the particular professional, it "represents nothing more than the future earning capacity of the individual." Id. Consequently, based on its belief that personal goodwill is not salable, the Yoon marital estate. court excluded personal goodwill from the Id.; see also Antolik v. Harvey, 761 P.2d 305, 317-18 (Haw. Ct. App. 1988). ¶41 personal circuit After and reviewing enterprise courts to draw cases goodwill, a that we distinguish choose distinction not between between to require personal and enterprise goodwill when dividing a marital estate that includes professional goodwill. This is so because the premise on which the distinction is grounded that enterprise goodwill is salable and personal goodwill is not is mistaken. As evidenced by the facts of the case at hand, Tim testified that when he bought Orthodontic Specialists for $930,000, nearly 90 percent of the sale price was for the professional goodwill. this goodwill as including elements of Tim described "personal" goodwill: "Dr. Grady's name, the noncompete clause, and the employment agreement that Dr. Grady would stay on to introduce me to his 22 No. existing patients." 2009AP639 Therefore, as this case demonstrates, in some situations, personal goodwill is salable. C. ¶42 Maintenance and Double Counting Having concluded that a circuit court shall consider salable professional goodwill, including what some courts term "personal" goodwill, as a divisible marital asset, we now set forth the law applicable to the second issue presented. second issue counted the presented value is of whether Tim's the circuit professional court goodwill by The double basing Tracy's maintenance award on Tim's expected future earnings when the future earnings will arise from Orthodontic Specialists. Under Tim's line of reasoning, the circuit court counted the goodwill once marital when asset. it Tim treated the contends that goodwill the as court a divisible then counted professional goodwill a second time when it awarded maintenance based on his past earnings from Orthodontic Specialists, given that professional goodwill increased those past earnings. ¶43 We begin with an overview of maintenance in Wisconsin. Maintenance awards16 upon a divorce are governed by Wis. Stat. § 767.56. order Pursuant to § 767.56, a circuit court "may grant an requiring maintenance payments to either party for a limited or indefinite length of time" after considering a list of enumerated factors.17 As aforementioned, it is within the 16 Generally, maintenance is "[f]inancial support given by one person to another, [usually] paid as a result of a legal separation or divorce." Black's Law Dictionary 1039 (9th ed. 2009). 17 Those factors are: 23 No. 2009AP639 circuit court's discretion to determine the amount and duration (1) The length of the marriage. (2) The age and physical and emotional health of the parties. (3) 767.61. The division of property made under s. (4) The educational level of each party at the time of marriage and at the time the action is commenced. (5) The earning capacity of the party seeking maintenance, including educational background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children and the time and expense necessary to acquire sufficient education or training to enable the party to find appropriate employment. (6) The feasibility that the maintenance can become self-supporting of living reasonably comparable to that the marriage, and, if so, the length of to achieve this goal. (7) party seeking at a standard enjoyed during time necessary The tax consequences to each party. (8) Any mutual agreement made by the parties before or during the marriage, according to the terms of which one party has made financial or service contributions to the other with the expectation of reciprocation or other compensation in the future, if the repayment has not been made, or any mutual agreement made by the parties before or during the marriage concerning any arrangement for the financial support of the parties. (9) The contribution by one party to the education, training or increased earning power of the other. (10) Such other factors as the court may in each individual case determine to be relevant. 24 No. Rohde-Giovanni, 269 Wis. 2d 598, ¶17. of maintenance. 2009AP639 However, the factors enumerated in § 767.56 should be the "touchstone of analysis" when a court sets maintenance. LaRocque v. LaRocque, 139 Wis. 2d 23, 32, 406 N.W.2d 736 (1987). ¶44 There are two objectives that an award of maintenance seeks to meet. spouse. The first objective is support of the payee Id. at 33. This objective may not be met by merely maintaining the payee spouse at a subsistence level. Id. at 35. Rather, maintenance should support the payee spouse at the predivorce standard. lifestyle that Id. the This standard should be measured by "the parties enjoyed in the years immediately before the divorce and could anticipate enjoying if they were to stay married." Id. at 36. The second objective is fairness, which aims to "compensate the recipient spouse for contributions made to the marriage, give arrangements, or prevent effect unjust to the parties' financial enrichment of either party." Id. at 33. ¶45 When determining the appropriate maintenance award, we have instructed courts to start with "the proposition that the dependent partner may be entitled to 50 percent of the total earnings of both parties" and then make any needed adjustments after considering Bahr, 107 Wis. 2d the 72, Wis. 85, Stat. § 767.56 factors. 318 N.W.2d 391 (1982); Bahr see v. also Heppner v. Heppner, 2009 WI App 90, ¶12, 319 Wis. 2d 237, 768 N.W.2d 261. Notwithstanding the proscribed starting point, "[t]he payment of maintenance is not to be viewed as a permanent annuity." Vander Perren v. Vander Perren, 105 Wis. 2d 219, 230, 25 No. 313 N.W.2d 813 (1982). Rather, maintenance is 2009AP639 "designed to maintain a party at an appropriate standard of living, under the facts and circumstances of the individual case, until the party exercising reasonable diligence has reached a level of income where maintenance is no longer necessary." ¶46 Id. As is the case here, concerns about double counting sometimes arise when awarding maintenance. We first pronounced the rule against double counting in Kronforst v. Kronforst, 21 At issue in Kronforst was Wis. 2d 54, 123 N.W.2d 528 (1963). the counting of profit-sharing termination withdraw his Mr. Kronforst's trust. of his The trust employment, interest from interest the was Mr. set in his up so Kronforst trust or employment that, could have his upon either interest disbursed to him in monthly installments over ten years. Id. at 63. When dividing the marital estate upon the couple's divorce, the circuit court included, as a divisible asset, Mr. Kronforst's interest in the trust and awarded the interest to him.18 Id. ¶47 On review, we concluded that the circuit court properly included Mr. Kronforst's interest in the trust in the divisible estate. We held, however, that the circuit court erred when it also considered the payments from the trust as Mr. Kronforst's income when calculating maintenance. Id. at 63-64. We underscored that at the time of trial, Mr. Kronforst was on 18 Ms. Kronforst was awarded 49 percent of the net estate, and Mr. Kronforst was awarded 51 percent. Kronforst v. Kronforst, 21 Wis. 2d 54, 60, 123 N.W.2d 528 (1963). 26 No. 2009AP639 extended medical leave, and therefore, "all probabilities" were that he would not return to work, meaning that his interest in the trust would not grow. Id. at 63. As such, we opined: We view the matter no differently than if the $9,749 had constituted cash in a bank deposit standing in defendant's name. Such an asset cannot be included as a principal asset in making division of the estate and then also as an income item to be considered in awarding alimony. Id. at 64. ¶48 Our case law since against double counting. Kronforst has refined the rule In Hommel v. Hommel, 162 Wis. 2d 782, 471 N.W.2d 1 (1991), we held that, generally, it did not violate the rule against double counting to include "investment income from assets awarded to a spouse as part of an equal division of property that pursuant spouse's to income a divorce for settlement purposes award to the payee spouse." of [when] revising Id. at 793. a calculating maintenance In so holding, we relied in part on the court of appeal's rationale and holding in Pelot v. Pelot, 116 Wis. 2d 339, 342 N.W.2d 64 (Ct. App. 1983). ¶49 In Pelot, when dividing the marital estate, circuit court assigned Mr. Pelot his union pension fund. 341. the Id. at The fund was calculated to have a present value of $9,680 at the time of the property division. Id. Later, when Mr. Pelot moved to modify the maintenance Mr. Pelot was paying to Ms. Pelot, the circuit court included in Mr. Pelot's income the monthly benefits from the pension fund. Id. at 342. On review, the court of appeals acknowledged the Kronforst rule against double counting, asserting that 27 "[i]f the present value is No. 2009AP639 included in the estate, then the pension payments themselves are not [to be] counted as income for purposes of fixing maintenance when the divorce is granted." ¶50 Id. at 343. The court went on, however, to question whether the Kronforst rule is absolute. Id. at 344. Specifically, the court underscored that there is a close relationship between maintenance and property division, as evidenced by the fact that, pursuant to Wis. Stat. § 767.26(3) (1981-82), one of the factors that a circuit court must maintenance is the property division.19 close relationship between maintenance consider Id. and in setting Because of this property division, the court concluded that "if the value of a pension fund is included in the property division, the court may consider it when making a maintenance award, although it must be considered differently from property which can be presently enjoyed." Id. at 345. ¶51 Based on this conclusion, the court held that "the trial court should exclude from [Mr. Pelot's] income his monthly retirement benefits until those benefits total $9,680, the value of the fund when it was assigned to him in the divorce." 342-43 (emphasis added). Id. at Once Mr. Pelot received the value of 19 The court of appeals pointed out that Kronforst was decided before the 1977 Divorce Reform Act. Pelot v. Pelot, 116 Wis. 2d 339, 344, 342 N.W.2d 64 (Ct. App. 1983). Consequently, the statute in effect at that time did not include the enumerated factors. See generally Wis. Stat. ch. 247 (1963). However, as with Wis. Stat. § 767.26(3) (1981-82), one factor listed in Wis. Stat. § 767.56 is the division of marital property. 28 No. 2009AP639 the pension assigned to him when the marital estate was divided (i.e., the $9,680), considered income. then his Id. at 346. pension benefits could be We have since applied the same rule as the court of appeals applied in Pelot for when pension benefit payouts maintenance. can be considered income in awarding Olski v. Olski, 197 Wis. 2d 237, 251, 540 N.W.2d 412 (1995) (assuming, based on the facts in the record, that the employee husband had received the benefits awarded him property in the full value of division the pension and holding, therefore, that "all future receipts of pension benefits are available in their entirety for on in possible maintenance obligations"). ¶52 Our reliance Pelot Hommel illustrates our rationale in Hommel for concluding that investment income that arises from a divided asset can be considered when determining maintenance.20 As in Pelot, in the typical property division case involving a pension, the trial 20 court may determine the While we were not as explicit in explaining our rationale as we could have been in Hommel, we now attempt to better illuminate the rationale underlying our holding. 29 No. present value of the pension.21 pension plan part, on is calculated, projected future that 2009AP639 When the present value of a present benefit value payments. is See based, in generally Pelot, 116 Wis. 2d at 341-43; see also Bloomer v. Bloomer, 84 Wis. 2d 124, 130-32, 267 N.W.2d 235 (1978) (explaining how numerous courts have calculated the present value of pension funds for property division purposes). Therefore, assuming the employee spouse is awarded the present value of the asset, he or she does not receive the value of the asset at the time of the property division. future payments. Rather, the spouse receives that value via Accordingly, as the court of appeals in Pelot underscored, it would be double counting to count the present value of the pension as a divisible asset and also count the future payments as income, since the income, up to the valuation placed on the pension at the time of the division, are one and the same. 21 "We have long recognized that a pension interest is very difficult to value." Olski v. Olski, 197 Wis. 2d 237, 248, 540 N.W.2d 412 (1995) (citations and internal quotation marks omitted). As we have explained, "[t]he problem of valuing prospective benefits under a pension plan is frequently exacerbated by the fact that unmatured rights may be terminated by death, discharge, or other contingencies. . . . Valuation is further complicated by the dual nature of most pension plans. If the employee continues to work until retirement, the payments to the employee, to the extent derived from employer's contributions, are in the nature of deferred compensation. If, however, the employee terminates work before retirement age, the usual plan provides at least for the return of employee contributions." Bloomer v. Bloomer, 84 Wis. 2d 124, 130, 267 N.W.2d 235 (1978) (internal citations omitted). This complexity underscores the necessity to give trial courts "broad discretion in valuing pension rights." Id. at 134. 30 No. ¶53 2009AP639 Contrarily, when an income earning asset is assigned to one spouse, as in Hommel, that spouse, generally, receives the full fair market value of that asset at the time of the property division. income property, Stated otherwise, if the spouse was awarded that spouse could turn around and sell the income property the next day and, thereby, attain the value of the property. The spouse could also elect to keep the property and earn income from it. As the spouse earns income, he or she does not lose the value of the property because he or she always has the option to sell the property for fair market value. Therefore, unlike pension benefit payments (up to the present value placed on the pension at the time of the division), the value of investment property earning counting. Wis. 2d separate from the income it Consequently, as Hommel held, counting income from generates. income is assets will typically not implicate double Hommel, 162 Wis. 2d at 792; see also, Heppner, 319 237, ¶18 (concluding there is no improper double counting when income from stock options awarded during property division is included in income when calculating maintenance). ¶54 Several years after Hommel, in 1997, we again analyzed the contours of the rule against double counting. Wis. 2d at 175-85. Cook, 208 The issue in Cook was whether a military pension that was divided between the spouses in the property division could maintenance. require us also be Id. at 175. to "ascertain considered income when calculating While the facts of Cook did not the precise scope of Kronforst's 'double-counting' rule," from our review of the double-counting 31 No. 2009AP639 case law, we concluded any prohibition of double counting must be flexible. Id. at 179. Namely, we opined that given the "infinite range of factual situations facing circuit courts in dividing property and determining maintenance and child support," it would be unwise to proscribe inflexible doublecounting rules. Id. at 180. Instead, we stressed that "the 'double-counting' rule serves to warn parties, counsel and the courts to avoid unfairness by carefully considering the division of income-producing and non-income-producing assets and the probable effects of that division on the need for maintenance and the support." double availability of income to both parents for child In short, when analyzing whether there has been Id. counting, the focus should be on fairness, not rigid double-counting rules. D. Application a. ¶55 Goodwill We now apply the legal principles set forth above to the facts and circumstances of this case. Starting with the value of professional goodwill in Orthodontic Specialists, Tim contends that the entire value of the salable professional goodwill in Orthodontic Specialists should not be included in the divisible marital estate. Specifically, Tim would like what he classifies as personal goodwill to be excluded.22 Notably, Tim does not argue that, if, as a matter of law, the entire 22 Tim does not aver that enterprise goodwill is excludable from the marital estate. See supra ¶17 above. 32 No. 2009AP639 value of Orthodontic Specialists' salable goodwill is includable in the marital Orthodontic estate, the Specialists' erroneous. circuit value is court's finding $1,058,000 was that clearly Nor does he challenge that the property should be divided equally. ¶56 Pursuant to our conclusion above, see supra II.B., the entire amount of salable professional goodwill was appropriately included in the marital estate. Here, Tim has not shown that the $1,058,000 value placed on Orthodontic Specialists includes nonsalable goodwill. Rather, the facts indicate the contrary. In particular, Tim bought the practice, over a decade ago, for $930,000. Approximately 90 percent of this purchase price was paid for goodwill. included "Dr. Moreover, Tim testified that this goodwill Grady's name, the noncompete clause, and the employment agreement that Dr. Grady would stay on to introduce me to his existing patients, [and] to counsel me through the process of learning how to do business," much of which is included in what Tim classifies as personal goodwill. ¶57 As the sale from in orthodontic goodwill appropriate an to include the Dr. Grady practice salable to Tim shows, personal is salable. goodwill from Specialists in the divisible marital estate. It is Orthodontic See Sommerfield, 154 Wis. 2d at 854. ¶58 Moreover, the record is replete with evidence that Tracy contributed to the development and success of Orthodontic Specialists. business's There is no question that she helped to create the goodwill. Consequently, 33 under the statutory No. 2009AP639 presumption of an equal division of the marital estate and the contributions of both parties to the creation of the marital estate herein, the circuit court did not erroneously exercise its discretion when it included the goodwill associated with Orthodontic Specialists in the marital estate and divided it on a 50:50 basis. Stated otherwise, the circuit court did not erroneously exercise its discretion when it included the entire $1,058,000 value of Orthodontic Specialists' goodwill in the marital estate. b. ¶59 Double counting Tim argues that the circuit court double counted the value of his professional goodwill when it included the goodwill in the divisible marital estate, and then based maintenance award on Tim's expected future earnings. Tracy's According to Tim, the expected future earnings also included the value of the goodwill because it was calculated using Tim's average income over the preceding five years which was increased by the goodwill. ¶60 We disagree. We start by underscoring our directive in Cook that the rule against double counting is advisory and not absolute. Cook, 208 counting income Wis. 2d rule from does assets at 180. not As set prohibit awarded to a the forth inclusion spouse division when calculating maintenance. 792. above, as of part the double investment of property Hommel, 162 Wis. 2d at This is so because the value of the investment asset is separate from the income it produces. Contrarily, pension benefit payouts (until they reach the amount of the valuation 34 No. given the pension as an asset at the time the of 2009AP639 property division) do not create value separate from the pension as an asset at the time of the property division. at 243-51; Pelot, 116 Wis. 2d at 343. Olski, 197 Wis. 2d Applying these principles to the case at hand, we conclude that the salable professional goodwill in Orthodontic Specialists is similar to an asset that produces income. ¶61 As with an income producing asset, the value of Orthodontic Specialists at the time of the property division had a set value, namely, $1,058,000. of the property Specialists and division, realized If Tim so chose, at the time he could this have value. sold Or, he Orthodontic could retain Orthodontic Specialists, earn income from it and sell it at a later time. Consequently, Tim has the option of continuing to generate substantial income from Orthodontic Specialists without diminishing its value. that if Tim works $465,000 annually. this income is 40 Specifically, the circuit court found hours per week, Tim's income will be As with income from an income earning asset, separate from the value of Orthodontic Specialists as it existed at the time of the property division. Consequently, the circuit court did not double count Orthodontic Specialists' erroneously professional exercise its goodwill and, discretion therefore, when it did awarded not Tracy $16,000 per month, for 20 years, in maintenance. III. ¶62 goodwill CONCLUSION We conclude the entire value of salable professional was properly counted as 35 divisible property in the No. marital estate. 2009AP639 Moreover, we conclude that the circuit court did not double count the professional goodwill from Orthodontic Specialists in the maintenance award. Accordingly, we affirm the decision of the court of appeals. By the Court. The decision affirmed. 36 of the court of appeals is No. 1 2009AP639
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